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:
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.