The Most Common Signs of Mortgage Servicing Abuse
Homeowners can use mortgage servicing fraud and abuse practices as a defense to stop a foreclosure lawsuit. Once mortgage loans are originated, they are frequently packaged and sold off to investors. While no one may really know who owns the loan, the rights to collect the payments are transferred to mortgage servicing companies. These companies are one of the greatest perpetrators of abuse and fraud against homeowners, as they have very little incentive to do right by the borrowers.
These companies are typically paid a flat fee by the trustees of the mortgage to administer the loan, collect payments, make sure property taxes and insurance are in place and paid through escrow, and pursue any foreclosure proceedings, if necessary. If homeowners do miss payments, the servicer gets paid anyway, and actually makes more money from a foreclosure than if they offered to work closer with the owners of the property to negotiate for a mortgage modification or other workout option.
That’s right — mortgage servicing companies actually lose more money when they help homeowners modify loans and save their homes from foreclosure! The fewer resources they dedicate towards loss mitigation and assisting borrowers, the more of the flat servicing fee they get to keep for themselves.
Of course, the parties on either side of the mortgage — the homeowners and the holders of the loans — lose far more in a foreclosure than a loan modification. But with a servicing company in the middle of the deal, it is more profitable to let a house go through the entire foreclosure process than to assist the borrowers in making the payments more affordable.
Servicing companies have also been found to “push” homeowners into foreclosure in a variety of abusive ways. If they are not pushed straight into foreclosure, the companies may covertly charge fees and extra interest, or credit payments late. If the owners ever do miss a payment (and many loan servicers only purchase rights to loans that are subprime or have higher risks of default), a foreclosure will quickly result and the costs to reinstate the loan may be astronomical.
The following is a list of the top seven most common mortgage servicing abuses that homeowners will run into. However, the ways that fraudulent companies can take advantage of borrowers are nearly endless, so if homeowners believe that they have been defrauded, they should take appropriate actions in court and with state and federal regulatory agencies. The more that they can discover about how their loan has been handled by a servicer, the better chance they have of proving servicing abuse and other related charges in a court.
Junk fees masquerading as legitimate. These may include property inspection fees, broker price opinions, and outrageous attorney fees, among many others. These will be charged to a borrower’s account in order to increase the amount of a payoff, thereby creating even more profits for a loan servicer during a foreclosure action.
Failure to disclose fees during a Chapter 13 bankruptcy. Servicing companies seem to work even harder against homeowners once they file for bankruptcy. Fees can increase, but little justification for the fees will ever be given, even to the bankruptcy courts.
Collection of junk fees even after discharge in Chapter 13. Because the company knows the homeowners no longer have the protection of the courts or the guidance of a bankruptcy lawyer, they can add the junk fees back in and charge them to the borrowers.
Using junk and late fees to show negative payment history. This would help the mortgage servicer argue that the homeowners have failed to uphold the bankruptcy payment plan and that a relief from stay should be granted. The servicer can try and argue this even if the borrowers have made all of the required Chapter 13 payments on time.
Attorneys for corrupt mortgage servicers just as corrupt. These attorneys will receive information they know to be inaccurate or misrepresented from the servicer and file motions in court like it was legitimate — another case of lawyers abusing their positions in order to keep a rich client happy. But the lawyers also know that they can overcharge for legal and court fees and it will be charged to the borrowers’ accounts. These fees may even be in excess of what courts have approved.
Escrow account abuse. Servicers may create illegitimate escrow accounts to hide the fact that they are taking borrowers’ money and applying it to junk fees, late fees, and interest, instead of on the actual amounts due on the loan. This pushes borrowers even further behind every month. Companies may also fail to fund escrow balances properly, creating negative balances when county property taxes or homeowners insurance are paid. The homeowners are then charged for this deficiency and fees and interest are added to the balance of the loan.
Forced-place homeowners insurance. Too often, servicing companies will arbitrarily determine that the property insurance in place on a home is not sufficient, or they will simply deny there is any insurance present at all. At this point, the mortgage loan servicer will buy a policy from an insurance company it is affiliated with and charge the premiums to the borrowers. Unfortunately, the premium may be several thousand dollars more than the original policy was. But the servicer will adamantly, consistently deny that the homeowners’ policy was adequate, and no amount of proof or phone calls will convince them otherwise.
Unfortunately, there are simply far too many ways that homeowners can be abused by servicing companies to list here. A surprising number of the largest names in mortgage servicing have been found engaging in these practices and have been forced to pay homeowners. A good attorney or foreclosure specialist trained in this area will be able to help the vast majority of borrowers determine if servicing abuse is a factor in their foreclosure.
Although there is no specific federal or state law outlining what constitutes mortgage servicing fraud or abuse, both areas of the law outline some prohibited actions for any mortgage lender or servicer. Regulation Z of the Truth in Lending Act is a good place to begin research, as well as any applicable state foreclosure laws, consumer protection laws, and banking regulations.
In terms of using this as a defense against a foreclosure lawsuit in court, homeowners may allege servicing abuse in the affirmative defenses or counterclaims portion of their answer to the complaint. Depending on the severity of the abuse, borrowers may be able to offset some of the damages they have suffered or have an entire defense to the lawsuit for especially egregious acts.
Nick publishes articles for the My
website. These articles provide resources to homeowners facing foreclosure, describing a number of alternatives they can use to delay foreclosure. The site details numerous methods, including loan modification, foreclosure lending, deed in lieu, filing Chapter 7, and others. Visit the site to find out more about how the foreclosure process works: http://www.myforeclosurelender.com/
The Most Common Signs of Mortgage Servicing Abuse