One of the things we’ve known for a long time is that foreclosure isn’t just bad for the homeowner; it’s bad for the community, the state, the country. Preventing foreclosure is good for all of us.
It’s not about a free house!
I hear this from time to time, and my response is the same: show me someone you know who got a free house. I’m sure there’s someone out there who did, but I haven’t met them. What it is about is due process of law and economic common sense.
In South Carolina, foreclosure is “judicial,” meaning the lender must sue the homeowner. And thankfully that’s the case. It gives the homeowner some basic due process rights–the right to contest wrongful foreclosure, for example.
Ironically, this is also good for many investors–the ones who are the owners of the mortgage notes. The real issue–from a policy standpoint–is to prevent unnecessary foreclosure. I define an unnecessary foreclosure as having one or more characteristics:
- The homeowner is behind on payments but can make his ongoing payments (foreclosure is a sledgehammer–massive overkill for a loan which would be modified slightly to allow the homeowner to catch up on payments);
- The house is “upside down”–it’s worth less than what’s owed (here, the investor will take a huge loss if the property is foreclosed so it’s better to get creative and write down the mortgage to the value, “mark it to market” as the finance folks say, and allow the homeowner to pay less in monthly payments as a result); or
- The homeowner can make the payments if the interest rate is reduced (here, again, a rate adjustment for a few years can make all the difference).
Because the investor–the owner of the mortgage note–will take a huge loss if the lender forecloses.
Let’s say a home is worth $200,000 but the homeowner owes $250,000. If the property is foreclosed, the property will need some repairs (perhaps substantial), the lender will need to pay homeowners dues or condo dues, insurance, maintenance, utilities, property taxes, and a real estate commission at the sale. The house may sell for $175,000 after the lender has expended substantial sums on these items. As a result, the lender might only net $150,000–maybe. Maybe even less if the home needs substantial repairs or is in a declining market.
You can do a lot of mortgage modification for $50,000!
I’m sayin’. And the investors (the owners of the mortgage notes) know this. The problem is with the servicers, who are–I won’t sugar coat it–just plain evil.
Laurie Goodman is an expert in mortgage-backed securities (MBS) and works for Amherst Securities. Goodman has the record for the most top rankings for fixed-income research. She’s a MBS guru. She speaks of a potential housing “death spiral,” warning that 10 million of the 55 million mortgage holders could default by 2018.
And Goodman points out what we’ve known for a long time: “If you save a borrower, you save an investor.” Why? Because modified loans actually provide investors with higher returns. Goodman advocates writing down the debt–in our example above-writing the note down to $200,000 from $250,000.
However, Goodman notes that servicers oppose write downs because their fee structures are tied to the principal balance, not the ultimate payback of the loan. She notes that this arrangement (servicers deciding whether to grant loan modifications) is “ridden with conflicts of interest.” Those of us dealing with this maddening process knew that already, but it’s nice to hear it from someone on the inside.
And I thank Ms. Goodman for telling it like it is. More people need to understand what’s really going on with the foreclosure crisis.
Postscript: Read more about Laurie Goodman and other Wall Street insiders in Money Magazine’s article, “Revolt of the Insiders.” (January/February, 2012), which is the source for the information in this post.