business ethics Class 8 Ethical Issues in the Real Estate Industry – Part 1 Class Discussion: Ras

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business ethics Class 8 Ethical Issues in the Real Estate Industry – Part 1 Class Discussion: Ras
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2015-11-02 19:21:41
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Class Discussion: Raskin Speech
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  1. Governor Raskin begins her speech with a discussion of housing market conditions. Briefly summarize the key condition of the housing market as described by Governor Raskin.
    • > Nationally, house prices have fallen by nearly one-third since their
    • peak in the first quarter of 2006, and total homeowners' equity in the
    • United States has shrunk by more than one-half--a loss of more than $7
    • trillion.

    • > The fall in house prices has caused families to cut back on their
    • spending and has prevented families from using their home equity to fund
    • education expenses or start small businesses.

    • > An estimated 3 million families are not able to refinance their
    • mortgages at today's historically low interest rates because they are
    • underwater on their mortgages.3 And many borrowers have lost their homes to foreclosure:

    • > More than 4 percent of all mortgages in the United States were in
    • foreclosure, and an additional 3 percent or so were delinquent by 90
    • days or more in the second quarter of this year.
  2. Why did the drop in house prices have such far-reaching effects on families?
    > because so many American families--nearly 70 percent--own their homes.1 In contrast, only about one-half of American families hold any stocks, either directly or through accounts such as Individual Retirement Accounts, 401(k)s, or mutual funds
  3. The speech states that “the huge wave of foreclosures has strained and sometimes overwhelmed the courts, particularly in states with judicial foreclosure processes.” Explain what this means.
    At nearly every linkage of our mortgage finance system there is a contractual relationship, and at nearly every contractual linkage there has been legal challenge and litigation..

    There are many relationships in the pool service agreement between institutions and they are not clear and most are vague in showing who is responsible.
  4. Governor Raskin states that there are a web of contractual relationships in the mortgage market: “The promissory note, for example, lays out the terms under which the borrower will repay the loan, while the mortgage reflects the lender's security interest in the property. But there are also contracts between the borrower and third parties and between the lender and third parties. For example, the borrower likely will enter agreements for title, flood, or private mortgage insurance, while the lender may enter an agreement with another institution to service the loan. Add mortgage securitization to the mix, and the number of contractual relationships snowballs. For a private-label securitization, a crucial contract is the pooling and servicing agreement, or PSA, which specifies matters such as the characteristics of the mortgages in the pool, how these mortgages will be serviced, and how the money generated from the loans will be distributed to investors.

    ”What, in Raskin’s view, is the problem with the multiple contracts?
    The standard servicing contract provides disincentives for servicers to act in the best interests of investors and borrowers. This misalignment of incentives has more profound consequences when defaults are high.
  5. The speech lays out specific concerns with the mortgage servicing process. She notes: “These problems include critical weaknesses in servicers' foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third-party law firms and other vendors. These problems indicate the existence of unsafe and unsound banking practices and violations of federal and state laws, as well as demonstrated patterns of misconduct and negligence on the part of servicers. Individual consumers have been harmed by this negligence, including the negligence of law firms.”

    Do you agree with Raskin that these problems are the responsibility of mortgage servicers? Do you believe that these are isolated cases or are indications of a broader pattern of failure across the industry? .
    I believe it is not just on the mortgage service providers, but all stakeholders involved. These are indications of broader patterns. She mentioned that her study covered 14 firms that controlled 2/3 of the mortgage servicing. Industry needs to be proactive and put together industry initiatives to put together best practices
  6. The speech notes that the terms of the standard pooling and servicing agreement (PSA), which is the standard contract governing servicing work for a private-label securitization, provides disincentives for servicers to act in the best interests of investors and borrowers. She notes that this misalignment of incentives has more profound consequences when defaults are high. The speech notes that: “Under the standard contract, servicers receive a flat fee per loan that they service, usually 1/4 to 1/2 percent of the unpaid loan balance annually, depending on the type of loan. The flat fee is considerably more than is required to service a performing loan and considerably less than is required to service a delinquent loan. The expectation is that, on average, the fee will cover the servicer's expenses. Servicers are also reimbursed for some expenses, such as the cost of a title search when pursuing a foreclosure, but generally not for unanticipated overhead or labor costs.”

    Why, according to Raskin, is this standard contract a problem?
    > he PSA does not perform nearly as well under stressed circumstances

    • > When mortgage delinquencies are high, mortgage servicing is not profitable, and servicers may feel extra pressure to cut costs as much
    • as possible.

    • > Servicers may not be properly motivated to perform loan modifications even when such modifications are in the best interests of borrowers and
    • investors.

    • > Servicer compensation is not generally tied to the performance of the loan, and in most cases a servicer receives no extra payment for
    • preventing a default.

    • > loan modifications are labor intensive, and this extra labor cost is not reimbursed under the contract. Instead, the PSA provides for the
    • reimbursement of some foreclosure expenses
  7. The speech notes that: “When mortgage delinquencies are high, mortgage servicing is not profitable, and servicers may feel extra pressure to cut costs as much as possible. In addition, servicers may not be properly motivated to perform loan modifications even when such modifications are in the best interests of borrowers and investors. Servicer compensation is not generally tied to the performance of the loan, and in most cases a servicer receives no extra payment for preventing a default. Further, loan modifications are labor intensive, and this extra labor cost is not reimbursed under the contract. Instead, the PSA provides for the reimbursement of some foreclosure expenses.


    ”How do these incentives affect servicer behavior in responding to mortgage delinquencies?
    They have no incentive to act upon these circumstances because the performance of the contract isn't tied into the revenue structure
  8. Raskin also note that PSA language provides a disincentive to encourage loan modifications or apply widespread solutions. Explain why.
    > Many PSAs provide minimal guidance about modifications beyond specifying that servicers should apply "usual and normal" servicing standards or the same standards that they apply to the loans held in portfolio

    > With such vague guidance, servicers assert that they are worried about litigation risk if they employ servicing approaches that have not been widely adopted throughout the industry.

    > even when the PSAs provide guidance about loan modifications, it can differ widely across PSAs, often preventing servicers from designing a uniform modification program for their entire portfolio.
  9. The speech notes that: “it is imperative to reconsider the compensation structure so that servicers have adequate incentives to perform payment processing efficiently on performing mortgages, and to perform effective loss mitigation on delinquent loans. After the compensation structure is reconsidered, the PSAs need to be amended or renegotiated in order to facilitate more workouts. Finally, PSAs should clarify the situations in which loan modifications and other mitigation strategies should be pursued.

    ”Do you agree with Raskin on this point? Why or why not?
    I totally agree with Raskin on this point. The restructuring of the PSA need to be well balance to allow for better streamlining. Inefficient processes will create cost inefficiencies
  10. Raskin also note that PSA language provides a disincentive to encourage loan modifications or apply widespread solutions. Explain why.

  11. Raskin also proposes changes in investor tools and practices. Explain.
    > metrics that allow investors to measure servicers' execution are not widely available.

    > Such metrics could include customer satisfaction ratings, delinquency and cure rates, the average time that a homeowner waits on the phone to talk with the servicer, and servicer error rates.

    > the ability to transfer servicing from low-performing servicers to high-performing ones would have to be enhance

    > the creation of common back-office systems across servicers would make transfer less prone to error and less costly, and any contractual or legal barriers would need to be reduced to allow investors to "fire" a low-performing servicer
  12. In describing the problem with “representations and warranties contained within PSAs,” Raskin notes that underwriting standards declined dramatically in the middle part of the previous decade as the housing bubble approached its peak. What evidence does she provide for this assertion?
    > the median combined loan-to-value ratio on subprime mortgages originated for home purchases rose from 90 percent in 2003 to 100 percent in 2005--meaning that more than one-half of borrowers who purchased homes with subprime mortgages put no money down

    > the share of mortgages in which borrowers did not document fully their income or assets also increased. In addition, the number of mortgages that defaulted in the first year after origination--commonly considered a gauge of poor underwriting--rose appreciably as the bubble approached its peak.
  13. She cites the "originate to distribute" model of loan origination as a problem. What does she mean by this?
    • > brokers or lenders sell the loan to a third party, typically a securitizer, who then issues securities collateralized by mortgage loans
    • to investors.

    • > This model technically describes securities guaranteed by Fannie Mae and Freddie Mac as well as private-label securities sponsored by financial institutions such as commercial or investment banks, but problems were
    • more acute in the private-label market.
  14. The speech notes that: “As securitization developed and became more prominent as a source of financing for mortgage lending, representations and warranties were one of the main tools market participants relied on to align incentives among originators and securitizers on the one hand and investors on the other. These provisions describe the underwriting standards and other matters with respect to the assets that are the subject of the securitization.


    “What, according to Raskin, was the problem with the reps and warranties, and in particular with the lack of a standardization?
    > These provisions describe the underwriting standards and other matters with respect to the assets that are the subject of the securitization.


    The originator, in principle, is required to refund at par (less payments received) the value of the loan should it violate the originator's representations and warranties or in some cases, should it default within a specified time from origination.

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