Friday, July 31, 2009

Mortage servicers’ perverse incentives

Posted on Reuters by Felix Salmon:

Last month, I wondered whether banks’ seeming inability to effectively modify mortgages was a function of “greed on the part of the banks — that while they pay lip service to the idea of modifying mortgages, they actually make more money by being recalcitrant and obstructive and unhelpful.”

It turns out that the answer is yes, it is — and the NYT’s Peter Goodman has chapter and verse:

Many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.

Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue — fees for insurance, appraisals, title searches and legal services.

In a sidebar, Goodman examines the case of a mortgage servicer, Countrywide, which refused to let Alfred Crawford sell his house for $620,000 in settlement of mortgage debts exceeding $800,000. The latest offer on the house is now just $465,000, and still no short-sale is being allowed.

In the meantime, Countrywide is paying itself lots of fees — fees which will ultimately come out of the pockets of the investors who bought the mortgage-backed bonds which Crawford’s loan was bundled into. The minute that Countrywide allows the house to be sold, that fee income dries up.

Countrywide’s official response is hilarious:

David Sunlin, Bank of America’s senior vice president in foreclosures and real estate management, acknowledged that Mr. Crawford’s applications for short sales had suffered from “a number of communication issues,” but he said that the bank had acted in good faith.

“We have to protect our investors’ interests,” he said. “We have reputational risks involved.”

A bank spokesman, Dan Frahm, said Bank of America owned a second mortgage on the property with a balance of $85,000 and stood to “take the full losses on it,” so it is at risk of loss along with the investors who own the first mortgage.

Countrywide clearly isn’t protecting its investors here: in fact, it’s gouging them for fees. And the second lien is a sideshow: that’s going to zero whether the house sells for $620,000, for $465,000, or for even less.

It’s not going to be easy to solve this problem. And I particularly feel for Mr Crawford, who moved out of his house two years ago, but who, it turns out, could simply have lived there rent-free for the past two years instead, while the process dragged on. Why should the servicers be the only people benefitting from all this inefficiency?

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