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are lenders delaying loan mods to avoid failure?

snigletsniglet
edited September 2008 in Housing Bubble
I have been wondering if one of the reasons that lenders have been so reluctant to do significant loan modifications on delinquent borrowers is due to a desire to avoid write-downs and consequent insolvency?

I noticed that the FDIC has ceased most of the foreclosures in process at IndyMac, and plans on modifying them instead. Perhaps the reason IndyMac was so reluctant to do modifications in the first place was precisely because the institution was in such dire straights. It is preferable to foreclose on a house but keep the book value of the mortgage at full price rather than accept a modification and take an immediate accounting hit. Having whole towns of unsold homes, with high list prices, attracting squatters will always be more attractive than selling them for market clearing rates or accepting loan modifications on them.

If it comes to a choice between going into conservatorship, or delaying the write downs of mortgages it's not hard to see which option a lender will choose.

Comments

  • mukohmukoh
    Sniglet I see actually more and more modifications being recorded on the foreclosures and close to under whater properties that I am watching. Including builders with new standing inventory getting their loans modified to the point of 2% APR.

    Of course someone who bought in Sept/07 for $585k in Kenmore on 80/20 and made no payments whatsoever is not getting modified.
  • snigletsniglet
    The more I ponder this (i.e. the possibility that some lenders literally can't afford to make write-downs) I wonder if this couldn't be a bigger factor in preventing the markets from correcting than the normal complaints about how banks are under-staffed and just "overwhelmed" with the volume of delinquencies.

    I wonder if it would be possible to do a calculation to determine just what kind of a hit a given bank would take to it's capital ratios if they were to write of 20% or 50% of the value of all delinquent loans/REOs in their portfolios?

    I wouldn't at all be surprised if the lenders in the worst financial shape are the ones that are least receptive to doing short-sales, principal reductions, or realistic REO pricing.
  • davidlosh@davidlosh.comdavidlosh@davidlosh.com
    The problem is that loans were made on an over inflated value. I have a short sale I'm working on now where the borrower purchased a home by Alderwood against my advice. They paid $270K for a new construction stand alone condo. It has no value as an asset, it never had the ability to appreciate. It's like a new car, once driven off the lot, you can only pay it off.
    Two years later, when everything got crazy the property showed a CMA price of $410K and they refinanced to take out $60K. The lender asked if they would like $100K, they said no thanks.
    They asked me last November to list the home for $410K, which I did. In December I recommended a price reduction to $380K which they refused, so I cancelled the listing.
    I should be clear that these sellers did not live in the house at this point. Thier jobs were in Seattle and they had moved into an apartment closer to work. They tried renting the place out then realized they were paying the difference with money they could not afford.
    In Febraury they contacted an attorney about what to do and the attorney called the lender who suggested they short sale the property. The lender is Chase. So we have the property listed and a pending sale at $320 with the lender paying $18K in down payment and closing costs for an FHA 0down program.

    OK I went through that because the circumstances are pretty typical of the short sale process. The lender is taking, bottom line $60K less than is owed, which is about 20%. Chase will take that money and immediately lend it again in consumer credit loans. I could go on about how the note was bought by Chase at a discount which makes this transaction pretty much a wash for them.
    In the case I mentioned they did try to modify the loan. They offered a lower interest rate. They offered every possible solution but the property is worth less than is owed. It's a nonappreciating housing unit and that's the problem.
    Lenders want to turn properties. They want the process to remain fluid, it's how they make money. At the same time there are lenders who are holding rental units, making bulk transfers of housing units, or managing assets. They own the loans, they can do what they want with them.
    The problem is that this loan is made on a nonappreciating asset. It was never meant to appreciate. It's sole function was to hold the dirt it sits on for future development. It's a hard concept for people who believe construction was made to last and some was, most wasn't. We're seeing it now in the Seattle Town Home design modifications. It will allow more density the same as L1,2,3 zoning has morphed into the town homes we have today.
    Nevada and Southern California are by far the worst offenders and those places have loans on nonappreciating assets. Is that making some sense? It also extends to regular housing. I owe $600K on a $300K asset. I'll pay it off but the fact is that the lender gave me the money. If I walk away there is no commission, sale, buyer with inspection, or hoping for financing. My lender is asking me every month if I want to modify and I'm waiting for all "fixes" to be exhausted.
  • snigletsniglet
    davidlosh@davidlosh.com wrote:
    The problem is that loans were made on an over inflated value.

    I am missing your point. Are you saying that lenders can't reduce loan principals because the original appraisals were for too high a value? I don't see how the value of some old appraisal would have any bearing on whether a lender is willing to reduce the principal today. All they have to do is get a new (and trusted) appraisal to tell what the current value is.

    Why is it that you think some lenders are unwilling ro do large principal write-downs?
  • snigletsniglet
    There seems to be increasing evidence that lenders have, in fact, been stalling on sales of foreclosed homes to avoid having to take big write-downs (i.e. hoping the market will improve if they just hang on). Recently, more and more lenders are throwing in the towel and selling for whatever they can get.

    Nevertheless, articles like this one provide some confirmation to my theory that at least some lenders have been purposefully dragging their feet with loan modifications and REO sales to avoid having to book write-downs.
    Banks are selling foreclosed homes in some cases for less than half the price they fetched two or three years ago. The cuts are coming as the U.S. banking sector, slogging through its worst crisis in decades, bites the bullet out of fear that prices will keep falling.

    Banks and investors have grown more leery of the rising costs of holding onto vacant homes. Along with such expenses as insurance, lawn care and maintenance, banks are being hit with higher costs for complying with local regulations applying to vacant homes.

    http://online.wsj.com/article/SB121858407824434917.html?mod=hps_us_pageone
  • snigletsniglet
    Here is yet more evidence that some lenders are dragging their feet on foreclosures. Somehow I think that the reason for tardiness in dealing with delinquent borrowers is not as simple as merely having to deal with the existing back-log. I still suspect that there are some lenders who just don't want to have to take any more write-downs to their books and would rather have delinquent borrowers live rent-free indefinitely rather than take more hits to their books with write-downs.
    Some homeowners in the area have gone months without paying their mortgages and have yet to receive a foreclosure notice ---- a development that suggests banks are overloaded and that also might mean foreclosure reports are understating the region's housing crisis.

    Several homeowners in the area interviewed last week said that they stopped paying their mortgages six to eight months ago and still have not received a notice of default, which typically comes by the fourth month of nonpayment.

    http://www.nctimes.com/articles/2008/08/30/business/z880d0dfc56110085882574b40074b8ec.txt
  • jillaynejillayne
    "Why is it that you think some lenders are unwilling ro do large principal write-downs?"

    I'd guess it has to do with the banks and their balance sheet and it also has to do with the investors. If a pool of investors each owns a piece of that mortgage, the lender has to get a "yes" to principal balance write-down from each investor. This is extremely time and resource consuming. This is one downside to securitized lending. We all know that the lenders under-priced risk; they also under-priced the cost of servicing securitized loans.

    Now let's go further. A lot of banks had to borrow money last year at this time (or towards the end of 2007, I believe) When they did this, they probably pledged collateral such as pools of RMBS.

    Writing down principal balances may not be an option.

    However, they CAN do temporary loan mods.

    Repeat: I'm hearing banks are willingly doing TEMP loan mods. This means, for example, that the homeowner's teaser rate stays fixed for another 3 years.

    This will only prolong the housing crisis by another 3 to 5 years, IMHO.
  • snigletsniglet
    jillayne wrote:
    Writing down principal balances may not be an option.

    However, they CAN do temporary loan mods.

    Repeat: I'm hearing banks are willingly doing TEMP loan mods. This means, for example, that the homeowner's teaser rate stays fixed for another 3 years.

    This will only prolong the housing crisis by another 3 to 5 years, IMHO.

    You are almost certainly correct. What amazes me is how resistant all the different players are to actually taking the hard medicine of marking assets to market as this whole credit implosion slowly unfolds. The LAST thing we want is to actually give principal reductions to struggling borrowers, or sell REOs for massive discounts. Let's not really sell our CDOs for market prices, but rather engineer some convoluted transaction where someone borrows our money to "buy" these assets from us at above market rates with a "guarantee" that they will be indemnified from further losses.

    It's all a big throw of the dice, hoping against hope that the markets recover and there never is a need to fully mark down asset prices.

    The real irony is that everyone would have been SO much better off it they had just accepted the hard medicine 10 months ago. It's like someone trying to sell their home who keeps chasing the market down, never willing to price their home at the real going rate and instead slowly dropping the price continually. They would have gotten a much better price if they'd just bitten the bullet to begin with.
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