Banking Law

Sheila Bair's press release last Friday was a publicity stunt that generated the expected snarky e-mails piling up in my e-mail in-box. Her statement that lenders always "win" by extending forbearance to borrowers and temporarily lowering their monthly mortgage payments because "foreclosure rarely benefits lenders and would cost the FDIC more money, not less," came in for some particularly vicious criticism. As one correspondent with over three decades of experience in real estate lending sniped, "Silly me - all these years I didn't realize that, after the borrower defaults, taking back collateral pledged to secure  the loan [the lender] made 'rarely benefits lenders.'" This observer's point is that the decision to foreclose or pursue some other alternative is based upon a case-by-case analysis of the borrower, the collateral, and the external environment, and that there will be situations where foreclosure is the alternative which will yield the best return to the lender. Moreover, unless there's some special risk associated with the collateral (for example, it sits on a toxic waste dump of the environmental kind, not the subprime kind), then foreclosing and selling the property has got to yield the lender some cash. Therefore, the statement that foreclosure "rarely benefits the lender" is false. It may not be the best alternative under the circumstances, but it will usually offer some benefit to a lender.

I think a January post about loan servicer Ocwen's sophisticated computer modeling of loan modification alternatives demonstrates that oversimplification of the process of loan modifications and/or forbearances doesn't aid the public in understanding that loan owners want what Ocwen, as a loan servicer, says it also wants: "a nearly messianic focus on the goal of maximizing returns for investors." Investors want to recover as much of what the borrower promised to pay them as they can. Forbearance may, in fact, increase the ultimate losses, not lessen them. It all depends on the facts applicable to each individual loan.

Therefore, let's say that what Ms. Bair meant to say was that with respect to a loan in default, if there is an alternative to foreclosure that makes sense, based upon a sophisticated analysis of the facts and circumstances applicable to that particular loan, then usually an alternative other than foreclosure will yield the most loss recovery to that loan's investors. Ocwen would agree.

"In most cases, that means keeping people in their homes and getting them to pay their mortgages," says Ocwen CEO Bill Erbey. In foreclosure, investors typically recoup only 60¢ on the dollar.

So, I'll cut her some slack on that point. After all, she's never actually been in the mortgage lending business. She simply regulates a portion of it.

A fan of irony made a comment about Ms. Bair's statements that I found even more telling. This correspondent observed that he wished Ms. Bair's enthusiasm for cutting borrowers slack extended to community and regional banks. While she loves granting forbearance to borrowers, she and the agency she heads have no such desire to extend forbearance to such banks, only to the big ones. The "little guys" are clamped down on, shown no mercy, and shut down in increasing numbers. As to them, "forbearance" is a four letter word.

I feel his pain and share his sentiments.