NAVIGATING THE FORECLOSURE CRISIS

HERE'S A CURIOUS POST by a Washington Post real estate column commentor who tags himself Afraid4America. Several key points are made which differentiate this coming tide of foreclosures from the one last year, which was nurtured by Chris Dodd and Barney Frank over at the Fannie Mae and Freddie Mac wing of all things wrong about government involvement in big business...

The bankers are in a real dilemma. They really don't want to foreclose. Foreclosure to a lender has two very negative consequences. First, they must recognize the loss of the mortgage on their books. Even if the borrower isn't paying, the loan is not considered a loss that has to be written off on the books until a foreclosure is processed. So, they defer the foreclosure for too long in most cases. Also, the foreclosure process has disastrous consequences for the collateral/house.

Borrowers trash places. You wouldn't believe it-torn out appliances, walls bashed in, broken toilets, spray painted obscenities, garbage, feces. Thousands of dollars of damage. Even if they don't trash the place, once they have been kicked out by the sheriff, you have the problem of a vacant house-breakins, fires, undetected roof leaks, etc. [Sometimes a house will simply explode due to an undetected gas leak.] Then you have to hire someone to monitor the place, clean it up and a broker to sell it.

There's another critical reason to deny the cold reality that the borrower will never be able to bring the loan current in just merely kicking the can further down the road, postponing the inevitable and making the ultimate loss even worse. It's a form of lender denial. The underwriting standards for so called "conventional" mortgages have steadily deteriorated over the years. For example, it used to be that you couldn't get a mortgage if the cost of owning the home (mortgage, taxes, insurance) exceeded 30% of your gross provable income. That percentage has gone up and up. And I am not talking about subprime loans to people with lousy credit.

However, as mentioned in the article, with regards to the foreclosure fiasco, there seems to be a win win solution at least short term and that is to let the defaulting borrower live in the house at a modest rent or no rent for a while.

But, a critical and easily preventable problem in this current mortgage meltdown is one the finance writers seldom mention. The people who control the workout system, the mortgage servicers, are hamstrung by the fact that most of these mortgages are in pools of collateralized mortgages and the "rules" that govern whether these servicers can modify the terms of the loans (i.e., lower interest rate, deferral of payments, write-down of principal, etc.) don't allow the kind of flexibility available to them if a mortgage is owned outright by a bank or GSE.

This lack of flexibility was foreseen from the outset by real estate lawyers who handled workouts as a problem with these CMBS structures from the get go, but the securities industry really didn't understand the special problems presented by collateral in securitized mortgage pools (as opposed to, say, pools of credit card receipts or car loans).

These collateralized mortgage structures were engineered by securities lawyers who know nothing about mortgages. They didn't have the brains or the curiosity to wonder whether credit card or car loan receipts and mortgages were totally different types of collateral. If things go south in a pool of credit card receipts or car loans, you just chase the borrower or repo the car and that's it. Blame the arrogant geniuses who "structured" these financial "vehicles" without consulting real estate lawyers for part of the problem here.

The Mortgage Banker's Association tried to address this issue about 7 yers ago with respect to commercial real estate mortgages [a different type of collateral], but I don't think anyone really listened or applied the conclusions to collateralized home mortgages.