Wednesday, December 30, 2009

On 'extend and pretend' and 'walking away on your mortgage'

Felix Salmon links to articles that show real-world examples of why it’s really just better to walk away than it is to try to deal with evil and/or incompetent mortgage servicers.

What we’re seeing here is the mortgage equivalent of credit-card sweatboxes: servicers who make sure to drain homeowners’ savings before they foreclose, since they know that they won’t chase homeowners after foreclosure, even in recourse states. By holding out the promise of a modification tomorrow, they make sure to squeeze every ounce of blood out of the homeowner before finally snatching the home away anyway.

So this is what I’d like to ask Megan McArdle, and others who like to extoll the moral virtues of paying one’s debts: just how much of your life’s savings should you give these snakes before they take your house

My take on it:
1. Are servicers the real culprits to go after when you’re trying to renegotiate a mortgage? I don’t know how it works in the US, but my gut feel is that these servicers work for the MBS investors. You need to go after the MBS investors if you want a renegotiation. Unfortunately, investment banks have made a real mess, and it now seems impossible to reconstitute who really owns what in MBS.

2. This may devious on the part of the banks who really may still have a way to renegotiate their loans, but extending a loan for as long as they can before they foreclose may be the only way to get back as much of their money as they can. With borrowers having paid no money down on the mortgage, extending and seeing how long borrowers will pay before defaulting is probably a belated way for banks to mitigate their loss. And with many borrowers having no prospects to pay the loan at all going into the future, many banks probably see a renegotiation as the real ‘extend and pretend’ option. The devious part of it though, is that if the banks already see a default down the line, they should just take their losses and foreclose now (and eat their losses) rather than trying to squeeze every last penny from borrowers who have already lost their jobs.

3. In the case of borrowers having no ability to pay the adjusted rates on their ARMM mortgages, but still have paying jobs, banks will need to be coerced to renegotiate. Here, nationalization seems to be the solution. A promising arrangement would probably be to impose a restructuring along the lines of rent-to-own. There have been good discussions on this so far.

4. In the case of borrowers who have the ability to pay their mortgage and only want to walk away, or do a renegotiation, because they are now underwater, the stance should still be ‘a deal is a deal’. Everybody who enters into a contract stares at the prospect of loss. That is why a contract is there, so people adhere to their agreements regardless of what happens after they close the deal. I maintain my position in a previous post.

To prevent this kind of mess of ever happening again, going forward, all mortgage securitizations should have recourse to the originator, and all mortgages should have personal recourse to the borrower. Take away all incentives to game the system.

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