Mortgage Servicer Proposal

There is no shortage of proposals by thoughtful people on how to get out of this financial/economic mess the world finds itself in. I do hope that we see the Treasury moving forward on its original plan to buy up a good chunk of the mortgage backed securities. I want to see the Treasury make some money in this market!

John Geanakoplos and Susan Koniak have an interesting oped in the New York Times today, addressing the role of the master servicer in mortgage pools.

I have been saying for some time that the incentives of the servicing organizations are key to how homeowners in default are treated. And that the terms of the mortgage trust that bought the mortgages, appointed the servicer, and sold the mortgage backed securities are the determining factors. The NYT piece argues, albeit with a lack of specificity, that the servicers are loath to renegotiate with homeowners in arrears as it will benefit some MBS owners and hurt others. I wish they had given some examples of how that would happen. If there had been only one class/tranche of MBS created, then the incentives of all would be aligned: renegotiation might make sense, say by lowering the interest rate in return for a higher likelihood of principal repayment. But with differing classes of security holders, conflicts will exist. The higher tranches won’t want to lower interest rates for a higher likelihood of repayment of principal, as they are first in line for both interest and principal. Also, there were triggering events in a lot of these pools that will benefit the higher tranches if they occur – so avoiding those events might not be in the higher tranches’ interests.

I am not sure I agree with the authors’ proposal for government-appointed trustees. No, wait, I am SURE I don’t like that proposal. What I could see working would be some legislation to change the terms of the mortgage pool contracts, or at least to give the servicers some indemnification from lawsuits.