A Rather Convenient Truth...

It just gets weirder and weirder.

Each time I think that the mortgage companies and banks can’t get any more creative I find out something new. We all saw the rise of No-Doc loans, stated income loans, loans at 125% of value, etc; all of those were odd enough, but they were sort of, well, standard-weird.

Now it’s just gotten spooky.

One of my bird-dogs (see a previous post for a definition) recently talked to me about something that’s going on with the loan modification program. We’ve all been hearing about how well that program is NOT going, but here’s a new twist. It’s called re-capitalization.

Now remember, I’m not a big banking analyst, so I encourage you to take a look at this stuff on your own and make your own conclusions, but this stuff really making me think, so I figure I should get it off my chest and over to you, my rebellious entourage. In a nutshell, recapitalization is a way for banks and mortgage companies to hand-off their risk onto somebody else, this time via the Troubled Asset Relief Program (TARP) by taking all the fines and penalties and overdue $$ a homeowner owes and bundling it up into something that you and I (um…I mean the government, with our money) will buy up in order to bail them out.

Here’s how it works.

As it stands, TARP will only buy up the toxic asset at the value of the principal-the money the homeowner owes, net of penalties, late charges, fees, etc (which can run into the tens of thousands of dollars). Now, those items are important parts of a bank’s revenue stream. So how can a bank get TARP to reimburse them for all those fees that right now, they just have to eat?

By making a new loan to the homeowner, that’s how. And by making it a condition of the loan that all of those fees, late-payment penalties, etc, are now part of the CAPITAL, the amount of the mortgage. It then becomes one clean amount that TARP will happily spend your money on for you.

BUT wait-why the heck would a homeowner agree to that, you ask, with a rebellious look on your face and sharpening your cutlass, ready to cut away a bunch of financial BS.

After all, that new loan is a “modified” loan, offered to the homeowner at a lower interest rate designed to give them payments that are more affordable. It’s for a trial period, to see if the homeowner can make the new payment better than they were making the old payment. Exactly what the loan modification process is supposed to be doing.

So, at face value, the bank is doing everything it’s supposed to due to help out homeowners in trouble, via the loan modification programs. Right?

NOT!

Because the modified loan with the reduced interest rate is for a limited time (around 6 months is what I’m seeing). And part of the deal, is that at the end of 6 months, a new loan is created that encompasses all the outstanding interests, penalties, etc, and another NEW interest rate-usually HIGHER than what was being charged during the “trial period”.

So, the homeowner (who was struggling with the original amount due), now has a BIGGER mortgage than they started with, at an interest rate HIGHER than what they were offered as a trial, and which they will most likely go into default with AGAIN.

But the bank…ah, the BANK now has one nice and tidy mortgage that they can show to the government and have it bought up under TARP with our money. They win. The homeowner loses, you and I lose, the whole system loses.

Now, as I’ve mentioned, I do a lot of work with banks and mortgage companies and I don’t really believe that there are little banking trolls sitting around board room tables inventing ways to screw over their customers.

All this just seems awfully convenient.

That’s all I’m sayin’!

Sheesh! I feel better now.

Stay Rebellious!
-Larry