Sunday, December 02, 2007

Not Gonna Work

While I previously said that the potential mortgage pain easing plan pushed by Paulson looked good at first glance, I'm increasingly convinced that the structure of Big Shitpile is such that there's really very little to be done. This bit in the NYT gets at why.

But specialists warned that it was too soon to describe the effort as a breakthrough, and some advocates for homeowners were skeptical that a voluntary plan by lenders would bring much relief.

“We need an increase in loan-modification activity that is so dramatically above what’s happening in the marketplace that it’s hard for a purely voluntary agreement to get the job done,” Eric Halperin, director of the Washington office of the Center for Responsible Lending, said.

Mr. Halperin, citing a report by Moody’s Investor Service, said mortgage servicing companies were modifying only about 1 percent of their troubled loans. One big reason, according to many specialists, is the difficulty in reaching agreement between the companies that service a mortgage and the investment funds that actually own the loan.

The people who actually own the loans aren't in the mortgage business anymore than stockholders in Apple are in the IPod business. Owners of these financial assets are in the business of trading pieces of paper with big numbers representing numerous actual mortgages on them. Those owners aren't necessarily the big financial institutions that we know like Citi; they might be small towns in Norway.

My guess is that the only thing which might really make any dent in this is actually modifying bankruptcy law to allow judges to change mortgage terms for primary residences the way that they already can for second homes and investment properties.