Administration Suspects Investors of Deterring Government Foreclosure Aid
Adding to the political tensions surrounding the Bush Administration’s latest plan to provide foreclosure relief to borrowers from Fannie Mae and Freddie Mac, are lawmakers’ suspicions that investors are hindering the said plan for their own interests. Representatives from the mortgage industry faced the House Financial Services Committee last Wednesday to deny the claim.
According to Tom Deutsch, deputy executive director of the American Securization Forum, foreclosures were the last option to resolve loan defaults since they costs more for investors. Mortgage adjustment was still a more viable alternative if the modification would cut losses for investors. The legal counsel for Managed Funds Association, Benjamin Allensworth agrees.
The committee however has another take on the matter. The lowered interest rate and mortgage principals may reduce the monthly expenses of homeowners in risk of foreclosure, but these would also mean fewer profits for investors. Add to this, mortgage companies do not profit from loan adjustments, but earn commissions and fees from foreclosures.
Presently, a whole or a part of a mortgage may be owned by a pension fund or other investors as a mortgage-backed security. Thirty years ago, the mortgage was owned by the lenders themselves.
Private mortgage-backed securities produced through loan pools hold $2.8 trillion of $14.8 trillion in unsettled loans. The government-controlled Fannie Mae and Freddie Mac produced $ 4.8 million in mortgage security they bought from original lenders.
Alabama Rep. Spencer Bachus, a Republican, says that mortgage companies are discouraged to adjust mortgage payments of homeowners facing foreclosure for fear of unhappy investors who might sue them.
Committee Chairman and Rep. Barney Frank adds that stories from homeowners facing foreclosure attest to the difficulty in getting loans from lenders. He says that the problem may require new legislation beyond previous bills passed by Congress which provides secures federal loan for modified mortgages.