What Do Subprime Securitization Contracts Actually Say About Loan Modification? Preliminary Results and Implications

Abstract:     
A review of pooling and servicing agreements from large subprime securitization programs in 2006 reveals that about 10% of the contract ban loan modifications altogether. The other 90% do not seem to forbid win-win loan modifications (defined as modifications that benefit the borrower and increase the present value of cash flows to the trust), although their terms are open-ended enough that reluctance to make such modifications is understandable. If the subprime universe as a whole looks similar to the contracts we have reviewed to date, mass clarification of contracts rather than mass abrogation either through special legislation or through the creation of a special bankruptcy process may be appropriate.

Keywords: subprime, pooling and servicing agreements, loan modification, mortgage modification, Countrywide

JEL Classifications: G20, G21, G28

Working Paper Series