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Why a little-known tax change may be a big deal in the real estate

Part 3
Why a little-known tax change may be a big deal in the real estate (Part 3 of 5)

Why does the tax law change matter to the non-bank servicers?

Servicers perform a vital role in the mortgage business

Servicers act as the liaison between the lender and the borrower. They process the mortgage payments from the borrower, send the required principal and interest payments to the bondholders, manage the escrow accounts, ensure that insurance and property taxes are paid on time, and also deal with delinquent borrowers. Given their vital role, and the fact that they directly interact with consumers, the government keeps a close eye on what they do.

Mortgage Delinquencies QuarterlyEnlarge Graph

When the real estate bubble burst, the first people called to Capitol Hill were the servicers

Once the real estate bubble burst, and people started defaulting on loans, Congress called the servicers up to the Hill in order to pressure them to start forgiving principal. Ultimately, the servicers work for the lenders and don’t really have much of a financial stake in whether the principal is paid or not, they are really only on the hook for advances. In an ironic twist, Congress and the administration gave the servicers the reward for making loan modifications, and not the lenders, who’s money is being so generously given away.

Servicers have a tough decision with short sales now

So, if you are a servicer with an underwater homeowner, do you pursue a principal modification, knowing that your distressed borrower may end up paying a few hundred dollars less a month on their mortgage payment, but will owe thousands of dollars to Uncle Sam in the Spring? It makes these sorts of determinations very difficult, and may mean that servicers are more reluctant to pursue principal mods. The big non-bank servicers like Nationstar (NSM) and Ocwen (OCN) are going to be pushed by the government to pursue principal mods when it might not be in the best interests of the ultimate lenders, who might be non-agency REITs like Two Harbors (TWO), Newcastle (NCT), or even Annaly (NLY).

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