Friday, October 24, 2008

Congress Talks Tough to Hedge Funds on Loan Modifications

(Housing Wire) More than a few hedge funds have gone public in recent days with their opposition to proposed loan modifications, which they say would hurt their investment interests — and on Friday, House Financial Services Committee chairman Barney Frank (D-MA), along with a host of other lawmakers, expressed “outrage” at the idea that investors would not back the government’s plan to refinance troubled homeowners into government-insured mortgages.

The New York Times ran a story on hedge fund opposition to the Hope for Homeowners program recently rolled out by the U.S. Department of Housing and Urban Development. The program was put into place to provide troubled borrowers the chance to refinance into an FHA-endorsed loan, so long as existing investors agree to a substantial haircut on their existing investments. [1] See earlier HW commentary.

“We were outraged to read that two hedge funds, Greenwich Financial Services and Braddock Financial Corporation, are instructing the servicers of their mortgages to defy this national program and to insist on further socially and economically damaging foreclosures,” said Frank.

“We believe the law clearly allows for modification where such changes would involve a lesser loss than foreclosure, and the benefits to the whole economy of such an approach are obvious.”

“For hedge funds, which have been the beneficiary of a lack of regulations and a very permissive attitude, now to put obstacles in the way of this important national policy is intolerable. We have written to these two hedge funds and to the Managed Funds Association as well, strongly urging them to reverse this policy which will have such negative impacts on the economy.”

Frank said his committee [2] will hold a hearing on Nov. 12 regarding investors’ interests in mortgages, and will want the managers from Greenwich and Braddock to attend. “If we are not able to get voluntary attendance, then we will pursue steps to compel them,” Frank warned.

Frank, along with other Democrats — including Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee Chairman Paul E. Kanjorski (D-PA), Financial Institutions and Consumer Credit Subcommittee Chairwoman Carolyn Maloney (D-NY), Housing and Community Opportunity Subcommittee Chairwoman Maxine Waters (D-CA), Domestic and International Monetary Policy Trade and Technology Chairman Luis Gutierrez (D-IL), and Oversight and Investigations Subcommittee Chairman Melvin Watt (D-NC) — sent letters to both the funds and to the Managed Funds Association expressing their anger over what they see as improper influence.

The lawmakers threatened “serious implications for the rules” governing hedge fund operations in the future should the funds maintain “this posture of obstruction.”

Hedge fund managers that spoke with HW said that their investment interests are clearly spelled out in existing contracts, and that harsh speaking from House Democrats would likely do little to compel them to forego their contractual interest in securitized deals.

“We’re going to have to tackle abrogation of contracts, address the issue of the sanctity of contracts,” said one fund manager, that asked not to be named. “Because what Frank et al want done here is for hedge funds to act contrary to their investors’ best interests, which carries legal liability as well. And that’s an issue that goes well beyond the current crisis.”

[3] Read the letter to Braddock Financial >>
[4] Read the letter to Greenwich Financial >>
[5] Read the letter to Managed Funds Association >>

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