It’s been a little more than a year since I last addressed this topic. As usual, things turned out a little differently than I expected.
Back then, the Market Movers theory was investors would not litigate over the modification plans because it would be hard to calculate damages, the litigation wouldn’t scale, and the bondholders were not a litigious group. I agreed with Felix that the economics of the litigation was not attractive and that the investors were not naturally litigious, but thought damages would not be hard to establish and that servicers would take a cautious approach which would lead to few modifications being done.
I think I was right about few modifications being done, but Felix and I both underestimated the desire of bondholders to get out from under the deals. The litigation has started (links to NY Times and Housing Wire stories). The bondholder remedy sought is the repurchase of the loans at par. That’s an ambition goal, but if they’re successful it would be a huge recovery. The threat may be enough to force a nice settlement, and the possibility will surely cause modification efforts on securitized deals to grind to a halt until the matter is settled.
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