The idea that the interests of troubled homeowners and mortgage investors are aligned — and that they conflict with those of loan servicers — is gaining momentum.
The compensation structure of mortgage servicers has led to unnecessary foreclosures, Adam Levitin, an associate professor at Georgetown University Law Center, and Tara Twomey, of counsel at the National Consumer Law Center, wrote in a recent white paper.
"Servicers have no stake in the performance of mortgage loans, so they do not share investors' interest in maximizing the net present value of the loan," the authors wrote. "Instead, servicers' decision of whether to foreclose or modify a loan is based on their own cost and income structure, which is skewed toward foreclosure."
In the paper, published this month in the Yale Journal on Regulation, Levitin and Twomey said they doubt the industry's shortcomings are fixable without government intervention.
"Existing regulatory and monitoring structures are inadequate for ensuring alignment of servicer and investor interests, and the market is unlikely to self-correct because neither investors nor affected homeowners have the incentives or the bargaining power to fix the system," they wrote.
Investors in mortgage-backed securities are fairly powerless to monitor servicers, the paper said, because they lack sufficient data. Instead, they "rely on trustees to protect their interests, but MBS trustees have very limited contractual duties and little incentive to be more diligent," Levitin and Twomey said.
"Vigorous monitoring could jeopardize trustees' close business relationships with servicers and ultimately result in costs for the trustee if the servicer had to be replaced and the trustee had to step in as standby servicer," they wrote.
The government could ease the industry's ills by changing the compensation structure of servicers. One way to do that is to make a servicer's economic interest dependent on the return on a loan, they said.
Or, compensation could be structured so that a servicer has no economic interest in the particular loss-mitigation approach taken.
New federal guidelines will significantly curb the use of automated valuation models in the appraisal process, says a default management and valuation firm, but they could also lead to more use of "hybrid" models.
Earlier this month the five federal banking regulators that make up the Federal Financial Institutions Examination Council — the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corp., the National Credit Union Administration and the Office of Thrift Supervision — issued guidelines that forbid regulated institutions from relying solely on technological tools like AVMs for a real estate valuation.
The agencies define AVMs as "computer programs that estimate a property's market value based on market, economic, and demographic factors."
According to the guidelines, "the results of an AVM would need to address a property's actual physical condition, and therefore, could not be based on an unsupported assumption, such as a property is in 'average' condition."
Ryan Tomazin, president of Integrated Asset Services LLC in Denver, said that given these requirements, lenders may consider "hybrid" models that incorporate both a licensed appraiser and an AVM for certain applications.
AVMs have been a point of contention in the mortgage industry. Technology providers have promoted their use as a way to get more accurate valuations in less time.
But some appraisers say they are an inefficient substitute for trained, localized professionals.
Sunny in San Diego
The forecast for San Diego is good.
Over the next 12 months the city's home values are expected to have the biggest increase in the country, 3.5%, according to a real estate market forecast from Veros Real Estate Solutions released Wednesday.
The four other markets expected to record the biggest increases are the Kennewick/Richland/Pasco area in Washington State (3.4%); Pittsburgh, Pa. (2.7%); Fargo, N.D. (2.6%); and the Washington, D.C., metropolitan area (2.5%), Veros said.
About 40% of all major metro markets are expected to appreciate, though mildly, over the next year, said Veros, a Santa Ana, Calif., risk management and valuation services provider.
Over the next two years, about 60% of major metropolitan markets should manage to record some price appreciation, the company said.
Conversely, Reno, Nev.; Orlando, Fla.; Boise, Idaho; Daytona Beach, Fla.; and Port St. Lucie, Fla., are expected to have the biggest drops in home values through December 2011, with declines ranging from 6.3% to 7.2%.
Florida remains one of the weakest states by home values, Veros said, since it includes six of the 10 major U.S. markets that are expected to suffer the greatest depreciation.
Overall, the forecast is much more upbeat than last year's, Veros said, when some markets were expected to see price depreciation in the double-digit range.