Consumer Law

Securitization is a Problem for Mortgage Workouts

By Alan White

By Alan White

The Office of the Comptroller of the Currency's 3rd quarter report on foreclosures and mortgage modifications reveals the huge disparities between workouts offered to homeowners whose mortgages are securitized, compared to those with mortgages held on the lender's own books, known as "portfolio" loans.  The report also confirms once again that if a modification reduces the borrower's payments it has a much better chance of succeeding, while modifications that increase debt burdens go back into default at discouraging rates (60% or more).

Two features of loan modifications illustrate the disparity between securitized and portfolio loans.  First is principal reduction.  Many economists and other pundits support principal reduction as the best means to insure sustainable mortgages over the long term.  Lenders holding their own mortgages offered principal reduction in some amount for about one-third of their modifications.  Servicers handling investor-owned mortgages, on the other hand, wrote down principal essentially never. 

Another problematic feature of modifications is the capitalization of unpaid interest and fees.  While investors understandably would prefer to add these amounts to borrower's balances rather than write them off, the result is to increase the homeowner's debt burden, and the likelihood of eventual default and foreclosure.  Lenders modifying their own loans used capitalization in fewer than 20% of their modifications, while securitized mortgage modifications included capitalization 70% to 80% of the time. 

Although portfolio loans are different in other ways (many option ARMs were held in portfolio, for example), these disparities suggest that there is something to the idea that securitization makes aggressive and effective loan modification more difficult.

Full post as published by CL&P Blog on January 14, 2010 (boomark / email).