PREDATORTY LENDING - continued
By Kurt O'Keefe, Attorney at Law on May 4, 2007 in General Bankruptcy Information
Out from Pleasantville, we have outsourcing and mortgage brokers replacing the good old days of the neighborhood banker.
And, servicers.
That bean counter pressure again. Mortgage companies came to believe that not only the origination, but the servicing, keeping track of the taxes and insurance, cashing the checks, doing the accounting, allocating the payments between principal and interest, could be done cheaper by outside entities.
This let them concentrate on their “core” business. Providing the funds. Frequently, once the initial mortgage is made, they flip it immediately, selling it to another company.
There is nothing wrong with this system, per se.
However, it insulates the mortgage company from the customer. The Pleasantville mortgage company had to hold on to the mortgage to make a profit.
They also had incentive to service the loan with the customer in mind, to get referral business.
The current system interposes the broker between the mortgagor and mortgagee. The broker walks away with a commission at the closing. He has no financial interest in whether that mortgage is paid off according to its terms, or even whether the first payment is made. His incentive is to place higher interest rate mortgages so the mortgage company makes more money.
The broker makes more money for putting his supposed client into a higher interest rate mortgage. He has an inherent conflict of interest in being paid by one side of the transaction while supposedly working for the other.
The mortgage company relies more on the brokers for marketing products. They are a commission sales force looking for places to put those excess Greenspan dollars.
The servicers are selected by the mortgagee side of the transaction, so have no incentive to actually serve the mortgagors. Their financial incentive is to create extra charges, which they keep, pursuant to their contracts with the mortgagor, or securitized trust, or whomever is collecting the principal and interest payments.
I am not a fan of regulation as a cure. My faith is in the people, not the government.
The cry of the creditor lobby pushing for bankruptcy reform was “personal responsibility.” This needs to be applied down the line, as the mortgage crisis unfolds.
The securitized trusts, and bonds they fund, and the people who set them up and sold them, cannot be allowed to distance themselves from the improvident, and even fraudulent, loans that made their business possible. They must be held personally responsible.
Another reform I advocate is abolition of the common law doctrine that you understood what you signed.
These deals are often closed quickly, with the closing agent claiming they must be out of the office in 45 or 60 minutes, not enough time for a lawyer to read the pile of papers now necessary to close a mortgage, let alone for someone who did not graduate high school, or whose second language is English.
In this digital age, it would be easy for the mortgagee to record the transaction, to be played to a jury, if necessary, to determine whether there was a meeting of minds, and whether a real contract was formed.
In the meantime, it seems the groundwork is being laid for the government to protect the bond market from the consequences of its bad decisions.
NO BAILOUT!
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