The Supreme Court may have helped cut the premium that rating agencies demand in securities backed by home mortgage collateral. That's the implication of two decisions by the high court dealing with secured mortgage lenders' rights in Chapter 13 bankruptcy cases.
In the latest decision, the high court decided last week in Rake, et al., vs. Wade, Trustee, No. 92-621, that a lender is entitled to back interest and fees on a home mortgage involved in a bankruptcy proceeding even though Lhe loan instrument did not explicity say so.
That ruling follows Nobelman vs. American Savings Bank, in which the court held that bankruptcy laws do not allow a debtor to "cram down" a home mortgage into secured and unsecured portions.
Both decisions are consistent with U.S. vs. Ron Pair Enterprises, a 1989 decision, which also held that lenders are entitled to interest and fees during the period when a debtor is not paying his secured home mortgage loan.
"In the latest decision, which is consistent with the two earlier decisions, the court held the Bankruptcy Code to say that lenders are entitled to the present value of their secured claim," said Dean S. Cooper, associate general counsel of the Federal Home Loan Mortgage Corp. "It requires that interest be paid on the entire secured claim even if it consists in part or in whole of interest arrearage and fees."
That is true even if the mortgage contract is silent on the issue, as are Freddie Mac and Federal National Mortgage Association uniform instruments, Cooper said.
For example, in reaction to the Nobelman decision on June 1, credit-rating agencies said they are studying whether to reduce the current reserve requirement in mortgage-backed securities pools for potetial bankruptcies.
The Rake ruling could give added impetus to such plans, industry officials said.
"We hold that respondent is entitled to preconfirmation and postconfirmation interest on the arrearages that were paid off under petitioners' plans," the court held in a unanimous opinion written by Justice Clarence Thomas. Cooper called the court's decision "sensible and practical."
The court said that, ~in answering a question regarding bankruptcy law, courts must look to the statute,' " he said. "What the Supreme Court does is interpret the law; Congress sets policy."
The implication for the mortgage lending industry is lesser fees in defending its rights in bankruptcy cases, the potential that rating agencies might demand less overage in a package of home mortgage loans being sold in the secondary market by a lender, as weu as higher ratings on these instruments by agencies, industry officials said.