So the banks owning large residential loan portfolios have slowed the foreclosure process to a trickle and, at the same time, have been unwilling to restructure home mortgage loans in a manner that would lead to large scale principal reductions. According to various studies, the best path to the maximization of defaulted mortgage recoveries runs through actions that keep people in their homes and paying instead of walking away.
And with regard to underwater borrowers (nearly a third of all mortgagors now) the best way to keep people paying is to renegotiate the original principal. Recoveries on that basis promise numbers closer to 70% of face, than to liquidations yielding half that ratio.
The banks do have one further concern that is not entirely illegitimate. The see moral hazard in the notion that aggressive principal modifications would trigger more widespread default, as borrowers who might otherwise pay will, literally in some cases, covet their neighbors principal reduction and default themselves in order to obtain the same treatment. But we do not see the advantages of a stand-off over liquidations or modifications in a stable or declining price environment, in the absence of sustainable macroeconomic improvement. We also note that it is somewhat painful to listen to moral hazard arguments from lenders who have recently been the beneficiaries of assistance themselves.
So that’s why we feel it important to highlight two pieces of journalism that have shed more light on these issues and promise further data to come.
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