[quote author="CapitalismWorks" date=1244865015][quote author="awgee" date=1244864238][quote author="CapitalismWorks" date=1244863476]How long can servicers sit on non-performing loans? It is driving me nuts. It is my understanding (limited) that servicers have broad authority to act in the interests of the bond holders, however in practice it would appear that there is a significant deficiency in the Default to Foreclosure process. To me it would seem that servicers would have a direct incentive to process process the non-performing loan as quickly as possible in an effort to maximize recovery values considering falling asset prices. Shoving non-performing loans into purgatory would seem to contradict their fiduciary duty.</blockquote>
The uncollected payments are counted as income on the bank's until the property is foreclosed. So, the servicer is incentivized to avoid foreclosure and avoid processing the non-performing loan as long as possible.</blockquote>
Perverse incentives must be at play here. I just reread Tanta's post on CR about servicing, and according to her booking revenue is limited to loans that are 90-days past due, because after that point the prospect of collecting on past due amount diminishes sharply (here is the quote: Basically, a usual servicing contract will require the servicer to advance interest until the loan is more than 90 days delinquent, after which it is placed in ?nonaccrual? status, meaning it is deemed uncollectable and no more interest has to be advanced.) Of course her comments are regarding the servicing end of the business, and may not necessarily apply to how the banks/investors are accounting for the problem.
It is hard for me to imagine that banks are reporting income on 90+ day delinquent loans, but that doesn't mean it isn't happening.
Let's assume that they can't continue to record income from non-performing loans, but can avoid realizing losses on securities/loans by pushing off the disposition on the collateral. Aided by a complicent FASB, and the altering of mark-to-market accounting, banks have been given some extra time. Still, how long can a bank carry of this charade? What about the MBS investors? Why wouldn't they be demanding an expedited foreclosures in light of declining market values on collateral and the resultant upward pressure on severities?</blockquote>
There's a certain logic there. If somebody is less than 90 days past due, there is at least a chance they might get current. After that, the possibility probably drops to so close to zero it might as well be zero.