To mark it to market, to mark it we go: Part 1, delinquents
No, not juvenile delinquents
With the spotlight shining on subprime loans, the New York Times adopts the classic personification-of-the-abstract approach by finding a single householder who’s fairly clearly in difficulties, and then generalizing expansively, along the way drawing almost precisely the wrong set of conclusions, starting from its lurid headline:
Mortgage Maze May Increase Foreclosures
Now I have to write a lengthy post explaining why they’re wrong!
Introducing our Pauline, in peril:
In 2003, Dianne Brimmage refinanced the mortgage on her home in
We thus learn that Ms. Brimmage’s new mortgage debt is a result of previous spending. So the 2003 transaction was a relief to her.
Now, struggling with a much higher interest rate and in foreclosure, she wants to modify the terms of the loan.
Entirely understandable.
Lenders have often agreed to such steps in the past because it was in everyone’s interest to avoid foreclosure costs and possibly greater losses.
Depending on the security and situation, it still is.
But that was back when local banks held the loans and the bankers knew the homeowners, as well as the value of the properties.
The Times tacitly implies that knowing the homeowner and knowing the property’s value makes the lender more willing to restructure the loan. Sometimes this is so; sometimes it isn’t.
Ms. Brimmage got her loan through a mortgage broker —
I’ve previously highlighted mortgage brokers as the ‘honorable mercenaries,’ giving them benefit of the doubt, and the evidence continues to mount that lender and originator supervision of individual agents was extremely lax. That’s what happens when credit discipline erodes because everybody’s making money in an extremely benign environment.
– just the first link in a financial merry-go-round.
A link in a merry-go-round? Block that metaphor!
See any links here?
The term of art is ‘value chain,’ which is business-speak for ‘delivery system.’
Some links in the value chain are stronger than others
The mortgage itself was pooled with others and sold to investors — insurance companies, mutual funds and pension funds. A different company processes her loan payments. Yet another company represents the investors as the trustee.
As we saw in lender: dramatis personae, there are quite a few different participants, each of whom plays a slightly different role, with different motivations.
Most significantly for Ms. Brimmage, and millions of householders like her, is that disaggregating the value chain means the ultimate risk party of the structured finance — the holder of the securitized junior piece — is very, very far away from Ms. Brimmage’s particular case:
She has gotten nowhere with any of the parties, despite her lawyer’s belief that fraud was involved in the mortgage.
If Ms. Brimmage’s lawyer thinks there was fraud, he can sue someone — the lender. Or, should the lender move to foreclose, he can assert fraud as an affirmative defense. Either way, Ms. Brimmage’s getting nowhere isn’t an issue if she’s playing defense against foreclosure; it’s a barrier to her working out a restructuring.
We have all the answers you need
As I observed in what’s a delinquent borrower to do?
The organizing principle is one simple precept: be part of the solution. This includes concepts like:
· Be the property’s best steward. Maintain or repair it as if you’re going to own it long term. That’s your goal, so act like you mean it.
· Trade sweat equity for enforcement relief. The more you do the things a lender would want done if you were out of the picture, the less motivation the lender has to take you out of the picture.
· Report frequently and accurately. Lenders love information — even bad news is better than no news. When news is absent, a lender’s fears run amok.
Ms. Brimmage is doing many of these things, and the Times story highlights that they haven’t worked — so far. Yet Ms. Brimmage isn’t out of her home, she’s still in it:
Like many other Americans, Ms. Brimmage is a homeowner stuck in foreclosure limbo, at risk of losing the home she has lived in since 1998.
Even though no hammer has descended upon Ms. Brimmage, she is living with uncertainty, and the homeowner’s anxiety at the moment of delinquency is tremendously debilitating.
Have I just lost it?
When we know we face future pain, we want it confronted, and over with — not this Waiting For Godebt.
As the housing market weakens and interest rates on adjustable mortgages rise, more and more borrowers are falling behind. Almost 14% of subprime borrowers were delinquent in the first quarter of 2007. Investors, fearful that these problems will hurt the overall economy, have retreated from the stock and bond markets, creating major sell-offs.
And the very innovation that made mortgages so easily available — an assembly line process known on Wall Street as securitization — is creating an obstacle for troubled borrowers.
Everything fits together in our value chain, see?
As I previously posted, securitization emerges in sophisticated capital markets:
It’s useful because it makes more efficient pricing of instruments, through a financing quilt, where each unit of risk and time is separately priced, so it allows a heterogeneous mix of maturities and risks to be sliced into bands, each sold separately
The slicing and dicing is quite sophisticated, very large scale, and efficient as all get-out. But, like all innovations it is not entirely cost-free:
As they try to restructure their loans, they are often thwarted, lawyers say, by strict protections put in place for investors who bought the mortgage pools.
Even allowing for the inherent spin factor in any phrase including the words “lawyers say” — particularly when it comes to finance! — we do need to ask ourselves:
Where’s the obstacle?
Who says there’s anything in your way?
[Continued tomorrow in Part 2.]
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