Lending, Servicing Operations Cause Conflict Of Interest For Major Banks; Attributed As Reason For Ineffectiveness Of Government's Loan Mod Program

A recent The New York Times story decribes a significant conflict of interest facing the major banks like Bank of America, JPMorgan Chase, Wells Fargo, Citibank and others that also provide loan servicing operations for other institutions/securitized mortgage investors:

• So where does the conflict of interest lie? Often, the same bank that services a primary mortgage owned by another institution also owns a second mortgage or home equity line of credit on the same property. When that borrower has trouble meeting both payments, the servicer has an interest in making sure that amounts owed on the second lien, which it owns, continue to be paid even if the first loan, which it has no interest in, slides into delinquency. About two-thirds of primary mortgages are serviced by banks who do not own them but hold the accompanying seconds.

• This conflict is a crucial reason that the government’s loan modification program has been so woefully ineffective. The Treasury Department never forced the second-lien holders who service troubled primary mortgages to reduce the amount they are owed by borrowers, even though such a move would give them a better shot at keeping their homes.

For more, see In This Play, One Role Is Enough.