HAMP--Is It Really All About the Money?

Are mortgage servicers really refusing to modify mortgage loans solely because of all of the "ancillary fees" they can generate from a completed foreclosure? Is the problem really all about the money or is there something more to it?

The New York Times reported about ten days ago that the HAMP mortgage servicers were reluctant to engage consumers in modifications because the companies collect such lucrative fees on delinquent mortgage loans. There is certainly a substantial body of evidence to support the "lucrative fees" disincentive theories. For example, the Federal Reserve Bank of Boston recently shed some light on this problem with a new study that concluded that only 3% of the seriously delinquent mortgages had been modified due to the "the simple fact that the lenders expect to recover more from a foreclosure that from a modified loan." And, the number of reported bankruptcy cases where mortgage servicers have been sanctioned for imposing unlawful, illegal and unreasonable "collateral and ancillary fees" is substantial and perhaps monumental in their numbers.

As a consumer's bankruptcy lawyer, I have made a very good living filing adversary proceedings against mortgage servicers for the misapplication of mortgage payments and for the unlawful imposition of fraudulent legal fees and other charges. These fees include forced placed insurance, rolling or legacy late fees, property inspection and preservation fees, broker price opinion fees, statutory expense fees and just about every other type of fee or charge they can think of or you could ever possibly think of. And, since many of the servicers often own their own inspection, appraisal and insurance companies, the servicers can "double dip" and "double charge" for these "captive company fees while the foreclosure process drags on and on."

Consequently, why would I, of all people, write anything that could be to any extent considered inconsistent with the "greed theory" for deplorable lack of realistic mortgage modifications? Well, let me be clear, I do not intend to imply in any way that servicers are not motivated by the desire to create and capture as many of these so-called "ancillary fees" as they can possibly get away with in any case, foreclosure or bankruptcy. And, I agree with those who contend that in many cases the financial incentives for the servicers are totally inconsistent with the financial rights of the bond holders in a securitized trust.

The real problem for servicers is not just a desire to make more money but their almost total inability to comply with HAMP. The problem with the HAMP plan is that it fails to take into account the normal obligations of servicers under their respective Pooling and Servicing Agreements. In most cases, a servicer is obligated to advance to the Trustee for the securitized mortgage trust the monthly principal and interest payments for every loan that has defaulted. This can be a massive monthly financial obligation. Most servicers are not allowed to recover these "P & I Advances" until the property is foreclosed and then sold as Real Estate Owned (REO). More importantly, HAMP forces mortgage servicers to act as "full-document" mortgage loan originators. Most mortgage servicers have no experience, training or knowledge about how to originate a mortgage loan. Yet, this is exactly what HAMP is asking them to do. The $1,000 HAMP modification fee and the annual $1,000 success for performance HAMP fees do not even begin to cover the expenses the servicers must incur in order to fully comply with the HAMP "origination" rules. As a result, the so-called "financial incentives" for servicers to modify loans are totally unrealistic and fail to take into account how this system really functions.

Accordingly, in the final analysis it really is about the money but just a lot more and for different reasons than has been reported by the media. There was "no hope" for the "Hope Now" program and there is no chance to ramp up the HAMP.

Comments

[Katie Porter]

I read this post as more support of a broader point that both Max and I have made repeatedly for years now-- the mortgage servicing industry was simply never set up to provide individualized, high-quality customer service. The system never contemplated this level of default, bringing with it the need to provide sophisticated, timely, and accurate responses to consumers. There is absolutely a financial incentive problem with servicers too. See this post on in-house vendor's as part of Countrywide's "countercyclical diversification strategy": http://www.creditslips.org/creditslips/2008/05/piling-on-fees.html

But Max's post is a powerful reminder that even if the financial incentives are upped to an appropriate level, it takes time and money and the right people in motion to retool any system, especially one that is as far from what is needed in today's foreclosure crisis as the mortgage servicing operations of most companies.

[Mike Dillon]

I understand Attorney Gardner's focus is on HAMP as opposed to the servicing industry - and, strictly from a consumer/mortgage servicing fraud victim POV, I tend to agree with him that HAMP was never properly set up to "incentivize" servicers to "do the right thing". To a certain extent, I agree that they may very be handcuffed by their PSAs - but at the same time, from my own meager research, collectively, the industry has completely and totally taken advantage of it's position in the chain of title with regard to how it deals with borrowers. Personally, I think the industry has been tempted with far too many "carrots" and it's long past the time to break out the "sticks" - or, in the hope of painting a more vivid literary picture while simultaneously underlining my extreme disappointment in the utter lack of civil and criminal enforcement in the industry - trebuchets.

And, due respect Professor Porter, who says that servicers AREN'T providing "high-quality customer servicer" the way that they are currently functioning? After all, we all know - although it is extremely easy to forget for a moment - that borrowers are NOT whom mortgage servicers are providing "customer service". Short of the few investor suits like Ellington v. Select Portfolio and a few others, I don't think I've heard of too much overall whining from Wall St. as far as the returns that tranches are seeing as a result of servicer efforts... Correct me if I'm wrong...

I just watched a family, who has been fighting Fairbanks/SPS for as long as I have (2002), prove that the FC mill's office was (once again?) attempting to foreclose on behalf of an entity that had no legal standing TO foreclose. This, after now 8 years and more than $30k in "reinstatement fees" that apparently don't show up anywhere on any of the KLTs that Fairbanks/SPS has provided as "proof" of the status of the account. The FC mill's office withdrew the foreclosure action.

So the family was able to breathe for the weekend for the first time in years. And on Monday, the family received an envelope with that "new Notice of Default" smell emanating from it, claiming more than 2 years of delinquency. No word yet on who SPS is representing THIS week as the note holder. If I remember correctly, the new NOD was drafted two days before the FC was withdrawn. And it was sent directly to the family - as opposed to being sent to the family's legal counsel whom there is absolutely ZERO chance of either the FC mill office OR SPS denying knowledge that the family was properly represented by counsel. Intentional? My vote is yes, but I'm understandably slightly biased in this case...

How's that $660 Million that SPS received as part of the HAMP program ( http://www.financialstability.gov/latest/reportsanddocs.html ) helping THIS family?

FYI, per dockets.justia.com:

181 federal cases naming Select Portfolio Servicing at the federal level and another 13 naming Fairbanks Capital Corp. for a total of 194 federal cases filed since January 2004.

45 filed naming Select Portfolio Servicing and counting since January 2009.

[Patches]

We all knew it wasn't going to amount to much. HAMP was just a stall tactic. An expensive one to boot. It just seems so hopeless sometimes when your down here wading around in the muck. You can practically file an Adversary on Mortgage fees in every case. Even for our firm which is not small but not huge that kind of work would be a huge draw on resources. We may though be tooling up to handle some more of that kind of work. The unfair burden shift of having to object to those fees via Objection to Claim in of itself slows down confirmation. As you know debtors are under huge amounts of pressure to confirm quickly.

[Andy Engel]

Is anyone familiar with any absolute requirement that servicers process HAMP applications prior to continuing with the foreclosure process?

[Nick]

Max, overall a good post. I think you've confused something in the second paragraph though. You say that there is an incentive for the servicer to foreclose because they'll get more fees, but cite the lender's recovery as an example. The servicer and lender are, in most cases, although not all, different entities.

I think overall your point about servicing costs exceeding the modification payments makes sense, unless the servicers are also the ones who own the bottom pieces of the deals (see today's WSJ article on Carrington). In that case, they're actually not going to foreclose at all and will modify anyone just to keep their bond from being wiped out.

Anyway, the incentives are all over the map for various parties (and there are a lot of them) and you're right that the servicers weren't not set up to handle the type of services they're supposed to be providing right now. It's a very complicated issue, so, for me, that leads me to agree with your conclusion that it's going to be hard to get servicers to ramp up the HAMP mods quickly.