The outcome of the negotiations between servicers, the group of state Attorneys General and the fledgling Consumer Financial Protection Bureau (CFPB) is extremely important to the future of housing and mortgage lending. The initial documents and press reports, unfortunately, are not encouraging. The proposed Settlement Terms released by the AGs in early March, combined with press reports of enormous fines being sought as part of any settlement, lead to the conclusion that the state and federal governments are together using the scandals arising from the servicing mess as a pretext to redistribute money from banks and investors to homeowners. Aside from issues of fairness, due process and execution, these discussions have enormous ramifications for the future of the mortgage industry and the housing market, particularly in light of the uncertain future of the GSEs.

In no way should these views be taken as a vote of confidence in the servicers, who have performed very poorly over the past three years. Nonetheless, they have been forced to deal with an unprecedented crush of nonperforming loans and crashing home prices. The major differences involved in servicing performing and nonperforming loans must also be kept in mind. Under normal circumstances, servicing is a process where huge numbers of payments are handled by automated processes. Once large numbers of loans become delinquent, the economics are reversed; every delinquent loan becomes a unique situation requiring individual attention, making the industry's automation and operating leverage worse than useless. The industry clearly mismanaged the transition from a market dominated by performing loans to one with huge numbers of seriously delinquent loans requiring individual attention, and is only catching up after years of missteps.

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