The “investors” behind the curtain in the mortgage crises (hedge funds, Fannie and Freddie) are buying “non-performing notes” (NPNs) for about 37 cents on the dollar.
Why would a bank sell your $200,000 note and mortgage for $74,000 and not agree to modify your loan? The answer lies in accounting rules, derivatives and bailout funds. Near the time of the 2008 bailouts, the Financial Accounting Standards Board changed FASB 157 which was its “mark to market” accounting rule. Prior to the change banks would have to value the $200,000 non-performing note at its best guess market value—somewhere south of $200,000. After the bailouts and the change to FASB 157 the banks have more latitude to value the NPN at its face value–$200,000. In addition, as the market unfolds, it appears that the Fed (either directly or through the FDIC) has stepped into AIGs derivative contract obligor shoes and agreed to make derivative payoffs to banks upon an event that takes the homeowner out of title—sheriff’s sale or short sale. Nothing else explains the banks’ financial performance during the worst economic conditions since the Great Depression. It also appears that the US Treasury is providing leverage to Fannie, Freddie and the hedge funds to acquire the NPNs. The result is that a bank can value the NPN at face amount with the understanding that the Fed (perhaps through the FDIC) will make it whole after a sheriff’s sale or other event that purports to knock the homeowner out of title. Banks are therefore incentivized to turn a transaction, not work with people. Knocking people out of title represents a big payday. Modifying a loan means a writedown (not even FASB 157 can prevent an adjustment if the bank modifies) and potentially a big hit to the banks’ balance sheets.
For this you can thank all your brave “public servants” in Congress who voted for the bank bailouts in 2008 and 2009.