There is an article in today’s UK edition of the Financial Times. It focused on the bankruptcy filing by New Century, a US based sub-prime mortgage originator. Near the tail end of the article is the following which I will quote here.
The fallout from payment problems on sub-prime mortgages has prompted a flurry of activity across Wall Street to stem the tide of losses.
Bear Stearns, the biggest US underwriter of bonds backed by home loans, yesterday said its EMC Mortgage unit had created a specialist team to travel the country helping restructure loans for distressed borrowers. The scheme is intended to stave off foreclosures, in which lenders on average lose 40 per cent of the money they lent.
Tom Marano, global head of mortgages at Bear Stearns, said investors should ultimately benefit from the scheme. “Proactively avoiding foreclosure can reduce the severity of losses, benefiting both homeowners and bondholders,” he said.
People talk about short sales. With a short sale a lender is accepting a pay-off for a loan in default where the amount paid is less than the total amount owned to the lender. A net payment to the lender after all closing costs is agreed. If the lender receives the specific amount by the agreed date they will release the borrower from the loan and release the lien on the property. Be very clear that the seller who is also the borrower in default can not make money from the sale of the real estate. The lender or lenders who are agreeing to take less than they are owed will review the closing statement as they want to know the borrower is not putting money in their own pocket when the lender is getting less than they are legally entitled to at closing. If the borrower is able to walk away from the closing with a check then the lender will not agree to the short sale.
The above quote from the FT is talking about an alternative that can be better for the borrower and the lender. EMC Mortgage is working with borrowers to see if they can restructure a loan that is in default assuming the borrower really could keep up with the new payments after a change in the loan terms. EMC Mortgage is willing to take less now and maybe less in the future so that the loan stays out of foreclosure.
In both the short sale and in a restructuring the lender is being pragmatic. They know that there is a cost to a full blown foreclosure. They are in the business to make money. Money later vs. a loss now is certainly something they will consider.
There are limits to what a lender can do to restructure a loan or when agreeing a short sale. If the loan was resold into a Mortgage Backed Security (MBS) bond offering the possible options might be very limited given the MBS contract terms and conditions. As a borrower or an investor you need to ask to find out. Also expect that loss mitigation departments are not always a shining example for prompt customer service and speedy responses. Polite persistence helps.