Sudbury MA Real Estate

Are Mortgage Servicers Like Evil Credit Card Companies?

There’s an article out today in the New York Times that portrays mortgage servicers in a pretty bad light. How bad? It makes them sound like those nasty credit card companies that Congress not-so-gently scolded recently through some new regulation. The Times asserts that mortgage servicers might be intentionally letting houses go into foreclosure so to collect higher delinquency and foreclosure-related fees.

Those servicers are claiming that they’re simply overwhelmed and can’t keep up with all of the mortgage modification requests coming in. Here’s what the Times reports:

But industry insiders and legal experts say the limited capacity of mortgage companies is not the primary factor impeding the government’s $75 billion program to prevent foreclosures. Instead, it is that many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.
Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue — fees for insurance, appraisals, title searches and legal services.

First, a note of clarity. Throughout this article the New York Times uses the term “mortgage companies” to refer to “mortgage servicers.” I’m not sure why they do this, but it’s probably an attempt to make for easier reading. But it’s just confusing. Countrywide was a mortgage company. Few exist anymore. Now mostly banks are mortgage companies. The firms they’re talking about are mortgage servicers — those who collect the mortgage payments and follow-up with delinquent borrowers. They are paid to do that work by the banks or investors who actually own the mortgages. I’m going to use the term “servicers,” because I think that’s clearer.

Okay, with that technical note out of the way, a few observations about this claim. First, this is troubling, but it’s different from the way credit card companies charge high fees on delinquent balances. It’s worse. Credit card companies don’t want their customers to go bankrupt — they want them to be delinquent as much as possible, but never actually reach the level of failure. With mortgage servicers it’s different: they appear to have an incentive to see the mortgages they manage fail.

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