Poor Servicing Paves the Path for Predators

Thanks to Credit Slips for having me back. I wanted to start the week talking about how poor mortgage servicing is paving the path for a new breed of predators and how little is being done to address the situation.

Homeowners facing foreclosure have always been vulnerable to scammers, con-artists, and thieves. As soon as an impending foreclosure becomes public information, homeowners are bombarded with post cards, telephone calls and even door-to-door solicitations from would be saviors.

When property values were appreciating rapidly, foreclosure rescue scams primarily focused on obtaining title to the home and robbing homeowners of their equity. Today with property prices depreciating and many homes already “underwater,” equity is no longer the game. Instead, rescuers have become high-volume, “loan modification specialists.” A recent editorial in the New York Times (here) and an article from BusinessWeek (here) describe this business that is now booming across the country. The gist of the business model is that for a fee, which can reach several thousand dollars, these specialists will attempt to obtain a loan modification for the borrower.

But why are homeowners giving their precious dollars to loan modification specialists when they should be able to obtain the same results for no charge?

The reality is that the mortgage servicing industry is fundamentally broken when it comes to meeting the needs of borrowers, and many homeowners don’t have the resources or the wherewithal to deal effectively with loan servicers. Homeowners cannot routinely reach a live person in the servicer’s shop who can provide reliable information about the loan account and who has authority to make loan modification decisions. Stories abound of exasperated homeowners attempting to navigate vast voice mail systems, being bounced around from one department to another, and receiving contradictory information from different servicer representatives.

If a homeowner cannot wait on hold for 30 minutes because they only have a 15-minute work break maybe $1000 isn’t too much to pay for a chance to save her home. If a homeowner can’t find his way out of the voice mail maze, maybe paying someone who can seems like money well spent. On the other hand, we are already seeing evidence that some loan modification companies take the money and run, while others “negotiate” simple repayment plans that are likely to land homeowners back in default. Outcomes such as these point to unfair and deceptive practices, if not outright theft. So far there seems to be little effort on the part of federal or state regulators to reign in these new predators. Nor does there seem to be much effort to get servicers to do their jobs in providing borrowers in need of assistance with timely, competent, and consistent information.

And, what do the investors and loan holders think about loan modification specialists? I wonder if they realize that the servicers’ inability to communicate effectively with borrowers is taking hundreds of thousands of dollars (if not more) away from potential mortgage payments and redirecting it to the same brokers and lenders that put borrowers in bad loans to begin with.