Excessive Mortgage Servicing Fees
You may already know that the United States is in the midst of a foreclosure crisis. Experts have estimated that two million Americans will lose their homes to foreclosure in the next few years. You may also know that many families choose to file Chapter 13 bankruptcy as a way to keep their houses.
What you may not know is that the judges hearing Chapter 13 bankruptcy cases of many people trying to avoid foreclosure have noticed a troubling trend among mortgage servicers and companies that execute foreclosures.
According to a study published by law professor Katherine Porter, an alarming number of lenders and mortgage servicers are taking advantage of those facing foreclosure by charging them excessive and unnecessary fees during the foreclosure process. Here's what you need to know.
What Do Mortgage Servicers Do and Why Do We Need Them?
Most mortgage lenders today securitize their loans with large investment companies, a process that involves selling borrowers' debt to investors. The investors pay a lump sum to lenders so lenders get money right away, and the investors then collect the payments gradually (for example, as the borrower makes payments on a home loan).
Mortgage servicers are middlemen in the process of collecting and repaying loans. In foreclosure proceedings, mortgage servicers are responsible for providing proof of ownership of a property (by the investor) and documentation of how much the borrower owes on the loan.
This model for the loan market is fairly new, and so are mortgage servicers. Unfortunately, that newness means that legislation concerning mortgage servicing hasn't yet caught up with mortgage servicing practices. Because of poor loan-servicer regulation, many mortgage servicers don't provide adequate information in foreclosure proceedings, and consumers end up losing out.
How Mortgage Servicers Make Money
According to Porter's study, mortgage servicers make most of their money in the following three ways:
- by receiving a percentage of every loan originated, usually higher for subprime loans than for prime loans
- by collecting some of the interest the money earns while sitting the securitization pool
- by collecting some, if not all of the fees assessed to a mortgage loan
During the housing boom, the large volume of subprime loans being originated meant significant revenue for mortgage servicers, even without the other two sources of income.
The current housing crunch means fewer new loans, so mortgage servicers have to make money in other ways, and late fees associated with delinquencies and payment defaults can mean big income for servicers.
But bankruptcy judges have expressed concern that some fees showing up in the paperwork of Chapter 13 bankruptcy petitioners trying to save their homes are less than reasonable. Some examples include:
- $50 Faxing Fee
- $137 Overnight Delivery Fee
- $145 Demand Fee
- $60 Payoff Statement Charge
- Monthly Property Inspection Fees
- Bimonthly Property Assessment Fees
Limited Borrower Options
Unfortunately, borrowers can't "shop around" for loans based on a loan's servicer. In fact, even if a borrower refinances a loan, there's no guarantee that the new loan will come with a new servicer. Porter's research showed that 40% of complaints received by the Department of Housing and Urban Development concern mortgage servicing issues, and that only 10% of borrowers say they're satisfied with their mortgage servicers.
Because mortgage servicers are middlemen in the lending/borrowing process, they have no direct responsibility to borrowers. Plus, the more fees borrowers pay, the more revenue servicers collect.
Besides those factors, the low number of new loans means that lenders are making less money, which means some servicers may be laid off. This, in turn, can mean cut corners and lower quality of mortgage servicing, which has been shown to lead to foreclosures.
Be Aware of Unnecessary Fees on Your Mortgage
Mortgage servicers have been getting away with charging excessive fees for two main reasons.
- Poor regulations: Currently, most regulations in the mortgage servicing industry focus on loan originations, the very beginning of the lending process. Porter's research suggests that laws regulating the rest of the mortgage servicing process (such as allowable fees) are needed.
- Unaware or uninformed borrowers: In many cases, borrowers simply don't know whether the fees they're being charged are legitimate. This stems from not thoroughly understanding the terms of thier mortgages or their state's laws. Mortgage servicers get away with outrageous fees because very few borrowers are familiar enough with their mortgages to recognize when a fee is inappropriate.
Porter's study found that almost all legal action taken in response to excessive mortgage fees occurred in bankruptcy court. While the reasons for this have not been determined, one theory is that borrowers find it easier to determine what they do and do not owe after consulting with a bankruptcy lawyer and receiving debt discharges from a bankruptcy judge.
And one bankruptcy trustee apparently said that the vast majority of questionable servicing fees are never addressed in court.
Many families struggling with their finances have to choose between paying the filing costs to contest fees they think are unnecessary and not potentially paying too much in unnecessary fees.
Government Action
Some agencies have recognized the need for immediate action to correct the abuses in the mortgage servicing industry.
The Federal Trade Commission (FTC) has announced that mortgage servicing abuse is a serious concern for homebuyers. As yet, the FTC has not taken any specific action to correct current practices.
The Justice Department's Office of the Trustee, which oversees bankruptcy in the United States, has pledged to take action against mortgage servicers that file inaccurate or false claims, charge borrowers unreasonable fees and fail to acknowledge discharged debts.
Recent Action Taken Against Excessive Mortgage Fees
- A bankruptcy court apparently found that a loan assessed by a mortgage servicer at more than $1 million was, without the fees, only worth $60,000. The excessive fees were removed.
- In New York, a $100 "Payoff Statement Fee" was allegedly struck down by a judge as unreasonable and inappropriate.
- A Louisiana judge may fine Wells Fargo bank for adding nearly $24,000 in fees to a mortgage loan.
- In 2006, Countrywide Financial Corp. reportedly made $285 million solely from late fees assessed to mortgages, a 20% increase from 2005.
Excessive mortgage servicing fees can be devastating to home ownership, and can lead to foreclosure and bankruptcy. You can learn more about preventing foreclosure from the rest of the resources available on the Foreclosure-Fighter website.