Lenders get Tax Payer Money to fix their Subprime Mess

Subprime lenders are lined up to received tax payer money to fix the subprime mortgage mess that has devastated the banking system.  Twenty one billion dollars that was ear marked to help bail out borrowers in the loans that these lenders created.

The funds come from the Home Affordable Modification Program. The program was created by the Obama Administration back in February to entice lenders to modify mortgage loans for borrowers facing foreclosure or at risk of foreclosure.

Several of Subprime lenders are participating with the program while other lenders have been reluctant to participate despite their responsibility in creating the subprime mess. Lenders that participated included one lender that was placed under federal supervision prior to voluntarily surrendering its bank charter. Two lenders settled charges of illegal collection practices with the Federal Government. AIG is very active and was the top bailout beneficiary. Subsidiaries of Merrill Lynch & Co and Lehman Brothers and Countrywide who underwrote subprime loans during the subprime boom are also active in the program.

Pressure from the Congress and the Obama Administration haven’t seemed to work in making lenders participate. The Obama Administration offered billions of dollars to entice lenders in the forms of incentive payments for lenders to participate and the current plan is slightly different from the original plan. Originally the plan was to have taxpayers buy stock in troubled firms. The current program does not offer returns to taxpayers on the investment. Opponents’ of the plan argue that there are serious concerns with paying these lenders public dollars to fix the mess they created. Opponents’ believe that a wrong message is being sent to lenders and borrowers that helped contribute to the mess. Opponents also believe that the modifications are not effective in the long run and only Band-Aid the foreclosure issue. Mortgages that are in foreclosure or are near foreclosure often self correct; meaning the borrowers bring the mortgage up to date. Mortgages that do get modified have a high rate of falling back into foreclosure and ultimately fail.

Fifty billion dollars in federal bailout funds has been allotted the Home Affordable Modification Program to assist more than four million distress homeowners.  The plan requires at participating lenders drop the homeowners payments to thirty eight percent of the homeowners monthly income and the Treasury will then match dollar for dollar to further reduce the percentage to thirty one percent of the homeowners monthly income. Homeowners are put into a trail period for the modification; during which if they stay current for three months the modification will become permanent. The lenders (servicers) can then start collecting their incentive payments from the Treasury. No incentive payments have been paid out at this time as no modifications have reached the three month mark.

Services under the plan  receive an upfront thousand dollars for each modification and then every year the modification is still enforce for a period of three years the servicer will receive an additional thousand dollars. The homeowner may receive a thousand dollars payment to be applied to the principal for five years. The program allows lenders to receive fifteen hundred dollars in a one - time payment for modifying a mortgage that is still current and servicers of the mortgage to receive five hundred.

The Treasury Department states that approximately two hundred seventy thousand mortgage modifications are currently in effect and that four hundred thirty thousand modification offers have been extended to homeowners in trouble. They believe that the program provides meaningful incentive to lenders to overcome the challenges in completing modifications. The Loan Servicers are the companies that demand what the borrower owes, collect payments and ultimately handle the foreclosures. The Loan Servicers are the ones who must agree to modification before a borrower can qualify. The lender and servicer of a mortgage loan are often the same company however in some cases they are not; which makes the process more complex.

The Treasury Departments data show as of August 2009 that forty four companies had qualified to collect a total of over twenty one billion dollars in incentives. The total includes monies going to lenders, servicers and borrowers. The top ten lists of those companies receiving the incentives is a reminder of the lenders and servicers that created the subprime mess from the start.

• Countrywide Home Loans Servicing LP, Simi Valley, California received $5.2 billion
• J.P. Morgan Chase Bank NA, Lewisville, Texas, received $2.7 billion
• Wells Fargo Bank NA, Des Moines, Iowa received $2.4 billion
• American Home Mortgage Servicing Inc, Coppell, Texas received $1.3 billion;  CitiMortgage Inc, O’Fallon, Missouri received $1.1 billion
• GMAC Mortgage Inc, Fort Washington, Pennsylvania received $1 billion
• Bank of America NA, Charlotte, North Carolina received $804.4 million
• Litton Loan Servicing LP, Houston, Texas received $774.9 million
• EMC Mortgage Corp, Lewisville, Texas received $707.4 million
• HomeEq Servicing, North Highlands, California received $674 million
• Saxon Mortgage Servicing, Salt Lake City, Utah received $660.6 million
• Ocwen Financial Corporation Inc., West Palm Beach, Florida received $553.4 million
• Aurora Loan Services LLC, Littleton, Colorado received $459.6 million
• Wilshire Credit Corporation, Beaverton, Oregon received $453.1 million
• Carrington Mortgage Services LLC, Santa Ana, California received $131 million
• MorEquity Inc, Evansville, Indiana received $23.5 million

The list reads like who is who in what once was a subprime lending market. The collapse was catalyst for the financial meltdown from over a year ago. The toxic mortgage loans were bought by investors and investment banks, pooled into securities and sold to investors across the world. The toxic loans began to go into default and then the house of cards began to fall all.

The number of foreclosures continues to climb even as the economy as a whole seems to appear to be edging back from the depths of disaster. RealtyTrac states that approximately one million nine hundred thousand foreclosures have been filed in the first six months of 2009; that is an increase of nine percent from the last six months and a fifteen percent increase from the first half of 2008.  The figure show that one in every eight four homes have or are in a foreclosure filing. Seriously delinquent mortgages for the first half of 2009 were over seven percent compare to the previous quarter.

The mortgages that are adjustable claim a thirty six percent seriously delinquent stat for the first quarter of 2009.

The mortgages that have been modified claim only a twenty nine percent success rate; meaning the borrower is still current. Thirty three percent are serious delinquent and seventeen percent have gone back into foreclosure.

Opponents’ to the plan contend that if mortgages simply go back into foreclosure the plan itself will have been a colossal waste the public’s money and time.