Corporate Welfare

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There is an important movement forming with the goal of making most or all real estate foreclosures go away over the issue of securitization. Securitization entails bundling of your mortgage with other mortgages, slicing and tranching that bundle, and selling it as a bond or bonds. A mortgage servicer then takes over receiving and processing your checks, and in turn makes sure those further up the pipeline get paid.

For mortgage bailout advocates, securitization has become a phrase like "cloning" or "warlords" or "health care reform." It is valuable because it is drained of meaning, and thus seems to offer an easy pro/con choice on ideas that are nebulous and often unrelated. Activists have picked up the idea that the securitization process means your mortgage either doesn't exist or is being manipulated against you.

Just a couple more loan modifications and I'll go from deadbeat to dreamboat!

On the doesn't exist side are Landmark National Bank vs. Kesler buffs. This Kansas Supreme Court case ruled that a second lienholder, which had not filed paperwork on time, did not have standing to collect when the primary mortgager foreclosed on a property. Because in this case the second lienholder was Mortgage Electronic Registration Systems, a clearinghouse established by large lenders for electronic trading and tracking of mortgages, advocates of affordable fair housing for fair housing affordability have decided that the ruling will make it impossible to foreclose on 60 million mortgages.

In fact, it's a long-established principle that passing along a debt -- by either securitizing it or just getting bought by a bigger bank -- does not make the debt go away. The changeover of mortgage servicers imposes no burden on the borrower, other than possibly having to mail checks to a new address. MERS may be an incompetent, evil, destructive system -- a list of the company's shareholders strongly suggests it is. But there's nothing hard to understand about its role. You agreed to pay a debt; MERS is collecting it and administering your account on behalf of the current debt holders.

On the being manipulated against you side are groups like National Consumer Law Center, which publishes this report [pdf], purporting to explain the "perverse incentives" that cause servicers to foreclose when they should be providing the bad borrower with an expensive and risky loan modification.

You may think it's not always clear what the legitimate holder of a loan should do when faced with a non-paying debtor, but the report throws out that nicety in its title: "Why Servicers Foreclose When They Should Modify…" Here's one of the perverse incentives:

Fees that servicers charge borrowers in default reward servicers for getting and keeping a borrower in default. As they grow, these fees make a modification less and less feasible. The servicer may have to waive them to make a loan modification feasible but is almost always assured of collecting them if a foreclosure goes through.

HuffPost's Shahien Nasiripour says this proves* that foreclosures are more "profitable" for servicers than loan modifications. It's not clear what "profit" means when you're talking about minimizing your loss on a loan gone bad. But foreclosure is the best option for the servicer for the same reason it's the best option for everybody else involved. As Hit & Run visitors have heard, time and time again, modified loans are so likely to end up defaulting again that there is essentially no argument for encouraging this procedure. Nor is there any mystery about why loan modification was so rare before the government spent $75 billion to subsidize it. Loans that go bad stay bad. The NCLC report is fairly reluctant to talk about redefault rates (who isn't, these days?), but does say second-strike defaulters just need one more slowball right over the plate. Or maybe five more:

Some servicers provide modifications upon redefault as part of their loss mitigation programs. This approach should be standard and mandated, and should include continued eligibility for Making Home Affordable modifications rather than only specific servicer or investor programs.

It's true, if you want to spend the money, and then spend it again in the future, you can eventually reduce the principal on every bad loan to the point that everybody can afford to pay it. You could even pay off every loan in its entirety if you really wanted to. It will cost a lot more than $75 billion, but isn't it worth it to keep people in their homes?

* Shahien Nasiripour sends in the following:

I never said any such thing. The NCLC may make that claim, but I don't (nor would I, for the record). I simply reported on the findings and recommendations in the group's report.