Are Mortgage Investors the Bad Guys?

I’ve written twice (”Borrowers Report Frustration with Mortgage Industry” AND “Trust Deficit in Mortgage Industry“) recently about public distrust and dissatisfaction of the mortgage industry. While my attacks were directed primarily at lenders, now I’m starting to wonder whether perhaps investors also deserve a large share of the blame.

After all, it was private mortgage investors that facilitated the housing bubble through their insatiable appetite for Mortgage Backed Securities (MBS). They bid down mortgage rates for borrowers with poor financial circumstances and dubious abilities to repay the mortgages. Facing billions of dollars in losses, investors have tried to putback such mortgages to lenders, which have been accused of neglecting their own underwriting standards and misleading investors. However, judges have ruled repeatedly against investors, often times dismissing their cases as being without merit.

Investors also may represent one of the primary obstacles to mortgage modification. Investors have singled out Bank of America, “for not foreclosing on homeowners quickly enough and for making loan modifications that may keep borrowers in their homes.” Investors have countered that they “aren’t opposed to loans being reworked for ‘deserving borrowers.’ ” That’s probably not much of a consolation for anyone who has failed to successfully navigate the mortgage modification process.

Comments of that nature provide a sad window into the thought process of investors, which are simply interested in extracting the most amount of value (or minimizing their losses, in this case). They viewed the foreclosure scandal is problematic not because of allegations of unjustified (or even illegal) foreclosures, but rather because it might delay them from recouping their investments. Their criticism that, “processing mistakes and insufficient staffing at Bank of America are unnecessarily delaying foreclosures” was directed at the system for being inefficient, not unfair.

It’s hard to know whether to feel happy or merely indifferent that investors are being rebuffed in their efforts to recoup their losses. On the one hand, it means there is some comeuppance for the mistakes they made. On the other hand, it implies a victory for lenders. If there is no check coming from the government and now no check coming from investors, it’s no wonder that most lenders are already recording healthy profits, and are set to emerge from the financial crisis unscathed. In theory, that should be good news for borrowers. In practice, I have reason to believe otherwise.