Why can’t efforts to work with servicers or put a moratorium on foreclosures help solve the problem?
Despite the best efforts and intentions of proponents, reforms like HOPE NOW and explicit encouragement to servicers to modify loans have not been able to solve the problem over the last year [see research by Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, and Eileen Mauskopf (PDF)]. Servicers are not compensated for successfully working out mortgages, so they have no incentives to put the effort and cost into real workouts. [See links to research by Chris Mayer and Yingjin Gan (PDF) and Adam Ashcraft and Til Schuermann.] In a few cases, servicers have tried large-scale workouts, but the bulk of those loans have re-defaulted in a relatively short period of time. Given the poor initial underwriting of subprime and Alt-A mortgages, serious workouts will require re-underwriting the mortgages one-by-one. Delays in foreclosures will not help if servicers are unable to handle workout effectively and will surely reduce the amount of future credit available as Karen Pence showed in
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- Why can’t efforts to work with servicers or put a moratorium on foreclosures help solve the problem?
