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 Business News | January 2008 
Cruel Jokes, and No One Is Laughing
 Gretchen Morgenson - NYTimes
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What do banks call it when a troubled borrower abandons her home, sending them the keys?
“Jingle mail.”
And what do they call it when an irate borrower abandons his home, yanking electrical outlets from walls, leaving faucets running and otherwise trashing it on the way out?
“Taking the inside of the house with you.”
There’s nothing like black humor to define — however sadly and starkly — the blows that keep on coming in this mortgage debacle. But make no mistake, lenders are only beginning to learn how to manage the onslaught of jingle mail and houses turned inside out.
Investors, homeowners and regulators have greeted the new year hoping that the worst of this financial nightmare is over. Some investors may even view Bank of America’s planned bailout of Countrywide Financial last week as a sign that it is safe to wade back into financial services stocks.
But while other economic crises over the last decade were resolved relatively quickly and cleanly — the Mexican peso mess, the Russian debt debacle and the dot-com implosion — the unraveling of the great home mortgage boom is significantly more complex. There are infinitely more moving parts to this problem, and it will take far longer to right.
For example, while it is widely known that a wave of subprime adjustable-rate mortgages, or A.R.M.’s, will reset this summer — raising the specter of further foreclosures — an even more troublesome mess involving pay-option adjustable-rate loans lies well beyond that. These are the kooky loans that allowed borrowers to make payments that were a fraction of the interest owed, without paying back any principal.
Only when the loan balloons to 15 percent larger than its original size — a nifty development that results from a multisyllabic quagmire known as “negative amortization” — do lenders demand that borrowers pay down principal. In many cases, this will cause borrowers’ monthly payments to double, according to analysts.
When do analysts say borrowers will have to start coughing up this extra cash? In 2009, or later.
“As difficult as the rescue prospects are for subprime borrowers, they are even worse for most pay-option A.R.M. borrowers,” said Michael D. Calhoun, president of the Center for Responsible Lending, a consumer advocacy group. “Three-quarters of pay-option borrowers are making the minimum payment based on 2 to 3 percent interest typically. The payment shock is so huge that a refinance is virtually impossible.”
Consider this as more evidence that we are moving into financial waters that we haven’t had to navigate in quite some time — if ever. Because other housing downturns were not national in scope and did not involve mortgages that had been pooled, sliced up and sold to investors around the globe, it is almost impossible to predict how long the turmoil will last or how financiers, regulators, municipalities and homeowners will manage its fallout.
BUT it is possible to get a feel for what is happening on the ground from a new survey of 2,400 real estate agents sponsored by Inside Mortgage Finance Publications. The survey taps into the outlook of people who see troubled borrowers firsthand, when they try to sell their homes before foreclosure occurs.
For example, agents participating in the survey confirmed what many borrowers say: that loan servicers are downright unresponsive. This is especially true when distressed owners try to sell their homes before being put through the trials of foreclosure. When they sell at a price that is lower than the outstanding mortgage debt, that is known as a short sale.
Asked how servicers could streamline such sales, one said: “Allow you to go directly to the loss mitigation department without having to speak or argue with eight people before they finally give in and transfer you.” Another said: “Respond to offers within five business days — they are killing the market by taking upwards of three months to respond to an offer.”
A third participant said: “Answer their phone, make it easier to talk with the appropriate people, instead of playing Mickey Mouse games. I have never understood why these companies who are owners of a defaulted loan do not make it easier to communicate with agents who are trying to sell these homes.”
Thomas Popick, principal at Geosegment Systems, the designer of the survey and a supplier of data to financial services firms, said its findings show that loan servicers are averse to short sales, even though they may be the best solution for many borrowers, lenders and the overall real estate market.
“In many cases, loan modifications — no matter how generous the terms — only delay foreclosures on properties where the mortgage balance far exceeds the current property value,” he said. Homeowners who try instead to sell “know they cannot afford the property and are trying to do the responsible thing — sell the property to someone else who can afford it.”
Indeed, the agents in the survey said short sales take place at prices that are 16 percent, on average, below the amount outstanding on the mortgage. Not ideal, but better than the losses of 20 to 40 percent that lenders typically incur on homes put into foreclosure and sold.
One reason that short sales generate more money than foreclosed properties is that as a house sits empty, its condition declines rapidly. Another is that after being through the foreclosure process, with all its fees and humiliations, some borrowers simply decide to take the inside of the house with them.
“The attitude of the folks handling these situations with homeowners creates an adversarial relationship and makes the homeowners less able to understand and work through the situation,” one survey respondent said. “Most foreclosure properties when listed back on the market with the corporate seller look like they have been through a war — and they often have.”
To be sure, short sales are complex because they involve more participants — the mortgage holder, often a second lienholder, two real estate agents, the buyer and a seller. They also involve accepting losses, which no investor likes to do.
But in many cases, short sales would benefit stressed borrowers, their neighbors (whose property values fall when foreclosures around them rise) and the holders of the mortgage note in question.
Regulators must begin to prod servicers into allowing short sales when they are merited, in addition to loan workouts. Investors in mortgage securitization pools should also push the loan servicers who are supposed to represent their interests to ease such sales.
The nation’s housing market is in a world of hurt, as everyone knows. If it is to recover quickly, transactions must clear. Frozen markets help no one. And it’s way past time to face up to the losses that the subprime lending spree has created. |
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