US Senate: STOP BEING STUPID

Posted on October 2, 2009. Filed under: Banking, Foreclosure Defense, Housing, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law, Politics | Tags: , , , , , , |

The legislation, introduced today by Senator Jack Reed of Rhode Island, would require lenders to evaluate all borrowers for affordable loan modifications before initiating foreclosure. It would also require banks to offer and approve a loan modification if the restructured mortgage returns more money, the so-called net-present value, to investors than would foreclosure.

The proposal would establish new penalties and would let borrowers overturn foreclosures if lenders fail to comply. It would also place new limits on fees charged in foreclosure.

The reason we have this crap going on is quite simple, and fixing it is also quite simple:

Banks are holding homes back and foreclosing when they should be modifying as a direct consequence of the policies and actions of the government.

As just one example the “loss share” agreement made with the buyers of IndyMac has set up a perverse incentive system where the usual incentives to modify loans have been intentionally and wantonly destroyed.

If you remember this was the deal announced:

As part of the deal, the FDIC entered into a loss-sharing agreement with IMB HoldCo. IndyMac will assume the first 20 percent of losses on a portfolio of “qualifying loans,” after which the FDIC will assume 80 percent on the next 10 percent of losses, and 95 percent on losses thereafter.

Ok, so we have a maximum loss that the investors (which include George Soros and Michael Dell, by the way) can take which is:

20% + 2% (80% of 10%) + 3.5% or about 25% of the total is theirs – but note that “theirs” is all at the top – once you get into the “meat” of the losses only 5% of whatever is left is theirs.

via US Senate: STOP BEING STUPID – The Market Ticker.

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