Mortgage servicer

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A mortgage servicer is a company to which some borrowers pay their mortgage loan payments and which performs other services in connection with mortgages and mortgage-backed securities. The mortgage servicer may be the entity that originated the mortgage, or it may have purchased the mortgage servicing rights from the original mortgage lender. [1] The duties of a mortgage servicer vary, but typically include the acceptance and recording of mortgage payments; calculating variable interest rates on adjustable rate loans; payment of taxes and insurance from borrower escrow accounts; negotiations of workouts and modifications of mortgage upon default; and conducting or supervising the foreclosure process when necessary. [2]

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Many borrowers confuse their mortgage servicer with their lender. A mortgage servicer may be a borrower's lender, but often the beneficial rights to the payment of principal and interest on mortgages are sold to investors such as Fannie Mae, Freddie Mac, Ginnie Mae, FHA, and private investors in mortgage securitization transactions. Banking organizations often perform mortgage servicing not only for mortgages they originate but for others where they have purchased the servicing rights. [3]

Controversies

Reluctance to modify mortgages, prevent foreclosures

In July 2009, the mortgage servicing industry received criticism for many servicers' apparent unwillingness to modify adjustable rate mortgages held by homeowners on the verge of foreclosure in the United States. Despite pressure from President Barack Obama's Administration on mortgage servicers to permanently modify thousands of loans to make them more affordable and prevent foreclosures, allegations arose that the servicers had an apparent conflict of interest which led them to stop or slow the modification process in many cases. Industry insiders and legal experts cited the lucrative fees which mortgage servicers charge to delinquent homeowners as the main reason behind the slow and difficult process of modifying a mortgage. [4]

Accusations of "robo-signing," foreclosure document fraud

In October 2010, many major mortgage servicers in the United States came under intense media and government scrutiny for their alleged mishandling of the large amount of foreclosures moving through the court system. Allegations included foreclosures being processed with missing or questionable paperwork (including paperwork showing proper chain of title on the part of the investment bank), falsifying dates and other information in foreclosure documents and "robo-signing," the practice of paying under-qualified personnel to sign hundreds or thousands of foreclosure documents a day, often without properly reviewing the documents. [5]

Congressional hearings

The alleged problems regarding foreclosure fraud were so widespread and popularized by the media that U.S. Congresswoman Maxine Waters announced that the United States House of Representatives subcommittee on housing issues will hold a hearing on November 18, 2010 to examine problems emerging in the mortgage servicing industry. [6]

Illegal foreclosures and mortgage overcharges on active-duty military members

The Servicemembers Civil Relief Act (SCRA) of 2003 protects United States active-duty military members from civil court proceedings (such as foreclosure) while serving their country. The SCRA also limits the interest rate which an active-duty military member can be charged on any outstanding debt (secured before their deployment) to 6% (six percentage points). In spite of these special protections granted to active-duty military members, news reports surfaced in which large mortgage servicers and investment banks illegally overcharged military families with members on active duty on their mortgages. [7]

In January 2011, JP Morgan Chase, the United States' second-largest bank based on market share, admitted that it had illegally overcharged some 4,000 active-duty military members on their home mortgage and accidentally foreclosed on as many as 14 families. Facing pressure from a United States Marine's lawsuit over the violations, Chase announced that it would work to reverse the illegal foreclosures and was mailing $2 million to the 4,000 military families as compensation, implying the mortgage bank overcharged each family an average of $500 on their mortgage. Lawsuits regarding the overcharges are still pending as of January 2011. [8]

Delaware Attorney General Beau Biden sent a letter to several large lending institutions demanding they review their operations in order to safeguard active-duty military members from illegal mortgage overcharges and fraudulent foreclosures. Those institutions included Citigroup, Inc., Bank of America Corp., Wells Fargo & Co., PNC Financial Services Group Inc., Ally Financial Inc. and Goldman Sachs Group Inc.'s Litton Loans. [9]

International Mortgage Servicing Problems

The controversy over mortgage servicing mistakes is not confined to the United States. Over 18,000 British homeowners holding adjustable rate mortgages with Yorkshire Bank and Clydesdale Bank found in July 2010 that their monthly variable interest rates had been miscalculated by a software error. The resulting corrected amortization schedule for their mortgage resulted in increased payments on an average of several hundred pounds a year. [10]

In Ireland, 436 mortgage holders with Allied Irish Bank learned in 2009 they were overcharged by an average of €900. In a statement, the bank claimed, "The error happened when customers were charged an interest rate that did not match the loan-to-value ratio on their account." [11]

An Australian businessman who owned 3 blocks of property with several business partners won a judgement against National Australia Bank in 2010, in which the Supreme Court of New South Wales found that the bank had incorrectly charged excess interest on the related mortgages on two separate occasions. During one period of time, the interest rate on the mortgage was to be fixed at 5.65%, but NAB incorrectly charged 5.85%. At another point during the servicing of the mortgage, National Australia Bank incorrectly charged a "default" interest rate of 20%, when it should have charged less than 6%, as the loan was not in default. Even if the Australian bank had a legitimate reason to charge such a default rate, that rate should have only been an additional 4%, not 14% according to Justice Stephen Rothman's judgement. The entire proceedings lasted six years. [12]

Related Research Articles

A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. The loan may be offered at the lender's standard variable rate/base rate. There may be a direct and legally defined link to the underlying index, but where the lender offers no specific link to the underlying market or index, the rate can be changed at the lender's discretion. The term "variable-rate mortgage" is most common outside the United States, whilst in the United States, "adjustable-rate mortgage" is most common, and implies a mortgage regulated by the Federal government, with caps on charges. In many countries, adjustable rate mortgages are the norm, and in such places, may simply be referred to as mortgages.

<span class="mw-page-title-main">Foreclosure</span> Legal process where a lender recoups an unpaid loan by forcing the borrower to sell the collateral

Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.

A reverse mortgage is a mortgage loan, usually secured by a residential property, that enables the borrower to access the unencumbered value of the property. The loans are typically promoted to older homeowners and typically do not require monthly mortgage payments. Borrowers are still responsible for property taxes or homeowner's insurance. Reverse mortgages allow older people to immediately access the home equity they have built up in their homes, and defer payment of the loan until they die, sell, or move out of the home. Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years. However, the borrower is generally not required to repay any additional loan balance in excess of the value of the home.

Predatory lending refers to unethical practices conducted by lending organizations during a loan origination process that are unfair, deceptive, or fraudulent. While there are no internationally agreed legal definitions for predatory lending, a 2006 audit report from the office of inspector general of the US Federal Deposit Insurance Corporation (FDIC) broadly defines predatory lending as "imposing unfair and abusive loan terms on borrowers", though "unfair" and "abusive" were not specifically defined. Though there are laws against some of the specific practices commonly identified as predatory, various federal agencies use the phrase as a catch-all term for many specific illegal activities in the loan industry. Predatory lending should not be confused with predatory mortgage servicing which is mortgage practices described by critics as unfair, deceptive, or fraudulent practices during the loan or mortgage servicing process, post loan origination.

<span class="mw-page-title-main">Mortgage-backed security</span> Type of asset-backed security

A mortgage-backed security (MBS) is a type of asset-backed security which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals that securitizes, or packages, the loans together into a security that investors can buy. Bonds securitizing mortgages are usually treated as a separate class, termed residential; another class is commercial, depending on whether the underlying asset is mortgages owned by borrowers or assets for commercial purposes ranging from office space to multi-dwelling buildings.

Lenders mortgage insurance (LMI), also known as private mortgage insurance (PMI) in the US, is a type of insurance payable to a lender or to a trustee for a pool of securities that may be required when taking out a mortgage loan. Its purpose is to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.

<span class="mw-page-title-main">Second mortgage</span> Additional loan

Second mortgages, commonly referred to as junior liens, are loans secured by a property in addition to the primary mortgage. Depending on the time at which the second mortgage is originated, the loan can be structured as either a standalone second mortgage or piggyback second mortgage. Whilst a standalone second mortgage is opened subsequent to the primary loan, those with a piggyback loan structure are originated simultaneously with the primary mortgage. With regard to the method in which funds are withdrawn, second mortgages can be arranged as home equity loans or home equity lines of credit. Home equity loans are granted for the full amount at the time of loan origination in contrast to home equity lines of credit which permit the homeowner access to a predetermined amount which is repaid during the repayment period.

A VA loan is a mortgage loan in the United States guaranteed by the United States Department of Veterans Affairs (VA). The program is for American veterans, military members currently serving in the U.S. military, reservists and select surviving spouses and can be used to purchase single-family homes, condominiums, multi-unit properties, manufactured homes and new construction. The VA does not originate loans, but sets the rules for who may qualify, issues minimum guidelines and requirements under which mortgages may be offered and financially guarantees loans that qualify under the program.

Mortgage insurance is an insurance policy which compensates lenders or investors in mortgage-backed securities for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a mortgage indemnity guarantee (MIG), particularly in the UK.

In the United States, a mortgage note is a promissory note secured by a specified mortgage loan.

<span class="mw-page-title-main">Mortgage</span> Loan secured using real estate

A mortgage loan or simply mortgage, in civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged. The loan is "secured" on the borrower's property through a process known as mortgage origination. This means that a legal mechanism is put into place which allows the lender to take possession and sell the secured property to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a Law French term used in Britain in the Middle Ages meaning "death pledge" and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure. A mortgage can also be described as "a borrower giving consideration in the form of a collateral for a benefit (loan)".

In finance, subprime lending is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subprime borrowers were defined as having FICO scores below 600, although this threshold has varied over time.

<span class="mw-page-title-main">Subprime mortgage crisis</span> 2007 mortgage crisis in the United States

The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. The crisis led to a severe economic recession, with millions of people losing their jobs and many businesses going bankrupt. The U.S. government intervened with a series of measures to stabilize the financial system, including the Troubled Asset Relief Program (TARP) and the American Recovery and Reinvestment Act (ARRA).

Loss mitigation is used to describe a third party helping a homeowner, a division within a bank that mitigates the loss of the bank, or a firm that handles the process of negotiation between a homeowner and the homeowner's lender. Loss mitigation works to negotiate mortgage terms for the homeowner that will prevent foreclosure. These new terms are typically obtained through loan modification, short sale negotiation, short refinance negotiation, deed in lieu of foreclosure, cash-for-keys negotiation, a partial claim loan, repayment plan, forbearance, or other loan work-out. All of the options serve the same purpose, to stabilize the risk of loss the lender (investor) is in danger of realizing.

This article provides background information regarding the subprime mortgage crisis. It discusses subprime lending, foreclosures, risk types, and mechanisms through which various entities involved were affected by the crisis.

Loan modification is the systematic alteration of mortgage loan agreements that help those having problems making the payments by reducing interest rates, monthly payments or principal balances. Lending institutions could make one or more of these changes to relieve financial pressure on borrowers to prevent the condition of foreclosure. Loan modifications have been practiced in the United States since the 1930s. During the Great Depression, loan modification programs took place at the state level in an effort to reduce levels of loan foreclosures.

A loan modification company, also known as a mortgage modification company, is a business that helps homeowners in the United States modify the terms of their home loans or mortgages. When a mortgage is modified, the original terms of the home loan contract between a lender and a borrower are renegotiated and then altered, usually in the favor of the borrower.

<span class="mw-page-title-main">Mortgage industry of the United States</span>

The mortgage industry of the United States is a major financial sector. The federal government created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the Government National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

A bank walkaway is a decision by a mortgage lender to not foreclose on a defaulted mortgage, or to not complete foreclosure proceedings. These are sometimes referred to as abandoned foreclosures or stalled foreclosures, though this latter term is also used more broadly when the foreclosure process has stalled for other reasons.

The Making Home Affordable program of the United States Treasury was launched in 2009 as part of the Troubled Asset Relief Program. The main activity under MHA is the Home Affordable Modification Program.

References

  1. ↑ Lemke, Lins and Picard, Mortgage-Backed Securities, §3:1 (Thomson West, 2013).
  2. ↑ "FDIC Law, Regulations, Related Acts". Federal Deposit Insurance Corporation. 1992-11-02. Retrieved 2010-11-10.
  3. ↑ Lemke, Lins and Picard, Mortgage-Backed Securities, §11:6 (Thomson West, 2013).
  4. ↑ Goodman, Peter (2009-07-29). "Lucrative Fees May Deter Efforts to Alter Loans". The New York Times. p. 2. Retrieved 2010-11-10.
  5. ↑ "Flawed Paperwork Aggravates a Foreclosure Crisis". The New York Times. 2010-10-03. p. 2. Retrieved 2010-11-12.
  6. ↑ "House panel sets hearing on foreclosure problems". Reuters. 2010-10-19. p. 3. Retrieved 2010-11-10.
  7. ↑ Henriques, Diana (2005-03-28). "A Law Gets Lost; Creditors Press Troops Despite Relief Act". The New York Times. p. 3. Retrieved 2011-01-30.
  8. ↑ Kopecki, Dawn; Margaret Cronin Fisk (2011-01-18). "JPMorgan Mails $2 Million to Military Families for Overcharges, Lost Homes". Bloomberg. p. 1. Retrieved 2011-01-30.
  9. ↑ Benoit, David (2011-01-28). "DOJ Investigating Violations Of Military Lending Protections". Fox Business News. p. 1. Archived from the original on 2012-09-27. Retrieved 2011-01-30.
  10. ↑ Butterworth, Myra (2010-07-21). "Home owners face higher mortgage payments after bank miscalculation". The Telegraph. p. 1. Retrieved 2012-08-25.
  11. ↑ Sheehy, Clodagh (2009-09-11). "Customers with AIB mortgages hit for €900". The Herald IE. p. 1. Retrieved 2012-08-25.
  12. ↑ Rolfe, John (2010-10-21). "National Australia Bank rips off Sydney family but GE Money holds off on eviction". news.com.au. p. 1. Retrieved 2012-08-25.
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