Mortgage Servicing Fraud

Gretchen Morgenson, writing for the New York Times, has a story entitled Mortgage Servicing Horror Stories. (h/t St. John & Associates). The story details some of the allegations of fraud in the mortgage servicing industry; and points out the feeling of some that it’s probably a good thing that the federal government has not made more progress on a deal to settle complaints with the industry.

That’s probably not a terrible thing. After all, no deal is better than a bad deal. State and federal authorities jumped into these talks without conducting serious investigations into foreclosure shenanigans. Why strike a deal — one that would, say, shield banks from new litigation over toxic loans, flawed securitizations and the mess at MERS, the registry that has made such a jumble of land records — without knowing what happened?

The article goes on to talk about allegations by former employees in some loan servicing companies that they were forging signatures on legal documents, falsely notarizing signatures (sometimes the ones they had previously forged), and being asked to manage attorney inquiries on files at the rate of 30 per hour.

This kind of abuse, in my mind, arises from divorcing the profit on the loan from its performance; primarily through bundling loans into securities. In the old fashioned sort of mortgage business, as a lender, you’d make your money through the interest paid by the borrower over time – this interest was your profit and your hedge against default by other borrowers. It prompts you to be more conservative with your loans. The incentives are not the same when you have a loan originator who takes its cut at closing, then walks away, a lender who bundles a bunch of loans and sells it to another buyer who, in turn, sells it to a bunch of investors who don’t look too closely at it because AIG has sprinkled fairy dust on it and turned a bunch of crap mortgages into AAA rated investment vehicles.

With the machine more complex and the money at risk so far removed from the initial mortgage, to grease the machine, you get abuses like the ones described in this New York Times article. I’m certainly no fan of letting debtors walk away from their obligations — particularly one where they have (or should have) fair knowledge of what deal they signed up for — but, if you have to commit fraud to “prove” that the person owes you money, you’re doing it wrong.