Another kind of Mortgage Servicing Fraud
Nomura Fixed Income Research
A possible outcome of a cooling housing market could be minimal dislocation of the mortgage and securitization markets. However, worse scenarios are also possible. Securitization professionals should consider the risk that investors lose confidence in residential mortgage securities and reduce their participation in the secondary mortgage market. Such loss of confidence could occur if investors feel that disclosure has been inadequate, if they suffer losses from issuer or servicer fraud, or if they become subject to assignee liability for predatory lending practices. Of note, some sub-
prime lenders have committed servicing fraud to avoid repurchasing loans that suffered early payment defaults (i.e., the lenders made payments on behalf of the borrowers in order to avoid reporting the loan as delinquent).
THIS could have very interesting ramifications in court if a borrower defending foreclosure is able to prove that the lender at time of alleged default was representing the mortgage as current to investors.
If this form of servicing fraud is proven, it also has significant impact on investor litigation and arbitration claims taking them to a whole new level beyond inadequate risk disclosure issues.