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FHFA punishes states

posted by Alan White
My comments on the FHFA mortgage fee increase for NY, NJ, FL, IL and CT, here at Consumer Law & Policy.

Comments

(1) Just because people "suggest" something doesn't make it true.

(2) Your conclusion that "[i]f a foreclosure delay results in loss mitigation, then by definition, losses are reduced, not increased" is not necessarily true. If delays in a given State cost me money, I will be more willing to enter into an alternative arrangements simply to avoid the incremental losses caused by the delay itself. I may still be worse off than if I had been permitted to foreclose without those delays.

Your whole argument seems to depend on the premise that lenders are not acting rationally when it comes to alternative arrangements. This may be true, but you don't provide any evidence that this is the case.

Econ 101. All the costs of delays are going to get passed on to the consumer. PERIOD. Every single time someone comes up with some brilliant regulation designed to protect consumers all that happens is the consumers' costs go up.

You cannot redefine loss mitigation and then criticize him for not meeting that definition. It's clear from the post that the loss mitigation he is discussing is when delays result in a modification that costs investors less then the foreclosure would have cost had the delays not existed. Delays that cost money relative to quick foreclosure, but less than more delays, are not part of the definition of loss mitigation.

As to Econ 101: I think the flaw in Econ 101 is that it teaches students that everybody is rational -- they're not.

The idea here is that banks might be behaving irrationally by pushing for foreclosure even when taking it slow and working toward modification or another result would be beneficial to themselves and society.

If FHFA considered the benefits of delays, but determined that the harm outweighed the benefits, then that might be okay. But if FHFA decided Delay = Bad, so FHFA needs to charge more, then the decision is ill conceived.

Ken -- "It's clear from the post that the loss mitigation he is discussing is when delays result in a modification that costs investors less then the foreclosure would have cost had the delays not existed." It is not that clear to me.

That said, if Prof. White is only saying what you so succinctly say in your third paragraph above, fine; but nothing in the post sheds any light on whether this is true.

Thanks for the comments. I did mean loss mitigation in the literal sense. Foreclosure delays are in many instances allowing less costly foreclosure alternatives to go forward. The federal banking agencies found last year that mortgage servicers systematically engaged in unsound practices including foreclosing on loans with approved modifications in place and failing to communicate with borrowers effectively about loss mitigation. Treasury suspended HAMP payments to Chase and BoA last year because they were seriously underperforming their peers in making NPV positive modifications. etc. There is ample evidence of "irrational", i.e. wasteful, conduct by mortgage servicers, largely due to agency problems. As for the comment about costs being passed on to consumers, that begs the question whether foreclosure delays impose net costs or benefits due to increased loss mitigation.

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