Until I can make blogging a habit, my entries will be sparse. I apologize for this late posting.
A couple of weeks ago, the Mayor of San Francisco Gavin Newsom, Assessor-Recorder Phil Ting, and Supervisors Sophie Maxwell and Tom Ammiano sent a letter to various mortgage lenders requesting cooperation on a few matters regarding their willingness to work with borrowers facing foreclosure. The aim of the press conference, I assume, was to apply political pressure to the letter by making this request public.
The letter, specifically, asked lenders to:
1) modify loan terms to so that borrowers can continue to afford their payments (extend the original teaser rate, for example);
2) support homebuyer education and counseling (i.e. give more money to housing counseling agencies so that more counselors can be hired);
3) stop, or reduce, the practice of lending based on stated-incomes (i.e. stop the fraudulent use of this loan feature that allowed borrowers to qualify for more than they really could afford); and
4) report data of loss mitigation outcomes (i.e. share statistics of how many loans are actually being modified so that the public can know whether or not lenders are actually willing to work with borrowers, as they say they are).
A rather annoying radio reporter from KCBS, Barbara Taylor, questioned the City’s attempt to hold mortgage lenders accountable for loans already done, especially if many are packaged and sold on the secondary markets. Paul Leonard of the Center for Responsible Lending eloquently responded to the question by explaining, in as simple terms as possible, how the mortgage securitization process worked and how lenders often retain servicing rights on those loans. In those cases, the servicer (lender) is responsible to their investors for “establishing and working out loan modifications” and essentially acting as a “fiduciary to the investors with the responsibility of maximizing revenues.” He goes on to say that “the calculation from an economic perspective is still very simple: foreclosures are more expensive than modifying the loan and keeping the initial rate, or even in some cases, lowering the rate, because you’re going to get some revenue flowing from the loan.”
What concerns me is that although foreclosures have historically not been profitable for lenders, we have never had a situation like this where this many borrowers could no longer afford to make payments. Will there be a point when the mathematics will change and it WILL be more profitable to foreclose? And how does the math work for the investors? How have they traditionally shared the costs involved in foreclosing on a property? And how are their investments protected/insured? I have a lot of learn, but I can’t help but think that the lenders would be doing much more to modify loans if it was really in their interest to do so…..
