Bill’s Place

If you want to understand why the shadow inventory is growing do a key word search on the Wall Street Journal article, “Congress Helped Banks Defang Key Rule” by Susan Pulliam & Tom McGinty ⁽²⁾

Under current accounting rules, banks and other mortgage investors are reluctant to complete a foreclosure or a loan modification because the completion of a foreclosure or modification transaction forces the revaluation of the mortgage asset on the financial books of bank’s, mortgage investor’s or Government Sponsored Enterprises (think bank loan loss reserves). And, banks and other investors would rather have a strategic defaulter, or a squatter in default, than have a vacant  foreclosed home because the squatter provides some security from vandalism and 'stripping', and because the squatter continues to be liable for property taxes, HOA fees and municipal assessments.

Unemployment is high and loan qualification standards are very restrictive, so the banks have a significantly reduced opportunity to sell foreclosed homes, so why rush to foreclose.

Stay tuned for the outcome of the investigations of the Mortgage Electronic Registration Systems (MERS). What institutions came-up with the concept of MERS and provided the funding for the start-up of MERS? Fannie Mae and Freddie Mac each provided 2 million $ in seed money to create MERS, then they invited the largest mortgage investment banks to join in the MERS process^.(3)

I watched the U.S. Senate and U.S. House of Representatives hearings on problems in the mortgage industry last week. It was truly ironic to see Senators and Congressional Representatives scolding and badgering witnesses about the problems in the mortgage crises. It would seem those in Congress don’t understand how they helped to create and fuel the mortgage and real estate bubble by years of policies they endorsed and encouraged.⁽⁴⁾

Committees in The U.S. Senate and House of Representatives held hearings on problems in the mortgage industry and problems in the mortgage modification effort last week. Most of the testifiers commented that a general problem in foreclosures and loan modifications was a mis-alignment of incentives. They also mentioned three other more specific issues:

(1) Most Mortgage servicers are ill-suited to the task of underwriting a modification. They were set up as operations designed to process and allocate payments, not to underwrite or modify loans.
(2) Mortgage servicers have monetary motivation to keep the original loan on the books as long as possible (even while appearing to work on a foreclosure). This is because fees and penalties, which represent income to the servicing entity, accrue while the loan is being modified.
(3) Investors in mortgage notes have little incentive to approve a HAMP modification (or any other modification for that matter) if it creates a loss in the net present value of their note, and most servicers and other witnesses testifying mentioned that mortgage investors have not yet really embraced the loan modification process.