by Alan Hall
Complex systems fail in unpredictable ways: the more complex, the more unpredictable. If you are in such a system -- whether health care or the Space Shuttle -- you are hostage to its complexity. But what if you are just a homeowner, paying your mortgage on time, and the system fails and somehow sucks your payment into limbo and causes you to lose your home?
An article in today's Wall Street Journal describes that bizarre scenario unfolding now.
American Home Mortgage collapsed on August 6 and recently filed for bankruptcy. Freddie Mac and Ginnie Mae, the government-chartered housing finance agencies, have seized the $7 million in payments for principal and interest, property taxes and insurance that homeowners sent in prior to that date. This means insurance policies may lapse for non-payment triggering foreclosure.
The agencies have the money to pay the insurance, but they don't have the loan records, which belong to American Home Mortgage.
Freddie Mac says it can't get AHM's loan service files without a court order, and so agency bureaucrats don't know who to pay or how much. The files are one of AHM's remaining saleable assets, which the company hopes to sell and in turn use the proceeds to pay offer creditors. Wall Street's biggest banks are hungry to grab the loan servicing files on $50 billion worth of AHM's mortgages.
The article describes a literal showdown at the subprime corral at AHM's facility in Texas: "In court documents, American Home said Ginnie Mae representatives 'stood in a line in front of the doors and sat on the stairs, preventing AHM Servicing employees from entering the office.' Freddie Mac said American Home 'had its security personnel escort the Freddie Mac representatives out.'"
The likely result of the showdown? Homeowners will appear to have missed payments, face several kinds of late fees, possible individual rate hikes, trashed credit reports, and even foreclosure.
Several complex systems are in play here: the subprime mortgage system, the bankruptcy court system, the Wall Street banking system, a Tampa class action law firm, the government actors Freddie and Ginnie, and a herd as big as Texas. It's a complicated failure.Like bureaucracies, systems develop goals of their own the instant they come into being, and the longer they exist, the more the primary self-preservation becomes, and the less they care about you, the individual.
"somehow sucks" = Mortgage Servicing Fraud