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FDIC speaks out on foreclosures

By: 30 January 2011 2 Comments

Last year, the national Mortgage Bankers Association and other industry insiders formed Council on Residential Mortgage Servicing for the 21st Century to take a look at the foreclosure crisis that’s hit the nation and to figure out how to both mitigate current problems and avoid future ones.

As anyone who follows the real estate industry knows, there were a lot of groups formed last year in the wake of questions over the legality of foreclosures. Most of them are government entities, but the Council on Residential Mortgage Servicing is different in that it’s rooted in the private sector.

That group was formed, primarily, to take a look at the secondary mortgage industry and how it does business. Consumers come in contact with the secondary mortgage industry only if they take out a mortgage with an institution that turns around and assigns it to a servicer.

While a lot of mortgages do not stay with the original lender, that’s not always the case. Some institutions handle mortgages in-house, but others do assign them to servicers that keep the secondary mortgage market up and running. Why is that market important? When it works well, borrowers can more easily get the credit they need to purchase homes.

The secondary mortgage industry puts loans in trust, packages them up as securities and sells them to investors through the mortgage backed securities market. That market is governed by risk – when investors feel the market is safe, putting money in that market is considered less risky and yields go down. When yields drop, mortgage interest rates fall, too.

When there are a lot of foreclosures and serious questions about how the secondary mortgage market is doing, then the problem of risk comes into play. Not only do consumers face the possibility of higher interest rates, but credit is harder to obtain.

In short, keeping credit flowing and interest rates low is only possible when the secondary market is performing as it should.

On Jan. 19, the Council on Residential Mortgage Servicing met in Washington, D.C., and heard testimony from Federal Deposit Insurance Company (FDIC) Chairman Sheila C. Bair. The FDIC is concerned over high foreclosure rates, too, and wants to see those reduced both now and in the future.

Bair’s solution? Lenders should work out loan modifications and avoid foreclosures when possible. When a loan modification is possible, everyone wins so long as the borrower can meet the new terms after they are negotiated and put in place.

Obviously, the homeowner comes out ahead – a loan modification certainly beats a ruined credit report, losing a home and facing the legal ramifications of a foreclosure. The lender benefits as it has been proven time and time again that banks lose money when homes go through foreclosure and are sold for less than they are worth. Other homeowners benefit as their property values aren’t hurt by a glut of inexpensive homes going through foreclosure.

However, we’ve heard about the advantages of loan modifications before. President Barack Obama has encouraged banks to consider them and has put programs in place to facilitate them, in fact.

The end result is that we’ve seen some modifications, but not as many as everyone from lenders to distressed homeowners want. Will we see more of them this year? Only time will tell, but rest assured the Mortgage Bankers Association of Arkansas will keep an eye on this issue.

Column written by Ethan C. Nobles and distributed to Arkansas publications on behalf of the Mortgage Bankers Association of Arkansas.

About: Ethan C. Nobles:
Benton resident. Rogue journalist. Recovering attorney. Email =

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