Merger-mania will make things worse for borrowers

If you have a sub-prime mortgage loan and aren’t keeping close track of what your mortgage servicer is doing, you better start. As the lenders scramble to buy up failing originators, loans will be moving in and out of the hands of servicers like cards in a game of gin rummy.

Even if you’re not facing foreclosure (like nearly 20% of recent sub-prime loans), get ready for the tsunami of transferred and messed-up mortgage accounts, and keep in mind the servicer who obtains your loan will believe anything and everything on the computer, no matter how screwed up it is. On top of that, the search for profitability will lead to adventures in fee creation as well as opportunistic equity recovery in order to balance out the really upside-down loans in a portfolio.

Contrary to what some industry observers have said, the servicers aren’t exactly in a panic about the 2+ million coming foreclosures of bad loans. In fact, the real predators are positioning themselves to take advantage of the mess, bargaining behind closed doors to divide up the spoils and offer troubled lenders a way out of their servicing-related overhead.

The industry would like Washington to believe that the closing of doors and shrinking profits are evidence of a market that can and will rid itself of bad or weak players. A few of the sub-prime lenders who made bad loans are going out of business and that seems to satisfy the Mortgage Bankers Association’s Chief Economist, Douglas G. Duncan. This is the same person who, in his prepared testimony before the Senate Committee on Banking, had the gall to claim: “The primary reason for defaults are family and economic difficulties – not product choices.” To support this half-truth, he points to a Freddie Mac study that looked at reasons for delinquency based on data from their “Workout Prospector® system.” Here’s what his table of reasons looks like:

Unemployment or curtailment of Income 41.5%
Illness or Death in Family 22.8%
Excessive Obligation 10.4%
Marital Difficulties 8.4%
Extreme Hardship 3.3%
Property Problem or Casualty Loss 2.1%
Inability to sell or rent property 1.6%
Employment Transfer or Military Service 0.9%
All Other Reasons 9.0%

Of course the data is from 2002 through 2005 and doesn’t touch the 2006 disaster – but that’s not the disingenuous part. What isn’t going to be one of the options the users of “Workout Prospector®” can enter into the system would be things like “Predatory Loan,” “Borrower Scammed by Lender,” “Illegally constructed loan,” or “Opportunistic Servicer.” And let's not forget, most sub-prime loans aren't touched by either Freddie or Fannie, so the data is even more misleading.

Duncan goes on to promote the “everyone loses in a foreclosure” mythology, conveniently ignoring the fact that the home being foreclosed on is going to be sold to someone, and that someone is probably going to get a new loan to buy it.

He even put this jewel in his prepared testimony: “Servicers do not have an incentive to intentionally cause foreclosures, because profitability rests in keeping loans current and, as such, the interests of borrowers and lenders are mostly aligned.”

His duplicity is glaring; “profitability” for servicers involves far more than keeping loans current and a substantial portion of it comes from fees and charges (legitimate or otherwise). Not to mention the discounted acquisition price some servicers pay for loans the previous servicer doesn’t want to handle.

So at least in Senate Committee testimony, the industry is as fundamentally sly as they are in the loan origination process.

Which brings me back to the original point – the troubles in the sub-prime lending marketplace are going to land in the laps of the borrowers, not the lenders and servicers. Trust me, these predators are not going to slink back under a rock somewhere and not try to minimize their losses.

Washington is going be dancing to the tune of the lobbyists, and the lending industry will spend millions in the coming election year to make sure they don’t have too much interference. And in the mean time, they’re going to grind as many of the garbage loans into mulch as fast as they can.

Anyone with a sub-prime loan best be equipped to prove every stinkin’ payment and stay on top of every little detail in their loan every month. And you’d better at least find an attorney and get him or her ready, because you are a target, especially if you have equity in your home.

The Honorable Judge Roy Bean