CA Shadow Inventory

[analyst]

[quote=SD Realtor]Analyst or Dave –

At alot of the auctions I am attending I would say the postponement rate is close to 90%. Now for alot of those they are postponed as short sales and thus the servicer is unwinding them. Another albeit smaller percentages is BK… No mystery of what is happening there. However there are plenty of beneficiary requests as well. Now in these cases I would presume a loan mod effort is underway but I am pessimistic about the numbers.

Dave you implied earlier that the bene does not have the authority or power to control the servicer entity, that the servicer will follow through with the foreclosure no matter what. Obviously it is the path of least resistance for the servicer to do this. Yet it does seem to me that if the bene wanted to, they could indeed work with the servicer to slow down the process, adding to the shadow inventory.

So I guess my question to either of you is how much autonomy does the servicer have. Dave your implication (and pardon if I got it incorrectly) to me appears to be that the servicer has substantial autonomy and is happy foreclosing and passing the dead asset back to the bene.[/quote]

The duties and responsibilities of the servicer are defined in a formal servicing agreement. Where a servicing agreement clearly specifies a required action, that is what the servicer must do. When decisions must be made for situations not clearly specified in the servicing agreement, the servicer is required to act in the best interest of those having a beneficial interest in the pool, the investors and insurers (if a credit default swap is involved).

As long as both investors and insurers are involved, it is very dangerous for servicers to depart from normal standard practices, for fear that one or the other will sue for damages.

For an MBS pool in trouble, as soon as the insurer (AIG) executes a physical settlement (buys all the securities at face value from the former investors), all beneficial interest is consolidated in one place (AIG), and that is to whom the servicer becomes responsible.

Without knowing the exact mechanics of how the conversation and paperwork handling takes place, I am confident that AIG and, therefore, the federal government owners, have the ability to directly bring about whatever action they desire on the mortgages in that troubled pool, provided they are willing to pay increased fees for increased effort by the servicer.

I would expect that for pools with no CDS insurance involvement, those demonstrating 100% ownership, whether a single investor or a multiple-investor group, would have the same ability.

Clearly, different servicers are going to have different views about how much effort is involved in any particular modification approach, and different views about what fees are appropriate for any given estimated level of effort. So not all discussions will result in similar agreements between servicer and the beneficial owner(s). That is why you see such wide variety in the handling of individual mortgages. Each separate combination of servicer and beneficial owner is a separate discussion/negotiation.

The real x-factor, and the reason why the assessment of shadow inventory is a necessary endeavor, is because each separate beneficial owner or owner-group presumably would have the option to implement a temporary go-slow approach with a servicer, to evaluate the effects, without undoing normal foreclosure as the underlying default rule. If go-slow turned out to be not to their liking, they would just let the temporary go-slow agreement expire and revert to underlying baseline rules, an increase in foreclosure pace being the result.

Note that the Federal Reserve is well along in its plan to buy over 1 trillion dollars of MBS. It is not clear whether the Federal Reserve is the first and only investor buying direct from creators, or whether they are buying existing from prior investors. The Federal Reserve may wind up being the largest single owner of MBS. Although broadly considered to be part of the federal government, the decision makers are different from those in direct control of AIG, so there could be differences in opinion and policy as time goes by.

The Federal Reserve may decide at some future time to sell its MBS holdings to arms-length investors at a discount from face value. This would be one method of recalling some percentage of the vast amount of money it printed to buy the MBS.

Would the new investors be adopting the collect-the-payments approach or the foreclosure approach? The answer depends on the level of discount from face-value set by the Federal Reserve. What is the effect of the Federal Reserve losing money (that it printed) by paying more for the MBS than it subsequently received by selling them back into the market? How will the Federal Reserve determine the price at which it will sell the MBS? How far into the future will this happen? Who will be the Federal Reserve chairman at the time.?

Time for everybody to input information into their computers for the mark-to-model calculation.

[an]

analyst, if that is true, then why would any bank release any REO at all? Wouldn’t it make sense for them to keep them all in shadow?

[an]

analyst, if that is true, then why would any bank release any REO at all? Wouldn’t it make sense for them to keep them all in shadow?

[an]

analyst, if that is true, then why would any bank release any REO at all? Wouldn’t it make sense for them to keep them all in shadow?

[an]

analyst, if that is true, then why would any bank release any REO at all? Wouldn’t it make sense for them to keep them all in shadow?

[an]

analyst, if that is true, then why would any bank release any REO at all? Wouldn’t it make sense for them to keep them all in shadow?

[analyst]

[quote=AN]analyst, if that is true, then why would any bank release any REO at all? Wouldn’t it make sense for them to keep them all in shadow?[/quote]

The choice whether to sell fast or wait reflects the owner’s prediction about the direction of house prices in the future, and how far and how fast they will move. Different decision-makers predict different future values, and take different actions.

The important point is that the choice only exists because of federal government intervention. If mark-to-market were rigorously enforced, the asset and equity markdowns would be mandatory, and all the big players would be declared insolvent and liquidated, instead of being allowed to stick around and make market-distorting decisions.

[analyst]

[quote=AN]analyst, if that is true, then why would any bank release any REO at all? Wouldn’t it make sense for them to keep them all in shadow?[/quote]

The choice whether to sell fast or wait reflects the owner’s prediction about the direction of house prices in the future, and how far and how fast they will move. Different decision-makers predict different future values, and take different actions.

The important point is that the choice only exists because of federal government intervention. If mark-to-market were rigorously enforced, the asset and equity markdowns would be mandatory, and all the big players would be declared insolvent and liquidated, instead of being allowed to stick around and make market-distorting decisions.

[analyst]

[quote=AN]analyst, if that is true, then why would any bank release any REO at all? Wouldn’t it make sense for them to keep them all in shadow?[/quote]

The choice whether to sell fast or wait reflects the owner’s prediction about the direction of house prices in the future, and how far and how fast they will move. Different decision-makers predict different future values, and take different actions.

The important point is that the choice only exists because of federal government intervention. If mark-to-market were rigorously enforced, the asset and equity markdowns would be mandatory, and all the big players would be declared insolvent and liquidated, instead of being allowed to stick around and make market-distorting decisions.

[analyst]

[quote=AN]analyst, if that is true, then why would any bank release any REO at all? Wouldn’t it make sense for them to keep them all in shadow?[/quote]

The choice whether to sell fast or wait reflects the owner’s prediction about the direction of house prices in the future, and how far and how fast they will move. Different decision-makers predict different future values, and take different actions.

The important point is that the choice only exists because of federal government intervention. If mark-to-market were rigorously enforced, the asset and equity markdowns would be mandatory, and all the big players would be declared insolvent and liquidated, instead of being allowed to stick around and make market-distorting decisions.

[analyst]

[quote=AN]analyst, if that is true, then why would any bank release any REO at all? Wouldn’t it make sense for them to keep them all in shadow?[/quote]

The choice whether to sell fast or wait reflects the owner’s prediction about the direction of house prices in the future, and how far and how fast they will move. Different decision-makers predict different future values, and take different actions.

The important point is that the choice only exists because of federal government intervention. If mark-to-market were rigorously enforced, the asset and equity markdowns would be mandatory, and all the big players would be declared insolvent and liquidated, instead of being allowed to stick around and make market-distorting decisions.

[an]

I’m not denying that the government can greatly manipulate the market. I’m just trying to understand the logic behind why banks are holding back inventory (especially when the market is showing that there are enough buyers out there right now to absorb more inventory). You’re saying decision-makers are the one that’s holding back supply. Are there many different decision-makers at a bank? If yes, then it make sense why some houses get hold back by BofA but other houses, BofA foreclosed on and put it on the market. If no, then I don’t understand why they would foreclose on some but not others.

[an]

I’m not denying that the government can greatly manipulate the market. I’m just trying to understand the logic behind why banks are holding back inventory (especially when the market is showing that there are enough buyers out there right now to absorb more inventory). You’re saying decision-makers are the one that’s holding back supply. Are there many different decision-makers at a bank? If yes, then it make sense why some houses get hold back by BofA but other houses, BofA foreclosed on and put it on the market. If no, then I don’t understand why they would foreclose on some but not others.

[an]

I’m not denying that the government can greatly manipulate the market. I’m just trying to understand the logic behind why banks are holding back inventory (especially when the market is showing that there are enough buyers out there right now to absorb more inventory). You’re saying decision-makers are the one that’s holding back supply. Are there many different decision-makers at a bank? If yes, then it make sense why some houses get hold back by BofA but other houses, BofA foreclosed on and put it on the market. If no, then I don’t understand why they would foreclose on some but not others.

[an]

I’m not denying that the government can greatly manipulate the market. I’m just trying to understand the logic behind why banks are holding back inventory (especially when the market is showing that there are enough buyers out there right now to absorb more inventory). You’re saying decision-makers are the one that’s holding back supply. Are there many different decision-makers at a bank? If yes, then it make sense why some houses get hold back by BofA but other houses, BofA foreclosed on and put it on the market. If no, then I don’t understand why they would foreclose on some but not others.

[Author]

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