The Mortgage Mess

We came across an article today. I was talking about the desperation of our government to try and figure out how to help with the foreclosure disaster. What we found most interesting about the article is it has a fairly good explanation of why it is much more difficult for lenders to work with borrowers. It has to do with the fact that, for many (if not most) mortgages, there were lumped into these huge investment pools so that a single mortgage may have many, many owners. So the bank can no longer just do as it wills with the loan. So this tangled web that was woven has handcuffed many lenders to where they could not prevent the foreclosure if they wanted to (and just know that lenders want to because it is extremely expensive for them to foreclose). Here is the portion of that article discussing this issue:

"Accelerating foreclosures is obviously, in my view, the huge driving problem right now,” said Elizabeth Warren, a Harvard law professor appointed by Congress to chair a panel overseeing the financial bailout. "Until we think in a more comprehensive way, we can't create solutions that will really make a difference," she told Congress last month.

Many of solutions tried so far have been stymied by the legal morass created by the modern mortgage.

In past recessions, it was not uncommon for lenders to work out more affordable terms with borrowers who had fallen on hard times. Bankers often prefer to cut their losses by lowering monthly payments and stretching them out over a longer term rather than bearing the cost of foreclosure. But the complex system of financing the recent housing boom — which was based heavily on the pooling of mortgages that were then sold to thousands of investors — has hopelessly complicated a once fairly simple renegotiation between lender and homeowner.

Multiple classes of investors, each with different claims on the same mortgage, often have conflicting interests. Some will do better with a loan foreclosure while others would profit by keeping the loan performing. Some contracts setting up these pool pay loan “servicers” — the companies that manage mortgage payments to investors — more generous payments for loans in foreclosure and offer little financial incentive to undertake the more costly process of modifying terms.

“You have got to have the investor or their representatives come to the table motivated to do something,” said Taylor. “And that’s currently what we don’t have.”

If you or anybody you know is caught up in this mess then let us know because we may be able to walk them through possible solutions.