Believe it or not, mortgage servicing is a noble industry. Or, at least, it’s supposed to be. Even in managing borrower defaults and repossessing property, there is something noble to the work, underneath it all — and it comes from following the law, enforcing contracts, ensuring that our nation’s system of property rights maintains its integrity for all Americans.
In many ways, for me, being involved in the machinery of servicing loans when I first started my career was sort of like being a financial cop; and it seemed to serve the same useful societal functions, too. There was purpose to the work that gave what we did meaning.
Call it youthful idealism. That idealism is now dead for me, for many reasons, including getting older and gaining a more realistic perspective on the industry I've been a part of.
I've come to realize that foreclosures aren’t just a cleansing mechanism, but a test of our nation’s real property laws. And as of late, we’ve been failing that test on a scale previously unimaginable by nearly anyone.
Anger and unease
Last week, I wrote about how our nation’s sacred system of protecting real property rights was being used as a weapon against us
. How this came to pass, however, is an entirely different story.
Have you seen the anger and indignation
of the American people? Just watch Jon Stewart and The Daily Show
. Talk to a waitress while getting your next lunch. Speak with your hairstylist the next time you get a haircut. Most borrowers don’t expect to live in their homes for free: but they do expect the rule of law to be followed.
Most Americans, at their core, understand very well and in a very guttural sense that the rule of law exists to maintain order in our society.
And most who understand this can’t help but be offended as the news has continued to unfold
regarding document missteps in the foreclosure process at some very large banks. One or two mistakes here or there are one thing. But enough mistakes to cause a major bank to halt foreclosures nationally? And other banks to halt foreclosures in a wide range of states? That’s another thing entirely.
I know many I speak to in the mortgage industry are extremely uneasy at the news that’s now been coming out, and I’d like to think that’s because they know this time is different — even if what’s allegedly been done doesn’t change the fact that a borrower has defaulted on their loan, and doesn’t change the fact that the bank is entitled to take back its secured interest in real property. Even if the borrower hasn't legally been damaged by any of it.
The rot from within
For years, mortgage servicing as an industry has been rotting from within, slowly but surely. Much of the industry has long confused rampant cost-cutting with process improvement, and has always been about moving as fast as possible — believing that moving faster was always the best approach to limiting investor losses. In an earlier column, I discussed the persona of “Chainsaw Al” and his cut-costs-at-all-costs mentality
. That’s the mentality that has ruled this industry for decades now.
It’s this same mentality that has spawned massive, interconnected computer systems that manage attorneys and others based almost entirely on how quickly they can respond and perform certain “steps” — not that the computer systems themselves are the problem, of course. They merely reflect the reality of an industry that long ago threw due process out the rear window in the name of ‘process efficiency.’
I’ve seen first hand the sort of nonsense that passes as ‘efficiency’ in mortgage servicing, since I spent years working as part of the industry. I’ve seen bank clients demand that a law firm I once worked for proceed with an eviction prior to the expiration of a given notice period; and I’ve seen line staff at banks threaten attorneys with removing cases should the law firm fail to do their bidding, even if that bidding directly contravened existing laws. (And this was in 2004; I can't imagine what it's like now.) Beyond witnessing it myself, I’ve heard stories over the years from numerous attorneys that practice in the field about the nonsense their clients would demand of them.
The insults on top of injury here are as numerous as they are now part of the servicing industry’s very fabric. Attorneys that manage foreclosures often aren’t usually even referred to as legal counsel anymore, insofar as many banking personnel are concerned. The law firms have been flat-fee'd into “vendor” status, instead, no different than whatever vendor is delivering office supplies. And these attorneys are often also subjected to the indignation of having to go through vendor management departments just even to be able to begin working for a given bank.
Show me one other industry where this is how legal work gets done.
As a result, attorneys in mortgage servicing now compete on the degree to which they rank on the various computer systems used in the industry — almost all of which measure speed as the most critical (if not the only) variable. Too many “exceptions” holding up your foreclosure work? Not only is a law firm going to expend inordinate resources explaining the “exceptions” to a bank employee that may or may not understand the legal prudence behind a given delay, but that law firm’s grade will suffer. As will, in turn, their ability to earn future work.
The result is that the concept of risk — the core of any truly good lawyering, in any field of law — has largely become a lost art in an industry that should have been concerned most of all with managing it. The industry charged with protecting the sanctity of our nation’s property rights has instead allowed them to rot in the name of ‘process efficiency.’
Blame at the feet of the GSEs?
How did this happen? How did we find ourselves in a world where protecting property rights became secondary to worshiping at the altar of speed-at-all-costs?
Most attorneys that I speak to — at least, those with enough tenure to remember how the industry evolved — point to the GSEs as being largely responsible for creating this mess. (Which is supremely ironic, given that most consumers also blame the GSEs for their predicament in a more general sense.)
While it’s true that Fannie Mae
and Freddie Mac
both publish allowable foreclosure timelines, I’m not sure that’s really the root of the problem. Timelines are by their very nature central to the foreclosure process, since foreclosure law by its very nature largely establishes the shortest possible time frame for foreclosures to proceed. The GSEs’ allowable time guidelines merely reflect the state-level laws, and help ensure that a servicer doesn’t spend too much time trying to find a work-out at the expense of the investor. It’s supposed to be an art as much as a science.
But when banks decided to take the GSE guidelines as literal gospel, requiring that the law firms manage every
to the published timelines or else
, things began to change. Non-attorneys placed in management roles at banks and elsewhere were trained only on the importance of timelines, rather than the virtues of legal risk management. Many were thrown into servicing operations with marching orders to ‘manage process’ without really knowing what, exactly, they were supposed to be managing. So everything became about the timeline. And I mean everything
There’s an old adage that says when all you have is a hammer, everything starts to resemble a nail. It applies in spades here.
Layer on top of this a surge in foreclosures so large that it has quite literally overwhelmed attorneys and servicers alike. With a series of bank managers that have now been trained to only understand timelines, and a glut of foreclosures now stuck in the system, law firms — ahem, make that vendors
— found themselves having to answer to angry bank managers that wanted to know why so many of their files were stuck in “exceptions” and not hitting the timelines that the bank’s computer systems said they were supposed to.
But the result of these industry forces now seem apparent: in an effort to appease clients, and push speed at all costs, it appears some law firms cut corners in order to get from point A to point B as fast as they could. However they could do it. (I have to think this isn't every firm in the industry, as there are very good firms that take their legal work very seriously, too.)
None of that matters, however, in the end. As a reminder, from the Fourteenth Amendment to the U.S. Constitition (italics are mine):
“No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law
; nor deny to any person within its jurisdiction the equal protection of the laws.”
Some part of the default industry have clearly allowed their charge to protect this vital Constitutional right — to ensure that no person is deprived of property without due process of law — to literally rot on the proverbial vine. I don't claim to know which part.
That this rot is being exposed right now, however, just as our nation’s property rights are truly being tested by a real estate collapse of historic proportions, is a threat to those same rights. The only question left is how we choose to respond. To those lawyers and servicers in the industry who have worked so hard to protect the sanctity of the due process of law, often for so little thanks in return: you're needed now, more than ever before.
Paul Jackson is the publisher or HousingWire.com and HousingWire Magazine. Follow him on Twitter: @pjackson