In this report, we look at the 753-page CFPB servicing rule that, in concert with the 804-page QM one, comprises the first chapter of the new mortgage magnum opus. As with our assessment of the QM, we focus here on strategic drivers created by the CFPB, not details sure to keep lawyers employed for eons. Importantly, all servicers, insurers and investors will now face a framework that gives the benefit of pretty much any doubt to the borrower of a first and/or second lien. This reduces the prospect of foreclosure in ways that may well help the deserving homeowners victimized by prior practice, at the cost of giving under-water borrowers or those who just want a lower principal balance a far easier way to beat the reaper when they don’t feel like paying their mortgage bills. Some commentary on the new rule discounts the loan-mod process on grounds that foreclosures now take longer than the rule clearly mandates. True enough, but that’s a legacy of the crisis, not the system going forward. The new rules fundamentally change the outlook for mortgage-default risk frequency drops but severity goes way high – factors that will be priced in and change the market’s structure in significant ways starting now.
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