Matt Stoller: Mortgage Servicers – Getting Away with the Perfect Crime?

By Matt Stoller, the former Senior Policy Advisor to Rep. Alan Grayson and a fellow at the Roosevelt Institute. You can reach him at stoller (at) or follow him on Twitter at @matthewstoller. Cross posted from New Deal 2.0

Without prosecutions, there’s nothing keeping fraud from becoming a standard business practice.

In 2004, the FBI warned Congress of an “epidemic of mortgage fraud,” of unscrupulous operators taking advantage of a booming real estate market. Less than two years later, an accounting scandal at Fannie Mae tipped us off that something was very wrong at the highest levels of corporate America.

Of course, we all know what happened next. Crime invaded the center of our banking system. Wall Street CEOs were signing on to SEC documents knowing they contained material misstatements. The New York Fed, riddled with conflicts of interest, shoveled money to large banks and tried to hide it under the veil of central bank independence. Even Tim Geithner noted that Lehman had “air in the marks” in its valuations of asset-backed securities, as the bankruptcy examiner’s report showed that accounting manipulation to disguise the condition of the balance sheet was a routine management tool at the bank. There’s a reason Charles Ferguson got an Academy Award for his work on the documentary Inside Job.

And yet, no handcuffs. The big news on prosecutions in the traditionally high-powered Southern District of New York are convictions for relatively petty insider trading that are unrelated to the collapse of the economy. The criminal charges could have been filed in the 1980s. U.S. Attorney Preet Bharara has brought minor civil suits against banks, but nothing significant, and no criminal indictments for the Ponzi scheme of the last four years.

And what happens when this kind of fraud goes unprosecuted? It continues, even today. The same banks that ran the corrupt home mortgage securitization chain are now committing rampant fraud in the foreclosure crisis. Here’s New Orleans Bankruptcy Judge Elizabeth Magner discussing problems at Lender Processing Services, the company that handles 80 percent of foreclosures on behalf of large banks (emphasis added):

In Jones v. Wells Fargo, this Court discovered that a highly automated software package owned by LPS and identified as MSP administered loans for servicers and note holders but was programed to apply payments contrary to the terms of the notes and mortgages.

The bad behavior is so rampant that banks think nothing of a contractor programming fraud into the software. This is shocking behavior and has led to untold numbers of foreclosures, as well as the theft of huge sums of money from mortgage-backed securities investors.
Here’s how the fraud works: Mortgage loan notes are very clear on the schedule of how payments are to be applied. First, the money goes to interest, then principal, then all other fees. That means that investors get paid first and servicers, who collect late fees for themselves, get paid either when they collect the late fee from the debtor or from the liquidation of the foreclosure. And fees are supposed to be capitalized into the overall mortgage amount. If you are late one month, it isn’t supposed to push you into being late on all subsequent months.

The software, however, prioritizes servicer fees above the contractually required interest and principal to investors. This isn’t a one-off; it’s programmed. It’s the very definition of a conspiracy! Who knows how many people paid late and then were pushed into a spiral of fees that led into a foreclosure? It’s the perfect crime, and many of the victims had paid every single mortgage payment.

A lack of criminal prosecutions means that unethical business practices like this one drive out ethical business practices. After all, why should a bank hire an ethical default servicer that charges a high price for its product when it can pay nothing to one that simply extracts from investors and homeowners?

The joke that is the U.S. Attorney network has become very old and very stale. And unfortunately, because of Attorney General Eric Holder, that joke is on us.

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  1. Middle Seaman

    Both Bush and Obama have drawn a clear dividing line between the financial system and Joe Shmo. The first are above the law on most financial activities. Everyone else is treated harshly. As we know, the law divide extends beyond business dealings.

    While during the Bush term, the law just looked the other way. Obama and Holder introduced corruption, bad faith and, to a certain extend, ineptitude into running the country. Holder clearly doesn’t want to apply the law to the financial sector and the crimes of the Bush administration. Holder and his colleagues punish undocumented workers, legalized marijuana user, etc.

    Obama and Holder behavior simply stinks up the whole joint.

  2. Fraud Guy

    I believe that corporations, because they are civil constructs as opposed to individuals, should be able to be found guilty of crimes at the threshold of preponderance of evidence (i.e., more likely than not).

    Whether this standard should be applied to executives and board members should be under consideration.

    Also, those who directly and indirectly received benefit from the frauds (in this case–executives, board members, sales folks and the like) should be disgorged of fraudulent profit (i.e., salaries, bonuses) and banned from financial or lobbying professions in the future. Any retirement or other long term benefits from their activities should also be disgorged.

    You gotta make it unprofitable to conduct such business; currently there is no reason not to do it.

    1. Rcoutme

      I agree completely. Financial crimes need to be punished where it hurts the criminals the most–money.

      Meanwhile something to consider:

      Way to fix the obscene compensation in corporations

      First off, we are talking only about corporations that are publicly owned and operate in more than one state (or operate internationally). Such corporations are supposed to be regulated by the federal government due to interstate commerce clause in the constitution. The reason it should only apply to publicly owned corporations is that if someone privately owns a corporation, he is entitled to its profits as a matter of fairness.

      1. No one is allowed to have a salary (including bonuses—see exceptions below) more than 10 times (or 20) that of the lowest paid person working for the corporation. This includes those who are ‘contracted’ to do work for the company and spend the majority of their time (or the most time of any place they work in similar contract) for that company (think contracted cleaning crew, etc)
      2. Exceptions to the above include those who cause the corporation to immediately realize the fruits of the their labor. Examples would include artists (singers, etc), professional athletes and sales people who sell items that allow the corporation to get the money immediately (not some promise of money in the future). Since these people cause the corporation to get the money immediately, they should be allowed to get their commision (or whatever) immediately.
      3. Employees may be given stock options that are set at the price when the options are issued or the price of the stock when the employee got his job—whichever is HIGHER! For those who don’t know how stock options work: you get the right to purchase stock at a guaranteed price, regardless of what the price at the market is. This would allow top management to earn those bloated salaries—but only if they get the corporation’s stock to rise in price!
      4. The stock options offered above can not be used until three years after they have been awarded. This will make it that management will not make short-sighted, potentially dangerous or risky decisions since much of their compensation will depend on the long-term viability of the corporation.

      1. john

        Turns out the whole Obama presidency was just a way to run out the clock on the statute of limitations. On the outside chance our next president actually gives a shit about the law as it applies to his grease monkeys in finance it will be too late!

  3. Lambert Strether

    What if we think of it this way? The computer code IS the law. What we think of as the law is no longer the law.

    The same was true for FISA, after all, and is probably true for HFT.

    1. LeonovaBalletRusse

      And how many sociopaths/psycopaths/grifters-for-hire are writing the code, lambert?

      Think of the implications of this for *High Speed Trading.”

      Recommended is the message from Nye Lavalle following the post dated April 13, 2011 on, served to us today at NC: “In RE Wilson | Lender Processing Services, LPS, Gets Gets [sic.] Slammed by BK Judge, Motion for Sactions Granted.” Lavalle writes:
      “I reduced the banking industry’s scams and abuses into three primary areas or categories OVER 12 YEARS AGO!!!!” He goes onto cite three major issues, including crucial detail, which tends to support your position. These three issues are a must-read.

      Now we can justly aver that the “The law is a ass!” in true Dickension revolt against “The Law as algorithms written by ‘anonymous’ computer programmers”–and at whose behest, we’d like to know?

      Time to prosecute the algorithm freaks at the top, for “writing The Law”–a counterfeit Law, and strictly unconstitutional. Only Congress can write the law, says the Constitution, making Presidential “law” unconstitutional also. “Signing statements” are “counterfeit Law.”

      What say you, lambert?

  4. K Ackermann

    These are the kinds of stories that have profoundly shifted my sensabilities.

    I think now I’d perfectly understand someone dumping benzene on their foreclosed property just to inflict a million dollars in cleanup liabilities.

    “You stole my house? Fine. The house gives me headaches anyway. If I had the money, I wouldv’e tested the soil, because I get such bad headaches here. B.T.W… I called the city about it. They should be out in a couple of days to run tests.”

  5. Pokey

    Where is the populist candidate? Few interested in democratic policies will be making contributions without a candidate. The same protected few will continue, and it makes little difference which whore is president.

    I plan to sit the next one out, and when the sky falls hope the occupant in the White House is not posing as a democrat.

    1. steelhead23

      I am not all that politically savvy, but OWS should have shown the Democratic Party that there is a groundswell of disenchantment with Obama – within the party and beyond. Why Kucinich or other populists are sitting on their hands is simply unfathomable. I recall that Johnson’s “I ain’t gonna run” speech was after McGovern or McCarthy announced. My dream for 2012 is Obama making an “I ain’t gonna run speech” but unless someone of stature announces soon, it ain’t gonna happen.

        1. steelhead23

          Let me be clear. It is not Dennis Kucinich who I support, it is the very concept of We the People. With Obama serving the oligarchy, there is a need for a people’s champion, if for no other reason but to force Obama to protect his left flank. But the truth is, McCarthy’s showing in NH and impending victory in WI on an anti-war platform drove Johnson to hang up his spurs. I want Obama to hang up his spurs.

      1. LeonovaBalletRusse

        “I ain’t gonna run” because “I ain’t ready to die yet,” perhaps? This likely was the reason that Willaim Jennings Bryan “changed his mind” about goldbuggery after he “lost the election” for President.

        “Choose: ruin or death.” This is the essence or the power in the time-honored rackets of “Louisiana politics” gone global.

        If you don’t want to play, you say: “ain’t gonna run.”

    2. Dr. Brian Oblivion

      Indoctrinated or filtered out of the political system and ignored by the media. Edward Bernays didn’t create and big business didn’t fund the public relations industry simply to sell war and cigarettes.

      1. Dr. Brian Oblivion

        Actually Eugene W. Debs was the closest I can think of to an American populist candidate. What happened to him, eh?

        1. Blunt

          I’ll cosign that.

          He received more votes than any other imprisoned candidate for President. We don’t run candidates with actual beliefs any more.

          And I think that’s prolly our own faults for our (as a people) unending worship gadgetry in the form of consumerism and a stubborn unwillingness to open our minds to anything that cannot be funneled into 1 and 1/2 minutes of a talking head recital.

          I suspect we get the candidates, and, hence, the office-holders we deserve to some extent and that the level of subterfuge is greater than it was at any time in the soviet republics.

          1. LeonovaBalletRusse

            Andrew Jackson of W. Virginia, a populist who wanted NO private central bank of Europe calling shots for the U.S. He did suffer an assassination attempt.

            *History re-tweets* is the new version of the truth.

            “THE BUBBLE THAT BROKE THE WORLD” by Garet Garrett (1932), see –

            “The Secret of Oz – Winner, Best Docu of 2010 v.1.09.11” uploaded by bstill3 on Feb 2, 2011 on You Tube:

            “Chart of who ‘owns’ the Federal Reserve [1976]” at:

            Connect the dots in the three-part SET above. The Bubbles are blown continually at We the People’s expense, even as the U.S. is deemed to be “Shylock” by greedy Europeans, from Garet Garret’s indictment in 1932, through today.

            At the TOP is the “Bank of England.” At the bottom is “We the People” being creamed in the “Satan Sandwich.” TODAY the “Great Satan” might be another name for Henry Kissinger, savior or YALE of Bush and Bones infamy, *head* of YALE’s contingent for the “Grand Strategy Programs” hatched at the Manhatten Institute by Roger Hertog (see: – blog by Allen Ruff: “How Private Warmongers and the US Military Infiltrated American Universities”).

            As in 1932, the Bubbly Bank of England is the Boss of Us, which the pecking order at the Fed (list of 1976 above) proves: Bank of England to the 1% Third-to-Fourth Reich. As in 1914, as in 1982, so from Bush-Nixon through Bush-Obama.

            NOW, wonder: Is the *State of Israel* a colony of The British Empire, paid for by *We the People* of the U.S., according to the diktat of the Agents of the Reich in U.S. Federal and State Office? Is this Victorian (German) Global Reich not the Foreign Power governing us, the Foreign Power engaged in “The Secret War Against the Jews” who are NOT agents for the British Imperial State of *Israel*? Is Henry Kissinger not an ARCH TRAITOR to *We the People* of the U.S., including the People of JacobIsrael who are non-dual Citizens of the United States.

            J’ACCUSE Henry Kissinger of being a TRAITOR against *We the People of the United States* in his capacity as Agent of a Foreign Power: to wit, The British Empire/Global Fourth Reich headed by the Bank of England–ruler of the Rockefeller Dynasty and the University of Chicago, for which he has willfully and with malice aforesight engaged in constant war against *We the People of the United States*, including American Jews who have not sworn fealty to the Rulers of the British Empire and their Agents world-wide. The MonopolyFinanceSecurity State is in their *diabolical* creation; Puppet President Obama is enthralled.

            Will We the People get serious about those among us who commit TREASON, and about enforcing the Law? The penalty for treason according to our Constitution is “to be hanged by the neck until dead.” Is this reserved for Saddam Hussein, according to the malefactors of PNAC, who are Agents of a Foreign Power that “doesn’t give a F!!! about [us]? (George Carlin).

            Visit for the latest questions raised by *We the People* of the U.S. Do WE have the WILL to become free of Despotic Rule by Traitors?

          2. LeonovaBalletRusse

            Connect dots above with those below:

            “THE FORTY YEARS WAR: The Rise and Fall of the Neocons, from Nixon to Obama” by Len Colodny and Tom Schachtman (New York, Harper, 2007);

            “THE SECRET WAR AGAINST THE JEWS: How Western Espionage Betrayed the Jewish People” by John Loftus and Mark Aarons (New York, St. Martin’s Press, 1994);

            “TRADING WITH THE ENEMY: The Nazi-American Money Plot 1933-1949” by Charles Higham (Higham, 1983; New York, Barnes & Noble, 1995);

            “A CENTURY OF WAR: Anglo-American Oil Politics and the New World Order” by F. William Engdahl (Wiesbaden, edition.engdahl, 2011 [1992]);

            “CONJURING HITLER: How Britain and America made the Third Reich by Guido Giacomo Preparata (London and Ann Arbor, Pluto Press, 2005);

            “THE ANGLO-AMERICAN ESTABLISHMENT” by Carroll Quigley (San Pedro, CA, GSG & Associates, n.d.);

            “AMERICAN DYNASTY: Aristocracy, Fortune, and the Politics of Deceit in the House of Bush” by Kevin Phillips (New York, VIKING, 2004).

            This is what our enemies call “The Great Satan.”

          3. LeonovaBalletRusse

            AND, as *lagniappe*, proving the true purpose of Rockefeller’s University of Chicago *putsch* of “The Encyclopedia Brittanica” into the brains of Americans:

            “MISINFORMING A NATION” by Willard Huntington Wright (New York, B.W. Huebsch, MCMXVII [1917]. The Victorian Reich propaganda of the *Rocquefeuille* Dynasty’s University of Chicago did not begin with Leo Strauss and Milton Friedman, for whose duties see: “The Tomb Raiders of the Postmodern Right: Junger’s Anarch, the Neocon, and the Bogus Hermeneutics of Leo Strauss”–Chapter 8 of “THE IDEOLOGY OF TYRANNY: Bataille, Foucault, and the Postmodern Corruption of Political Dissent” by Guido Giacomo Preparata (New York, Palgrave MacMillan, 2007).

            To square the circle, compare European Banker Third Reich hegemony in Garet Garret’s “THE BUBBLE THAT BROKE THE WORLD” of 1932 ( with that of the Fourth from Nixon/Kissinger and “The Reagan Revolution” through TARP and Kissinger/Obama.

            Can you frame YALE, Walker-Bush, Dulles, Poppy, Sullivan and Cromwell, Bush from then to now?

            George Carlin was dead right. Aaron Russo died to know, but he left “TRADING PLACES” as our guide to justice.

        2. bmeisen

          Debs was a great American socialist, god bless him. That’s not populism. Try Huey Long if you’re looking for a populist.

  6. off_leash

    Amazing how the RICO statutes don’t seem to be applied. In a normal world treble damages would be a deterrent

  7. Unsympathetic

    The populist candidate who has a remote chance is Buddy Roemer.

    He will not accept contributions greater than $100, and his entire position is precisely what OWS and Dylan Ratigan push: Getting money out of politics.

    1. LeonovaBalletRusse

      You DON’T want Buddy Roemer, a good ole boy if ever there was one, well-versed in “la politique de Richelieu” for the Republican putsch in Dixie. Who resurrected him, anyway?

  8. PL

    Why aren’t more investors suing for breach of contract because servicer fees are being given higher priority than specified in the pooling and servicing agreement?

    1. Yves Smith Post author

      Investors have ongoing relationships with these banks. They think they depend on them for market intelligence.

      Also, professional fund manager fee structures aren’t well suited to funding litigation. The only ones who do sue regularly are hedgies.

  9. Capt. Jack

    If any servicer manages to foreclose on this house, then yes, something would have to be perfect. Perfectly criminal…

    Assignment of Mortgage from Hell

    For some eye-popping fun try to find who you think could foreclose on this one.

    Fortunately, this action is taking place in a so-called “non-judicial” state. The homeowner has retained rather agressive council so, in this case at least, the outcome may be somewhat less than perfect for the defendants.

    They are all being sued…

    (Link goes to The Hamlet)

  10. Capo Regime

    Wow Matt! The joke of the U.S. Attny’s is of course not just limited to loan servicing. Think of all the activities (ehr rackets) where lack of enforcement (or even awareness) is encouraging the sort of Greshams law of american business enterprise in 2011 (bad practices drive out good). Just imagine will ya….

  11. El Goyo

    “In Jones v. Wells Fargo, this Court discovered that a highly automated software package owned by LPS and identified as MSP administered loans for servicers and note holders but was programed to apply payments contrary to the terms of the notes and mortgages.”

    First of all, the term “highly automated” makes MSP sound pretty awesome. In reality MSP is a mainframe dinosaur whose origins date back to the ’70s. It is, however, the 900 pound gorilla of the servicing automation world (unfortunately). It does automate many processes. But in Jones v. Wells we are talking about a loan in bankruptcy. And when a loan goes chapter 13 you now have payments coming from both the borrower and the trustee which have to be applied separately and in a specific fashion. And this requires human intervention. And that’s where things fall apart in most servicing shops because they have poorly trained clerks applying payments incorrectly. I’m not defending either servicers nor LPS, just trying to make a point that it isn’t “programmed fraud” as Stoller suggests.

    “And fees are supposed to be capitalized into the overall mortgage amount”

    Huh? If Stoller’s definition of capitalized is the same as mine then we’d be adding fees to the unpaid principal balance and charging interest on them. That simply isn’t the case nor is it standard MSP functionality.

    “Mortgage loan notes are very clear on the schedule of how payments are to be applied. First, the money goes to interest, then principal, then all other fees. That means that investors get paid first and servicers, who collect late fees for themselves, get paid either when they collect the late fee from the debtor or from the liquidation of the foreclosure.”

    Stoller is conflating matters here. The note does dictate how payments are applied. The note does not address how those payments pass through to an investor.

    “The software, however, prioritizes servicer fees above the contractually required interest and principal to investors.”

    Once again, (depending on what Stoller is referring to when he says servicer fees) this would be defined in the Purchase and Servicing Agreement between the servicer and investor. Typically with securitized mortgages principal and interest due the investor is advanced by the servicer when a loan is delinquent. Any fees due the servicer would only be collected once the borrower brings the loan current or upon liquidation of the loan either through payoff or foreclosure. In the latter case, if proceeds are insufficient to fully liquidate the loan the servicer can recapture out of pocket advances and servicing fees. Servicing fees in this case is the amount due the servicer which is represented as a spread between the mortgage coupon rate and the passthru rate to the investor. This does not include late charges or other fluff fees.

    Stoller’s overall point addressing lack of prosecutions is well taken. But his understanding of the servicing business is severely lacking and statements like “programmed fraud” are unfounded.

    Once again I’m not trying to defend servicers – they are largely an incompetent bunch. But Stoller’s missive is simply nonfactual.

    1. Pokey

      If the statement of the bankruptcy judge was correct, this explanation is not. I take the judge’s observation to mean that the collection of late charges took precedence over principal and interest. If this is the case, a payment short of a late fee followed by timely complete payments could result in a defaulted loan and continued imposition of late charges.

      Misapplication of arrearage payments from the trustee is not a programming issue.

  12. EH

    The bad behavior is so rampant that banks think nothing of a contractor programming fraud into the software.

    In software development the decision to prioritize fees over everything else is a “business rule.” Someone had to spec this out and either tell the software provider to account this way, or a software provider convinced the bank that they already knew how to do this stuff. One case is a systematic engineering of fraud on the part of the bank, the other is malpractice on the part of the software provider, maybe fraud.

    tl;dr: Someone higher approved the order of accounting for these pieces of software, it wasn’t just some programmer shooting in the dark.

  13. kravitz

    There’s an event today which Fox suggests will result in yet another meeting between Tom Miller and Kamela Harris. Another effort to get her back in the settlement talks.

    Given what happened yesterday with the SEC and Citi, and today with Delaware and New York, settlement is getting to be an ugly word.

    Iowa AG Expected to Press California AG to Join Foreclosure Settlement

    “Sources tell the FOX Business Network that Iowa AG Tom Miller also plans to discuss with California AG Kamela Harris why she should join the broader settlement. A spokesman for Miller would not deny the matter and Harris’s spokesman did not return phone calls or e-mail requests.”

    NY, Delaware AGs may intervene in BofA, BNY Mellon MBS settlement

    “The AGs are eager to get a presence in the proceedings, so they can represent the interests of the investing public in their respective states before a final deal is reached. Admission to the process gives the AGs a chance to hear where talks are going and an opportunity to object to provisions of the deal.”

    Just like Judge Rakoff put it.

  14. barrisj

    AG Holder’s principal role during BHO’s first (and please, O Lord, make it his last) term is to be the useful-idiot-in-chief, burying forever all of the crimes against humanity committed by the Cheney-Bush team, CIA torture, domestic warrantless spying on an unprecedented scale, financial thuggery up to and well into Holder’s term of office, the list is endless, as Glenn Greenwald and others have painstakingly demonstrated. But, just to prove that he can take a punch, Holder was left holding the sack on “Fast and Furious”, so he can grab some quick cover as a Republican pinata, and divert attention away from DOJ’s many major substantive nonfeasances. Obama has signaled unambiguously to his appointed minions who is to get a pass, and certainly the big campaign donators on “The Street” first and foremost are accorded special treatment – always have, always will.

    1. LeonovaBalletRusse

      If Holder and Obama are “running out the clock” on the statute of limitations on the crimes of the Bush Administration, aren’t they hoist on their own petard? If they are complicit in hiding evidence by not bringing suit, does this not extend the statute of limitations on the crimes into THEIR present? By their *coverup* through failure to act on the crimes before them, they have themselves extended the statute of limitations on the crimes in which they are now complicit.

      Is this not so?

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