Out of Service | Feb 13th at 11:47am
This last panel of financial professionals and academics was quite fascinating, though peppered with such delightful turns of phrase (from the financial professionals) as “we were allowed to do it” and “we have to have the will to change”.
The panel emphasized just how complex securitization of mortgages is and touched briefly on the uglier side of foreclosure mitigation: servicer (dis)incentives to modify. Lewis Ranieri, Chairman of Ranieri Partners, dropped a bombshell that I wasn’t prepared for. He claimed that servicers make more money in foreclosure than in restructuring (though Austan Goolsbee noted that as housing prices decline, the cost-benefit shifts in the other direction). This is at odds with what we hear from politicians and housing advocates, but it’s certainly a possibility. Also, Ranieri said that servicers are really the only ones who can be a mortgage’s fiduciary and that, currently, they have too many masters.
These latter points are at the heart of an amendment to the stimulus package (included in the Senate version without funding, but not in the conference report as far as I can tell) proposed by Mel Martinez, Republican of Florida. He proposed government payments to servicers who evaluate and modify mortgages that will likely end in foreclosure and, crucially, provides legal “safe harbor” to servicers from grumbling investors. This provides servicers an additional incentive to modify (both monetary and legal) and resolves to some extent the “too many masters” problem. The rub, though, is that there are no affordability requirements so redefault is a serious concern. In that case, the government would essentially be paying servicers to delay foreclosure ( a similar concern arises with bankruptcy, but without the cost to government).
Harry Moroz is a research associate at the Drum Major Institute for Public Policy, where he analyzes congressional legislation for TheMiddleClass.org. Harry is a weekly contributor to the The HuffingtonPost, OpenLeft, and DMIBlog where he writes frequently about housing and urban policy.
Michael Freedman-Schnapp on Fri, Feb 13, 2009 at 12:14pm
Yes, narrowly speaking, the lenders make more money in foreclosure when the market is rising, because they get to sell a house that’s worth more than the outstanding loan. They lose money on prepayment of mortgages that happens when people refinance in rising markets with low interest rates (typically concurrent events). However, when prepayment penalties are in place that cover many of the currently foreclosed mortgages, the banks are supposed to be indifferent between foreclosure and prepayment.
hj in delaware on Fri, Feb 13, 2009 at 12:53pm
It seemed that “9/11” would have called for dramatic action by President Bush to gather and analyze data to turn it into the intelligence needed to feret out and destroy the assasins: shut down NASA and put the entire NASA braintrust to work on INTELLIGENCE - unthinkable!
We have a similar situation with this “foreclosure crisis”, but the “braintrust” is already available - all of those layed-off from mortgage and financial services jobs. Let’s put them to work for the USA all around the country in local offices directly “curing” citizens with homes in and likely to be in foreclosure .
All the “Braintrust” would need is a pile of $ and operating principles like “we’ll save your house if it’s your home”. This will reduce asset toxicity and take care of complexities like “servicers”. Unfortunately, this is probably the small part of the mortgage crisis.
If we get this “moral” issue out of the way, though, maybe the tough blows can be dealt to the right places so the pain is felt more where they got the gain. Let’s start out being simple!