Mortgage servicers and servicing critics agree on at least one point: The industry has made mistakes, and things should change. What's in dispute is the scope and type of problems -- and how often misbehavior plays a role.
David H. Stevens, president and chief executive of the Mortgage Bankers Association, a trade group whose members include servicers, talked with me for this week's story on the state of servicing and said he's supportive of the idea of nationwide mortgage servicing standards -- which seems likely to happen under the guidance of the new Consumer Financial Protection Bureau.
"Coming out with a common set of standards that applies to everybody, ideally applies to all states, would create a system in this country that would have integrity and protect consumers and be enforceable, and that's what we're lacking right now," said Stevens, former commissioner of the Federal Housing Administration. (He expressed concern about competing sets of rules, some in place, some in the works.)
On the subject of servicing problems, he said "mistakes were made, and they were made in a variety of different ways." He said servicers were caught off guard and overwhelmed by the extent of the housing crisis, though he said some companies were more adept than others.
The problems Stevens is talking about are the ones struggling borrowers are well acquainted with by now. He rattled off a list "from lack of trained resources, to being able to properly explain these new [assistance] programs that had been created, to operational challenges of handing off a borrower who calls a call center to someone knowledgeable about underwriting guidelines."
That all falls into the broad category of foreclosure-prevention assistance -- loan modifications, short sales and the like. Situations such as Lutherville doctor Anca Safta's -- where a servicer sent an intent-to-foreclose notice because it wasn't properly recognizing her on-time payments -- "would be an extreme rarity in the process," Stevens said. Loan-modification issues are "the more common challenges we have heard," he said.
Homeowner advocates say problems such as foreclosing on the wrong people, locking people out of their homes and throwing away their possessions when they weren't behind on any mortgage or weren't yet to the point of foreclosure auction, and charging inappropriate fees are more common than the industry acknowledges.
The U.S. Trustee Program, the arm of the Justice Department charged with protecting the integrity of the bankruptcy process, was involved with the investigation that led to a $108 million settlement with Countrywide last year over allegations about fee-gouging before it was acquired by Bank of America.
In November the trustees launched a "concentrated enforcement effort" of bankruptcy cases in locations across the country to closely look at mortgage servicers' filings. Their findings so far suggest "continued, widespread problems," said Jane Limprecht, a spokeswoman for the U.S. Trustee Program.
"To obtain more information, we have filed hundreds of motions for discovery," she said in an email. "In response, servicers have filed more than 200 motions to quash our discovery requests."
Limprecht said the enforcement effort grew out of work on individual cases. "We soon saw that there were broader, long-standing problems that had victimized many homeowners," she said in the email.
What they're looking for include inaccuracies in amounts servicers claim are owed, impermissible charges and insufficient proof.
I asked for examples. Here's what Limprecht provided:
A servicer filed a $30,000 arrearage claim primarily for missed payments. The amount listed for each missed payment exceeded the monthly amount due on the note, suggesting that the missed payment included an escrow payment. There was, however, a separate $370 escrow shortage charge already included on the claim. Further, the servicer claimed other charges, including $1,600 for "foreclosure fees," for which it did not provide an invoice or dates explaining the charges. The servicer amended its claim twice and both times calculated the missed payments differently than in the original proof of claim. The supporting documentation attached to the first amended claim was for a property that was unrelated to the debtors.
A servicer amended its claim four times to add a variety of charges, such as appraisal fees, bankruptcy attorney fees, foreclosure fees, property inspection fees, and interest on escrow. No invoices for the charges or dates for when the charges were incurred were provided. On the most recent proof of claim, the undocumented charges exceeded $6,000.
A claim was filed for $52,042.58. After the debtor objected, the claim was amended to reduce the arrearage amount to $3,156. ...
A servicer obtained forced-place insurance even though the debtors had their own insurance. The servicer then sought relief from stay [in order to foreclose], asserting an arrearage based on the erroneous insurance charges.
No supporting documentation was included for $10,260.50 in "prior service" fees.
After a debtor's chapter 13 plan was confirmed, the lender doubled the escrow payment, increasing the monthly payment by about one-half. The debtor could not afford the new payment and the lender filed a motion for relief from stay to foreclose.
The links above were provided by me for people in need of definitions for escrow and forced-place (also known as force-placed or lender-placed) insurance.
There's been a long-running argument over fees and charges, and whether servicers are purposely squeezing homeowners to drum up more money for themselves rather than helping people who could otherwise avoid foreclosure.
The Mortgage Bankers Association says in a white paper about servicing that it's a "myth" that companies make money from late fees, considering the expenses they shoulder when a borrower is in default. Servicers have no financial incentive to foreclose because they then lose the monthly stream of income they received from managing the loan, the group says.
"I recognize there are mistakes made, but without question, it does nothing but harm to the servicer as well as the family," said Stevens, the trade group's CEO. "Servicers lose on all counts when they make mistakes, and the fees do not offset the expenses associated.”
Congress has heard testimony about servicer compensation that suggests it is indeed playing a role in the way the companies are handling delinquent borrowers' requests for modifications, short sales and other foreclosure alternatives. Laurie Goodman of Amherst Securities Group testified in May to a subcommittee of the Senate Banking Committee that servicers have conflicts of interest that harm both homeowners and mortgage investors, including this one:
The servicer often owns a share in companies that [provide] ancillary services during the foreclosure process, and [charge] above‐market rates on such. Entities that provide services during the foreclosure process that are possibly owned by servicers include force‐placed insurance providers and property preservation companies. (These companies provide maintenance services as well as property inspection services.) Even when a servicer is not affiliated with the company providing the service, they often mark up the fees considerably.
What is the consequence of affiliates of the servicer charging above market fees? Such fees are added to the delinquent amount of the loan, making it much harder for a borrower to become current. Moreover, when a loan is liquidated, the severity on the loan (the percentage of the current loan amount lost in the foreclosure/liquidation process) will be much higher, to the detriment of the investor(s) in that mortgage. It also tends to make servicers less inclined to resolve the loan through a short sale, as fee income that will be earned in the interim (as the loan winds its way through a lengthy foreclosure process) is quite attractive.
More on force-placed insurance tomorrow.