Academic

One of the things we've tried to do here during the credit crisis is to examine the legal basis for the government's many initiatives - something worth doing, given that the government itself often gestures briefly, at most, towards questions of authority.  For yesterday's Frannie announcement, for example, FHFA vaguely pointed to the Housing and Economic Recovery Act as the basis for doing streamlined modifications of delinquent prime loans.

As we've noted before, the problem with modifying these mortgage contracts is that if they have been securitized, Frannie wouldn't own them, or at least solely own them - and indeed hundreds of institutions might hold bits of the the securitized mortgage pool.  How can the government announce unilateral modifications without getting the approval of each party with a right to some payment from the mortgage?

I may be missing something here, but I think it can't.  The HERA gives the conservator nothing more than all the powers that Frannie had to begin with.  And I think that this is why the announcement yesterday was accompanied by this statement of eligbility:

The loan is a Freddie Mac, Fannie Mae or portfolio loan with participating investors.

So it appears that the loan modification program, criticized by some as insufficient already, applies only to the loans that Frannie kept or those that it/they packaged and sold ... if the buyers are willing to participate in the modification.

Now, it could be that the government thinks it can just modify the loans without getting this participation by other contract parties.  Perhaps when Frannie buys a mortgage it has a standard contract term giving it the right to modify the contract; perhaps when it securitizes and sells, it does something similar.  But HERA doesn't, on a quick read, at least, appear to offer the rather spellbinding power to unilaterally modify contracts (or bilaterally, at least, the homeowner has to sign on too) that Frannie doesn't own entirely.

Here's a gloss on FHFA's powers under HERA, and here's the Senate's take.