Far From Wonderful: The Role Of Mortgage Servicers, Part 1

The real estate crisis of recent years has created all sorts of ripples across the national economy.

In many parts of the country, the real estate market has finally begun to improve. But the sheer number of foreclosures - both residential and commercial - has greatly affected the market. Indeed, it is likely to do so for some time to come.

In Michigan and across the country, the role of mortgage-servicing companies remains central to resolution of real estate issues of many types. In this two-part post, we will discuss the role of mortgage servicers and the increased scrutiny they have been under from government regulators.

Mortgage servicers take care of billing and payment-collection for lenders. In the traditional model of mortgage lending, banks or credit unions did not only make home loans; they serviced those loans themselves.

It's a Wonderful Life," a classic movie from 1946 that was widely shown for decades on television around the holidays, is based on the premise of small local banks taking care of their own financing.

The mortgage crisis of a few years ago would have been inconceivable in the localized world of this famous Jimmy Steward film. The reality, however, is that long before the 2008 crisis hit, the financing model for both residential and commercial development had become radically changed.

Instead of local banks, financing increasingly went through national lenders. As mortgages came to be treated like commodities, bought and sold in bulk, the American mortgage market became closely linked to the international economy.

In 2008, this led to nearly disastrous results as credit markets froze up amid the chaos caused by large numbers of subprime mortgage defaults and their destabilizing effects on the economy.

One of the destabilizing effects was widespread foreclosures. In part two of this post, we will discuss the flawed response by many lenders and loan servicers to the foreclosure crisis. We will also take note of current concerns among government regulators about mortgage servicers.

Source: Wall Street Journal, "Moody's Sees Pros and Cons in Mortgage Servicer Scrutiny," Andrew R. Johnson, Feb. 26, 2014

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