What do bankruptcy mortgage servicing and ebola have in common?

A long long time ago in this same galaxy, I wrote what may be Credit Slips' most popular post: What do bankruptcy mortgage servicing and phone sex in common? Today, I bring you a new comparison: bankruptcy mortgage servicing and ebola. At the outset, let me be very clear that ebola is a tragic health care crisis. I do not mean to minimize those deaths and illnesses with a comparison to mortgage servicing--although to be sure, poor mortgage servicing has tragic financial consequences.

Here is the basic analogy. Ebola has a high kill rate. Similarly, screwed up mortgage servicing can be the death knell for homeownership. Ebola is currently epidemic in West Africa, just as the foreclosure crisis made mortgage servicing a top-line policy problem. And despite the publicity, both ebola and foreclosure--as epidemiological matters--are rare. This is one of the reasons that investment and research on both problems has lagged behind more common occurrences such as, respectively, malaria and mobile banking. We have known about the risks of ebola for years, yet the global community is still struggling to find fixes. Again, in parallel, it has been twelve years since Hank Hildebrand wrote "The Sad State of Mortgage Service Providers," and six years after Tara Twomey's and my research on mortgage servicing errors in bankruptcy hit the front pages of newspapers. While improved, bankruptcy mortgage servicing is still a threat to a healthy bankruptcy system.

My favorite recent case in point:  In re Williams, in which a couple filed a second bankruptcy solely to save their home--the exact reason for their first bankruptcy. (At least you can only get ebola once!) The Williams alleged that Ocwen had not properly serviced their mortgage during their first bankruptcy. Ocwen pursued a foreclosure after the debtors had completed their chapter 13 plan and refused to accept debtors' payments. Its proof of claim alleged 28 missed payments and an arrearage of $43,388.82.  U.S. Bankruptcy Judge Brendan Shannon (Bankr. Del.) ultimately found the debtors owed only $16,164.24 (12 payments) and ordered Ocwen to pay the costs and fees of the debtors' second bankruptcy filing and litigation with Ocwen. In describing the situation, Judge Shannon, said that the bankruptcy servicing created an "ensuing mess [that] is "dispiritingly predictable." The system was bogged down with a second case, the debtors threatened and stressed by a second foreclosure, and Ocwen spent its resources on a second round of litigation (instead of helping homeowners get loan modifications.)

The Williams' situation could have been prevented. Just like rubber gloves for medical professionals and sanitation for health care facilities could dramatically reduce ebola transmissions, the problems created by bankruptcy mortgage servicing could be addressed if servicers would invest in preventative technology that properly applied mortgage payments during chapter 13. Uniform national rules, including a model plan, also would help reduce servicer errors; it is akin to having standardized training for treating outbreaks. Investors who monitor servicing outcomes and reward compliant and effective servicing in bankruptcy would also help. As I point out in this article in the Wall Street Journal, a foreclosure on the Williams' homes would not only have hurt them, but also the investors who owned their mortgage because of worse loss severities. A wrongful foreclosure has contamination effects that reverberate, hurting small investors in mortgage-backed securities and communities dealing with vacant homes. We have seen a similar worldwide reaction to the ebola outbreak, with fears being aired about government readiness for a public health catastrophe. A wrongful foreclosure also shakes our belief in the rule of law, and in government's role in protecting our rights.

I've seen many improvements in mortgage servicing, particularly in the last two years. And we have made great strides in certain public initiatives in that time too. But today, bankruptcy mortgage servicing is still as troubling (and ebola is as terrifying) as when they both emerged as public policy problems in the late 1990s. The commonality of both problems is insufficient investment in prevention.