Law of Unintended Consequences is at work again.

Implications: Potential Lawsuits, repurchase demands and flawed collateral documentation will cause many more problems than the intended solution will solve. The limited nature of the eligible loans will be far less than the 1,000,000 loans identified by the administration. The parties making the agreement do not have the right to do so.

Analysis:

With the best of intentions many groups have latched on to the "teaser Freeze" as a way to reduce the additional loans going to foreclosure and to allow those same borrowers a chance to refinance out of those loans in the future when there is a stable real estate market. Unfortunately, the Law of Unintended Consequences is at work with such intentions and as always the devil is in the details.

1. Lender/Servicers ability to make such a deal. These lenders can not speak for the investors. They can only speak to the loans that they hold in portfolio. Many of the investors are foreign and will not take kindly to government intervention. Because the loans are not individually owned in a securities pool every investor in a pool will need to agree or they will be able to sue based on a securities violation. They will sue the securitizing firm who will inturn demand repurchase of the orignator of the loan. The very same banks that are committing to the plan may have to buy the loan back and then they can agree with the plan all they want.

2. What is so special about the cut off dates selected. It will be a class action/ tort attorneys dream to have a borrower whose loan was originated right before or right after the cut offs. Can you imagine a jury saying it was okay for one individual to get assistance and not another. The same will hold true for those borrowers whose rates have already reset and they were forced into delinquency and foreclosure/bankruptcy. Why should they be excluded. How about those whose loans had longer than two years in the teaser period, originated in 2004 with a three year reset or five year reset. I quess they do not count.

3. The funny part of the plan is the logic that the same servicers who can not get to their defaulted borrowers and work them out (long wait times, delays, etc) are going to review each of these loans and make the reamortizations happen. I did not know that there were that many folks standing by with nothing to do at the loan servicers. I will be curious how many FTE are assigned to address these "Teaser Freezer" loans instead of working on the defaulted loans at hand and trying to stop the bleeding.

4. Speaking of which, does the plan require each loan to be modified by and individual? Who is going to pull the title work to make sure that no second lien (second mortgage, home equity loan) has been established since the loan was originated. If they do not pull preliminary tiltle then there is the strong likelihood that the modified first mortgage will now be a modified second mortgage. The former second will be able to foreclosure out the first. Talk about lawsuits.

5. If the plan is to just grant modifications without a borrower signed legal addendum to note and addendum to mortgage, then there will be no legal binding agreement to ever present if the loan goes delinquent again. This is not a small problem, afterall these are sub prime loans.

6. Fitch has already raised the issue of loan accounting being an issue and these accounts will reflect delinquent for some time before they are fixed. If they ever go delinquent again, what amount will be brought before a judge for foreclosure? We have judges that are dismissing with predjuice foreclosures (basically making it impossible to foreclose and giving the borrower the home) now for unrecorded assignements, imagine what they will do with a disputed loan amounts.

The issue is not the intentions of the plan designers but the execution. Why this group and not all borrowers in default (exception to the investment properties). Why not make the servicers use the likes of the Hope Alliance and the Foreclosure Attorneys to make contact and present them with solutions and then make the solutions happen for all loans. The 100,000 to 200,000 loans impacted by this plan will not stop the fall for the mortgage industry and the economy. By the time the lawsuits are done, repurchases made, and homes lost and back on the market, a recession will be the least of our worries.