Why are the banks in trouble if they have already off loaded mortgages off their books? A lot of the banks did their own securitizations and weren't able to sell them to investors, so they had to keep them on their own books. They had completed tens of billions in re tranching, resecuritizations, CDO & CDL tranching just before the secondary market blew up. All of those toxic assets had no place to go accept back on to balance sheets or SIVS.
From the above graphic, the delinquency rates are 35% for bank securitized mortgages and 42% from Private Mortgage backed investors.
This is the real problem that millions of home owners are facing with regards to mortgage modifications. The banks even though in bad shape are in no structural position to do these modifications. They don't have the horses to do so. Also a bigger problem, under The Making Homes Affordable Program, participating mortgage companies must modify loans for all qualified borrowers, the only exception is when a contract with investors prohibits the modification. Almost all of the private label mortgage contracts have prohibitions that prohibit modifications.
Most of these private label mortgages were ARM, Option ARM, Negative Amortization, and other dangerous types of hybrids. These mortgages were very profitable all the way of the supply chain. The banks knew they were selling products that home owner did not understand, but the fact remains that these were very profitable. You can assume that the main reason they are fighting the Plain Vanilla Mortgage standard offered by the consumer protection agency is to protect these type of actions. They continue to say it stifles innovation. INNOVATION! If Neg AM, Option ARM, Pick-A-Pay is innovation, please downgrade me to DOS on my PC! Furthermore, have you ever looked at a Hybrid Mortgage Tranche prospectus? It is nearly twice the size of a conventional 15/30 year prospectus.
Now we get to the way these mortgages are sliced and diced through the system. Where is Clyde when you need him the most?
After a typical mortgage is placed with a home owner, the bank that underwrote/originated the mortgage knowing that is crap, will attempt to sell this note to an investment bank, which in turn also knowing its crap, will bundle it up with other similar pieces of crap. This is how a MBS security is created. The investment bank will give it a fancy name. After the securitization has taken place, The syndicate department within the Structured area will peddle the crap to investors, who kinda know its crap, but need the extra yield. We live in an ALPHA WORLD. That's not the end of it. Someone has to manage the crap, so they hire another investment bank to that. Someone also has to service the crap make sure the payments are made, etc. Along along the chain, everyone is getting paid.
The buyers of MBS are not usually readily available, but its generally 401k's, Pension Plans, foreign governments, and college endowments. Sprinkle in some widows and orphans and you have an investor base. Now, you may ask how are 401k's and Pension Plans allowed to buy this crap? Are they not allowed to buy sub prime mortgages? Yes they are, but then again the banks had that covered as well. The Ratings Agency would always slap a AAA rating on them. Perfect for the pension fund manager.
Its this last area that banks are using as an excuse not to modify mortgages. They generally say that they are acting in the best interests of investors by not modifying these contracts as they hurt the overall MBS. They say that its the investors who are standing in the way of modifications. Firstly, legal experts say that investors have no say at all in mortgage mods. Secondly, this begs the question. Were the banks acting on investors best interest when they were placing crap disguised as Gold? Also the Obama Administration has amended many securitization rules that give the banks extreme latitude in doing modifications.
The reason they are not doing them is two fold:
1-They don't have the horses to do them. They are understaffed.
2-If they do modify mortgages, the underlying MBS gets repriced to a more reasonable true valuation. From this the banks would all have to take a haircut on the crap they currently own on their own books.
Needless to say Wells Fargo, BOFA, along with JP Morgan are the biggest suspects in these modification schemes.
The convenient excuse of blaming investors and contract rules don't jive with the facts. In reality the contracts themselves generally don’t limit modifications. Researchers at UC Berkeley’s law school looked at the contracts covering three-quarters of the subprime loans that were securitized in 2006. The researchers found that only 8% prohibited modifications outright. About a third of the loans were in contracts that said nothing about modification, and the rest set some limits but generally gave the servicers a lot to leeway to modify, particularly for homeowners that had defaulted or would likely default soon
Wells Fargo is the most egregious offender here, partly because they have the most to lose in a mortgage modification. That is because Wells currently is a giant Mortgage Hedging Company, disguised as a lender. IF they modify more loans, the value of their MSR hedges decline, because the mortgage servicing rights decline when a modifications takes place. As the MSR value goes down. We are not even going into the revaluation process of all of the mortgages on their books that would take place.
http://tradersutra.blogspot.com/2009/10/pure-simple-wells-fargo-is-disgrace.html
All of this has made modifications next to impossible. You can not take the banks seriously when they say they are trying to keep people in their homes. The only reason foreclosures slow down is that banks just don't want any more inventory on their books.
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