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It's My Fault You Can't Get a Mortgage

posted by Adam Levitin

Can’t get a mortgage?  Turns out it’s my fault.  As in mine, personally.  Yup.  That’s the claim in a Housing Wire written by right-wing banking analyst R. Christopher Whalen.  Here is Whalen’s argument in a nutshell:  

Servicing regulations make banks really reluctant to deal with anyone but very good credit borrowers because it takes so long to foreclose on anyone anymore.  Servicing regulations are so onerous because of an article Tara Twomey and I wrote on mortgage servicing that said that servicers were doing bad things. The problem (in Whalen's view) is that Tara and I had it totally wrong.

I'm flattered that Whalen credits the article with having inspired all of the subsequent foreclosure regulation, but it would be nice if Whalen would accurately characterize the article. (Has he even read it?)  It would also be nice if Whalen would acknowledge that servicers have done an awful lot of bad things over the past several years, which might just possibily have something to do with the current regulatory enviornment for servicing. But such an admission that might get in the way of Whalen grinding his political axe (two legs good, regulation ba-a-a-d).

Whalen claims that the basic thrust of our paper “is that mortgage lenders and services want to push home owners into foreclosure, gain control over the homes and thereby profit.”  

Nope.  Wrong.  First, Tara and I make no claims about lenders.  Our paper is about servicers.  Their incentives are distinct from lenders, and that's part of the problem, we argue. Second, our argument is not about servicers wanting to push homeowners into foreclosure, nor is it about servicers wanting to gain control over the homes (via foreclosure sale purchases).  Some of that does happen, but that’s not our argument. Our article is about how servicers are compensated, and our argument is that servicers' compensation structures mean that when a homeowner defaults, then the servicer is not incentivized to modify the loan. The servicer isn’t looking to trigger a default if the loan is performing in most cases.  And Tara and I barely mentioned the REO aftersale market in the article. So while I’m thrilled to be proclaimed the intellectual godfather of servicing regulation, I wish it would be on a more accurate basis.  (It would also be nice if Whalen could get basic details right, like how to spell either my name or Tara’s name correctly or the correct publication date of our article which is 2011, not 2010, although it was mainly written in 2009-10).  

Putting aside Whalen's mischaracterization of our argument, what about his claim that servicers are not interested in foreclosing?  He writes:  

“If you actually know the world of distressed servicing, there are three golden rules when it comes to a non-performing loan.  First is keep the owner in the house.  Second is protect the asset and make sure that maintenance, taxes, and insurance are current.  And third is to preserve the cash flow of the loan via loan modification, if possible.”  

Whalen is playing games here.  First, he fails to acknowledge that the servicing market has changed a LOT over the past few years, primarily in response to regulation and litigation.  In 2008-2010, when Tara and I were writing, there were around 1 million completed foreclosure sales occuring per year in a market with perhaps 50 million mortgages.  There was also precious little “distressed servicing”, which is mainly special servicing. Instead, there were large master servicing shops that had no ability or expertise in handling huge volumes of distressed loans. The idea that these shops were just stumbling into 1 million plus foreclosures per year despite these "golden rules" is preposterous.  Whalen also fails to mention all of the illegal, fraudulent activitiy done by servicers that resulted in stuff like the National Mortgage Servicing Settlement, as milquetoast as the settlement was.  To the extent that foreclosures have dropped, it isn't just out of the goodness of servicers' hearts. 

Second, Whalen conflates servicers and lenders. His golden rules are golden rules for a portfolio lender. But that’s not the same as for a servicer. Special servicing contracts in the past few years have started to play with compensation structures (as did HAMP), but Whalen’s got no evidence that servicers’ incentives have fundamentally changed. And indeed, there’s still plenty of bad stuff going on in the servicing market.  

Finally, Whalen moans about all of the regulations on servicing now despite all of the “high touch” servicers that are now handling many of the distressed loans. For Whalen, this is all because of a a liberal regulatory cabal looking to extort innocent, hard-working financial institutions.

This legalized extortion is done in the name of “protecting consumers,” but the true objective of the exercise is clearly political.

Politics always has an end game about favoring on interest group or another or aggrandizing someone's power. Whalen never really explains what the political end game is of this "legalized extortion." What exactly do the CFPB or state regulators gain by gratuitiously beating up on servicers?  Neither gains any new power.  Nor is it clear what constituency is benefitted from gratuitious overregulation. Whalen doesn't have a story that holds up unless you have an a priori view that the regulators are all evil boogiemen. (Indeed, Whalen makes sure to name drop as many of the financial services industry's bugbears, as he can just to stir up the pot.) 

Of course, there is a story that would fit here:  the CFPB and state regulators are doing their legal duty and that is a duty that redounds to the benefit of consumers who will now be treated more fairly by servicers. But Whalen can't acknowledge that story.  Indeed, Whalen won't acknowledge that there were ever problems in the servicing industry.  If he did, he would have to face the the fact that bad acts have consequences. If the mortgage industry in 2014 is facing the regulatory consequences of the bad stuff it did during the previous decade, should anyone be surprised? Regulation and enforcement doesn’t happen in real time.  Perhaps today’s servicing players are better than those of five years ago.  If so, that’s wonderful (although it might be because of regulation and litigation, and not in spite of it), but having seen the abuses of the past, the servicing industry can't be left unregulated.  


Well said! Of course, I only spent 27 years in the financial services industry and most of that in the area of loan documentation and servicing so no doubt Whalen has far more experience than I. Since my employers were all portfolio lenders they did indeed work to modify loans when possible however the bastardization of the market and surge of non-regulated servicers has spelled doom for millions of American Consumers who have all but literally paid with the shirts off their backs. Shame on Whalen for his meritless claims but even more so on those who give him the least bit of credit for his baseless, "opinion for hire."

Yes, it is your fault that millions of Americans can't get a loan Mr. Levitan.

It is interesting that Mr. Levitan has to resort to character assassination and personal attacks in his supposed rebuttal. In fact, the only thing that has changed in the world of mortgage servicing is the cost thanks to Dodd-Frank and the CFPB. I have worked in the financial services industry for three decades and most recently for one of the best special servicers in the business, so excused me for sticking to the facts. While it is true the there is a lot of fraud and irrational behavior in the markets, particularly from the big banks, the fact remains that keeping the family in the home, protecting the asset and the cash flow, are the optimal strategies. Pro-consumer activists like Mr. Levitan want desperately to believe that the irrational behaviors are the rule, but in fact most of the special servicers such as OCN, NSM and WAC all try to keep the debtor in the house when possible. That is the best way to make money. There are just SO MANY cases--no single measure can apply, so everyone is committing fraud from time to time and everyone is frustrated by the frauds of others. Sadly, I don't think Mr. Levitan understands finance well enough to appreciate the point in my article, but unlike him and the other intolerant fascists who populate the liberal spectrum of American politics, I at least respect his right to have an opinion. Obviously Levitan does not.

Chris Whalen

PS; Further reading.


Posted by: rc whalen |

Mr. Whalen, I have personally documented or reviewed over 25,000 sets of loan documents, posted thousands and thousands of loan payments, serviced loans for 3rd parties and handled all related accounting activities. I'll put my 27 years in the trenches of loan operations against your 30 years of blowing hot air as one of the countless "Senior Managers" whose idiocy I always had to work hard to overcome. Your ongoing implicit suggestion that servicers don't make money on defaulted loans is evidence you know absolutely nothing about the nuts and bolts of the business. PORTFOLIO lenders try to modify if possible. SERVICERS, by definition, are NOT LENDERS. Having "serviced" loans including spending time working for financial services companies that tried to turn servicing into a relatively high profit division let me assure you, with your non-existent experience actually servicing loans, drafting documents, performing due diligence, that DEFAULTS = MONEY. In fact, default servicing generates MUCH more income than the servicing of loans that are current. I don't care WHO you worked for because one thing you make abundantly clear is that you have NEVER actually worked with individual loans on a day to day basis.

BTW Mr. Whalen - why don't you do ALL of the readers a favor and tell us about the federally insured institutions for which YOU worked. I only ask since your commentary, indeed your entire skewed view of the financial services industry, more than suggests you've NEVER worked anyplace where FDIC insurance was either obtained or required.

BigBub1, I have never made a loan, so I will defer to you on the details. But I work with a lot of loan officers, lawyers and receivers, so my sources are not to be dismissed. Also, I think we can agree that the BIG DUMB BANKS are irrational, as your post suggests. The point of my post, which nobody seems to have actually read, is about NONBANKS. A nonbank lender/servicer has real clients and must pay real money for capital and funding. Thus they tend to behave rationally. The TBTF banks lose money, have a zero cost of funds and are otherwise ungovernable, thus they do really stupid things. The pre-crisis non-banks were in the same bucket. You are right that default servicing generates more money, but it is much more costly. Also, default servicers tend to fund NPLs via investors, not equity capital, so they are very much under focus in terms of ROI. And keeping the family in the house, preserving the asset and maintaining cash flow is the best ROI, correct? I worked for the largest buyer of NPLs in the US, so please don't dismiss my experience out of hand. Or are you one of these arrogant people who has all of the answers?

Finally, I worked at the Fed of New York in Sup & Reg, then a number of investment banks. No commercial banks thank God. Owned a bank rating agency for 10 years. The folks at FDIC know me well.


BTW, sorry to misspell Dr. Levitin's name but can't edit the comment. ;(

I appreciate your response Mr. Whalen. I would point out however that the low cost of funds to FDIC insured banks is relatively recent and, indeed, is a large part of the reason they've behaved so stupidly. I will add that the failure to adequately regulate the insured institutions is one of the largest factors in the nightmare that we have endured the past several years. In my days I worked for, inter alia, Aames Financial which at one time had a very large servicing portfolio which ultimately was viewed as quite a cash cow and was therefore an early casualty in the pre-implosion days. In my travels I spent a fair amount of time working with the FRB of San Francisco, particularly Mr. David Vandre. Unfortunately I have also litigated quite heavily against both Ocwen and Nationstar and found them to be the exact opposite of what you suggest. While you may be asserting they have effectively "changed" it is hard for me to believe this has happened out of any realization it is more prudent to modify. I personally represented a number of homeowners who could have paid modified mortgage payments only to have them utterly and totally refuse to work with myself or my client. Thus, while my experience is necessarily anecdotal it is also consistent with that reported to me by literally dozens and dozens of consumer attorneys. Frankly I do wish it were otherwise and would hope what you assert is now or soon to be true however that is simply not what I and my colleagues have experienced. Since most of them work for non-profits their reports are not some function of income (or the lack thereof). Perhaps your disagreements with Dr. Levitin are traceable to the same sort of source of information.


BTW - you're quite right about the annoying inability to edit. Most software engines used for comments allow edits but, to be fair, few things are more mercurial than those based on software.

Some food for thought. As I've been rehashing the discussions among Messrs. Andelman, Cox, Levitin and Whalen one story that keeps coming to mind is that of the blind men trying to describe an elephant. That's not to say any of them are blind however they appear to have some very different sources of information that are influencing their respective viewpoints. Since I know both Mr. Cox and Mr. Andelman personally I find their disagreement to be quite disconcerting however, given the same split between Messrs. Levitin and Whalen it now seems to me that the "differences" are far more the result of wholly different sources of information than any fundamental disagreement (or at least I so hope). I know, for example, that Martin has ready access to the "higher ups" at a number of the financial services companies under discussion. I also know that Tom has spent, literally, years litigating with many of these same companies. It occurs to me that the difference may simply be the result of who's doing the talking on behalf of the servicers. In the case of Mr. Cox (and myself) it is always either low level employees or, more commonly, attorneys employed to defend the servicer in litigation. In that setting it is beyond clear to me that both Mr. Cox and Prof. Levitin are absolutely right. When I contrast that with the very high level employees with whom Martin (and I presume Mr. Whalen) speaks and from whom Martin is able to obtain excellent results I suspect I have uncovered the ultimate source of the "disagreement." Martin's success in obtaining loan modifications is unparalleled in my experience whereas Tom's success has taken the route I and many, many consumer attorneys have traveled to wit, an adversarial one. With this in mind I have a suggestion for both Martin and Mr. Whalen - try working with a homeowner seeking a modification without revealing your involvement. Listen in on the phone calls they make and the level of service homeowners receive. I'd also suggest that you make your contacts available to Prof. Levitin and Tom Cox and that you first let them know you're sharing the information. My strong suspicion is that the responses everyone will get from the previously "unused" sources will prove extraordinarily educational for all parties. After all, few things can do more to resolve differences than the truth itself.

I’m going to address both Chris Whalen articles. Let’s start first with the ZeroHedge article. In the concluding paragraph it has the following:
"To really appreciate “too big to fail,” you must first and foremost understand that it is a political concept that springs from a sense of liberal privilege and entitlement. Conservatives generally oppose TBTF and advocate market based outcomes for banks, large and small."

I would argue with vigorously that TBTF and outcroppings such as TARP came from insiders and powerplayers then from a liberal vs. conservative view. While Mr. Whalen was a proponent of allowing bond holders to take haircuts - I remember watching him on CNBC discussing Washington Mutual, it was the bastion of those who held power on both sides that brought TARP and codified TBTF. Many on the far left and far right wanted to see the process play out but it was those that stood the most to lose - those in the higher echelons of both parties that won the day. So let's drop the argument that TBTF was somehow a liberal policy. Mr. Whalen mentions Geither in the article saving Citigroup, but it was Henry Paulson, the Treasury secretary under a Republican president was its main architect to codify where we stand today. There is plenty of blame to go around in both parties, but it’s all concentrated in the power bases.

Now to the HousingWire article's thesis – I tried to break it down into the following elements:
Non-bank institutions in the mortgage industry (servicers) will have issues with earnings because:
* 1. “The cause of the subprime crisis was securities fraud – not the violation of consumer rights” and regulators are not focusing on this point.

* 2. Because regulators are focusing on consumers they do not see servicers first approach is to keep customers in their home and because of this they are getting mis-characterized. This creates more regulation, oversight, and overall ill will towards servicers.

* 3. If servicers do everything right, it still may not be possible to satisfy the doctrinaire liberals that populate the CFPB and state regulatory agencies

The result is which:
* 4. Banks will not transfer loans to "high touch" servicers

* 5. Banks will not lend to lower scoring (700 and below) FICO scores because the regulatory environment is such that they cannot get an exit through a foreclosure.

* 6. Secondary market prices for non-performing loans in states like MA, CT, NY and NJ are typically among the lowest in the nation because of the regulatory regimes in these states.

* 7. Profits for non-servicers will be continued to be challenged due to regulatory complexity

Let’s take these one-at-a-time:

1. Agree. Securities fraud + greed + poor underwriting brought about the subprime crisis not the violation of consumer rights. However, unless we are talking about the Fed, OCC, or NCUA; the CFPB and state regulators role and responsibilities align either completely or more in line with constituents not to broader principles such as Safety and Soundness. In that sense, a NY regulator has less regard for what occurred so much as who it hurt and how they can stop it from occurring again.

2. Agree. However, I think the point Adam made was that when the paper was written and released 2008 – 2010 that particular approach was not being followed by all servicers at that time. Unfortunately, there may be some great servicers out there but due to the reckless and illegal actions of others the entire industry gets hit. As you may remember, it didn’t matter in 2008 if you had a “fortress” balance sheet in banking; every bank got whacked in the stock market and thus the same thing happened here. The actions of bad actors colored the entire industry from a regulatory standpoint and thus brought this regulation.

3. Again I will skip the political comment and jump to my point. It is not the role of the regulator to ensure that servicers can stay in business. It’s the role of the regulator to ensure that all actors are playing fairly. The industry had bad actors and thus everyone received new regulatory rules. If servicers cannot satisfy those requirements then perhaps they need to charge more of their bank customers or change their business model.

4. I’ll flip the question on this. Why as a regulator would I want an entity that is not the bank servicing these loans? The ZeroHedge article talked about “liberal” despising “small town business ethic”. I would say if indeed regulators are trying to keep banks servicing loans it would have more in line with small town or community lending then the outsourced, dis-intermediated version prevalent in large banks today. While a servicer may have the ability to help work out the loan more easily. I can make the argument that it’s better that banks own the entire process; in much the same way that community banks do, a process that Mr. Whalen has discussed favorably.

5. This argument holds only about 2 cups out of a 5 gallon bucket of water. The reason banks are not lending down below 720 has to do with an entire recalibration of risk models across the industry, higher down payments, the entire secondary market drying up, asset price instability, and NOT whether or not you can foreclose on someone in 180 vs. 390 days. Banks got hit hard by both losses and increased regulatory capital requirements neither of which was impacted greatly by the speed of a foreclosure so I dismiss this argument almost completely.

6. Agreed. I cannot find anything to dispute this particular fact. However, unless I am concerned from a standpoint of safety and soundness as a regulator why should I care whether a bank can get top dollar from a foreclosed home when they should not have made the loan in the first place? You can make the argument that lower secondary market home prices are not good for the rest of the neighborhood and community and that would be a fair argument. My rebuttal would be that slower speeds to sell may be helping ensure that market supply is restricted and thus buoys price.

7. Again, it’s not the role of any regulator to support an ancillary, bank support business (loan servicing) business model. It’s the role of the CPFB and state regulators to focus on the health of the consumer while it’s the role of the Fed, OCC, and NUCA to focus on the health of the financial institutions. No entity’s charter says anything about ensuring the servicer business is viable.

We can say unequivocally that securities fraud was indeed a part of the sub-prime crisis, but consumers were impacted by bad actors within the mortgage servicing industry during that time as well. Due to this, those regulators that are focused on consumer interests more intently chose to exercise their regulatory powers and thus ALL servicers face new regulation. Whether or not the servicing industry can survive those changes can only be addressed by servicers and their clients.

It never ceases to amaze me that we have allowed the Fair Isaac Company, founded by those erstwhile snake oil salesmen - Bill Fair and Earl Issac, to become THE standard for ascertaining creditworthiness. If ever a company needed regulating it's FICO with its "secret sauce" credit scoring OUIJA board. If only more bankers had thrown FICO sales staff out the door as I used to on a regular basis in the 80s we wouldn't be saddled with the absurd notion that a private company can tell us who's a good mortgage risk. They are as much a part of the economic downturn as Neg Am loans and deregulation. I will never forget their sales people trying to convince me that their 3 digit "score" was more meaningful than the 7+ year credit history I could see on a credit report. More than interesting that in 1995 both Fannie and Freddie "recommended" the use of FICO scores and the company's stock surged thereafter. Must be a money trail there if anyone actually wants to figure out who we should blame.

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