Commentary: On Unintended Consequences and the Foreclosure Machine

If you do nothing else today, read this post by Tanta over at Calculated Risk. All of it.

In it, you’ll see a very thorough debunking of the myth that says everything in mortgage servicing can be automated, as well as a debunking of the single largest myth emerging in today’s major media: that so-called predatory servicing is the result of willful intent on the part of the servicer.

The truth is that most of what consumer groups conveniently call predatory servicing — say, for example, a borrower freshly-discharged from Chapter 13 receiving a notice of default one month later on unpaid escrow adjustments — has very little to do with intent. Instead, it has everything to do with organizational stupidity and the belief that a technology can automate away any real need for those on the front lines to understand the process they’re a part of.

Tanta’s conclusion:

…frankly it is time that CEOs and consultants and analysts start taking a good hard look at the “price” of certain kinds of “efficiency.” I am not a Luddite, but I know from painful experience that a computer only does what it is programmed to do. They can handle most of the processes on a performing loan with almost no human intervention; they are efficient and they keep costs down for everyone. But I don’t care what fancy consultant told you they can do default servicing without expert human beings controlling the process. This is why you get 50 bps on subprime servicing. You get 25 bps on prime paper. You cannot claim it costs you more to deal with loans in BK–a common enough occurence with subprime loans–and then expect to process them with the same efficiency as prime paper. Not. Gonna. Happen.

HW readers likely already know from previous posts my disdain for the default industry’s nearly-religious reliance on managing to a timeline, perhaps the most visible sign of “efficiency” in default management to anyone who has ever worked in the field.

Managing solely to timeline has real costs, for both the industry as well as consumers.

Case in point: I have a neighbor who happens to be a retired 32-year-old multi-millionaire. But he’s leasing the house he lives in because he felt the property values in the area were too high; and the owner — an investor from California — just lost the house in foreclosure. My neighbor has wanted buy the house, and he can pay cash. He’s now working with a dimwit of an REO agent to try and complete a purchase after the sale and before he and his family get kicked onto the street.

And guess what? He still might end up on the street, either because the REO outsourcer managing the property can’t figure out how to process the transaction or because the REO agent has no idea what he’s doing.

Things might actually be easier for the REO department if he vacated the property with a cash-for-keys payment, the REO vendor then hired their property preservation folks to trash-out and clean the place, and then he and his family purchased the property and moved back in.

It’s all part of a perverse definition of “efficiency,” if you ask me.

It’s high time this changed — because what default servicers need right now are people who really, truly and deeply understand what it is that they’re doing, not someone who understands how to rock LenStar.