Foreclosure Resolution Blog

If there are any real opportunities for homeowners trying to avoid foreclosure and investors to share a win-win experience, it would be if some of these garbage ARM and high-rate loans would be sold.While The American Housing Rescue and Foreclosure Prevention Act purports to offer an avenue for these transfers to take place, one only needs to look at the current state of the MBS market to see why these transactions may never materialize… at least, not in significant numbers.

Lately, a number of investment players have created funds to buy distressed mortgages. such as Blackrock Inc.’s Private National Acceptance Co. LLC. Others, such as Marathon Financial, are buying subprime securities.The biggest complaint from most fund managers is that they’re not seeing a lot of product available at attractive prices. I believe it may be a long while before anyone’s really willing to face their losses and sell these loans at really good prices unless they’re forced to do so by some external forces.

Furthermore, if you look at Marathon’s approach, it’s fundamentally flawed. As Warren Buffet stated in Fortune: “If you take one of the lower tranches of the CDO and take 50 of those and create a CDO squared, you’re now up to 750,000 pages to read to understand one security. I mean, it can’t be done. When you start buying tranches of other instruments, nobody knows what the hell they’re doing. It’s ridiculous.”

So first of all, the boys buying these securities think they’re smarter than Warren Buffet.Secondly, the underlying loans are still being managed by the servicers who’ve proven to be woefully inept in handling the current foreclosure climate.Thirdly, if they truly want the servicers to represent their point of view, they’re going to either have to raise servicing income, or give them an equity stake.

Despite the fact that this lesson should have been learned already, I doubt MBS investors will be willing to give a bigger piece of the pie to loan servicers.

I have been saying for YEARS that if investors knew just how poorly their money was managed in the mortgage industry, they’d pull out immediately.

Here’s why: the “fiduciary duty” that the servicer owes the investors (or the trust who hold the mortgages) is often the first thing that goes out the window when the collections or loss mitigation staff is dealing with a homeowner who’s trying to avoid foreclosure. And, the actions taken, and the solutions provided, to homeowners who are behind on mortgage payments, often put the long-term performance and viability of the payment stream at risk. 

 I delve into this in my How to Avoid Foreclosure 101 video, but suffice it to say that if you asked the investors how they’d prefer that the foreclosure was avoided, they might pick a different path… particularly when you look at the recidivism rate for those who receive a loan modification. Yet somehow, these Wall Streeters seem eager to jump right in, just because the price might be “attractive.” I wonder how often “attractive” proves “unprofitable.”

The proof is in the pudding: according to the Wall Street Journal, “Marathon’s Distressed Subprime Fund is down 2.4% since its launch last fall.”So, is there a means for both homeowners trying to avoid foreclosure AND investors to share a win? I think so. A smarter approach is that taken by Blackrock and others. They’re focused on buying “whole loans,” where the security is purchased, along with the servicing rights. Bought at the proper discount, there should be plenty of room to work with homeowners to avoid foreclosure.

However… this is going to require a brand of servicing that hasn’t been seen yet. The servicing arms are going to have to act significantly differently than the servicers we’ve seen thus far. Most of these firms already have servicing set up as part of their outfit, or perhaps are considering one of these “new breed servicers.”

I have expressed skepticism about these outfits. Why would industry veterans suddenly begin to act more effectively in helping homeowners to avoid foreclosure? It smacks of “old dogs,” more than new tricks, to me.If it ever comes to pass that these loans are sold en masse to outfits as whole loans, I suppose I’ll be looking for something else to do. For now, while current investors continue to pretend that “it’s not a loss until I sell,” it doesn’t look like that will be happening any time soon.

So, homeowners trying to avoid foreclosure will continue to face limited options and fight an uphill battle with their loss mitigation departments.

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This entry was posted on Monday, June 23rd, 2008 at 11:13 pm and is filed under Avoid Foreclosure, Loss Mitigation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.