Big Banks Drag Feet in Foreclosures to Reap Gains

Thursday morning’s Wall St. Journal ran an interesting article about condo associations trying to collect back dues by foreclosing on bank-seized properties. Banks claim they are stalling the foreclosure process due to political pressures. Condo associations say banks are stalling to avoid paying back dues.

Our friend David Proman, investment professional at a boutique investment management fund, responds to the Wall St. Journal article. Mr. Proman questions whether the banks’ excuse is valid, and he points out the underlying competing interests at hand:

Dear Nick,

You posted a great article this morning. However, this part raises my concern:

Lenders say they are caught between condo associations that want to speed through foreclosures and political pressure to slow foreclosures as mortgage-servicing firms work to modify loans. ‘There’s no generalized delay in foreclosure on either condominiums or anything else. Unfortunately, the courts are clogged with these things,’ said Thomas Cardwell, general counsel for the Florida Bankers Association.

First, the government does not want to modify loans on vacant properties — especially investor properties. And a lot of these condos fall into this category. Rather, political pressures are prompting mortgage servicers to attempt to modify loans of hard working American families who were coaxed into borrowing an inappropriate amount of money. (The blame can be given to both the borrower and the lender for each of these, but this is a topic for a whole separate discussion.)

Second, the main mortgage servicers in this country are the Big Four Banks: Bank of America (BAC), Wells Fargo (WFC), JP Morgan Chase (JPM) and Citi (C). These servicers have a separate agenda from mortgage/abs [asset-backed securities] investors, the government, and most importantly homeowners. Although the servicers project a false image that they have homeowners’ interests at heart (by not foreclosing/liquidating), the banks’ only genuine interests are their own (which, we should not forget, is the mission of any corporation). This interest is to advance principal and debt interest as long as possible. During this time the servicers recoup these costs first upon a liquidation ahead of senior lien holders. Once property liquidations occur, the servicer’s Interest-Only (IO) goes away and profitability decreases. If they are able to retain the new IO somehow, it will be on a lower priced property. Therefore, their profitability still falls.

Also, the largest problem for the Big Four right now is that they own more than 60% of all second lien morgtages ((HELOCS)) outstanding. These second liens are held at close to par on their books. As soon as properties get liquidated, the holders of these second liens (the Big Four) are forced to write them down to zero (assuming the proceeds from the sale are less than the first lien loan amount, as is the case for almost all foreclosures right now). Only the servicers have an interest to avoid foreclosure and liquidation. Mortgage investors would heavily prefer liquidations so they could actually recoup any remaining principal before it is eaten up by servicer advances which must be repaid at the time of sale. The servicers have a fiduciary responsibility to maximize the value of the trusts where the loans reside. Instead, they choose to maximize their own value at all other parties’ costs — especially mortgage investors. Your article clearly notes the servicers are also screwing property management companies.

The banks only care about one thing: their bottom line. Bank of America, Wells Fargo, JP Morgan Chase, and Citi have over a combined $450 billion in second liens on their books. They cannot afford the imminent 50-70 cent hit on these loans as it would deem them insolvent. As a result, the delinquency buckets are piling up and no liquidations are occuring. Recently, the Big Four spent millions of dollars on lobbyists to get S.896 (a servicer safe harbor) passed. The bill monetarily incentivizes them to modify loans, allowing them to keep their IO values in tact and in turn maintain profitability.

Thank you for writing this article and bringing things to light. I feel that most people are still kept in the dark on many of these important underlying issues which are plaguing our country.

I hope all is well with you and look forward to your response.

Sincerely,

David Proman

Comments

[D. McHattie:]

"[The banks] cannot afford the imminent 50-70 cent hit on these loans as it would deem them insolvent."

Nailed it.

The banks are still insolvent and they do not serve the public interest. They are not a worthwhile recipient of taxpayer dollars, not from any standpoint.

These banks need to be wound down so that healthy, viable banks can take their place. Period.

Jun 19 07:45 AM

[greedcanbgood:]

I'm not sure that I concur. A deal that far gone will HAVE to be foreclosed upon at some time so whether it's this quarter or next, the hit still remains. I would think that a financial institution might want to get them written off faster, take their lumps and purge their portfolios so they can look like a hero in subsequent quarters.

Jun 19 12:08 PM

[AmericanSheep:]

U.S. Code Title 18 Chapter 47 Section 1005,1006,1010,and 1014 In short says, a broker , lender or employee of a financial institution will be charged for defrauding or falsifying docs. No where does it say the homeowner to be charged. More lies. Why? Because a homeowner doesn't have the employeed power to enforce a contract.
www.law.cornell.edu/us...

If a home owner lied about his debts then they risk their own finances. But the broker had my bank statements, taxes from my acountant, and my credit report, how was it possible to lie about my income.

Title 12 Chap. 29 Section 2803 (6) loan application must be on file for 4 years. Where 's my loan app. Show me where I lied.

Tittle 12 Chap.27. Sec. 2604 Special Information Booklet. Did you ever see one?
A client signs the docs., just as they sign the docs. allowing a doctor or mechanic to perform their duties. Your not responsible if your doctor performs a sugery you didn't request. Your not responsible if your car breaks down pulling out of the shop. We have laws protecting the consumer. They're just largely being ignored.

Jun 19 01:32 PM

[wall street...:]

All the stalling on the macro level has one motive: preventing market sell-offs. Stocks can correct in only two ways: price or time. So, we can unwind the banks and have the stock market go down another 50%, or we can play BS rhetoric and accounting games to go sideways until value catches up with price again.

Since governments only care about maintaining order, they will choose tread sideways over taking our bitter medicine.


On Jun 19 12:08 PM greedcanbgood wrote:

> I'm not sure that I concur. A deal that far gone will HAVE to be
> foreclosed upon at some time so whether it's this quarter or next,
> the hit still remains. I would think that a financial institution
> might want to get them written off faster, take their lumps and purge
> their portfolios so they can look like a hero in subsequent quarters.

Jun 20 12:29 AM

[wall street...:]

Excellent research!


On Jun 19 01:32 PM AmericanSheep wrote:

> U.S. Code Title 18 Chapter 47 Section 1005,1006,1010,and 1014 In
> short says, a broker , lender or employee of a financial institution
> will be charged for defrauding or falsifying docs. No where does
> it say the homeowner to be charged. More lies. Why? Because a homeowner
> doesn't have the employeed power to enforce a contract.
> www.law.cornell.edu/us...
>
>
> If a home owner lied about his debts then they risk their own finances.
> But the broker had my bank statements, taxes from my acountant, and
> my credit report, how was it possible to lie about my income. <br/>
>
> Title 12 Chap. 29 Section 2803 (6) loan application must be on file
> for 4 years. Where 's my loan app. Show me where I lied.
>
> Tittle 12 Chap.27. Sec. 2604 Special Information Booklet. Did you
> ever see one?
> A client signs the docs., just as they sign the docs. allowing a
> doctor or mechanic to perform their duties. Your not responsible
> if your doctor performs a sugery you didn't request. Your not responsible
> if your car breaks down pulling out of the shop. We have laws protecting
> the consumer. They're just largely being ignored.

Jun 20 12:30 AM

[Fitz919:]

So the big 4 banks are holding off on forclosures because the Home Equity Lines Of Credit connected to those mortgages will be valued at zero on their books. The dollar amount involved is so huge that the banks will go broke and therefore be insolvent.

And this is supposed to be news. There are already lots of reasons why the big 4 are insolvent. They get to carry on their charade because the government has forced them to. If they don't play ball with the government, CEO's and boards are fired. So they continue to play their game.

If the big 4...the too big to fail big 4, collapse, confidence in the U.S. financial system will collapse, and we won't be able to sell our debt to foreigners any more. Credit will freeze even tighter than it already has, and everyone will go into survival mode, not just the people whose unemployment benefits have run out.

This is why government reports are "Seasonally Adjusted', or have fictional "Births and Deaths" numbers thrown in to make them look better. Everything is being spun so that we don't lose confidence.

For the Obama administration, it's one wrong move, and they're presiding over a Depression. So they just keep dancing around the truth, and keep the lies flowing. It's amazing what they can accomplish with a good teleprompter, some arm-twisting behind the scenes, and repeating a pack of lies.

Jun 20 01:05 PM

[wall street...:]

Welcome to the way it has always been, my friend. Barry Ritholtz covers all that everyday ...


On Jun 20 01:05 PM Fitz919 wrote:

> So the big 4 banks are holding off on forclosures because the Home
> Equity Lines Of Credit connected to those mortgages will be valued
> at zero on their books. The dollar amount involved is so huge that
> the banks will go broke and therefore be insolvent.
>
> And this is supposed to be news. There are already lots of reasons
> why the big 4 are insolvent. They get to carry on their charade
> because the government has forced them to. If they don't play ball
> with the government, CEO's and boards are fired. So they continue
> to play their game.
>
> If the big 4...the too big to fail big 4, collapse, confidence in
> the U.S. financial system will collapse, and we won't be able to
> sell our debt to foreigners any more. Credit will freeze even tighter
> than it already has, and everyone will go into survival mode, not
> just the people whose unemployment benefits have run out.
>
> This is why government reports are "Seasonally Adjusted', or have
> fictional "Births and Deaths" numbers thrown in to make them look
> better. Everything is being spun so that we don't lose confidence.
>
>
> For the Obama administration, it's one wrong move, and they're presiding
> over a Depression. So they just keep dancing around the truth, and
> keep the lies flowing. It's amazing what they can accomplish with
> a good teleprompter, some arm-twisting behind the scenes, and repeating
> a pack of lies.

Jun 24 12:09 AM

[TeresaE:]

Yes, logic dictates that the hit comes either today, or tomorrow and tomorrow at a higher cost (as taxes, dues, legal fees continue to accrue every day).

Regretfully, the banks (and Congress) don't understand the terms "logic" or "reason."

All they care about is this quarter and maybe, the next quarter.

With a bit of luck, the CEOs and others can slink away in the middle of the night and not be accountable when the inevitable shit hits the fan.

Which is the EXACT reason we are in the mess to begin with.


On Jun 19 12:08 PM greedcanbgood wrote:

> I'm not sure that I concur. A deal that far gone will HAVE to be
> foreclosed upon at some time so whether it's this quarter or next,
> the hit still remains. I would think that a financial institution
> might want to get them written off faster, take their lumps and purge
> their portfolios so they can look like a hero in subsequent quarters.

Jul 06 02:59 PM

[TeresaE:]

This problem is only being brought to light because the Condo Associations are demanding their fair share.

What about the MILLIONS of empty homes/buildings that are just sitting? No signs, no foreclosure stickers and I would bet, no mention in the "foreclosed" numbers. I believe the banks are just sitting on these properties and keeping them in the "distressed" but not "foreclosed" categories.

Yes, eventually when the transfer of property occurs, the bank will have to take the loss. But, I'm sure their lobbyists are working hard on legislation to change that accounting rule too.

We are being lied to by the powers that be, all of them.

The greatest theft via wealth transfer ever perpetuated on a country's citizens continues unabated.

More green shoots.

Jul 06 03:02 PM