More On Why Banks Aren't Foreclosing On Homeowners
In today's New York Times, Gretchen Morgenson has an interesting column that validates one of the key points I made in my post from several days ago about why the owners of mortgages are not foreclosing more often on homeowners who aren't making their monthly payments. The answer: Foreclosing would require that the mortgage owners re-estimate downward the value of the second liens to what Morgenson calls "fantasy levels." That, in turn, would require them to admit that the loans had gone bad and, therefore, require that they repurchase the loans from Fannie Mae and Freddie Mac.
One strategy the mortgage owners have for dealing with this is to fight the repurchase request. But if they lose that fight they have to buy back they loan and put it on their books. As a result, a second strategy that has emerged is to avoid the problem completely by not foreclosing at all. This retains the pure fiction that the loan is still at the original value and, therefore, doesn't trigger the repurchase provisions.
Gretchen has confused you
"That, in turn, would require them to admit that the loans had gone bad and, therefore, require that they repurchase the loans from Fannie Mae and Freddie Mac."
I don't think it would. And if you go back and read Morgenson's piece very carefully, you'll notice that she doesn't say it that it would. In fact, the article doesn't suggest any actual connection whatsoever between foreclosure and buy-backs. It simply discusses both topics side by side, leaving the reader to invent a connection.
Morgenson lays out the criteria for compulsory buy-backs: "...Fannie and Freddie require lenders or loan servicers to sign contracts requiring those firms to repurchase loans that don’t meet certain standards relating to borrower incomes, job status or assets. Loans that were extended fraudulently, or deemed to have been predatory, are also candidates for buybacks." Notice that repayment status is not a factor. A "bad loan" for these purposes isn't one that has "gone bad" but rather one that didn't meet the GSEs' underwriting standards in the first place.
Right motivation; complicated cause
I'm still not sure if you've got to the nub if this yet. Are there numbers for mortgages that are seriously in arrears but not in foreclosure? Time that the mortgages have been eligible for foreclosure but the mortgage owners have not taken action?
I still think it has more to do with the mortgage owner's accounting; that there's an advantage to have it as delinquent then a loss; possibly due to capital requirements, possibly the complexity of identifying the multiple owners for any single mortgage, possibly due to the foreclosure's negative pressure on the CDS's value.
We recently sold a house, and the new buyers were told, "You're mortgage will be sold." In your earlier post, you said foreclosure were more common when the bank that originated the mortgage still held it. So it seems there's something about the nature of sold mortgages thats going on.
Sounds to me like a symptom of the synthetic derivatives that brought us this mess are still popular; still 'spreading the risk' without accounting for risk. Sounds to me like the problem in 2008 is still a problem today.
I think you mean "re-estimate
I think you mean "re-estimate downward the value" from "fantasy levels" not to "fantasy levels".
Representations
The representations concerning mortgages that are securitized generally speak as of the time the mortgage was originated or transferred to the securitization vehicle. If there was some misrepresentation at that time, the mortgage originators would have to buy back the mortgages from Fannnie and Freddie, but subsequent changes are generally not the responsiblity of the originators.