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Carrington and the skin-in-the-game myth

Big props to American Banker and Amherst Securities for this in-depth look at the double-dealing practices of Carrington Mortgage, which is both an investor and a servicer in some of the stinkiest subprime mortgage-backed securities.

The story, by Jeff Horwitz, explains why so many Carrington-serviced foreclosures involving mortgages from the big subprime lenders have long been sitting empty in urban neighborhoods: Carrington is allegedly booking these loans as “performing,” and not selling the vacant homes, in order to help itself to substantial proceeds from its pools that it would not receive if foreclosures proceeded and home sales were booked at their substantially depreciated real-market values.

Even more important, going forward:

Carrington’s performance suggests that forcing securitizers to retain exposure to their own deals may not reliably guarantee quality origination and aligned incentives among investor classes, and shows how hard it is for investors to figure out how pools of collateral are being managed. It also demonstrates how the basic structure of a securitization — that the claims of some classes of investors outrank others — can be turned on its head.

As the headline “A Servicer’s Alleged Conflict Raises Doubts About ‘Skin in the Game’ Reforms” suggests, Carrington’s maneuvers raise questions about the value of Dodd-Frank’s 5% risk-retention requirement, which is supposed to give financial institutions that issue mortgage-backed securities some skin in the game and therefore discourage the marketing of mortgages destined to fail. The major banks all now do their own mortgage servicing and are in a position to pull exactly the same kind of games that Carrington did, selling bad loans, milking the failing loan pools profitably, and then literally leaving communities to deal with the wreckage.

(Special thank you to Twitter for crashing so I actually had to go to the trouble of writing a blog post.)

February 28th, 2011 | Tags: American Banker, Carrington, risk retention, securitization
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