Comments on the California Assn of Realtors Press Release on Need To Imporve Short Sale Process

I congratulate the California Association of Realtors (“CAR”) in coming forth to and taking a public position on the need to address lenders and loan servicers issues in their processing of short sale requests,  (See their “open letter” at http://www.car.org/newsstand/news/openletter/ .  This is something that the National Association of Realtors should do also (and this should have been done a long time ago.) 

I believe that the current situation is outrageous, especially when you consider how the loan servicing process has been allowed to be run. (See my previous post at http://sandiegohomequestblog.com/why-short-sales-and-loan-modifications-and-foreclosures-take-so-long/)

However, in my opinion, the CAR proposals to correct the issue do not go far enough.

In particular, I believe that the activities of Fannie Mae and Freddie Mac do need to be significantly modified and/or curtailed. In particular:

1. I concur with a number of others who assert that their backstopping of conventional loans (and support for irresponsible lending practices, such as “Option Arms” and “No Documentation” lending) was a significant factor in the housing market meltdown.  By taking away the risk of loss from lenders, any thoughts that they may have had with regard to prudent lending practices went out the window. (After all, the government was always there to bail them out – and that is exactly what happened. So it is not surprising that they were willing to take on greater risks to see if they could earn higher returns.)

2. I also believe, from both my experiences and what I have seen and heard from others, that the behavior of both of these quasi-government entities has been more akin to what I would expect from storefront payday loan operators. (E.g., see my previous post at http://sandiegohomequestblog.com/looking-at-buying-a-bank-owned-reo-property-heres-a-few-things-you-should-know/ )  Let us not forget that these are government sponsored entities that have been granted special rights. Given that situation, I believe that they should be operating (at least in part) in the public interest – especially since we (as tax-payers) are now bailing them out to the tune of at least hundreds of billions of dollars.

 I believe that other methods of supporting the government’s political objectives to make homeownership more affordable should be employed., one’s that do not involve disrupting prudent lending practices by financial instutitions.  These could include: An expansion of first time homeowner programs, support for shared equity lending products and homebuyer tax credit programs (ones that could be structured so that the tax credit would be recovered on the sale of the home. )

In addition, I think that we all need to remember that money is fungible (and is perhaps the ultimate commodity.) That is, each and every dollar has the same value as each and every other dollar,  and there are no special manufacturing skills that lenders need to employ to produce them.  (In fact, they all come from the same source – all of our efforts in creating a viable and valuable economy.) 

Accordingly, there is no reason to encourage (or allow) banks to grow in size to the point where they “cannot be allowed to fail.” (In fact, smaller banks fail all the time.) When there is a disruption, there is usually an opportunity for others to come in (with their own capital or with c0-investors) to take the place of any banks that do fail.  Those who do so would have the potential to make higher returns until the void, if any, was filled by new competition.

To further minimize the disruption that any of these failures might cause, I believe that we should also place limits on the size of “retail”  (that is, consumer-focused) lending organizations.   That is,  their activities should be restricted so that each such organization would onlybe allowed to operate “locally” (i.e., in a city, or a county or perhaps even as large as a state.). If that were done, then (i) the size of the disruption from a failure would be limited, (ii) others would be able to come into the market, set up shop, and reap the benefits; and (iii) the banks would likely become more engaged with thier clients and with trying to help them.

 The other area where significant reform is needed relates to the way that loans have been allowed to be serviced. As you may know, the banks that originated many of the home loans no longer own those loans  (Typically 80% or more of loans that were funded by the large banks have been sold off to “investors” (including Freddie Mac, Fannie Mae, and others).  So the banks (and other loan servicers), may no longer have a risk of loss on those loans if there is a default. Instead, under the loan servicing contracts typically in use today, they may actually be in a position to make more when a borrower defaults. That is, they may earn more by: (i) dragging out the process (so that they continue to earn the loan servicing fee); (ii) “putting” homeowners into default (which enables the servicers to charge late payment, default and other additional fees); and (iii) having the opportunity to manage the sale of the foreclosed homes if they are acquired by their clients in the foreclosure process (so-called “bank owned” or “REO” properties.)

In addition, it appears that the banks also have an agenda may not be shared by the note holders – that is, they frequently seem to want to “punish” borrowers whom they deem unworthy for either a short sale or a loan modification. (In contrast, one would rationally expect the note holders themselves to be more interested in maximizing the recovery of their investments, and not in punishing anyone.)

So, while the loan servicers do have a fiduciary responsibility to act in the best interests of their clients, it appears that some of the above potential conflicts of interest between that fiduciary duty and the loan servicers own interests have been getting in the way of properly addressing the need to resolve the home loan crises we have been facing.

 Accordingly, I continue to believe that the suggestions presented in a previous post on this site (http://sandiegohomequestblog.com/home-loan-servicing-problems-some-potential-solutions/) should be considered.

 That’s my opinion. What’s yours?

Copyright 2011, Arthur Chatroo. All Rights Reserved.

Important Notice

Arthur Chatroo and Realty Experts are not associated or affiliated in any way, shape, or form with the government, and services have not been reviewed, endorsed, or approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.

The views expressed here are Chatroo’s personal views and do not reflect the views of Realty Experts.