More on Congress Talking to Hedge Funds

Yesterday we wrote about the House Financial Services Committee requesting a hearing with certain hedge fund managers (see Barney Frank to Hedge Funds: See You on November 12).  Other news organizations also picked up on this story.  Below is a story from the website, the original article can be found here.

BREAKING NEWS: Congress talking tough to hedge fund managers refusing to lower mortgage rates

The New York Times reported yesterday that two hedge funds are fighting proposals to ease the terms of home mortgages put forth by the government in H.R. 3221, a bill passed over the summer that gives flexibilities to some mortgage holders to renegotiate their rates. The hedge fund managers are arguing that such a move would hurt their investments.

Today, the House Financial Services Committee issued a press statement to these institutions expressing their “outrage” over the remarks of these hedge fund managers and their intentions to combat the private sector backlash to government programs aimed at preventing additional home foreclosures.

“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.  Because this is so important, and because this irresponsible, antisocial behavior by these hedge funds has such important implications, we have set a hearing of the Financial Services Committee for November 12, and we are inviting these companies as well as the Managed Funds Association to attend. If we are not able to get voluntary attendance, then we will pursue steps to compel them,” said members of the House Financial Services Committee.

The two funds, Greenwich Financial and Braddock Financial, intend to hold the companies issuing mortgages that they support through their financial instruments to their term rates. That means they’ll use their influence over mortgage companies to prevent the companies from lowering rates for struggling homeowners.

In his statement to the Times, William Frey, the president Greenwich Financial Services said that he was acting to protect the firm’s investments. “Any investor in mortgage-backed securities has the right to insist that their contract be enforced,” he said.

This position is unacceptable to House Financial Services Committee members, who feel the hedge funds are providing road blocks to healing a deeply troubled economy.

“What Congress passed overwhelmingly and President Bush signed last July provides for a reasonable modification of mortgages that clearly never should have been granted in the first place to avoid foreclosure and thus lessen the economic damage that a cascade of foreclosures has been doing to our economy…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.”

According to the House Financial Services website, H.R. 3221, The American Housing and Foreclosure Act:

  • Provides mortgage refinancing assistance to keep families from losing their homes, protect neighboring home values, and help stabilize the housing market.
  • Expands the FHA program so many borrowers in danger of losing their home can refinance into lower-cost government -insured mortgages they can afford to repay.  This legislation will help troubled borrowers avoid foreclosure while minimizing taxpayer exposure.
  • Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.
  • Protects taxpayers by requiring lenders and homeowners to take responsibility.  This is not a bailout; in order to participate, lenders and mortgage investors must take significant losses by reducing the loan principal.  In exchange for an FHA guarantee on the mortgage, borrowers must share any profit from the resale of a refinanced home with the government.
  • Contains important protections for taxpayers’ dollars, including higher refinancing fees that establish a new FHA reserve to cover possible losses from defaults on these government-backed mortgages.
  • Provides $230 million for financial counseling to help families stay in their homes.

If other companies join the attitudes of these two hedge funds in fighting government bailout bills, a second wave of panic might overtake the financial markets, which have already factored government interventions into their calculations. Any deviations at this point, and in this tumultuous market, would send stocks spiraling downward even further.

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