Who could possibly have seen this coming? [Arnold Kling]:
Servicing [of mortgages] has been traditionally a very low-margin business, with the whole ballgame about keeping costs low.
Back in 2009, policy makers treated mortgage servicers like a piñata. They beat on servicers to provide foreclosure relief, loan modifications, and so forth. They told them to administer new programs that combined loan origination procedures with loan servicing procedures. They sought to punish servicers for noncompliance.
Well, guess what. Now servicers do not want anything to do with any loan that might become delinquent. The cost of dealing with such loans has skyrocketed, thanks to Washington’s piñata-bashing. So if you originate a loan to someone with a low credit score, the servicer charges a hefty premium. That in turn means that risky borrowers either have to pay that premium or get rationed out of the market altogether.
Not wholly unrelated: Sunday’s Washington Post laments that home values in suburban Prince George’s County, Maryland have not bounced back from the crash the way those in Reston, Va., have, and discerns a racial-injustice angle. Unfortunately, it misses a big legal angle that might explain some of the difference, about how the two states’ laws and lawmakers reacted to the foreclosure wave. And: more from Arnold Kling.