Obstacles to Mortgage Modifications
- By:
- Tom Kerr | November 02, 2007
The mortgage crisis has had such an overwhelming affect on our nation, that even the President has asked mortgage companies to show flexibility when dealing with homeowners who face a threat of foreclosure. But mortgage investors may oppose such efforts because they have their own financial interests at stake.
Every day, the number of foreclosures across the U.S. is growing, as current housing troubles are fueled by the worst mortgage lending crisis since the Great Depression. One of the biggest places the catastrophe is exerting pressure is on investors.
Many individual investors buy mortgages in the secondary market, and so do investment banks, hedge funds, and other colossal entities with larger-than-life monetary clout. That phenomenon works just fine when the real estate market is robust and homebuyers go shopping for competitive loans, because it ensures that there is plenty of money to borrow. But in times like these-when collateral is plummeting in value-investors are suffering substantial losses. Because these businesses only exist to make profits, they're now aggressively looking for ways to preserve and protect their margins, even if that means no leniency for the average American homeowner.
Lenders can lose as much as 50 percent of their profits to legal and maintenance fees, marketing costs, and other unwanted expenses each time they foreclose on a borrower's home. As a result, they're eager to renegotiate or devise some other reasonable alternative. But they also have to contend with pressure from those investors who provide the resale market for mortgages.
Some investors are concerned that modification of problem loans is merely a temporary solution. They predict that it will only postpone a problem they see as imminent and unavoidable-namely, delinquent payments leading to outright default on mortgage obligations by consumers. Rather than negotiate with homeowners to stave off foreclosure, these investors think that it's best to proceed quickly with the foreclosure, which will minimize losses and free up their cash before any more time is lost. With about $6 trillion dollars involved in this "after market" for mortgages, investors can exert powerful influence over mortgage companies.
Right now, modified loans make up only a small fraction-approximately 1 to 3 percent-of all mortgages traded as securities. As millions of loans reset to more expensive monthly payments over the next two years, the percentage of modified loans is also expected to rise dramatically. Meanwhile politicians and homeowners pushing for modifications find themselves in a tug-'o-war with investors who want to ramp up the pace of real estate repossession. Legal agreements between investors and those who service loans generally require that mortgage service companies act not on behalf of the homeowner, but in the best financial interest of the investors.
For many, this controversy may not even matter. Unfortunately for borrowers, about one out of every 20 loans contains legal language that stipulates that no modifications can be made under any circumstances.
Every day, the number of foreclosures across the U.S. is growing, as current housing troubles are fueled by the worst mortgage lending crisis since the Great Depression. One of the biggest places the catastrophe is exerting pressure is on investors.
Investors and real estate
Many individual investors buy mortgages in the secondary market, and so do investment banks, hedge funds, and other colossal entities with larger-than-life monetary clout. That phenomenon works just fine when the real estate market is robust and homebuyers go shopping for competitive loans, because it ensures that there is plenty of money to borrow. But in times like these-when collateral is plummeting in value-investors are suffering substantial losses. Because these businesses only exist to make profits, they're now aggressively looking for ways to preserve and protect their margins, even if that means no leniency for the average American homeowner.
Lenders can lose as much as 50 percent of their profits to legal and maintenance fees, marketing costs, and other unwanted expenses each time they foreclose on a borrower's home. As a result, they're eager to renegotiate or devise some other reasonable alternative. But they also have to contend with pressure from those investors who provide the resale market for mortgages.
Foreclosure minimizes losses
Some investors are concerned that modification of problem loans is merely a temporary solution. They predict that it will only postpone a problem they see as imminent and unavoidable-namely, delinquent payments leading to outright default on mortgage obligations by consumers. Rather than negotiate with homeowners to stave off foreclosure, these investors think that it's best to proceed quickly with the foreclosure, which will minimize losses and free up their cash before any more time is lost. With about $6 trillion dollars involved in this "after market" for mortgages, investors can exert powerful influence over mortgage companies.
Right now, modified loans make up only a small fraction-approximately 1 to 3 percent-of all mortgages traded as securities. As millions of loans reset to more expensive monthly payments over the next two years, the percentage of modified loans is also expected to rise dramatically. Meanwhile politicians and homeowners pushing for modifications find themselves in a tug-'o-war with investors who want to ramp up the pace of real estate repossession. Legal agreements between investors and those who service loans generally require that mortgage service companies act not on behalf of the homeowner, but in the best financial interest of the investors.
For many, this controversy may not even matter. Unfortunately for borrowers, about one out of every 20 loans contains legal language that stipulates that no modifications can be made under any circumstances.
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