Negotiating with the Mortgage Company

At the heart of a loan modification is communication between a creditor and a debtor that leads to an agreement on new contract terms. If the debtor cannot get reach a person with authority to negotiate, a modification won't be possible. If the creditor can't get the debtor to return its calls or read its mail, a modification also won't be possible. The communication problems in today's securitized mortgage market are very different than during past real estate downturns, such as the Midwest farm crisis of the 1980s or the wave of foreclosures in the 1930s. Why? Because of the widespread use of mortgage servicers, third-party agents who collect payments from borrowers and remit them to the mortgage note holders (usually investors, often via a trust). Mortgage servicers are responsible for enforcing defaults, including pursuing foreclosures, and for engaging in loss mitigation. Gone are the days of sitting down with the bank that originated your loan and negotiating a new deal. Why am I making this very basic point? Because I am concerned that policymakers, including legislators, judges, and regulators still do not understand the barrier that loan servicing presents to voluntary or consensual loan modification.

I keep seeing reference to the willingness of "lenders" to negotiate, but the reality is that it is a diffuse group of investors (including people like me whose 401(k) plans bought securities backed by mortgage receivables), not lenders who own the note. And the investors contracted with mortgage servicers via pooling and servicing agreements to service the loans. Thoe terms of those contracts may limit servicers' freedom to negotiate or offer loan modification. Perhaps the bigger problem though is that mortgage servicers actually PROFIT from default. To be clear, I wrote servicers, not investors, who do face large losses when foreclosures occur. How can servicers profit when a borrower defaults? Because servicers typically retain fees, such as late fees, that are paid by consumers. Servicers may also assess other default charges such as property inspections or attorneys fees when a loan goes into default. Allegations are swirling around that servicers up-charge for these default costs, tacking on profit to the actual charges they paid for the servicers when they bill the consumer. Even if this isn't happening, simple late fees are a huge source of revenue for mortgage servicers--millions of dollars each quarter. The flip side is, that while default can be profitable for servicers, modifications are very costly. The available estimates suggest that loan modifications cost $500-$1000. What incentive do servicers have to spend this money? The answer to this question may change with new legislation introduced by Representative Waters. More to come on that in a future post.

Comments

[AMC]

A lack of communication is one of the many reasons that voluntary loan modifications won't work.

The loss mitigation departments are understaffed and overwhelmed - if you can even figure out how to get in contact with them. And God help you if you try to negotiate a loan modification with the collection department.

Then, even if you are able to engage in negotiations with someone trained in loss mitigation, getting authority to actually do something meaningful is a hurdle most debtors never even get to. Most 'modification' proposals are a band-aid on a hemorrhage, but the band-aid is only available only to a select few.

Not to mention that the "negotiations" have no real framework to start from, so each loan modification proceeds with all the speed and efficiency of hand-made shoes.

Oh, and most of the debtors' attorneys think it's a complete waste of time and not worth doing. Unfortunately, since this view is based on experience, it is hard to change.

Other than that, voluntary programs are a great idea for solving the foreclosure crisis.... public relations problem.

[Mike Dillon]

Professor, if there is anything that I can do from a borrower's standpoint please do not hesitate to contact me. Additionally, I am in touch with mortgage servicing fraud victims who have already testified before Senate sub committees so if they would be at all beneficial I can certainly bring them into the discussion.

With regard to servicers and modifications, any "fees" that are associated with the modification may very well be going into the servicer's pocket as additional servicing compensation depending on how the Pooling & Servicing Agreement for the particular trust has been negotiated.

Additionally, I'm beginning to see PSAs that allow servicers to keep any "excess amounts for REO sales" as well. This is a clear indication to me that servicers are after any equity that may exist in a property at the time of foreclosure. The assumption has previously been that FC'd properties are to be sold at FMV and any excess after the loan account is settled out is returned to the homeowner. That simply is not happening in the majority of cases that I've been able to look at.

Say a property is worth $200,000 and has a mortgage of $100,000 at the time of foreclosure including all associated "fees". If the property sells at auction for $100,000 the FC'd homeowner loses any equity that they may have built up in the property. Now, if the lender/note holder purchases the property for the outstanding $100,000 and turn around and sell the property for $150,000 (still $50k under FMV) then the lender/note holder books a profit of $50k - and the FC'd borrower STILL sees nothing in recovered equity.

Why this is a concern for servicers is that, again, depending on the PSA terns, servicers may have right of first refusal to purchase the property. And a servicer is in a prime position to not only be able to see what FMV is on a property via a simple BPO (which may also be charged to the borrower thereby increasing the "fee" base and eating up equity) but if there is enough equity, a servicer can begin to manufacture defaults against the borrower. In doing so, the servicer makes money either way - either the borrower pays the excess bogus fees OR the borrower ends up defaulting and the servicer forecloses. Either way, the servicer is making money in the process.

My case is a perfect example of this. I had over $100k in equity in my property at the peak of the bubble. I've been charged I don't know how many BPO fees at this point by Fairbanks/SPS. The salient point here is that, while they claim that they have "reversed" the BPO charges initially levied against me, per the terms of my mortgage they never should have been charged to me in the first place. I liken it to the analogy of "Just because you took your foot off of my throat doesn't mean you didn't try to kill me." This information has all been made public previously so I'm not giving anything new up here.

The point is that servicers are doing this consistently. I may be wrong, but I believe that it is Litton Loan that has the RADAR system. Again, I'm not totally familiar with Litton but from what I remember, the accusation has been made that RADAR is capable of "cherry picking" loans to be targeted for mortgage servicing fraud. I've heard anecdotal accounts of other servicers having their own software systems as well.

With regard to Cong. Waters' legislation, unless it has been recently amended it doesn't go nearly far enough to address mortgage servicing issues. The portions of HR 3837 and HR 3915 that addressed mortgage servicing issues would have been far more beneficial to the consumer had they managed to get through the Senate.

There IS the potential for a bipartisan bill to survive if the appropriate people from both sides of the aisle can get together. It's just a question of whether or not anyone wants to make the effort on behalf of their constituents that are losing their homes to illegal foreclosures.

[Patches]

Ohhh its bad Real BAD! When servicers are involved the right hand doesn’t know what the head is doing. Or maybe it does?

When debtors come in to talk about their bankruptcy options they are usually in the early to mid stages of loan modification. At that point they have been referred to this department and that and have been saddled down with so much paperwork it would give a title company a headache.

This is the most common situation I see: Mr. and Mrs. come in to talk about “BK”. By that time they have been dealing with the servicer and/or their foreclosure attorneys for better that two weeks. They just got the “Co.” to agree to loan modification which took about 6 hrs on average. (Being on hold, calling foreclosure attys, getting referred to servicer, servicer saying that can’t do anything but to try this extension). Now the debtors have to send in X amount usually consisting of Attorneys fees, late fees, loan mod fees, you name it. On top of that they have to send in paystubs, tax returns, bank account statements, list of liabilities and they all have to be in before X day(usually occurring a week or less before foreclosure). Then the paper work comes in the mail 4-6 days later and they have to fill out their paper work send in the payment with the additional documents enclosed. In small print the servicer indicates that they could still deny their application.

So the debtors do all of that and then they can’t get anyone to acknowledge that the servicer has received the paperwork, payment and docs! They call religiously every day 3-4 times a day and are getting the same response day after day. Meanwhile the clock is ticking. At the last second the servicer denies their application. Now there is only a few weeks to no weeks until foreclosure they have missed several payments and cannot refinance their loan or sell a home for that matter.

This complicated process has opened the door for all kinds of fraudulent “Mortgage Rescue” companies who are taking money from debtors to negotiate with the mortgage companies. Who can blame the debtors for going with these companies given the complexity of the process? We have even had to commence adversaries and get TRO’s because the mortgage company went ahead and foreclosed anyway despite getting the paper work and money.

In this one case I worked on I timed when the debtors sent the payment and when the servicer said it got it. The paper trail I got from the servicer showed that when they denied the application (due to not receiving the funds on time) the money order traveled across 3 states. It went from where the servicer told the debtors to send it to the actual person who needed it which happened to be in an whole other freggin state! It was there on time it just didn’t get on the right desk, in the right state, in the right city.

Thank god for Chapter 13 bankruptcy and the Automatic Stay.

All I have to say is ditto to AMC and Mikes posts. All of that plus some! I really do believe that servicers are stripping equity. What really burns me is that you cannot get a HUD or FHA backed home without it being farmed off to a servicer like Fairbanks and one of my least favorite servicers CitiFinancial. (It may be just me, but I hate dealing with mortgage issues when the servicer can hardly speak English or you can't understand the English they are speaking)

To add to Mikes comment; in a non-judicial foreclosure state like Texas (except for Home EQ’s), if no one bids, it goes right back to the mortgage co. Then it’s a REO and the bank can wait to get a better price and even list it. Who gets the excess then? If any?

[Mike Dillon]

Patches -

Does your office, by any chance, have a consumer protection atty that you can refer clients to for further legal counsel if/when necessary?

Proof that at least one payment made to one servicer was held until pat due.
http://www.getdshirtz.com/paymenthold.htm

[Patches]

Yes we do. Locally we refer consumer issues to Deborah J. Greer, http://www.deborahjgreer.com/ She has had some great success on cases we have referred to her. She is supper knowledgeable. She knows the mortgage creditor side of Bankruptcy and Consumer law. Before striking out on her own she used to represent Mortgage Creditors in Bankruptcy matters. That is how we have come to know her. She is in private practice now and does a fantastic job on consumer related issues as well as being a supper consumer bankruptcy attorney. The other is Herald Browning. He is a great attorney that has a ton of experience on consumer related issues and knows Banking law inside and out. He and Deborah collaborate on consumer cases from time to time. I cannot leave out Jim McMillen http://www.consumerlawoffice.com/index.html He is teaching now but I believe his daughter and son in law have taken over the practice. I just talked to him about 3 weeks ago. He has also had great success on consumer issues and has had some big class action settlements. He is also the guy that gave us (Mendoza) 5th cir. Op that allows us to Modify Chapter 13 Plans to include Post-Petition mortgage debt despite objections by Mortgage Creditors. Another thing is that Mendoza is still good even after Bankruptcy Reform.

[Patches]

We usually refer out to these people but there is way enough work to go around. For Sure! Volume begets volume.

[Laxmi P Sarathy]

Patches

What happens to the equity in the house when it goes into foreclosure is a matter of state law since foreclosures are state procedures. Although I cannot state with certainty, many states do allow for the previous owners of the foreclosed property to withdraw the proceeds of the foreclosure. In Illinois, we have petitioned the state court and helped a couple of previous homeowners withdraw the excess proceeds. In addition, in Illinois at least after a foreclosure sale, unclaimed proceeds do not go to the lender - rather it remains with the court and if left unclaimed goes to the state coffers.

[Teri Malarkey]

I have a question....I'm just a homeowner, single mom, trying to get through. I ended up with an adjustable rate mortgage and now the value of my house has dropped over 100k. A company contacted me and said that for a flat fee of $3500 they could negotiate a modified mortgage for me. I'm very wary of this, but if were true, it would be a life saver. Are companies like this legitimate? Can I try to negotiate on my own? I do go through a servicing company because my original lender went bankrupt. Any help or suggestions anyone can give would be greatly appreciated.