Q: I read your article my local paper titled “Mortgage Modification is Stymied” and I, too, am appalled at the treatment many borrowers receive in the modification process.
Most of the large lenders simply have not staffed their servicing departments with enough knowledgeable people to handle the overwhelming volume of requests coming in. I think much of the poor service is related to that rather than the loan servicer’s desire to cheat customers or push their home into foreclosure.
I would like to know the reasoning behind your statement in the article relating to servicers of loans making more money when a loan goes into default than when a homeowner is current on a loan.
I work for a large national lender that is in the business of servicing loans and I know for a fact that we do not make way more money when a property goes into foreclosure. Maybe I did not read the quote correctly or I’m missing something.
A: Thank you for your comment. There are two issues that need to be addressed with the loan servicing process and the foreclosure process. Since you work for a loan servicer, you know that a borrower who makes his or her payments on time provides you with a stream of income over the life of the loan that is constant.
However, once a borrower is delinquent on his payments, or goes into default, the borrower will have to pay late fees and, depending on the circumstance, other costs to keep the loan from going into foreclosure. These fees are substantial and add up pretty quickly.
The experts in your industry I have talked to have told me that those fees have become a significant source of revenue for loan servicers. In most residential mortgages, standard loan documents provide for the lender to bill the borrower five percent of the monthly mortgage payment for any payment that is late.
If a borrower has a $150,000 loan with a monthly payment of about $1,000, a late-paying borrower will have to pay that loan servicer an additional fee of $50. If that borrower’s interest rate is about 7.5 percent and he or she is five years into the loan, the monthly payment is made up of an interest payment of about $810 and a principal payment of about $190.
The net effect is to raise the interest payment for that borrower while he or she is in default by 5 percent to about 12.5 percent. That increase is an increase in the amount owed the servicer by the borrower. On top of that, there are other fees that may be added that may need to be paid by the borrower.
I want to be clear that when I was talking about default, I’m talking about borrowers who are not current, who may be quite delinquent in their payments, but are not yet in foreclosure. They may be in a trial loan modification, paying less than they originally owed, for months or years while the investor is deciding what to do. All the while, the fees add up.
While my article did not address the issue of whether the servicer or the investor that owns the loan will make money once the loan moves through the court system and goes into foreclosure (and they may not), if the borrower pays the fees and is able to get current on his loan, the servicer and the investor have increased the amount of money that has come in from that loan.
These days it seems that companies are making more money on additional fees and expenses than on the price of the product.
I appreciate that you believe that your employer, a national loan servicer, has been unable to hire and maintain qualified people to service the wave of people seeking loan modifications and assistance from your bank, but if the bank felt that it would make more money modifying loans than foreclosing on those borrowers, your employer would have put enough resources into servicing loan modifications almost three years after the housing crisis started.
Finally, if you are right and the lenders are not making money on the borrowers they service that are severely delinquent and may be heading into foreclosure but, rather, they would make more money by modifying their loans and keeping them as non-defaulted customers, shame on them for failing to adequately hire, train and maintain staff to process the paperwork necessary for them to process the paperwork for their customers.
Can you imagine what our economy would look like if every company out there handled their dealings with their customers in the same manner as this country’s largest loan servicers have for the last three years?
I will publish responses to this letter in a future column.