The Frontiers of Mortgage Servicing, Part I
For the last 18 months, I've served as the California Monitor for the National Mortgage Settlement at the request of California Attorney General Kamala D. Harris. Disclaimer: This post does not necessarily represent the views of the CA AG or CA DOJ. It's just me, Professor Porter writing. And what I wanted to write about is the first in a series of thoughts that I have about where mortgage servicing policy needs to go in the future.
My first topic where think mortgage servicing needs more conversation and reform is the role of the FHFA and Fannie/Freddie in having fostered/enabled/encouraged some of the unsavory practices in mortgage servicing through their servicing guidelines. Dustin Zachs' piece, Robo-Litigation, offers several detailed examples of how Fannie and Freddie were entangled with the law firms engaged in robo-signing and other illegal practices. He gives a detailed account of David Stern, named Fannie Mae's lawyer of the year in 1998 and 1999. But in 2002, the Florida Bar disciplined him for misleading affidavits in those prior years. Fannie and Freddie did not stop referring cases to him until October 2010. And then there was the litigation--brought by Stern against F/F to collect fees for his practices--not brought by F/F to recoup fees paid for work that Stern's firm may have done in violation of the rules of professional responsibility, state law, or the servicing guidelines.
I think there is good reason to believe that the development of the "retained attorney network" in 1997 and the metrics used by Fannie and Freddie to measure servicing performance--at minimum--created poor incentives for following state foreclosure and consumer protection law. Okay, that was then. Where are we now? The process is better, for sure. Fannie Mae and Freddie Mac have an initiative to "align incentives" --that the website says will accomplish things "when fully implemented"--when?? (Chime in if you know.) But note that Freddie's new servicer scorecard gives exactly 4% of total weight of determined "servicing excellence" to the performance of workouts--whether loss mitigation solutions are working to prevent foreclosure. By contrast "liquidation efficiency" is 15%. Hhhmm . . .
Despite all the debate about Fannie and Freddie's role as loan guarnators and the debate over leadership at FHFA, there has been relatively little written on the servicing guidelines and the role of Fannie/Freddie as the largest "consumer" in the servicing market, with the most ability to reshape the business of servicing.