We like to think of the foreclosure scandal as Hamp on super-steroids, with a hefty dose of litigation and structured finance for added fun.
Recall that the US administration’s mortgage modification program was aimed simply at keeping people in their houses. The foreclosure freeze does this too, albeit somewhat inadvertently.
What’s perverse about this moratorium is that it’s mostly self-imposed. A number of mortgage servicing companies have decided to postpone foreclosures in recent weeks.
As Moe Tkacik at Washington City Paper notes, “banks do not just walk away from a cash cow like mortgage servicing without a good reason.” In fact, one of the major sticking points to previous loan modification programmes was that the schemes failed to tackle the issue of servicer incentives.
Servicers in private-label mortgage securitisations have to abide by the Pooling and Servicing Agreement (PSA), which dictates that they must consider the benefits to investors of a mortgage mod (as in Hamp) compared to foreclosure. The problem is that PSAs are often open to servicer interpretation, and the servicers themselves may be incentivised to foreclose as they may collect higher fees that way.
Hamp was meant to be different in this respect — it was meant to resolve the interests preventing servicers from engaging in mortgage mods. Servicers were paid ‘Hamp bonuses’ in lieu of the extra foreclosure income and to compensate for expenses, and the loan mods were standardised to streamline the paperwork process.
While the Hamp programme is now widely regarded as a failure, you now have a self-imposed foreclosure freeze largely doing the same job, without the fees.
The scale involved is pretty amazing too.
You can see the amount of affected loans in the table below, from mortgage-specialist Amherst Securities. It shows private label security volume for Bank of America, GMAC and JP Morgan Chase. PNC Financial, which has also halted foreclosures, is not shown as it services a relatively small amount of private label.
Amherst, incidentally, expects a six-month extension in the liquidation process for servicers operating in so-called judicial states (where foreclosures are processed through courts), which will impact house and mortgage-backed security prices.
Most of the foreclosure moratoriums are for mortgages in these judicial states, of which there are 23. Bank of America is the only servicer to have extended its foreclosure freeze to all 50 states. It’s worth asking why as it gives a flavour of some of the motivations involved in the mortgage industry.
According to Amherst’s Laurie Goodman:
Some market participants suspect political motivations—it’s right before an election, and it helps garner support from state attorneys general. Other market participants blame political pressure on Bank of America. But we always look to the economics of a move or transaction! Another possible explanation is that Bank of America owns Balboa, a property and casualty insurance [P&C] company. When the borrower stops making his mortgage payment, he generally also stops making the tax and insurance payments. Bank of America force-places the P&C insurance with Balboa, at rates well above that charged by other property and casualty insurance companies … Evidence of above normal rates on this forced-placed insurance comes from an internet posting that has been making the rounds. This site highlights an actual affidavit with a number of inconsistencies. It’s a good read, in any case. But what caught our eye was the monies owed for the 27 month period 12/2007-2/2010. This included insurance of $33,775 that had been advanced on, a charge of roughly $15,000 per year. A non-random survey of Amherst employees who failed to leave early for Columbus Day weekend indicated most faced a homeowner’s insurance charge of $2500-$5000 per year. So—Bank of America may be in a bit less of a hurry to liquidate than other servicers who do not own such an entity.
Even when mortgage servicers are staving off foreclosures, then, there may be underlying interests involved. Hamp was meant to fix this, but too many sticking points stood in its way. The programme was rejigged this year, with principal reduction instead of just principal forbearance added to the mix.
The foreclosure scandal keeps people in their houses as Hamp was meant to do, albeit not quite in a politically-correct way. It is ironically driven by some servicers possibly cutting corners to trim costs and deal with foreclosure scale — for instance Robo-Signing affidavits to make up for lost paperwork.
And perhaps unsurprisingly, it’s now seen by some as a jumping off point to fix the problems of Hamp, and perhaps force just the right amount of pain on those stubborn servicers — maybe in the form of further principal writedowns in mortgages.
It’s unclear, yet, whether the administration will choose to make that leap.
Related links:
Foreclosure fraud for dummies, 5 – Rortybomb
Mortgage servicing for uber-nerds - Calculated Risk
The incentives of mortgage servicers: myths and realities – Federal discussion series
FT Alphaville’s coverage of Hamp