Many Americans are trying to work out new loans for their mortgages to avoid foreclosure--no surprise there. An article at CNNMoney.com gives an explanation that might explain why some Americans are finding it difficult to accomplish this task. The person who will decide whether or not the homeowner will get a new loan is a person called a "servicer". These individuals are hired to process mortgage payments and manage loans, but they are not the owners of the notes.

These intermediaries are paid anywhere from 0.25% to 0.50% (for subprime loans) of the monthly mortgage payments to process those payments and funnel the rest to the investors that hold the securities backed by the mortgage. As such, they have little incentive to work out new loans when they get to keep the profits from late fees. Some servicers have been accused of holding up posting mortgage payments until past the due date so that they could collect these extra charges.

There are other factors that discourage servicers from doing workouts. They have a contractual fiduciary obligation to take action to maximize the return to the security holders. Because of these contractual obligations and the type of modifications they can offer; it sometimes requires a servicer to pursue foreclosures. There are also tax issues to consider from the tax exempt loan pools. If the percentage of loan modifications exceed 5% that could jeopardize the trust's tax-exempt status. Another factor is frankly sheer volume. There is such a demand that the servicers cannot keep up. Mortgage delinquencies are up 112% during the first three months of 2008 compared to the same period last year.

Article: http://money.cnn.com/2008/05/15/real_estate/servicers_who_are_they/?postversion=2008051507

Chandra

In order to avoid a widening of the banking/credit crisis, the Federal Reserve has opened the window wide. That is, unprecedented amounts of money have been loaned to banks as well as (in a recent move) to brokerage firms. So, while the official word is that all is well and things are about to turn around, the amount of money which banks and brokerage firms are borrowing in order to survive is skyrocketing. These amounts do not include separate one time "facilities" used, for example, to finance the purchase of Bear Stearns by JP Morgan Chase.

Quote:
The Federal Reserve's direct loans of cash to commercial banks climbed to the highest level on record in the past week as money-losing lenders increasingly turn to the central bank for funds.

Funds provided through the so-called discount window for banks rose by $2.8 billion to a daily average of $14.4 billion in the week to May 14, the central bank said today in Washington. Separately, the Fed's loans to Wall Street bond dealers rose by $75 million to $16.6 billion.

…
Bear Stearns Cos. had borrowed $32.5 billion from the Fed as of March 21, according to a JPMorgan Chase & Co. regulatory filing on April 11. The Fed provided $29 billion of financing to secure JPMorgan's takeover of the investment bank in March.

Bank of America Corp. Chief Executive Officer Kenneth Lewis urged policy makers today to choose between bailing out Wall Street investment banks or letting the ``hotbeds of risky financial innovation'' fail as the market dictates.

``I understand the argument for opening up the Fed's discount window to investment banks in this environment,'' Lewis said in a speech today at New York University's Stern School of Business. ``But I'd also say that providing a public backstop to an inherently risky business that is not required to backstop itself is a tough sell for taxpayers.''

Here is a link to the whole article:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aur2QcWbKf2U&refer=home

Michael