This paper presents the results of the only publicly available empirical study of what agreements governing subprime securitized mortgages say about mortgage modification.
The mortgage and foreclosure crisis continues to transfix the nation, even as housing markets across the country show signs of improvement. 2 The government has tried to promote mortgage modifications to allow homeowners to stay in their homes. 3 One particular focus of these efforts has been subprime loans that are securitized, that is, transferred into pools held by trusts and administered by servicers on behalf of investors who buy certificates. For securitized mortgages, a contract called the pooling and servicing agreement governs what the servicer may do to modify the mortgages in the pool. 4
Throughout the crisis, an important factor in policy analysis has been what the pooling and servicing agreements that govern securitized subprime mortgages say about mortgage modification. Do these agreements forbid mortgage modifications, so that the most effective modification programs have to trump these agreements, raising all the issues that attend government modification of private contracts? 5 Or do the agreements by and large permit mortgage modifications, so that policymakers designing modification programs should concentrate on other possible rigidities that frustrate modification?
Whether and how pooling and servicing agreements constrain mortgage modification is relevant to current policy debates. It is still an open question whether the federal government should take action to trump anti-modification provisions in private securitization agreements, for example by trying to establish the supremacy of federal servicing standards over these agreements. Another question currently under debate is whether local governments should exercise the power of eminent domain to take securitized mortgages and modify them. Municipalities across the country have considered or are currently considering this idea. 6 Proponents of such a strategy argue that securitization agreements limit the modification of securitized mortgages, so local governments must step in. 7 Another open question is whether differences in terms across securitization agreements impede an effective policy response to problems in the mortgage market, so that the agreements should be standardized. 8 The findings reported here suggest that subprime securitization agreements are in fact heterogeneous, so the results bear on this question as well.