Maybe it’s time to let Bankruptcy Courts deal with Neg-Am Mortgages.

This blog should fall into the arena of gossip for some more educated source to follow up and provide better and more firm facts.


Someone I trust was talking to a banker and they started to discuss the problems with the banking system. After covering all the numerous talking points about who was to blame and pointing the usual fingers; the Community Investment Act, Fannie and Freddie Mac acting as irresponsible investor on bad loans, and the removal of the restriction preventing Investment Banks from engaging in real estate (Glass-Stegal). In other words the usual complaints. They then started to discuss possible solutions to the debacle, this is where I became interested.

Most real estate agents, and others who have attempted a loan modification, know what kind of a byzantine nightmare the process can be. Many calls, lost paperwork, and low level staff manning the phones that have no authority other than the right to tell you 'NO' and 'declined'.
They talked about the system. Once a bank receives the modification or short sale request, it has to go to its files and pull the loan documents, submit all the paperwork to an underwriter who was given a set of policies drafted by the banks attorney's who may also eventually research the loan. At the same time, if there is a second loan, a concurrent negotiation occurs with an institution that has their own phalanx of underwriters, attorneys, and guidelines.

Part of the bank's research is to determine if there was mortgage insurance and if there was an investor on the loan. Once it is discovered that these entities exist, there are yet another set of guidelines to deal with from corporations who have yet another series of underwriters, guidelines, and attorneys.

So lets review, under the ideal situation in any short sale or loan modification with one loan there
could be as few one and many as three institutions involved; the bank then additionally one insurer and/or one investor. If there are two mortgages, then there are two to six institutions.

Now let's complicate the matter, like the reality for most. No bank has one investor, nor do they use one insurer. So as the pool of loans grows and the number of vendors grows, and the process gets more and more complicated. Other complications arise when you consider the myriad of state laws and the fact that many of the investors are overseas. but then it gets really tricky.
Somewhere along the line, investment banks created these "so-called" risk hedges called the collateralized mortgage obligation or collateralized debt obligation (CMO's or CDO's). This was a new form of investment designed to reduce losses on bad mortgages. So the banks take their pool of assets backed by debt and people's incomes and they divide these obligations into investment vehicles, using another set of contracts (drafted by attorneys) and start trading them on Wall Street to institutional investors (who have their own attorneys).


So at the peak of the bubble we had we had little or no oversight from the Republicans, We had Democrats pushing banks to underwrite bad loans that were purchased by Fannie Mae and Freddie Mac. The Investment Banks poured money into the mortgage market. Banks wrote loans, sold some to investors, and insured others, all while packaging bundles of investments and selling them to insurance companies, other banks, foreign governments and hedge funds.


So now the banker gets to the end of his discussion. "Event's didn't work out so well." he says. "Real Estate agents are working the short sales and individuals are trying to perform loan modifications." He continued, "The reason most loan mod's and short sales do not get approved is because it is just cheaper to foreclose than to deal with all the various companies and their attorneys. Every bank can't come up with one set of guidleines to deal with all the different situations all these contracts and attorneys have created." Once the foreclosure occurs then it wipes the slate clean for the bank holding the loan at the core of this complex system of contracts. The homeowner is treated like one of the investors and gets wiped out with the foreclosure.


This is why it's so hard to do a short sale or loan mod.