On the Inequity of Handing Mortgage Servicers $27,065,760,000

The media seems curiously indifferent to the continued and deserved anger of the public regarding bank bailouts. Of course, the fundamental problem is that we were sold a bill of goods. The money was clearly going to fill existing black holes in financial firms’ balance sheets. That would have been a legitimate use of taxpayer dollars if incumbent management had been thrown out, bad assets were disposed of, and the industry was put on a short enough leash to prevent this sort of thing from happening again in the near future. Instead, citizens were given a bald-faced lie: that the funds would go to support new lending.

Now one can argue that too much lending was what got us into this mess in the first place, but that does not alter the basic conundrum: that the bailouts were badly misrepresented but the media for the most part seems unwilling to push too hard on this front. Yes, the papers carry the occasional “banks aren’t lending” story. But we haven’t seen much pushback on the deception underlying this entire operation.

One piece of this is the inability of cutting the Gordian knot of restrurcturing underwater mortgages. Before I get the usual howls from readers objecting to supposed deadbeats or greedy people getting an unfair break, I suggest you consider a few facts. First, no one seems to have a problem with Chapter 11 for companies, in which they get a stay from creditors and they work out a plan which includes writing down debts to a level that the company can support. We (and just as important, the lenders themselves) recognize that half a loaf is better than none.

In the stone ages before securitization became widespread, banks would do what we now call mortgage modifications with viable (stress viable) borrowers. If a homeowner still had a source of income, the bank recognized in most cases the losses would be lower if the homeowner could be kept in place than if the bank incurred the costs of foreclosure and bore the risks and uncertainty of disposing of the house.

As most readers know all too well, this pattern has been turned on its head. The complexities of the structuring of mortgage securities means that the trancheholders who will bear the brunt of losses in a foreclosure are in most cases are different than the ones that take the hit in a principal reduction (the only type of mortgage mod that has decent odds of succeeding). An even bigger barrier is that services profit from foreclosures and are set up to do them on a streamlined basis, while mods are best done one-on-one, and even attempts to standardize procedures still take a fair bit of individual attention.

Reader Barbara, a mortgage industry veteran, is disgusted by the fact that servicers who have refused to make mortgage mods are getting large government bribes inducements and are still doing perilous little. See pages 22 and 23 of this October 2 TARP update which shows the total dole to servicers.

McClatchy, which was the only major news organization to offer critical coverage of the Iraq war, seems to be the only one taking servicer misdeeds seriously. It has two stories by Chris Adams on servicer misdeeds. One discusses how some recipients of TARP funds, such as Select Portfolio Servicing (formerly Fairbanks Capital) and Countrywide have had run-ins with state officials about customer abuses.

A second, longer piece, “Firms are getting billions, yet aren’t averting foreclosures,” is pointed but also does a good job of covering the bases:

The federal government is engaged in a massive mortgage modification program that’s on track to send billions in tax dollars to many of the very companies that judges or regulators have cited in recent years for abusive mortgage practices.

The firms, called mortgage servicers, have been cited for badgering, manipulating or lying to their customers; sticking them with bogus fees, or improperly foreclosing on them…

The reliance on such companies points to an ironic paradox for federal regulators: Cleaning up the nation’s financial crisis often rewards the firms that helped create the mess. …

To make matters worse, the Government Accountability Office, Congress’ watchdog, has said that the Treasury Department hasn’t done enough to oversee the companies participating in what’s known as the Home Affordable Modification Program…

Since it began this spring, only 12 percent of a potential 3 million delinquent mortgages have begun the process of being reworked, or put into “a trial modification,”…

Although it’s early in the Treasury Department’s program, housing advocates say the servicer industry for years has resisted helping customers with modifications….

It shouldn’t have been a surprise that the mortgage service companies would have trouble executing wide-scale mortgage modifications. They generally aren’t set up for the complicated business of reworking loans.

In 2007, an assistant attorney general in Iowa, Patrick Madigan, analyzed the looming mortgage meltdown and found that mortgage service companies have a “highly automated process, spending as little time as possible on an individual loan and preferably no time actually talking to the customer.”

“Loan modifications, by contrast, are a time-intensive process that requires a great deal of individualized attention,” he wrote. “In some situations, it may be easier and cheaper for a servicer to simply foreclose on a borrower than to try to fix the underlying problem.”

Service companies had high turnover and employees who saw their jobs as akin to that of collection agents. Some were known to hang up on callers if they started to get tough questions, Madigan wrote. He urged mortgage service companies to hire far more staff and boost training….

By this year, more federal and private efforts were under way to modify millions of troubled mortgages, and customer service was beginning to improve. Companies, though, were still having trouble getting the job done.

“It is difficult for homeowners to initiate productive discussions with lenders because many servicers lack the capacity to deal with a large volume of modifications,” the Congressional Oversight Panel reported. “Servicers are generally understaffed for handling a large volume of consumer loan workouts.”

The panel found that it’s “unlikely” that mortgage servicers will be able to do all they’re being asked to do: “Servicers are simply in the wrong line of business for doing modifications en masse,” it said.

The full story is here.

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  1. Mogden

    This is a great quote:

    > The reliance on such companies points to an ironic paradox for federal regulators: Cleaning up the nation’s financial crisis often rewards the firms that helped create the mess.

    Why, it’s almost as though that was part of some mysterious, hidden plan.

  2. fresno dan

    “Before I get the usual howls from readers objecting to supposed deadbeats or greedy people getting an unfair break”
    Gee, I don’t get the idea that most of the usual commenters here would think that. I would imagine most are like me – consider your financial situation, and if you are overpaying – default! Its a financial transaction. What makes a free market worthwhile is that both parties enter into the contract freely, and it is in the interest of BOTH. BOTH parties have the option of bankruptcy. Continuing to pay a mortgage of 650K on a house worth 350K is silly, and really helps no one. Economies work on price signals, and skewing those signals always comes back to lower output in the future (funny thing about the future – it shows up sooner than you would think).

  3. Wayne Blanchard

    The Media hounds are silent, simply because the same gang of Zionist thugs running the Criminal Federal Reserve Enterprise owns the Media, lock, stock and barrel.

    $Billions for the Bankers, Debts for the People, nothing has changed in over 2,000 years…but it soon will.

  4. Siggy

    Handing mortgage servicers inducements to modify loans is nuts. Allow the foreclosures to go forward, in fact, accelerate them! As the typical mortgage does not have a deficiency clause, let whoever owns the loan eat the loss.

    We could even eliminate the servicer, force the party who owns the loan to service it. Who owns the loan? Are you being threatened with foreclosure, tell the judge you want the party seeking foreclosure to produce the loan and the mortgage contracts, demonstrate standing. The case in Kansas goes to the issue, who owns the loan is the party that will eat a modification. The problem is that there is not a clean line of ownership.

    As much as there is inequity here there is rank stupidity. We seem to be able to agree that there has been irresponsible lending and borrowing. We seem to be able to agree that deleveraging is a good and necessary process. Why try to inhibit the process? Why not foster its acceleration?

  5. Terry

    Comparing the mortgage mod to a Chapter 11 bankruptcy is incorrect – in a Chapter 11 bankruptcy, the equity holders don’t get anything until creditors’ claims are satisfied. In the mortgage mod/cramdown situation, the homeowner gets to keep the asset, the house, while the lender takes 100% of the loss.

  6. Eric

    I won’t howl about deadbeats, but I’d like to point out two things to bear in mind when we consider the overall impact of defaults. First, defaulters who simply check the real estate market and then determine whether to pay the mortgage or not based on their equity postion, even if their income allows them to service their debt, are within their rights, I guess, but to the extent that their actions drive bank bailouts and/or FDIC claims they are clearly shifing an agreed to obligation from themselves to the public. Second, even though it is the law now, I find it pretty reprehensible that forbearance gained on defaulting or the rare principle reduction modifications goes untaxed. How can anyone claim with a straight face that relief from an agreed debt is not income? Again, it is the law, but everyone who is paying their mortgage, or owns outright or rents ought to be pretty upset by the added burdens placed on their shoulders by defaulters – particularly those that have the resources to pay but choose not to.

  7. Susan

    I am in the midst of this – I’m one of those people that someone might call a deadbeat. I haven’t missed a payment, I haven’t been late. And I’ve been trying to work with IndyMac, then IndyMac Federal after their bailout, then OneWest after their sale, the servicers of my loan, for a loan mod, for more than a year.

    I’ve been turned down repeatedly despite having a steady income and a good credit history. Here’s why, according to them.

    1. Six months into the process – there are new programs coming. We’re abandoning these current programs.

    2. We have no programs for people who are not delinquent.

    3. We’re preparing to join the HAMP program – please appy again.

    4. The latest? We’ve decided not to get into HAMP after all and we have no program for customers who aren’t delinquent. We’ll let you know if we change our minds.

    Over the past year, my payment, which is 68% of my income, has actually gone UP thanks to increased taxes. And I’m paying PMI, which is also non-negotiable thanks to the decreased value of my home.

    I put a great deal of money into improvements to this place. We expected to stay, to be able to afford it with the income of two people – but one of our incomes disappeared with the recession. The bank didn’t give a loan to both of us – just to me. It didn’t ask for income verification, we had some cash and we thought we could make it. So we risked it, and we lost.

    I do not expect a handout, but I am disgusted that after a year of providing more and more information, after a year of being led on and continuing to pay a mortgage I cannot afford on time, that my servicer, which took a federal handout to stay afloat until IT could be sold, won’t work with me.

    Where is the oversight? There isn’t any.

    I don’t know what we’re doing – if we can sell, we sell. Do we hang on until we’re totally broke? Or do we walk away and let the bank choke on the place?

    I was raised to pay my bills in full and on time. It’s an ugly new world.

  8. DellaTerious

    Am I nuts or what? Wells Fargo and other banks are cutting or eliminating Helocs like mad. The Reason? The property value on which said Heloc is based is “compromised”. Yet they refuse to downgrade the MBS’s which contain those same properties as the basis for their evaluation. So if a property is held on WFB’s books, it’s valued at $300g’s, let’s say, but if you want to borrow on that same property, the appraised amount of $150g’s is the amount the loan is based on.

    Am I missing something? I’ve seen no hint of the disconnect, and, well, fraud, that keeping two sets of books entails, brought up anywhere. At least the SIVs were there for anyone to see, given Enron’s demise, but so is this, but it’s not mentioned anywhere (that I’ve seen)…

    The entire justification posited by the bank robbers is that the deflated values of the properties are only temporary, so if that’s the case, why are they canceling helocs on those very same properties?

  9. Vinny G.

    Being the brilliant (but humble) contrarian that my reputation demands of me to be, I shall now explain the true reason why banks are opposing restructuring of underwater mortgages, along with proper disposal of the repossessed properties they currently carry on their books.

    It is simple: because they need the *land* in order to turn this country into a feudal society, similar to the United Kingdom, where a handful of “lords” own most of the land in the country (including that on which most everybody’s single-family house sits on). So there, after 230 years of liberation from that decrepit and backward British Empire, we are now finding our way back to it.

    As such, I propose we embrace the inevitable and burn our Constitution and immediately set up a system of lords, earls, dukes, counts, princes, princesses, and countless other layers of entitled parasitical pieces of human garbage to suck on the blood of the hard-working, long-suffering masses. Just like they have it at Mamma Britain’s home, eh? Yeah, let’s have our own version of that adulterous Prince Charles, shall we? And, while at it, let’s also choose a Queen as our supreme monarch. We can then enjoy yearly spectacles of stupidity around Christmas and Easter, rampant knighting of crooked Wall Street banksters and health insurance executives, along with immediate commission Lord Donald Trump to build our queen numerous castles all over the country, with gold-plated toilet sears where she can freely take a blue-blooded dump at her royal heart’s desire.

    In other words, the banksters want the land. Yes, it’s all about the land.

    So welcome back home to Mamma Britannia… Feudalism a la 21-st Century and beyond…LOL

    Vinny G. – “The Unstoppable Think Tanker of One”

  10. Vinny G.

    @ Wayne Blanchard:

    You have a point, but I’m not sure it’s primarily the Zionists who are behind this. I think it is mainly the US-UK connection that runs the show here. The same “exploit the masses” mentality promoted by the most violent and murderous empire in history: The British Empire.

    But nothing will change here without a revolution. Systems as well entrenched as this one don’t change out of the goodness of their hearts. It takes brute force.

    Just look at the sickening spectacles of this so-called health care reform — It’s all a sham, another way to scam the already-impoverished American chumps. I work in health care, so I see the absolute and total disaster that this system has become, the immense suffering of millions, all for the benefit of the handful of criminal and murderous health insurance elite, along with some doctors who don’t feel good about themselves unless they make a million dollars a year. But hey, as long as there are enough selfish, uneducated, gun-loving, grandparents willing to shout and shove at town hall meeting in order to keep their grandchildren ill and uninsured just so their wasteful Medicare benefits aren’t restructured, things won’t change. Things will stay the same.

    Until one day… when the kettle boils over. That’s why I keep my passport and an open plane ticket handy. Because let me tell you, when the shit hits the fan in this country, I’d rather be at my condo in Niece…

    Vinny G.

  11. run75441


    That name sounds familar. Didn’t I know you from some where or place before??? Did I meet you at a convention of some sort and we were talking throughput and Lean Six Sigma? Now I remember . . .you write a financial blog and just finished a book. Its been so long since I read anything of yours . . . welcome back to the fold.

  12. Vinny G.

    @ run75441:

    Hey, thanks for sharing with us about Yves’ writing a book and a blog. This is truly great news for all of us here. Wow! I never would have thought Yves did that…LOL

    Vinny G.

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