Thursday, June 5, 2008

Putting the Pig Back Together

Everyone is pressing for loan modifications. If we can just negotiate between the holders of the mortgage and home owners we can solve a great big chunk of the current foreclosure crisis. Unfortunately it will not be that easy. This article from Bloomberg titled `Sliced, Diced' Mortgages More Likely to Default, Offit Says explains they multi-layer complexities involved. Here are some choice snippets -

Most of the 5.85 million subprime mortgages in the U.S. are in danger of defaulting in the next 12 months because of restrictions on changing terms of the loans, according to Offit Capital Advisors.

About 80 percent of the loans are in bonds that ``slice and dice'' rights to a mortgage's interest or principal in multiyear segments, said Todd Petzel, chief investment officer for the New York-based firm, which manages $5 billion. Lifting restrictions on loan modifications spelled out in the securities requires the agreement of everyone who has invested in them, Petzel said.

``If you could get all the investors in the same room, there's no limit to the modifications that could be made to a loan, but that's not likely to happen,'' Petzel said. ``Once you cut up a pig into pork chops and loins and hams it's nearly impossible to put the pieces back together.''

Loans have been chopped to bits and sold as parts. Legal chop-shops for the mortgage industry. There are many owners to each mortgage and trying to negotiate is very difficult. There are probably times when just tracking down the mortgage owners runs out the clock. It is tough to negotiate when both sides are not at the table.

Then you also have to deal with the group falling into foreclosure that do not trust and do not communicate with the lenders. There are so many cases where people either felt lied to or did not fully comprehend what they were getting into - how are we now going to convince this group that the same people they blame for getting them into this mess will now try to help them.

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