Q: What do the panelist think of moral hazard question? Are borrowers likely to default in order to qualify for a loan modification?
David Moskowitz: The moral hazard issue has always been a hot topic behind scenes. I personally think that the threat of strategic default is not substantial. I believe that at the end of the day people tend to do the right thing.
Paul Leonard: The moral hazard question often leads to the distinction of responsible and irresponsible borrowers. I think the borrower’s responsibility is not the key to determine the foreclosure crisis’ primary causes. Bad underwriting standards and lending on future appreciation have to be regarded as the starting point of malfunction. Therefore the evaluation of responsibility of borrowers alone is misdirected. Most loan modification programs are too concerned about moral hazard. The basic question is how far are people willing to go – are they going to quit their jobs in order to meet the requirements for a modification? I believe it is possible to construct the programs in a way that mitigates the risk of moral hazard.
James Rhyne: Borrowers can be broken down in the group of people that have knowledge and can scam the system and those that make decisions out of ignorance that results either from cultural norms or simple imitation. This ignorance of the system works and what may happen if they default on paying their loans made them believe that they can afford to buy a house and made them trust the people that offered the loans. I think we should find a middle ground between putting too many restrictions on people and precluding them from owning a home ever and letting them make their imprudent decisions.
Q: How does one find out who “holds” a particular loan?
David Moskowitz: Consumers have to be informed about the holder/owner of the loan not only about the servicer.
Nancy Wallace: The problem is that we do not have a uniform system of loan IDs in the U.S. Each time the loan is sold, it is renumbered. Therefore there is no possibility of tracking the loan, the whole process is basically unverifiable.
Paul Leonard: One problem is understanding which trustee owns the note but what is a really big issue are the services agreements. Often loan modifications are turned down with the explanation that the investor does not allow them but no specific information on the issue is provided.
David Moskowitz: The services rules are hard for people to understand and there is definitely need for improvement in communication.
Paul Leonard: Sometimes the information provided to the borrower is just wrong. Often the investor would prefer to modify than to head for foreclosure.
Q: Is there a significant “shadow inventorial” of banks? Will it hit the market causing a second crisis?
David Moskowitz: There is a strong perception of a shadow inventory of deferred foreclosures. I am not sure when it will clear up but certainly the recovery of the market should lead to moves in that area.
Q: Is Silicon Valley helping to solve the forclosure problem through companies like Zillow that help to evaluate homes?
Nancy Wallace: Collecting and providing data certainly helps to solve the problem partly. What is needed though is a deep, complex, long-term and expensive assessment of house values. Nevertheless companies like Zillow help to enhance transparency.
Laurence Platt: The tech industry jumped into the mortgage industry, but they are not able to handle the regulatory aspects. There is a clash between business efficiency and regulatory requirements. Look at Microsoft, they jumped in and jumped out.