A week or so ago, the CFPB updated – read toughened – its 2014 mortgage-servicing rule.  The “update” ran to 901 pages atop the underlying, 1,180 page rule.  As a result, the CFPB’s mortgage-servicing opus clocks in at 2,081 pages of doubtless-dulcet prose.  The only companies I can think of now brave enough to service a mortgage have to be one with courage borne of complete insouciance to legal and reputational risk.  Mortgage bankers from the mid-2000s, fire up those BMW 7-series you bought with the proceeds gained from putting folks into homes they couldn’t afford and come on back to service them – the coast is clear of more punctilious competitors.

I was actually pretty hopeful that the CFPB would make consumer finance better when Dodd-Frank created it in 2010.   Having watched the banking regulators sit idly by as the mortgage crisis grew because of internal squabbling and top-brass focus only on prudential regulation, I thought that a new, single-minded agency would be all to the good.  We even took a stab when the CFPB got started with suggestions it kindly requested on ways to make its rules clearer, tougher, and more enforceable.  We were politely thanked and haven’t darkened the Bureau’s doors since.  Subsequent gargantuan rule-makings make it clear that we were, shall I say, on the wrong page.

The CFPB defends all it does on grounds that it makes consumer-finance safer.  Does it?  The only one who could love rules that run thousands of pages are those paid by the hour to read or litigate over them.  Litigate is more likely since the business proposition of fully-compliant mortgage servicing is thrown into the trash-basket with rules essentially designed only to produce got-cha moments.

So, who will service America’s mortgages? Although banks hardly have unblemished housing-compliance records, they nonetheless have extensive risk-management staffs that were given expensive, deep teeth by Dodd-Frank.  Coupled with the capital cost of delinquent mortgages, many banks now take compliance very, very seriously.  As a result, they are running as fast as they can out of mortgage servicing, leaving non-banks with an ever-growing dominance in this field.  For many – not all but many – non-banks, compliance culture is an after-thought – they may soon learn the hard way that it has to come first, but how many homes will again be lost along the learning curve? 

It’s not just consumers who lose if mortgage servicers act with the impunity encouraged by a rule with which no one could reasonably be expected to comply.  Fannie, Freddie, and Ginnie Mae all depend on the ability of mortgage servicers to know who’s where, who’s paid what, how to move the money to who’s supposed to get it, and when to take action when someone screws up.  The CFPB rules are rightly meant to give consumers far better odds of avoiding foreclosure than they had when servicers robo-signed and otherwise forced all too many homeowners onto the streets.  But, if the rules fail to ensure that mortgage investors get paid promptly and that servicers can handle the advance payments required until a loan’s fate is sealed one way or another, the U.S. residential-finance system fragments into far smaller corners into which I’m afraid to look.

Consumers can and should be protected from deceptive mortgages and abusive servicing that forces them into foreclosure far faster than necessary when there is a reasonable shot at remediation or modification.  But a fundamental fact of mortgage finance – like pretty much all finance, come to think of it – is that those who put up money want to get it back.  Mortgage-servicing rules that do little to ensure both meaningful compliance and timely payment serve only to force investors to depend still more on governmental guarantees that will make good when no one else does. With rules no one can understand, investors have no hope but to turn back to the biggest sugar daddy of them all.  That way, consumers are protected – even from themselves – and tort lawyers are richer, with only the hapless taxpayer yet again picking up the tab.