The Mortgage Modification Morass

President Obama, currently in southern Nevada — one of the unfortunate centers of the foreclosure problems in the wake of the Housing Bubble Collapse — would like to promote more mortgage modification to assist homeowners who are having difficulty paying their mortgages.  [LVSun]

Unfortunately the same problem that got us into this mess (securitization) is precisely the source of the problem getting out of it (securitization).

Why, for example, would any financial firm ever opt to promote foreclosures if there were any possibility the homeowners could be assisted to fulfill their mortgage obligations with a little modifications?

Well, if the firm is a mortgage servicing company then there are at least four reasons (shown in the graphic above) which make it more profitable for the foreclosure process to continue, than for a mortgage modification to be negotiated.  [Credit Write Downs] [AllmandLaw]

“Obama focused his address on the need for Congress to approve his housing market plan to assist “responsible homeowners” that he presented in February. The plan would allow those homeowners a chance at a lower rate, saving them about $3,000 a year.” [LVSun] (link added)

Or, a bit more specifically:

“Under the proposal, borrowers with loans insured by Fannie Mae or Freddie Mac (i.e. GSE-insured loans) will have access to streamlined refinancing through the GSEs. Borrowers with standard non-GSE loans will have access to refinancing through a new program run through the FHA. For responsible borrowers, there will be no more barriers and no more excuses.” [WH]

There’s another fly in this ointment.   While the President’s proposal is certainly better than the present position of the Congress in which Doing Nothing seems always preferable to doing anything,  the plan really doesn’t go far enough.  Congressional Republicans have been enthusiastic about opposing what little has been done (HAMP) on the grounds that the underfunded and limited program hasn’t been effective — as underfunded and limited programs often are in the face of massive problems.  A short list of problem creators:

The Foot Draggers: Those who (a)  invested heavily in mortgaged based securities during the Housing Bubble, especially in the upper tranches, have little incentive to support mortgage modification if any hope remains that they’ll get their share IF they hold out.  The MBS market, recently viewed though it was some small fuzzy brown thing walking on a dinner plate, is now “coming back.” [ChiTrib] (b) There is also the MERC Mess.  Investment companies, finding the efforts of local county recorders entirely too slow to satisfy the bankers’ voracious appetite for more mortgages more swiftly, created their own electronic recording system only to see it collapse in a heap of unresolved paper work which leaves homeowners wondering who owns what.  (c) Mortgage service companies who want to protect their margins. “We find that loss mitigation is costly for servicers, in large part because servicers currently lack adequate staff and technology; unfortunately, servicers have few financial incentives to expand capacity.” [ClFed]

The Inch Worms:  The foreclosure problem is a national issue, as illustrated by Realty Trac’s map shown below:

Click on the map to go to Realty Trac for more information.  About 93% of those facing foreclosure are single family homeowners [FDIC pdf] — not the “flippers” so often blamed in some conservative blogs.  Secondly, most of the mortgages in really serious trouble are those notorious adjustable rate monsters with reset rates designed to make homeowners refinance (thus stuffing the mortgage finance industry with new revenue) rather than pay off the existing mortgage.

Any plan which allows the mortgage sector to renegotiate loan by loan day by day inch by inch is insufficient to solve the problems.  Banks or other mortgage holders need to be required to deal with categories of mortgages not individual mortgage holders.   No doubt the bankers assault on this idea on Capitol Hill would be roughly analogous to the D-Day landings in Normandy.

The Principals:  Bankers and the financial sector recoil in horror at any proposal calling for them to take any cuts in the principal of a mortgage.  This is a bit hard to stomach since these were the same little Wall Street Wizards who paid zilch attention to the types of mortgages being sold to unsuspecting, and quite often unsophisticated borrowers, all in the interest of creating fodder for their CDOs and Synthetic CDOs… There are some real estate markets, and Nevada may well be one of them, in which the foreclosure problem will not be significantly mitigated until some banks take a cram down.

Calendar Watchers:  Forbearance is a lovely word.  The White House proposal addresses this as follows:

 “Move by Major Servicers to Use 12-Month Forbearance as Default Approach: Key servicers have also followed the Administration’s lead in extending forbearance for the unemployed to a year. Wells Fargo and Bank of America, two of the nation’s largest lenders, have begun to offer this longer period to customers whose loans they hold on their own books, recognizing that it is not just helpful for these struggling families, but it makes good economic sense for their lenders as well.”  [WH]

12 MONTHS?  And, notice that the Lady Bountiful Forbearance demonstrated by Wells Fargo and Bank of America is on loans which they hold on their own books.   First, why only 12 months? Why not just get rid of the resets on those nefarious ARM mortgages and turn them into good old fashioned fixed rate mortgages?  Or, why not allow 24 months or 36 months for ‘forbearance?’

And…not to bring up another sticky point… What about those mortgages which are on someone’s books somewhere that isn’t a bank?  Unless, of course, the argument is that if BoA and Wells-Fargo can do it, why then can’t some mortgage servicer?  At which point we revert to the dis-incentives for servicers to modify much of anything.

Perhaps the best that can be said of the President’s proposal is that it does try to do something, and it does answer the Grover Norquist mailer sent to Nevada households saying that the President “promised” to solve the foreclosure crisis — which no, he didn’t.  And, in the face of extraordinary opposition from bankers, mortgage servicers, bondholders, shareholders, investment houses, and the attendant army of lobbyists thereof, it might be the best option political practicable at the moment.  It’s certainly better than Governor Romney’s suggestion that we simply let things “bottom out.”

There’s one more trap coming from the financialists — any good news concerning the housing market becomes fodder for the argument that we really don’t need to do anything because “the market is coming back.”   Tell that to the underwater, out of luck, and nearly out of time, homeowners in one of those states shown in deep red on the RealtyTrac map.

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Filed under 2012 election, banking, Economy, financial regulation, Foreclosures, Nevada economy, Obama

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