Worrying About Mortgage Servicers’ Fate

Mortgage servicing is hot. Goldman Sachs is looking at buying the C-Bass servicing

unit, and there are many other deals going through as well, such as Wilbur Ross

paying $435 million for the servicing business of American Home, and Carrington

Capital Management buying the servicing business of New Century Financial for

$184 million.

I have to say this worries me. Joe

Giannone explains that loan servicing is an attractive business to be in

during a housing bust:

Litton makes changes to mortgages that can help struggling borrowers pay

their debt, a business that would do well as delinquency rates rise.

Ideally, however, loan servicing isn’t a standalone business – certainly

not one which should be levered up by Wall Street and then bought with the intention

of selling it later at a large profit. If you simply have a lender and a borrower,

then often the servicing arm of the lender can be incredibly valuable to both

sides: a good loan servicer will find a way to keep the borrower in their house,

and maximize the value of the loan for the lender, which otherwise might have

to write it off or go through a painful, expensive, and protracted foreclosure


What happens, however, when the servicer is a for-profit entity not connected

with the lender? Suddenly, there’s a conflict between saving money for the lender,

on the one hand, and making money for itself, on the other. A simple mortgage

renegotiation is not very lucrative, for a servicer; a fully-blown foreclosure,

on the other hand, provides much more in the way of opportunities to profit.

More generally, any savings from the negotiation now have to be split three

ways (between the lender, the borrower, and the servicer) rather than just two

ways (between the lender and the borrower).

In other words, if servicers get bought up by financial investors, that’s bad

news for borrowers. What’s needed now is more common sense in the mortgage world,

and less profit motive. But the banks and hedge funds who are buying up the

servicers have nothing but a profit motive – and I can’t say that I’ve

seen a great deal of common sense from them of late.

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