Foreclosure Fraud Represents Banks Trying to Evade Eating Toxic MortgagesBy: David Dayen
Monday October 25, 2010 8:46 am
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Business Week has a long piece about the foreclosure mess, and it approaches the subject from exactly the right angle:
http://www.businessweek.com/magazine/content/10_44/b4201076208349.htm At the root, this is about who will have to eat Big Shitpile, the phase lovingly coined by Atrios to explain the mass of toxic mortgages written at the height of the housing bubble. Business Week sums this up in one paragraph: Wall Street’s unspoken strategy has been to kick mortgage losses down the road until an economic recovery reinflates the housing market. The faulty-foreclosure crisis has forced the issue back into the present tense, triggering a fight over who will bear the brunt of those losses. The combatants—all of whom are trying to minimize their share of the damage—include homeowners, lenders and mortgage brokers, loan servicers and the underwriters of mortgage-backed securities, the buyers of those securities, title insurers, rating firms, and the federally controlled mortgage buyers Fannie Mae (FNM) and Freddie Mac (FRD). J.P. Morgan predicts that bondholders will absorb most of the estimated $1.1 trillion loss—but may succeed in foisting about $55 billion on banks. If the bank losses turn out to be steeper than J.P. Morgan and most other analysts expect, taxpayers may be asked to inject more capital into the financial institutions. Fannie Mae and Freddie Mac, already wards of the state, might require more capital as well.
I think this is absolutely the way to look at this. Homeowners want to save their homes. Loan servicers want to maximize profits. Investors want to put back the soured mortgage-backed securities on the banks. The banks want to fight that. Title insurers don’t want to take losses on properties with blighted titles. Fannie and Freddie are acting like investors on one side and like partners with the banks on the other. There are all sorts of competing incentives.
To understand this better, you have to understand that a foreclosed home makes more financial sense to both the servicers and the owners of the mortgages than a loan modification or even a short sale. This has to do with the mark to myth accounting that the banks managed to get last year. Under current law, they only have to realize the loss on a foreclosure after the property is sold. This has created a great deal of “shadow inventory,” foreclosed and vacant homes pulled from the market so the banks don’t have to face any balance-sheet reality. A short sale or loan modification would force a recognition of a loss right away. HAMP helped the banks by delaying foreclosure and getting a few extra pennies out of the borrower; when the dam breaks, they’d rather move quickly into foreclosure than give the borrower an opportunity to stay in the home or sell their way out of it at a loss.
Lenders claim that they’re concerned about short sale fraud to explain why they reject them in favor of foreclosures which, on paper, are worse for their bottom line. But the real explanation is the balance sheet issue. The NYT article claims that short sale fraud costs the banks $300 million a year. Big Shitpile is several orders of magnitude bigger. Bank of America alone holds $74 billion in properties which are either in foreclosure or facing it soon.<snip>
More:
http://news.firedoglake.com/2010/10/25/foreclosure-fraud-represents-banks-trying-to-evade-eating-toxic-mortgages/:kick:
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