By THE EDITORIAL BOARD
October 6, 2015
The promise of widespread relief for homeowners facing foreclosure in the wake of the housing bust has never been realized. The government did not require the banks to rework bad loans, which in many cases the banks offloaded on the federal agencies that insured them. Now these same agencies are selling some of these loans at a discount to hedge funds and private equity firms. Has this merry-go-round helped homeowners? No. The myth of mortgage relief lives on.
At first glance, the sale of discounted mortgages to private firms would seem to be a way to help troubled borrowers. Say, for instance, that a private firm buys a mortgage with a face value of $200,000 for $140,000. At that price, the firm could make money even if it reworked the troubled loan by reducing the principal, which would cut the homeowner’s monthly payment and restore some equity.
But according to a recent report in The Times by Matthew Goldstein, that’s not the way things are working out. However great the discount, buyers of these loans almost always go ahead with foreclosure anyway, then repackage the debt into bonds that generate income from selling the foreclosed homes or renting them out. One of the firms The Times’s report focused on — Lone Star Funds, a $60 billion private equity firm that has become a major force in the market for distressed mortgage debt — has relied largely on foreclosure and resale of the homes to make money. Loan modifications that reduce borrowers’ principal have been virtually nonexistent.
In the aftermath of a bust, there is a legitimate role for distressed debt investors who seek to extract what value remains in impaired assets. But the federal mortgage sales are apparently occurring before all borrowers have been given a chance to apply for and receive help that was promised under the terms of the bank bailouts and, since then, under various legal settlements and regulations intended to prevent foreclosure abuses.
For that reason, the sales of discounted mortgages should be suspended until the government has procedures in place to protect the rights of homeowners. The government also needs a plan to ensure that a larger share of sales are made to nonprofit housing agencies, which tend to be more committed to foreclosure avoidance than private-sector buyers are.