One of the many themes being used to cultivate class warfare in foreclosure-land is the idea that people who are losing their homes are getting an unfair break. Many of them have learned that banks are moving very slowly on foreclosures and so they stay put until the sheriff evicts them. One culprit is crowded court dockets, which are often blamed on borrowers who are gumming up the works by fighting foreclosures. But that’s an exaggeration; the vast majority of borrowers don’t contest foreclosure filings. And as we have heard at some length in Congressional testimony this week, borrowers that do seek to stay in the home typically fall into one of three categories. First is that they are in a mod program (and became delinquent at the urging of the bank) but find the foreclosure is moving apace, despite the bank saying otherwise. Second is that they believe that they are not in arrears, that the bank has been charging unwarranted fees. Third is that they filed for a Chapter 13 bankruptcy (meaning they are holding all their creditors at bay while working out a repayment plan) and the bank is still improperly trying to take their house.
So borrowers getting to live rent free until they are told to depart is hardly their fault; the timing is entirely under the bank’s control. And this extra time is no freebie: banks can and do seek deficiency judgments when the proceeds from the home sale fall short of the mortgage balance, so the borrower in many cases could be pursued for the mortgage payments due during the extra months, which would be added to the principal balance.
I had long thought that the big reason banks were moving slowly was that once they seized the property, they would be liable for real estate taxes and upkeep, which could be quite a cash flow drain if a local market already had too much housing inventory and the sales process could be expected to be slow. But there may be more obvious incentives.
Kate Berry, in an American Banker story, reports that servicer profits are very much correlated with how long a mortgage loan stays in the securitization trust. Industry experts contend that longer holding periods allow the servicer to tack on more fees, which is to the detriment of investors.
From American Banker:
“The property is never worth zero, but there were fees added to the loan balance that exceeded the amount invested by the trust,” said Ritu Chachra, a RangeMark managing director, who analyzed securitized loans in which the loss severity for investors exceeded 100%. “The longer a loan stays in a trust and is not liquidated, the longer the servicer has to tack on these miscellaneous fees.”…
Ultimately these expenses are paid by investors…Private investors in mortgage-backed securities complain that loan servicers’ incentives are not aligned with their own and that the servicers do not provide loan-level data or a breakdown of charges and fees that ultimately come out of bondholders’ cash flow….
Evidence in court cases also suggests that some servicers have padded fees or steered foreclosure-related business to in-house divisions or affiliates…
“Foreclosure costs should not be more than 3% to 5%, so if the losses are higher we think there is either appraisal fraud or losses the servicer has tacked on,” she [Chachra] said…
Many of the fees charged by servicers are relatively small. But with defaulted borrowers staying in their homes an average of 18 months before heading to foreclosure, according to Lender Processing Services, every $40 monthly late fee, processing charge or broker price opinion fee compounds total losses.
“The longer this drags on, the more fees are involved for the attorneys and the servicers themselves,” said Steven Gillan, the executive director of the American Alliance of Home Modification Professionals, an Astoria, N.Y., company that helps servicers with the government’s loan modification program. “The servicers always argue that they’re not making money on foreclosures, but all the late fees and penalties are tacked on to the final value of the property, which increases the losses.”..
O. Max Gardner, a North Carolina consumer bankruptcy lawyer, said servicers “double-dip, triple-dip and charge fees on things that aren’t even real.”
In a Nov. 12 speech, Sarah Raskin, a governor of the Federal Reserve Board, admonished servicers for padding late fees, BPO fees, property inspection and attorneys’ fees, and for inappropriately assessing force-placed insurance. “The servicer makes money, to oversimplify a bit, by maximizing fees earned and minimizing expenses,” Raskin said, adding that “a foreclosure almost always costs the investor money, but may actually earn money for the servicer in the form of fees.”
The more you look at the foreclosure crisis, the more it becomes obvious that servicers are the problem. Everyone but the servicer (and subordinated bond investors) benefits from mods to viable borrowers. Servicers are in the game of maximizing fees, and until a way is found to rein them in, the needs of a small group of business units will continue to have a greatly disproportionate impact on the economy as a whole.