Servicers vs. Actual Owners Of The Mortgage

Mortgage securitization, the process of pooling mortgages and converting them into bonds sold by Wall Street investment firms, has had many consequences that are bad for consumers. But, one that has been standing out recently is the disconnect between the owners of the mortgages (investors, trusts, etc.) and the people who service the mortgage.

Most people don't know that the company you write your check to every month or receive statements from actually doesn't own your mortgage.

I was on a panel at the American Bar Association's Equal Justice Conference last week and I raised the point that servicers are often not acting in the best interest of the actual owners of the mortgage loan. Specifically, they are insisting on homeowners paying late fees, attorney fees, inspection fees, etc. to avoid foreclosure....when everybody knows that it is in the actual owners interest to avoid foreclosure all together, forgive those fees, and get the homeowner back on track. Foreclosure is expensive. Yet, homeowners are being forced into it by servicers.

Other folks on the panel vehemently disagreed, including a representative from the Office of Thrift Supervision. She stated that servicers always waive these fees to avoid foreclosure. That hasn't been my experience. And, I don't think that it has been the experience of too many of the housing counselors I talk to. Well, to that end, I wanted to point out Professor Porter's great post at Credit Slips. Here is an excerpt (click here for the full). I will wait for my apology from the Office of Thrift Supervision.

In the recent hearing on mortgage servicing, the Senators probed Countrywide's chief executive for loan administration, Steve Bailey, on exactly how mortgage servicers (distinct from the owners of the mortgage) make their profits. Mr. Bailey confirmed the description in my article of the three ways that servicers earn revenue: a fee that is a percentage of the mortgage, float income from interest on temporarily-held funds, and retained fees such as late charges and other fees that are paid by borrowers. Senator Schumer described the imposition of these default costs as "piling on" and expressed a fear that a "vulture mentality" was developing among servicers as defaults rise. Mr. Bailey tried to diffuse these concerns, but Senator Schumer called him to task in attempting to deny that servicers can and do generate profit from delinquent homeowners, even when borrowers and loan holders might benefit if the family retained its home, rather than struggle to pay an avalanche of default costs. The Senator quoted from a Countrywide earnings' call that characterized the "piling on" practice as a "counter-cyclical diversification strategy."

....

Mr. Sambol is saying that, for the 75-88% of loans that Countrywide services but does not hold any loss position, the servicer's additional expenses when a loan defaults are paid by the borrower. Defaults do not cut into a servicer's profits. Indeed, the reference to ancillary income tending to "fully offset" increased operating expenses suggests that in at least some cases, a servicer will make money when a loan is non-performing, particularly if that loan is repeatedly non-performing but ultimately the borrower pays (Gee, that sounds a lot like the situation before bankruptcy, doesn't it?)

I think the most damning part of this statement is the reference to "in-sourced vendor functions." Allegations are swirling around that servicers, and their agents such as MERS, bloat their actual costs of collection or default and build in a profit margin. This is illegal, in part, because most mortgages only permit the recovery of "costs," which most courts read to mean actual costs incurred, not some amount chosen to "offset" the costs of servicing delinquent loans. Judge Elizabeth Magner has a recent opinion that addresses the propriety of this practice. She writes in the Memorandum Opinion in In re Stewart (07-11113, Bankr. E.D. La. April 10, 2008) that "Wells Fargo's national counsel has represented to this Court that only $50.00 of each invoice represents the actual cost incurred by Wells Fargo fro a BPO. The remaining amounts, approximately $880.00 in total, were added to the actual costs by Wells Fargo. The Court concludes that these additional charges are an undisclosed fee, disguised as a third party vendor cost, and illegally imposed by Wells Fargo." Her opinion, combined with the statement in Countrywide's earnings statement, suggest that Senator Schumer may be too generous in calling servicers' practices "piling on." If this practice is widespread, the more apt term may be "ripping off" struggling homeowners.