Saturday, January 3, 2009

Why Loans Cannot Be Modified


The last posting discussed the problem with ARMs, and why a great number of borrowers are finding it impossible to make payments. The simple answer is to have the lender change the terms of the loan, MODIFY the agreement, so the Borrower does not end up facing a foreclosure. Houses generally sell for a maximum of 1/2 to 2/3 of their value at a foreclosure auction. The Lender wants money, not a house. The Lender especially does not want to own a house, waiting for the right buyer. During that period the house is a non-earning asset for the Lender, and the Lender has to pay for heat, upkeep, etc. Regulators, like the FDIC, do not like non-earning assets.

As was posted earlier (9/30, 10/25, 12/3) the Lender of the money no longer owns the loan. No ONE does. Loans are now packaged and sold $500,000,000.00 at a time. Investors bought little pieces of the who group of mortgages; they bought a tiny piece of each mortgage. The Lender hires a Servicer, a company to send bills and receive payments. The entities lawyers, government officials, and Borrowers talk to when trying to modify a mortgage, is the Servicer. This entity has very little authority to alter the terms of the contract with the Borrower (see last post). Even if the request from the Borrower to help him/her keep the home is to cut the interest rate to a more reasonable rate, and to allow all back payments, if any, to be paid after the regular term of the loan is over, Servicers DO NOT have the authority to make those deals.

The words I hate from a Servicer or its attorney, when I am trying to get a modification for a client facing foreclosure, are "I will have to check with my investor". The chart shows who does what, and who owns the Loan. Like I stated -NO ONE - it has become part of a security, a bond; it has been sliced and diced and cut into a million tiny pieces, owned by hundreds of investors. If you have Mutual Funds in a 401K, or IRA, or just held in your name, which own(ed) Mortgage Backed Securities ("MBS"), you owned a teeny tiny piece of many mortgages. You might have need an electron microscope to see how much of a loan you owned, but own it you did.
An explanation of the Chart from the top:

1. The Originator/Seller is the Lender with whom you dealt and from whom "bought" your loan.

2. The Special Purpose Entity ("SPE") is just a corporation set up to own the mortgages until they are sold. The SPE pays the Lender for the loans. The only assets in the SPE are the mortgages the Lender has made/originated.

3. The QSPE/Trust is the entity that ultimately puts the $500,000,000.00 of mortgages together and gets them ready to sell to investors; big investors like mutual fund managers, or little investors like you and me.

4. The Trust/QSPE (the "Q" is for "Qualified") is responsible for managing the assets through a Trustee, typically a bank like Wells Fargo or Deutsche Bank.

5.The Trustee has a duty to the investors who buy the pieces of this big pool of mortgages, which is now called a "Mortgage Backed Security". The Trustee has no duty to any Borrower, unless the Servicer, hired by the Trustee, really makes a mess of things. It is at this stage that the Mortgage Backed Securities are sold; sold in tiny pieces of the whole pool

6. The Servicer is the company/bank that actually sends payment notices to Borrowers, collects payments from borrowers, keeps track of real estate taxes and insurance on each property securing the mortgage note (the I.O.U. you sign to get the money to buy the house), and hires the law firm to foreclose if payments are not made. The Servicer has a duty only to its boss, the Trustee. It has very little authority to do any modification. THIS IS WHERE THE PROBLEM LIES.

7. The investors buy pieces of the MBS put together by the Trustee of the QSPE itself. They demand payment in full of both interest and principal. They do not care about a homeowner because they don't own a mortgage from the homeowner. They own a piece of paper that states they own $25,000,000.00 of this MBS. If it is a mutual fund, then thousands of people own the teeny tiny portions I mentioned above, because they invested in the Mutual Fund. Most people still have no idea of what a mortgage-backed security is, or how it works. The Mutual Fund that does know all about them, however, has no idea, and never had any idea, of the quality of the MBS. By quality I mean the probability that the investment will not lose value and will pay interest as promised.

The Borrower and owners of the loan are so far removed from each other that it is literally impossible for a Borrower to talk to the real owners of the mortgage, because there are thousands of them for each loan. Remember, 1000, 2,500, 5,000 or more loans get mashed together to make the MBS.


The alternative, which is being hotly debated in Congress, is to give Bankruptcy Judges the right to modify loan terms which can be shown to be too harsh; or where the value of the property has gone down so far that there is a huge gap between the amount of the loan ($125,000 for example) and the value of the property ($90,000), or $400,000 loan and a current value of the house of $300,000. This issue, coupled with the kinds of loan discussed in prior posts and set out in detail in the post from earlier today, can be fixed by a law that allows Federal Judges to keep people in their homes by making the mortgages more realistic and not fraudulent or misrepresentative.

There is no answer that will make everyone happy. Our economy, in fact the world's economy depends on stability. We do not need the MBS to pay out 100% of what was invested, but rather to know what the value is and to know that there is a mechanism to stop the foreclosure debacle.

Author's Copyright by Richard I. Isacoff, Esq, January 2009

1 comment:

Joe Huprich said...

Richard - I somewhat agree. I am a lawyer myself and have been filing Truth in Lending lawsuits against banks this year, attempting to negotiate a better deal for the borrower, keep them out of foreclosure, and in the end a better deal for the bank in avoiding the costs of foreclosure, etc. The banks do not seem to be cooperative and are fighting much more than I would expect. Any thoughts as to why?