Things to Watch For
Servicing plays a large part in the secondary market, as servicers handle the loans ultimately owned by investors. So servicers should take a keen interest in efforts to restart what is now a stalled market.
Executives of the Mortgage Bankers Association met with the press at its National Secondary Market Conference recently in Chicago to discuss their most recent position papers on market liquidity and key considerations for the future, and they're a good place to start.
MBA president John Courson told reporters he expects the problem will carry over until next year, with possibly hearings being held in Congress this year. The immediate next step is to determine the structure of a secondary market, whether private, public, or co-operative, he said.
The first guiding principle is that secondary market transactions should be funded by investors who take on the credit risk and other risks inherent in the transactions. Transparency is needed in four areas - loan level information, bond structure, risk assessments by ratings agencies and others, and regulatory oversight. Secondary market participants should be aware of the risk they are taking on, including fraud, and independent third parties (like ratings agencies) should provide objective, independent risk assessments. These all seem like reasonable priorities.
Another thing servicers need to watch for is fraud. David Fleck, a consultant who formerly was a deputy district attorney for Los Angeles County, told the SourceMedia Mortgage Servicing Conference co-sponsored by MSN in Dallas that a felon intent on mortgage fraud can steal 100% of the equity in a home fairly simply, by forging a notice of reconveyance.
That notice, one of the last acts of servicing a mortgage, attests the mortgagor has paid off the loan and is now the owner of the property. Another clever idea, he said, is "rent skimming," in which a fraudster breaks in to a bank-owned property and then poses as the owner, renting it out to an unsuspecting tenant and then disappearing with the proceeds.