Thursday, August 20, 2009

Here's Why Mortgage Modifications Won't Work

The issue synthesizes down to which party at the table is going to take the financial hit when the individual home mortgage principal balance is reduced and the monthly cash flow generated from the mortgage is reduced in order to try and keep the homeowner from walking away (which is whole issue unto itself as unemployment skyrockets).

As per this court case being tried, the parties at the table are 1) the original bank which underwrote the mortgage and 2) the investors in the mortgage-backed bond trust which purchased the mortgage, ultimately enabling the underwriting bank to fund the mortgage and the homeowner to overpay for the house:

"The current case was brought by two investment funds holding Countrywide mortgages, Greenwich Financial Services Distressed Mortgage Fund 3 LLC and QED LLC. These investors complained they would be harmed if Countrywide shifted the burdens of loan modifications to 374 trusts into which loans had been repackaged and securitized. These investors would rather Countrywide repurchase modified loans for the full unpaid amounts."

Who Takes the Mortgage Mod Hit?

So either these mortgage-backed trusts have to take a big hit - and don't forget the Chinese and Japanese were very large investors in these trusts on the faith that they were triple-A rated quality. Or Bank of America, which now owns Countrywide and other fraudulent mortgage originators, has to pony up the cash to keep the investors whole. And we KNOW what it means it BAC has to fund the mortgage losses in the modifications...

...How 'bout it America? Feel like using more of your tax money to pay for mortgage modifications on mortgages that should have never been underwritten in first place? Your money is already being funnelled into all of the Fannie Mae/Freddie Mac mortgage mods being done. Oh, and by the way, studies show that over 50% of all modified mortgages go delinquent again within the first 12 months...


  1. Until jobs are plentiful don't expect anything the gov't is doing to help.

    They might as well redo the loans with 0% interest for 5 years like car dealerships did...perhaps that's the only way some can afford it.

  2. Problem is, it messes up the existing MBS Trusts if they were to turn the underlying collateral into 0% mortgages. Either the originating bank, the Trust investors or the Government will have to take the hit.

  3. Hi Dave,

    Great blog.

    I did a search for hyperinflation and came up zeros.

    Are you a gold fan because you believe a hyperinflationary collapse will come (i.e. a soveriegn default as US economic activity collapses or a mass monetization of debt to pay back creditors)?

    Or are you more a gold fan because you see a slower, steadier dollar debasement?

    Or something else?