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Thursday, October 07, 2010

Lawler: “Foreclosure-Gate”: Who Will, and Who Should “Pay”?

by Calculated Risk on 10/07/2010 05:09:00 PM

CR Note: This is from economist Tom Lawler, who joked today: Maybe large servicers should be forced to put up billions in "claims fund," like BP? (the latter "caused" slime, while the former are just "slimy"!)

The mortgage-foreclosure debacle, which started with a story about a GMAC “technicality” (and included a “GMAC denies foreclosure moratorium” story) but which quickly “ballooned” as more mortgage servicers were “implicated,” has now exploded into a full-blown “issue” of unknown proportions. One thing is pretty clear – many larger mortgage servicers simply “screwed up” by trying to deal with the surge in foreclosures by taking shortcuts to keep costs down, and this mistake has blown up in their faces.

But … is it just “their” faces?

It seems pretty clear that one of the outcomes of the recent “revelations” is that many foreclosures will be postponed; there will be more “refilings” of foreclosure petitions that will cost money; more borrowers facing foreclosures will hire lawyers, and servicers will have to reimburse more borrowers for legal fees; and some foreclosures could be delayed for quite a while. It is unclear at this point whether there will be any significant number of completed foreclosures that might be reversed, but if so that’s gonna cost! Net, there are going to be significant costs that someone is going to have to bear.

But who will bear those costs? Will it be mortgage servicers? Well, if they also own the mortgage, sure. But what about for loans they service for others (including private-label securities, Fannie, Freddie, FHA, VA, …)? Who’s a’ gonna’ pay?

From a “who should” perspective, any increase in losses associated with mistakes made by mortgage servicers, especially if those mistakes involved not following state foreclosure laws, which is a “violation” of most servicing contracts, the answer is crystal clear – the mortgage servicers. But how easy is it going to be to determine losses associated with mistakes by mortgage servicers? What are the “rules” on what a servicer can “recoup” in terms of costs associated with foreclosure when a servicer makes a mistake in private-label deals? With loans serviced for Fannie and Freddie, or FHA? What about delays in foreclosures clearly associated with servicer mistakes, which generally result in increased loss severities? Mortgage investors shouldn’t bear those costs, but how can they be sure they won’t?

What if there is a national “foreclosure moratorium” triggered by mortgage servicer mistakes that ultimately increase the severity of losses? Who “pays the price” in reality, as opposed to who “should?” Will there be lawsuits from mortgage investors whose loans and/or loans backing securities they own find that their incidence and/or severity of loss was adversely impacted by servicers mistakes, and will they be able to ensure that servicers who “screwed up” bear those losses instead of them?

I don’t know the “technically right” answers to any of the above questions, but it is crystal clear that the “right” answer should be that mortgage servicers who messed up should bear all of the costs associated with their mess up.

CR Note: This is from economist Tom Lawler