Pity the Poor Mortgagee

“I’m tired of worry about my debts,” goes the old story, “now you worry about them.” 

In trying to understand the plight of borrowers in any prospective subprime lender meltdown, we may have failed to focus on the fact that for every unpaid loan, there is an unpaid lender. Evidence of this point comes from the apparent collapse of Ownit Mortgage Solutions Inc. which filed for Chapter 11 in Van Nuys last Friday. The LA Times says:

Ownit grew rapidly over the last few years, becoming a top 20 lender nationally in the sub-prime niche, but the closely held company turned unprofitable as interest rates and homes prices rose and competition for a shrinking customer base intensified.

Interest rates? Competition? I wonder if somebody got spun here. Much deeper in the story, the reporter adds that “by far the biggest portion of the debt resulted from soured mortgages,” which sounds to me like “we made a lot of lunatic loans that we never should have made in the first place.”

In any event, is fascinating to speculate on what, if anything will be the implications of a failure like this for the harassed borrower. It used to be that for the debtor, news of your lender’s bankruptcy was the best you could hope for: you’d be dealing with a trustee with a limited warchest; records would get misplaced or simply forgotten; and in any event, during a general unravelling, the last thing the creditor wanted was to take the property back.

 I haven’t any idea whether this is what is happening here; it may be a different story altogether, or it may be that I am just fighting the last war –our mantra these days seems to be that securitization has rewritten the rule book, and this may be the place where we find out what the new rules look like.

 Paranoid further thought: now I am really getting beyond myself, but bear with me. Deep in the story, we are also told that, in addition to sour mortgages,  “glitches in recording payments and other technical problems also played a role.” Hello, technical problems?  Glitches? Glitches? I am old enough to remember any number of mortgage-lender meltdowns that came unmasked as outright Ponzi schemes, riven with fraud from top to bottom. Yes, yes, I am getting way beyond the evidence here, but I am wondering if this might turn out to be a case that only a lawyer could love. 

Comments

[Andrew Engel]

I've handled many a broker originated sub-prime loan. Although some ended up being securitized, many were simply held by the originating lender - Flagstar, Bank One and First Union are a few examples. When I could get the attention of lender counsel (i.e. when they stopped thinking my clients were just freeloaders) I could usually convince them that they were the targets of the scam. This is almost always true. Was it Willy Sutton who said, when asked "Why do you rob banks?", "Because that's were the money is."

There are some lenders who are the perps in these loan scams. Many more, I believe, are the targets. The borrowers are collateral damage. To be sure, the damage inflicted upon them is perhaps more reprehenisble because the borrower is far less able to protect themselves and less able to absorb the loss. Also, the banks are far more culpable for the same reasons. That does not change the underlying fact that the lender is often the real target of the loan scam.

How you look at the various "victims" depends on what slice of money you're analyzing and who is living with the loans. Are you looking at the lender's origination charges or the broker fees? Is this a portfolio loan, or is the mortgage quickly sold?

There have been other casualties in the sub-prime market as well. Several years ago, Bank One sold its wholesale division, in part because of poor performance of the loans. At the time, Bank One was writing every loan as NIV. Everything was underwritten of of credit score and appraisals. Unfortunately, Bank One was not pulling its own credit reports, so some brokers were literally cutting and pasting credit scores onto faxed reports submitted with the application. And we all know about appraisal manipulation.

The bottom line is that scammers take advantage of stupidity.
Invariably, the borrowers are always stupid (okay, you can call them unsophisticated or naive). Often the lenders, who front the actual cash, are also acting stupid.

By the way, when I could turn the lender into an ally, both it and my clients usually came out of the litigation well. When I couldn't turn the lender against the broker, things didn't go so well.

Just some of my perspective from the Ohio trenches.

[PSP]

“glitches in recording payments and other technical problems"

Any Chapter 13 practitioner or Judge can tell you of many many many mortgage lenders’ stay motions alleging non-payment, which the Debtor defended by producing cancelled checks proving that the payments were received.

And often, the only way to avoid a late fee is to send the payments by certified mail, because the payments aren’t credited until the late fee has accrued.

It is quite scary that this is commonplace and unremarkable.

[David]

There's a bankruptcy court in Van Nuys?!

[Buce]

Anything west of Burbank Junction is Van Nuys.