Servicer Distrust as an Obstacle to Mortgage Mods

Before we get the usual objections to mortgage modifications, I need to remind readers that in the old fashioned days of banking, when bank kept the loans they made, it would be unthinkable NOT to modify a mortgage or any other loan when a borrower got in trouble, assuming the borrower was viable. “Viable” means that the borrower still has enough income to pay enough that the bank still comes out ahead by modifying the loan rather than other recovery strategies, which for a mortgage loan means foreclosure.

This isn’t charity, it’s good business sense.

Many commentators have pointed out that mortgage servicers are the big reason mods aren’t happening. Most mortgages in recent years were securitized, and the servicers are not the investors. With loss severities (finance speak for losses on the original investment amount) at 70% and higher on a foreclosure, a principal mod in the 30% to 50% range is a clear win-win.

But servicers have lots of reasons not to go there. First, they get lots of fees upon foreclosure and have organized streamlined processes to make it a profitable activity for them. Second, they are obligated to keep advancing principal and interest when borrowers default. Technically, they can stop when the borrower looks irredeemable, but in practice, they keep advancing P&I until they reach the mortgage balance. So they also are driven to foreclose to recover P&I advances. Third, they are just not set up to do mods. Not only do their contracts not allow for them to collect fees to do mods, but for a mod to have any hopes of success, you need to do some borrower assessment. Servicers are factories, highly routinized, so doing anything on a one-to-one basis is difficult given their operating parameters.

These first three reasons have gotten some attention in the media and blogosphere. But a fourth reason has not gotten the attention it deserves. Borrowers don’t trust servicers, and with good reason. It’s virtually impossible to get consistent answers from servicers. If you have an error, even with the intervention of an attorney, it seldom gets corrected. And the horror stories from HAMP both showed the borrower worst fears to be fully warranted and further damaged their already bad reputations. Accounts of banks requiring borrowers to submit the same paperwork multiple times because they “lost” it were legion. Even worse, homeowners were instructed to become delinquent to qualify, then told they were going to get the mod (or even receiving a written mod offer) while they continued to receive foreclosure notices. The servicer would tell them to ignore the foreclosure notices, only to find it was the legal notices, not the servicer reassurances that mattered, and they’d lose the home.

Mistrust of servicers is old news to anyone in this space. Even the Bush administration sought to involve mortgage counselors to serve as the front line in mortgage mod assessment, precisely because the counselors had the right skills (experience in dealing with borrower budgeting) and were perceived to be trustworthy. Another approach, created by NACA, has borrowers bring documents to a specialist, who uploads them to a server so the servicer who can verify them, then works with the borrower to enter household income and expense data into a spreadsheet so that the servicer can see how much cash flow the borrower has, which is crucial to understanding whether they can afford even a restructured loan.

The New York Times, in an article on the Cleveland program E.S.O.P., again underscores the need to find someone other than the servicer to assess and work with stressed borrowers. Key extracts:

ESOP (which stands for Empowering and Strengthening Ohio’s People) engages loan servicers or lenders and borrowers, acting as a good-faith intermediary between the parties, so it can effectively negotiate sustainable mortgage “workouts.”…

One thing that distinguished ESOP from the government’s program, as well as other mortgage counselors, is how it holds lenders accountable. It has gotten several large companies, including Bank of America, CitiMortgage, Ocwen Financial Corporation, and Litton Loan Servicing, to sign “fair lending agreements” which spell out the terms of their working relationship. In its agreements, ESOP requires that lenders provide a single point of contact, someone with decision making authority. Without this access, ESOP says, homeowners get bounced around the bureaucracy, making little progress, and files simply vanish, frequent complaints from borrowers who seek to take advantage of the government assistance. ESOP also insists on a defined escalation process for cases it believes are mishandled. Some agreements give it the right to appeal all the way to a lender’s chief executive.

ESOP also succeeds by adding a human element. They bring executives from banks and loan servicers on community tours, where they get to meet their homeowners and see the effects of their policies. These neighborhood tours almost always strengthen ESOP’s partnerships with lenders. Countrywide (now owned by Bank of America) signed an agreement after senior executives took a tour of Slavic Village, an area on the east side of Cleveland where a third of homes, many of them foreclosed by the lender, remain vacant, boarded up, stripped and ransacked, demolished, or occupied by squatters and drug dealers.

So why don’t the banks refuse to sign the agreements or take the tours, and just foreclose? ESOP uses both a carrot and a stick.

The carrot is that ESOP genuinely helps its lenders do something they are not structured to do well: communicate effectively with a large number of distressed borrowers… The state of Ohio’s foreclosure prevention program, “Save the Dream,” forwards its applications from homeowners to loan servicers and tracks the companies’ response rates. In its 2009 report (pdf, p. 16), the response rates for Chase, US Bank and Wells Fargo were all less than 2 percent. By contrast, Countrywide’s rate was 72 percent and Ocwen’s was 85 percent. The latter two have signed agreements with ESOP.

When it comes to dealing with borrowers, ESOP has two major advantages over lenders. First, while lenders have many competing interests, ESOP specializes in saving homes. Second, borrowers tend to trust ESOP ─ which is a free service ─ so they provide more comprehensive and truthful information, the key to a solution. They also know that ESOP can tell when a lender is offering a reasonable deal or trying to take advantage of their situation. In many cases, ESOP gets better information than lenders do — clients are more forthcoming about things like credit card debt and cell phone bills, for example… Finally, ESOP doesn’t press lenders to do workouts that homeowners can’t sustain, which builds trust among their partners, too.

In its dealing with homeowners, ESOP is both compassionate and tough. The goal is to help clients take control of their lives, not to cushion them from reality. If three phone calls to a client go unanswered or a document requested fails to arrive within five days, the file is closed. The tough love approach works. In 2009, 5,011 homeowners walked into ESOP’s offices and 63 percent complied with all information requests.

One of the casualties of the financial crisis has been trust in banks. Borrowers are understandably wary of cooperating with a party that is at best bureaucratic and uncaring. Parties like ESOP, which can show banks the benefits of behaving better towards borrowers, and convince borrowers that it is a fair broker, serve as an important remedy in the foreclosure crisis.

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  1. skippy

    “One of the casualties of the financial crisis has been trust in banks” Yves…

    Skippy here…the direction and velocity of money…purchasing power and asset value as defined by labor vs. capital is at a historical mismatch since post WWII, for the west…victors of the last global conflict.

    They let them smell the roses and then when things got tough…politically, environmentally, lifestyle ARB, economically, they pulled the rug out and for what[?]…self indulgent mental masturbation….cough neo-liberalism…

    Skippy…I know the answer…some monkeys eat the lesser casts…to ensure their survival…that does not make it all the more palatable…to me.

  2. psychohistorian

    So here we have an industry that is operating against societal interests and in some cases their long term financial interests. In the past we had a government that rose to such an occasion by imposing regulation and controls on such industries of the day and those policies and regulations provided the basis for long term grown and stability….and a commensurate reduction in the accumulation of wealth, power and control of the ultra rich.

    These regulations and controls have been successfully reversed as is evident by our current situation (even without Wikileaks the facade of control is visibly shaky). Will America devolve into a police state playground for the rich and their management level (banks, corporations, politicians, etc.) while the rest of the labor competitive work force become part of the world’s masses fighting for wage scraps as elective consumption resets worldwide? It sure looks that way to me

  3. Francois T

    “This isn’t charity, it’s good business sense.”

    I may be reading too much into this, but to me, this simple sentence summarize a lot of what has been going wrong recently. That Yves has to write such an obvious reminder shows that emotionality, morality play and severe deficiencies in financial critical thinking have become a plague among the hoi polloi.

    Either that, or the trolling problem is much more severe than I previously thought.

    1. attempter

      The problem is that we should reject both “charity” and what’s “good business sense” for organized crime as frames that have any validity. But is seems we have a long way to go to reach any higher consciousness than that.

    2. Paul Tioxon

      Good business sense can be divided between the state chartered banks and the ABA chartered banks. A National Bank charter can frequently find state banking commissions taking a pass on the level of scrutiny, if any, it performs on other than the its state chartered banks. Over the past several decades, the proportion of state charter banks has declined along with the total number of all commercial banks, since the virtual elimination of the S&L industry in the 1980’s.

      In the good old days of state banking, hiding a non performing loan would be good business in that you would not have to face the harsh light of bank inspectors questioning your lending practices, and calling upon management changes and/or increased capital requirements. By working with a client and maybe modifying a loan, or better yet, getting the loan off of your books by having them refi elsewhere, you do not look like the dope who does not know how to lend money to the kind of people who know how to pay it back. Nobody, pols and chambers of commerce boosters, wants to see bad banking leading to businesses going under, causing unemployment and making your community look the place where business goes to die.

      The trend towards National charters resulting in the current gargantuan multi state banking world produced the outsourcing of everything not considered to be the core business of the banking industry, including servicing and apparently any worries about regulators examining the books or pressure to make managerial changes etc. The state government’s regulatory structures are being byassed by a more friendly and captured set of Federal regulators. The National scale of banking is causing the demise of local control on the state level and community level of the everyday lives of people, as capital comes from very far away, if it comes at all.

  4. Matt

    Did Countrywide/BAC turn on a dime in Ohio? Months ago Countrywide was the poster boy for the servicer black hole from which no useful contact could emerge.
    Or is this a shill piece from the NYT?

  5. attempter

    I saw the stick for the homeowner, but I missed the stick for the banks. Was it supposed to be where that ellipse is?

    Here’s an idea for a stick: When we commence the lot redemption programs, we start with banks that refused to sign such agreements. That might make it sound more like justice from the point of view of people still thinking in terms of the legitimate business vs. organized crime conundrum.

  6. Leviathan

    Good piece, Yves. Thanks.

    Here’s the problem: well run community organizations like ESOP are (like good servicers and honest bankers) thin on the ground and hard to build from scratch. So, to whom will the estimated 11.5 million (Amherst Securities estimate) American families headed toward foreclosure turn for help?

    There is no quick fix. By the time agencies like this could hope to ramp up to speed, millions more will have passed to the other side.

    The banks must realize their own folly and the government must force them to cut better deals with borrowers.

    Not holding my breath.

  7. ftm


    “The state of Ohio’s foreclosure prevention program, “Save the Dream,” forwards its applications from homeowners to loan servicers and tracks the companies’ response rates. In its 2009 report (pdf, p. 16), the response rates for Chase, US Bank and Wells Fargo were all less than 2 percent.”

    So this Ohio Program would collect all the relevant information from borrowers and forward it to servicers and then track what happened. And these large criminal gangs(servicers) could only respond to a state run program less than two percent of the time. WTF!! Maybe Jamie Dimon can devote some of his bonus this year to hiring a few more people to work on foreclosure workouts.

    Everyone knew servicers were way understaffed and swamped but this confirms they are willfully non-responsive.

    Where is Obama on this? There is a huge opportunity here to support the housing market and homeowners by taking mortgage restructuring away from the servicers and giving it to a third party.

  8. Duke of Youngstown

    We call ESOP (one of several groups we partner with) “anti-brokers” who do “un-lending”. It’s a hard slog on every file and frankly, the pay sucks for the value these unsung heroes bring to the communities where they do their work.

    Our country was set upon by hundreds of thousands of morally compromised mortgage brokers who pulled down six figure incomes to drumming up destructive loans for subprime and Alt-A lenders. Unfortunately, we can only number foreclosure counselors in the low tens of thousands, and none of the industry or policy gurus have figured out how much an anti-broker doing un-lending can accomplish to ameliorate this disaster, one distressed homeowner at a time.

    I’m sure they’ll come around after we throw a few more trillion dollars onto the foreclosure bonfire. And there is no reason to assume the servicing industry can’t drive loss severity rates past 70% up to 100%. Give them another uninterrupted two years at the “default servicing” trough, and my money is they will push losses well past 100%.

    As ESOP and other counseling groups make clear every day, it ain’t that complicated. But there is still much more money to be made in this country doing the wrong thing over the right thing. On that front, there’s no change in sight.

  9. F. Beard

    One of the casualties of the financial crisis has been trust in banks Yves

    Great! Since when should counterfeiters be trusted?

    I can see how charity might be suspect in some people’s eyes but even Ayn Rand (who hated altruism) insisted on honesty. Why can’t we as a nation at least insist on that? Oh yeah, we have a form of honesty, Assets = Equity + Liabilities, but that is a sham as far as fractional reserve banks go since they create both assets and liabilities as they “lend”. Pure hocus pocus and we as a society allow it. Well, guess what? As well as being dishonest it is (it should be no surprise) unstable too.

    1. ohioralph

      F. Beard, you need to modify your comment to refer to fractional reserve banking as fictional reserve banking.
      The banks have no reserves and hence practice mark to fantasy accounting with their make believe loans and then back them up with Basil 1,2,3 capital requirements. With a fantasy like this world, is there any wonder that banks cannot be trusted.

      1. F. Beard

        … you need to modify your comment to refer to fractional reserve banking as fictional reserve banking. ohioralph

        Agreed. Fictional reserve banking it shall be then, henceforth.

  10. NYT Bombs Iran

    There’s that word again “viable”. Right – nothing to get emotional about, there are many among the swarming mass of human capital who are simply not viable. Why the rehash from a sometimes questionable source – the NYT? , including that Gretchen style depravity of assuming “what’s done is done” which makes little sense, unless it is much easier, much more convenient to accuse the lil’guy of wanting a luxury item – a house for heaven’s sake.
    In other words, haven’t we concluded that Banks/Fannie Mae et al were never concerned with the borrowers ability to pay? Underwriting standards, regulations gutted, unheard of price manipulation. Now, after the bombs were dropped on American villages, we wonder who is allowed to stay there, based on an efficient measurement of their viability. Get real please!

    1. Wendy

      ah! right you are but that’s when there’s a fee or three to be made. no fee? no warm body to help you solve your problem.

      what I wonder about is the obvious conflict of interest that the servicer has with the investors, esp. when the servicer seems to be a clear fiduciary. even if there is a conflict waiver in the MBS package, can you waive fiduciary conflicts of interest?

  11. Fannie Violence

    “Servicers are factories, highly routinized, so doing anything on a one-to-one basis is difficult given their operating parameters.” Weren’t they fully staffed and goin’ one on one when they doled out debt bondage like candy?

    1. Wendy

      ah! right you are but that’s when there’s a fee or three to be made. no fee? no warm body to help you solve your problem.

      what I wonder about is the obvious conflict of interest that the servicer has with the investors, esp. when the servicer seems to be a clear fiduciary. even if there is a conflict waiver in the MBS package, can you waive fiduciary conflicts of interest?

    2. f247

      No. They were thinly staffed as all get out. That is the history of the servicing business over the past 20 years. Standardize, automate, consolidate, keep customer contact to a miminum, cut costs.

  12. dejavuagain

    Today (Wed. 12/8) Judiciary Hearing for 10:00 AM on foreclosures has been “postponed” – this was going to be a panel where I suspect the foreclosure attorneys were going to do some damage. This was the panel that was supposed to testify on Dec. 2

    1. dejavuagain

      Yves says: “Second, they [the servicers] are obligated to keep advancing principal and interest when borrowers default.”

      True, but does not anyone wonder whether this a “good” thing that servicers were put into this position. It is good for the original sponsor, for they can “sell” the certificates with claims of a steady cash flow. But, the obligation itself assure disfunction.

      Question – why would an independent servicer entity every agree to be a “bank” for the certificate holders at at the behest of the hands of sponsor of the deal?

      How can the servicer “honestly” obtain the cash needed to make these payments Why would they do this?

      The problem is that the pooling and servicing agreement place all the responsibilities on the servicers, while all of the profits go to the deal makers who take out 50% on bonuses the year the deal was closed.

      This is why it is appropriate to describe the deal structures as sociopathic, if not plain anti-social; is it not appropriate to describe the YBGIBG deal architects as sociopaths, if not anti-social. That these problems would occur in time of economic downturn were predictable, and even predicted.

      Thought must be given to a new structural paradigm for these MBS/REMICS – one reform would to prohibit the sale of servicing, or to not permit the seller of servicing to take the proceeds as income in one year, but must stretch the income out over the life of the deal. The idea is that the servicing fee income for the servicer cannot be allowed to be stripped out. The servicers should be able to use the servicing fee for the sole purpose of servicing, and not paying off the financing costs for purchasing the servicing.

      The point is that many attack Yves and other blogs for not proposing solutions. There is a need for solutions to the past and solutions for the future. Before proposing solutions, the causes of the problems must be identified first.

      The first issue to understand is that perhaps the way in which the deals are structured are a major part of the problem.

      Another issue is that the mortgage servicer should be isolated from conflicts – they may not be owned or controlled by those having second liens. Nor can the servicer have any involvement in the splitting of the cash flow for the various tranches. Finally, as noted, they should have no obligation to make advances. Perhaps, that should be handled by a separate entity as well.

      1. Nicholas Weaver

        Its actually a VERY good deal for the servicers. True, it requires a large amount of float, but on the eventual foreclosure, the servicer gets the payout first, WITH a hefty interest rate.

        1. dejavuagain


          Thanks for pointing this out. I just looked over the PSA that Yves posted the other day in the RASC Series 2007-EXMx1 Trust. It is not readily apparent how this works. The servicer is able to reimburse itself under 3.10 (a)(ii). But, the receipt by the servicer of interest on advances, and the rate applicable thereto, is not at all evident. If you would point this out in this PSA, I would be appreciative.

          Your point is interesting, for this would suggest that there is an incentive for a servicer to delay foreclosures, if the spread obtainable on advances to the investors is significant at all.

          1. f247

            servicers PAY interest on advances. servicer borrows $ to make advances to the trust, and there is a cost to borrow that $. (sorry if that’s real obvious, but i don’t get what nicholas is referring to here)

  13. Brian Longley

    I guess I will never understand the dichotomy of top down and bottom up views to this “crisis”. On the top, everyone is still attempting to cover their delicately coiffed fur to find a solution for the country, the investor, the bank. There is always an attitude that it will be fixed. I have been around long enough to note no one but a mechanic fixes anything. People that are not simply stare at something in wonder hoping it fixes itself. Finance must be protected! shouts one group, The public first! shouts another.
    But to realize that the voice from the top is one of protectionism, and the voice from the bottom is a voice of protectionism.
    I do wish all the brilliant minds could for a moment realize that with the increase in money from an arguable 12 Trillion in world currency, and 60 Trillion in pretend fiat “agreements”, there is an issue that is totally ignored.
    There isn’t 60 trillion. It is vaporous. It is fiction. It is not as real as Harry Potter. Those that continue from the top wanting payback for someone else’s haircut will be screaming it until they too are looking for a piece of bread and such. The people with the homes, the ones that rent apartments, you know, the people that do all the work when there is work to be done?
    If you remove them, disenfranchise them, destroy their families, futures and their nation, not to mention their dreams, You will never get them back to your side. They have no reason to trust again. They have no reason to believe anyone again. The “hope” turned out to be dope. The big lie was used as successfully as ever before.
    If the people aren’t restored to their homes, what do you figure, a few more years of this pretense before fascism?
    Go to the barber. Get your financial haircut. If you don’t, the little guy, maybe even the barber is going to cut your throat next time you come back to sit in his chair, or taxi, or office desk. He has realized the big guys are the problem that killed his children’s future.
    Wake up before you finish your dream and see what life is really like.

  14. Siggy

    One should first of all trust only themselves. After that one should assume that each and every counterparty is acting in its own self interest.

    Now the question becomes is the servicer’s best interest my best interest? And; is the servicer’s best interest the lender or note owner’s best interest? This latter question should give rise to the realization that the borrower can only look to himself for support.

    As to viability, that is where the issue should be resolved; but then, how can you afford to give consideration to that when the borrower was initially possesed of insufficient income by a factor of 10 or more?

    I say liquidate the loan, evict the squatters and raze the house lest it become a habitat for crack.

    As to fraudclosure, we would do well to begin prosecutions! Absent prosecutions there will be no road out of the quagmire.

    1. attempter

      I say liquidate the loan, evict the squatters and raze the house lest it become a habitat for crack.

      Well, the first of those makes sense. But if you don’t want the third, why do the second? (And why call taxpayers who own the bank and therefore the land “squatters”?)

  15. financial matters

    ((Note that this refers to people not corporations. One wikileak observed that what bothers the chinese populace the most is corruption))

    Another tenet of neoclassical economic theory is that people always act in their own self-interest and that this oveall leads to the good of society. There are many holes in this theory but I think one of the more interesting is that people do actually cooperate with each other and help each other out a fair amount…

    and that pure self-interest can be pretty chaotic… from Yves Smith Econned

    Central to the problem is the assumption that when asked a question, the individual gives an answer which will maximize his personal gain. How good is this assumption? I doubt it is very good. “Where is the railway station?” he asks me. “There,” I say, pointing to the post office, “and would you please post this letter for me on the way?” “Yes,” he says, determined to open the envelope and check whether it contains something valuable. (Nobel Prize winner Amartya Sen)

    1. attempter

      One wikileak observed that what bothers the chinese populace the most is corruption.

      If only that were so in the West…

      I hope the persecution of Assange doesn’t interfere with the promised bankster leak delivery.

  16. aletheia33

    i have coined a new term: “gold-collar” crime, to refer to criminals who belong to the international predator class with no national loyalties; they are creative, they think outside the box, and they have long ago left behind the traditional white-collar criminal’s motives; their chief aim is not really monetary gain, as the thrills of acquiring and spending actual money have long lost their freshness for them. they simply seek to outdo their class-mates in an escalating game of “mine is bigger than yours.” they are addicted to the hit they get from their moments of one-upmanship of each other, a hit that becomes less and less exciting as tolerance builds in their psyches, forcing them to seek greater and greater takings. they have been “using” for so long that no antidote or alternative can help them quit; they are now in the late stages of dependency.

    what we need to do with these gold-collar greedheads is evict them from the bunkers they’ve established in the world financial system, which they have taken over without sufficient moral capital to have any right to do so, and raze the shadow economy within whose protection they cruise constantly, desperately seeking their next “kill.”

  17. Leviathan

    I’m linking to a very interesting study from the good people at the FDIC about what happens to foreclosees in the years after the event.

    In a nutshell: their credit is usually shot for a very long time, sometimes forever. And no one knows why. But I have a guess. It’s partly financial (can’t get loans, may be hard to get new jobs, even apartments) and partly psychological (the system is against me, why should I strive for middle class respectability?).

    Eleven million families may be foreclosed on in the next few years. That’s a lot of collateral damage. Think about that before calling people deadbeats and saying they get what they deserve.

  18. Forler98022

    My mother who is now disabled has filed her hamp 3 times now and they keep loosing all of it but the hardship letter and they sent us a letter telling us
    to resend some papers by a curtain date and the date was up before they even mailed the letter to us.
    The second time we filed we contacted Indymac three days later and they told us they had every thing they needed then two weeks later we called and we asked for a status update on are Hamp and the lady told us they were missing every thing but the hardship statement and we would have to resubmit every thing and they would need another thirty days to do that to reexamine it
    The third time we did the fax hamp and they confirmed all the pages then three days later when we called they said nine pages where missing and then
    they said it will take another thirty days again.We refaxed them with the cover letter and are now waiting again and are running out of time.
    Every time we talk to a person at Indymac bank we get a different person and they wont ever give there full name same thing with the hope for home owners people.And every time we call indymac now we get conflicting answers one person will tell us one thing then if we call back a few min latter and get some one else they will give us a completely different answers.
    Has any one else had these problems?

    1. ScottS

      Many cynics would say that in this case HAMP is working as intended. That the bank is stringing your mother along to get some more payments out of your mother and leave her with the carry costs (property tax, up-keep, etc).

      Yes, it happens to a majority of HAMP applicants. Even the ones that successfully get a temporary mod lose it eventually for no apparent reason.

      You can get some analysis and empathy here, but for practical advice, turn to

    2. aletheia33

      your state attorney general’s office, depending on how accessible they are to citizens directly, may be able to give you some guidance.

      you should also check with your state government in general to find out if there are any state programs or new regulations/laws that have been put into place to help protect people such as yourself and provide some recourse. there are many thousands who have had and are having the same experiences as yours.

      use the telephone and the internet to find out more about any resources that may exist in your state.

      there is help available, and you do not have to give in to these unfair practices without a fight. do not give up or be discouraged.

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