Recidivism (IIPA: /???s?d?v?zm?/. From recidive + ism, from Latin recid?vus "recurring", from re- "back" + cad? "I fall") is the act of a person repeating an undesirable behavior after they have either experienced negative consequences of that behavior, or have been treated or trained to extinguish that behavior (from Wikipedia). HW readers that work on the servicing side of the business may know this term well. Others likely do not, and I think it's high time we all got acquainted with the term used to describe what happens when a loss mitigation strategy doesn't stick. Why? Because it will be happening alot over the next year, for one, and -- more pertinently to this post -- because reporters at the Associated Press decided to pen a story that displayed a stunning ignorance of how mortgage servicing works. Here's the opener:
A cancer diagnosis forced Lindsey Jennings to give up his government job. With less income, Jennings feared he might lose the home he and his wife Pearl built near Atlanta almost 20 years ago. So he asked for help. But Jennings, who needed to lower his monthly mortgage payment, was rejected for a loan modification. The snub didn't come from the mortgage lender, but from a less likely source -- the company that collects and processes the payments, the loan servicer.
Now, I'm sure a cancer diagnosis isn't a picnic and I certainly don't wish it on anyone. I'm also pretty sure, however, that the concept of a loan servicer -- ahem -- actually servicing a loan isn't the "less likely" approach the AP reporter here would have you believe.
All mortgage and student-loan payees know their servicer -- it's the company that collects their monthly payments. The companies are an integral part of the complex mortgage sector with a relatively simple role, like a corporate payroll department. But as the housing crash ravages the mortgage sector, millions of servicing contracts are changing hands as parent companies go bankrupt or pare back their lending activities. Amid the turmoil, even home owners who pay their mortgages on time face the real possibility of falling behind on insurance or property tax payments because of clerical errors at the servicer.
Servicing, for one, is not a relatively simple role -- particularly when we get into servicing loans for different trustees and under mounds of pooling and servicing agreements, which put a servicer in the position of having to negotiate across a very complex landscape. It's sort of like saying golf is a simple game -- all you do is hit a ball. Further, only an uninformed dolt of a reporter would think that loan servicing involves merely collecting and disbursing payments on performing loans, which is the insinuation here. The AP reporter here might also want to look at the mortgage industry outside of times of trouble -- servicing contracts change hands all the time, not just when a servicer or its parent goes bankrupt. There is an entire market for valuing and trading mortgage servicing rights, for God's sake. Even further, a LENDER paring back LENDING activities usually doesn't go hand in hand with a SERVICER paring back on SERVICING -- in fact, as defaults are surging, most servicing shops are ramping up staff levels dramatically. (But, of course, to realize that you'd first have to realize that servicing loans includes so-called "special" servicing -- or servicing loans that aren't performing.) But back to our troubled family:
And home owners like the Jenningses, who try in good faith to salvage a troubled mortgage, are finding many servicers — the only point of contact for payees — unwilling, and in most cases not even able, to renegotiate terms.
We have no idea here how the AP reporter was able to divine "good faith," beyond likely taking the good family's word for it, of course. We also don't know how the reporter was able to determine that servicers are "unwilling" to work with troubled borrowers -- I'd assume here that the AP reporter meant to write that servicers are (shockingly) unwilling to modify a loan that isn't going to prevent a foreclosure. And that leads us to the word of the day: recidivism. The story only begins to touch on the issue, after dispensing with the "bad, naughty servicer" rhetoric:
The other party, of course, is the loan owner — the investor pocketing interest on the mortgage who hired the servicer to collect payments. "The servicer is obligated to guide their actions by what's in the best interest of the owner," said Larry Platt, a lawyer with K&L Gates specializing in mortgage financing and consumer credit issues. In most cases, the investor wants to avoid foreclosure — especially when that means taking possesion of a property that is losing value. But if a workout merely forestalls the inevitable, that ultimately makes the foreclosure more costly. Whether a servicer offers a modification that can help the borrower is "a clinical, unemotional cost calculus -- there's not a social factor that is included in the analysis," Platt said. That's partly the reason loan servicing remains a very profitable corner of the mortgage market. But many of the largest servicers -- eight of the top 30 -- have been or are in the process of being bought in the past year. That means servicing for loans with a value of $913.6 billion -- or about 9 percent of the market -- will change hands, which can cause clerical problems.
Wow. I'll have to come up with some sort of prize for the person that can lucidly explain to me how a lack of loan modification activity during a time of housing duress leads to loan servicing being "very profitable." Bonus points if you can fathom how a servicer acquisition actually would lead an acquired servicer to decide to transfer away its servicing rights -- the very reason it was acquired -- to some unknown third party. But let's get back to the Jennings family:
Pearl Jennings said AMC wouldn't help because the servicer did not feel responsible for her family's plight. "They said it wasn't their fault," she said. The Jenningses are still in their Atlanta-area home -- for now. With NCRC's help, they were able to work out a two-year plan with AMC. The consumer group persuaded the servicer to drop demands for an upfront payment. The Jenningses now have a fixed interest rate for two years -- a workout similar to the type Chase offers. The couple is worried they'll fall behind again when their loan adjusts, unless they refinance before then.
So the Jennings family got some sort of loan workout accomplished -- but it's one that the family readily admits hasn't solved their problem. Which brings us back to that word again: recidivism, anyone? I don't have a problem with reporters bringing bad industry behavior to light; I have a problem when a journalist doesn't take the time to research a story before putting it out there. Keep in mind that I've worked as a reporter and understand how stories get written. This reeks of a journalist having heard of the Moody's study noting that loan mod activity remains low, deciding to interview a few troubled homeowners who inevitably blame the servicer for their plight and would clearly be saved if only a modification could be made, and then getting an idea to cast servicers as the bad guy because of a "connect the dot" moment to something that took place at American Home that the reporter had also heard about. Mix in absolutely no idea of how loan servicing works, and a dash of the inability to distinguish between a repayment plan and loan modification, and -- voila! -- you have this mess of a story. There are sources this reporter could have spoken with; at some point I might have said me. But I'm with Tanta at CR on this -- I'd probably just end up being misquoted and having my industry friends laugh their asses off at me.