I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.[/quote]
One of the better suggested reforms I’ve heard would require loan originators (who often act as servicers, as well) keep some skin in the game on the mortgage for a period of x-years after the loan is made. If the underwriters had to hold the loan longer, they’d underwrite more conservatively.
Example:
You loan a coworker $100 to cover their rent shortfall till the next day (payday?). You don’t have much worry that they’ll pay you back, since the time period is so short.
Now make the same loan but make it for a year… lots of variables and risks come into play. They could lose their job, they could die, etc… Even if they’re an upstanding person, the risks are higher the longer the term of the loan.
Translate that into mortgages. In the old days (back before the big GSE’s started buying up mortgages) banks made loans locally and new their customers. They did full underwriting and were very conservative. They had to be because they HELD the mortgage for the life of the loan. When banks started selling off the mortgages, the underwriting started changing… they only had to have confidence the loan wouldn’t default before they were able to sell it off. A much shorter period (6months to a year, typically).
It’s been suggested that loan originators be held on the hook for defaults for a period of years after the loan is sold. If the loan defaults, it would automatically revert to the originator/servicer. Kind of like bad seafood.
