The New York Times had a don't-miss story Sunday showing how good news for some homeowners facing foreclosure may mean bad news for everyone else.
The story looks at the market for distressed mortgage-backed securities, and explains that some of the institutions that buy these toxic assets from failing banks pass on some of the discount to the homeowners-which is good for them-but then pass on all of the default risk to the taxpayers.
Statistics show that 70 percent of loan modifications ultimately fail, the borrowers losing their homes to foreclosure anyway. Most mods do not involve a reduction of the principal balance on the loan, and though I can't find default figures for those, they're probably better. Still, a lot of these loans remain questionable even after the principal balance is reduced. The Times spoke to Steven and Marisela Alva in Pico Rivera, Calif. They got a note in the mail from a middle man company called MCM Capital Partners-the true identity of the company that bought their loan, incredibly, remains a mystery-explaining that a fund had bought their mortgage at a discount and wanted to pass some of the savings on to them:
"I couldn't believe it," said Mr. Alva, a 62-year-old janitor and father of three. "I kept thinking to myself, 'Something is wrong, something is wrong. This sounds too good.' "
But it was true. The balance on the Alvas' mortgage was ultimately reduced to $314,000 from $440,000.
Hot damn! That's like a $126,000 gift.
But wait! Dude's a janitor & his mortgage is still over $300k.
The $126,000 gift could be great for the Alvas, if they can keep up with the new payments. If they can't, however, what happens next in these deals is the problem. As the Times explains, the Alvas's new loan will be backed by FHA-meaning that if they default the taxpayers will pick up the tab.
The FHA is already in trouble; something like one-third of all the loans it made in 2007 have defaulted. The 2008 vintage is already over 20 percent. The agency backs more than 40 percent of the mortgages being made these days. It says it will not require a bailout.
The folks doing these deals are not altruistic, even though they're battling the big banks to reduce folks' loan balances, and lobbying Congress (of course) for more favorable rules:
In April, about a dozen investment firms formed a group called the Mortgage Investors Coalition to press their case. One investor who is speaking out is Wilbur L. Ross, who runs a fund that buys mortgages and owns a large mortgage servicing company.
Baltimoreans might remember Wilbur Ross. He's the guy who, in 2003, bought the Sparrows Point steel plant, terminated the retirees' pension fund, and flipped it to another vulture investor a year later.
As former Sun reporter Mark Reutter figured it in his excellent book, Making Steel, Ross's $1.1 billion profit roughly equaled the loss suffered by about 145,000 U.S. Steel retirees, who lost their pensions and medical benefits. About $200 million of that sum was paid to the retirees by the Pension Benefit Guaranty Corporation, a government-backed pension insurance fund.
The Times doesn't delve into the individual investors much-after all, they're trying to keep a low profile. But the paper quotes a former HUD official named Howard Glaser, who sums thing up well enough:
"From the systemic point of view, there is something disturbing about investors that had substantial short-term profit in backing toxic loans now swooping down to make another profit on cleaning up that mess."
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