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Paul Kiesel
Paul Kiesel
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Why a Mortgage Bailout is Unlikely to Occur

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It is unlikely that a substantial mortgage bailout will occur anytime soon. It might not happen all together. Granted, some mortgagees will find relief and at some point in time our government will be able to come together and agree on a housing bill or package, however, it’s likely it will only help a small fraction of borrowers. The reason: the servicers.

Servicers collect payments and manage loans. Some, like Countrywide Financial or Wells Fargo, are also lenders; others are only in the business of servicing loans. All servicers are paid a piece of the monthly mortgage payment and funnel the rest to investors, such as hedge funds, that hold securities backed by mortgages. Those investors are, ultimately, the servicers number one priority. So any deal that is made to help out the mortgagee will have to benefit the servicer, as well. Therefore, at this point in time, servicers, along with the House, Senate and White House, are unable to come up with a plan that would be incentive enough for investors to go along with it (without them suing the servicer), and this puts the servicers in a tough situation.

The problem is that servicers are being overrun by the foreclosure crisis: They were set up to process payments, not do loan workouts on a massive scale. As such, they lack the financial incentive to help homeowners workout new loans. Again, their priority is the investor. According to statistics from CNNMoney.com, servicers have financial reasons for not helping homeowners who fall behind. “As middlemen, they are paid a small percentage – usually 0.25% – of the principal of each loan they administer (0.5% for subprime loans). That’s about $250 for every $100,000 borrowed, about $21 a month. But when borrowers fall behind, late fees alone can be $25 or more and exceed what a servicer may be paid to maintain an up-to-date loan,” (5/15/08, CNNMoney.com). Therefore, it is financially lucrative for servicers to see borrowers fall behind on payments, just as long as borrowers don’t move into the foreclosure process.