So what I postulated in an earlier post, that the banks have positive incentives to foreclose and not to modify loans has now been said in House testimony by Adam J. Levitin Associate Professor of Law Georgetown University Law Center (thanks to James Kwak Baseline Scenario for alerting us to this):
The servicing problems stem from servicers’ failed business model. Servicers are primarily in the transaction processing business and are failing miserably at trying to adapt themselves to the loan modification business. Servicers’ business model also encourages them to cut costs wherever possible, even if this involves cutting corners on legal requirements, and to lard on junk fees and in-sourced expenses at inflated prices. The financial incentives of mortgage servicers also encourage them to foreclose, rather than modify loans in many cases, even when modification would maximize the net present value of the loan for investors.
I will read the rest of the testimony in the morning… since I already know that I will be incensed at the content.
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