Friday, February 13, 2009

Mortgages, Foreclosures, and Other Monsters Under Your Bed

NPR had a piece on the 13th discussing the issues dealt with here in days past, namely the mortgages servicers/securitization problems. Specifically, the inability for anyone to do anything until the "government" passes a law or buys the Mortgage Backed Securities from investors at "market value" and then passes that savings to homeowners in a refinance.

The issue is that the investors, which may be individuals or mutual funds or retirement funds etc., who own the securitized loans, want the high returns they were promised; they do not want to take less, nor do they want to have the MBS sold for less than 100% of the "face value" (the outstanding balances of principal and interest of all of the loans in the MBS) of the security. Remember, as confusing as this is, that a MBS is like a corporate or municipal bond. It is merely a way for mortgage lenders to spread the risk, of loans they have made, among literally thousands of individual or corporate investors. (see 1/3/09 posting ).

Congress carefully avoided the question in the most recent stimulus package. The President is at a loss because of all of the competing interests, both in government and out. "Wall Street" wants the Government to guarantee 100% of the investment, as do all of the pension plans, mutual funds, and others who own Mortgage Backed Securities. (Ownership, as I write of it here, may mean nothing more than $1,000 of a worker's 401K, invested in the XYZ Mutual Fund that owns $5 million of MBS out of a fund of $100 million. The individual therefore owns 1/1000th of 1% of the $5 million of MBS that his/her mutual fund owns. The more staggering numbers are that the $5 million of MBS that the worker's mutual fund [the ENTIRE FUND, not just that worker's share] owns is only 1% of the entire Mortgage Backed Security which was worth $500 million when it started.) So, some "shares" or ownership rights are as small as 1/100th of 1/1000th of 1%

The others who have a stake in the outcome are the brokers who buy and sell the MBS as securities, the companies who service the loans in the MBS, the Banks who act as Trustees for the MBS, and the HOMEOWNERS / BORROWERS who are being foreclosed, and the lobbyists for all of the aforementioned.

Right now, nearly all of the Lenders have put a hold on foreclosures - some under March 6th (JP MorganChase, Morgan Stanley, Bank of America), some until the 12th (CitiGroup) and others, voluntarily, maybe, as requested by John Reich, who is the out-going Director of the Office of Thrift Supervision (Federal Savings Banks "FSBs", state-chartered Savings Banks with FDIC Insurance, Savings and Loans "S&Ls" etc) in a memo to all regulated thrift institutions on Feb 12th.

Mr. Reich summed up what we the issue with which we have to contend. Everyone is hoping that the President's team will have a plan - within weeks. The problem took years to get where it is and our new administration is supposed to have the quick fix ready by March 6th?. Perhaps the banks and Thrifts that have made loans and still own them can work with a simple payment reduction formula. They still own and control the loan so it is a case by case decision made by the LENDER.

Congress has not been able to agree on much of anything - they are now going to try to tackle the Wall Street conundrum of Mortgage-Backed Securities and all of the voices that will be shouting, "Let someone else take the loss - we just made the investment and we WILL NOT ALLOW any reduction in our return on our investments. By the way, everyone who has his/her retirement money in mutual funds that own the MBSs will say the same thing. Someone has to accept a loss or the federal government will spread the loss to all of the taxpayers in the country.
What's fair? Nothing, but we have to do something.

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

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