A months-long internal investigation of 500 loan files by the Federal Reserve found no wrongful foreclosures, members of the Fed's Consumer Advisory Council said earlier this month. Zero out of 500. The Fed's report defined "wrongful foreclosures" as repossessions of borrowers' homes who were not significantly behind on their payments. But consumer advocates stated that didn't matter, because "That homeowners were not delinquent has never been our contention," said Rashmi Rangan, a member of the panel and the executive director of the Delaware Community Reinvestment Action Council. "Our contention is that many of these foreclosures were avoidable."
In other words, they could have written down the loan and kept the delinquent borrower in their homes. Heck, why require anyone to pay back their debts, just think of the Keynesian stimulus!
A new regulator, meanwhile, is not encumbered with lots of banking experts. The CFPB, Elizabeth Warren's new financial regulator, is excited to make a bang in home lending. A power point leaked to the HuffPost shows that the CFPA notes banks saved $20B by not applying 'special servicing of delinquent loans'. Presumably, given foreclosed loans were found to all be truly delinquent, this would merely add more signatures and busy work to what is a fact. Somehow, I don't see how adding costs to the intermediation process helps anyone, but that's why I'm not in charge.
The CFPB presentation notes that it could 'require 3.0 million principal reduction modifications over six months , exempting government FHA and VA loans. Why any private bank lends to homeowners any more is an interesting question. The CFPB notes 'servicers fund write-downs (make investors whole)', as if the problem with banks is they have too much money. That will really get the economy going.
With all the financial problems in the pipeline, I'm almost hoping the CFPB does something this bone-headed right out of the gate, because creating a big mess early is probably the best thing they can do. That is, if they did something subtle it would probably be worse because it would take longer to fester.
10 comments:
Long before this crisis hit, I noted a key difference between RMBS and CMBS -- dedicated special servicers that got paid to work things out, and minimize losses for the lower CMBS tranches, or, the AAAs if they took over the deal.
RMBS structures worked fine with their underpaid servicers until the volume of delinquency got too high -- if the servicer is only getting 10 bp/yr, there will be a lot of corners cut.
Using a CMBS-type structure would benefit everyone. Delinquencies would get a lot more attention, and the special servicer could decide to do the mods in the best interests of the lowest certificateholder, or, if nothing would work, foreclose, and send the lowest certificateholder the principal reduction.
I'm not in favor of the bureaucrats, but there are improvements that could be made privately. This is one.
You may be confused about "Keynesian stimulus." Keynesian stimulus is about increasing government spending to enable people to pay off their debt by preventing or minimizing the impact of recessions. Mass bankruptcy and debt cancellation is also stimulating, but it most certainly is not, in any sense, Keynesian.
David,
I'm not up on the servicer differences, so you could be right...I wonder if their relatively efficiency was incented by the 1990 experience
Anon: taking from rich giving to poor helps via the multiplier, the higher MPC for the plebs.
There are a lot fewer, bigger loans in CMBS so it is worth it to overcome the fixed costs of personalized servicing. Also the CMBS special servicers usually hold the junior tranche so their interests are aligned; this is uncommon in RMBS.
Whoever said:
*** You may be confused about "Keynesian stimulus." Keynesian stimulus is about increasing government spending to enable people to pay off their debt by preventing or minimizing the impact of recessions. Mass bankruptcy and debt cancellation is also stimulating, but it most certainly is not, in any sense, Keynesian.
Uh, are you serious? Thanks Mr. Helper. Eric's ANALOGY is funny and has truth to it. Only a leftist would correct it.
There are special servicers for RMBS as well. Typically they charge 50 to 150 bp per year, plus get a slice of recoveries. They are both more aggressive in seeking payment, and have authority to cut deals. If you are having some temporary problems and fall behind on your mortgage, you're happy to be transferred to a special servicer, because you can talk to the person on the other end of the telephone. If you really can't pay, you're unhappy, because the special servicer will make you less happy and get you out of the house quicker.
My guess is the $20 billion figure comes from taking the total value of foreclosed loans that never went to special servicing, and multiplying it by average special servicer fees. That's a bit ironic, because a lot of the extra money the banks would have spent doing that would have gone to harassing consumers--the kind of stuff consumer protection people fight against.
Every mortgage originator that gets in trouble, and this goes back to the 80s, gets the bright idea of reinventing itself as a special servicer. After all, their regular servicing people have acquired a lot of experience with troubled loans. As you might expect, it never works. For one thing, it's a different skill set. Regular servicing is located in very low-wage places, special servicing requires more ambitious and experienced people. For another, when everything goes bad, there's no value-added to special servicing (which is likely why banks did very little of it).
Special servicing is like triage, with one difference. Like triage doctors, you leave alone the ones that will cure themselves, and cure the sick ones that can survive. Unlike triage doctors, special servicers also kill (foreclose quickly) those that won't survive. Most of the skill is in knowing the difference. When no one will survive, why pay a doctor?
I can't imagine what a logistical nightmare it must be for a special servicer of RMBS, especially the way that the CFPB seems to want it done. Some idiot borrower is faxing you all sorts of random files, tax stubs from 1996, emails of savings accounts (where he just hit "Save As" in Internet Explorer), heartfelt letters explaining all their woes, sending it to the wrong number or email address every time... not excusing the servicers here, they seem to be idiots too, but even if you had the best faith on the servicing side I have to think that it would be unbelievably expensive to give a full re-underwriting of every mortgage loan. I help run a college scholarship program and our applicants can't even fill out the application correctly and we are trying to give money away to them. And these are probably at least at the 50th percentile for intelligence.
Theres more where that came from. Looks like this is just the begining.
Eric:
You write: "The CFPB notes 'servicers fund write-downs (make investors whole)', as if the problem with banks is they have too much money." Umm, actually they do. To be precise, $1.4 trillion in excess reserves sitting at the Fed earning 25 bps a year. That's on top of the bonuses, dividends, money for share buybacks etc.
Well, many want banks to be less levered, including banks! This means more capital, more 'excess reserves'. See what happened in 1937 when the government tried to take those 'unused' reserves (aka, capital). They reversed course very quickly.
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