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October 18, 2010

Toxic incentives at both beginning and end of subprime mortgages

A post last week remarked upon the parallels between the rise and collapse of the mortgage bubble -- extremely poor paperwork in both the mortgage issuance process and the mortgage foreclosure process. The Washington Post had a terrific story over the weekend about a corollary parallel -- indeed, the common factor that is at the root of problems on both ends of the mortgage process: rich rewards that paid people to cut corners.

Up to 2007 mortgage originators and brokers were making ridiculous amounts of money issuing loans to people who shouldn't have qualified. The more loans they made, the more money they made. Turns out it's the same deal with foreclosures. The more house seizures the foreclosure mills can implement, the more money they make, too. One law firm in Florida got $1,300 for each case processed without a challenge from the homeowner. It's another indictment of the culture of manufactured financial incentives that has infected the American economy, starting at corporate executive pay and moving on down. From the Post:

The financial incentives show that the problems plaguing the foreclosure process extend well beyond a few, low-ranking document processors who forged documents or failed to review foreclosure files even as they signed off on them. In fact, virtually everyone involved - loan servicers, law firms, document processing companies and others - made more money as they evicted more borrowers from their homes, creating a system that was vulnerable to error and difficult for homeowners to challenge.
Posted by Jay Hancock at 9:04 AM | | Comments (0)
Categories: The Great Recession
        

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About Jay Hancock
Jay Hancock has been a financial columnist for The Baltimore Sun since 2001. He has also been The Baltimore Sun's diplomatic correspondent in Washington and its chief economics writer. Before moving to Baltimore in 1994 he worked for The Virginian-Pilot of Norfolk and The Daily Press of Newport News.

His columns appear Tuesdays and Sundays.
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