We all know that the secondary market introduced a disincentive for mortgage lenders to do their due diligence in making loans. This led to a great deal of the bad paper that caused the housing bubble and now the foreclosure and credit mess. What we may not have thought about is that the secondary market is extending the misery for many of those who are pro-actively looking to avoid foreclosure.

The problem is that a mortgage companies hands are tied if they are servicing a secondary loan. A borrower comes to them looking for relief or to rework a loan that is headed to foreclosure. The mortgage company knows that a tweak here or there could turn the loan from an expensive foreclosure to a much smaller loss or even a long term gain. However, since the loan is owned on the secondary market, their hands are tied and the property ends up going into foreclosure.

So the mortgage company is stuck foreclosing on the loan and creating an expensive process for themselves due to the agreement in place with the secondary investors. Thus the entity that spurred on the rash of bad loans now will make it impossible for anyone to work out these loans and worsen an already bad situation for lender, borrower, and processor alike.

This is why I am a firm believer in the law of unintended consequences.

Amy Gonzales, a home buyer who was struggling to pay her readjusted mortgage with Countrywide Financial Corp., turned to the San Diego Home Loan Counseling & Education Center, which is funded by the U.S Department of Housing and Urban Development. The center helped her secure a fixed-rate, interest-only payment for five years. By then she hopes the real estate market will have rebounded enough to allow her to refinance her loan, she says.
Jim Bliesner, with the San Diego Reinvestment Coalition, has also been working with lenders to avoid foreclosures.
“All the lenders we’ve talked to seem to be willing to go along with the program, but the primary obstacle is that 50 percent of their portfolio belongs to secondary investors, and the terms of the loans have been determined by those agreements, so their ability to rewrite those loans are constricted,” Bliesner says.
With a flood of defaults nationwide, relatively few lenders are willing to renegotiate loans. Dozens of mortgage firms have gone belly up, after all, and nobody wants to join them. Some stock analysts say that Countrywide, the nation’s largest lender, could face insolvency because of the credit crunch. Last week it tapped into an $11.5 billion line of credit.  via SignOnSanDiego.com

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