Blogs For Victory

The news story:

The government’s $50 billion program to ease the mortgage crisis is helping only a tiny fraction of struggling homeowners, and a list released Tuesday showed which lenders are laggards.

As of July, only 9 percent of eligible borrowers had seen their mortgage payments reduced with modified loans. And the first monthly progress report showed that 10 lenders had not changed a single mortgage.

The report indicated that lenders such as Bank of America Corp. and Wells Fargo and Co. have lagged behind government expectations. Both banks received billions in federal bailout money.

BofA modified just 4 percent of eligible loans, and Wells Fargo 6 percent. Wachovia Corp., which was taken over by Wells Fargo in December, modified only 2 percent.

“We think they could have ramped up better, faster, more consistently and done a better job serving borrowers and bringing stabilization to the broader mortgage markets and economy,” said Michael Barr, the Treasury Department’s assistant secretary for financial institutions. “We expect them to do more.”

This is a complex issue and its not entirely the banks fault. Its mostly their fault, but not entirely.

First off, you have to keep in mind that “servicing bank” and “holder of the note” are only rarely the same entity, especially in the larger banks. “Un-Named Bank A” services my loan, but my note is held by Freddie Mac – having been sold to them by Centex Mortgage, my loan originator. I can talk to “Un-Named Bank A” until I’m blue in the face (and I am talking to them, and I’m nearly blue), but when push comes to shove, “Un-Named Bank A” can only do what the note holder allows – and therein lies the problem.

We have three parties, for most mortgages, and they are all working at cross purposes:

1. Servicing bank just wants to keep making money servicing the loans and I suspect that they get paid at least partially on the amount of loan they’re servicing. I might be wrong on this, but the deliberate obtuseness of Loss Mitigation departments at these servicing banks indicates either massive stupidity or a desire to spin things out and hope that little or nothing will eventually have to be done.

2. Borrower wants to “cram down” the mortgage amount to be in line with current market value. If you owe $400,000 on a house worth $200,000 there is no sense at all – financial, for certain; in morality, it is a bit complex and I’m not qualified to render a final judgment on such things – in shoveling money in to it…even if the mortgage is stretched out to 40 years and the interest rate dropped very low, the fact of the matter remains that you are paying for a house which will never be worth what you paid for it (at least, not in any reasonable time frame – the most optimistic people actually involved are figuring 10-20 years for a price recovery…the more negative are figuring that we’ll never get back to that bubble level in real terms).

3. The note holders seem to be viewing a “short sale” as preferable to “cram down” – in other words, they’d rather have the $400,000 house go on a short sale for $150,000 than re-do the mortgage to $200,000. A 150k bird in the hand seeming to be more desirable than a 200k bird in the bush. A “short sale” also helps the note holder in that, unlike in a foreclosure, they don’t have title and therefor responsibility for the house. This relieves the note holder from all sorts of hassles and liabilities.

In my view, “cram down” is the only logical, moral and financially responsible thing to do – and don’t think that its all the banks losing on such a deal. As a matter of fact, the only people currently losing on the deal are the borrowers…time for the banks to take a bite of the poop sandwich. These borrowers have paid many tens of thousands of dollars since loan origination and that money is gone. They’ve lost that money – now its time for the banks to lose some, too. Now, why doesn’t this happen?

The managers of the banks – service and note-holder – are afraid. Scared spitless at losing job, wealth, position, prestige…for the people who run these financial institutions the raw, stark thought of not having what they have now has made them simply afraid to make a decision…because if you make a decision, you might make the wrong one, and that could cost you. They are standing about, Micawber-like, hoping that something turns up to get them off the hook – to make it so that they don’t have to make a decision. They look to China’s booming stock market, Obama’s spendulus, book keeping which allows them to ignore “one time” losses…something, anything which puts off that terrible day when “yes” or “no” will have to be uttered.

Its going to be interesting to watch – especially as the second wave of foreclosures hits (which won’t show up as foreclosures, per se, but as a vast increase in non-performing loans), commercial lending collapses and China’s stock bubble goes down in flames. A bit scary, too, as it will probably cost me my job – which is bad in the sense of not having income, good in the sense that I will have my very reasonable excuse for disengaging with this aspect of our economy.