Once Subprime Always Subprime

Have you wondered why there are homes down the street that are empty and the bank will not lower the price? Some of the time those homes are not even on the market. It isn’t forgotten, it is probably in a mortgage pool.

In learning the foreclosure market and studying the crisis we hear time and time again that “the banks are not in the business of owning homes.”  Maintenance costs, taxes, and lost interest can basically eat away what is left on the loan’s value. So why are homes owned by the bank sometimes sitting on the market for a year, even two? Why are some investors turning down short sale offers that could avoid tens of thousands of dollars in more losses? This article should set some light on it.

When subprime lenders pooled their high interest loans with safer investments, they became junior investors in many cases. This might be considered the bottom tray in a CDO. (If you are not familiar with this term please see this.) In a pool, or CDO, as long as everyone is paying interest, every investor gets paid. When some of the loans in the pool stop performing, like in a foreclosure, the primary investors (or AAA rated,) will get their piece first. What is left goes to the junior investor. However, when a loan is closed out, like in a refinance or property sale, that investor is removed from the pool completely.

Keeping worthless houses on the market artificially creates a cash flow on the backs of other investors. These are the very banks that are strangling the economy with their inability to lend. To make matters worse, as the lawsuit contends, investors are allowed to collect interest from the servicer while the home is on the market. This interest can be refunded when the home is sold but the servicer is out those funds in the meantime that could be used to…. maybe…. expand the loss mitigation departments? or move it back from that call center in Caracas?