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In the crowded landscape of predatory lending, real-estate fraud, and mortgage fraud, mortgage-servicing fraud is yet another case of greedy individuals and companies taking advantage of homeowners.
Because the problem has surfaced only recently, and because few victims report the transgressions, and because those reports don't go through any central clearinghouse, there are no reliable statistics on its prevalence. But the 300,000 homeowners represented in Curry v. Fairbanks likely represent just a small fraction of those affected.
The past four years have seen additional class-action lawsuits against Ocwen Financial Corporation and Litton Loan Servicing, also among the country's highest-volume servicers. And there have been countless individual lawsuits against these collection firms. "It's a terrible problem," says Jack Guttentag, finance professor emeritus at the University of Pennsylvania's Wharton School.
Guttentag, who prefers the term "predatory servicing," since there are no laws to govern much of the unscrupulous behavior, has written extensively about the state of mortgage servicing, with a keen eye on the limitations the industry places on consumer choice. "It is these specialized servicers that are the problem, because they have zero incentive to satisfy their customers," he says. "Servicers have nothing to sell the customer, so they make their money by squeezing nickels and dimes out of customers."
Mortgage servicing is just one of many specialized niches in the larger mortgage business. In this recently deregulated industry, what begins as a relatively simple loan may be bundled into a complex investment for Wall Street investors. In this process, a mortgage can change hands several times within weeks of its creation. But no matter where it ends up at the bank that originated it, or perhaps as part of a "mortgage-backed security" at an investment bank the monthly payments still need collecting. That's where the servicer fits in. Most lending banks can't be bothered with collections, so they typically transfer "servicing rights" for their loans to firms like Fairbanks.
For a small per-mortgage fee, these companies collect interest and principal on loans, do the required paperwork, and hound delinquent borrowers. But since late customers require considerably more work than punctual ones, the lenders let the servicers impose late fees and various other fines to compensate for their trouble. To an unscrupulous firm, the prospect of milking such fees from punctual borrowers may be too enticing to pass up.
In most industries, a company that systematically fleeced its clients would quickly go out of business, because the customers would switch to a competitor. In the mortgage servicing industry, customers have no such freedom. Banks can sell their mortgages to nearly any investment bank they wish, and the investment banks, in turn, can sell servicing rights to whomever they please. Neither transaction requires approval from the borrower, nor does the borrower have the means to change servicers.
Maureen McGrath, representing a group calling itself the National Advocacy Against Mortgage Servicing Fraud, made this point to a House of Representatives subcommittee in June 2004. "The financial incentives to provide good service to customers, which work in other sectors of our economy, don't work for loan servicing," she testified. "The firm servicing mortgages will not get more customers by improving service quality, only higher costs. And the firm providing minimal service or less will not lose customers, because their customers are locked in."
Fairbanks/SPS customers may have caught a break this past August, when the Federal Trade Commission issued an order modifying the original Curry settlement. The revised order requires the company to undergo third-party audits each year until 2013, and to hereafter issue clear and comprehensive monthly statements to each borrower. The change should do much to protect the firm's current and future clients, but it's of little help to Hultman.
LOREN TOEWS PITTSBURG HOUSE STEALER. This stenciled message outside the Ward Street house, misspelling and all, plays on Loren's past as a linebacker for the Pittsburgh Steelers. Over the past decade, he and his younger brother Jeff, a former Miami Dolphin, have bought and sold more than one hundred foreclosed homes around the greater Bay Area. Now Jim Hultman and some of his neighbors hope to shame the Toewses into returning the property.
In a next-door neighbor's window, a paper sign asks: LOREN AND JEFF TOEWS HOW CAN YOU SLEEP AT NIGHT?
But isn't Fairbanks the bad guy here? Actually, Hultman suspects the Toewses are in cahoots with the mortgage servicer, and systematically follow the lenders Fairbanks contracts with. Loren Toews will have none of this. "We don't know anything about what transpires prior to an auction," he says.
Indeed, trustee's sales occur so frequently and with such short notice that investors seldom have much time to research a given property (see "The Best Game in Town," page 17). "We show up and the world is invited and encouraged to bid," Loren Toews says. "In any event, we showed up, and unfortunately showed up with the highest bid. We happen to be the easiest dog to kick, because we bought the house. But he's kicking the wrong dog."
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