It seems to me that foreclosure-gate as the foreclosure mess is being called has the hallmarks of a classic, large scale, operational risk failure.
Operational Risk, for those of you who remember your Basel II, is defined as risk that comes from People, Processes, Systems or External events which cause a loss to (in Basel’s world view) a bank. It was distinguished from Credit, Market and Interest risks, which Basel-Before-Numbers had looked at systematically.
This current crisis has operational risk hitting on all four cylinders:
People: The so-called robo-signers were not doing their job correctly. And many of the mortgage service companies had hired untrained people – Burger King kids – who didn’t even know what a mortgage was to do the work.
Processes: The mortgage servicing companies had processes in place to deal with the level of mortgages that they had, but these processes were not in fact compliant with legal requirements on them. The processes made MERS the holder of the mortgage and most mortgage servicers never provided the deeds and lien paperwork to the trusts that ostensibly held the mortgage. The processes were built to be cheap to run, not compliant to regulation and law.
Systems: The systems that the companies and MERS used were characterized in at least one report as antiquated.
External Event: Well we all know what that was, and in fact the mortgage servicers should not have been surprised by it. The number of foreclosures shot up, at near record amounts. The fact that these same servicers knew beforehand what was happening with their loans just meant that they ignored the leading signal. They could have seen it coming.
Now of course we will have to see if it was merely stupidity, greed, or fraud.
By the way, I recommend Mike Konczal’s excellent primer on the foreclosure mess: Foreclosure Fraud for Dummies.
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