According to a January 12, 2012 report on CNN, “More than 4 million homes have been lost to foreclosure over the past five years.”
From 2008 forward, NewsLanc has been outspoken that the federal government should empower mortgage service organizations to modify defaulting loans on houses through downward adjustments of interest rates and principal amounts. In the realm of commercial real estate, this is often referred to as a “cram down” or a “haircut.”
Lenders were irrationally foreclosing on home owners for defaulting on the terms of their mortgages and thus suffering a far greater through repossessing, repairs, mainaining, and ultimately selling the houses. Furthermore, such unprecedented number of foreclosures was creating a glut in the housing market and driving down prices, thus generating still greater losses when foreclosed homes were sold.
With the publication earlier this month of “Bull By The Horns, Fight to save Main Street from Wall Street and Wall Street from itself” by Sheila Bair, Former FDIC [Federal Deposit Insurance Corporation] Chair, we learn how this tragic failure to bring about modifications came about.
According to Bair, great efforts were made by the FDIC to come up with successful programs to help keep people in their homes, but they were stymied by service organizations which reflected their own economic interests. Moreover, both the George W. Bush and Barack Obama administration were far more concerned about bailing out banks than helping homeowners, in direct contradiction of promises made to Congress at the time the Troubled Asset Relief Bill (TARP) bill was passed that ended up bailing out major banks.
Top administration officials singled out for criticism are former head of the New York Federal Reserve and now Secretary of the Treasury Tim Geitner and former Chair of the Panel of Economic Advisors (as well as an earlier former Secretary of the Treasury) Larry Summers.
While NewsLanc had called for legislation to enable mortgage service organizations to restructure loans, we learned from Bair that the service organizations under their service contracts already had such authorization. But they were exposed to litigation had they exercised their power. And the Constitution prohibits the government from changing the terms of contracts, so it largely needed to entice rather than require, to wield a carrot rather than a stick.
Below are excerpts taken from two chapters which serve to summarize many of Bair’s salient observations concerning the mortgage foreclosure debacle:
“Losses on foreclosed property sales can typically approach 40 to 50 percent of unpaid principal balances. … Why not try modification first? … If the lender is successful in rehabilitating the loan, the payoff will usually be much greater than any incremental losses in recoveries caused by several months of delay in the foreclosure sale. That is the reason that when banks hold loans in their own portfolios, they will aggressively work with distressed borrowers to restructure their obligations.”
This was NewsLanc’s observation.
Bair continues: “A major culprit, again, is securitization….that was because through the securitization process, those who owned the mortgages were different from those who would be responsible for restructuring them and the legal contracts governing the modification process created economic incentives skewed in favor of foreclosure.”
“The agreements that [securitized mortgages] operated compensated them based on flat fee; they were not paid more for dealing with a delinquent loan…”
“… most mortgage securitizations were set up to provide the senior tranche – the triple-A portion of the securitization – with substantial overcollateralization.. ..because of the way in which many securitization documents were written, if instead of a foreclosure sale, the loan was modified, the reduced mortgage payments flowed through to all investors in the securitization pool, meaning that everyone’s income was reduced, including that of the triple-A investors.”
“So we received a lot of happy talk from the securitization industry, but by the fall of 2007, it was clear that the major servicers were still pursuing foreclosure as the default option…less than 1 percent of subprime mortgages were to be restructured.”
“In past crises, the market had worked because the owners of loans had also serviced those loans. Now responsibility for loan [modifications] was in the hands of understaffed and undercompensated servicers who made more money from foreclosing than modifying….They were operating within their contractual rights- rights that the government could not constitutionally abrogate. Unless the government made it economically worth their while to stop, they would continue to foreclose.”
It is Bair’s contention that programs that the FDIC had proposed, based upon prior successful experience, could have prevented a large portion of the foreclosures and also have stabilized the housing market. She believes that this was the intention of President Barack Obama, but that his appointment of Geitner and others from the prior Republican administration continued the policy of focusing attention on and funding for the ‘too big to fail’ banks to the neglect of the plight of home owners.
They say that money is the root of all evil. It certainly seems to be very true the past few years as those who have it simply attempt to earn more and more, not taking into account that those who do not have it are struggling to make the necessary payments.
Instead of helping and understanding, they are hindering and making things worse.
I guess in the end it doesn’t matter to them. As long as they still get their money, to hell with those who lose everything because of it.
If Mr. Geitner or anyone else, was preventing the President from achieving his intended goal of saving homeowners the president could have and should have fired them and hired people who could get the job done.