BLOG VIEW: Placing Bets On A House Of Cards


This past Sunday, ’60 Minutes’ aired a news segment titled ‘House of Cards’ – an apt (and perhaps hackneyed) reference to the shaky composition of the subprime mortgage market and its ultimate collapse.

While the report offered no information that mortgage servicers and related professionals would find groundbreaking, the show's delivery of the news was wonderfully sensational.

Correspondent Steve Kroft employed language such as ‘corruption, greed and negligence’ to set the report's tone and noted that Stockton, Calif., is the ‘foreclosure capital of America.’ He went on to report that subprime lenders ‘handed out free money to anyone who wanted to buy’ and said borrowers were ‘getting paid to buy a house.’

One could certainly argue that all of the preceding statements and characterizations are valid. The subprime market propelled itself with the highly liquid capital markets, and risks were passed from one player to the next – from borrowers to overseas securities investors. Throughout, everyone betted on home prices increasing ad infinitum.

We all know how things played out. And today, a crisis is great fodder for national news coverage.

The most compelling portion of the ’60 Minutes’ news segment focused on borrowers' experiences. Kroft interviewed a husband and wife from Stockton who secured an adjustable-rate subprime mortgage and now find themselves unable to pay their mortgage.

Kroft inquired about the loan terms – the initial rate, which would ultimately reset to a higher percentage.

‘Did you understand all this?’ he asked.

‘No. Not really,’ the husband replied.

Kroft commented that this borrower surely must have understood, at least, that he was undertaking a massive financial responsibility, to the tune of hundreds of thousands of dollars.

‘I didn't really look at it like that,’ he said.

The wife then chimed in with some broker-bashing, suggesting that she and her husband were duped: ‘After it was all said and done, and the paperwork was drawn up, it was something different,’ she commented.

There are only two possibilities here. On one hand, the broker truly did dupe the couple. On the other hand, the broker explained the loan terms, but the borrowers were too obtuse to understand what ‘adjustable’ meant. Or, they simply didn't care what it meant at the time of loan origination. They wanted the house.

Another couple Kroft interviewed claimed no ignorance. These borrowers knew very well what an adjustable-rate mortgage was, opting to agree to such a loan and intending to refinance into a fixed-rate product before the rate reset.

Not so fast. In Stockton, home prices dropped dramatically. When this couple went to refinance their mortgage, the home's current value could not support a new loan. So, time expired, and the payment reset to more than $3,000 a month.

The couple noted that they were able to make the higher payment, but were compelled to ‘walk away.’ Kroft gave a puzzled look and remarked that they agreed to make payments under the terms of the loan.

‘Fineâ�¦if the value is going up, [but] the value is going down,’ the borrower said. ‘It makes no sense.’

These borrowers are prepared to face foreclosure and absorb the substantial lashing to their credit. Doing so, they said, is more sensible than paying a mortgage on a home that is no longer rising in value.

‘Why can't our mortgage company work with us?’ she asked.

Work with them to do what? Raise the home's value? Give away more ‘free money’?

Kroft offered no answer to the borrower's question, but I will propose one: The mortgage company is not going to work with you because you made a bet and lost. Servicers are not on the loss-mitigation front lines to remedy borrowers' ill-fated gambles.

But interestingly enough, if this borrower does behave like a sore loser and walk away from the home – resulting in foreclosure – her servicer is going to try to help anyway.

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