This weekend, “This American Life” aired another fantastic report on the banking crisis. In one of the show’s segments, TAL reporter Julie Chow and producer Alex Blumberg told the story of a pair of entrepreneurs who have gone into the business of buying distressed mortgages from banks and engineering workouts for a profit. This passage struck me as crucial to understanding the mess we’re in:
CHOW: Then we drive around the corner to the house whose mortgage Albert and Raj are looking to own… According to Albert’s paperwork, the house’s appraised value back in the fall of 2007 was $635,000. Now it’s down to $440,000, which is pretty bad if you consider that what [the borrowers] owe on the house is $475,000. They’re underwater. They owe more than their house is worth, and they haven’t made a mortgage payment in 16 months, since October of 2007. […]
Albert and Raj say they’re not actually allowed by law to talk to the people living here. But once they close the deal and take possession of the mortgage, they can. And in fact, the better a deal Raj and Albert get, the better it might be for the homeowner.
Raj explains it this way. Say the mortgage is worth $400,000, but they get it at $200,000. They can approach the homeowner and say, “We can cut you a new deal, rewrite your mortgage. And then, for the homeowner:
RAJ: The numbers are very different. Their monthly payments can go down from $1,300 to $500 a month, and we are making an incredibly good return on our money.
BLUMBERG: And you can do that because you’ve bought it at such a discount?
RAJ: Yeah, it’s really not that we’re using creative, rocket-science finance. We’ve bought the mortgage at a reduction and somebody’s taken a hit on that, and we have the ability to restructure that mortgage now.
CHOW: But Albert says so far, in their experience, even with this kind of reduction, three quarters of the homeowners can’t afford to make the new payments.
Obviously, one shouldn’t put too much stock in anecdotal evidence, but that is a remarkable statement. These guys are out there buying mortgages for half of what they’re worth and offering borrowers 60-percent reductions in their monthly payments, and three quarters of them are still unable to stay current. It’s enough to make me pessimistic about President Obama’s foreclosure-prevention plan, to say the least.