Banks Need to Show Respect to Delinquent Homeowners

Wells Fargo (WFC) published “Wells Fargo, NACA Collaborate on Programs to Benefit At-Risk Mortgage Customers” on Friday. Wells cites the Neighborhood Assistance Corporation of America’s (NACA) ability to gain insight into their customers and create effective mortgage restructuring programs to avert foreclosures. Wells will also continue to work with HOPE NOW and other counseling services.

Counseling delinquent homeowners is like your spouse repeatedly telling you did something wrong that you already know is wrong and have already repeatedly acknowledged is wrong. But your spouse won’t stop reprimanding you. The Democrats keep trying to allocate more money for counseling in sympathy. The Republicans say homeowners must honor their mortgage contracts to the bitter end. Both are exerting punishment: the Democrats through unneeded embarrassment and the Republicans through continuous roadblocks to breaking crushing mortgages.

To quote Jim Cramer, “it doesn’t matter where a stock has been; it only matters where it’s going”. Likewise, it doesn’t matter what the mortgage contract says, it only matters how to make it current. FDIC Chairwoman Sheila Bair is restructuring most of IndyMac Federal Bank's problem mortgages to “achieve sustainable payments at a 38 percent DTI ratio of principal, interest, taxes and insurance.” And IndyMac even has an online portal called “Overcoming Payment Challenges” to start the process. In general I have not been happy with Bair’s preemptive strikes on Wachovia (WB) and Washington Mutual, but her direct, pragmatic approach to IndyMac’s mortgage problems is right on target. Forget the moral hazard, forget the embarrassment, and forget teaching homeowners a lesson.

From IndyMac’s website they appear to be fully open for business, and paying relatively high CD and savings rates. Bair seems to be maximizing the taxpayers investment by creating a truly consumer friendly bank.

Every bank conference call I listen to emphasizes customer relationships and cross selling products. Each brags about their average number of products per customer. If customer relationships are so important than why are they sending their customers to outside counselors? Bank of America has been forced by the courts to directly modify many of Countrywide’s mortgages. Although they have not admitted it, this will be beneficial to them. Why not sell more products to a bad customer turned good?

It all comes down to simple math, not calculus nor advanced psychology. Is the present value of an affordable mortgage less than or greater than the present value of the net proceeds from foreclosure? If the present value of the modified mortgage is greater – just do it and leave the moralizing for later.

Disclosures: Author is long BAC, WB, and WFC.

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