So, in my last two posts I made fun of all the experts who said borrowers should call their lender in one form or another (here and here). The people who often blame borrowers for buying a home they could not afford turn around and tell borrowers to not feel ashamed and call their lender (or a housing counselor who will then call their lender for them). These folks have various creative reasons why borrowers will not call their lenders. I wonder if there is another reason that has not been mentioned?
[And when I said lender above, I really meant "loan servicer" -- a separate collection company for the lender. And when I said the lender in the sentence before, I really meant "investor" -- the owner of the income stream created by the loan. Often loans are pooled and packaged into complex arrangements and investors buy shares in them based on risk and expected return. For most home loans these days, nobody really knows who "the lender" is.]
I digress. Could it be that the borrowers are a little smarter than all the experts? Could it be that borrowers have not contacted their loan servicers because it is simply a waste of time? If the word got out that contacting loan servicers really helped, don’t you think everyone would do it? How many people negotiate the price of a car? Do nonprofits and government agencies need to run flashy ads on tv begging people to get a better deal on a car than the sticker?
I am gonna side with borrowers then on the premise that it is of little use to contact your loan servicer to negotiate a better loan. (Note that I do agree that a troubled borrower would be wise to contact the servicer to, at least, keep the property from entering the foreclosure process too quickly. And it is entirely possible that a servicer will make a deal that might enable the borrower to save the home, but it is rare that the deal involves modifying the interest rate or the principle. The “deals” being offered by servicers are more like paying them everything they claim is owed at present (including bogus fees and charges) within a year, plus staying current with the payments coming due. Yes, I have read reports of thousands of families saved from foreclosure by this or that company. But how were they saved? Were they even in trouble or threatened? Did the lender drop the rate or the principle or did the company really just refinance a lot of debt, make even more money, and publish their stats to the public?)
I digress again. There are a host of reasons why investors are not encouraging loan servicers to write down loans (lowering the interest rate or principle of the loan to make it affordable). It might have something to do with their money. They might say — “let the other guy drop his rate or principle and save us all.” The world economy might fail, and the markets know it, but nobody wants to go at it alone. Imagine that.
But let’s just look at the bill collectors — the servicers. Could they be part of the problem? Funny enough, the loan servicers also claim they are worried about being sued if they work with borrowers. The investors who hired them have contracts that limit what servicers can do, so they say.
Just as servicers were concerned that modifying loans could expose them to litigation from investors, servicers may also be concerned that writing down loans could lead to litigation. But if a reasonable write-down results in a loss that is significantly smaller than the loss that would result from foreclosure, I would again argue that the servicer, whose duty is to maximize the return on the pool, has more to answer for by doing nothing.
FDIC Chairman Sheila C. Bair, Feb 2008 (complete speech here)
Possible litigation is a problem, but it also might be that these servicers prefer more business, and that means keeping investors happy. Bucking an investor will get around in a hurry. They might talk to each other like borrowers do. Loan servicing is very competitive. Investors struggle to decide which loan servicer can hire the least number of telemarketers (aka service representatives) per thousand borrowers, pay them the lowest salaries, train them the least, and equip them with the cheapest phone and computer system made. Well, actually, the market reduces all of these factors into a number we call – price. Ahh, the beauty of the market saves us all.
Did I do it again? Also having to do with money — like ethics have ever had anything to do with anything in business (despite a Harvard course) — loan servicers make more money foreclosing, as opposed to modifying the loan. See CRL Policy Brief. Remember, servicers did not loan the money, they have complex compensation formulas, and foreclosures are typically given more favorable compensation, than working out a loan modification with a troubled borrower.
Finally, even if a servicer has permission to modify a loan to make it more affordable and is given good incentives to save the home, rather than foreclose on it, there is a still a mighty problem in the way – another lender. In these last many years, borrowers did not take out one loan, but two (a primary loan let’s call it, and a second loan called a piggy-back loan). High percentages of defaulting subprime primary loans are coupled with these loans: “The Congressional Budget Office estimates that about 40 percent of riskier mortgages made in recent years are coupled with [piggy-back] loans.” New York Times, June 29, 2008 (article). Primary lenders required piggy-back loans where the borrower did not have 20 percent to put down to purchase the home. (Funny thing was sometimes the same lender made both loans, but in different departments that don’t get along, but that is another story.) Anyway, this piggy-back loan sounds cute and all, but it causes real problems when a borrower needs to workout a problem:
The combination of piggyback loans, securitization, and legal complexities makes it much more difficult to modify loans, particularly if the first and second mortgages have been packaged into separate securitizations. Dealing with two different lenders or servicers, as well as different securitizations, can significantly complicate efforts to restructure loans.
Eric S. Rosengren, CEO, Federal Reserve Bank Boston, May 2008 (complete speech here).
Bottom line is that if we want to see any real change, these investors are going to have to be better persuaded to modify or refinance the loans so all these problems will be addressed (and/or Congress needs to allow bankruptcy courts to restructure them like the courts can do for loans for vacation homes and yachts). There are pros and cons to each method but we’ll leave that for another day. In the meantime, borrowers can call lenders, but it is not gonna do what everyone seems to promise. But when it does, borrowers will get the message in a hurry.
Filed under: Advice for Borrowers, National Foreclosure News
