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Book Describes Out of Control Mortgage Servicing Industry

I really highly recommend Paul Kiel’s new ebook “The Great American Foreclosure Story,” which focuses on the foreclosure crisis and the cascade of abuse piled on troubled borrowers by servicers. It looks at one foreclosure in particular, but uses it to stand in for the larger crisis in a really great way.

One theme of the book is how the servicers simply had no ability to deal with a large crisis, considering their cost-cutting worldview, lack of experienced personnel and motivation toward profit rather than customer service. In this excerpt from the book, Chris Wyatt, a former employee at Litton Loan Servicing, the servicer that was actually part of Goldman Sachs, describes the state of affairs:

Wyatt led Litton’s “Executive Response Team,” which was charged with handling customer complaints. Litton employees, overwhelmed and undertrained, frequently made basic errors when calculating a homeowner’s income, he says. HAMP guidelines often weren’t followed, because Litton was “way understaffed” and couldn’t keep up, he recalls. But the worst part was the way Litton dealt with homeowners’ documents, he says.

When homeowners faxed their documents, they didn’t go to Litton, Wyatt says. They went to India, where a low-cost company scanned and filed the documents — but often misfiled or lost them. Wyatt says Litton routinely denied modifications because homeowners had not sent their documents when, in fact, they had.

In a process internally referred to as a “denial sweep,” Litton’s computers would automatically generate denial letters for every homeowner who, according to Litton’s records, hadn’t sent their documents. But untold numbers of those documents had been lost on another continent. Wyatt complained about the practice in multiple meetings with senior management, he says, but managers were chiefly worried about reducing the overwhelming backlog.

In other words, the servicers systematically abused their customers, because it would have cost too much to perform their job in a satisfactory fashion. The investors who owned the loans ended up getting far less than full value for the servicing, of course, because they took losses on the foreclosed properties of a much larger scale than they would have with loan modifications on those borrowers.

The excerpt brings up yet another reason why servicers were reluctant to modify rather than foreclose, aside from their documented financial benefits from foreclosure. According to Wyatt, Litton was wary of modification grants under HAMP because “modifications also meant closer scrutiny from the program’s auditors.” They just didn’t want to be regulated, because then other aspects of their fraudulent activities would get revealed.

Despite all of these strategies, servicers still have a very low profit margin. This suggests that the servicing model cannot possibly work, at least not without abusing their customers. The CFPB wants to create standards for mortgage servicing, but it’s not clear that an honest servicer is even viable. After all, even today you have the ludicrous spectacle of a servicer suing itself on a foreclosure case.

In the March 29 filing, Bank of America is seeking to foreclose on a condominium and names the condo owner and Bank of America as defendants in the suit. The company is literally seeking damages from itself in order to foreclose on the condo owner.

“We are servicing the first mortgage on behalf of an investor and we own the second mortgage,” Bank of America spokeswoman Jumana Bauwens told HuffPost. “Naming the second-lien holder in the suit is necessary to eliminate the junior interest,” Bauwens said.

“This just strikes me as classic robo foreclosure,” Professor Alan White of Valparaiso University Law School told HuffPost. White, a predatory lending expert who tracks and analyzes data on loan modifications and foreclosures, said that lawyers for the bank likely performed an electronic title search to see if any other liens on the property existed and simply wrote down the name of whatever bank came up in the search. Lawyers and paralegals who perform these tasks typically fill out dozens of such forms a day, White told HuffPost.

The same strategies that proved inadequate when the housing market collapsed, in other words, are still being employed. And the same homeowners are bearing the brunt of the consequences.

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David Dayen

David Dayen