There is no contradiction here: stopping foreclosures and a buildup of REOs often does represent an alignment of everyone’s financial interests.

Empty foreclosed houses are targets of looting by opportunistic criminals, often within days. See Fortune: Crime scene: foreclosure. This is not merely petty vandalism: according to the article, “looters don’t take long to make a vacant property nearly worthless”. Everything of value inside the house is stolen, damaging walls in the process to take out piping. And the loss of windows, doors and aluminum siding exposes the house to the elements and causes even more rapid deterioration of what’s left. Repairing and renovating such houses would cost more than they could hope to sell for, and it would cost too much money even to raze them all. And then the drug dealers move in.

Faced with the near-total loss of value, not to mention the potential lawsuit liability if, say, a drug-related shooting takes place on or around your REO property, it may be a no-brainer to let the borrower stay on as an unpaid housesitter or de facto renter. Doing so is consistent with a servicer’s fiduciary duty to investors, to prevent a merely very bad loss from becoming a total writeoff.

1)
Since mortgage brokers have a fiduciary duty to act in good faith on their clients behalf in California;how is it not a breach of this duty when the lenders pre-emptively contact borrows who they believe may not be able to afford an increase adjusted rate in the future? Obviously it is to soon to know what the screening method they will to identify these possible defaulting homeowners; but we can rule out late payments since that is one of the pre-requites for qualifying for the rate freeze. I am guessing it will have to be something with their earning and potential to pay the higher rate.
If this is the case, the good faith requirements require that a broker may not knowing arrange a loan beyond the ability of the borrower to repay per the terms, or to enter a situation where the lenders may incur a reasonably foreseeable loss at the time the loan is made. It will be kind of hard to claim that they could not have “reasonably foreseen” that the homeowner could not afford the loan at the procurement stage, if they turn around and use the homeowners income information as a pre-screening tool for future defaults. It would seem to me that any adjustment or reaching out to specific homeowners, without a method of determination that became available after the closing of the loan and was not used at that time, could rise to a breach of this duty.

2) It would seem to me that any changing of the loan is a significant modification of the contract, enough so that it would materiality change the terms and render it invalid? So I wonder would you consider the restructuring of the loan as the dissolution of the old and replacing it with a new one? Or would you help them refinance the loan into another arm with a set rate? The reason I wonder about this is, by refinancing your loan in California it could be argued that it is not a purchase money order and therefore does not fall under the anti-deficiency statute of the state. While you could make the public policy argument that it fits within the intended situation envisioned by the legislative, that being the protecting of community value in the face of downward economic times, the district courts have been split on whether or not to allow this extension. What I am getting it is, you could see a rise in judicial foreclosure proceedings and personal judgments being sought between the lender and the homeowner for the difference between the foreclosed price and that on the loan.

I could be wrong, and if i am in my defense it is four in the morning, but none the less i thought i would post this.

I haven’t seen anything specific either, but Bair’s proposal, and the Schwarzenegger crew said they took their cues from her proposal, made it sound as if no adjustment was made to principal. And I have a strong suspicion that this is the concept, as you put it, a reduction in NPV of the payments.

Now in fact that often happens in loan mods, so that isn’t as heinous as it might sound. But to do that on a broad scale basis is bad incentives, and therefore bad policy.