Mortgage Servicing Industry

ProPublica has been looking into how homeowners have been treated in the foreclosure crisis. This article deals with how the mortgage servicing industry has dealt with struggling homeowners.

Loan Mod Program Left Homeowner's Fate in Hands of Dysfunctional Industry
by Olga pierce and Paul Kiel - ProPublica

Last February, with 6 million homeowners in danger of losing their homes, the mortgage industry was assembled at a luxury hotel in San Diego applauding themselves—literally.

“As a group, we owe ourselves a round of applause,” said Yvette Gilmore, vice president of loss mitigation at Freddie Mac, citing the industry’s efforts to avoid foreclosures, garnering loud clapping from the ballroom full of bank executives, lawyers and others in the industry.

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Over the past year, ProPublica has been exploring why the government’s program has helped so few homeowners. So far, we have detailed the Treasury department’s weak oversight [1], and how the administration quietly retreated [5] from a plan to get tough on banks. In part 3, we will discuss reforms that could lead to more help for homeowners.

The stories are based on newly disclosed data, lobbying disclosures, dozens of interviews with insiders, members of Congress, and others. Today we tell the inside story of what happened when the fate of struggling homeowners was placed in the hands of the industry little incentive to help: the mortgage servicing industry.

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On paper, the government’s Home Affordable Modification Program, or HAMP, was supposed to address one of the main roadblocks to modifying loans: The banks handling most mortgages often have little incentive to avoid a home going into foreclosure since they don’t actually lose money when that happens.

That’s because mortgage servicers, the largest of which are the nation’s largest banks, don’t own the vast majority of the loans they handle. So, they don’t bear the loss if the loan goes to foreclosure. In fact, servicers often make money from foreclosure fees.

“Foreclosure is the path of least resistance inside a servicing shop, because once it goes into that mode, all of the costs are essentially borne by third parties,” said Horne.

But when it comes to making modifications, servicers have to make big investments in staff and infrastructure to work effectively with homeowners. HAMP sought to defray some of those costs by paying servicers $1,000 per modification and up to $3,000 more over time if it was successful.

Before the foreclosure crisis, mortgage servicing was a highly profitable business for large banks. They were paid a flat percentage that more than covered the cost of cashing checks from homeowners. Servicing a typical loan cost the servicer about $48 a year, according to a new Federal Housing Finance Agency analysis, while for a typical $250,000 mortgage, the servicer’s annual fee would be about $625 a year. Given the huge number of mortgages they handled, servicers made tens of billions of dollars in the years leading up to the crisis.

Ideally, “in good times, servicers are using some of the residual income to build out systems and procedures to handle the pressures that come with worse times,” said Fed Governor Raskin. “Unfortunately, as we have seen, this has not happened.”

Instead of investing in technology upgrades or employee training, banks pocketed the profits.

When the default rate tripled, servicers floundered, and almost as soon as HAMP launched it became apparent they weren’t up to the job.

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