A couple of days ago the market dropped due to an analyst downgrading Wells Fargo to sell from hold. Part of the reasoning was that the Wells Fargo profit was tied to mortgage servicing, which is not an income stream that is sustainable in the long run. As it turns out, however, the companies making the most from loan servicing include Bank of America, Citigroup and JPMogan Chase; go figure.
http://online.wsj.com/article/BT-CO-20091022-708579.html
So hey, you say, what does it matter where their profit comes from. Well, if you understand the situation, you are going to be just a little bit pissed off. Let's start with the fact the these financial institutions brought us the financial meltdown of the past year or two by playing a lot of financial games. We are talking derivatives and high leverage games that led to serious problems from which the entire planet is suffering. Next we move to the fact that we the people bailed out their collective arses at great cost. Our government debt is at record levels and our children and grandchildren will pay the price. Then we move on to how these too big to fail idiots continued providing big bonuses to themselves and dividends to their stockholders with our money. Upset yet? You will be. Now many of these companies are returning to profitability despite record numbers of Americans losing their homes due in no small part to the policies of the financial institutions. What do I mean by that?
Well, most banks securitized their mortgage portfolios and sold them off to investors. The loans were sliced and diced ad infinitum. Yet they remained the servicers on the loans, extracting fees for collecting payments and foreclosing on homes. As it turns out, many of the financial institutions that created the current mess are making loads of money off of the misery of those facing foreclosure. They are profiting from our pain and they are avoiding loan modifications because they can make more money through the foreclosure route. Are you outraged yet?
http://www.creditwritedowns.com/2009/10/why-mortgages-arent-modified-and-what-a-ruling-stopping-foreclosures-means.html
Disclosures: None.
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3 comments:
As an attorney, I'm certain that Craig has mastered the art of earning substantial sums of money at the expense of others. Much to his chagrin, mortgage servicers do not profit from foreclosures. The fees that banks charge are typically a reimbursement of third party costs associated with preparing the property for sale, clean up, and guess what, LEGAL fees. While I agree that banks took too much risk and over leveraged the entire financial system. A person does not have enough fingers to point out the complicit parties. I suggest Craig stick to subjects that he has some knowledge and can validate his words.
I linked a Wall Street Journal article that validated my point, though I apologize if you lack a subscription and were unable to access it. Not that the WSJ article is correct all the time, but in this instance I have seen the same point made elsewhere. The bottom line is that these institutions are unwilling to do any significant loan modifications as most modifications will reduce the fees that they are able to charge for loan servicing. We are not talking here about loans the banks still have on their books. These instead are loans they securitized where they simply remained on the books as the servicer. And no, I am not making one penny from any foreclosure activity, though I have helped some relatives for free to try to get some loan modifications.
P.S. The WSJ article quotes at length from a report by the National Consumer Law Center from last month. The following describes in greater detail the point I was making:
"Servicers have four main sources of income, listed in descending order of importance:
The monthly servicing fee, a fixed percentage of the unpaid principal balance of the loans in the pool;
Fees charged borrowers in default, including late fees and “process management fees”;
Float income, or interest income from the time between when the servicer collects the payment from the borrower and when it turns the payment over to the mortgage owner; and
Income from investment interests in the pool of mortgage loans that the servicer is servicing.
Overall, these sources of income give servicers little incentive to offer sustainable loan modifications, and some incentive to push loans into foreclosure. The monthly fee that the servicer receives based on a percentage of the outstanding principal of the loans in the pool provides some incentive to servicers to keep loans in the pool rather than foreclosing on them, but also provides a significant disincentive to offer principal reductions or other loan modifications that are sustainable on the long term. In fact, this fee gives servicers an incentive to increase the loan principal by adding delinquent amounts and junk fees. Then the servicer receives a higher monthly fee for a while, until the loan finally fails. Fees that servicers charge borrowers in default reward servicers for getting and keeping a borrower in default. As they grow, these fees make a modification less and less feasible. The servicer may have to waive them to make a loan modification feasible but is almost always assured of collecting them if a foreclosure goes through. The other two sources of servicer income are less significant.
If servicers’ income gives no incentive to modify and some incentive to foreclose, through increased fees, what about servicers’ expenditures? Servicers’ largest expenses are the costs of financing the advances they are required to make to investors of the principal and interest payments on nonperforming loans. Once a loan is modified or the home foreclosed on and sold, the requirement to make advances stops. Servicers will only want to modify if doing so stops the clock on advances sooner than a foreclosure would.
Worse, under the rules promulgated by the credit rating agencies and bond insurers, servicers are delayed in recovering the advances when they do a modification, but not when they foreclose. Servicers lose no money from foreclosures because they recover all of their expenses when a loan is foreclosed, before any of the investors get paid. The rules for recovery of expenses in a modification are much less clear and somewhat less generous.
In addition, performing large numbers of loan modifications would cost servicers upfront money in fixed overhead costs, including staffing and physical infrastructure, plus out-of-pocket expenses such as property valuation and credit reports as well as financing costs. On the other hand, servicers lose no money from foreclosures."
Read more: http://www.creditwritedowns.com/2009/10/why-mortgages-arent-modified-and-what-a-ruling-stopping-foreclosures-means.html#ixzz0V3juVCSg
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