Lenders Swamped By Foreclosures Let Homeowners Stay

[jeffrey]

Banks are so overwhelmed by the U.S. housing crisis they've started to look the other way when homeowners stop paying their mortgages...

Lenders who allow owners to stay in their homes are distorting the record foreclosure rate and delaying the worst of the housing decline, said Mark Zandi, chief economist at Moody's Economy.com, a unit of New York-based Moody's Corp. These borrowers will eventually push the number of delinquencies even higher and send more homes onto an already glutted market.

"We don't have a sense of the magnitude of what's really going on because the whole process is being delayed,'' Zandi said in an interview. "Looking at the data, we see the problems, but they are probably measurably greater than we think.''

Bloomberg.com: Exclusive

[Joan.of.the.Arch]

Mortgage servicers, who collect monthly payments and are responsible for starting the foreclosure process, also were caught short-staffed....
....``The most experienced people you can bring in are origination people,'' Stern said. ``But for a bank it's a moral hazard to have the same people who originated the loans now modifying those loans. That wouldn't be desirable. Once around is enough.''

Can someone explain this? Maybe starting with what a moral hazard is?

The only thing I can think of is that originator employees might intentionally negotiate "bad" deals with borrowers in hopes that a lot of borrowers failing to pay their mortgages would then provide more work for the originator employee who can then be hired as a "servicer." But that sounds pretty far fetched to me. There must be something more obvious I'm missing.

[Seeker]

moral hazard: Definition and Much More from Answers.com