So, what’s next? Much more peril. Lots of people and banks walking away with no solutions and no money. This is not going away, because so many Alt-A and Adjustables will try to reset in the next two years, and without relief from modiifications, will continue to drag our economy closer to the edge of the abyss.

Upshot? Real social revolution is entirely believable within the next two to three years. Look at what happens in the third world: revolution!! Don’t think it can’t happen here!!

P.S. If anyone out there thinks I am just trying to be one of those people who feels I need to get my break or piece of the pie, you could’nt be more wrong. I have stable income but have lost enough to fall very short every month. My savings is gone and my wife has not been able to find work since being laid off. Add to that the fact that we have been trying to modify for 11 months now makes this whole modification process a joke. Now have nowhere else to turn but the rental market.

The other dirty secret of securitization is that the big banks originated a lot of these loans and stayed on as servicers. Why do you think WaMu charges extremely high servicing fees? You’ll find that it’s often the case that the originator and servicer are subsidaries or divisions of the same bank.

To give you an example, here is the pooling agreement of a Merrill Lynch run securitized trust.

http://www.secinfo.com/dsvr4.u73h.d.htm

First Franklin, at the time a wholly owned subsidiary of Merrill, sold all of its loans to Merrill Lynch Mortgage Investors, the depositor of the pooling agreement. Merrill then bundled them together and created this trust. The servicer, Home Loan Services, Inc., is also owned by Merrill. The trust then sells the rights to collect on the loans to the public (ie investors). The Trustee acts as the single entity that holds all the paperwork in the name of the trustors.

Now lets say all of First Franklin’s default. First Franklin already got paid when it originated the loans. Merrill Mortgage got paid when it sold the loans to the trust. Home Loan Services, as the servicer, gets paid no matter what, and actually gets paid more if the loan is in default or forecloses. The Trustee gets paid a bonus when it forecloses on a property. All the legal fees and foreclosure costs are paid by the Trustors. The only ones that are going to feel the pain of a default are the Trustors, who have no voice in the matter other than to sell the bonds of the trust, and have no idea what’s going on as to each individual loan.

Of course no one is going to modify! Every party here other than the trustors either already got paid or will get paid more if there is a foreclosure. The banks will foreclose even if it’s to the detriment of the Trustors (ie borrower offers to set balance at $200k on a $100k FMV house, servicer+trustee will foreclose anyway because they only make money if there is a foreclosure).

The only way to get servicers+trustees to offer modifications that will benefit both borrower and trustor is to restructure securitization agreements (don’t see how this can be done unless Trustors sue) or prosecution of the servicer+trustors for breach of fidicuiary duties (again it’s in the hands of the Trustors), or some other action that will disincentivze servicers+trustees from making deals that screw the Trustors.

Government cheese? Government housing. Lots and lots of government housing.

The fun part is that it can be done by the states, as well as the Feds. Thanks to wingnut Supreme Court jurisprudence, the mortgagers wouldn’t be able to get into Federal court. (This is likely a feature, not a bug.)

This sounds a bit like HOLC. However, HOLC won’t work, because the servicers won’t consent at a reasonable price.

The only place modification has a place is where there is a prepayment penalty. We should have a ban on prepayment penalties to deal with this. To deal retroactively with prepayment penalties, perhaps we could have cut a deal to let banks that eliminated
those penalties be loan servicers for the refinances.

What value does their creation or innovation provide? To the homeowner/mortgagee who signed up with a particular bank or mortgage company? None-negative in fact, it externalizes more hassle and work onto this mortgagee, and increases costs. What value does it provide our courts including bankruptcy when they are adjudicating property rights and contracts? None-negative in fact, the servicer is not the mortgage holder and typically has no authority to modify-creates an additional seperation that adds no value.
To society and the community at large? None-negative in fact, being able to securitize and sell mortgages as AAA, when they are in fact much less in quality led to this very economic crisis due to CDOs, etc.

How about this, if you want to be in the mortgage business, you underwrite the paper based on your lending standards, you set and satisfy reserve requirements, you service the mortgage, and you stand one step away from the mortgagee to facilitate contract and property right adjudication in the courts. You disclose fees and costs up front.

Sounds pretty basic to me. In fact, isn’t this the way it used to work before “innovation”? And, wasn’t it less expensive for the borrower, with fewer foreclosures, and involved far less hassle?