Sunday, November 9, 2008

Who Is The Bailout Helping Right Now?


For days and even weeks, aside from the election, the headlines were about the financial bailout package the government was establishing for large banks and other financial entities, so that lending would begin again. Credit had gotten very tight, meaning that borrowing was difficult, even for corporations. Especially hard hit was and is the mortgage industry.

With all of the talk about "Toxic Assets" (see prior posts) banks and Mortgage Backed Securities ("MBS") holders were scrambling to avoid being the kid who, while paying musical chairs, finds him/herself without any place to sit. In this case perhaps anyplace to hide would have been more apt. There was and still is a fear that the MBS will be worthless. If they are valued at less than 90% of the pre-hysteria price, it is NOT due to value, but rather to a continued state of anxiety. Anxiety, by the way, has been described, at least in part, as fear without an object or real situation of which one is afraid. It's kind of like "free floating fear" - or "A Fear without a Cause" (excuse me James Dean).

The money is SUPPOSED to be used for loans, INCLUDING loans to homeowners to stop foreclosures, especially if the problems relate to rates adjusting upward. JPMorganChase announced that it would suspend foreclosures for a 90 day period; Washington Mutual (WAMU) had set up special procedures to assist in mortgage modifications to prevent foreclosures; Bank of America, which recently acquired Countrywide Home Loans & Countrywide Mortgages et al, has settled actions brought against Countrywide by 22 states for predatory lending practices. This settlement is claimed to be a lifeline for homeowners in default, or in danger of default; Wells Fargo Bank, Wells Fargo Financial, Wells Fargo Home Mortgage etc have each established an executive office for loss mitigation to keep homeowners from losing their houses.

Is Any Of This Working?

Based on the dozen or so loans with which I am working, I can say "MAYBE", in some cases. The problem still remains - MORTGAGE BACKED SECURITIES. There are contracts between and among servicers, packagers, securitizers, brokers, investors ... None of these parties wants to accept less than 100% of what the contract states that it will be paid, yet they are each certain that the MBSs are worth far less than face value; and will cause economic ruin if the government doesn't buy them from the entities which hold them; and buy them at face value, with the government taking any losses. WHAT IS WRONG WITH THIS PICTURE?

Why would it not be reasonable for the Federal Government - Congress for example - to pass a law, to permit these contracts for MBSs to be broken, and the individual loans modified? After establishing a post-depression like Federal Government Agency, not like a FannieMae or FreddieMac, but like the FHA or Rural Housing (part of USDA), this agency could rewrite the truly troubled loans in a portfolio (MBS), making the payments affordable to the homeowner, and taking the toxicity out of the MBS asset. The same agency could originate new loans for "credit worthy" borrowers, giving them the government rate for their loans, and eliminating the worst of the ARMs. This entity could also encourage first-time home buyers by offering great rates, and a slightly higher than normal loan-to-value ratio WITHOUT mortgage insurance premiums. (The issues presented are not meant to be a panacea for the problems; however they can work, if placed in context with other legislation)

But Is It Working?

Yes for me and my clients! But in general,NOT REALLY! I am regularly hearing from lenders Counsel, "The investor will not permit modifications" and from the loss mitigation departments themselves,"Send us our loss mitigation package and we will consider it. IF IT LOOKS LIKE WE CAN HELP, we will call off the foreclosure sale". My answer is "Can't you postpone the sale, which is scheduled for next week, NOW?" The response is, too often, "NO". Typically, I can get to a person who can assist my client, but that is because I am an attorney and I have an extensive banking and mortgage industry background. I know how the business works, and I can empatize with the people on the other end of the telephone. But for others, even other lawyers, NO! Of the cases I have, 1/2 are referrals from other attorneys.

The pace of sales is still escalating although we don't hear about it as much. That is due to the fact that there was an onslaught of "Notices of Intent" sent to borrowers, putting them into foreclosure status. Now the volume has stabilized, so it is not news (we also had an election in the middle - how dare they). Please note that I said that the volume has stabilized, not that is going down, or that fewer borrowers are losing homes, or that sales have stopped. I merely stated that things are staying the same - it is just that we are numb to it - unless of course the victim/borrower in trouble is us!

To be fair, Lenders/Servicers are caught in the middle. The owners of most of the loans are mutual funds, retirement plans, 401K plans, private investors, all looking for a pre-determined return on the amount invested. No One wants to give up anything, but Everyone is clamoring for the other party to fix it, or for the Bailout to work.

Until there is a Federal solution, mandated by Congress, the crisis will continue. Is there a recession? Ask an economist for the technical answer. In REALITY, which in this case is based PURELY ON PERCEPTION, not the data or true financial information, YES. Are MBSs worthless? NO! Will anyone believe that? No enough of them!

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