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- Mortgage reform
- Aug 1:
- Homeowners and investors may lose, but bank wins
Last week, the Obama administration summoned mortgage company executives to Washington to demand they move faster to lower payments for homeowners sliding toward foreclosure. Treasury officials called on the companies to hire and train more people quickly to field applications for relief.
But industry insiders and legal experts say the limited capacity of mortgage companies is not the primary factor impeding the government's $75 billion program to prevent foreclosures. Instead, it is that many mortgage companies are reluctant to give strapped homeowners a break, because the companies collect lucrative fees on delinquent loans.
Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue -- fees for insurance, appraisals, title searches and legal services.
"It frustrates me when I see the government looking to the servicer for the solution, because it will never ever happen," said Margery Golant, a Florida lawyer who defends homeowners against foreclosure and who previously worked in the law department of a major mortgage company, Ocwen Financial. "I don't think they're motivated to do modifications at all. They keep hitting the loan all the way through for junk fees. It's a license to do whatever they want."
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"That's the short-term strategy," said Miller, who oversaw training programs at Countrywide, which was bought by Bank of America, and now works as an industry consultant.
Bank of America disputed that characterization. "To think that somehow or other we would jeopardize investor relationships and customer relationships for the very small incremental income we would receive by delaying seems ludicrous," said Robert James, the bank's senior vice president for mortgage operations and insurance. "It's not the right thing to do."
At the White House and in Congress last week, banks and lenders strongly urged to show signs that they were trying to save homes from foreclosure.
Rep. Barney Frank, a senior House Democrat, threatened that Congress will revive legislation that would let bankruptcy judges write down a home owner's monthly mortgage payment if the number of loan modifications remain low.
Frank's statement was aimed at adding momentum to a deal struck earlier in the week between Treasury Secretary Timothy Geithner and more than two dozen mortgage companies. The two sides agreed to set the goal of adjusting 500,000 loans by Nov. 1.
But it was far from clear whether that would happen.
Mortgage companies, some of which are affiliated with the nation's largest banks, are paid to manage pools of loans owned by investors. Under their contracts, the companies typically collect a percentage of the value of the loans they service. They extract their share regardless of whether borrowers are current on their payments. Their percentage often increases on delinquent loans.
Legal experts say the opportunities for additional revenue in delinquency are considerable, confronting mortgage companies with a conflict between their own financial interest in harvesting fees and their responsibility to collect as much as they can for investors who own most mortgages.
"The rules by which servicers are reimbursed for expenses may provide a perverse incentive to foreclose rather than modify," concluded a recent paper published by the Federal Reserve Bank of Boston.
But Salt Lake City loan officer Al Bingham said although servicers may get additional revenue from delinquent loans, they also can be subject to financial penalties if too many of their loans in a particular pool are delinquent. Plus, if a loan ends up in foreclosure, they may gain some additional fee revenue in the short term, but ultimately are going to forfeit revenue over the long term if the loan is foreclosed.
"It's simply not in a servicer's best interest for a loan to go into foreclosure," he said.
Under the Obama administration's foreclosure program, a servicer that modifies a loan for a homeowner collects $1,000 from the government, followed by $1,000 a year for each of the next three years.
A senior Treasury adviser, Seth Wheeler, said these payments amount to "meaningful incentives to servicers to help overcome the challenges and competing demands they face in considering and completing loan modifications." He added that mortgage companies "are contractually obligated to the terms of this program, which require them to offer modifications to qualified borrowers."
But experts say the administration's incentives are often outweighed by the benefits of collecting fees from delinquency, and then more fees through the sale of homes in foreclosure.
"If they do a loan modification, they get a few shekels from the government," said David Dickey, who formerly headed a national mortgage sales team at Countrywide and Bank of America, leaving in March to start his own mortgage advisory firm, National Home Loan Advocates. By contrast, he said, the road to foreclosure, especially if it is prolonged, is lined with fees. "There's all sorts of things behind the scenes," he said.
When borrowers begin to fall behind, mortgage companies typically collect late fees reaching 6 percent of the monthly payments.
"For many subprime servicers, late fees alone constitute a significant fraction of their total income and profit," said Diane Thompson, a lawyer for the National Consumer Law Center, in recent testimony to the Senate Banking Committee. "Servicers thus have an incentive to push homeowners into late payments and keep them there. if the loan pays late, the servicer is more likely to profit."
She cited Ocwen Financial, which reported that nearly 12 percent of its income in 2007 came from fees charged to borrowers.
Paul Koches, Ocwen's general counsel, said: "We'd prefer that to be zero. The costs associated with our delinquent loans are in every instance in excess of the late fees." Data on delinquencies reinforces the notion that servicers are inclined to let problem loans float in purgatory -- neither taking control of houses and selling them, nor modifying loans to give homeowners a break.
From June 2008 to June 2009, the number of American mortgages that were 90 days or more delinquent soared from 1.8 million to nearly 3 million, according to the realty research company First American Core Logic. During that period, the number of loans that resulted in the bank taking ownership of the home declined to 245,000 from 333,000.
As a home slides toward foreclosure, mortgage companies pay for many services required to take control of the property and resell it. They typically funnel orders for title searches, insurance policies, appraisals and legal filings to companies they own or share revenue with.
Ocwen established its own title company, Premium Title Services, in part to keep more of the revenue flowing from foreclosures, said Golant, who was involved in starting the venture.
"It was hugely profitable," she said. "Premium Title would charge for the title when it got transferred to Ocwen, then charge again when it got transferred to the new buyer, and then sell title insurance. It was easy money."
Mortgage companies not only gain this extra business through their subsidiaries, but also collect reimbursement for the payments when the houses are sold.
The investors who own bad mortgages accept whatever is left. Investors typically do not notice how much they relinquish to the servicers, because fees are embedded in complex sales.
"It's under the radar," Golant said.
Ultimately, the benefits of delinquency erode incentives for mortgage companies to dispose of troubled loans quickly, say experts, allowing distressed houses to decay and fall in value -- a fact of little interest to the servicer.
"At the end of the day, it doesn't matter what the house sells for, because they don't take that loss," said Golant. "Meanwhile, they are collecting all these fees."
Tribune reporter Lesley Mitchell contributed to this story
