By David Dayen
This should never happen, but it did, thanks to the sordid mortgage servicing industry.
A few months ago, Ceith and Louise Sinclair of Altadena, California,
were told that their home had been sold. It was the first time they’d
heard that it was for sale.
Their mortgage servicer, Nationstar, foreclosed on them without their
knowledge, and sold the house to an investment company. If it wasn’t
for the Sinclairs going to a
local ABC affiliate
and describing their horror story, they would have been thrown out on
the street, despite never missing a mortgage payment. It’s impossible to
know how many homeowners who didn’t get the media to pick up their tale
have dealt with a similar catastrophe, and eventually lost their home.
As finance writer Barry Ritholtz
has explained,
home purchases involve a series of precise safeguards, designed to
protect property rights and prevent situations where borrowers who are
perfect on their payments get evicted. “In a nation of laws, contract
and property rights, there is no room for errors,” Ritholtz writes. “The
only way these errors could have occurred is if several people involved
in the process committed criminal fraud.”
Any observer of the mortgage industry since 2009 is no stranger to
foreclosure fraud, and the fact that virtually nobody has paid the price
for this crime. But the case of the Sinclairs involves a new player in
that rotten game: Nationstar. Unheralded just a few years ago, the firm,
owned by a private equity behemoth, has been buying up the rights to
service mortgages, accepting monthly payments and distributing the
proceeds to the owners of the loan, taking a little off the top for
itself.
Nationstar has racked up an impressively horrible customer
service record in its short life, failing to honor prior agreements
with borrowers and pursuing illegal foreclosures. The fact that
Nationstar and other corrupt companies like it are beginning to corner
the market for mortgage servicing should trouble not only homeowners,
but the regulators tasked with looking out for them. It didn’t seem
possible that a broken mortgage servicing industry could get worse, but
it has.
Nationstar is at the forefront of a massive shift in
mortgage servicing. In the past few years, the largest servicers were
arms of major banks, like JPMorgan Chase, Wells Fargo, Bank of America,
Citi and Ally Bank. Those were the “big five” servicers sanctioned for
an array of fraudulent conduct in the National Mortgage Settlement,
which mandated specific standards for servicers to follow, like
providing a single point of contact for customers and an end to “dual
tracking,” when a servicer offers a trial modification to a borrower and
pursues foreclosure at the same time.
The banks realized that
they could sell the servicing rights and evade these standards, along
with the higher labor costs associated with implementing them. What’s
more, they would avoid new, higher capital requirements associated with
holding servicing assets, allowing them to give bigger dividends to
shareholders and bigger bonuses to executives.
So the big banks
started selling off their servicing rights, not to other banks, but to
specialty financial services firms like Green Tree, Nationstar, Walter
Investment Management and Ocwen, all of whom are in kind of
an arms race to become the biggest servicer.
Last October, Ocwen purchased the
entire servicing portfolio of Ally Bank, covering about $329 billion in loans. Ocwen has also purchased part of JPMorgan Chase’s servicing, as well as a slice from
OneWest Bank; it is attempting to
dominate the market.
Nationstar acquired business from Bank of America and Aurora Bank in 2012, and more in 2013.
Wells Fargo is
poised to sell
some servicing rights as well, and Nationstar will surely bid for those
rights. As of June 30 of this year, Nationstar has the right to collect
on $318 billion worth of home loans—growing three-fold in under two
years—and it will seek to add even more in the future. The company,
majority owned by the private equity firm Fortress Investment Group,
recently
raised $1.1 billion in capital to buy up more servicing rights from banks around the country.
This
means that homeowners victimized by big-bank servicers, who were
supposed to get a commitment to honest treatment as part of the National
Mortgage Settlement, instead got their servicing rights sold to
companies no longer bound by the terms of that settlement. So homeowners
lose all of their protections, and often have to start back at square
one with their new servicer. For example, if a borrower was in process
on a loan modification with their old servicer, the new servicer can
choose to simply not recognize that modification, and demand the full
monthly payment under threat of foreclosure. This is a
very common practice.
What’s
more, this new breed of non-bank servicers scooping up all these
servicing rights has proven themselves as a bunch of cheats profiting
off their customers. Green Tree Servicing has a
terrible record of
ripoffs. Ocwen has been
sued in state court over its practices, including an
innovative scam involving sending homeowners a check for $3.50, and claiming that cashing the check automatically enrolls the customer in an
appliance insurance plan, which costs $54.95 a month.
Fitch, the credit rating agency, wrote in a
research note
in June that the growth of non-bank servicers “may pose challenges to a
potential orderly transfer of servicing,” and that the involvement of
private equity firms “raises questions” about the ultimate endgame for
these servicers. In effect, servicing has shifted from big banks to
private equity and hedge funds, and neither really have the customer’s
needs in mind.
Nationstar is no different in the non-bank servicer space. While the company
promised California
that it would adhere to all settlement obligations on the servicing
rights it purchases, the Sinclairs were subjected to familiar abuse. The
family paid their mortgage on time since purchasing their home in 2003.
Last year, they received a loan modification. But their servicer sold
the rights to Nationstar, and Nationstar didn’t honor the modification.
In June, the Sinclairs sent in their mortgage payment, and Nationstar
sent it back in full. Then it sold the home. When questioned, Nationstar
claimed the Sinclairs didn’t notarize one page of their modification,
which turned out to be untrue.
It was a clear attempt to find an
excuse to deny the modification and push the Sinclairs into foreclosure.
Mortgage servicers actually make more money with foreclosures than with
loan modifications, because of how their compensation structure works.
Servicers load up various foreclosure fees on homeowners that they get
to keep, and they get paid off first in a foreclosure sale.
A loan
modification simply cuts their percentage balance on the loan.
This is not Nationstar’s only scam. The Consumer Financial Protection Bureau, which recently
started examining non-bank servicers, put out a
report this summer
on the illicit practices of these firms. CFPB found that servicers like
Nationstar often failed to inform homeowners about the change in
servicing rights when they are transferred, meaning that the homeowner
kept paying the wrong servicer. This is a clever way to facilitate late
fees; just don’t tell the customer where to send their money.
Servicers
also delayed property taxes paid out of escrow accounts, making
borrowers late on those taxes and triggering more delinquency fees;
failed to refund insurance premiums and other fees due back to
borrowers; did not communicate properly with borrowers in need of a loan
modification; lost documents solicited from borrowers for that process
and made it impossible to complete the applications; failed to even
properly file documents associated with the transfer of servicing
rights; and charged customers default fees “without adequately
documenting the reasons for and amounts of the fees,” and neglected to
waive certain fees or interest charges.
CFPB also found that
non-bank servicers like Nationstar had no comprehensive compliance
management system in place to ensure that they followed all applicable
consumer protection laws. Many didn’t even have formal, written policies
or independent auditors. They hadn’t been subject to any examination
prior to CFPB, so this stands to reason.
Nationstar is
being sued
in New York’s Supreme Court for auctioning off non-performing loans
that it would rather not service at a severe discount, shortchanging
investors in the process. The company’s auction sales, made with an
online auction company that its private equity parent firm has a
“business affiliation” with, end up allowing Nationstar to recoup its
take, with all the losses falling on the underlying loan owners. So
Nationstar has managed to infuriate both sides of the mortgage deal, the
lenders and the borrowers, with its unscrupulous practices.
Getting examiners inside these “specialty” companies is a start, and new servicer
rules coming from CFPB
in January would cover non-bank servicers as well. But no regulator has
the resources to deal with such flagrant abuses. Mortgage servicing is a
sewer, and it needs to be completely overhauled from the ground up. If
Nationstar represents the future, then until it faces real penalties or
an expulsion from the industry for its conduct, private property rights
in America will have to be seen as theoretical. Just ask the Sinclairs.
David Dayen is a freelance writer based in Los Angeles, CA. Follow him on Twitter at @ddayen.
