The finger pointing continues in the fallout from US subprime. Now hedge funds are attacking bank decisions that help delinquent US mortgage borrowers remain in their homes, reports the FT on Friday.
A group of more than 25 funds has asked the International Swaps and Derivatives Association, the derivatives industry body, to act on their concerns that banks that both sell derivatives that pay out when loans hit problems, and handle mortgage payments could be making concessions to avoid making good on the contracts.
The concerns centre on loan modifications that are used to help borrowers keep up with payments. Analysts say that in these cases 40 per cent of the loans fall back into arrears within a year - but the changes do not trigger write-downs on the bonds, which would in turn lead to payment to purchases of credit-insurance derivatives.
“Hedge funds force people from their homes,” isn’t the kind of publicity the industry, which has only just clawed its way out of the public enemy number one spot, is after. One member of the group told the FT that in fact the funds were just trying to make sure that banks were keeping the interest of their trading desks and their mortgage arms separate.
Which, of course, they should be doing anyway. And if they’re not, it’s going to take more than a letter to the ISDA to prompt a change.
But the funds did know all this when they signed up to buy these contracts. Such modifications or payment plans are presumably common-practice and banks are not generally renowned for bending over backwards to let their borrowers off the hook - the only difference now is that since the subprime world hit trouble, the banks are just not being as draconian as the funds would like them to be.
Perhaps it’s this kind of diligence that got them into trouble.
