Lots of people are worrying about there being too many foreclosures. But the real problem may be too few.
In recent weeks we’ve been treated to multiple stories about robo-signers processing 8,000 or 10,000 foreclosures per month. Assuming a 60 hour work-week, that’s a package every two minutes. Since one of these packages is umpteen pages long, it’s not hard to see why these folks didn’t have time to read them all.
This foreclosure crisis is a logical outgrowth of the securitization culture of mid-decade. The worker-bees who kept the mortgage and consumer loan engines humming were incented according to one metric: cost. So it’s no surprise that too few people had too much work to do in too little time. Since the assumption was that continually rising home prices would cover over any paperwork problems, getting the documents right wasn’t a priority.
Now we’re reaping the harvest. Poorly documented loans are proving to be a major liability for the banks that wrote them, bought, them, and serviced them. If the security for these notes turns out to be uncollectible because of sloppy paperwork, the banks involved may have another round of losses awaiting them.
But it’s crucial that our financial system collect the security on nonperforming loans in an efficient manner. When expenses are low, loans are cheaper. As many banks are re-learning, though, the cheapest service is often the most expensive.
Douglas R. Tengdin, CFA
Chief Investment Officer
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