Early results of the government's program to encourage short sales are far from encouraging. Part of the problem may be lenders' reluctance to waive the right to make borrowers pay the shortfall.
So far, only 4.2% of borrowers who were rejected for the Home Affordable Modification Program through May ended up paying off their mortgages in a short sale or deed-in-lieu under the companion Home Affordable Foreclosure Alternatives program. Another 11.6% of Hamp dropouts went into foreclosure.
In a short sale, the home is sold for less than is owed on the mortgage and the lender accepts a discounted payoff to release its lien on the property. However, the mortgage is not always considered paid in full.
Rachel Dollar, the president of Smith Dollar PC, a Santa Rosa, Calif., law firm, said some lenders are not taking part in Hafa, despite the program's incentive payments, because it doesn't let them pursue a borrower for the remaining amount of the loan that went unpaid.
"There's a misconception among borrowers that doing a short sale relieves them of the obligation," said Dollar, who represents some of the largest servicers. "I'm not sure why borrowers would do a short sale."
Another factor hindering short sales is the potential for a hit to the borrower's credit record.
When there is still a remaining debt, the 85- to 160-point hit to a borrower's credit score could be just as egregious for a short sale as for a foreclosure.
"We're seeing these questions asked more and more in these absolutely dead markets where the borrowers asks if they sign a promissory note, will you not report me" to the credit bureaus, said Jim Satterwhite, chief operating officer at Infusion Technologies LLC, a Jacksonville, Fla., short-sale services firm. "Something needs to be done to get a reasonable range of understanding of the hit to credit if you do a short sale."
Old Before Its Time
"Inside Job," a documentary about the financial crisis set to be released in October, is already out of date.
The film, directed by Charles Ferguson, aims to explain how the meltdown happened and casts a scathing eye on everyone from federal regulators and Wall Street firms and rating agencies to business schools for perpetuating an era of deregulation and excessive risk-taking.
President Obama is derided for failing to enact reform during his first year in office and for not holding more people in Washington and on Wall Street accountable for their misdeeds.
"Some things are worth fighting for," the voice-over narrator, Matt Damon, says in the final scene, a shot of the Statue of Liberty.
Though it's true that there was no financial reform during Obama's first 12 months in office, the movie seems ill-timed given that the president signed a sweeping overhaul into law Wednesday. The film debuted at the Cannes Film Festival in May, and will play in select theaters this fall.
Still, Ferguson's biting observations make good entertainment. The film was made with a broad audience in mind, simplifying complex concepts like collateralized debt obligations so that those who know nothing about banking can follow the story.
Ferguson, best known for the 2007 Academy Award-nominated documentary "No End in Sight: The American Occupation of Iraq," taps into the anti-banker sentiment of the day, criticizing the big paydays and extravagant lifestyles of Wall Streeters.
Songs like Peter Gabriel's "Big Time" and Ace Frehley's "New York Groove" accompany images of excess — towering office buildings, fancy cars, million-dollar houses in the Hamptons, expensive yachts.
Ferguson cuts between old clips from C-Span and other news outlets and his own interviews with big names in government and finance, including Paul Volcker, Barney Frank and Eliot Spitzer.
The director is blunt in his questioning, and some of his interviewees, such as Frederic Mishkin, a former Federal Reserve Board governor, are seen squirming in their seats, unable to answer Ferguson or deflecting his questions.
As Fannie Mae and Freddie Mac increasingly send loans back, do banks know their full liability for repurchases?
Chris Gamaitoni at Compass Point Research and Trading LLC has estimated that banks will have to absorb roughly $27.2 billion in losses over the next three to four years just from repurchases of loans from the government-sponsored enterprises — far less than banks are setting aside in reserves.
In a research note Monday, Gamaitoni said the GSEs have only "just become operationally efficient" by increasing staffing for loan document reviews. But in the next few months, they will be forced to resolve a bigger percentage of seriously delinquent loans, pushing more of them back to servicers, particularly for those borrowers who failed to qualify for a permanent Hamp loan mod, he said.
"There is a material risk relating to mortgage losses in the banking sector due to representations and warranties made to the GSEs and other private-label buyers," Gamaitoni said. He came up with a wide range for potential losses from buybacks with a best-case scenario at $11.9 billion to a worst-case of $64.8 billion for the industry.