Auction of foreclosed bank owned propertyExecutives from the mortgage servicing industry go before the Senate today, and they'll try to save face by apologizing for their industry's role in the foreclosure mess. One theme sure to be touched on is how the foreclosure documentation problems -- robo-signing and all -- are just 'technical' errors. Another theme will be how as servicers, the banks are caught between the homeowners and the investors, and that it's investors who are forcing the foreclosures.

But don't believe the hype: The document problems are substantive, and the servicers, not investors, are the ones with a powerful incentive to foreclose instead of modify.

According to The New York Times, Barbara Desoer, the head of Bank of America Home Loans, will announce new initiatives, including the revolutionary idea that each borrower should be assigned a single case manager, so borrowers don't get passed from employee to employee. That such a basic concept is a new initiative speaks volumes about why the millions of borrowers that Bank of America (BAC) is foreclosing on have been unable to get modifications or otherwise work things out with BofA. Similarly the Times says the head of Chase Home Loans (JPM), David Lowman, is expected to take "an apologetic stance."

Who Gets the Money?

Of course, no apology can fix the problems created by the banks' foreclosure processes. For example, hundreds, perhaps thousands, of Massachusetts foreclosures must be redone because the banks filed incomplete papers, resulting in clouded titles, reported The Boston Globe.

A different problem results when banks, presumably deliberately, are foreclosing in their own names instead of the entity that really owns the loan. Naked Capitalism reported that BofA, at least in Kentucky, has apparently taken to foreclosing in its own name instead of in the name of the securitization trust that officially owns the loan.

After such a foreclosure, who gets the proceeds? Are the security holders sure they'll get paid properly? And it's not just BofA. I've already reported on Wells Fargo (WFC) trying foreclose on a home in its own name that was really owned by Freddie Mac. I've seen papers it filed in a different case where Wells Fargo tried to foreclose in its own name, but the loan was owned by Fannie Mae.

Finally, a report from the Congressional Oversight Panel cautions that it's just too early to know what the ramifications of the foreclosure documentation problem are, but that the consequences could be "severe" enough to warrant stress testing the banks.

Servicers Profit in Two Ways

The investors-make-us-foreclose line is as specious as the one about the documentation problems. For starters, given that investors generally lose less money when a defaulted loan is modified than foreclosed, there's little reason for investors to push foreclosure over modifications. On the other hand, the economics of servicing make foreclosure infinitely more attractive to a servicer than any meaningful loan modification. As the inspector general for the TARP program (TARP includes the government's loan-modification efforts) explained in his October report to Congress, servicers make money in two ways.

First, they get a fee that's a percentage of the mortgage's principal balance, so any modification that reduces the principal -- exactly what underwater homeowners need -- also reduces servicer income. That's why most of the modifications that servicers do finalize aren't in the government program -- because the government doesn't let them roll as many fees into principal, and it pushes to reduce the principal balance. Under their "proprietary" programs, the servicers can preserve or even increase this fee income.

Second, when servicers foreclose, they get to deduct all the accumulated fees, such as late fees, broker price-opinion fees and inspection fees, from the foreclosure's proceeds before sending the balance of the foreclosure sale money to investors. Those fees can really add up, since during trial modifications the homeowner can still be charged late fees for not paying the amounts they aren't supposed to be paying under the modification, which the TARP October report explains on page 72.

Keeping People in Their Homes

Given the financial incentives for servicers and their extraordinary inability to do basic customer service (given the "new initiative" of having one person be responsible for each loan), it's not surprising that modifications have been such a failure so far. Iowa Attorney General Tom Miller, who's also scheduled to testify, will reportedly say the state AGs are focusing more on fixing the modification process than the documentation problems. That's good news as long as the documentation problems are taken on after modifications are fixed.

Keeping people in their homes is the best possible outcome for most communities, as foreclosure can have severely damaging consequences for surrounding properties. Besides, court systems have been taking steps to defend themselves from the bad documents, for example by requiring special affirmations. So, with luck the bad document problem will be ending anyway.

One problem unlikely to come up today is just how bad the servicers are beyond their foreclosure problems. Federal Reserve Governor Sarah Bloom Raskin says she has seen servicers use "a Pandora's Box of predatory tactics that included:
the padding of fees, such as late fees, broker-price opinions, inspection fees, attorney's fees, and other fees;

the strategic misapplication of payments so that the homeowner's payments for principal and interest due on the loan were improperly applied to the servicer's fees, sometimes improperly causing the loan to be considered to be in default; and

the inappropriate assessment of force-placed insurance, with premiums of two to four times the cost of standard homeowners' insurance, which in turn caused servicers to collect these premiums before applying the payments to principal and interest, precipitating foreclosure.
So if you to tune into the political theater of today's hearing, keep in mind just how broad and deep the servicing industry's problems are, and how far we have to go to get real accountability for its tactics.

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Reverse mortgage is a nice financial instrument for the senior citizens in the country who do not have adequate retirement fund at their disposal and whose age is 62 or more .

July 21 2013 at 2:21 PM Report abuse rate up rate down Reply

Abigail! Thank you! We have to pass this article around and email it to our local and state government and Attorney General's...

November 17 2010 at 2:34 PM Report abuse rate up rate down Reply

Better analysis and comment than that Four Loco article you wrote yesterday.

November 17 2010 at 12:01 AM Report abuse rate up rate down Reply

First and foremost I would like to thank Abigail for her diligence in this matter and keeping us informed. When I could not get a modification from Countrywide, even though they said they would. No phone calls or any communication from Countrywide at all. Then BofA took over and for a small moment I had a sigh of relief. Thinking a big bank such as BofA would continue with the modification. HOW WRONG WAS I. It took two phone calls from my Attorney Generals Office to get them to talk with me. Soon after that I was sent a Modification from hell. Four hundred dollars more then my original, a modification of 9 1/2%. Well it went down hill from their. So my next request from BofA was that I wanted to know who owned my loan and who was my lender. Their answer was "We can't tell you". I thought this was odd and I thought this was wrong. Then I started my investigation and I found out terms and words I have never known. Things like mortgage pools, MERS, assignments, allongs and QWR (Qualified Written Request). Not to mention Federal and State Laws. WOW !! What I found out was that I am the only one recorded on my Deed of Trust along with the Original Lender. No One Else. I have no idea what transpired between my Original Lender and Countrywide. According to Law ... I should not have even been paying Countrywide. So as the Banksters of America tried and screw me .... I took the Tea and Threw it in the Bay (sort of speak) and I have not paid BofA one red cent. Going on 19 months of no payments and I have even begged the Banksters to foreclose on me just so I could take them to court. Well here I sit and I will just wait ... I had finally got a hold of MERS's Web Site and entered my Name, my address and my zip code ... It comes up Nothing Recorded. I could say a lot more but the bottom line is ... these lenders and servicer like BofA, GMAC and Chase and many more are just liers and crooks. It is just a matter of Time.

November 16 2010 at 8:39 PM Report abuse +1 rate up rate down Reply

I worked in the mortgage servicing industry back in the 80's. The same was true then as it is now. The money made on home loans is in the servicing, not the origination of the loan. Two years ago my own home loan was serviced by CitiBank, and they completely screwed up all of my attempts to avoid foreclosure after I lost my job. First, they made me jump through hoops to do a refinance, then did not approve it. They wouldn't do a modification because I was not behind on the payments (yet). Next,on their advice, and since the house was now worth less than what was owed, I tried doing a short sale. We had three contracts from buyers who wanted the house. Citi sat on them for months, and all three buyers backed out and bought other houses. By the time Citi Loan servicing responded to the offers, I was behind on the payments, and the legal arm of Citi had started the foreclosure. Literally several days later, Citi sold the servicing of my loan to yet another company that completed the foreclosure. The news headlines read that Citi had sold the servicing on thousands of loans to raise capital. When it was over, the final foreclosure sale netted about one third of what was owed on the house, the short sale would have netted two thirds. What a sorry situation. My loan was not a subprime loan either, I had put down 25% in 2003 and had excellent credit.

November 16 2010 at 7:47 PM Report abuse rate up rate down Reply

if i was the law the first thing that would happen is barney frank would stand trial every time i make a transaction with a bank i tell myself i just dealt with a criminal frank as a cellmate to madoff would be justice

November 16 2010 at 7:08 PM Report abuse rate up rate down Reply

Right on Abigail...guess no bankers are sittin near you ... probably all afraid you'd write about them !... You go get'em girl.........

November 16 2010 at 4:41 PM Report abuse rate up rate down Reply

Granted mortgage providers did a lot wrong--their biggest wrong was lending money to unqualified people. However--once again we have taken a bad situation only to make it worse by allowing lawyers (quickly becoming social leeches) to have their way. How many homes that were current with their mortgage were actually foreclosed on? Not many. Again we need to get lawyers under control--their cost to our economy grows more and more each day.

November 16 2010 at 1:51 PM Report abuse +1 rate up rate down Reply
2 replies to mdunnjr's comment

Let's start with Eric HOlder -- the top lawyer. And we will work our way down to the Supreme Court there alot of lawyers there. And we could move down the road to congress and each state has a AG. It's not the lawyers, it's the fact this country does not enforce it's LAWS ON THE BOOKs. If we enforced the laws to the letter. Then there would be no need for lawyers.

November 16 2010 at 2:06 PM Report abuse +2 rate up rate down Reply

Just who do you think unearthed all this greed and theft from the poor, the elderly and the taxpayers -- comment posters? the banks? And who do you owe your right to spew your venomous comments? Be careful you might get what you wish for!

March 07 2011 at 6:18 PM Report abuse rate up rate down Reply

Why did this take so long to figure it out -- US here on Main street figured it out 14 months ago. The banksters need to be stressed tested alright, and the hoodlums need to be audited -- and now the banksters are blaming the investors. PONY UP BOYS you got caught, you got caught selling bad loans to people who had no business or money to own a MacMansion, JUST FOR THE COMMISSION AND THE ABILITY TO SELL THAT TOXIC DERVATIVE OVER AN OVER AGAIN. Then you made money on broker fees and lied on those toxic dervatives by using fake AAA ratings, Then you scum bags walked, balked to Barney, right up to the Fha, Freedie Mac and Fannie Mae I have more money ATM machine and got the defaulted notes proceeds, wrote the bad debt off, sold the house in short sale and the whole process started again. WHO ARE YOU KIDDING. GO TO JAIL, this is collusion, fraud, cooked books, deception to homeowners, THE BANKS COLLAPSED THE AMERICAN ECONOMY AND THE GLOBAL ECONOMY TOO.

November 16 2010 at 12:52 PM Report abuse +3 rate up rate down Reply
2 replies to jkennedy806's comment

I suppose your are referring to the homeowners that stopped making payments on their mortgage--weeks--months ago.

November 16 2010 at 1:52 PM Report abuse rate up rate down Reply

I suppose that it's okay for a financial sector to set up a RICO type industry that errodes the trust, confidence of it's customers and furthers destroys the construction and real estate industry to boot. I know people who have had their homes foreclosed on by banks B of A and B of A doesn't own the loan. Or better yet, my neighbor got a loan mod from Citi did all the paperwork made all the trial payments, got thru it. And last month her mortgage payment skyrocketed to 2400. Her original payment before mod was 1200.00 And who do you suppose we make our payments too ??? Some people don't even know. MERS should be outlawed. In the olden days the mortgage loan you had stayed with the bank thru out the lifetime of the note. It wasn't swapped like a baseball card or a cheap date. It's a travesty -- all for the love of Money and Greed.

November 16 2010 at 2:03 PM Report abuse +2 rate up rate down Reply