Legislating a fix for mortgage servicing

So, the government has now admitted that Home Affordable Modification Program was a failure, or at least some folks working there have admitted what the industry has known for a long time. This was no surprise to folks working here. What it is, to be frank (to say nothing of Dodd), is a problem for the industry. You see, when the government sets out in all of its wisdom to solve a problem, it doesn’t like be embarrassed by a failure of its constituency to forego whatever freedoms or established business practices are necessary to make their solution work. This makes our elected officials look bad, to say nothing of the bureaucrats that make their living by casting threatening glances upon those who even consider violating the letter of the law. Apparently, that’s what some people are now suggesting was the problem in the first place. It turns out that we don’t have any laws on the books that say a servicer has to modify a person’s mortgage loan if, for any reason, the borrower finds himself unable or unwilling to pay. All of our current laws and business practices say that the servicer must foreclose on the borrower who ends up in that position. And that just won’t do. People must be housed! And in a home they own! Apparently, or something like that. Now, with a beginning like this, I could easily go back down the same worn path and rant on about how borrowers should pay their mortgage and how a government that takes away the borrower’s responsibility to repay is basically putting a stake through the heart of anyone with money to invest in the secondary market and therefore making itself the only viable investor in US mortgages. Just ask the guys meeting down at the Asset Securitization Forum this week. That ground has been well covered. The only folks who haven’t gotten that message yet are busy making new laws. Instead, I’d like to look at a bigger picture. This discussion of what laws need to be passed and rules need to be made to effectively regulate the financial services industry needs clarity that can only be provided by looking all the way back to the reasons we have laws in the first place. Let us talk about when the Founding Fathers set up this country. I know…I can almost hear some of you moaning, “here we go again.” I’m not one of the wackos screaming that we need to hold another Continental Congress and then burn all of the law books. On the other hand, I can’t imagine that the men who set up this country could have envisioned a day when the answer to every problem was new legislation. I think those guys were sick of a having voluminous body of law that was implemented haphazardly at the will of a monarch and not having any power to influence what the law said or what penalties they would pay for breaking it. I have read that some members of the first Continental Congress were against putting any laws on the books and wanted to give everyone the freedom to do what they wanted in this new land. Of course, that’s the pendulum swinging too far the other way, something we see a lot of in our industry. No society can operate without laws. Even the Founding Fathers got that. But laws should be used to prohibit behavior and, if necessary, punish those who cannot be dissuaded from such behaviors. Laws should rarely if ever be used to mandate behavior, at least not in countries that advertise themselves as free democracies. God didn’t even do that and I’m pretty sure he’s a monarch. Fully 80% percent of the Ten Commandments are prohibitions. Only two of the Commandments talk about what you must do (keep the Sabbath and honor your parents), and they don’t even tell you “how” you must do that. What a great example of preservation of free will. Deep down, we all know how laws should be used in our societies. When someone says, “That’s against the law!” do we automatically assume that someone has acted in a way that is contrary to our societal norms or failed to act in a way that pleases the government? I’m looking forward to your answers (unless you work for the government, in which case I already know your answer—I’m such a cynic!). Rick Grant is veteran journalist covering mortgage technology and the financial industry. Follow him on Twitter: @NYRickGrant