The Loan Arranger Rides Again

Cynthia Kouril at FDL goes over the Obama administration's mortgage loan modification program, and finds out that -- surprise! -- the banks took the money and ran.  Is anyone surprised after finding out the program was run by Timmy and Treasury?

Talk about burying the lede. The NYTimes has run a story which purports to be about the plans by the Treasury Department to pressure banks to do more to renegotiate delinquent mortgages. It has all sorts of blather from Treasury about using “embarrassment” as tool to get banks to do what they were given $75 Billion dollars to do under the federal Making Home Affordable Program.

The real story though, does not come out until the very bottom of the article. The real story is the continuing fraud being perpetrated on both the Government and consumers by the banks and other “mortgage servicers.” Predatory lending has an ugly tail end.

Some lawyers who defend homeowners against foreclosure assert that mortgage companies are merely stalling, using trial loan modifications as an opportunity to extract a few more dollars from borrowers who would otherwise make no payments.

“I don’t think they ever intended to do permanent loan modifications,” said Margery Golant, a Florida lawyer who previously worked for a major mortgage company, Ocwen Financial. “It’s a shell game that they’re playing.”

According to the Times, this federal bailout was intended to save 4 million homes from foreclosure, yet there are only approximately 650,000 homes in the program to date. A previous report showed that ONLY 2,000 of the then 500,000 in process had their loan modifications made permanent.

That's right.  2,000 mortgage loans out of a program to help 4 million.  That's .05% for those of you keeping score at home.
(More after the jump...)

There are a number of reasons why the program has failed miserably:

This was a dumb idea on several fronts:

1)      The loan servicers don’t give a damn if the loan defaults. In fact, perversely, it is to the servicer’s short term benefit if the loan does go into default because the servicer is then entitled to all kinds of additional fees.

2)      The reason the servicers don’t care if the loan goes into default, is that the servicers don’t own the mortgage; so if the mortgage is suddenly worthless, the servicer is not the one taking the loss, the owner of the mortgage is.

3)      The owners of these mortgages that have been pooled together and sold off as securities are pension funds and municipalities and college endowments. They don’t own a specific mortgage, just a percentage of a pool of thousands of mortgages held in trust for their benefit. They will take the loss if the mortgage defaults. Or will they?

4)      Don’t forget all those “credit default swaps” that we had to bail out AIG for. Many Mortgage Backed Securities have insurance policies on them that are supposed to pay some or all of the loss if the security fails. The insurer has no power to recast the mortgage to mitigate that loss, though. However, the insurers have, or expect, government bailouts and back up guarantees to prevent an insurance industry collapse.

5)      What about the Trustee who holds all these mortgages for the benefit of the pension plans, etc., who bought the mortgage backed securities? You would think as a fiduciary for the security holders that the Trustee would have some incentive to mitigate the losses by getting a reduced, but flowing, income stream rather than no income stream at all. But often the trust agreement does not give the Trustee the power to recast these loans.

And here's the best part:

The servicers are using the modification program as a way to extract financial information from homeowners, to obtain information about income and assets, including that of people in the household who are not obligated under the mortgage. This is information that the servicer is otherwise not entitled to demand under the fair Debt Collections Act and which they therefore obtain by trickery. Sometimes in this sham “loan modification” the servicers get other family members, who were not originally obligated under the mortgage, to sign as additional obligees.

Why? Because after the homeowner fails to graduate from the trial period, the servicer is still going to put the homeowner in foreclosure, kick the homeowner out and sell the house. However, because of the collapse of the housing market, the sale of the house is unlikely to cover the outstanding debt, resulting in a deficiency judgment.

The servicer will now be able to use the asset information it obtained during the renegotiation phase to go after any other assets or income the former homeowner may have. If other family members signed as new-co-obligees, the servicer now has additional people to go after to collect, people who never took out a loan in the first place.

Only know, with the evidence out the clearly the program has only served to make the issue worse, is the Obama administration taking steps to increase that .05% permanent loan modification rate.

With the foreclosure crisis showing no signs of relenting, the Obama administration plans to expand a program aimed at helping people remain in their homes.
The goal of the announcement, expected Monday, is to increase the rate at which troubled home loans are converted into new loans with lower monthly payments, Treasury spokeswoman Meg Reilly said over the weekend.

Industry officials said the new effort would include increased pressure on mortgage companies to accelerate loan modifications by highlighting firms that are lagging in that area.

The Treasury is also expected to announce that it will wait until the loan modifications are permanent before paying cash incentives to mortgage companies that lower loan payments.

That's a start, but it clearly should have been that way from the beginning.  Now?  Well, for millions of Americans, now it's too late.  They've been screwed over a second time by the same predatory lenders using the program as a cover to set up even more predatory mortgage lending.

Heck of a job, Timmy...