Bankers’ Hours column: The impending mortgage servicing nightmare
There may be a mortgage servicing nightmare on the horizon. This is a really a very grim prospect, because loan servicing, the administration of mortgages after they’re funded, can be complicated under the best of circumstances.
Despite significant advances in the automation of mortgage underwriting and closing, getting a home loan is still the most complex act of acquisition in our free enterprise system. Yet it’s nothing compared to the administration of the loan after it’s made. Murphy’s Law (what can go wrong, will go wrong) permeates the whole system.
I won’t bore you with all of the detail involved in the care and feeding of a home loan after it’s funded; I’ll be happy to send you an overview if you’re interested in the minutiae. But, currently there are around 3 million residential mortgages that are in forbearance, meaning that payments have been suspended due to employment disruption during the pandemic. Chaos could be imminent; that suspension is good for no more than a year, after which the debt must be serviced.
To better get a handle on what might be, here’s a cautionary tale about Nationstar Mortgage, currently the nation’s fourth-largest loan servicer, and what happened to it when it grew rapidly between 2012 and 2016. (Today, the company goes by the name of “Mr. Cooper” — odd name for a residential home loan company, but what’s in a name, after all.)
The Consumer Financial Protection Bureau, aided and abetted by attorneys general in all 50 states, recently hit the firm with some $91 million in fines and orders of restitution, alleging wrongdoing in a plethora of instances involving mortgages that, as a result of the 2008 housing meltdown, had been modified, or were in the modification process, which would provide a safe harbor for homeowners and protected them from foreclosure.
As noted, this company experienced a growth spurt when it acquired the servicing rights to existing loans made and serviced by other lenders. Many of these companies and banks were probably bankrupt or, if insured financial institutions, in the process of being shut down by the FDIC.
The CFPB and state AGs alleged that Nationstar didn’t honor commitments made to homeowners by the previous servicer, or by Nationstar itself, after acquisition of servicing. For example, many of these loans had been made to borrowers who had fallen behind. Consequently, a number of homeowners had already worked out a loan modification agreement with the original lender. In other instances, modification applications were in process when the transfer of the loans occurred. According to the complaint, Nationstar improperly commenced foreclosure on these mortgages.
It was also alleged that the company issued written promises not to foreclose, then did, and that it increased monthly mortgage payments when it committed not to do so. This latter claim is interesting, and, if you’ve ever watched the process of sausage being made — that is a typical loan servicing operation — you can see what might have happened.
Say that a loan is properly modified, giving the borrower a lower total monthly payment, which is made up of principal, interest and an amount for a reserve for real estate taxes and insurance so those obligations can be paid when due. But the latter amounts change, generally on the upside. Thus, if you’re going to pay the taxes when due, which you must, or cover the cost of insurance to avoid cancellation, you have to dig into your corporate pocket to ante up. The classic rock and a hard place. If you decide your company’s not going to pay, then you notify the borrower that the amount due next month has just taken an uptick.
Of course, this is speculation, but the odds are good that’s the story. The servicing folks at Nationstar weren’t Snidely Whiplashes, twisting their mustache and getting kicks kicking people out of their homes. They were just doing a difficult job and, apparently, got overwhelmed.
Certainly, circumstances are different this time around. The 3 million in forbearance are with lenders who are probably solvent and committed to handling the resumption of payments. But the sheer volume will be daunting; even the best of systems gets overloaded. Also, the pandemic recession wasn’t the fault of mortgage lenders. Governmental and regulatory agencies know this and will almost certainly tender some assistance and forbearance of their own.
But all of that may not mean much at the moment when a borrower has spent two hours on the phone attempting to get payments restarted, when, simultaneously trying to get life itself back on the rails.
In previous columns, I’ve offered some tips on dealing with a mortgage servicer. Of course not legal advice but just some suggestions that may have relevance.
After all, they come from a guy who’s screwed up more than one mortgage loan servicing department in his career.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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