Protesters tried to send a message at this week’s Mortgage Bankers Association Annual Convention in Chicago, but my impression is the lenders still aren’t listening.
Those attending the convention seemed to be playing victim, sporting a “woe is us” attitude that belied the tension and frustration expressed by protesters. MBA staff warned attendees not to “engage or confront” protesters.
I attended sessions onthe regulatory consent orders covering 14 mortgage servicersand talked to panelists and attendees about the issues raised by the agencies. No one was willing to talk on the record about the consent orders, although most speakers mentioned them as part of the “challenging environment” they are operating in now.
Mortgage bankers’ comments, especially servicers’ comments, were tightly scripted. There were no off-the-cuff remarks. And there were some conspicuous absences – no representatives from the Office of the Comptroller of the Currency, Federal Reserve Board, or the former Office of Thrift Supervision were on hand to answer questions about progress on the action plans and technology remediation plans required by the consent orders. Similarly, there was no representative from a mortgage servicer on the panel entitled “Perspectives on the Future of Mortgage Servicing.”
Laurie Goodman, a senior managing director atAmherst Securities, represented investors in mortgage backed securities on that panel. She talked about theconflicts of interest that discourage servicers from acting in the best interests of their two customer bases – mortgage investors and homeowners.
“There has been very little discussion that addresses these conflicts for future origination and securitization,” Goodman told me. “I’m not very optimistic they will be addressed at all with regard to prior problems.”
She has a particular problem with the conflict at large servicers that have significant ownership interests in second liens, often with no ownership interest in the corresponding first mortgages.The servicer thus has a financial incentive to manage the first lien to the benefit of the second lien holder, which can go against the financial interest of the investor or borrower.
During her presentation Goodman proposed some solutions to protect the investor and the borrower, such as: giving first-lien investors veto power over second liens; banning seconds when the combined loan-to-value would exceed a designated level; or forbidding a company to service the first and second lien on the same home if it only owns the second.
ButGoodman and other proponents of national servicing standardsaren’t getting much traction in their efforts to eliminate conflicts. The banks are obstinately opposed to such change. The conflicts are built in to how the banks manage their profitability among their own businesses and against competitors or third parties.
External disclosure is muddled. It’s tough to get a distinct read for each line of business, especially the reserves for losses and litigation contingencies. Inside the banks, each line-of-business head is still trying to salvage profitability from his or her book.
If a borrower is paying on his second lien but not on the first lien, and there’s a short sale offer at the market value of the property, the second lien should get written off immediately. But if the servicer is also the second lien holder, it will probably reject the short sale offer to preserve second-lien asset value and cash flow, even though the sale would have been in the best interests of the borrower and first lien investor.
In a loan modification, only the mortgage debt is affected. Most programs, including the government’s Home Affordable Modification Program, look at the payments on a borrower’s first mortgage plus taxes and insurance, and compare that to the borrower’s income. Goodman has testified to Congress that there are situations in which only the first lien is modified, and the second lien is kept intact, weakening the impact on the borrower’s total debt burden. The result, according to Goodman, is a high redefault rate on modifications.
Why don’t the modification programs look at all of the borrower’s obligations? Maybe because the banks aren’t yet ready to acknowledge potentially large losses in credit card and student loan debt.
Conflicts of interest are allowed to continue because someone is making money and no one – especially not captured regulators – want to be the one to cut off the cash flow.
The bankers are tone deaf, still focused on stock prices and bonuses. In the meantime, borrowers and investors seem to be gaining comfort only from each other.
Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.