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I just returned from my first Midwinter Housing Finance Conference in Park City, Utah. Though the conference, organized by Brian Hershkowitz, has been an annual favorite of snow-loving housing professionals for decades, it tends to receive far less publicity than the American Securitization Forum (ASF), which takes place around the same time every year. That will hopefully begin to change, as I found this year’s conference to be engaging and, ultimately, newsworthy, thanks to a keynote speech by Fed Reserve Board Gov. Sarah Raskin that placed the servicing industry directly in the cross hairs.
In fact, while a wide range of topics was discussed during the conference’s three days of presentations and panels, servicing deficiencies dominated the conversation. Most conference participants agreed that the default servicing model was broken, and continued to be major drag on the recovery of the housing market. There was also a consensus that servicer conflicts of interest and misaligned incentives played a large role in these deficiencies–stymieing loan modification programs and contributing to the latent foreclosure (aka “fraudclosure”) crisis. However, it seemed that each participant had a different idea about what it would take to fix this important industry.
This diversity of opinion can be attributed in part to the complexity of the issues, but also to the diversity of the conference participants themselves–something that I found to be one of the strengths of this conference. The professionals in attendance were not limited to one segment of the housing industry, but included investors, regulators, bankers, academics, financiers, consultants and members of the press. Indeed, the number of different opinions about the problems with the servicing industry seemed to outnumber even the participants.
I presented on a panel that served as a microcosm of this blend of viewpoints. The session was called “Investor Putbacks, MERS & the Capital Markets,” and included a presentation on MERS by Christopher Peterson, a law professor at the University of Utah; a presentation on Trends in Investor RMBS Litigation by me, a blogger and litigation consultant; and a presentation on what investors are looking for these days by Neil Powers, a fixed income investor at Vectors Research Mgmt. Though the topics and viewpoints differed, they combined nicely in my opinion to paint a multilayer picture of the current MBS landscape. The lively Q&A that followed only enriched that perspective.
Of course, another topic that arose frequently during conference sessions was the future of the GSEs, especially with the White House’s release on Friday of a white paper suggesting the gradual winding down of Freddie and Fannie. Cal Professor Dwight M. Jaffee gave an reassuring presentation on why he believes a privatized US mortgage market will work–a refreshing viewpoint for those of us who believe in the future of private mortgage finance. This was followed, appropriately enough, by a presentation by Fannie Mae’s Doug Duncan called “Economics and Mortgage Market Analysis,” in which he noted that while housing fundamentals were improving, homeownership rates will likely trend downward due to weakness in demand.
But the most surprising moment in the conference came with Fed Gov. Raskin’s speech, the full text of which is available here. Striking a decidedly more direct tone than her Fed counterparts, Raskin noted that “widespread weaknesses exist in the servicing industry… [T]hese deficiencies pose significant risk to mortgage servicing and foreclosure processes, impair the functioning of mortgage markets, and diminish overall accountability to homeowners.” She also called out the servicers that are affiliates of the larger banks, saying:
For those in the housing and mortgage fields, making needed changes will not be easy. In particular, for those in the mortgage servicing industry, it means difficult changes and significant investments to rectify broken systems. For those servicers who are subsidiaries or affiliates of a broader parent financial institution, the responsibility for change and further investment absolutely extends up to that parent company, many of which have enjoyed substantial profits while their servicing arms have been run on the cheap.
While Raskin’s speech was short on aggressive proposals to fix these problems, such as legislating a divestment of servicing arms by the major banks to avoid conflicts of interest, she can be commended for attacking head-on the current problems with default servicing and suggesting a variety of alternative business models that might ease some of the problems with this industry. And though the Midwinter Conference participants could have had a lively debate about the merits of these various models, I think almost all of us could agree with Raskin’s statement that, “Until these operational problems are addressed once and for all, the foreclosure crisis will continue and the housing sector will languish.”
As I checked out of the St. Regis in Park City and headed home, I was left to marinate on these words and the fact that while responsible servicing might not have prevented the Mortgage Crisis, it certainly would have made the cleanup a whole lot easier. Here’s hoping that the many intelligent folks I met at Midwinter and throughout this industry can reach a consensus on building a better servicing model going forward.