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

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.