Those Contrite Mortgage Servicers Have Plenty to Be Sorry for

Another excellent article by Abigail Field at Daily Finance.

Executives 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.

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.

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.