Who Would JP Morgan Invite?

My friend Joel has been pestering me about the subprime meltdown: how will it happen? What are the mechanics? If JP Morgan wanted to bring the folks together on his yacht and strongarm a settlement, whom would he invite?

Elaborating--in the old days, Jimmy Stewart made the loan across the desk in a Greek revival bank building next to the courthouse square. He might be able to see the property from the front door, but at any rate, if the loan went sour, he personally was involved in the foreclosure. The best fertilizer, as Lyndon Johnson used to say, is the farmer's footsteps walking over the land.

These days, of course, it is nothing like that. The loan is bundled up with a thousand other loans into "Real Estate Portfolio #34," and sold for cash to, oh say to the pension fund.

But what happens when the loan goes bad? Surely the pension fund does not run the foreclosure. Who would JP Morgan invite to his yacht?

My first thought: you need to find the person who has the incentive to maximize the value of the loan package, whether performing or otherwise. That would mean, inter alia, that somebody would be motivated to renegotiate with this defaulting debtor, now, if renegotiating was the best way to maximize value.

I tried the question on my friend Ignoto, who has a lot more experience than I do on the issue. Ignoto said:

[Who will JP Morgan invite?] No one. The "servicing" of these mortgages was farmed out (or retained) when they were securitized, and my experience ... is that there is a huge disconnect between the traditional ownership decisions and the day-to-day collection (or not) of the payments. Put another way, I don't think the agent has instructions from the principal, and I don't think the principal knows that they own the problem.

Comment: He is probably onto something here, but I'd still like to know more. Seems to me it might depend on the agent's compensation package. If he is getting paid by the week, he'll just go by the book (the way the IRS used to do, before they got religion)--and he'll leave a lot of money on the table. If he gets paid for performance, why then we might expect a different result. My guess--supported, at least obliquely, by Ignoto's email, is that so far we haven't identified anybody with the right motivation.