Here, we get to see Yves go through the paces on the foreclosure fraud mess, focusing mostly on the Loan Servicers link in the chain of the foreclosure mess. She more than adequately explains why foreclosing on people, instead of modifying their loan, is the top priority for Loan Servicers.
Below this video are my notes on what Yves sets down. It is not an absolute transcript, but reasonably close.
My Notes from the above interview of Yves Smith:
The Mortgage Servicing industry is a new industry sprung up around this new process of doing mortgages today called “securitization”.
In the old days of banking, the borrower would go to the bank and get the loan, and the loan would remain with the bank.
The change we had, which started in the 1980s, and which has now become the predominant way . . . at least for the way first mortgages are done . . . is you go to the bank, you might even go to the mortgage broker, and you’ll get the loan with them, but instead of keeping the loan, they will sell it. And this (loan the borrower took out) will usually not go to just one party, but it will go to a series of parties. Eventually the loan will end up with a series of investors in a legal box called a “Trust”.
Now this means someone has to somewhat play the role the bank of the old days used to play in collecting payments on the loan. So the Mortgage Servicing industry is the party which gets the payments, its the party which credits the payments, it is the party which takes all the cash from all the people the banks are dealing with and makes sure the cash is properly sent to all the parties the way the contracts are drawn up.
Lending Process Servicing Company is the company which most of the time intercedes for a bank to begin foreclosing. This company gives a lot of support to the lending Servicers in the foreclosure field. For instance, this is the company which hires a “foreclosure mill” to begin foreclosing on a homeowner.
What normally happens is the Servicer normally notifies the borrower that they are behind . . . only very late in the process. The supposed payments behind have gotten so large that the borrower is usually very surprised by the large amount of money being demanded by the Servicer . . . if its because of the compounded fees that they are in that unenviable position
Keep in mind it is the Trusts (which shelter Investors) which hires the Loan Servicers. The sequence runs like this:
Yves goes on to point out one diabolical thing a Service will do. She says suppose a borrower already has one late fee. In many cases, these late fees are not bona fide late fees as the servicer applied the payment late as it circulated through the intestines of the servicing "factory". More insidious, Servicers have also been found to “hold” payments sometimes so as to purposefully make the borrowers late.
Here’s what happens with these late fees:
Let’s call the month when a first late fee payment is assigned Month #1:
Now here are the reasons why it is more profitable to push into foreclosure:
Normally, whenever you have a borrower get in trouble, in any type of lending, the first thing the lender says is “Should I liquidate the loan, should I take what I can get, or is there some way we can restructure the loan?” Yves comments, “I’m always better taking half a loaf . . . if the borrower has enough income, I’d be better served by taking less and restructuring the loan.
Hence in our above case, the Investor(s) would be better served by having the loan restructured; however, the Servicer is having to advance principal and interest, the Servicers do not get paid for modifying loans (hence they have no Economic incentive to modify the loan), and the only way for the Servicer to recoup the money it has been sending to the Investor(s) is to foreclose on the borrower. The reason for this is the Servicer can foreclose on the house, sell it for whatever they can get, take their fees out of the sale before anyone else, and send the remaining money to the Investors.
All the incentives for the Servicers favors foreclosure. None of the incentives favor loan modification.
Yves goes on to say that academics have covered many, many stories about people being foreclosed upon and they haven’t missed a payment. She contends the reason lenders will make up fraudulent documents to take away an on time borrowers home is there is more money to be made in the foreclosure process than remediation.
Yves says banks want to paint the problem as one of where borrowers are deadbeats, and she acknowledges that many borrowers can no longer afford their homes due to loss of jobs, a medical emergency, etc. On the other hand, a very significant amount of the people who are actively fighting foreclosure are victims of Servicer error and they can’t get it straightened out . . . OR . . . they have actually filed for bankruptcy, and in bankruptcy, everybody who has filed to collect money from the borrower is supposed to wait ‘til the court sorts it out.
Yves says Servicers keep trying to take the house before the bankruptcy process has been worked out fully. She says many unsophisticated borrowers and unsophisticated borrowers’ lawyers . . . they will make deals with banks the first time banks come for the house, and the deals are very unfavorable to the borrower who might have had grounds to hold on to their house.
Lastly, the banks are drawing out the process of foreclosing s-l-o-w-l-y because the banks don’t want to sit on all this Shadow Inventory all at one time.
1. The Trusts hire the Servicer.
2. The Servicer’s imperative is not whether someone is to be foreclosed upon. Instead it is focused on “keeping costs down”.
3. The Servicer does its work inside a big office like factory where processes are mostly automated.
4. And the Servicer has imperatives to Maximize fees. Foreclosures happen to be more profitable than routine servicing of a loan.
5. Hence, Servicers have no incentive to help people from getting in trouble. In fact, they have incentives to get people in trouble.
Yves goes on to point out one diabolical thing a Service will do. She says suppose a borrower already has one late fee. In many cases, these late fees are not bona fide late fees as the servicer applied the payment late as it circulated through the intestines of the servicing "factory". More insidious, Servicers have also been found to “hold” payments sometimes so as to purposefully make the borrowers late.
Here’s what happens with these late fees:
Let’s call the month when a first late fee payment is assigned Month #1:
1. The late fee will not be applied until the next month’s bill, or Month #2.
2. Currently, the borrower tears out another payment slip from his/her mortgage payment books and sends in their Month #2 payment. At this moment, they have no idea they are being assessed a late fee by the Loan Servicer . . . which for this example, let’s say is $75.00.
3. Eventhough the borrower sends in their regular payment for Month #2 on time - which by Federal law is supposed to go against mortgage principal and mortgage interest - the Loan Servicer instead will subtract the late fee from Month #2’s on time payment . . . which makes the second month’s payment short. This shorting of Month #2’s payment by the Servicer also makes Month #2’s . . . in theory . . . late . . . because it is (in the eyes of the Servicer) not PAID IN FULL.
4. Thus, in this example, another late fee is applied on top of a bogus late fee. And maybe an extra fee is charged on top of that.
5. Well, when a borrower has been late twice under the agreement, the investors require the Servicer to get something called a “Broker’s Price Opinion” (which Yves claims is kind of worthless). All this is is some broker drives by the house and makes some opinion about the real price of the house during his drive by.
6. This “Broker Price Opinion” costs somewhere between $150 - $250 for this “drive by”. This “Broker Price Opinion” is supposed to be charged to the investor(s) in the Securitization. Many times, the Loan Servicer has been found to “double dip” and charge the borrower also.
7. So now, we many times have a borrower who is tagged with two late payments(and maybe another surreptitious hidden charge on Month #2’s supposed late payment) AND many times they are assigned a “Broker Price Opinion” charge which legally the Investor(s) are supposed to pay, not the loan borrower.
8. These usurious, illegal fees compound.
Now here are the reasons why it is more profitable to push into foreclosure:
1. When the borrower goes into foreclosure, the Servicer is allowed to charge more and bigger Servicer Administrative fees.
2. These new fees for foreclosing come right off the top.
3. Also, if the borrower gets seriously delinquent, the Servicer still must continue to make the payments to the Investors as if the borrower were still making the payments on time.
Normally, whenever you have a borrower get in trouble, in any type of lending, the first thing the lender says is “Should I liquidate the loan, should I take what I can get, or is there some way we can restructure the loan?” Yves comments, “I’m always better taking half a loaf . . . if the borrower has enough income, I’d be better served by taking less and restructuring the loan.
Hence in our above case, the Investor(s) would be better served by having the loan restructured; however, the Servicer is having to advance principal and interest, the Servicers do not get paid for modifying loans (hence they have no Economic incentive to modify the loan), and the only way for the Servicer to recoup the money it has been sending to the Investor(s) is to foreclose on the borrower. The reason for this is the Servicer can foreclose on the house, sell it for whatever they can get, take their fees out of the sale before anyone else, and send the remaining money to the Investors.
All the incentives for the Servicers favors foreclosure. None of the incentives favor loan modification.
Yves goes on to say that academics have covered many, many stories about people being foreclosed upon and they haven’t missed a payment. She contends the reason lenders will make up fraudulent documents to take away an on time borrowers home is there is more money to be made in the foreclosure process than remediation.
Yves says banks want to paint the problem as one of where borrowers are deadbeats, and she acknowledges that many borrowers can no longer afford their homes due to loss of jobs, a medical emergency, etc. On the other hand, a very significant amount of the people who are actively fighting foreclosure are victims of Servicer error and they can’t get it straightened out . . . OR . . . they have actually filed for bankruptcy, and in bankruptcy, everybody who has filed to collect money from the borrower is supposed to wait ‘til the court sorts it out.
Yves says Servicers keep trying to take the house before the bankruptcy process has been worked out fully. She says many unsophisticated borrowers and unsophisticated borrowers’ lawyers . . . they will make deals with banks the first time banks come for the house, and the deals are very unfavorable to the borrower who might have had grounds to hold on to their house.
Lastly, the banks are drawing out the process of foreclosing s-l-o-w-l-y because the banks don’t want to sit on all this Shadow Inventory all at one time.
Banks don’t want to be responsible for paying taxes and insurance on these houses and want to keep those losses off on Servicers until the last minute. It’s better for banks in destroyed Real Estate markets to stay in the house, to maintain the house, to pay the RE taxes and insurance, than it is for the bank to take it back, add it to stealth inventory, and have the house sit empty eating a hole in the banks’ books.The Mortgage Servicing industry is a new industry sprung up around this new process of doing mortgages today called “securitization”.
3 comments:
Thank you very much for the notes added under the video, Rock. You and Yves deserve much credit for keeping us abreast on the Housing Crash and Credit Crisis - and now the Foreclosure Fraud messes.
When are the Feds going to go after these criminal enterprises ripping off non-suspecting good Americans?
Loan Servicers are as evil as predatory lenders who stuffed the front end with mountains of fraudulent paperwork.
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