Vindictive servicer of the day: ING Direct
I’m a longstanding fan of American Homeowner Preservation, which has found a clever way of keeping underwater homeowners in their homes while minimizing the loss to their lenders. Even the red-in-tooth-and-claw capitalists at Goldman Sachs can understand that. But not, it seems, the idiots at ING Direct:
ING Direct, the Dutch bank and internet-based mortgage lender, has objected to American Homeowner Preservation’s program to keep families in their homes, and ING will no longer consider AHP short sales. “ING DIRECT will also be adding your company to our exclusionary list as your company strictly finds investors to keep sellers in their home, while the bank takes a significant loss. This is against ING DIRECT’s short sale policies and guidelines, and as such you will no longer be able to work on this short sale file or any future ING DIRECT accounts,” Adam Agostinelli of ING Direct Retail Asset Management advised in an email to AHP.
If you cut out the excess verbiage, this basically boils down to “you try to keep homeowners in their homes, so we’re not going to deal with you”. Most companies would recognize this, and determine that if their short-sale policies barred sales to AHP, then they should change those policies as fast as possible. Not ING, which has come to the inhumane and self-defeating conclusion that the policies must always come first, even if they make no sense.
ING does allow short sales, of course, where the house is sold, often to an investor, in satisfaction of the loan. If ING were rational, it would want to get as much money as possible out of such a short sale, and therefore make the house as attractive as possible to as many potential buyers as possible. Instead, it is going out of its way to exclude the one set of buyers which actively wants to buy houses in short-sale situations: AHP-backed investors who intend to lease the home back to the current owners.
This is vindictiveness, plain and simple. ING might get more money if it played ball with AHP, but the homeowner wouldn’t suffer as much. Clearly, if ING is going to take “a significant loss”, then it needs an element of suffering on the part of the borrower — it’s a modern-day Shylock, demanding a pound of flesh which can do it no good whatsoever. ING gets no extra money if the homeowner is evicted as part of the short-sale proceedings. To the contrary, it will probably get less, since AHP makes its offers at full market price and doesn’t need to worry about the owners trashing the place when they’re forced out of their home.
Theoretically, AHP could try to do an end-run around ING’s absurd policies. It could give the family in question a place to camp out for a few weeks after being evicted, buy the house out of foreclosure for less than it was offering as a short sale, and then reinstate the family under its original terms. ING would get less money for the house, and on top of that pay large amounts of money to foreclose on the house, evict the family, and then sell the house. It’s a highly unattractive option for all concerned, especially the family which would have to move all of their stuff twice, and suffer the uncertainty of knowing whether they would be able to get their home back or not. In comparison, the AHP solution is a clear improvement for everybody, which leaves the inescapable conclusion that Adam Agostinelli and his paymasters are stupid, sadistic, or some combination of the two.
It’s worth mentioning the moral-hazard response only to dismiss it. I haven’t actually heard this argument made in any seriousness, but theoretically it could be made: if ING Direct allows short sales where the borrower stays in their home, then that reduces the cost of default, makes default more attractive, and therefore is liable to increase the default rate across the rest of ING’s portfolio. But if bankers think like that, they’re doomed.
AHP deals only with houses which are deep underwater, and where there is no way that the borrower can or even should attempt to pay off their mortgage in full. Maybe taking out the original loan was a bad idea, but that’s no crime, and doesn’t deserve gratuitous extra punishment. In all of AHP’s cases, the bank will end up selling the home at a loss. If it wants to minimize that loss, it should work with AHP. If it wants to maximize that loss, it should ignore AHP. In either case, its decision will make no difference whatsoever to other underwater borrowers and their propensity to default.
There’s one other possibility here. Maybe ING Direct is the servicer of the loan but not the beneficial owner of the loan, which has been securitized. In that case, it’s not ING which would get the benefit of a higher sale price, it’s the owners. On the other hand, if ING goes through elaborate foreclosure and eviction proceedings, it can charge those owners fees all the way along the process. Of course, the servicer is meant to be operating on behalf of the owners, but as we’ve seen many times, bondholders have no real ability to monitor what servicers do in their name, and have no control over what the servicers do even if they do find out. If foreclosure proceedings are a profit center for ING rather than a cost center, then suddenly its decision makes a lot more sense. If you can’t make money off the borrowers, make money off the lenders instead!