By The Lending Lies Team
The Goldman’s bought their house months prior to 9/11. For a decade before they had been able to supplement their income by restoring old homes and returning them to their original condition. On average they netted about 27k a home after taxes and expenses. They were so credit-worthy they were granted signature loan status.
Then 9/11 occurred and the markets froze. All of a sudden the Goldman’s had two homes and couldn’t sell either. Within six months the markets started correcting and although they had gotten behind on their payments they had enough equity in each property- that they could have sold the homes and paid the banks back in full. The banks had different plans.
In fact, the servicer didn’t want to work with the Goldmans- they wanted their homes. The Goldman’s could easily make good on both loans with a little assistance based on their assets and salaries- but they would need help restructuring their loans. The servicer saw only an opportunity to make a large profit off of the Goldman’s bad fortune.
The Goldmans ended up giving one house back to a pretend lender and the 35k in equity they had accumulated. The other house has now been in litigation for the past 13 years. The bank could have worked with the Goldman’s to find an equitable solution. The Goldman’s would have made a small profit and the bank would have been paid in full.
Instead, the home is locked in a tug-of-war between a servicer with no standing and a family who refuses to give their home back to an imposter. It is anyone’s guess who will win but the bank has now resorted to fabricating documents to try and get the upper hand (and it will likely result in a court loss based on a complaint now for fraud). Meanwhile, both parties have spent over 300k on legal fees on a home that was purchased for $186k. Mrs. Goldman reports that this battle is no longer about the home, but about due process and justice.
The mortgage servicing industry is a punitive and predatory system. One missed payment can result in the loss of your home. It doesn’t matter how much equity you have in the home or if the missed payment was a simple oversight and not indicative of financial issues- your mortgage is an unconscionable adhesion contract that protects the bank in full- and is structured to the detriment of the homeowner.
Seniors who are briefly hospitalized emerge from the hospital to discover that because they were incapacitated and missed one monthly mortgage payment that the bank will prevent them from repaying any missed payments and fees. The loan servicer is financially rewarded from creating a default.
At LivingLies, it isn’t unusual to get calls from homeowners who missed one payment while traveling internationally, experienced a short-term cash flow period, or even faced a natural disaster to find that they have lost control of their home due to one missed payment. Even if they attempt to solve the issue in good faith, homeowners claim that there servicer refuses to provide assistance.
We recently consulted with an older woman in San Diego who has 950k of equity in her home, and was suckered into a reverse mortgage. She is now $48k in arrears and has had to file bankruptcy to get the court to assist her in structuring some type of agreement with a belligerent servicer. Her lender was not willing to work with her- but kept providing erroneous information to ensure she would not be able to correct the outstanding balance. As the late fees compounded, her mortgage statement became indecipherable.
One, or even two missed payments during a thirty-year mortgage should not result in the loss of a home. However, the modern mortgage industry is militant, inflexible, and rigged to create a default. Even if the bank makes the mistake and misapplies a payment, trying to get a loan servicer to correct their error and do the right thing can be an extended battle that often requires hiring legal counsel.
Mortgages are written to be unconscionable, strict contracts with no flexibility. There should be some type of loan mechanism that permits an occasional error without the loss of the home. The bank should be permitted to charge the homeowner for their losses but foreclosing on a home, for example, with over 200k in equity for a missed payment of $1,650 (one late payment in ten years) should not result in the loss of a home- but it often does.
50 years ago, a homeowner who missed a payment or two would meet with their local banker and explain their situation. The bank wanted the homeowner to pay the loan, they did not want to take back real estate from working families- so an equitable solution was found. Now, the bank hopes the homeowner will make a mistake, because they are in the business of taking back real estate from working families.
People are not perfect and life is messy. Crisis occur despite our best attempts to avoid them. If your mortgage is due on Monday, you better not have a heart attack on Sunday night. If you miss a payment you are in default. Since most people are dependent on their employer, and most people have no savings to speak of, almost all Americans are extremely vulnerable if life doesn’t go as planned. One unforeseen crisis that disrupts cash flow could result in the loss of a home- and the banks, like vultures, simply wait for the opportunity to swoop in.
Abusive Mortgage Servicing Defined
Abusive servicing occurs when a loan servicer, either through action or inaction, obtains or attempts to obtain unwarranted fees or other costs from borrowers, engages in unfair collection practices, or through its own improper behavior or inaction causes borrowers to go into default or have their homes foreclosed.
Abusive practices are distinguished from appropriate actions that may harm borrowers, such as a servicer collecting appropriate late fees or foreclosing on borrowers who have not make their payments despite proper loss mitigation efforts. Servicing is abusive when the bank intentionally charges unwarranted fees, or negligently like when a servicer’s records are so inaccurate that the borrowers are regularly charged late fees even when mortgage payments were made on time, for example.
There is evidence that some Mortgage servicers are regularly engaging in abusive behavior. Some servicers have engaged in practices that are not only detrimental to borrowers but also illegal. The abusive servicing practices that have been documented include improper foreclosure or attempted foreclosure, improper fees, improper forced-placed insurance, and improper use or oversight of escrow funds .
Improper foreclosure or Attempted foreclosure
Because servicers exact fees from filing foreclosures, such as attorneys’ fees, some servicers attempt to foreclose on property even when borrowers are current on their payments or without giving borrowers enough time to repay or refusing to work with them on a repayment plan. Premature foreclosure may save servicers the cost of attempting other remedies that might have prevented the foreclosure.
Servicers have acted so brazenly that they regularly declare to the courts that borrowers are in default so as to justify foreclosure, even though the borrowers were current on their payments. The use of false statements in court to obtain relief from stay in order to foreclose on borrowers’ homes is a daily occurrence. Take for example, Hart v. GMAC Mortgage Corporation, et al., 246 B.R. 709 (2000).
Even though the borrower had made the payments required by a forbearance agreement with the servicer GMAC Mortgage Corporation, it created a “negative suspense account” for moneys it had paid out, and improperly charged the borrower an additional monthly sum to repay the negative suspense account and charged him late fees for failing to make the entire payment demanded. Foreclosure proceedings were then enacted.
Servicers routinely claim that borrowers are in default when they are actually current. This fraudulent practice allows servicers to charge unwarranted fees, either late fees or fees related to default and foreclosure. Servicers receive a fee percentage of the total value of the loans they service, typically 25 basis points for prime loans and 50 basis points for subprime loans. In addition, servicing contracts typically provide that the servicer, not the trustee or investors, has the right to keep any and all late fees or fees associated with defaults.
Servicers don’t make money off of homeowners who pay, they make money off homeowners who miss payments and/or default. These fees are crucial profit centers for servicers. In fact, extra fees, like late fees often pay all operating costs for a lender’s entire servicing department. The pressure to collect these fees appears to be higher for subprime servicers than for prime servicers.
For example, borrowers who mail in their payment can’t usually prove the exact date a payment was received. This allows a servicer to add on late fees even when the payment was received on time. Improper late fees may also be based on the loss of borrowers’ payments by servicers, their inability to track those payments accurately, or the servicer’s failure to post payments in a timely fashion.
In Ronemus v. FTB Mortgage Services, 201 B.R. 458 (1996), under a Chapter 13 bankruptcy plan, the borrowers had made all of their payments on time except for two; the debtors received permission to pay these two late and paid late fees for the privilege. However, the servicer, FTB Mortgage Services, misapplied their payments, then began placing their payments into a suspense account and collecting unauthorized late fees without court approval. The servicer ignored several letters from the borrowers’ attorney attempting to clear up the matter, sent regular demands for late fees, and began harassing the borrowers with collection efforts. When the borrowers sued, the servicer submitted to the court an artificially inflated accounting of how much the borrowers owed.
Servicers are known to retain extra payment of principal or misapply the payment, and fail to credit it to the borrower. Late fees on timely payments are a common problem when borrowers are making mortgage payments through a bankruptcy plan.
Servicers routinely add false fees and charges not authorized by law or contract to their monthly payment demands, relying on borrowers’ ignorance of the exact amount owed. The servicer has the power to collect such fees or other unwarranted claims by submitting inaccurate payoff demands when a borrower refinances or sells the house). Or they can place the borrowers’ monthly payments in a suspense account and then charge late fees even though they received the payment.
Worse yet, some servicers pyramid their late fees, applying a portion of the current payment to a previous late fee and then charging an additional late fee even though the borrower has made a timely and full payment for the new month pyramiding late fees allows servicers to charge late fees month after month even though the borrower made only one late payment.
Servicers can turn their fees into a profit center by sending inaccurate monthly payment demands, demanding unearned fees or charges not owed, or imposing fees higher than the expenses for a panoply of actions For example, some servicers take advantage of borrowers’ ignorance by charging fees, such as prepayment penalties, where the note does not provide for them Servicers have sometimes imposed a uniform set of fees over an entire pool of loans, disregarding the fact that some of the loan documents did not provide for those particular fees.
Or the servicer will charge more for attorneys’, property inspection, or appraisal fees than were actually incurred. Some servicers may add a fee by conducting unnecessary property inspections, having an agent drive by even when the borrower is not in default, or conducting multiple inspections during a single period of default to charge the resulting multiple fees
The complexity of the terms of many loans makes it difficult for borrowers to discover whether they are being overcharged Moreover, servicers can frustrate any attempts to sort out which fees are genuine.
Escrow Account Mismanagement
One of the benefits of servicing mortgages is controlling escrow accounts to pay for insurance, taxes, and the like and, in most states, keeping any interest earned on these accounts Borrowers have complained that servicers have failed to make tax or insurance payments when they were due or at all. The treasurer of the country’s second largest county estimated that this failure to make timely payments cost borrowers late fees of at least $2 million in that county over a two-year span, causing some to lose their homes. If servicers fail to make insurance payments and a policy lapses, borrowers may face much higher insurance costs even if they purchase their own, non-force-placed policy. Worse yet, borrowers may find themselves unable to buy insurance at all if they cannot find a new insurer willing to write them a policy.
It is recommended that all borrowers demand to pay the insurance and taxes on their properties instead of relying on a loan servicer with ulterior motives to do so.
The system must be changed to include some modicum of flexibility, accountability and equitable agreement between the homeowner and servicer. As it stands the servicer has all of the power, the incentive to perform in bad faith, and to profit from their illegal tactics. Borrowers will likely have some sort of life tragedy or crisis that may result in a payment being received late. This error should not result in a loss of their home if there is sufficient proof that the homeowner will make good on their commitment.
When you miss one new car payment on an auto lease or installment agreement- the lender typically will help you catch up and bring your loan current. The manufacturer doesn’t want a depreciated car back, the expense of repossession and prefer that the loan stay in good standing. The servicer, on the other hand, has different goals because the asset (the home) is appreciating- plus they will make more money if the homeowner defaults. The way this industry is set up creates a conflict of interest. You can’t call yourself a servicer when your objectives are to create profit by any means possible.
If a homeowner is wise they will purchase a home with a local bank or credit union who will agree to hold the paper in-house instead of securitize or sell the debt. A lender with skin in the game operates much differently than a lender with none. A homeowner would be wise to negotiate a clause where one payment can be missed once every five years with no penalty. The missed payment will be automatically amortized into the overall balance due at the end of the loan and a penalty can be assessed to cover the bank’s costs.
It is time that the homeowner take back some control and avoid mega-bank loan servicers who have figured out how to rig loan servicing to their advantage by unfair and illegal tactics. The industry is the epitome of a predatory lending entity and by the time the homeowner figures out how the game is played- it is often too late.
Filed under: foreclosure |