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Do Mortgage Servicers Even Understand Their Own Business?

posted by Adam Levitin

The House Financial Services Committee's Subcommittee on Housing and Community Opportunity had a hearing today on foreclosures, modifications, and servicing.  There was a deja vu aspect to the hearing.  Congress has been holding this same type of hearing for 4 years now, and nothing seems to change.  The servicers all say that they promise to make improvements, but that they can't help everyone and nothing really changes.  

There was one particularly enlightening moment from the hearing, however.  Rep. Brad Miller (D-NC) asked a panel with some 5 servicing executives on it why it makes sense for a servicer to be affiliated with either a loan originator, a loan securitizer, or a trustee.   He might have been speaking Klingon to these executives.  They stared blankly at him like he was asking them something that was far beyond their comprehension.  None of them had a real answer for him,.

This wasn't a case of the servicers not wanting to speak an uncomfortable truth.  There are perfectly legitimate reasons to bundle origination and servicing, for example--servicing is countercylical to origination (this is hardly news; banks' 10-Ks state as much).  Instead, this was a case of silence from ignorance.     

I was rather stunned to realize that a bunch of senior servicing executives clearly had no understanding of their own industry and that they had probably never given it any thought.  Maybe I'm just too used to navel-gazing academics, but if top servicing executives don't understand basic things about their own industry, why are we listening to them about anything?  

(Miller's question is just at the end of the second panel, at around 1:15 pm, which should be 3:15 or so into the total hearing.)  


Adam is too modest to state this but he was invited to both the Senate hearing on mortgage servicing and foreclosure issues, and then again on Thursday for the House of Representative meeting as well.

http://www.swarmthebanks.com salutes you, and for those interested, links to each sessions can be found here http://swarmthebanks.blogspot.com/2010/11/watch-cspan3-nov-18-2010-house-meeting.html

and here http://swarmthebanks.blogspot.com/2010/11/cspan3s-coverage-of-nov-16-2010-banking.html

It is good to get your perspective on this "enlightening moment". I believe that your assesment of their reaction is accurate.

As a business person, I am amused by the servicer executives use (or misuse) of the term "customer". IE, the consumer walks into the branch office as a "customer" seeking a mortgage loan. Minutes after that customer leaves the bank the loan is sold to one of the GSEs with the fiduciary responsibility going to the "investor", etc. etc.

The various hats worn in the GSE Business Model "players" contributes to the impression that they do not know what they are doing as the roles are conflicting and flawed.

Keep up the good work.

Very nice job on both hearings, Professor. Now on to this TILA stripping proposal by the Fed I guess...

Richard, don't tell me you're still in your battle....?

As an attorney representing consumer debtors, I'm routinely asked why the servicers and/or lenders act in a way that defies logic. My "stock" answer is that logic is pretty much MIA in servicers, and one should not attribute their behavior to a coherent strategy, but to ignorance. I think this is true from the top executives down to the beleaguered account officers

Its interesting because if you look at it the servicers customer is the trustee or mortgage note holder. The mortgagee (homeowner) is in the role of a money supplier no more and no less. Of course part of the issue is that the PSA's were priced assuming servicing was essentially an automated business, take the payments, divy them up and take you fee, with a small amount of foreclosures down in the cost noise.

Allowing mortgage servicers to decide who should or shouldn't be foreclosed on or who should get a loan modification is like giving a sixteen year-old male the keys to a Corvette.

Now we're seeing the Senate and House members do their best to look surprised.

I think this is typical of most businessmen. They may be very good at their jobs, but they never think about theoretical questions involving why their industry does things in way X rather than way Y. They are just very good at way X. It takes an entrepreneurial mind to think outside the box. Read schumpeter on this.

The post's conclusion is correct, though: asking a businessman about government policy towards his industry is like asking a giraffe how his heart manages to pump blood so high. The giraffe can do the pumping, but dont' expect a coherent explanation.

It’s important to maintain the required property insurance on your home. If you don’t, your servicer can buy insurance on your behalf. This type of policy is known as force placed insurance. It usually costs more than typical insurance even though it provides less coverage. The primary purpose of a force placed policy is to protect the mortgage owner.

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