Monday, December 3, 2007

Investor Litigation and the Paulson Mortgage Relief Plan

Felix Salmon has a post discussing the low likelihood of investor litigation arising out of the proposed mortgage relief plan (Portfolio Market Movers). I think he's right about the poor economics of pursuing litigation and the fact the investor profile is not litigious, but I do disagree on a couple of points:

1) Depending on what happens, it could be pretty easy to establish damages on any particular modification. Let's say the servicer agrees to a seven year modification at a below market interest rate on a nice house in a good neighborhood. Let's say that market bottoms in 2008 and comes back to current levels in 2010. It's not hard to calculate in hindsight how much the investor lost as a result of the servicer entering into a long term modification when a short term modification would have worked just as well. Whether or not something like that will happen and whether or not the investor will take the trouble to pursue it is unknowable at this point, but the possibilities are likely to be on the minds of legal counsel for the servicers.

2) Even if we agree it's unlikely there will be investor litigation, I don't think that will matter much to servicers. I can't see counsel for the servicer saying, "Go ahead, sign that modification - there's not much risk" when the servicer can remove the risk by getting investor consent. Getting the consent will undoubtedly slow the process down, possibly to a halt, but I think that's what servicers will do.