The industry will probably adapt faster than government regulation to fix this issue. If the banks can't resell their mortgages then they are in trouble to raise capital for the next round of mortgages.
But if a foreclosure is delayed, the servicer must typically keep advancing payments that will go to all bondholders, including the junior debt holders, even though the home loan itself is producing no revenue stream.
The latest events has set up an odd circumstance where junior bondholders--typically at the bottom of the credit structure--could actually end up better off than they expected. Senior bondholders, typically at the top, could end up worse off, reports the WSJ.
Banks and experts are still weighing the potential costs.
Typically, mortgage servicers enter into contracts called pooling and servicing agreements with bondholders that spell out the servicers' obligations to manage the loans in the best interests of the investors.
These agreements provide that the servicers be reimbursed by funds in the trust for all costs related to litigation and extra processing of foreclosures, provided they follow standard industry practices.
Servicing companies hope the reviews will be quick.
But the problems could be magnified if the reviews uncover a lack of proper documentation or other substantive problems rather than simple procedural errors, according to the WSJ.
The furor over servicer practices is also likely to trigger additional legal challenges from borrowers facing foreclosure and more judicial scrutiny, which could further slow the process and increase foreclosure costs.
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