How Sheila Bair Would Fix the Foreclosure Crisis

by Mercator Advisory Group 0

The efforts to reduce foreclosures by keeping borrowers in their homes have been a failure because of incentives and conflicts of interest of the stakeholders. This includes servicers, bond holders, and second lien holders. At a summit today, FDIC Shelia Blair outlined some of the problems that should be addressed:

One problem with the system is the way servicers are paid, Bair said. “Paying servicers a low fixed-fee structure based on volume may be sufficient to ensure that payments are processed and accounts are settled during good times, when most mortgages are performing,” she said. “But it does not provide sufficient incentives to effectively manage large volumes of problem loans during a period of market distress.”

Solutions identified by her include:

First, she would like servicers to provide a single point of contact to assist troubled borrowers throughout the loss-mitigation and foreclosure process.

Second, servicers must commit to adequate staffing and training for effective loss mitigation.

Third, to expedite the loan modification process, loan-modification offers should be “greatly simplified” in exchange for waivers of claims, Bair said

In addition, the second-lien problem needs to be addressed, Bair said. “Throughout the mortgage crisis, the competing interests of first and second lien holders have been a source of conflict for servicers,” she said. “Early in the crisis, many servicers were unwilling to modify first mortgages unless second-liens were written down or extinguished. More recently, investors in first mortgages have complained that they were accepting losses without meaningful participation of second lien holders,” even where both loans were being serviced by the same company

For additional information, read the news article in Bank Technology News: