Financing The MBS Fix: The 800 Pound Gorilla

by Scott J. Wilson and Anthony M. Freed  

Since the United States Government has decided to go into the MBS business (Mortgage Backed Securities), I have noticed in all of the debate and coverage that there is a serious lack of knowledge on the part of our congressional membership and in the news media regarding the mechanics of such a plan, and no one has even come close to outlining the actual costs that will be incurred. 

I don’t expect government bureaucrats news jockeys to know and understand all the intricacies of the mortgage business, but someone, somewhere has to have wondered what exactly the long term costs required to administrate a program of this magnitude would be. 

What will happen when the government buys trillions and trillions of dollars of these “toxic” loans in this MBS bailout?  How many thousands of people will it take to do all the legwork on these mortgages?   Will there have to be a new government division created just for this purpose?  How many hundreds-of-millions of dollars will this plan need that has not been budgeted for – or even considered as of yet? 

Or will they contract this all out?  Then the real corruption can begin!  Can you imagine all the “deals” that will be made with “friends” to get these huge government-paid contracts? 

Everybody, there is an 800 lbs gorilla sitting in the living room of this banking bailout, and the general public doesn’t see it.  Trust me it’s there, and there are more than a few bank executives  that have taken notice. 

I know Hank Paulson and Ben Bernanke are quite aware of the situation. 

I worked for one of the three largest banks still standing, and I have done everything from marketing, originating, processing, closing, secondary markets, and even foreclosures – at one particular bank I would estimate that there were no less than 2000 people who work in foreclosures, loss mitigation, and short sales alone – and that was before the bubble popped when foreclosures were minimal. 

Thousands upon thousands people will be needed to take care of foreclosures alone. 

In addition to this new government agency that will need to be created to manage these loans, there is also a highly complex computer system that will have to be developed to handle all the different formats and software that currently store the loan information at the different banks. 

There is also a tremendous risk to data security and system integrity in this process, with aditional costs of their own.

I know what a hassle it was when the bank that I was at purchased a block of loans from another bank:  We basically had to “build” a new in-house system to adapt to the format of the system that the loan information was stored on, and it could take weeks. 

This is just one bank assimilating one block of loans from another bank, nothing like the task of assimilating thousands of blocks of toxic loans from hundreds of different banks, with dozens of different systems and software packages being consolidated into one single system, and then expecting that system to run properly. 

As it never ran well with only two different systems, I can not imagine the nightmare of problems that lie ahead for the programmers on this project.  It literally will take years to get the data organized, and at a tremendous cost that has not been addressed. 

And then there are the servicing problems. 

The banks I worked for made tens-of-millions of dollars a month for “servicing” loans.   The bank gets a “servicing fee” every month for basically just collecting your payment.  They don’t make a lot on every loan, the basic principal is making a little on a large volume – and they do. 

This is a huge profit machine for banks, but it takes a large number of loans to be profitable, so large in fact that many banks just opt to sell the “servicing rights” to the big banks like Chase, Bank of America, and Wells Fargo for an SRP (service release premium), basically an upfront payment against the value of the servicing fees. 

The issue that I am getting at is this:  Who will do the servicing for all these toxic loans when the government buys them all up? 

If they let the banks service them even though the government holds all of the risk, the banks will be getting the best of both worlds.  The banks will get rid of the bad debt on their books courtesy of the American Taxpayer, and they still get to make a ton of money by servicing them for the government. 

And what happens if the taxes and insurance are not paid on the loan?  Normally it is the servicer’s responsibility to pay the taxes and insurance whether the borrower has paid them or not. 

Will this cost be passed on to the taxpayers too? 

Again, this is a division of the banks that employ tens-of-thousands of people – will this mean yet another government department will have to created?  Will it be contracted out? Either way, it is a tremendous expense to taxpayers that is not being addressed in any of the MBS bailout talk, and will be in addition to the cost of the assets to begin, which is all they seem to be discussing. 

More unseen costs of this MBS bailout. 

I don’t expect the government officials and journalists to know or understand all these small details of how the mortgage business operates, but if this is the business they are itching to get into, they should at least understand the basics of it before they dig our nation into a financial hole we will not be able to climb out of.