A Loan Servicer That Gets It….Sort Of

Since the financial crisis started I have argued on this blog that the real estate problem must be solved before the economy can grow again. Treating the symptoms of the bubble and not its causes creates even more destruction. One solution I pushed was created by John Hussman of the Hussman funds (who is suddenly back in style). Hussman and I both argued for write downs of loans (principal) for homeowners, but John took it one step further with a genius idea of Property Appreciation Rights or PARs. You can read about it in my September 2009 blogpost “Hussman: Tradeable PAR’s = Solution to Mortgage Mess”. The idea is that in exchange for a write down in principal the owner of that loan would receive a portion of any future appreciation when the homeowner sells, these rights would be tradable.

Needless to say addressing the mortgage mess in a reasonable fashion was not on the administrations radar and they chose a program that was destined to fail, just like the previous administrations programs. Millions of homeowners have been foreclosed on since and the market has not improved. But at least one company has seen the light, partially.

A client of mine sent me an article by Kenneth Harney, “Ocwen Financial expanding program for underwater borrowers”. Turns out that Ocwen is doing exactly what Hussman and myself prescribed – principal write downs combined with appreciation rights (retained by Ocwen) and it is working very well with low re-default rates, go figure. The only problem is that Ocwen will only do these programs with homeowners who are in distress (as if owning a home that is worth 50% less than you paid is not “distress”). The program needs to be offered to everyone in order to clear the market. Still, it is encouraging to see such a method employed and even more encouraging to know that it works.

By the time the rest of the loan servicers catch on, it will be too late. Its not like the answers weren’t available, we just chose not to use them and now we have a stagnating economy with low growth prospects…but at least a few people got a homeowner tax credit (and I’m willing to bet are now underwater).

Scott Dauenhauer CFP, MSFP, AIF


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