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November 22nd, 2010 12:48 PM by David W. Welch
There was really good article from Barron's on Yahoo that explains what is going on with banks and the effect of mortgage putbacks. If you have dealt with short sales, and wondered why banks do not have any real process in place for granting approvals, here is the answer. Generally speaking they have very little financial incentive to get them done. Banks sell off most of their mortgages to investors through a process that securitizes the mortgages. In other words, similar mortgages are bundled together, then a security (stock) is created to represent an ownership interest in the mortgages. This is where the term mortgage backed securities comes from. When the bank sells these off they get their money back, and re-lend it - wash, rinse, repeat.
Most mortgages are only being serviced by the banks for a fee. The banks get their fee regardless of whether they actually collect payment. You may ask why the investors that purchased these mortgage backed securities don't get rid of them. Well that is exactly what has been going on and The Fed has purchased large amounts (over $1.6 trillion). Fannie and Freddie hold a lot of these which is why The Fed has had to bail them out to the tune of many billions more dollars. There are still a lot of private money investor out there holding these securities, and they are suing the banks to take them back. Read the article linked above for more details on this. If these investors suits are successful, the banks will no longer be just servicers, but holders of the mortgages. This should force them into a position where approving short sales will be in their best interest, and they will also be more aggressive on pursuing foreclosures as well. The CEO of Bank of America denies that they drag their feet on short sales just to keep collecting their servicing fees, but in the same breath he says these putbacks will force them to ramp up their foreclosures. Business does what it has an incentive to do to make a profit, and if the putback suits are successful the incentives change for the banks.
David Welch Real Estate Optimist, Orlando Real Estate