Economics: Housing: Big lenders detail their slack that caused mass foreclosures of home-owners' mortgages

At last, I'm getting an angle on the structure of the so-called subprime housing industry, the portion of the housing industry that subsists on subprime interest rates tagged to mortgages on homes, especially in the case of first-time home buyers.
What we see, thru testimony before Congress, is the role of greed in investors who buy shares in the lending companies that finance the bulk of these mortgages. That greed is currently protected by law in the USA, requiring bank and other mortgage holders to foreclose on the home-owners who can't make their monthly payments as the amounts "balloon."

Anyone who tampers with that law will scare off the investors who make the dollars available to the lenders, and subprime housing will dry up, no matter what market there mite be otherwise for new homes.

Apparently, however, there is no law preventing or incriminating investors who finance lending to mortage-buyers (home-buyers on the low-end) who actuarily are known to have extremely low probabilities of making their payments some months down the road from initial purchase. In other words, the structure of this unethical kind of investment is designed to draw people into mortgage arrangements regarding which they can't fulfill their obligations. It's fraud on the investors and lenders party in that they are not really financing a purchase, rather they are engaging in rentals that last a short period, exhaust the wannabe buyers finanicially, and are papered over with the fiction of investing and lending for purchase.

Caveat emptor. Let the buyer beware indeed!

Washington Times's Patrice Hill, "House hears of mortgage fixes; foreclosures inevitable for many" (Apr18,2k7).

Housing finance agencies told legislators yesterday they are trying to arrange safe mortgages for millions of people who could lose their homes because of ballooning loan payments, but legal constraints may prevent them from stopping foreclosure on many homes.

At the same time, bank regulators warned against trying to rewrite mortgage finance laws in ways that hurt investors and dry up funding that supports the housing market, although they said investors who made risky loans possible in the first place should be forced to bear some of the losses from today's rash of defaults.

The testimony before the House banking committee came amid a doubling of home foreclosures since last year, and calls from some in Congress for a moratorium on foreclosures as well as taxpayer-financed bailouts for vulnerable borrowers like minorities and people in states like Ohio where manufacturing job losses have contributed to delinquencies.

Freddie Mac, Fannie Mae and the Federal Housing Administration testified that they are preparing to offer more lenient loan terms for hard-pressed borrowers who would like to refinance into safer, long-term mortgages with fixed interest rates. But they cautioned that there is little they can do to help those who used fraudulent means or extremely lax lending standards to buy homes they could ill afford in the first place.

Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC), said many of the loans now failing not only featured ballooning mortgage payments that borrowers cannot afford after an introductory period, but had other high-risk characteristics like second liens and a lack of equity that should have been red flags to borrowers, lenders and investors alike.

"It was clear to investors there was huge risk, so I think everybody needs to share the pain now," she said. "We did not have good market discipline with investors buying all these mortgages."

Ms. Bair told reporters that many times it is in the interest of investors as well as borrowers to work out new loan arrangements to avoid foreclosure because the cost of seizing and reselling the homes is high. She suggested that some investors may allow borrowers to maintain low "starter" interest rates to prevent defaults when the rates suddenly adjust to higher market rates.

"I don't think they really will be harmed if the starter rate is just continued." she said. "What's the alternative? Foreclosure, and then they face much bigger losses."

The FDIC and other U.S. bank regulators issued a joint statement yesterday encouraging mortgage lenders to "work constructively with residential borrowers" who may be in danger of missing payments on their loans.

Regulators "encourage financial institutions to consider prudent workout arrangements that increase the potential for financially stressed residential borrowers to keep their homes," the regulators said, as long as such arrangements are "feasible or appropriate."

However, Ms. Bair testified that workout arrangements may not be possible in many cases because of legal constraints contained in the loan contracts and because most mortgages in recent years were securitized in loan pools and sold to investors -- creating an inflexible legal situation that makes it difficult to rework loans in favor of the borrowers.

The loan-servicing agencies that funnel mortgage payments each month to investors usually have contracts charging them with maintaining the best interests of investors -- not the borrowers -- which can lead to early foreclosures in some cases, regulators said.

"The entire housing finance system rests on the integrity and dependability of mortgage contracts between borrowers and lenders," said Richard F. Syron, chairman of Freddie Mac. While foreclosure is an "undesirable outcome for both parties" in most cases, he said, "at the end of the day, the ability to enforce a mortgage contract, including the use of foreclosure, is critical to continued investors confidence in the U.S. housing market."

George Miller, executive director of the American Securitization Forum, warned lawmakers that "well-intentioned" efforts to help borrowers in distress can have unintended consequences. He said investors are being much more cautious about what securities they buy these days.

Any regulatory overkill that forces investors to suffer undue losses could cause them to "shun the market altogether and cut off mortgage credit for worthy subprime borrowers," he said.

Harry C. Alford, co-founder of the National Black Chamber of Commerce, also cautioned against bailing out borrowers who took on more than they could handle, contending that will make it harder for more worthy borrowers to get the loans they need.

My stance may not be a direct deducation from Mr Hill's report, but the reader can imagine what points I seized on as more significant. For instance, I don't credit Freddie Mac chairman Richard F. Syron's statement much at all. It's self-serving, seeking as it does to place his agency in a better lite than what the public record of the last year has shown regarding financial scandals of its own, and also of Fannie Mae.

In closing, during the recent stock market near-collapse, tho triggered by the Shanghai Flu, also was co-triggered by the epidemic of foreclosures on residential housing brawt on by the afore-discussed suckering of wannabe home-owners by the investors, their securitizing pools, the contracting lenders, and the banks and agencies who exploit the subprime interest rates for what are really rentals, not actuarily sound sales to home purchasers.

More Info:

Regulators call on lenders to work with borrowers to avoid mortgage foreclosure

Mortgage Giants May Help Borrowers

Foreclosure Problem Too Complex for One Solution

Foreclosure's Shadow Falls Across Diverse Set of Homeowners

110th Congress no cakewalk for financial-services lobbyists

Congress targets subprime lending