In the news, the foreclosure picture worsens, there is no relief in sight:
“Countrywide announced plans to refinance or modify some $16 billion worth of loans for more than 80,000 borrowers who will soon hit an unaffordable rate reset, or those who have already fallen behind after their payments rose.”
“Countrywide said it serviced about 9 million loans for $1.46 trillion as of Sept. 30.”
Millions of Families are at Risk
2.2 million: Approximate number of families who may lose their homes and up to $164 billion of accumulated wealth due to foreclosure, according to the Center for Responsible Lending.
1.2 million: Number of foreclosure filings in 2006. This number is up 42 percent from 2005.
As the link notes above, Countrywide, the world’s largest mortgage lender, has announced an intention to try to help 80,000 families who owe $16 billion on their homes. This amounts to roughly 1% of its servicing portfolio, and only a very small portion of the people who obviously are in trouble nationwide. This might not seem like a large number for a company that has a contractual relationship with respect to the mortgages that 9 million homeowners have taken out, but one needs to be mindful of what the nature of that contractual relationship is. Being the servicer of these loans only means that, at least with respect to most of them, Countrywide provides the address and the facility that payments are mailed to and processed in. The actual parties that are entitled to receive repayment of the principal loaned, and the interest paid thereon are numerous and diverse.
Pension funds, insurance companies, and well to do retirees were typically the sorts of things that used to spring to mind when one thought about who the end purchasers of mortgage backed securities were. And then the “creative finance” people got some bright ideas and managed to get the ownership of U.S. mortgages mixed, churned, and spread all over the globe just in time for the whole thing to go sour on millions of investors who may not even have fully understood that individual homeowners not making mortgage payments that turned unaffordable could render fancy investments worthless.
This is not a plea for sympathy for rich people who got in over their head, but merely an effort to illustrate why so little has been done to fix the subprime mortgage/foreclosure crisis, and why there is really very little that can be done. If it was possible, as was the case as recently as even ten years ago, to look one person in the face who owned, or represented the entity that owned, a group of loans that had some bad ones in it the approach that Countrywide is taking with a small number of borrowers might be possible. “Might” because things like pension funds have a “fiduciary responsibility” that cannot be breached, so some variety of forbearance can be offered only if doing so can be said to be a clearly more profitable choice than proceeding to foreclosure.
With a financial environment that has become so complex, however, there seldom is still a person who can make a decision. Rights are spread in a disparate manner around the entire globe. Further, discretionary choices are, at least to some extent, curtailed by “covenants” contained in the convoluted legal documents that were created to bring so many players into the game in the first place. And a final level of complexity is created where entities that were created to hold paper that is now non-performing are made insolvent by these “investments” and their interests are now in the hands of Bankruptcy Trustees.
You see, the reason why Countrywide is extending relief on such a limited basis is because the actual owners of only a small number of bad loans can and do say to give the borrowers a break. For the rest, the answer may well be “no”, but in the vast majority of instances where, when, and how to even get a decision is probably still trying to be worked out.
So, such is the situation with respect to doing some sort of a modification to an existing loan, at least without the government stepping in and offering a financial incentive to the lender to offer borrower relief. Right now there is no program that has been made public that is based on a government bailout of that sort, and it is unlikely, given the magnitude of the problem that any such program could even be funded. Also, that would be a very politically unpalatable road to head down. But the only other approach also suffers from these same drawbacks. Instead of giving the old lender an incentive to offer relief, it is conceivable that a set of inducements could be structured to cause a new lender to offer a refinance to borrowers who clearly would not be eligible otherwise. Paying mortgage companies to make loans that they would consider otherwise to be a bad deal has not yet been mentioned, and likely will not be.
A comprehensive remedy for the financial tidal wave that relentlessly heads toward us is nowhere on the horizon. Small things are being proposed or attempted that amount to chipping away at the edges of the problem, but the bulk of the crisis goes unaddressed because the United Sates has the same number of houses that it had two years ago but has far fewer people who are eligible to be homeowners, and no financing that will, or likely should, be offered to people who really can’t afford the millions of houses that are available.
[The fourth and concluding piece in this series will show the role that “privatization” of the mortgage industry has played in impacting homeownership.]