Felix Salmon

Place not your hopes in mortgage servicers

By Felix Salmon
August 20, 2009

Mike Konczal has a spectacularly good post up at Baseline Scenario today about mortgage servicers. He gives a lot of examples of how incredibly bad and/or evil they are at anything to do with loan modification, and concludes:

Servicers were never designed to do this kind of work; they don’t underwrite, and paying them $1,000 isn’t going to give them the experience needed for underwriting. It’s hard work that requires experience and dedication, skills that we don’t have currently…

But isn’t it at least possible that as the sophistication of the servicers increase, they’ll become equally good at learning how to game the system? I don’t mean this as a gotcha point, because I think it is the fundamental problem here, and there isn’t any way to break it…

The people we are trying to ‘nudge’ into acting as the fiduciary are going to be more than happy to rent-seek these instruments while they crush the consumer economy. This ‘gordian knot’ has to be broken, but it’ll need to be done outside the instruments – in the bankruptcy court.

He’s completely right. If we look to mortgage servicers as our best hope of modifying and restructuring the mortgages which are dragging down the US economy, we are doomed to disappointment. It was probably worth a try, because it’s the easiest and most obvious place to do this kind of thing. But the experiment has failed, and we should move on, and try something else instead.

4 comments so far | RSS Comments RSS

Servicers are leeches. They contribute nothing other than to manage the flow of paper. They not only are incapable of decisions but they stand in the way of sensible decision-making because they insulate the lenders from their customers. I can’t tell you how difficult it is to get through a servicer to speak to the actual holder of a mortgage – commerical, residential, whatever. They simply pass paper through and that creates massive communication gaps and adds significant timing costs.

Posted by jonathan | Report as abusive

I think it’s a fair argument when it comes to third party servicers – which are the norm in the UK for subprime mortgages. But in the US, there are huge volumes of loans serviced by subsidiaries or affiliates of the originators. In theory, they have access to all the underwriting expertise anyone could hope for. Now, in practice, there may be Chinese walls or simply cost considerations preventing this, on top of self interest. But Bank of America, say, can’t claim that it doesn’t know how to underwrite a loan unless it wants to lose whatever credibility it has left.

The “mystery” seems fairly simple to me, though the solution isn’t at all. An entire sector and accompanying infrastructure was built up around the idea that modifications would be an exceptionally rare event. This was reinforced by legally binding obligations designed to ensure that it remained that way. Then the foundations of that industry proved to be completely unsound, and modification became both widespread (compared to expectations and historical experience) and politically desirable. This is obviously going to cause strain, and given the lack of evidence that modifications do actually reduce losses on average, even a servicer with underwriting skills, contractual freedom and a fiduciary duty would probably be reluctant to do much modification.

Posted by Ginger Yellow | Report as abusive

Ginger Yellow writes:

“given the lack of evidence that modifications do actually reduce losses on average, even a servicer with underwriting skills, contractual freedom and a fiduciary duty would probably be reluctant to do much modification.”

Naturally there is no evidence that modification reduce losses when (real, meaningful) mods have not even been tried. The circularity of this argument would make it hilarious were it not so pernicious.

Posted by K-squared | Report as abusive

Check out http://www.obamamortgagerelief.org/ There needs to be a program for the elderly but not quite to retirement age for mortgage modification when the have lost their job during this particular recession. I made a decent wage because I put my time into a company and now have no job. I am looking at $10 – to $12 hr jobs after working all my life. You can’t make a mortgage payment on that kind of money. I will eventually lose my home.


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