Bankruptcy Bills Will Have Unintended Consequences for MBS

Implications: Bankruptcy reform proposals appear to be moving in Congress, but these bills will create additional risks for mortgages and MBS.  Holders of MBS may see if further decline in value if the legislation passes.  Mortgage costs would likely go up to reflect new risks.

Analysis: Congress is actively considering Bankruptcy amendments that would, at a minimum, permit a bankruptcy court to restructure mortgage loans.  The Senate bill would permit the court to "cram down" the amount of the claim to the market value of the home, and extend the payment period on the mortgage for up to an additional 30 years.  The court would be able to re-set the interest rate during the 30 year repayment period.  The House bill is more limited, but is likely to adopt some of the Senate provisions as it makes it way through the legislative process.  If this legislation passes, it would apply retroactively to existing mortgages and would thus further impair the value of MBS.  In addition, new mortgages would have to be priced to reflect the added risks.  The bills could have the unintended consequence of making the current problems in the mortgage area worse.