On last week’s This American Life, Chris Arnold of NPR did a good segment on loan servicers and why they do or do not modify loans for delinquent borrowers (starting around the 10-minute mark). There isn’t a lot that avid readers won’t know already; the central message is that it would be better for everyone involved – including lenders and investors – if more loans were modified. It also doesn’t address the legal issues created by collateralized debt obligations where the tranches have different priorities. But if you’re confused about the basics, it’s worth listening to.
Still, there were a couple things that were new or interesting to me:
- Scott Simon, a managing director at PIMCO (the world’s biggest bond fund manager), said that he thinks loan servicers should be modifying more mortgages; that seems like a pretty clear vote from the investor side.
- The segment brings up the issue of computer systems, which is something I hadn’t thought of but should have. Apparently, most if not all of the big, bank-owned servicers don’t have computer systems (software) that can estimate the net present value of a foreclosure as opposed to a modification, taking into account zip code-specific repair costs, broker’s fees on the sale, closing costs, foreclosure-specific legal costs, and expected sale proceeds. Big-company information technology is something I know well, and I can say with a high degree of confidence that if they started designing these things in 2007, they won’t be done until sometime next year at the earliest, and there’s a good chance they won’t work, and even if they do they will have difficulty handling the load. On the other hand, one good product manager and ten good developers in Silicon Valley could probably build something better in about 12-18 months. I sure hope the fate of the economy doesn’t depend on custom homegrown software.
By James Kwak