May 10th, 2012
Econintersect: There have been questions about why banks are not doing more to try for workouts of delinquent mortgages rather than go through foreclosure. From an article by Bloomberg editors (first Source, end of article): "...when homes go into foreclosure, banks lose money." But that is not what drives the behavior of the servicers of mortgages; they are driven by what they get the most pay for and the jackpot for the servicer is to go to foreclosure. The bank has an interest in reaching workouts when possible, yet the interface to the borrower has an interest in seeing foreclosure filed. Guess who manages the mortgagor (borrower) – mortgagee (lender) interface? The servicer, who is incentivized to work against the interests of the other two parties, is in control of the connection between those parties.
This double fraud was documented by Diane E. Thompson, National Consumer Law Center, in testimony before the Senate Committee on Banking, Housing, & Urban Affairs in 2010. From that testimony:
The falsification of judicial foreclosure documents is closely and directly tied to widespread errors and maladministration of HAMP and non-HAMP modification programs, and the forced-placed insurance and escrow issues. Homeowners for decades have complained about servicer abuses that pushed them into foreclosure without cause, stripped equity, and resulted, all too often, in wrongful foreclosure. In recent months, investors have come to realize that servicers’ abuses strip wealth from investors as well. Unless and until servicers are held to account for their behavior, we will continue to see fundamental flaws in mortgage servicing, with cascading costs throughout our society.
The report just published (8 May 2012) by Reuters focuses on one specific mortgage service abuse - the practice of forced-placed insurance. This is a process that involves the mortgage servicer to replace lapsed insurance when the borrower fails to keep required coverage in force. The Reuters report maintains that, instead of obtaining effective insurance at a reasonable cost, the servicers obtain policies that have exorbitant coverages and outlandish premiums. One example given by Reuters is where one Florida servicer was force-placing policies that cost ten times what the previous policy premiums had been. These often are enough to push total payments be the borrower to an unpayable level, instigating a serious delinquency and the start of foreclosure proceedings.
Reuters provides the following detail:
Here’s how it generally works: Banks and their mortgage servicers strike arrangements -- often exclusive -- with insurance companies in which the banks agree to buy high-priced policies on behalf of homeowners whose coverage has lapsed. The bank advances the premium to the insurer, and the insurer pays the bank a commission, which is priced into the premium. (Insurers say the commissions compensate banks for expenses like “advancing premiums, billing and collections.”) The homeowner is then billed for the premium, commissions and all.
It’s a lucrative business. Premiums on force-placed insurance exceeded $5.5 billion in 2010, according to the Center for Economic Justice, a group that advocates on behalf of low- income consumers. An investigation by Benjamin Lawsky, who heads New York State’s Department of Financial Services, has found nearly 15 percent of the premiums flow back to the banks.
It doesn’t end there. Lenders often get an additional cut of the profits by reinsuring the force-placed policy through the bank’s insurance subsidiary. That puts the lender in the conflicted position of requiring insurance to protect its collateral but with a financial incentive to never pay out a claim.
This new report by Reuters is actually not news – the Thompson testimony in 2010 repeatedly mentioned forced-placement of insurance by mortgage servicers as a significant abuse.
Other situations when mortgage servicing created problems has been covered extensively by Naked Capitalism over the past two plus years. There have been many articles which discussed forced placement abuses.
One particular story reported by GEI News that exemplifies the perverse compensation incentives and the out-and-out illegal frauds of mortgage servicing was published just last month. In that case a court found that Wells Fargo was systematically in violation of its own mortgage contracts in processes that piled multiple charges onto mortgage balances, used mortgage payments to offset those charges (instead of applying them to the mortgage as their own contracts required) and then foreclosed for lack of mortgage payments.
- Look Who’s Pushing Homeowners off the Foreclosure Cliff (Bloomberg Editors, 8 May 2012)
- Foreclosures are More Profitable Than Loan Modifications, According to New Report (by Shahein Nasiripour, Huffington Post, 18 March 2009)
- Problems in Mortgage Servicing From Modification to Foreclosure (Diane E. Thompson, Senate Testimony, 16 November 2010)
- Judge: Wells Fargo Fails to Follow Its Own Mortgage Contracts (GEI News, 09 April 2012)