Place Not Your Hopes in Mortgage Servicers

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.

Comments

[Uncommon_Cents:]

Forget loan modifications, there's too many reasons they won't work. Debtors who are prone to re-default, moral hazard, servicers looking only to line their pockets, etc.

Let's just institute a speedy foreclosure porcess, and get these homes in the hands of landlords. The idea that every American should own his or her home can come back around when personal responsibility once again takes hold as a core principle. Until then, renter nation.

Aug 20 10:22 PM

[Living4Divi...:]

The program has been a failure.

The residential mortgage totals in the US is appx 10T. Most of these mortgages are FHA Conforming. The ultimate holder of a huge chunk of these mortgages is the US Govt thru Fannie and Freddie at $3T-$5T. Therefore the holder of the bulk of prime mortgages is the US Govt.

They are free to forgive principal/renegotiate and do whatever they want. The Fed balance sheet has exploded by 7-9T to bailout the banks. (2.5T in actual money, with the rest as future guarantees) The automakers have been bailed out. Banks have been bailed out. AIG (insurer) has been bailed out.

Where is the homeowner's bailout?

Aug 21 10:58 AM

[nym:]

"Homeowners" who can't make their payments would have to be bailed out over and over. Those homes must get into the hands of those who can make their payments. As the foreclosures continue, prices will continue to fall, and more buyers will become eligible.

We need more media coverage of cases where demolition has become appropriate.

Aug 21 11:16 AM

[dmj625:]

If I am understanding it correctly, I judge ruled this week that Countrywide could not modify mortgages that were packaged into Mortgage-Backed Securities (MBS) because of the contractual obligations of the MBS bonds. See here:

seekingalpha.com/artic...

and here:

www.nytimes.com/2009/0...

dmj625

Aug 21 02:00 PM

[joegold:]

There is no skull-duggery or evil doing here, I highly resent that statement. I am an educated individual but the demands of people to be modified has exploded beyond all reason. Also we can underwrite, but trying to underwrite a poorly underwritten loan after the fact is madness, ( so in some sense I guess I agree with Felix)

Aug 21 02:16 PM