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.