Bair Blames Servicing Flaws On Misaligned Incentives

‘Robo-signing’ points to misaligned incentives in mortgage servicing, Federal Deposit Insurance Corp. (FDIC) Chairwoman Sheila C. Bair told the Urban Land Institute Wednesday.

‘Because the pricing of mortgage securitization deals did not adequately provide for special servicing, servicers were not funded or adequately staffed to address problems,’ Bair said. ‘Not only that, servicers are often required to advance principal and interest on nonperforming loans to securitization trusts – but are quickly reimbursed for foreclosure costs. These incentives can have the effect of encouraging foreclosures, while discouraging modifications.’

Bair said a rule on securitizations that was recently adopted by the FDIC requires the issue of servicer incentives to be addressed. Further, the rule addresses what she called a recurring problem in servicing: the obligation for servicers to advance payments missed by borrowers.

‘Under most current servicing agreements, this obligation has the effect of accelerating foreclosures as servicers seek to recover these payments by selling the home,’ Bair said. The new FDIC rule, which is limited to banks, limits advances to three payments unless repayment to the servicer is not contingent on foreclosure.

SOURCE: Federal Deposit Insurance Corp.


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