Failure to Fix Servicing and Fallacy of “Save Banks at All Costs” Policy

The mortgage servicing abuses continue:

by Yves Smith


Repeated Foreclosures on an On-Time Borrower Demonstrates Failure to Fix Servicing and Fallacy of “Save Banks at All Costs” Policy

It was obvious at the time of the various mortgage “settlements” that the Administration’s policy was to make only cosmetic fixes in a badly broken servicing model. And despite evidence of continuing mortgage servicing abuses, from significant errors in records to failure to implement required reforms, like ending dual tracking, the public is being subjected to Big Lies from Timothy Geithner (in his new book) and Larry Summers (in a Financial Times opinion piece) that the only approach possible to the crisis was the one that was taken, of coddling the banks and leaving the greater public bearing the costs in numerous ways, from rising inequality, a lousy job market and weak growth, to a mortgage market that is destined to remain on government life support.

The last point is not as well understood as it needs to be. The failure to make servicers clean up servicing means that there is virtually no private mortgage securitization market. Prior to the crisis, it was 40% to 60% of total mortgage originations.

Mortgages made now are overwhelmingly either government guaranteed or retained on bank balance sheets. Except for a very few deals (jumbos with very large down payments), investors, who were badly burned by servicing abuses, are not willing to be fooled again.

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