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More "Ideas" To Fix Housing


Since when do service providers have the authority to reduce interest rates, allow delayed payments, or change loan terms in any way?


I keep wondering when absurd housing proposals are going to stop. As of right now it appears the list is endless.

I started compiling a list in Absurd Housing Bailout Proposals:

Well here is yet another one for the list with the Fed Urging Loan Holders to Avoid Defaults.

The Federal Reserve and other banking regulators issued special guidance Tuesday urging loan service companies to work with borrowers in danger of defaulting on their home mortgages. Sheila Bair, chairman of the Federal Deposit Insurance Corp., said that mortgage collectors have the authority under existing accounting and tax rules to help deserving borrowers.

"More and more consumers with subprime and hybrid mortgage products are facing the very real prospect of losing their homes through foreclosure as their payments reset and become unaffordable," she said in a statement. "It is vital that mortgage servicers work proactively with borrowers facing much higher payments as their interest rates reset."

The guidelines were aimed at addressing the fact that in many cases the company in charge of collecting monthly mortgage payments is not the same company that originated the loan.

Question of Authority

Since when do service providers have the authority to reduce interest rates, allow delayed payments, or change loan terms in any way?

Just to be sure the Fed was not misquoted, please take a look this September 4, 2007 joint press release entitled Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages.

The key word in that press release on loss mitigation is, of course, "servicers". But let's take a look inside. (The bolding below is mine.)

The federal financial regulatory agencies and the Conference of State Bank Supervisors (CSBS) on Tuesday issued a statement encouraging federally regulated financial institutions and state-supervised entities that service securitized residential mortgages to review to determine the full extent of their authority under pooling and servicing agreements to identify borrowers at risk of default and pursue appropriate loss mitigation strategies designed to preserve homeownership.

....Service providers generally get paid to service loans not make decisions. Yes, they do have a stake in the matter, as the longer they service the loan the more they collect. But that typically is the extent of the contract because of obvious conflict of interest issues that would arise if the servicer could change the terms of the loan just to keep servicing it.

Real World Example

Some random bank, big or small, makes a mortgage commitment. More often than not the loan is securitized (sold to investors like pension plans, international investors, life insurance companies, etc). The originator may or may not service the loan but most often not. Typically the servicing is outsourced to an additional party. That party may again outsource it to someone else.

Now the Fed is proposing some second, third or even fourth-removed party that services the loan make "loan modifications, defer payments, or reduce principal".

The idea is silly given the fact that the servicer may not have the slightest idea as to who owns the loan and likely has no ability (and should have no ability) to modify the terms of the loan because of conflict of interest issues.

Is the Fed really this clueless?

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