“Trust Deficit” in Mortgage Industry

According to David Stevens, the commissioner of the Federal Housing Administration, there is a “trust deficit” in the mortgage industry. Gee, you think?!

Let’s review the facts. First, there was the subprime/predatory lending scandal. Lenders/brokers used aggressive marketing tactics to sell mortgages to low-income borrowers. Their financial situations were disguised using No-Income/No-Asset (”Liar Loans”) Mortgages are Stated-Income/Stated-Asset loans, and they were steered into adjustable rate mortgages (ARMs), balloon loans, interest-only mortgages, and other risky types of loans, with no down-payment requirements and unnaturally low monthly payments.

Lenders didn’t worry about the creditworthiness (or lack thereof) of borrowers, because they knew the loans could ultimately be repackaged and sold to investors.Meanwhile, appraisers reported receiving pressure from lenders to confirm lofty valuations for properties with pending buyers, thereby eliminating a potential brake on the inflating of the housing bubble. Of course, when housing prices collapsed and the economy slid into recession, many borrowers found themselves unable to make payment.

This marked the beginning of lenders’ second breach of borrower trust. With many borrowers already delinquent on their loans and millions of others underwater, lenders refused to ease their burden. They sabotaged the federal government’s loan modification program (which has been in a continuous state of decline over the last year) by offering in-house loan modifications. Horror stories began to emerge, involving hours spent on the phone with loan servicers and lost paperwork.

Only after lawyers or other third-party advocates for borrowers intervene were loan modifications granted. Even then, the majority of the modifications were never made permanent. Only in few cases did lenders agree to slash the principal, opting instead to make nominal (and usually temporary) cuts to borrowers’ interest rates. In addition, many of those that wanted to refinance their loans were rejected due to insufficient home equity or credit scores that no longer met lending criteria.

The encore for this performance was a massive effort to foreclose on delinquent mortgages. This stage was also marked by allegations of lender incompetence and even fraud. A full-blown scandal erupted when it emerged that loan servicers were “robo-signing” documents and executing foreclosures in bulk, without bothering to scrutinizing individual cases. Documents that had been lost were simply re-created, as lenders scrambled to prove that they indeed owned the properties that they were foreclosing upon.

From the series of events described above – representing only the tip of the iceberg – it would appear that the mortgage industry is completely indifferent to its customers. On the one hand, this is understandable, as mortgages have long since been transformed into a commodity product, marketed on the basis of price and interest rates and dominated by a handful of large corporations. Moreover, the whole process has become anonymous, since the lender that originated your loan is probably different than the organization servicing it, which in turn, is different from the company that currently owns it and may be trying to foreclose on it.

From a human perspective, however, this is deplorable. And even worse, there is no evidence that lenders see this as anything more serious than a Public Relations problem. If this system is to change, it will take more than just government regulation. It will require feedback from borrowers, and boycotting of lenders that fail to reform.