The Perverse Incentive to Foreclose
Doug Rushkoff points out that mortgage servicers have very little incentive to help out borrowers who could afford their mortgages by refinancing.
What it means is that mortgage companies can often make more money when the homeowner goes into foreclosure than if the homeowner pays his bills. The longer a homeowner is delinquent, the more late fees and other penalties are accrued. Plus, there’s other fees the mortgage servicer gets if the homeowner goes belly up, once the bank sells the house.
So if a homeowner is beginning to miss payments, it is not to the mortgage lender’s benefit to help him refinance, work out a new payment schedule, or do anything else to keep the loan in place. The mortgage servicer is, as they put it in business, disincentivized to help. He will get paid the most if the borrower misses a lot of payments, and then goes into foreclosure.
This is, sadly, part of the natural evolution of the financial system. When banks go national and mortages are chopped up and sold as assets, homes and communities just become entries in a ledger. Never mind that communities are better off if the homeowner can keep their home through a re-fi. Never mind the drag that foreclosures place on banks. Never mind that in the long term, getting the mortage paid off with slightly less interest is in everyone’s best interest.
One of the primary reasons for our current crisis is that the finance sector of the economy is oftentimes at odds with the part of the economy that actually creates things of value. Obsession with earning high, short-term returns on what is essentially gambling now trumps long-term investment and value creation. None of those incentives have changed in the past year. All the government has done is demonstrated that it’s willing to cover the gambling losses of large financial institutions while people who actually create things and innovate are left out in the cold to pay for it. There are no moves to actually change the institutional incentives created by government policy. Just promises to be “tougher regulators.”
I don’t see how that bodes well for the future.
Image Credit: Jeff Turner