Mortgage Servicing

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The mortgage servicer is an entity that collects payments on behalf of the beneficial owner of the mortgage and note owner. The servicer compensation system encourages fraud against both borrowers and investors and is one key source of the financial crisis.

Investors don't collect mortgage payments from homeowners.  The entity that does this is a 'servicer' hired by the investors or the investors' 'master servicer.'  Servicers "servicing fees" are generally a fixed percentage of the loan principal balance.  Servicers generally receive 0.25% to service a prime loan, 0.35% to service an adjustible rate loan and 0.50% to service a subprime loan.  Research from the Federal Reserve has speculated that the low base servicing rate contemplates and tolerates some degree of servicing fraud to foist part of the cost of servicing onto the borrower.

Research shows that most mortgage servicers earn more revenue from late fees, interest and capital gains on suspense account funds and other fees and charges than from the the monthly servicing fee charged to investors.

A proper investigation of a mortgage servicer includes learning all of mortgage servicing computer system's parameters, obtaining copies of set up manuals and other computer system rules so that the attorney can see how the system applies the payments the borrower makes, in what order it applies the payments, and how the system calculates interest.  The attorney should make the servicer define the terms the system uses.  If the attorney sends a request for admissions, it is possible to for the servicer to deny allegations that are not worded properly because of a lack of familiarity with the servicer's computer sysetms.

Another important link in the chain of servicing fraud witnesses and parties is the lockbox operator.  When the borrower sends in his payments, the customarily are sent to a lockbox, or post office box.  Then a lockbox service like Fiserv or LPS process the payments.  If the payment does not exactly conform to the expected payment, the system treats the payment as an "irregular payment" rejects it as conforming and deposits it into a suspense account.  The suspense account is a servicer account that the servicer may invest, borrow against and other wise earn "income on the float."

Once a loan is delinquent, all funds received from the borrower are placed into a suspense account and the servicer earns money from income on the float.  The servicer often also uses the suspense account funds to pay bogus fees and charges.  The servicer may keep all funds in the suspense account if it creates sufficient bogus charges and fees.  A common bogus charge or fee is for force placed insurance where the borrower already has homeowners insurance.

Most servicers violate Fannie Mae's uniform covenants, which require a servicer who decides to apply payments to apply them in the following order:

  1. Interest due
  2. Principal due
  3. Escrowed items
  4. Late fees and late charges
  5. Ancillary fees and charges
  6. Reduction of principal debt not due

Why HAMP Benefits Servicers and Not Borrowers or Investors

The servicer books fees and charges for late payments during the entire HAMP program and holds all borrower payments made during the HAMP trial modification period in a suspense account.  Like all other funds held in the suspense account, the servicer may invest that money, earn interest on it, or borrow against it.  If the payments were regular and conforming, the servicer would be required to instead remit them to the trust that owns the mortgages.  This is why servicers make more money from HAMP trial modifications followed by foreclosures than they do from borrowers who pay on time and also from borrowers who are granted permanent loan modifications.

Servicers prepare monthly investor reports and one of these reports can be very useful in a bankruptcy action.  The servicer tells the investors what amount is due on the loans in fees, charges and principal balance.  The amount the servicer tells the investors is due is almost never equal to what the servicer claims in its bankruptcy proof of claim is due.

The servicer reports to the investor that it can't get the money for various bogus services and charges from the consumer and so it needs the investor to pay it.  Then the servicer tells the bankruptcy judge that it needs to get the money from the borrower to cover these fees and charges.  These may include fees and charges for home inspections that never occurred, force placed insurance that was unnecessary and unauthorized, the preparation of various reports and anything else that can be thought of.

Servicers use two sets of books for both loan modifications and tracking serviced accounts: one for the investors and one for the servicer.

Servicers have gone so far as to securitize their fixed servicing fees.  This right to this servicing income is sometimes transferred into a trust, then the trust paid the "price" for the right to the proceeds of the securitized servicing income, and the servicer then spent the money.  Servicers that already spent the money they earned securitizing their right to future servicing fees have little choice but to seek ancillary fee income because they may not have sufficient income to operate otherwise.

Servicers may retain interest accrued on any money they hold until they remit it to the trust that owns the mortgages and notes.  If the trust is due its payments on the 20th of each month, the servicer may invest money paid by borrowers from the 1st to the 20th and retain the income from that fund.  This is called "income on the float."  As attorney Walter Hackett has said, what is "income on the float" for mortgage servicers would be called "kiting" if it was engaged in by a consumer.

When the servicer accepts a payment from the borrower, this is not the same thing as applying the payment to the actual mortgage debt.  The servicer may apply the borrower's payment to ancillary fees, collateral fees and other fees.  The servicer will often use any excuse, theory or method to hold the funds for as long as possible in a systematic way across loans to earn income on the float.

Ancillary fees may include:

  • Late payment fees
  • Payoff Quote Fees
  • Fax Fees
  • Participation in force-placed insurance fees
  • Affiliated outsourced Services
  • HAMP modification fees, HAMP success fees
  • Property inspections

Fraudulent property inspections are common due to an algorithm where upon default, the system automatically requests a property inspection, usually accomplished by an affiliate or wholly owned subsidiary of the mortgage servicer.  Sometimes the entire process is a sham and there is no property inspection, only a charge for the property inspection.  The purpose of the property inspection upon initial default is not to actually inspect the property to determine its condition, but instead to generate a fee for inspecting the property.  Often property inspections will be accomplished via Google Maps street view using photos that are months or years old and the servicer will conduct these property inspections monthly and then bill both the borrower and the investors for the inspections.

Attorneys should ask to see the digital photos from the property inspection, the inspection report, the wire transfer or check paying the property inspector for the service and other evidence that the inspection actually occurred.

Usually, after 60 days in default, the servicer's computer algorithm orders a broker price opinion.  The servicer often pays the broker $25 or $50 for a broker price opinion (BPO).  Sometimes these BPOs never take place, but the servicer charges both the borrower and the investor for them as if they did.

The Dodd Frank Act provides that servicers may not charge for a Qualified Written Response (QWR) This "statutory compliance fee" is one of the MSP codes and servicers used to secretly charge borrowers $150 to $175 to respond to the QWR.  We expect that servicers will no longer charge for this fee, but it is presently uncertain.

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Call us at 408.797.0000

Call us for a consultation at 408.797.0000. We offer expert services and proven experience with complex issues that others can overlook.

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