Wells To Modify Option ARMs In 7 States. Bondholder Impacts of Foreclosure Mess.
Wells Fargo To Modify More Option ARMs
Remember when Wells Fargo took over Wachovia, wrote down the option ARM’s, and thought that was the end of the problem? It wasn’t: at least 531 Illinois homeowners will be offered mortgage loan modifications by Wells after an investigation into allegedly deceptive marketing of Option ARM’s. Illinois and seven other states investigated Wachovia and Golden West’s marketing of pay-option ARM’s. Under the settlement, Illinois borrowers will be offered $39.5 million in mortgage relief in the form of loan modifications, including almost $17 million in principal forgiveness. Wells Fargo will also pay $2.2 million to the state to compensate affected borrowers who have lost their homes to foreclosure, to cover the cost of the investigation and to provide assistance to struggling Illinois mortgage borrowers.
More On Foreclosure Mess
This foreclosure nightmare is bringing many things to light, and in fact many are wondering about the lending business in general. “Why would anyone pay their mortgage ever again? Why would any business want to make mortgages, or buy them as an investment ever again? Compensation is about to change, individual loan officer TILA liability, being asked to do certain refi’s at no compensation to lenders. There are many federal agencies pushing lenders to write down principal on loans underwater. Will borrowers who are making their payments on time be viewed as ‘stupid’? Anarchy in mortgage lending!”
And what are investors thinking about this foreclosure issue? If a foreclosure is delayed, the servicer must typically keep advancing payments that will go to all bondholders, including the junior debt holders, even though the home loan itself is producing no revenue stream. Costs of reprocessing foreclosures will have to be absorbed. But the delay and confusion makes subordinate bond holders happy, and they don’t mind the wait. But senior debt holders want banks to foreclose faster to reduce expenses. Junior bondholders are generally happy to stretch things out. A WSJ report reminds us that:
“mortgage servicers enter into contracts called pooling and servicing agreements with bondholders that spell out the servicers’ obligations to manage the loans in the best interests of the investors. These agreements provide that the servicers be reimbursed by funds in the trust for all costs related to litigation and extra processing of foreclosures, provided they follow standard industry practices.”
GMAC & Chase think the reviews will take a few weeks – unless system-wide problems are found, and/or documents are missing. Uh oh.
It is obviously a very tough situation, as you don’t just want to throw away contract law, and forget what a “debt” means. Who would ever want to lend large sums of money if the borrower can walk with no penalty? On the other hand, someone wrote, “Maybe buyers should be allowed back into the market sooner after foreclosure. People who lost their home already – not now – and earlier on in the crisis, before modifications, before buy and bails were prevalent, could be given some type of leniency. A job loss, or an escalating option ARM, might be acceptable reasons. I don’t agree with walking away from a home that you can make the payments on, but a majority of the earlier default loans in this crisis were not preventable by the borrowers.”