“Lucrative Fees May Deter Efforts to Alter Troubled Loans”

That’s the headline, NYTimes and elsewhere.

What it means is that mortgage companies can often make more money when the homeowner goes into foreclosure than if the homeowner pays his bills. The longer a homeowner is delinquent, the more late fees and other penalties are accrued. Plus, there’s other fees the mortgage servicer gets if the homeowner goes belly up, once the bank sells the house.

So if a homeowner is beginning to miss payments, it is not to the mortgage lender’s benefit to help him refinance, work out a new payment schedule, or do anything else to keep the loan in place. The mortgage servicer is, as they put it in business, disincentivized to help. He will get paid the most if the borrower misses a lot of payments, and then goes into foreclosure.

This is the reason why so many people who have missed their payments aren’t able to get through to their lenders – why mortgage servicers don’t call back, or tell borrowers to hang on another couple of months. It’s not because they are so busy creating refinance packages for their customers – it’s because they’ll make much more money off our failing than our succeeding.

How could that be true? What sort of business model would be based on customer failure? The one devised – partly by accident – 400 years ago by a failing aristocracy. It set in place a class war – not between people so much as between people and the highly centralized, extractive institutions writing the rules of the economy.

These are the distorting rules we live under today. They quite predictably create situations where success is disincentivized, and bankruptcy for one party appears like a win for the other. Ultimately, we all lose.

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