Banking Law

Hell hath no fury like a bureaucrat scorned.
---Milton Friedman

"Did, too!"
"Did not!"
"Did, too!"
"Did, not!"

No, that's not Paris Hilton and Britney Spears fighting over who went commando in the limo last night, that's the Mortgage Bankers Association and FDIC Chairman Sheila Bair having in their own little bitch-slap-fest last week concerning whether or not mortgage loan servicers are modifying residential loans quickly enough to satisfy the "unreasonably imprudent subprime lender test." As you might have guessed, the MBA believes that its members have been faster than a speeding bullet in modifying every ARM they can lay their grubby little hands upon. Just as obviously, Ms. Bair thinks that progress has been moving at a bit slower than Warp Factor 3.

First, the MBA:

A mortgage industry trade group insisted Thursday that lenders are doing a better job of helping troubled borrowers than outside reports say they are.   

The Mortgage Bankers Association said in a new report that mortgage lenders modified 54,000 loans and established 183,000 repayment plans in the third quarter, a period in which there were 384,000 new foreclosures.   

"The industry is doing a good job, and I think we're going to see these numbers grow," said Jay Brinkmann, vice president of research and economics for the trade group.

[...]

The mortgage industry was criticized by consumer groups, lawmakers and regulators last fall after a survey by Moody's Investors Service in August showed lenders had modified only 1 percent of subprime loans to people with poor credit records. A follow-up survey by Moody's found in September that 3.5 percent of subprime loans that reset to higher levels in the first eight months of 2007 had been modified.   

The new analysis, however, argued that Moody's study incorrectly compared the number of borrowers receiving help to the total number of outstanding subprime loans, many of which are refinanced before they reset at higher rates. A better way to examine the issue, the group said, is to compare the total number of loan modifications to the total number of foreclosures in the quarter.

[...]

The trade group's report used its own estimate for foreclosures, which is lower than that of RealtyTrac Inc., which reported more than 635,000 filings in the third quarter.   

The Mortgage Bankers Association says its results are more accurate than those of Irvine, Calif.-based RealtyTrac, which includes default notices, auction sale notices and bank repossessions in its reporting and can include two notices on the same property if the owner has multiple mortgages.   

Today's report, the trade group says, underscores how hard banks are working to assist strapped borrowers with loan modifications and repayment plans. Making matters difficult, the group said, is a high proportion of homes owned by speculators and situations in which borrowers didn't respond to repeated attempts to contact them.   

Among the foreclosures, 63 percent involved cases in which borrowers had already defaulted on a previous loan workout plan, didn't respond to efforts to contact them or didn't live in the home, the survey found.

Consumer advocates disputed the meaning of the MBA report, contending that only 24% of the loan modifications were made to subprime ARM loans, and that the number represented less than 1% of the 3 million subprime ARM loans outstanding. However, I thought that the goal was to modify subprime ARM loans where the borrowers could not afford the post-adjustment payments, not all subprime ARM loans. Oh, wait a minute, I forgot: Sheila Bair and other full-time professional consumer advocates want all subprime borrowers to get a better deal than they bargained for on the basis that none of the participants in the subprime mortgage market expected the loans to be repaid as originally written, so what the heck! As Ellen Schloemer, research director at the Center for Responsible Lending in Durham N.C., put it, "It's rare that those loans are going to be able to be repaid as they are currently structured."

Sorry, I momentarily forgot that we weren't operating in a free market.

Ms. Bair made it plain that she's not buying the MBA's line.

"We must see a pickup in the pace, and the sooner the better,'' Bair said [last Thursday] at a Bear Stearns mortgage and structured products conference in New York. The industry's progress on modifications is not going "as well as it should be,'' and regulators will be "closely watching'' its progress, Bair said.

Bair cited a November Moody's Investors Service report that showed 3.5 percent of loans that reset in the first eight months of 2007 had been modified.

"That puts us way behind the curve going into the new year,'' Bair said, adding that nearly 2 million subprime borrowers will face resets through the end of 2009.

And, of course, all 2 million loans will have to be modified, if you follow Ms. Bair's line of mandatory subprime borrower relief.

Bair then made a not-so-veiled threat that if the mortgage lending industry doesn't bend to her will voluntarily, she'll bend it by force.

I very much believe in the market,'' Bair said. "But if market solutions fail to solve the problem, government will step in.''

Yeah, Chairman Bair "very much believes in the market."

I can't wait until the federal government steps in to "solve the problem."

If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand.
---Milton Friedman