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.