[quote=permabear]Sound reasoning. But you forgot second mortgages.
[quote]One of the barriers to liquidation is the write downs required by “solvent” banks (we all know most of them are not solvent). A huge problem within the GSE portfolios is that the servicers of delinquent loans are intentionally delaying foreclosure when the parent bank holds the second mortgage.
For example, let’s say that Bank of America is the servicer on a delinquent first mortgage. Their servicer agreement with the GSEs lays out a procedure to mitigate losses for the GSE portfolio. If there is no second mortgage, servicers will generally follow these procedures to the letter, and in the end, most properties end up in foreclosure. However, if Bank of America is the servicer, and they also hold the second mortgage, they do not follow standard procedure because the resulting foreclosure will cause them to lose most or all of the value in the second mortgage.[/quote]
Here is a summary of the author’s position regarding servicing and second mortgages: “These comments [above] are aimed directly at the practice of avoiding foreclosure on properties that have second mortgages on the servicer’s books. That is the primary reason a servicer fails to foreclose and dispose in a timely manner.”
This is incorrect. It is ONE of a handful of reasons in CERTAIN CASES that a servicer “fails to foreclose and dispose in a timely manner,” but it is by no means the PRIMARY reason. The primary reason that foreclosures have been dragged out for so long is very simple (as I’ve explained here several times): the servicer’s lack of manpower to do the job. Although this article is about the problems related to robo-signing, Lawler’s general point also applies here:
“However, the whole issue is yet another glaring indictment of the mortgage servicing industry, and its continued attempts to keep costs down during this housing/mortgage market “crisis” in fashions that have been penny-wise/pound foolish. Mega-mortgage servicers, of course, got to be really large by charging little to service loans because of the incredible economies of scale of processing mortgage payments. There are not, of course, similar economies of scales in dealing with problem loans, but servicers as a whole were incredibly slow to increase staff to deal with the surge in delinquent loans, and didn’t actually do so in a meaningful fashion until last year – with the “ramp” goosed in part by “HAMP.” Clearly, however, servicers did not ramp up their staffing sufficiently to deal with the surge in actual foreclosures, despite its predictability, to a large extent because such actions increased expenses without generating revenues!”
Take a look at the table in that article. There are four monster servicers with average past dues of about 10%. Let’s assume that of those past dues for each servicer, maybe a quarter (hey, say half if you like) of them have seconds that the parent bank holds on its books (recall that the majority of their servicing portfolio is held by OTHERS, not the servicer’s parent). Now whittle it down to situations where the servicer could reasonably justify to the customer (the GSEs) that it should delay foreclosure. You can see where I’m going with this: the numbers aren’t all that large with respect to the seconds that each individual bank’s servicers would actually have much control over.
Now, that’s not to say that there are not major issues with second mortgages generically in the banking industry. There are. But the link between second mortgages and the poor servicing of the GSE portfolios by big bank servicers is pretty weak. The real problem, as I’ve pointed out here in the past (and as Tim Lawler discusses above) is a lack of manpower at the servicers. And I don’t know when that’s going to change. The servicing problems that we’ve witnessed thus far are less about sinister plots to prop up parents and more about just plain ole incompetence and lack of cash flow to hire more people.
