WHY VERY FEW MODIFICATIONS AND SHORT-SALES ARE APPROVED

EDITOR’S NOTES: BASICALLY IT IS ABOUT MONEY:

  • Investment Banks make more money as long as the loans are non performing
  • All the other intermediaries make more money while the loans are non-performing
  • The details of securitization as a scheme to defraud investors and borrowers are kept under wraps
  • Insurance is only paid on loans that are devalued or in default
  • Credit default swap liability by counterparties in only paid when loans are in default or devalued
  • Resecuritization is actually riskier for the investment bank on performing loans than non-performing loans. Nobody asks for an accounting for a loan they know is in default. Modification would convert a loan classified as non-performing, subject to write down or write-off to performing which might create a liability to return third party payments through insurance and credit enhancements.
  • Servicers might lose the major part of their income, since they get paid more on performing loans. Note that deep inside the securitization documents, the servicer ends up with ultimate decision-making authority over the loan, NOT the so-called Trustee.

Lucrative Fees May Deter Efforts to Alter Loans

This week, the Obama administration summoned mortgage company executives to Washington to demand they move faster to lower payments for homeowners sliding toward foreclosure. Treasury officials called on the companies to hire and train more people quickly to field applications for relief.

But industry insiders and legal experts say the limited capacity of mortgage companies is not the primary factor impeding the government’s $75 billion program to prevent foreclosures. Instead, it is that many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.

Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue — fees for insurance, appraisals, title searches and legal services.

“It frustrates me when I see the government looking to the servicer for the solution, because it will never ever happen,” said Margery Golant, a Florida lawyer who defends homeowners against foreclosure and who worked in the law department of a major mortgage company, Ocwen Financial. “I don’t think they’re motivated to do modifications at all. They keep hitting the loan all the way through for junk fees. It’s a license to do whatever they want.”

Rich Miller, a governance project manager at Countrywide Financial and Bank of America before he left in January, said Bank of America had been reluctant to modify loans, which hurt the bottom line. The company has been waiting and hoping the economy will improve and delinquent customers will resume making payments, he said.

“That’s the short-term strategy,” said Mr. Miller, who oversaw training programs at Countrywide, which was bought by Bank of America. He now works as an industry consultant.

Bank of America disputed that characterization. “To think that somehow or other we would jeopardize investor relationships and customer relationships for the very small incremental income we would receive by delaying seems ludicrous,” said Robert V. James, the bank’s senior vice president for mortgage operations and insurance. “It’s not the right thing to do.”

Mortgage companies, some of which are affiliated with the nation’s largest banks, are paid to manage pools of loans owned by investors. The companies typically collect a percentage of the value of the loans they service. They extract their share regardless of whether borrowers are current on their payments. Indeed, their percentage often increases on delinquent loans.

Legal experts say the opportunities for additional revenue in delinquency are considerable, confronting mortgage companies with a conflict between their own financial interest in collecting fees and their responsibility to recoup money for investors who own most mortgages.

“The rules by which servicers are reimbursed for expenses may provide a perverse incentive to foreclose rather than modify,” concluded a recent paper published by the Federal Reserve Bank of Boston.

Under the Obama administration’s foreclosure program, a servicer that modifies a loan for a homeowner collects $1,000 from the government, followed by $1,000 a year for each of the next three years. A senior Treasury adviser, Seth Wheeler, said these payments amounted to “meaningful incentives to servicers to help overcome the challenges and competing demands they face in considering and completing loan modifications.” He added that mortgage companies “are contractually obligated to the terms of this program, which require them to offer modifications to qualified borrowers.”

But experts say the administration’s incentives are often outweighed by the benefits of collecting fees from delinquency, and then more fees through the sale of homes in foreclosure.

“If they do a loan modification, they get a few shekels from the government,” said David Dickey, who led a mortgage sales team at Countrywide and Bank of America, leaving in March to start his own mortgage advisory firm, National Home Loan Advocates. By contrast, he said, the road to foreclosure is lined with fees, especially if it is prolonged. “There’s all sorts of things behind the scenes,” he said.

When borrowers fall behind, mortgage companies typically collect late fees reaching 6 percent of the monthly payments.

“For many subprime servicers, late fees alone constitute a significant fraction of their total income and profit,” said Diane E. Thompson, a lawyer for the National Consumer Law Center, in testimony to the Senate Banking Committee this month. “Servicers thus have an incentive to push homeowners into late payments and keep them there: if the loan pays late, the servicer is more likely to profit.”

She cited Ocwen Financial, which reported that nearly 12 percent of its income in 2007 came from fees to borrowers.

Paul A. Koches, Ocwen’s general counsel, said: “We’d prefer that to be zero. The costs associated with our delinquent loans are in every instance in excess of the late fees.”

Data on delinquencies reinforces the notion that servicers are inclined to let problem loans float in purgatory — neither taking control of houses and selling them, nor modifying loans to give homeowners a break.

From June 2008 to June 2009, the number of American mortgages that were 90 days or more delinquent soared from 1.8 million to nearly 3 million, according to the realty research company First American Core Logic. During that period, the number of loans that resulted in the bank taking ownership of the home declined to 245,000, from 333,000.

As a home slides toward foreclosure, mortgage companies pay for many services required to take control of the property and resell it. They typically funnel orders for title searches, insurance policies, appraisals and legal filings to companies they own or share revenue with.

Ocwen established its own title company, Premium Title Services, in part to keep more of the revenue from foreclosures, said Ms. Golant, who helped start it.

“It was hugely profitable,” she said. “Premium Title would charge for the title when it got transferred to Ocwen, then charge again when it got transferred to the new buyer, and then sell title insurance. It was easy money.”

Mortgage companies not only gain this extra business through their subsidiaries, but also collect reimbursement for the payments when the houses are sold.

The investors who own bad mortgages accept whatever is left. Investors typically do not notice how much they give up to the servicers, because fees are embedded in complex sales.

“It’s under the radar,” Ms. Golant said.

Ultimately, the benefits of delinquency erode incentives for mortgage companies to dispose of troubled loans quickly, say experts, allowing distressed houses to decay and fall in value — a fact of little interest to the servicer.

“At the end of the day, it doesn’t matter what the house sells for, because they don’t take that loss,” said Ms. Golant. “Meanwhile, they are collecting all these fees.”

16 Responses

  1. Isn’t always the bottom these guys work from? Everything they do is to make one more buck. How else would these shysters afford their high-rise office towers, over looking the rest of us pee-ons, thinking themselves so much better than we are. Obviously they are not losing any money on these loans or they would be going bankrupt with the rest of American.

    Isn’t it cute how they structure it all to look like they are taking it in the a** and claim even more trillions in bailouts. What dups the public is to buy all of this “dog and pony show” (someone suggested).

    Chunga is right. It is all orchestrated by the cunning “homeowner”. Shame on them for being so….

    Stop Mortgage Foreclosure Process

  2. 2 Anonymous… Hummm… well that explains the smirk on the GS top dog at congressional hearings… a dog and pony show if there ever was one…

    All I ask is simple “will the investor’s please stand up”… that is the simple solution to this all…

  3. PJ

    Do not think that is what Chunga is trying to say. The law is so outdated – so complicated – and, therefore, so easy to manipulate. Courts are far behind financial engineering. This was a comment during the Enron scandal. Attorneys stated that Enron financial manipulations were structured to out maneuver court comprehension.

    This is the way it works. All was done via flaws in the law – and flaws in the court system. Well thought out – and well planned. It takes a long time for courts to catch up to financial engineering.

  4. 2 Chunga… you seem 2 agree that all we need to solve this problem is to have the “investors” identified…. along with who took out a liar loan… by admission or not… who wrote those loans … and who betted against and profited from those loans….

    Apparently it was rather easy for the WS crowd to gleam though data… correct… it seems to be all there from the links in your post.

    Time for the American People to have a look at that data as well.

  5. While there are many components in play, let’s set aside all the social, ideological, and political ingredients and look at what this country is founded on.

    This is a country of laws..not men.

    If a borrower commits a crime in the act of borrowing said borrower should be held accountable.

    If a lender commits a crime in the act of lending said lender should be held accountable.

    Americans are splintered on this issue because understanding this very nuanced and technical area of law is by design deliberately counter intuitive and laboriously difficult to understand.

    An argument could be made that the dreary complexity of the laws involving borrowing and lending forge the bedrock of popular opinion – which largely and lamentably defaults to everything BUT the law.

    The splinter is large but not yet incurable. I’ll go out on this splintered limb and say that not only have homeowners in default ostensibly been had – but so have many of those not in default. Shine the light on all securitized mortgages and let the chips fall where they may.

    These days, who even knows the averred value of a performing vs. non-performing loan? The same laws that apply to homeowners in foreclosure apply to those who are not.

    The outrage is coming….

    From the Right:

    Wall Street Probe Widens – J.P. Morgan, Citigroup, Deutsche Bank and UBS Also Face Prosecutors’ Scrutiny.

    Government Probe into Wall Street Sales Widening.

    From the Left:

    Prosecutors Ask if 8 Banks Duped Rating Agencies.

    Class Warfare: Hundreds Protest Outside Bankers’ Houses In DC.

    From Abroad:

    Greece Considering Legal Action Against U.S. Banks for Crisis.

    And lastly…from Florida:

    State AG investigates its own.

    The Hamlet

  6. Read the WSJ “loan mod” piece very carefully… the “investor” is mentioned twice as not participating in HAMP etal… or any other form of loan modification…. Why then one has to ask did the “bank’s” and servicers receive a bailout via TARP, when it is or not the “shadow investor” that is calling the shoots?

    And was there a formal letter/documentation identifying the “investor” in each situation… did the MOD applicants persue and or demand claification of who was/is dening them?

    What makes this pertinante is that Fannie Mae is now backing %95.5 of home mortgages in the USA, not the “investors” and they have been provided unlimited access to the equity of yesterday, today and long into the future of each and every American.

    GET IT?

    The story told here is simple on its “emotional” face value but quite revealing in its information…..

  7. Daniela Mars,

    I came to that same conclusion years ago, they can’t afford to fight the home owners with the best lawyers if they have no money coming in. Same thing with the government.

    If everyone just stopped paying taxes, what are they gunna do? Arrest every person in the country? Hah!

    There are just to many sheeple who think they have to do things, when they don’t, and they have no mind of their own, they just do what anybody tells them. So sad really.

  8. Everything that i am reading leads me to one conclusion: the real only way to fight and win would be if EVERY American Citizen STOPPED paying their mortgages right now.

    That would make all these securities worth nothing.
    It would cause Financial Caos.

    I did not think about the consequences, but for the homeowners it will be the solution.

  9. Anonymous: please read and translate?

    http://www.americansecuritization.com/uploadedfiles/winter10RMBSshortfalls.pdf

  10. because who would lend to a person who at best will make 70 percent of what making today. Plus the house is gonna be worth at best 60 percent of what it is worth today.

    LE TS FACE IT AMERICA IS BROKE. + 700 TRILLION DOLLARS IN DERIVATIVES.

    GOD BLESS AMERICA.
    WE WILL BOUNCE BACK MUCH STRONGER.

  11. Actually now realize that we are living in a completely schizophrenic world… will someone please blow the whistle and get the team on the bench…

    http://online.wsj.com/article/SB10001424052748703315404575250463403570640.html?mod

  12. So what is Mr.Goodman actually saying here about the Million-dollar “Foreclosure Mill’s?

    “As a home slides toward foreclosure, mortgage companies pay for many services required to take control of the property and resell it. They typically funnel orders for title searches, insurance policies, appraisals and legal filings to companies they own or share revenue with.”

    Also agree with Anonymous… Mr. Goodman please define “Mortgage Company”..

  13. HA HA

    And to Mr. Peter Goodman – define “mortgage company.”

  14. Try again…minus the links…

    How Main Street has Destroyed Wall Street

    Posted by Capt. Jack

    I guess now would be a good time to shoot the greedy homeowners.

    It’s crystal clear. From the very beginning the homeowners have gamed the system. They started by tricking the property appraiser (lender’s agent) into submitting an outcome-based appraisal.

    Then, millions of homeowners shrewdly conned the “lenders” into dismissing all agency and fiduciary responsibility in the underwriting process….going so far as to force the “lenders” into forging
    documents.

    Then, the greedy homeowners forced the “lenders” to securitize the loan in such a fashion as to bifurcate the mortgage from the note.

    On top of that, the homeowners secretly cooked up the concept of “Credit Default Swaps” and forced the “lenders” to insure the collateral at the full (outcome based) value 30X over.

    Having successfully pulled the wool over everyone’s eyes – these irresponsible homeowners showered themselves with well deserved bonuses.

    Realizing they were too big to fail, these irresponsible, reckless homeowners lined the pockets of legislators and received enormous sums of taxpayer bailouts.

    The result of these cunning maneuvers by the fraudulent homeowner scheme has them sitting fat and happy in the cat birds seat. Yup, that’s how they did it. And they’re getting away with it.

    Savings drained – check, 401ks all gone – check. Kicked out of their homes – check. “Lenders” made whole many times over via Credit Default Swaps – check. Homeowners foreclosed and “lender” buys back property
    for pennies on the dollar – check.

    Follow the money and you’ll find the culprit. It’s about time we hold these homeowners accountable.

    Good call. The websites below are sponsored by a well-healed, politically connected, PR machine of greedy volunteers…and contain detailed information on how the collusion on Main Street has ripped off Wall Street.

    Don’t look though…it’s just spam.

    foreclosurehamlet dot org

    4closurefraud dot org

  15. How Main Street has Destroyed Wall Street

    Posted by Capt. Jack

    I guess now would be a good time to shoot the greedy homeowners.

    It’s crystal clear. From the very beginning the homeowners have gamed the system. They started by tricking the property appraiser (lender’s agent) into submitting an outcome-based appraisal.

    Then, millions of homeowners shrewdly conned the “lenders” into dismissing all agency and fiduciary responsibility in the underwriting process….going so far as to force the “lenders” into forging
    documents.

    Then, the greedy homeowners forced the “lenders” to securitize the loan in such a fashion as to bifurcate the mortgage from the note.

    On top of that, the homeowners secretly cooked up the concept of “Credit Default Swaps” and forced the “lenders” to insure the collateral at the full (outcome based) value 30X over.

    Having successfully pulled the wool over everyone’s eyes – these irresponsible homeowners showered themselves with well deserved bonuses.

    Realizing they were too big to fail, these irresponsible, reckless homeowners lined the pockets of legislators and received enormous sums of taxpayer bailouts.

    The result of these cunning maneuvers by the fraudulent homeowner scheme has them sitting fat and happy in the cat birds seat. Yup, that’s how they did it. And they’re getting away with it.

    Savings drained – check, 401ks all gone – check. Kicked out of their homes – check. “Lenders” made whole many times over via Credit Default Swaps – check. Homeowners foreclosed and “lender” buys back property
    for pennies on the dollar – check.

    Follow the money and you’ll find the culprit. It’s about time we hold these homeowners accountable.

    Good call. The websites below are sponsored by a well-healed, politically connected, PR machine of greedy volunteers…and contain detailed information on how the collusion on Main Street has ripped off Wall Street.

    Don’t look though…it’s just spam.

    http://www.foreclosurehamlet.org

    http://www.4closurefraud.org

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