Why mortgage servicing won’t get fixed
Back in November, Treasury’s Michael Barr set a clock ticking, with respect to mortgage-servicing reform.
“Institutions are resistant to change and have difficulty implementing,” said Barr, but “you’ll see flow improvement over the course of the next year.”
Could I hold Treasury to that? Sort of: “You should hold us to whether things get better or worse. If a year from now nothing has changed, that would be a reasonable criticism.”
I was skeptical — and in March, when reform guidelines were leaked, I retained my belief that mortgage servicers simply aren’t capable of reforming themselves.
Now, we’re only a couple of months away from Barr’s self-imposed deadline, and the chances of anything substantive having happened by year-end have never looked more remote. Instead, we’re just getting more talk from the official sector that things aren’t good enough. Here’s Raj Date, who’s running the Consumer Financial Protection Bureau, addressing the American Banker Regulatory Symposium:
Date said servicing is marked by two features – the structure of servicing fees, and the consumer-servicer relationship – that make it especially prone to consumer harm.
Mortgage-servicing rights, for example, are often bought and sold among servicers.
“So a servicer can, in a sense, ‘fire’ a borrower; but a borrower can’t fire a servicer,” he said. “That reduces the incentive for servicers to treat borrowers properly.”
He said the servicing fee structure has also encouraged servicers to spend less than they might need to handle a spike in foreclosures.
Essentially, we’re still in the same place that we were a year ago: the government is wholly cognizant of the problems, but is having enormous difficulty implementing solutions.
Date’s point here is very important: the whole structure of the mortgage-servicing industry mitigates against reform. Servicers are like shareholders: if they don’t like something in their portfolio, they can just sell it. That’s a lot easier than trying to change things themselves. And the secondary market in mortgage-servicing rights also means, inevitably, that mortgages will, in general, end up being serviced by the institutions best capable of extracting the maximum amount of money from any given borrower. Their responsibilities are first and foremost to their own shareholders; any responsibilities to borrowers are far down the list.
Mortgage insurance started out as something very sensible: if there were doubts about a borrower’s creditworthiness, that borrower was required to buy mortgage insurance. But then the banks decided they wanted in on that income stream, and things started getting very skeevy. Essentially, they asked for 40% of the insurance premiums to be returned to them as kickbacks, disguised as “reinsurance” — a product carefully designed so that the banks would never have to pay any claims. It was $6 billion of free money for the banks, and of course it all ended in tears when the mortgage insurers went bust.
According to Horwitz, the Department of Justice has been sitting on a massive dossier explaining all this activity in great detail, and has the ability to bring a big case against the banks in question. But no case has been brought, maybe because Justice doesn’t have the financial expertise to have confidence in their ability to prosecute a case.
Will the CFPB step up and enforce mortgage-reinsurance cases against the banks? Maybe — although I’m not holding my breath. But conceptually speaking, I’m still very skeptical about the idea that the mortgage-servicing industry can be fixed with a combination of regulations and enforcement. Even if you get tough regulation, the enforcement never seems to happen. That’s why we won’t have seen any serious change to mortgage servicing by the time Barr’s deadline has been reached. Or thereafter, either, for that matter.