Since you used to do this for a living, can you shed some light on what I see as a conflict of interest. I used to have my real estate license and do short sales. I could never piece together the conflict of interest I saw between the banks and the loan servicers. The banks would get more money if they agreed to do a short sale vs. taking the property all the way to foreclosure. However, it seemed to me that the servicers made it nearly impossible to do a short sale and most of the time denied the offers until the property went to foreclosure. So theb banks would make more money with the short sale but it seemed that the servicers prevented that from happening. So it seemed to me that the servicers helped the banks to loose money. This never made sense to me.
Easy. Bonus reward schemes.
A big bank is a huge corporation with tens of thousands of employees, and their personal interest is often not aligned with the interest of the organization itself. The same applies for the CEO. Employees and managers tend to concentrate their effort to maximize their bonus/reward plans, which vary differently from the stated goals of the organization.
Usually, banks try to remedy this by including organizational-level metrics in the bonus scheme for its middle and upper management, such as net income, risk adjusted return on capital, but in general what’s best for the bank is not necessary best for a specific employee(s) and vice versa.
I’ll illustrate this on your example - say that 30% of your base salary comes from a reward structure - you get paid additionally if the number of successful foreclosures are above X.
Would you care about short sales? No. That’s what would matter to the bank as an organization.You’d be dead against short sales actually, because then there wouldn’t be foreclosures and the number of successful foreclosures wouldn’t reach X and you wouldn’t get your bonus or however you may call it. You would be aware of the issue and discuss it with your colleagues, but you wouldn’t want to rock the boat and jeopardize the30% of your income so that a bank raking billions can rake billions and something.
This is a hypothetical scenario, but probably close to the truth. Same with predatory lending before the bubble burst - you want to push, push for loans and get your commission - it’s not your problem what happens later, it’s for guys in the recovery department to worry about.
Thanks for giving me something to think about. The people who service the loan tend to be different companies. It just seemed odd that there objectives were at odds as to what would be best for the bank and the bank wouldn’t pay much attention to it. So I’m guessing the servicing co. made more money when the property went all the way to foreclosure vs. a short sale.
If they’re different companies then it is 100% obvious as they are paid a commission on every completed foreclosure. No foreclosure, no commission.
That’s why some banks keep the loan servicing internal.