Extend And Pretend – Lenders Wait For Housing Turnaround
From A USA Today Blog
The main reason for slow progress is that modifications require banks to take write-downs and come clean about the true value of their assets.
Banks, to paraphrase Jack Nicholson in A Few Good Men, can’t handle the truth. That became evident in April when they successfully lobbied to end an accounting rule known as “mark-to-market.” Under that rule, lenders had to value their loan portfolios according to what they were worth at current market prices — not what they thought they should be worth, or what they once were worth, or what they might be worth in the future. Now banks are free to fictionalize their balance sheets in ways they think will help them, at least in the short term.
A Rolling Loan Gathers No Loss
If the lender doesn’t have to take a write down until the loan is either modified, sold in a short sale or foreclosed upon, then why not just keep letting the loan stay delinquent. Why not delay the short sale, modification or foreclosure. At You Walk Away, (over 4,000 customers) we see this trend increasing and hear some of our customers saying, “why isn’t the lender filing the foreclosure notice? I want to get this behind me”.
We have clients that have been living in their homes for over 2 years without making a payment. Most of them are jumbo loans which would make sense why the lender doesn’t want to take the write down.
Some lenders & banks are walking away from some of these properties as well. We have several cases where the lender gave the property back to the homeowner and cancelled the note all together. These homes in particular aren’t in the most desirable neighborhoods which is presumably why the lender doesn’t want them. Needless to say, it creates a pretty big mess for the homeowner.
New York Times reported on July 30th: Lucrative fees may deter efforts to alter loans
“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.
…“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.
…”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.
A comment on the USA Today blog above said:
The Government through TARP and tax avoidance laws geared to protect and expanded bank reserves and liquidity has provided a major disincentive for a bank to process a “short sale” or “loan modification”.
The new 2008 and 2009 foreclosure laws were complex, hard to implement, clumsy, restrictive, and ultimately provided an indeterminate or worse end situation for the home owner, and are counter to the bank reserves and liquidity goals.
Initially in 2007 and 2008, Bankers and Builders are in a race to the bottom to clear a housing inventory. Banker won the every round by selling foreclosures below replacement cost.
How is it that these banks are all acting and pricing the same way in concert with each other? Is there collusion?
Banks have no incentive to refinance.
2009, the Fed is loaning money to banks at less than 1%, with the government owned AIG paying out the foreclosure insurance, with direct bailout money to cover reserve calls, with tax write offs when they buy securities and no taxes after they hold to sell banks are making money on the backs of the down and out mortgage holders.
Banks have no incentive to refinance.
The way to accomplish that is to delay, delay, and delay and blame the homeowner for some bank paperwork SNAFU.
Business Week report in the June 8th issue that JPMorgan Chase bought Washington Mutual for just $1.9 billion and is looking to pocket $29.1 billion over the life of the loans.
Conclusion
By “extending and pretending”, the responsible parties are ultimately dragging out the crisis and making this mess last a whole lot longer than it should. In what some would call agony, it would be to inaccurate to say it’s a “slow death” because eventually there will be a real recovery. It just may not look like everyone is expecting it to…
Jon Maddux
CEO
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{ 4 comments… read them below or add one }
I really like your blog and i respect your work. I’ll be a frequent visitor.
What implication does a forclosure in Mississippi have on military retirement pay? Can this retirement pay be garnished?
I have a house in riverside, the servicer, countrywide/BofA, isn’t doing anything after
8 months of non payment, futher, they are paying the insurence out of an escrow account that I don’t pay into? They told me that they’re not doing anykind of modification with interest only loans. What can I do
to resolve there lack of action.
Great Article!
Causes me to wonder how the foreclosure timeline will play out in MN? Seems like the best approach for the home owner is to stop paying their mortgage and wait out the lender to see the effects of an ever increasing inventory of forclosures to process. It makes total sense that they would not refi at terms that would still make a profit (e.g. 1.25%) when there are so many incentives to turn a crisis into a short-term opportunity to profit.
So I wonder if it makes more sense to put a house up for sale or let the lender foreclose? Granted if a person could actually break even their credit rating would be better off. But if you anticipate your best scenario is a short sale, why not just let the lender do all the work and pay all the fees to sell the property?