Foreclosure Crisis and the Blindness of the Mortgage System
Before, only the borrower and the bank are the parties involved in a mortgage loan. The bank helps the borrower when the time comes that he cannot anymore pay the loan. When economic crisis strike and housing prices fell radically, it is the bank’s interest to look for possible ways to help the borrower so as to avoid foreclosure of the property. Usually, they adjust the terms or rework the interest to lower the monthly payments.
Nowadays, there are 3 parties involved - the borrower, the lender and the master servicer. The master servicer is paid to oversee the mortgages while the security holders are technically the ones we call the lenders. The lenders are not allowed legally to contact the homeowners thus giving them no power at all to rework the loans.
What happens when the borrower cannot pay anymore? Unlike the old days when he can easily go to the bank for help, he hides away from the master servicer because he knows that the servicer is eager to foreclose his property.
On the master servicer’s side, he has the power to rework the loan but chooses not to do it because of these reasons:
First, they benefit whether or not they rework the loans. A master servicer both render service to the security holders who either comes out as big losers or winners. Practically, if the servicer does nothing and let the property be foreclosed without much involvement, they would avoid future complaint by the security holders.
Second, tracking down and assessing the property values of the homeowner to see if foreclosing would be more or less beneficial than reworking are not just tedious but also more expensive. Lastly, some master servicer’s are affiliated with the companies that own the securities. Because of this, the decisions they make are somewhat biased to benefit them.
The current economic crisis is directly affecting many families, especially those who lose their homes to foreclosure. Mortgages therefore can be reworked if trustees, who can be either a community-based or government appointed, can act unbiased about the whole thing and work hard to make sure that the final foreclosure decision is not influenced by the securities tied to the mortgage.
