Overwhelmed servicers, undeserving borrowers are only part of the story
If the application of the rule indicates that the mortgage will have a higher NPV to the owner with modification than without it, the servicer's obligation to the owner is met. But the NPV rule is a complex step in an already complex process. Furthermore, because the NPV is calculated by the servicer and uses some servicer-specific information, there is no way for borrowers to know in advance if they will qualify for a modification.
Rationalization of servicing: The development of mortgage servicing as a separate line of business was accompanied by process changes designed to enhance efficiency. In general, this involved automating everything that could be automated, and simplifying functions that could not be automated so that they could be performed by relatively unskilled (and lower-paid) employees.
But modifications require a higher level of skills, which few servicer employees had. Of equal importance, servicers did not have the systems they needed for handling and routing inbound calls and faxes; for tracking files; for compiling and recording documents received from borrowers; for allocating responsibilities among staff; and so on.
In effect, servicers were on the beach with no protection when the modification tsunami hit them.
Next week: some recent developments affecting modifications.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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