Somebody should have seen this coming.

It was just months ago that people, in large numbers, begain calling for changes in mortgage practices.  Allegations flew of companies using deceptive and misleading practices to place people in loans they could never afford.  The emphasis was on how these people got into their mortgages; the outcry was that they should have never qualified.  The argument can be condensed down to something like the following:  if lenders had more closely scrutinized borrowers and applied stricter lending standards, the country would not be experiencing a “sub-prime mortgage meltdown”.

Yesterday, Katherine M. Porter of the University of Iowa’s College of Law published a paper titled “Misbehavior and Mistake in Bankruptcy Mortgage Claims,” based on her research of over 1,730 different Chapter 13 bankruptcy cases recently filed by homeowners (find the abstract and paper here).  In it, she suggested a departure from the outrage expressed towards the narrow part of mortgage-lending outlined above.  “Instead of focusing exclusively on loan origination,” says Porter, “these data suggest that regulators and policymakers should broaden their vision to consider how poor mortgage servicing can threaten families’ efforts at homeownership throughout the country.”

Some of the results are astounding:

–  In 96% of the claims Ms. Porter studied, the borrower and the lender disagreed on the size of the mortgage debt.  In fact, she says, “Each year, mortgage creditors assert that bankrupt families owe them an aggregate of at least one billion dollars more than the families themselves believe are their outstanding mortgage debts.”

–  “The median difference between the amounts the creditor and the borrower submitted was $1,366; the average was $3,533, Ms. Porter said. In 30 percent of the cases in which creditors’ claims were higher, the discrepancy was greater than 5 percent of the homeowners’ figure.” (NYT)

–  “A majority of mortgage companies’ proofs of claim lack the required documentation necessary to establish a valid debt.”

–  “Fees and charges on bankruptcy claims often are identified poorly and sometimes do not appear to be reasonable.”  Some of the fees are unquestionably illegal, others for unwanted, unsolicited, and unnecessary services.

The study uncovered the “specter of poor recordkeeping, failure to comply with consumer protection laws, and massive, consistent overcharging.”  In light of this, Katherine Porter concludes, quite seriously, that “On a system level, mistakes or misbehavior by mortgage servicers undermine America’s homeownership policies for all families trying to buy a home.”

This is the most important fact to homebuilders and construction companies.  It seems that mortgage lenders and servicers could be significantly adding to the problems of supply and demand.  Because Chapter 13 Bankruptcy offers homeowners a chance to delay foreclosure, settle their debts, and stay in their homes, practices that disrupt this procedure can cost homebuilders.

First, homeowners that loose their home and hurt their credit due to practices like this are unlikely to be purchasing a new home anytime soon.  Furthermore, the ‘domino affect’ comes into play, making quality mortgages harder to find for everyone, and discouraging fiscally secure Americans from looking for or selling their home.  Demand for new homes will inevitably decrease as more and more people default, making the overall American home buying environment unpalatable. 

Second, increased foreclosures lead to increased supply in the used home market…as if there are not already enough homes for sale.  Reselling these foreclosed homes at steep discounts is common, and puts downward pressure on already deflated home prices. 

Again, click to read Misbehavior and Mistake in Bankruptcy Mortgage Claims.