Profiting from foreclosure?

NY Times:

As record numbers of homeowners default on their mortgages, questionable practices among lenders are coming to light in bankruptcy courts, leading some legal specialists to contend that companies instigating foreclosures may be taking advantage of imperiled borrowers.

Because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage servicers, who collect loan payments, are profiting from foreclosures.

Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question.

“Regulators need to look beyond their current, myopic focus on loan origination and consider how servicers’ calculation and collection practices leave families vulnerable to foreclosure,” said Katherine M. Porter, associate professor of law at the University of Iowa.

In an analysis of foreclosures in Chapter 13 bankruptcy, the program intended to help troubled borrowers save their homes, Ms. Porter found that questionable fees had been added to almost half of the loans she examined, and many of the charges were identified only vaguely. Most of the fees were less than $200 each, but collectively they could raise millions of dollars for loan servicers at a time when the other side of the business, mortgage origination, has faltered.

In one example, Ms. Porter found that a lender had filed a claim stating that the borrower owed more than $1 million. But after the loan history was scrutinized, the balance turned out to be $60,000. And a judge in Louisiana is considering an award for sanctions against Wells Fargo in a case in which the bank assessed improper fees and charges that added more than $24,000 to a borrower’s loan.

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The problems seems to be uncoupling the servicing from the lending. A lender rarely ever makes money off of a foreclosed loan. In fact he is usually the biggest loser. When a lender winds up owning a bunch of real estate his assets are written down to the current market which means he is worth less than he was when the loan was an asset. Therefore, he should have no interest in making loans to people who are going to default. By decoupling the origination and the servicing, he has lost control of the protections he would normally have. The originators and the servicers should have some fiduciary responsibility to not lend the money unwisely. Lenders should be looking to them to recover losses from bad loans if they acted inappropriately.

Opinion Journal makes the point that Congress also has some responsibility for these unwise loans.

Throughout the 1980s and '90s, Congress prodded, even strong-armed, banks into making more mortgage loans to low-income and minority families. Washington enacted anti-discrimination and community lending laws with penalties against lenders for failing to issue riskier mortgages to homebuyers living in poor neighborhoods or with low down payments and subpar credit ratings. And so it was that the modern subprime mortgage market was born.

Now, and for a variety of reasons, some two million of those loans have gone sour, and the same politicians are searching for villains. Leading the charge is House Financial Services Chairman Barney Frank, who is accusing banks of "predatory lending"--by which he means making loans to the very group of borrowers that Mr. Frank and his colleagues urged banks to serve.

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Franks is now swinging back in the other direction and would penalize lenders for making loans to risky borrowers. This is non sense on stilts. The market place is already penalizing lenders for making the bad loans to the point that they are having to write off billions in losses. There is a conceit in the NY Times story and in the Frank position that "predatory" lenders somehow profited from making bad loans. While there may be some people in the process who profited, the lenders certainly are not profiting from making non performing loans and foreclosing on property that is worth less than the loan amount. The punishment of the market place should be enough.

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