Foreclosure Mods Farce


WELLSFARGO-RATING/SANDPNew Orleans The scorecard is finally being written on the ballyhooed, though mostly baloney, loan modifications being done by big home mortgage loan servicers and trumpeted by the federal government (and largest shareholder in many of these outfits) as a real plan for foreclosure relief, and it stinks.  Gretchen Morgenson in a searing Times column today that rested on the analysis of Professor Alan M. White at Valparaiso University Law School of 3.5 million subprime and alt-A mortgages in securitization pools controlled by Wells Fargo, and led to the Times editorializing that banks need to start writing off principal, since they are losing their shirts anyway.

Though they do not mention the obvious 600 pound gorilla in the room, the specter of “ghost banks” becomes even more real since many are still hiding behind presumed, and non-existent values on their books for many of these mortgages.  Real relief and write downs for homeowners would reduce the asset ledgers dramatically.  Sooner, rather than later, President Obama is even going to see these facts emerge and realize that he’s out selling something that begins to seem like a scam.  Less modifications being made, fewer write downs of principals amounts on the loans in order to protect fragile, papier-mâché balance sheets, and homeowners bounced out on the street in the name of this farce, while new buyers scoop the homes up at 2/3 or more discounts once they are in a foreclosure sale.

We need a real program now!

Here are the guts of the indictment from Morgenson’s column:

“The loans were written in 2005 through 2007; data on their performance is provided to the trusts’ investors. Mortgages handled by five of the nation’s largest loan servicing companies — Bank of America, Chase Home Finance and Litton Loan Servicing among them — are contained in the Wells Fargo data.

Mr. White found that mortgage modifications peaked in February and have declined in all but one month since. While servicers modified 23,749 loans in these trusts in February, they changed only 19,041 in May and 18,179 in June. This is exactly when servicers were supposed to be responding to the government’s loan modification urgings.

Foreclosures, meanwhile, keep rising. In June, 281,560 were in process, slightly above the 277,847 in May. Last January, there were about 242,000 foreclosures in the pipeline among the Wells Fargo trusts.

“I was hoping we would see some impact in June of the government’s program,” Mr. White said. “Is ‘Home Affordable’ working? My short answer is no.”

To be sure, the government’s data differs from that which Mr. White analyzed, and its loan modification figures for the second quarter may look better as a result. The O.C.C. includes prime loans as well as subprime, for example, while the Wells Fargo data contains no prime loans.

Nevertheless, Mr. White has collected the figures since November 2008, and he said that in the months since, the performance of the 3.5 million mortgages that he analyzes tracked the O.C.C. data pretty closely.

But the most fascinating, and frightening, figures in the data detail how much money is lost when foreclosed homes are sold. In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance.

Here are the numbers: the average loan balance began at almost $223,000. But in the liquidation sale, the property sold for $144,000 less, on average. Perhaps no other single figure shows how wildly the mortgage mania pumped up home prices. It also bodes poorly for the quality of the mortgage-related assets lurking in banks’ books.

Loss severities, like foreclosures, are rising. In November, losses averaged 56.1 percent of the original loan balance; in February, 63.3 percent.

Given losses like these, Mr. White said he was perplexed that lenders and their representatives were resisting reducing principal when they modify loans. His data shows how rare it is for lenders to reduce principal. In June, for example, 3,135 loans — just 17.2 percent of the total modified — involved write-downs of principal, interest or fees. The total loss from these write-downs was just $45 million in June.

And yet, the losses incurred in foreclosure sales involving loans in the securitization trusts were a staggering $4.59 billion in June. “There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications,” Mr. White said. “That is not rational economic behavior.”