One of the benefits of the Treasury Department's Troubled Asset Relief Program is that servicers will have substantial latitude to modify loans without having to amend securitization documents, according to review by the law firm Thacher Proffitt & Wood LLP.
Erik Klingenberg, the chairman of Thacher Proffitt's TARP group, wrote in a 16-page report issued last week that Treasury Secretary Henry Paulson will "bring market pressure to bear on servicers" to adopt specific approaches to modifications and workouts, including whole-loan pools and mortgage-backed securities purchased under the program.
Mr. Klingenberg expects the program to include "systemic loan modification" similar to what the Federal Deposit Insurance Corp. announced in August after IndyMac Bancorp. Inc. collapsed.
For more than a year, servicers have said they cannot modify loans, because doing so required the approval of a majority of each class of investors.
The Treasury program also will require extensive due diligence of property valuations, borrower credit, and collateral, Mr. Klingenberg wrote.
He advised that the Treasury consider obtaining its own valuations for loans.
"Property valuations are a critical element in pricing" distressed mortgages, he wrote.
Many private-equity and hedge funds are sitting on the sidelines, potentially looking at purchasing distressed assets, but they have been unwilling to take losses, fearing that property values would fall even lower, Mr. Klingenberg wrote.
