A Portrait of the Mortgage Ax, Not Falling

Edmund Andrews’ Sunday confession in the NYT ended with the following line:

Eight months after my last payment to the bank, I am still waiting for the ax to fall.

The man spends a couple thousand words chronicling his personal credit crisis, how debts have tormented him and nearly ruined his marriage, and how he had no choice but to stop paying his mortgage. The build up to this decision is clearly heart-wrenching, as it must be for so many families facing foreclosure.

And then….nothing happens.

Here it is eight months later and the foreclosure fairy, in this case Chase, still hasn’t come to take his house. The man’s been living rent free for the better part of a year because (he thinks but can’t say for sure) that Chase is so swamped with foreclosures his just can’t be processed. Could it really be that easy?

It’s been suggested that the best ways to get out from under an unpayable mortgage is to walk away. Apparently not. Forget mailing your keys to the bank, just stop writing checks and see what happens.

OA wanted to dig a little deeper on this point: is it really just a paperwork snafu that’s keeping him in his house? A long-time reader who knows a thing or two on the topic weighs in with these thoughts:

1) Chase, and other lenders, has only so much manpower to apply to the situation, although 8 months seems like it would have been plenty of time to get around to him. It’s not likely that this is a big factor, but it could have contributing effects. He does address this in the article, of course.

2) Due to the fact that Chase has sold his loan, they (Chase) as servicer, don’t have much skin in the game. In fact, he’s just an expense to them and the only way Chase can start getting servicing fees again is if he starts paying. If it were a questions of KEEPING him paying, then Chase cares, but at this point there’s not much to play for from the servicer’s standpoint. If Chase sold the mortgage to a specific institution, that institution could maybe spur Chase to pick up the pace (if it wanted a resolution, see 4), but if Chase sold the mortgage in a pool then only God and a small minority of the angels know who has the rights to the mortgage. It’s even theoretically possible that there could be so much paperwork chaos that a court would rule that no lender/investor has been able to present a valid claim and the borrower could effectively walk away with the house (pending someone actually being able to put together adequate paperwork evidence). With no single customer to badger Chase into action, and no stake of their own in the game, Chase is likely content to allow the loan to linger until they can get to it later. In the end, they are obligated to complete their role as “servicer”, but there isn’t anything that says they have to do it “right now” as long as they can prove that they were doing the best they could. With the workload/manpower issues covered in point (1), they have ample cover.

3) It’s entirely possible he doesn’t qualify for one of the common modifications available. If that’s true, the computer system isn’t going to waste an employee’s time letting him know.

4) Why not wait a little longer and see what incentive the gov’t offers lenders to modify mortgages? An $8K payoff from Uncle Sam? Much like the talk that setting a hard deadline for withdrawing from Iraq would encourage the insurgents to wait us out, the government suggesting forthcoming new and glorious salvation encourages mortgage services to wait it out and see what happens. I would prefer a different allegory as I don’t want to suggest that I equate mortgage servicers with Iraqi insurgents, but that’s the best that comes to mind.

So clearly this is a non-performing mortgage, and very likely there are thousands more like it. Whoever owns these mortgages should be writing them down appropriately. Are they?

We don’t really know who’s balance sheet it’s on, so it’s impossible to really know. The only things we know are that it’s not on Chase’s sheet, and its definitely non-preforming.

If it were just a loan (and not part of a pool in a security) at this point it would almost certainly have been partially charged off as a loss on a bad loan. That’s the way it is SUPPOSED to work. For retail loans there are maximum delinquency periods for waiting to charge off a reatil loan which are very strongly suggested by the FDIC. By 180 days past due, the lender is supposed to get an updated appraisal and at 180 days is supposed to charge off as a loss the amount of the loan that exceeds the appraised collateral (value minus selling expenses). These days I wouldn’t be stunned if the apprasials weren’t getting done on time and the chargeoffs were getting delayed. There just aren’t enough appraisers, and if the bank can’t get an appraisal, they’ll have the excuse of not knowing how much they need to charge off.

By the way, most banks don’t wait so long to charge off a bad retail loan. More conservative banks will charge off unsecured debt at 60 days and start taking estimated chargeoffs at 90 on even secured debt. You can always book a “recovery” at a later date if the bank was overzealous.

Being in a security really complicates things. Investors can make an Other Than Temporary Impairment adjustment, but that will not erode their capital unless they “don’t expect to receive” that cash flow… yet the interpretation of “expecting to receive” seems wide open (at least for a deperate bank) unless the insitution were to get some sort of communication from the servicer to the investors of the impacted tranches saying ” you’ve lost $X in principle” to the subordinate tranche and “you’ve had $X repaid” to the senior tranche. I am not certain how that is communicated. Is the principle considered lost at 180 days, as a loan would be? Or is it only considered lost when the property is actually foreclosed? There’s a lot of confusion around it, and the whole situation is incredibly opaque.

It’s possible to construct a home-made loss estimate, but requires much labor involving looking up the securities a bank invested in (and what tranche), reading the prospectus for said security, estimating deault rates and assuming a loss on the default balance equal to the average home price decline by geographic area based on some sort of index (case schiller is the easiest). A lot of time and effort for a basic and obvious answer:

It’s not pretty for option arm / subprime / alt-a investors.

Comments

[vvvvviking]

You're reader is wrong - if Chase is just the servicer, they are advancing payments to the owner of the loan (often an MBS trust) so DO care about initiating the foreclosure.

Odds are they are just backed up. I have seen loans that are many years delinquent. Yes, years. Usually there was some glitch in the foreclosure situation and the servicer never circled back around to deal with it.

2009 May 20 12:13 PM

[Matthew Starolis]

wwwiking - are you saying chase pays out more to the MBS trust than they collect? If so, please explain how this works. I presume a servicer simply forwards what *is* collected, minus servicing fees.

If my understanding above is correct, please elaborate on the servicer's motivation to initiate a foreclosure. It's not clear to me.

2009 May 20 01:37 PM

[infp]

What a great scam for the delinquent home owner. By all means let's bail people like this out along with the banksters of Wall Street. After all, they were simply victims of their own greed.

2009 May 20 02:15 PM

[Jasper M]

FUBAR. Just FUBAR
A very eye-opening post, desPite the fact that the details are left a mystery.

2009 May 20 03:29 PM

[Alfredo Martinez]

One more way society is rewarding irresponsible people. I would love to have a year without paying my mortgage!

At some point, Atlas is going to shrug, and these deadbeats will have no one left to leach off of.

2009 May 20 10:28 PM