Mortgage Debacle

Gretchen Morgensen has written an insightful article in the Sunday Business Section of the New York Times. After the heartbreaking introduction of a homeowner in New Jersey who would like more than anything to keep her home, Gretchen offers the following insight:

Lenders, government officials and loan servicers, who take in borrowers’ monthly mortgage payments, contend that troubled borrowers everywhere are being helped to stay in their homes by those overseeing their loans. But neither data nor anecdotal evidence supports this view. A recent survey of 16 top subprime loan servicers by Moody’s Investors Service found that for the first six months of 2007, an average of only 1 percent of loans experiencing an interest rate adjustment, or reset, had been modified.

A few minutes of logical thought would lead one to assume that lowering the interest rate of troubled loans so that the homeowner can continue to make payments and keep the house would be the best result for all concerned. The holder of the mystical “collateralized debt obligation” would continue to receive an income stream (albeit slightly reduced), the loan servicing agency would continue to skim fees for processing the loan and tax payments and the homeowner would get to keep his / her house.

But alas, the world does not operate according to my logical expectations. Later in the article, Gretchen explains,

… on the billions of dollars worth of mortgage loans that have been sold to investors in the last few years, it is not the banks or lenders like Countrywide that are hit with big losses when homes go into foreclosure. It is the sea of faceless investors who own pieces of these trusts. Also, under the trusts’ pooling and servicing agreements, Countrywide and other servicers typically recoup any costs they cover in the foreclosure process, such as legal and appraisal fees.

The foreclosure process is a profit opportunity for servicers and lenders, but there is very little oversight of the fees imposed.

Now it all makes sense. The profit for the “loan originator” is not in the loan, but in the transaction. Any transaction.

Something is broken here.

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