| A lack of understanding by borrowers, servicers, attorneys, judges and regulators of the securitized model and the roles of the various participants led to confusion and difficulty applying the law of negotiable instruments , ineffective efforts to address the resulting issues and problems. Conflicts of interest among different tranches of investors; between servicers and clients; between trusts and originators. Since servicers do not own the loans, they do not receive any economic incentive from minimization of ultimate loss. They are paid per month per loan, so the more loans they have in their servicing portfolios, the more their compensation. They are also paid more per loan for loans in default than for performing loans, on the theory that loans in default entail more work. However, they then attempt to maximize profitability by "production line" servicing, entailing call centers, often offshore, long hold times, minimal interaction with borrowers, and only cursory interaction with the foreclosure law firms. Servicers are also usually entitled to retain the late fees and junk fees (i.e. property inspection, appraisal, payoff statement fees, etc.), and generally benefit from "force-placed" insurance premiums, which motivates them to keep loans in default. Robotic foreclosure processing, by law firms paid small flat fees per case. Insufficient market for foreclosed properties. As the numbers of defaulted and foreclosed loans increases, they drag down further all home prices, putting an increasing number of borrowers underwater, making it increasingly impossible for homeowners to sell homes they think they will be unable to afford, or must leave for some reason. Lessons Learned… What now? Numerous failures, breakdowns and conflicts of interest, combined with a lack of meaningful oversight, caused the current crisis. Government and regulatory agencies are searching for answers to how to prevent this from ever happening again. It is evident from what has been done to date that the debate is still ongoing. While it is instructive to see what is starting to emerge in the way of legislative/regulatory response, of course, none of these measures will address the existing problem, and are analogous to closing the barn after the horses have escaped… |
Securitization in Depth
Part 4 of 4