The New York Times has an important story on page one about the conflicts of interest at mortgage companies that may be slowing down efforts to modify mortgages. I have to say this seems so blatant I’m wondering why we’re just now reading about this.
That’s not to take away at all from reporter Peter S. Goodman’s effort—it’s dynamite. Here’s his tough second and third paragraphs:
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.
This story raises serious questions about the Obama administration’s mortgage-modification initiative, which hasn’t done much at all, and raises yet more questions about the mortgage industry. That’s why I’m surprised that I’m just now reading a story like this—I haven’t seen much of anything like it. You’d think by now the press would have the carcass of the corrupt mortgage industry picked clean.
The Times also has a sort-of whistleblower who worked for Countrywide—which is now known as Bank of America in one of the stupider bits of PR in recent memory—says it—surprise!—doesn’t want to modify mortgages.
Rich Miller, a governance project manager at Countrywide Financial and Bank of America before he left in January, said Bank of America had been reluctant to modify loans, which hurt the bottom line. The company has been waiting and hoping the economy will improve and delinquent customers will resume making payments, he said.
The key to understanding this story is to get that it’s talking about mortgage servicers, not the people who actually own the loans (at least in most cases). Fees aren’t going to come close to making up the huge losses incurred by a foreclosure that the actual lender takes. But the servicer’s entire business is fees. The more the merrier. The longer it can string out a borrower and tack on late fees and the like, the more revenue it makes. It gets paid out of the proceeds of the eventual sale, the Times reports, and then makes money on the actual sale, too.
Legal experts say the opportunities for additional revenue in delinquency are considerable, confronting mortgage companies with a conflict between their own financial interest in collecting fees and their responsibility to recoup money 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.
So this not only hurts homeowners, it hurts investors, too—which makes it all the more shocking that it’s still set up this way. They’re the ones with high-powered lobbyists, after all, unlike Alfred L. Crawford of Los Angeles.
In a great sidebar, Goodman reports on Crawford’s situation. He’s been out of the house for two years and tried to do a short sale, which typically means he will have to make up part of the loss on the loan. But the servicer, good old Bank of America won’t agree to it. Check out these conflicts of interest:
Twice this year, Bank of America has ordered appraisals of the property as part of Mr. Crawford’s request for a short sale. Both times, the bank gave the order for the appraisal to its wholly owned subsidiary, LandSafe, paying the company a total of $900.
When Mr. Crawford stopped paying the insurance policy on his home, Bank of America took out its own policy, securing it from another subsidiary, Balboa.
Bank of America stands to collect reimbursement for these fees whenever the property sells.
The Times quotes a servicer, Ocwen Financial, which gets 12 percent of its revenue from borrower fees, saying those fees aren’t profitable. I’d liked to have seen that statement checked out, rather than just let stand. If it’s true, it undermines the story. But it could be your typical corporate spin. We’re not told, though the tenor of the story leads us to believe it’s the latter.
And this makes money, at the very least:
Ocwen established its own title company, Premium Title Services, in part to keep more of the revenue from foreclosures, said Ms. Golant, who helped start it.
“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.”
Here’s the good kicker:
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 Ms. Golant. “Meanwhile, they are collecting all these fees.”
Good for the Times for bringing this issue to the fore.
(UPDATE): I changed the headline shortly after publishing to better reflect what the story found. It didn’t find specific “corruption” so much as “conflicts,” or potential corruption.)