The Bank And The Bond

Posted in Foreclosure, Mortgages, July 11th, 2007 |

What is the missing link between the bond market at Walls Street and the price of a property that has been retaken by a lender after it fails to be sold at a foreclosure auction? It is missing to the eye but it is there alright – lurking behind. In a foreclosure what goes up for auction is not really the property but the loan/loans on it. If no buyer can be found then the unit goes back to the company who forwarded the loan or to the servicer, that is the agent that had been collecting the payments. Laura Pephens, a board member of California Mortgage Banks Association, gave the explanation. The ongoing discussion about houses owned by banks or REO’s (real estate owned), as they are technically known in lending industry’s parlance.

In most of the instances of foreclosure the loans are not with the lenders nowadays. These are held by those investors who bought securities that were mortgag- backed. This means that the lender does not have the direct right to decide on the price of the property. For instance the lender cannot say that $6000,000 is acceptable for a mortgage that was $700,000. The lender has to run around and get the approval from others – those that issued the mortgage-backed securities or the loan aggregator.

It should be kept in mind, said Pephnes, that many mortgage-backed securities are resting in pension funds, insurance funds and other relevant investment portfolios. Thus one does not have far to go to reason out why the issuers are far from eager and hesitant about discounting the loans beyond a certain point. The compelling fear is that the value of the stakeholder’s investments might be eroded. This will give the stock market an uncomfortable shake.

This is a completely new approach to the raging foreclosure crisis lashing through the country. Daniel Gross at Slate analyzed it from quite another angle – the link between the lender and the bond brokers. It came through Inman News blog, which has also other points of interest centering on the foreclosure crisis in its discussion topics. The website is open to discussion with anybody who has had experience in buying an REO unit in California of late. It will be interesting to know how it went off and how much time was spent to get the sanction for the final offer.

Via