The courage to serve borrowers

I was impressed with the turnout and the energy level at last week’s Mortgage Bankers Association‘s national mortgage loan servicing conference. I was told by vendors there that demonstration suites were full and booth traffic was better than average. Some even told me that servicers were actually buying this year instead of just looking. Desperation can have a positive effect on people, in some cases. I’ve come out in favor of mortgage servicers many times in this space. There’s something about firms that have the courage to stand in the face of an angry borrower long after the investor (who only cares about the bottom line) and the lender (who only cares about originating anything that will meet those investor guidelines) have left the building. Oh, I know that the mortgage servicing industry didn’t come into being to care about borrowers. They thought it was about process outsourcing, sending out bills, posting checks to accounts, managing escrow accounts. That’s not a business that requires a great deal of courage, in general. Borrowers didn’t really enter into the equation, unless they went into default. And then, of course, they weren’t really borrowers anymore; they were problems. But with a few internal staff members and an electronic connection to a good attorney, most of the “problems” the industry had to deal with over the past few decades were resolved with little negative impact on the servicing enterprise. When defaults rose above 5% of the servicer’s portfolio, that all changed. When they rose above 10%, all hell broke loose. In most businesses, a problem like this would have been viewed as an opportunity by a few plucky service providers. They would have innovated, changed things, made things better and if that had happened here we’d be in a much different place right now. That didn’t happen in our industry. Instead, some folks in government (mostly associated in some semi-secret way with large Wall Street firms that had a great deal to lose in a massive real estate industry downturn) stepped in to save the day, for all of us. Instead of a game of “fix this problem before we die” (the game most business executives play every day), it became a game of “wait around until we figure out what the government wants us to do and then start to slowly adapt our enterprises to do so in a way that changes things very slowly, if at all, and just keeps us within the statutory guidelines.” Instead of serving borrowers (or even investors), it became a compliance game. The only people who ever win those games are government bureaucrats and attorneys. Consequently, behind the smiles I saw on executives hustling from place to place at the recent show, I was pretty sure I caught a hint of desperation. This was confirmed when I sat in on a session entitled “Mortgage Deficiency Recovery and Deterrents to Strategic Default.” Now, I may have missed the mark on the takeaways from this session a bit, but I’m sure someone will write in and let me know if I did. From my seat, it sounded like: You want to recover a deficiency after an REO sale? Good luck! Best strategies for stopping strategic default: threaten them with legal action to recover any deficiency after the sale of the REO. Uh…wait! At least three questions came from the floor requesting that the speakers share some additional strategies for deterring strategic default. The closest the panel came was Amit Seru, assistant professor of Finance at the University of Chicago’s School of Business, who told the audience: “You’re basically asking the consumer not to exercise what is a free option for them. If you’re going to do that, you must be open to offering them concessions. More than you’re offering them now.” As HousingWire has already reported, JPMorgan Chase and GMAC are already aggressively writing down principal for mortgage borrowers in trouble, but the idea of offering principal reductions to borrowers who could pay but just don’t want to — a group of homeowners that Seru says could make up 40% of all mortgage holders currently in default. That’s taking the concept of serving borrowers to a whole new level. To do that when you have an investor with a knife in your back, that takes real courage. Will doing that actually help the industry, the taxpayer or all the new bureaucrats who are even now setting up their desks and powering up their new oversight devices? That’s a subject for another column, but I’ll give you a preview here: no. Rick Grant is veteran journalist covering mortgage technology and the financial industry. Follow him on Twitter: @NYRickGrant