Mortgage servicers take on two roles, and the homeowner pays

In her column, Fair Game, in the Sunday New York Times, Gretchen Morgenson lays bare a possible reason that homeowners are not getting approved for mortgage modifications—the folks who make those decisions also own junior liens that may be prejudiced by those decisions.

Morgenson introduces you to Brad Miller, a Democratic representative from North Carolina with a background in consumer law.  “This past March, Mr. Miller introduced a bill that would eliminate one of the most pernicious conflicts of interest in banking today: the dueling roles played by the big mortgage servicers.”

“When borrowers are defaulting in droves, as they are now, loan servicing becomes much more complex and laborious. Servicers must chase delinquent borrowers for payments and otherwise manage these uneasy relationships, possibly into foreclosure.

“So where does the conflict of interest lie? Often, the same bank that services a primary mortgage owned by another institution also owns a second mortgage or home equity line of credit on the same property. When that borrower has trouble meeting both payments, the servicer has an interest in making sure that amounts owed on the second lien, which it owns, continue to be paid even if the first loan, which it has no interest in, slides into delinquency. About two-thirds of primary mortgages are serviced by banks who do not own them but hold the accompanying seconds.”

Miller has some good ideas but knows it will be an uphill fight.  We’ll keep you posted.

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