The new nation-wide investigation into foreclosure frauds comes as no surprise to people who follow the mortgage service business. Shoddy, deceptive paperwork has plagued homeowners for years. In the industry's slimy underside, firms push borrowers into default and foreclosure, even when they've been making payments on time.
Foreclosure Mess: What it Means for You
- How The Foreclosure Mess Could Hurt The Housing Market
- Don't Be Driven to Foreclosure by Mortgage Fraud
- Is Your Lender Taking Advantage of You?
- Why We Need a National Freeze on Foreclosures
- Will a Foreclosure Freeze Fix the Housing Market?
- 50 States Launch Joint Probe into Foreclosures
Their business model makes defaults profitable, says Marie McDonnell who has been auditing mortgages for accuracy since 1986. The ugly chain of deception starts with the way a servicer might handle your escrow account.
A mortgage service company collects your monthly payments, deducts a fee, and passes the remainder to the investors who own the loan. The majority of the servicing is done by big banks, such as JPMorgan Chase, Wells Fargo, and Bank of America. Your payments usually include a sum for property taxes and homeowners insurance premiums, which goes into an escrow account. The servicer uses that account to pay the taxes and premiums as they come due.
However, every homeowner should check his or her mortgage escrow account -- right now -- for one of two wrongs.
First, the servicer might be putting more into escrow than you actually owe, hoping you won't notice. That gives the bank extra money to earn some interest on. Or second, you might owe more than you realize. That leads to underpayments, default, fat late fees owed and, eventually, foreclosure.
As an example of the first case, take Nathalie Martin, who teaches bankruptcy law at the University of New Mexico. She recently noticed an unusual change in her escrow account. Her property taxes had risen by about $60 a month, yet her servicer -- without notice, she says -- had started withdrawing an extra $120 from her account. The same thing was happening to some of the clients of the university's law clinic, who were seeking help with loan modifications or foreclosure notices.
When Martin called her servicer (and actually got a live body instead of a machine), she was told that the extra $60 was a "voluntary" payment on her part. Voluntary? Not likely. The servicer had simply helped itself to her money. You're supposed to get a notice 30 days before an increase, but servicers don't always send it out, McDonnell says. Or the borrower overlooks it.
Martin complained and the extra charge was stopped. Her advice to homeowners: Every time your taxes or insurance premiums rise, calculate how much you'll have to pay over the next year and divide by 12. That's the amount that servicers should be charging for your escrow each month. They're allowed a little extra only if there's a shortage of money in the account they have to prove it.
Also, be sure check your monthly mortgage statements, if you get them (some servicers send statements only once a year). Homeowners with fixed-rate mortgages might not open the envelopes, because they don't expect their payments to go up. But the servicer might raise your escrow payment -- and overcharge you -- in advance of a tax change. You have to watch them every minute.
If you accidentally underpay, you fall into a cruel trap.
This happens when you don't realize that your escrow payments are going to rise. When you make your next payment -- at the old rate -- it won't be enough to cover the escrow plus the mortgage payment due.
You might expect the servicer to use the money to cover your mortgage and notify you that the escrow amount was short. But that's not the way it works. Instead, the bank puts your payment into a "suspense" account.
None of the money is applied to the mortgage due. You're recorded as being in default. A late fee is charged and your false, bank-manufactured delinquency is reported to the credit bureau. "That's a theft of mortgage payments," McDonnell says.
If you don't realize what's happening because the servicer doesn't send monthly statements (or you don't check your statements), you'll send the same payment the second month. There's now enough money to cover the first month you "missed" but not enough for the second month. You've officially defaulted again.
At this point, the servicer will probably send you a pre-foreclosure notice, demanding all the past payments due, plus interest and fees. If you can't come up with a lump sum to settle the demand immediately, you might be foreclosed before you can even begin to straighten out the mess. "It's a train out of control," McDonnell says.
There's another way that a sloppy (or calculating) servicer can force a default. If you pay for homeowners insurance directly, without going through the escrow account, the bank might conclude you're uninsured. It will buy the insurance for you, without telling you -- and again, your regular monthly payment might fall short. The same thing could happen if you let your insurance lapse.
Even worse, the banks buy the insurance from an entity that they have a relationship with, paying two or three times the premium that a homeowner would pay directly, mortgage expert Jack Guttentag says.
McDonnell has audited many mortgages that predatory servicers have pushed into default, even though the homeowners always paid on time. The banks' incentive? High fees for late payments and for managing the foreclosure process. She believes that defaults became a profit center around 1995. Ever since 2005, servicers have been putting up "absolute resistance" to working thing out with the consumer, "even when I can prove servicer wrongdoing," she says.
You might be tempted to blame the errors and fraud that led to the current foreclosure freeze on the sheer volume of defaults. In fact, in this poorly regulated industry, the servicers have been getting away with abuse for a very long time. They need to be added to new Consumer Financial Protection Bureau's lengthening list.