Average foreclosure timelines, or the length of time between the first missed payment on a loan to its liquidation, have continued to increase, particularly in judicial foreclosure states, where a court order is required to evict a borrower. This increase reflects a number of factors: borrowers are being given more opportunities to stay in their home through mortgage modifications, state attorneys general have imposed various foreclosure moratoriums to increase consumer protections, and courts are backlogged.
A mortgage servicer is a company that operates in a specialized niche in the securitization process. The loan originator approves the loan, which is sold to a securitizer, who packages the loan and sells it to investors. But once the loan is originated, none of those folks actually want to have any contact with the borrower. That task falls on the loan servicer, who takes your monthly payments and distributes them to where they need to go–taxes, insurance, and payments to the securitizers, who pass them through to investors. The servicer also deals with you when you become delinquent, and if appropriate, takes you to foreclusre. Servicing has been traditionally a very low-margin business, with the whole ballgame about keeping costs low.
Back in 2009, policy makers treated mortgage servicers like a piñata. They beat on servicers to provide foreclosure relief, loan modifications, and so forth. They told them to administer new programs that combined loan origination procedures with loan servicing procedures. They sought to punish servicers for noncompliance.
Well, guess what. Now servicers do not want anything to do with any loan that might become delinquent. The cost of dealing with such loans has skyrocketed, thanks to Washington’s piñata-bashing. So if you originate a loan to someone with a low credit score, the servicer charges a hefty premium. That in turn means that risky borrowers either have to pay that premium or get rationed out of the market altogether.
And so now policy makers are beating up on originators to be nicer to risky borrowers. It really is like something out of Atlas Shrugged.
I could see all of this coming back in 2010. When I testified on HAMP (I start about 90 minutes in), I was the only one who focused on the plight of mortgage servicers.
And they’re going after the CEOs, Ocwen CEO just forced out. Wonder if it’s connected.
Market forces are sure to continue to dictate direction here.
Hedging against high risk loans was considered unacceptable so mortgage servicers avoid high risk loans.
Avoiding high risk loans is considered unacceptable, so… ?
Point is, no business will willingly accept risk beyond a certain point and the only way to legislate that away is to legally force a group of people to provide a given service. It will be interesting to see what happens as mortgage servicers and insurance providers are forced to accept more and more risk.
Nothing an Elizabeth Warren Administration can’t cure.
Data point of one, of course, but I remember being amazed at the difference in servicing between the commercial real estate market (in which I work, doing construction type things using $25M-$100+M loans) and the residential services I’ve dealt with.
As the owner of a property I would be happy to have had foreclosed years ago (now just over 5 years into the process), it’s been amazing in a disturbing way to learn more about the process. Many of the “consumer protections” put in NJ have only muddied the waters and prolonged the reset,
particularly because it is a judicial foreclosure state. If you’re not trying to live “rent free” in a place all this prolonging is actually harmful…
One interesting other factor – my loan is a Fannie loan. Until recently they wouldn’t consider any kind of “deal” unless a condo association lien was paid off in full. They wouldn’t let make paying it off contingent on having a deal in place, like a typical business would do. And the incentive to make a large payment is rather low if you don’t have a deal for resolution in place – so, stalemate.
I just keep thinking that had this been a commercial type loan, we’d have cut a deal years ago and both parties would be better off.