Foreclosure Speed Made Loan Modifications Impossible

On By southwerkIn Philosophy of Business1 Comment

Why would a bank modify a loan rather than foreclosing? Loan modification is usually more profitable.

Let me explain. Take a typical home mortgage that has run into trouble. The purchaser owns a home that he bought at a price of 350,000 dollars in early 2006. He has fallen behind on the mortgage. He can pay each month but not as much as the mortgage is worth. However and it is a big however, the real estate boom has collapsed. The home valued now is worth only 270,000 dollars. His mortgage payments, his salary and the other facts point to him being able to pay a mortgage of that size. So, the bank would accept a loss on the mortgage reducing it to 270,000 in value. The bank now has a workable agreement with the homeowner. He can now pay on the loan regularly.

There is a 80,000 dollar loss for the bank. That would be a big deal if the bank had any way of getting it. If they foreclose on the house, they will be attempting to resell quickly a home now valued at 270k, and at the additional expense of the time and money of the foreclosure process. That 80,000 is not recoverable. Why not renegotiate a lower mortgage with the current owner who is already making payments?

This key questions here are, “How much is this property worth?” and “Can I get as much by foreclosure as I can by modifying the mortgage?”

Everyone watching the process of foreclosures over the last few years has been struck by one fact – there have been very few loan modifications. Almost every homeowner was foreclosed on. It did not seem to matter whether a modification was profitable or not.

As a society, we had never seen that before. People had been foreclosed on before in every kind of economic crisis. But in all these situations if the banks profited more by modifying the mortgage, the mortgage got modified. Now, it doesn’t matter if the bank profits from a loan modification or not. It’s easier and quicker to foreclose.

Also, it was easier to measure success by foreclosure rather than by re-negotiations. You could count the scalps on the wall. Negotiations that resulted in greater profits over longer periods of time didn’t count well.

The system is tilted against homeowners. The speed and number of foreclosures made it impossible for lenders to renegotiate.

From the Washington Post –

The financial incentives show that the problems plaguing the foreclosure process extend well beyond a few, low-ranking document processors who forged documents or failed to review foreclosure files even as they signed off on them. In fact, virtually everyone involved – loan servicers, law firms, document processing companies and others – made more money as they evicted more borrowers from their homes, creating a system that was vulnerable to error and difficult for homeowners to challenge.

“This was a systemic problem. It’s not like a few renegade employees made mistakes,” said lawyer Peter Ticktin, who defends Florida homeowners facing foreclosure. “It was industry-wide and pervasive, and everyone knew about it.”

The need for speed neutralized any attempt at judgment. No human intelligence could be allowed to interfere with number and speed, a total victory of the abstract over the concrete and real. Loan modifications are better for long term profits but they are not fast.

Understand this. In any long term profit making analysis, you have to apply human judgment, and from that you can maximise profit. The foreclosure system we have now does only one thing well – foreclose quickly. Everything else is does badly.

James Pilant

Do Individuals Matter?

On By southwerkIn business ethics, Capitalism, White Collar Crime

Sometimes.

Look at this story of two citizens who took on the behemoth of the foreclosure industry and gave it a mauling it won’t soon forget.

More than a year before lenders, law firms and document companies began owning up to widespread paperwork problems with their foreclosure filings, Lisa Epstein and Michael Redman already knew that something was wrong — very wrong.

Redman, a former online automobile consultant, got his first taste of the problem in early 2008, when he tried to help a relative who was facing foreclosure.

As he tried to determine which of three or four supposed lenders held the note, Redman, 35, realized that not only did he not know the answer, neither did any of the companies that were asking for payment.

Epstein, a nurse who cares for cancer patients, also is going through foreclosure. She got her baptism in the world of shoddy foreclosure paperwork in the summer of 2009, however, when she tried to help a brain tumor patient keep her home.

Warms your heart, doesn’t it.

James Pilant

ABC Dropped From Favorites

On By southwerkIn ethics

I used ABC as a source for some stories. When I went in today to look for something interesting, my first look got me an obnoxious and loud commercial. There is no way to turn it off. I just wanted to read the articles. So, I carefully chose one without a camera sign by it. I got nailed again.

I’m not going to be treated that way. I’m not on the computer to get more television. I’m on the computer to avoid television.

There’s plenty of sources that aren’t ABC. I’ll be there.

James Pilant

Just For Fun – Rich Whitey On Ballot In Illinois!

On By southwerkIn Government Failure

From the Chicago Sun-Times –

The last name of Green Party gubernatorial candidate Rich Whitney is misspelled as “Whitey” on electronic-voting machines in nearly two dozen wards — about half in predominantly African-American areas — and election officials said Wednesday the problem cannot be corrected by Election Day.

The misspelling turned up on touch-screen machines in 23 wards overall. Whitney’s name is spelled correctly on the machines’ initial screens showing all of the candidates’ names, but it is misspelled on review screens that later show a voter his or her choices, said Jim Allen, spokesman for the Chicago Board of Elections.

This is the actual “Rich Whitney.”

This is a serious problem. The misspelling could endanger his chances of winning the election. However, since he is polling currently at 2%, the danger may be small.

(It might knock him down to 1.8% in the general election, a true landslide.)

James Pilant

Could A Foreclosure Freeze Damage The Housing Market?

On By southwerkIn business ethics, Capitalism, ethics, Philosophy of Business, Teaching, White Collar Crime

Well, of course, it will. Massive wrong doing has consequences for the innocent. That is the nature of illegal acts. That is the nature of speculation and greed. People without fault are injured.

So, we have competing values here. Should the health of the economy and the suffering of the innocent be a bar on prosecuting thousands upon thousands of mortgages done outside the rules of the law.

I’m going to come down on the side of the rule of law.

I teach business ethics. You can’t have business ethics just through teaching and exhortation. They have to be backed up by penalties. If the suffering of the innocent is a bar to prosecution, it sends a clear signal that cutting corners, skirting the law, deliberately disobeying the law, have little or no consequences as long as the perpetrators can point at economic hostages and say, “Oh, but we can’t harm them.”

You cannot avoid prosecuting the guilty in the business community over and over again without them getting the message that there are no consequences. They will realize (or have realized) that the law does not apply to them.

Once they know this, what will happen to the rest of us?

Here’s the CBS News Story – Beware it has a commercial.

James Pilant

A View On The Mortgage Fiasco From A Georgia Professor

On By southwerkIn business ethics, Capitalism, ethics, White Collar Crime

What’s the academic view point on this disaster you might ask. Well, one sign is this professor’s comments from the University of Georgia. It’s a brief comment and there are no commercials. Enjoy –

James Pilant

Narcissistic Mindset in Financial Institutions (via Sonia Jaspal’s RiskBoard)

On By southwerkIn business ethics, Capitalism, ethics, Philosophy of Business1 Comment

I exchanged e-mails with Alain Sherter and asked him what he thought about the amazing sense of entitlement among Wall Street executives. Although, he replied very politely and tactfully, there was a certain element of “What planet have you been on?” And he was right, I should have picked up on it a long time ago. Once I did, I encountered more and more examples of this phenomenon. It was astonishing. These individuals who had every advantage from birth could swear on a Bible that every last atom of their success had been earned through their hard labor. They knew that they were the important producers of value in this society and flew in unimaginable higher intellectual circles than the poor ingrates beneath them. They know that everyone who is not in their class is lazy and undeserving. They know that any, down to the tiniest amount, of taxation is a blow to their productive capability, totally unfair, and an unearned charity to the great mass of lazy, unmotivated citizenry.

Sonia Jaspal blogs on this mindset. It’s a fine article. She writes a blog from an extremely well educated background, not an assumed or pretentious academic style, but an educated approach as hard as stone. You know that her evidence is strong and her facts correct.

I recommend the article to your attention.

James Pilant

Financial institutions are again grabbing headlines for the wrong reasons. This time it is because of the foreclosure of mortgages without adequate due diligence.  As Senator Robert Menendez wrote to the heads of JPMorgan Chase and Co, Bank of America Corp and Ally Financial Inc- “It is simply inexcusable that proper oversight proceedings were not in place, especially when dealing with matters as monumental as the seizure of a family’s home.”  Wh … Read More

via Sonia Jaspal's RiskBoard

Does History Repeat Itself – The Stock Market Crash?

On By southwerkIn business ethics, Capitalism, Economic measurement, ethics, Government Failure, White Collar Crime

“The past is prologue?” Are we in the same place that America was in during the first years of the Depression? I worry that this economic downturn is just the beginning of long term destabilization of the economy.

(You should probably avoid my blog if you want to put a happy face on the economic situations because I find it hard to find things just to be content about.)

I found a wonderful set of history films about the early days of the Great Depression. They provide a lot of insight into how people thought and reacted to the events as they unfolded day by day. We look at what people were saying, what they were reading, what music they were listening to. We can wonder if we wouldn’t have done the same things. It’s a better way to understand history than the summaries in textbooks.

If you listen to the incredible confidence that the moneyed and political class had in the economy and the sureness they had in an immediate recovery, you have to wonder about those in out system today, who say we’ve turned the corner.

We have not.

Part 1 –

Part 2 –

Part 3 –


Part 4 –

Part 5 –

I want to be wrong about all this. I want the economy to thrive, everyone to have a job, and as much as possible for people to become prosperous.

We’ll see.

James Pilant

President Obama Is Lagging Behind Public Opinion

On By southwerkIn business ethics, Capitalism, ethics, Government Failure, Philosophy of Business, White Collar Crime

I’ve been saying this for several days. The public, the states, the courts, are all moving toward a consensus that a foreclosure freeze is necessary. The President does not think so and he has sent his minions to be sure we understand his position.

Andrew Leonard writing in Salon, an article entitled “Obama’s foreclosure nightmare,” describes the situation in terms very similar to mine.

Once again, the President lines up with the financial industry and the banks against the interest of middle class Americans.

Drawing on Leonard’s article and adding my own spin, the situation is like this. Now, generally speaking, I do not waste my time on the Wall Street Journal Editorial Page, but have heard a rumor that their take on this situation is that all this stuff about not having the proper documents is just a matter of procedure and is really not something to get that excited about.

This is the United States. In this country you cannot transfer any land whatsoever without a written contract, that’s LAW 101, the statute of frauds. If you can’t produce your paperwork, you don’t get the property. Why? Because in Western Civilization, land has been considered the primary measure of wealth and status for hundreds of years. Therefore, the law was made to protect those interests.

How come the banks don’t have good records of who owns the property? Well, that has to do with the enormous speculation(casino capitalism) of the latter part of this decade. The great wall street investment houses were buying and packaging mortgages into packages of securities. But if they followed careful procedures they wouldn’t have had as much as they wanted. So, they “cut some corners,” “skipped a few steps,” “overlooked a rule here or there,” to get those mortgages as quickly as possible. What was the result? Incomplete paperwork, missing documents, and general confusion were the result of that speculative era. So, the banks had a problem with foreclosures. If they followed proper procedures they were hit with a double whammy. First, there was no way they could process the number of mortgages they wanted foreclosed without hiring a lot more staff and spending a lot more time doing the work right. Second, if they examined the documents carefully they would run across all the problems bequeathed them by the previous financial speculators. So, they solved both problems. They processed the mortgages without looking at them. It was an elegant solution. It was thrifty, cost effective almost beyond belief, and not legal.

I am outraged. I’m not the only one. The general public is only at the edge of this issue. It’s only been running hot in the media for almost two weeks. This issue has built up power in a politically brief period of time. But it’s not hard to tell the direction that public opinion is going. On one side we have banks refusing to obey the rules, while on the other we have story after story of homeowners tossed from their homes without legal justification. How do you think it’s going to go? If this were a Western, who’s wearing the black hats and bushwhacking their enemies?

The President should declare a moratorium on mortgage foreclosures. It does not have to be a blanket ban. He could ban the ones where it is known that there have been problems with a provision to extend it to other firms if similar wrongdoing is found. That would be adequate. In my opinion, a full blanket ban is the smarter move politically but that’s really not important.

I know the President is worried that this will stall the recovery. Of course, if you follow my blog, you know that I believe this is a lull before more serious problems appear and not a recovery at all.

To the President I would say, “This nation can handle a steeper economic downturn better than the continued wrong doing by some of the most important and most influential people in the financial industry. At some point, justice has to take priority over economics.”

I might add.

“Mr. President, I can feel the anger out there. How much more can people take? The basic facts appear to be out. The financial industry breaks the rules and knows that nothing will be done. The money will continue to flow. Their stock will go up. The bonuses will get bigger. The great mass of American citizens do not believe that if they did these things that they would be handled so gently and rewarded so thoroughly.”

“So, what’s it gonna’ be. Are you going to confirm to the great majority of Americans that there are two kinds of law, one for them and another for the foreclosure industry?”

“At what point, will you decide to enforce the law, seek out the guilty and bring them to justice?”

James Pilant

Robot Trading – Money Maker Or Formula For Disaster?

On By southwerkIn business ethics, Economic measurement, ethics, Philosophy of Business

I went to You Tube and ran the search, “robot trading.” I was looking for a journalistic take on the dangers of this kind of trading. I didn’t get it. There are innumerable sales pitches for just such trading mechanisms. I watched one and they are “exuberant.” They appear absolutely convinced that these things will make you rich. Apparently this is similar in the trading world to the “second coming.”

I found an actual news story by getting a link from a blog. I just couldn’t get one off You Tube. I have virtually never had difficulty finding an appropriate video for an economic comment. The sales pitches simply dominate the results of the search. I haven’t seen that before.

The CBS news program, Sixty Minutes, has a report on the subject. It is a daunting report on the implications of robot trading. It can be very dangerous to whole system. If one robot goes in one direction. It is possible that they will all go in that direction. You should hope that they are all buying because selling could be painful. I recommend you watch the program.

I warn you, there are commercials. However, the report is elegantly done and will maintain your interest.

Let me ask a question –

Is it ethical to use super computers to get a fraction of a second (sometimes, hundreds of a second or less) advantage over your competition?

I want you to understand that only a very few people can afford a “super” computer. Generally speaking, that is probably not you. If you, as a human, attempt to compete with one of these machines (and you’re not, you’re competing with dozens or hundreds of them), are you on a level playing field.

As a society, we might find the costs of this trading to be higher than the benefits, if one is willing to think of the interests of the nation as a whole, something currently not in fashion.

But it should be.

James Pilant