All 50 state attorneys general are now involved in investigating procedural deficiencies in the mortgage foreclosure process. While these deficiencies are inexcusable, the attention they are getting from regulators and the media is disproportionate to the offense.
I have yet to see a documented case of a borrower who was foreclosed because of procedural snafus who should not have been foreclosed, though the courts may soon be clogged with claims from borrowers who want their houses back because the process through which they lost them was legally flawed. Any injustices done to borrowers, furthermore, have been inadvertent rather than deliberate.
Public outrage against mortgage servicers should be directed at their predatory practices, which adversely affect millions of borrowers rather than a possible handful, and which are deliberate and premeditated. Here is a partial list.
1. Incomplete and incomprehensible statements: There is no law or regulation that requires servicers to provide easy-to-understand monthly mortgage statements showing everything that transpired during the month that affected the borrower’s account: balance changes and their sources; escrow changes and their sources; payments; disbursements; rate adjustments; and fees. I have a file of servicing statements sent to me by readers over the years, and they are a sorry lot; many are provided only once a year, and most are not meant to be understood.
In the absence of comprehensive and comprehensible monthly statements, the unsavory practices described below can go unnoticed by the borrower indefinitely.
2. Profiting from loans in collection: A loan entering collections triggers purchases from third parties, such as law firms or property inspection firms. Some servicers purchase from affiliated entities or are paid referral fees.
Profiting from loans in collections provides an incentive to move borrowers to that status unnecessarily. It also increases the cost to borrowers struggling to return to good standing by repaying arrears.
3. Forced-placed insurance: A similar abuse arises when a careless borrower allows her homeowners insurance policy to lapse. This cues the servicer to purchase its own policy, at a premium two to three times higher than that paid by the borrower, from an insurer with whom the servicer has a financial relationship. The same thing can happen when a loan is in default, in which case the servicer profits at the expense of the investor.
4. Failure to report to credit bureaus: Some servicers do not report favorable payment records to the credit bureaus. This can cripple the ability of a borrower to refinance, which is the point.
5. Conversions to simple interest: Some servicers have a policy that when they purchase the servicing of a pool of mortgages, the loans are converted to simple interest if the note does not explicitly prevent it. Simple-interest mortgages accrue interest daily, and are more problematic and costly for borrowers than standard monthly accrual mortgages.
If a borrower did not negotiate a simple-interest mortgage at origination, a later conversion to simple interest following a transfer of servicing is unconscionable.
6. Suspension of payments because of an escrow shortage: A widespread practice of servicers is to place scheduled payments of principal and interest into suspense accounts when only the escrow payment is short. A payment placed in a suspense account is recorded as delinquent. Even if the borrower makes full payments thereafter, until the escrow shortage is made good the delinquency (and late charges) will continue.
If the borrower doesn’t know what is going on (see Incomplete and Incomprehensible Statements above), this pernicious practice can be a slippery slope to collections and ultimate foreclosure.
7. Lack of disclosure regarding policy toward crediting extra payments: Many borrowers systematically make extra payments to principal without knowing when or whether the payments are being credited. Usually these payments must be received before some day of the month to be credited that month, but that day is very difficult for a borrower to discover.
Borrowers making extra payments of principal need this information to plan their schedule of extra payments in the most advantageous way.
8. Leave records behind on sale of servicing: When servicing is transferred to a new servicer, the purchasing firm sometimes leaves behind the file of payment history prior to the transfer. For all practical purposes, that information is lost. This means that borrowers can question or challenge something that happened prior to the transfer only if they have retained their own files, which most have not been warned to do.
The Dodd-Frank bill enacted this year overhauled many parts of the financial system, but the focus of the sections dealing with housing finance was "originations." None of the servicing problems described above were addressed.
The loan origination market is a minefield for borrowers, to be sure, but they do have choices. When the loan is closed and shifted to a servicing agent, however, the borrower’s choices disappear. They cannot fire that firm for cause, no matter how wretched the firm’s service. The only way they can extricate themselves from a predatory servicer is to refinance, which is costly, with no assurance that the next servicer will be better. In fact, they can end up with the same servicer!