A story at Huffington Post by Shahien Narisipour and Arthur Delaney, about how a couple lost their home as a result of the Administration’s HAMP program, actually serves to illustrate a broader issue, namely, how servicers’ dubious fees can put mortgage borrowers hopelessly under water.
It is critical to understand that it is not uncommon for borrowers to lose their homes thanks to servicer errors and abuses. And this bad practice has policy implications. Whenever we discuss “fix the housing mess” solutions that involve loss sharing, like giving viable borrowers a deep principal mod, some readers react that “deadbeat borrowers” are getting a free ride, and often will contend that they were irresponsible and need to take their medicine.
This black/white picture is simplistic and misleading. Yes, there were people who borrowed too much in the bubble. Guess what? Those people tended to have been subprime borrowers and the resets on teaser loans had pretty much concluded by the end of 2008. As a result, they would have been relatively early to hit the wall. Many have already lost their house.
Another cohort could have made the payments if they hadn’t lost their job or suffered a reduction in hours. And remember how soft this job market it is, so even people who had savings that would have been enough to carry themselves through a typical period of job search are coming up short. These individuals are collateral damage of the global financial crisis, but they too often are depicted as having been reckless rather than unlucky
But the third cohort is most often overlooked and most troubling, which is victims of servicer abuses. This problem is very much underdiagnosed because the servicer is judge, jury, and executioner as far as its charges are concerned. Borrowers find it a pitched battle to get the detailed payment records from servicers, even with a lawyer’s help. Even then, the statements are usually incomprehensible. Attorneys have told me they typically have to hire a forensic accountant both to get to the bottom of the mess and to serve as an expert witness.
Given how expensive it is to fight this sort of case on the real issue, the borrower’s belief that the servicer has overcharged him, many of these cases are instead fought on the simpler grounds of standing. That feeds the perception that borrowers are taking advantage of bank errors, rather than having legitimate grounds for opposing a foreclosure.
So the best we can go by is estimates by attorneys that actually handle these cases. Remember, most people who really cannot afford their house will not put up a fight. Nevertheless, Diane Thompson, Counsel for the National Consumer Law Center said in testimony before the Senate Banking Committee last November that in 50% of the cases she handled, the foreclosure was the result of a servicer driven default. I’ve had attorneys who’ve handled hundreds of cases put the percentage even higher.
Now some readers no doubt may be skeptical that servicer screw-ups or venality can have that sort of impact, so let’s look at the Michigan couple highlighted in Huffington Post as a case study.
The background is a bit ugly. The Garwoods had missed one payment, but this apparently was not unsalvageable; the husband’s roofing business was seasonal. Their servicer, JP Morgan Chase, contacted them and encouraged them to enroll in HAMP.
The HAMP trial mod, which was supposed to last three months, instead ran nine months and lowered their payments by about $500 a month. When they were ultimately refused a permanent mod (despite hearing encouraging noises from the servicer in the meantime), they were presented with a bill for the reversal of the reduction, plus fees, of $12,000.
Stop a second and do the math. Let’s be unduly uncharitable to JP Morgan and assume “about $500” means $540. $540 x 9 is $4,860. That means the fees and charges were $7,140, or nearly $800 a month.
How can charges like that be legitimate? Answer: they almost assuredly aren’t. The payments were reduced as a result of a trial mod, so any late fees would be improper. Thus the only legitimate charges would be additional interest, perhaps at a penalty rate. So tell me how you have interest charges of nearly 400% on an annualized basis on the overdue amount and call them permissible? I guarantee there is not a shred of paperwork anywhere that can support this level of interest charge, either with the investor or with the borrower.
But as we indicated, it’s a hopelessly uphill battle to fight servicers on this issue. The Garwoods threw in the towel and stopped paying last spring. One can dispute whether that was the best move, but even if they have paid the normal mortgage amount due in full each month, it is almost a certainty that JP Morgan would have credited the payments, contrary to the pooling and servicing agreement, to fees first, assuring that the current amount due would be insufficient and thus not arresting the compounding charges. In other words, unless the Garwoods acceded to the bank’s bogus charges and paid the $12,000 in full, there was no way out of compounding fee hell.
We used to call that level of charges loan sharking and would send people to jail for it. It has now become standard operating procedure in banking and no one bats an eye.
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Servicers may be exploiting check-writing culture. Often portrayed as a service provided by banks to their valued customers, checking is an moldy leftover from the commercial correspondence party. Like stale bread, it invites abuse.
Often it’s customers struggling to make ends meet who are demonized after they figure out the kiting option. (Systematic institutional kiters have received little attention.) But it isn’t speculation to ask if banks have benefitted from checking beyond the wildest dreams of poor people armed with pens.
For example, how many homebuyers are savvy enought to send every mortgage payment by certified mail? And how often did servicers, receiving a check by normal mail neglect processing until it fell behind and a fat fee was due? Surely there are some responsible Americans working for servicers, good people who want to help out. But how many of them had a manager looking over their shoulders telling them to let uncertified mail sit?
Many Americans may still not realize that there is a payments alternative. Direct debit/paperless transfers are the standard in Germany. while living poor in the US I paid hundreds if not thousands in bounced check fees, and since moving to Germany 15 years ago not a cent.
We can add this fraud and loansharking to the RICO tally.
Their servicer, JP Morgan Chase, contacted them and encouraged them to enroll in HAMP.
There’s yet another broken contract. If the bank advises a homeowner to take such a drastic step as to miss a payment, no honest observer would think anyone would agree to do that other than if the debtor believed this was a contract with the bank, where the bank promised it would grant the mod in good faith if the debtor qualified. The debtor believes in this contract, and the bank knows the debtor believes in this contract and makes its representations according to that circumstance. So the bank agrees – it’s a contract to modify the mortgage.
I defy anyone to tell me why someone would intentionally miss a payment other than because such a contract existed.
So this is yet more fraud and yet more violation of the sanctified “contract”.
It’s yet another reason the people must purge all faith in contracts and reject as scams all contracts with banks or any other corporation. That’s clearly how the economic elites view them. They laugh at rubes who still believe in the “contract” propaganda.
And yet even most of these gangsters’ most severe critics still collapse in the end and agree that we need for these criminals to exist at all, when we so clearly do not.
And the banks’ reason for purposely forcing people into foreclosure is…..? JPM is doing this merely to extract $12,000 out of the borrowers, and then will ‘credit bid’ in order to be saddled with the house as an REO? Why do it for only a very low five figures per house? Do the investors ever see any reimbursement on these foreclosed loans? I still don’t understand the benefit to the banks of doing this, unless it’s rolling-up and covering up their crime. Why do we never rarely about what happens to the houses after these foreclosures, other than a few articles about bank walkaways in rustbelt minority neighborhoods?
I fully understand this process, since a friend of mine experienced similar with WF. Early on she lined up a buyer for a short sale, which WF refused; then WF refused to even consider her for a loan mod, and demanded $12,000. A few months later they offered her a HAMP mod. Then they foreclosed.
The only possible reason I can think of for this process is if the banks are being paid face value of these mortgages by Fannie, or as a cover-up of their crimes. I find it hard to believe that it’s worth it for a mere $12,000 in bogus fees per foreclosure.
Apparently the banks have already stolen the investors’ money, so it’s time to start over again, churning houses for the fees the banks can make at each roll-over of the housing market? But they’re not writing mortgages now, so what’s the plan for making money on mortgage loans now?
my understanding is that the servicers fees accrued, legitimate or not, after a default are first monies received at the foreclosure sale. it seems that they are gaming the system to improperly become a “senior” creditor for some quick cash for the current quarter.
remember, as the servicer not “owner”, they are trying to maximize servicing fees, they could care less what else happens to the other parties.
Then the servicer is acting in its own best interest, and not in the best interest of the investor, to which it has a fiduciary duty.
Correct.
Amen, Amen, Amen, The servicer has different financial inentives to screw the borrower than the actual owner of the mortage. Nice straw man AR.
This response is typical of folks who can’t get out of the pre-securitization mindset and realize that JPM and others are SERVICERS not loan owners. After the foreclosure, the servicer is not saddled with anything other than a bunch of ill-gotten gains that they take off the top. Even if there is no sale for years, the servicer makes out like the bandit they are. The investors or us taxpayers (or, often, both) are the saddled party.
Anyone who has worked for a bank will tell you it is a crooked and parasitic institution.
NSF checks: Bank representatives will tell you that they will pay the bigger bills first, ostensibly because these bills must be important, such as mortgages or car payments or insurance payments, whereas the little bills are surely insignificant. They are doing you a kindness, right? Except if they pay the bigger bills – of which there are generally fewer – then they can charge all those lovely NSF fees on all those little bills.
Insurance: the bank I worked for (no longer in business) used to “barge” accounts at will. This entailed “losing” insurance information, then informing the customer that if they didn’t show proof of insurance within X days, the bank would provide it for them – at a much higher rate than standard. The customer would mail/fax/present proof of insurance, which would then get “lost”. The bank would take our insurance on the account – earning a fee from the insurer, of course – and then the customer would have to sort it all out.
Predatory or simply smart business? Our laws seem to think it’s smart business.
It used to be that a company’s reputation for integrity would determine its success. Now it seems that the most predatory and unfair are rewarded by becoming TBTF. Or should I say, Too Rich to Fail?
So, as a soon-to-be new homeowner, I of course don’t expect to fall behind on my payments (who does?). What’s the best proactive defense against servicer shenanigans? Send every payment certified mail, return receipt requested? What about electronic transfers from bank accounts – are they legally sufficient to demonstrate payment?
Here’s a case of an elderly couple wth a 1977 vintage mortgage from WaMu, which was acquired by JPM/JPM’s servicer, which proceeded to violate their automatic payment from their checking account by taking an extra $1,000 one month, without notice, saying it was for their property taxes, even though the couple pay the taxes themselves, and were current. This lowered their FICO from 750 to 554, etc. The bank refused to talk with them to iron out the problem. http://foreclosureblues.wordpress.com/2010/12/10/massachusetts-class-action-says-chase-fumbled-mortgage-payments/
I’m with Nathan Williams above – how can we protect ourselves from servicer abuse? My refinance is now being handled by BofA, so I’m more than a little paranoid, since my old loan was with my Credit Union and I never worried about this.
How about it, NC? Is writing a check the best option ( I always thought it was, because then I have a record….) or should I do a direct debit/billpay? I pay all my other bills that way, but not paying the water bill isn’t going to get me foreclosed on!
Tapped Out: How an Unpaid Water Bill Cost a Baltimore Woman her Home
http://huffpostfund.org/stories/pages/video-tapped-out-how-unpaid-water-bill-cost-baltimore-woman-her-home
I am an attorney in the midwest and I represent borrowers. Here’s a letter I recently wrote to servicer regarding junk fees, the names omitted to protect the innocent:
Dear XXXXXXXX,
Please take notice that I represent the above referenced mortgagors with respect to the substantial increase in their mortgage escrow payment. Please communicate directly me with regarding this issue only.
As you are aware, on September 21, 2010, your analysis alleged that my clients had a negative escrow balance. Furthermore, your analysis increased my clients’ tax and insurance payments. As a result, my clients’ monthly payment jumped $663.75 a month, which is an increase of 40%!
My clients tendered to me a ‘detail transaction history’ from their previous servicer ‘XXXXXXXXXXXXXXXXXXXXXXXXXXXXX’ from 01/04/2008 to 06/01/2010 along with a XXXXXXXXXXXXXXXXXXX bank ‘Customer Account Activity Statement’ from 06/03/2010 to 09/15/2010.
I have reviewed both documents as part of my own analysis and I have determined that these documents are utterly and complete rife with errors. As the famous accounting term says, “garbage in, garbage out.”
The XXXXXXXXXXXXXXXXXX document is almost completely illegible and unintelligible and there is no way that the inputted information can be accurate. For example, at lines 98-107 purport to charge 10 separate late fees in the amount of $53.86 apiece. Line 108 has XXXXXXXXXXXXXXXX paying ‘Harris’ $215.60 for absolutely no reason whatsoever given that they are not the servicer, nor the real estate taxing entity nor the mortgage insurer. Line 110 has an ‘Inspection Charge’ for $14.00 for no apparent reason. Line 120 and 121 are each $5.00 ‘Tax Fee’ for tax bills that should have only been charged once.
In another example, lines 124-127 dated 02/16/2009 reflect a disturbing trend apparent throughout the entire printout. Line 124 reflects my clients’ payment of $1,063.51 but then line 125 reverses the payment for an alleged ‘Insuf Funds’ and then line 126 reapplies the very same payment. Line 127 charges a late fee of $53.86.
The reoccurring late fees are another deeply troubling issue that arises repeatedly throughout the printout. It appears that my clients have been consistently charged late fees nearly every time they pay. In fact, in some months, for example, April 2008 (lines 57-58), and June 2008 (lines 66-67), my clients’ payment posts to your system ever so suspiciously one or two days late which meant a $53.86 late fee was assessed. In July 2008 (lines 70-71), XXXXXXXXXXXXXXXX charged a late fee on the July 1st even though payment was made the very same day!
For reasons unknown, in October 2009 (line 178) there is a “Misc Adj” for $606.46 apparently reversing the previous 12 late fees (lines 166-177) – all of which were assessed on the same day during October 2009.
On October 20, 2009 (line 179) my clients’ escrow purports to contain $1,221.52 and in the very next line (180) it is reduced to $668.80 for some reason stated as “Reversal (Prior Day)”. The balance of $668.80 is removed from the escrow entirely in the following entry, line 181, as a “Escrow Adj” and line 182 placed the escrow into the negative with another “Misc Adj” for no apparent reason. From October 2009 to the present the escrow balance oscillates between negative, zero and fully funded.
In June 2010, XXXXXXXXXXXXXXXX took over servicing of the loan and on June 3, 2010, set up the loan and gave my clients a zero escrow account balance.
In short, this loan history is an account reconsoliation nightmare and with accounting like this it comes as no surprise that the previous servicer filed for bankruptcy in mid-2010. As such, it is obvious to the layman that XXXXXXXXXXXXXXX completely and utterly screwed up my clients’ escrow. This is no fault of my clients.
XXXXXXXXXXXXXXX , using faulty information provided by the previous servicer, has negligently and erroneous computed my clients’ escrow balance shortage as $4,901.99. My clients do not owe the escrow shortage and furthermore, cannot afford to pay it. The money is not in their budget to do so. Just because XXXXXXXXXXXXX says that there is a shortage does not mean that there actually is a shortage given the accounting errors that arise from using transaction history that appears to be prepared by a third grader.
As such, my clients demand that you properly reconcile their escrow, by hand if necessary, and determine with specificity the true balance. It is blindingly obvious they do not owe $4,901.99. In the alternative, I suggest XXXXXXXXXXXXX bear any monetary loss, paper or real, if it turns out that the previous servicer intentionally or negligently misappropriated my clients’ escrow funds.
Very truly yours,
xxxxxxxxxxxxxxxxxxxxx
I wrote this letter in mid December and I have yet to hear anything whatsoever from the TBTF bank.
Yves,
Thanks for writing again on this important topic. Its very sad to see people’s ethical impulses in trying to do the right thing in participating in HAMP being used against them by servicers. All I can say is that people have to realize that if they are having trouble keeping up they should discount their home’s value by another 20%, if they live in chicago for instance, and then decide, based upon their accrued equity whether it makes sense to keep paying on a declining asset, given their property tax burden.
It is just an asset that must be looked at in a black and white manner. If the calculus isn’t favorable, stop paying, save your money and force the hand of the lender to give you a principal reduction as a condition of every making a payment again.
Yves,
Thanks for writing again on this important topic. Its very sad to see people’s ethical impulses in trying to do the right thing in participating in HAMP being used against them by servicers. All I can say is that people have to realize that if they are having trouble keeping up they should discount their home’s value by another 20%, if they live in chicago for instance, and then decide, based upon their accrued equity whether it makes sense to keep paying on a declining asset, given their property tax burden.
It is just an asset that must be looked at in a black and white manner. If the calculus isn’t favorable, stop paying, save your money and force the hand of the lender to give you a principal reduction as a condition of ever making a payment again. The entire financial industry has been bailed out to the tune of $3 trillion us tax payer dollars. Why shouldn’t the homeowner be allowed to get some of their own tax dollars in the form of a principal reduction.
“We used to call that level of charges loan sharking and would send people to jail for it. It has now become standard operating procedure in banking and no one bats an eye.”
The incredibly sad thing about all of this is I once thought the obama admin would “bat an eye” but the only “bat” we’ve seen from them is their “going to bat” for the banks.
It’s a sad, sad world.
If I were a deal maker or hedge fund selecting reference collateral for a CDO that I planned to short, no doubt I would select entities with servicers that actively engage in mortgage servicing fraud because servicers are so integral to the process and hugely influence the disposition of the collateral. Ka Ching !