The well-intentioned but doomed mortgage settlement
No wonder the proposed settlement with mortgage servicers is proving too hard to write about: it’s really hard to read. There might be a lot of Elizabeth Warren in its substance, but there’s none of her in its style.
For those who can wade through it, however, it really is a code of best practices for servicers and it’s sorely needed. There’s much to love here, but it all basically comes down to the golden rule: treat your borrowers with honesty and humanity and common sense and you’ll be fine. Do servicers really need to be told that if they make more money from a loan mod than from a foreclosure, they should do the loan mod? Or that “sworn statements shall not contain information that is false”? Evidently, yes, they do.
I do have my doubts about whether all of this is feasible in the real world. Consider II.C.4:
Servicer shall create a Single Electronic Record for each account, the contents of which shall be accessible throughout the servicer, including to the Single Point of Contact, all mitigation staff, all foreclosure staff, and all bankruptcy staff.
There’s even a bit later on (see page 19), where the servicer is asked to “consider”, whatever that means, partnering with Kinko’s or Wal-Mart to allow borrowers to scan and email documents for free.
All of this is reasonable, on one level — but at the same time it’s also setting the servicers up to fail, since few if any of them have the ability to implement all of these changes. Some of the settlement is easy: if you’re currently doing force-placed insurance, stop doing it. But the parts of it which involve massive IT overhauls will certainly break and go over budget and not play well with various legacy systems and generally be incredibly difficult to get working.
As a result, the big question here isn’t whether the settlement is reasonable — yes, it’s entirely reasonable. Instead, we should ask what the penalties for non-compliance are, since just about every servicer will be non-compliant for the foreseeable future.
Those penalties come at the end of the document and they’re extremely vague: there’s talk of “monetary penalties and additional remedial actions”, but there’s also talk of “failure to meet timelines”, which implies that much of this stuff could be pushed off far into the future and of “a special master or referee to resolve violations”, with no indication of how such a person might be chosen.
I’m reminded of the tale of the scorpion and the frog. In this case, the servicers are the scorpion and the frog is a legal settlement which can get them some kind of protection in law. The two will get, uncomfortably, halfway across the river and then the servicers, unable to go against their nature, will doom them both.
Ultimately I still feel the same way I did in November, when I said that only a radical restructuring of the entire securitization architecture—and especially the broken relationships between investors and trustees and between trustees and servicers—has any chance of actually working. The settlement’s heart is in the right place. But I have no faith in the ability of the servicers to implement it successfully.