naked capitalism

ndk says:

Meanwhile, somewhere better, Tanta is laughing her ass off:

“In practical real-world terms (not the pretty stuff you see in contracts), when recovery values in a foreclosure are high (in an RE boom), servicers can noodle along and rack up expenses you didn’t know existed—i.e., shove as much of your “overhead” into FC expenses as you can get away with, since someone else will eventually pay the tab.”

But mortgage servicers have always had bad incentives here. The real question is why investors and insurers are not fighting back, because they’re the ones who tend to pay the fees, which counts in a bad market. Tanta continues:

“When the liquidation value starts to approach or drop under the loan amount, on the other hand, investors and insurers start going over those expense reports with a fine-toothed comb, and it can end up in the same kind of “war” we’re seeing with repurchases.”

I suspect acute modification of investor and insurer behavior through interventions by the Treasury and Fed — like buying $1.4t of agency MBS, and pressuring them not to foreclose — is our biggest culprit.

Did someone say “moral hazard”? Because I thought I heard “moral hazard”.

Richard Kline says:

As I read that article tonight, it _was_ veniality. The judge caught the exec effectively lying about the actions the servicer had taken: he claimed that she had repeatedly failed to follow requested documentation when she produced proof no such documentation had ever been solicited from her. Doesn’t matter if the exec was ill-advised; he should never have made such a statement without records that demonstrated it, while she produced records that showed the claim was bogus. —And still, no sanctions of any kind from the judge. Probably because the judge has no grounds to show genuine intent rather than ineptitude, and so little hope of making sanctions stick.

Regarding those investors and insurers leaning on servicers to do mods . . . securitization was _designed_ to insulate sellers from consequences. Most of those in junior tranches have, effectively, no rights at all as I recall discussions of this from 12 and 18 months ago. Barring proved criminality, they are dead meat. And those senior tranche holders, I will wager that having gone back to the fine print on the 33rd codicile they have found that, oops, they too have very little leverage to pressure servicers. One thing that triggers their rights to intervene are, wait for it, foreclosure rates above set thresholds. Is it any surprise that servicers wish to hold _filed, official foreclosures_ below threshold triggers, regardless of the actual state of payments for many of the notes involved? If they don’t foreclose, they are largely insulated, I suspect. How did holders of these plutonium notes end up in such straights? Juniors were told they’d be wiped if loss rates went above x but that was impossible as housing only goes up. And seniors never expected to hold the notes long-term, but ended up red-handed when they couldn’t on-sell. . . . None of these blokes expected to ever _need_ to force mods, so they didn’t care.

And ndk, no but yes. One can’t lump the Agency MBSs directly into this discussion. Everybody keeps trying but their really a different beast. They are _already_ government securities de facto as the Guvmint has guaranteed them. We the people will take the loss one way or the other, now or later. The Treasury buying them is a misguided attempt to de-toxify ‘Frannie’ in a good bank-bad bank way that the latter can keep the US mortgage market from entirely collapsing.

But on the yes side, I think Guvmint buy-up is exactly what the servicers and MSB holders are holding out for; a Resolution Trust Co. scamfest where they offload their death notes for good money. So again, there is every incentive to suppress modifications now, for the losses of which they will be responsible, in favor of stringing this out until the Guvmint ‘does the right thing’ in their view. The actual house occupants behind these mortgages are less than the dust beneath their Ferrari wheels. And yes in that regard, the Treasury buying up Agency MBSs does lend credence to the notion that evetually the minions there will cave and buy privately held notes at near face, or at least on easy, easy terms. The end problem here, again, is that there is no strategy and no will inside the White House. Instead of saying “X will happen; Y will not happen,” they’ve bought into the zombie croon of “Tomorrow is another day.”

lambert strether says:

Has anyone considered the possibility that “we can’t find the paperwork” is a symptom of accounting control fraud?