Wednesday, March 7, 2012

Servicer misconduct and housing crisis

Editor’s Note: It seems that we can’t go three months without hearing about yet another species of misconduct by mortgage servicers that shifts losses onto the lienholders they are supposed to protect. We’ve read reports about force-placed insurance, inflated appraisal and maintenance fees, robosigning and other foreclosure irregularities, interference with loan mods and short sales due to second lien holdings, and, most recently, reports of the ongoing collection of fees by servicers for loans that have already been liquidated. Why do we seem to be facing a near-constant stream of news stories about mortgage servicers behaving badly? It turns out that this problem is nothing new, and traces back to a fundamental issue that we discuss at length in Way Too Big to Fail - misalignment of incentives. In this revealing guest post, former insider Steve Ruterman draws on his experiences to illustrate the roots of this fundamental problem. – IM

These experiences with servicers have led me to believe that the current mortgage market meltdown, documentation deficiencies, robosigning and related foreclosure problems all stem from the same cause: the complete collapse of any regime of internal controls at mortgage originators, sellers and servicers resulting from a misalignment of incentives. Once the loan underwriter sells all of its originations, and expects to do so in the future, it concludes that it can do without the internal control provided by things like underwriting guidelines. In fact, it finds that it can dispense with all of its former internal controls, which only cost it money.

Once all internal controls are dispensed with, management and employees pursue the incentives given them by the owners, and you get the fiasco in the mortgage markets we are living with today.

read the full article here The Subprime Shakeout

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