Yves Smith makes an important point that I’ve noticed in my Portrait of HAMP Failure series. The amount that the bank owes after they reject a permanent modification never matches up simply with the difference between the original and modified payment. Habitually they jack up the cost with fees. She looks specifically at the Garwood family profiled in the above clip:

The HAMP trial mod, which was supposed to last three months, instead ran nine months and lowered their payments by about $500 a month. When they were ultimately refused a permanent mod (despite hearing encouraging noises from the servicer in the meantime), they were presented with a bill for the reversal of the reduction, plus fees, of $12,000.

Stop a second and do the math. Let’s be unduly uncharitable to JP Morgan and assume “about $500? means $540. $540 x 9 is $4,860. That means the fees and charges were $7,140, or nearly $800 a month.

How can charges like that be legitimate? Answer: they almost assuredly aren’t. The payments were reduced as a result of a trial mod, so any late fees would be improper. Thus the only legitimate charges would be additional interest, perhaps at a penalty rate. So tell me how you have interest charges of nearly 400% on an annualized basis on the overdue amount and call them permissible? I guarantee there is not a shred of paperwork anywhere that can support this level of interest charge, either with the investor or with the borrower.

As Yves notes, the family had a missed payment, so it’s possible that is included in the $12,000 charge. But unless it’s a million-dollar home, that would not alter her main point: the servicer tacked on junk fees without documentation, probably in violation of the mortgage note, which specifically spells out the various fees than can be charged. You can never really tell, because it’s almost impossible to decipher payment records from the servicers, and what fees correspond to what penalties.

This is a common scenario. Diane Thompson said in a Senate Banking Committee hearing last November that 50% of the foreclosure cases she sees are the result of servicer-driven defaults. Not only can they do this through junk fees, which they get to keep at 100% and don’t have to pass on to investors, but they can force a default through endlessly delaying the trial period and adding the difference between original and modified payment to unpaid principal balance, which increases the final overall payment and causes borrowers to eventually fail the net present value test. They also decline to inform a borrower if they’re as little as 10 cents short on a payment and add fees based on that, and then taking the subsequent payments to pay off those fees (which violates the pooling and servicing agreements, by the way), creating additional defaults on even a full payment. There are any number of scams here, all derived from the fact that servicers have incentives to jack up fees (which go directly to them) and put borrowers into foreclosure (which aids them financially as well, at least over a loan modification).

Servicer abuse is a main cause of this crisis, and most people don’t want to engage with that, because they would have to question their own assumptions about deadbeat borrowers.

Needless to say, this is the kind of thing that the Consumer Financial Protection Bureau was designed to investigate, and that investigation can happen really at any time.

David Dayen

David Dayen