The silence of the lenders

By Gretchen Morgenson
Published: July 13, 2008

while everyone else from the homeowner to the taxpayers are left holding the bag.

Of course, after a while of not eating you are dead and can't pay the stupid mortgage anyway.

They lost a huge opportunity with me when I refinanced in the spring of 2003. Here's the bullet point version:

- I was in year 9 of a 30-year fixed rate loan with Countrywide at 7.125%. (Countrywide was not the original lender. They bought the note in about year 2). My credit was excellent, I had a good job, had not lost my shirt in a divorce three years earlier, etc. Very well qualified borrower.

- I decided to try to refinance at fixed rate with a 15-year term. Solicited quotes from Countrywide, Wells Fargo, WaMu, and gave LendingTree.com a chance (their pitch was they could get up to four good offers in 24 hours for free over the Web).

- I received six offers. Countrywide's was the weakest by a large margin. Something around 6% plus about $2,500 in fees. It was a garbage offer.

- The best offer came through LendingTree. An East Coast company called MortgageSelect offered 15 years fixed at 4.75%. Fees totaled $900. It almost looked too good to be true.

- I took MortgageSelect's offer. It was a bit of a pain dealing with them, but they came through as promised.

- A month later, MortgageSelect sent a payment coupon book along with a notice that my loan was likely to be sold before the following month's payment was due. I was to keep paying them until I received notice of the new lender.

- Three weeks after that I was notified that my new mortgage had been sold.

My new lender was (and still is) Countrywide.

Many borrowers have trouble even reaching a workout specialist; others soon find that the modifications they received are as unaffordable as the mortgages they replaced. Some homeowners, eager to sell their homes before the value falls further, say they are impeded by loan servicers' inaction or incompetence.

That does not surprise me. Countrywide does not have a real workout specialist team. Ironically, some of the best loan workout people work for sub-prime lenders like HSBC.

I've been involved in real estate lending and related businesses long enough to recognize that Countrywide's business model was strange. They didn't want to bother with certain aspects of the process, including originations and servicing. They would prefer to buy and collect payments on loans that are not likely to require any kind of intervention.

This is the key point IMO:

Lenders and servicers like Countrywide are inundated with requests for help from borrowers who cannot afford their loans. Alas, these companies' operations weren't set up for such work; servicing units were originally intended to collect monthly checks from borrowers and then disburse the payments to mortgage holders. During the boom years, there was little need to advise borrowers or restructure loans.

In other words they were little more than a company shuffling paperwork.

There are two types of loans in respect to lenders, risk-based and non-risk based. Sometimes it is phrased as fee-based and non-fee based. On a risk-based loan, the servicer has the leeway to change interest rates, term, etc within reason. Non-risk based(probably the most common type of mortgage) presents a whole other set of problems. An investor owns the entire or majority of risk. The servicer is simply payed a portion of the interest each month. Generally this is based on the pass thru rate. If you are paying 7% interest and the pass thru rate is 6% then your servicer WAMU, CW, Wells Fargo etc is only keeping 1%. When a person asks for a 2% interest rate reduction, you can see how it leads to a big problem.

There are also payment scheduled such as actual-actual and actual-scheduled, but you can see the point.