Trust goes out of mortgage business

Mortgage reprieve will leave investors on hook

Excerpt:

A temporary freeze on interest rates on some subprime mortgages may please homeowners and lenders, but the investors who bought securities backed by those mortgages soon may be on the phone to their lawyers.

"This is the kind of scheme that takes your breath away," said Richard Epstein, a University of Chicago law professor. "When people are losing breath, they run to their lawyers, not away from them."

"This is a real hammer," he said of the U.S. Treasury-led proposal that would have investors in mortgage-backed securities forgo billions of dollars in interest. "I think it's unconstitutional. It's confiscation of money."

A Minneapolis lawyer who has argued real estate cases before the U.S. Supreme Court, Jeff Eckland, said he foresees lawsuits on many fronts as a result of the plan -- both between private parties who feel forced to go along with mortgage forebearance and between investors and the government.

"If you can't trust a mortgage, what do you know you can trust in the real estate business?" said Eckland of Eckland & Blando.

Comment: For background consider Imagine a butcher making sausage. So you're an investor who invests in CDO's. You expect a certain return (interest rate). That bundle of mortgages in your CDO has already exceeded its expected default rate. And now a financial institution pressured by the government is unilaterally reducing your interest rate! Can you say "lawsuit"!