Saturday, October 25, 2008

Foreclosure Crisis - How To Stop It


Why do we have a foreclosure crisis, beside the obvious reason that payments are not being made? Quite simply because the mortgage industry changed the rules! In fact, the mortgage industry itself no longer has any say in the matter. As stated in earlier posts, mortgages have been packaged and sold as securities, so it is the managers of the securities who have control.

In a New York Times news story appearing 10/25/2008, some of these investors/managers have threatened to sue (not sure who or what) if the mortgages in securitized pools (the bunches of mortgages that have been put together and sold as shares of a bond -see earlier posts) are renegotiated. They will sue if a lender tries to change terms of a loan, even if to stop a foreclosure and salvage value for the "pool" by keeping the homeowner able to pay.

In the past, a borrower could call the bank, or his/her attorney could call, and discuss modifying the terms to avoid a foreclosure. NO MORE in many cases because no bank owns the loan - the investment world and thousands of investors each own a tiny bit of every loan that has been securitized. The SEC and other agencies are, and should be, looking into a way to force the issue. WHY? The means are already in place. We have the Securities and Exchange Commission (SEC), and the IRS.

The SEC regulates the public sale of securities, and that's what mortgages have packaged as - Mortgage Backed SECURITIES (MBS). The folks putting the pools together and some of the initial investors get tax breaks, so the IRS already has some authority there.

Perhaps the concept is too simple but - why can't the MBS be "taken apart" and restructured? When a mortgage loans, which are part of a MBS go delinquent, why can't the MBS be forced to permit a rewrite/modification of that loan? IRS could waive penalties, and the SEC could allow/force the restructure of the MBS. Investors might get a slightly lower return on the investment but that is better than the devaluation that is occurring now.

We now have "Toxic Assets"! What is meant by that specifically are MBS - no one KNOWS the value of a securitized pool because no one is certain of how many loans will "go bad". How many foreclosures will there be, and will they overwhelm the loss assumptions made when the pool was originally sold to the public? The loss will be minimized if the underlying collateral, the houses that the mortgages secure, do not go to auction. If the owner/borrowers keep paying, at worst, the return on the investment is lessened, but only minimally. If too many Borrowers stop paying, for whatever reason, the return goes to zero. How to stop it? Stop the foreclosure. Allow mortgage modifications -restructure the pools if necessary. There are loss reserves built into the pools. There are ways to keep them from being exceeded, but not by insisting that an MBS cannot be touched.

author's copyright by Richard I. Isacoff, Esq October 2008

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