In Whose Universe Was Robo-Signing a Good Idea?

Given that all 50 state attorneys general are looking into current foreclosure practices (full article from New York Times here), it seems likely that some of the practices weren't OK in the legal universe.

Taking "hair stylists, Walmart floor workers and people who had worked on assembly lines" and making them "foreclosure experts" without any formal training, as reported by AP's Michelle Conlin (full story here) certainly isn't OK in the ethical universe.

But ... beyond all that? ... it was stupid in the corporate universe too.

Of depositions released Tuesday, Conlin writes,

The depositions paint a surreal picture of foreclosure experts who didn't understand even the most elementary aspects of the mortgage or foreclosure process -- even though they were entrusted as the records custodians of homeowners' loans. In one deposition taken in Houston, a foreclosure supervisor with Litton Loan couldn't define basic terms like promissory note, mortgagee, lien, receiver, jurisdiction, circuit court, plaintiff's assignor or defendant. She testified that she didn't know why a spouse might claim interest in a property, what the required conditions were for a bank to foreclose or who the holder of the mortgage note was. "I don't know the ins and outs of the loan, I just sign documents," she said at one point.

If it weren't so pathetic, it might be funny.

If you're a bank with a whole lot of mortgage loans that might or might not, well OK, probably are, bad ... wouldn't you want people looking at the documents who could figure out which ones were really really bad and which ones might be salvageable?

I wrote last month about the recurring problem of a passion for new sales as opposed to servicing and satisfying the customers you have, and part of this problem is related to that one. In the go-go years, banks spent billions to build their mortgage machines. With the market on a seemingly nonstop upward rise, actually servicing mortgages became an afterthought.

But when the bubble popped, a new army of trained employees was needed, and the banks were very slow to hire such talent. Enter the robo-signer (for those of you who haven't been following this story closely, some bank employees were signing off on literally thousands of foreclosure every month without reviewing the files, as is legally required. To keep up with the flow of paperwork, they just kept signing -- a robot could have done it just as well.).

The Times' Eric Dash and Nelson Schwartz note that "banks had few financial incentives to invest in their servicing operations... A mortgage generates an annual fee equal to only about 0.25 percent of the loan's total value, or about $500 a year on a typical $200,000 mortgage. That revenue evaporates once a loan becomes delinquent, while the cost of a foreclosure can easily reach $2,500 and devour the meager profits generated from handling healthy loans." (click here for full story)

So once again, we see that incentives work ... as long as we know what exactly we're incentivizing.

And one might argue that, if the cost of a foreclosure is so much higher than the profit, it might pay to do the triage and find as many homeowners whose loans could successfully be modified as possible....

The scandals are going to get worse, I fear, before they get better. Felix Salmon's Reuters blog makes a strong case that the investment "banks had price-sensitive information on the quality of the loan pool which they failed to pass on to investors in that pool. That’s a lie of omission, and if I was one of the investors in one of these pools, I’d be inclined to sue for my money back."

Maybe I should have gone to law school.