The New York Times discusses a trend that is helpful to individual consumers but perhaps not so helpful to the rest of us: Debt buyers buy up blocks of defaulted mortgages, offer to reduce the amount owed by individual consumers, and then get the government to back the loans.
As millions of Americans struggle to hold on to their homes, Wall Street has found a way to make money from the mortgage mess.
Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.
But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.
While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government – and, ultimately, taxpayers – at a time when Americans are falling behind on their mortgage payments in record numbers.
This is a good summary of this intriguing practice:
It is too early to know how the new loans will work.
David H. Stevens, the new commissioner of the F.H.A., said he was monitoring F.H.A. lenders but did not have thorough information about which ones work with distressed investors. So far he has not seen a problem from loans coming from hedge funds.
“They’re helping to protect people in their homes and they’re refinancing people from a distressed situation,” he said.
But he acknowledged that funds have an incentive to aggressively push homeowners into federally guaranteed loans, since the investors get their money back as soon as they complete the refinancing.
If you are presented with this opportunity, or any opportunity to modify your loan, its always a good idea to make sure that whatever the modification is you can live with it or otherwise you are just delaying the inevitable.
We’ll keep you posted on this new approach that debt buyers are using.
If you live in Alabama and would like to discuss your experience with mortgage companies or debt buyers or if you are or have faced foreclosure, feel free to let us know and we’ll be glad to meet with you to discuss your legal options. Foreclosure is a frightening process but having information can help take some of the fear away as you learn more about your options.