“The rules by which servicers are reimbursed for expenses may provide a perverse incentive to foreclose rather than modify”

Recent paper published by the Federal Reserve Bank of Boston, quoted by The New York Times, July 30, 2009.

I’ve written about the distinction between law and ethics before.  But shrinking English muffins and the “grocery shrink ray” pale in comparison to the hidden incentives lenders have to push struggling mortgage holders into foreclosure. 

According to the legal experts, the Obama administration’s loan modification program incentives are outweighed by the revenue stream banks derive from collecting mortgage late fees.  The longer the lender waits before foreclosing, the more late fees can be collected. 

Once the property is foreclosed on, the same mortgage company often participates in the transfer and resale process.  According to one insider, one mortgage company established its own title company so that it could keep more of the revenues from foreclosures – charging for a title search when the property was foreclosed on and titled transferred to the mortgagor, and again when it transferred to a new buyer, along with title insurance.  Ca-ching!

I’m sure there was plenty of contract language somewhere that allowed these lenders to justify raking in all of those fees.  But you can’t help question the ethics and social conscience underlying those business decisions when the collateral damage they create (undermining the loan modification program, exacerbating the borrower’s financial distress, and depressing housing values) far exceeds their own narrow interests.

©2009 Corporate M.O., LLC.