Lenders not eager to help fix mortgages
Lucrative fees gained even in foreclosure

Not motivated to modify: Data on delinquencies reinforce the notion that servicers are inclined to let problem loans float in purgatory – neither taking control of houses and selling them, nor modifying loans to give homeowners a break.

Delinquencies increase: From June 2008 to June 2009, the number of U.S. mortgages 90 days or more delinquent soared from 1.8 million to nearly 3 million, according to the realty research company First American Core Logic. During that period, the number of loans that resulted in the bank taking ownership of the home declined to 245,000 from 333,000.

This week, the Obama administration summoned mortgage company executives to Washington to demand they move faster to lower payments for homeowners sliding toward foreclosure. Treasury officials called on the companies to hire and train more people quickly to field applications for relief.

But industry insiders and legal experts said the limited capacity of mortgage companies isn't the primary factor impeding the government's $75 billion program to prevent foreclosures. Instead, they said 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 sold in foreclosure. 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.

“It frustrates me when I see the government looking to the servicer for the solution, because it will never ever happen,” said Margery Golant, a Florida lawyer who defends homeowners against foreclosure and who worked as deputy counsel for a major mortgage company, Ocwen Financial. “I don't think they're motivated to do modifications at all. They keep hitting the loan all the way through for junk fees. It's a license to do whatever they want.”

Rich Miller, a governance project manager at Countrywide Financial and Bank of America before he left in January, said Bank of America had been reluctant to modify loans, which hurts the bottom line. The company has been waiting and hoping the economy will improve and delinquent customers will resume making payments, he said.

“That's the short-term strategy,” said Miller, who oversaw training programs at Countrywide, which was bought by Bank of America, and now works as an industry consultant.

Bank of America disputed that characterization. “To think that somehow or other we would jeopardize investor relationships and customer relationships for the very small incremental income we would receive by delaying seems ludicrous,” said Robert V. James, the bank's senior vice president for mortgage operations. “It's not the right thing to do.”

Mortgage companies, some of which are affiliated with the nation's largest banks, are paid to manage pools of loans owned by investors. Under their contracts, the companies typically collect a percentage of the value of the loans they service. They extract their share regardless of whether borrowers are current on their payments. Indeed, their percentage often increases on delinquent loans.

Legal experts said the opportunities for additional revenue in delinquency are considerable, confronting mortgage companies with a conflict between their financial interest in harvesting fees and their responsibility to collect as much as they can for investors who own most mortgages.

“The rules by which servicers are reimbursed for expenses may provide a perverse incentive to foreclose rather than modify,” concluded a recent paper published by the Federal Reserve Bank of Boston.

Under the Obama administration's foreclosure program, a servicer that modifies a loan for a homeowner collects $1,000 from the government, followed by $1,000 a year for each of the next three years.

A senior Treasury adviser, Seth Wheeler, said these payments amount to “meaningful incentives to servicers to help overcome the challenges and competing demands they face in considering and completing loan modifications.” He added mortgage companies “are contractually obligated to the terms of this program, which require them to offer modifications to qualified borrowers.”

But experts said the administration's incentives are often outweighed by the benefits of collecting fees from delinquency, and then more fees through the sale of homes in foreclosure.

“If they do a loan modification, they get a few shekels from the government,” said David Dickey, who formerly headed a national mortgage sales team at Countrywide and Bank of America, leaving in March to start a mortgage advisory firm, National Home Loan Advocates. By contrast, he said, the road to foreclosure, especially if it's prolonged, is lined with fees. “There's all sorts of things behind the scenes,” he said.

When borrowers begin to fall behind, mortgage companies typically collect late fees reaching 6 percent of the monthly payments.

“For many subprime servicers, late fees alone constitute a significant fraction of their total income and profit,” said Diane E. Thompson, a lawyer for the National Consumer Law Center, in testimony to the Senate Banking Committee this month. “Servicers thus have an incentive to push homeowners into late payments and keep them there: If the loan pays late, the servicer is more likely to profit.”

She cited Ocwen Financial, which reported that nearly 12 percent of its income in 2007 came from fees charged to borrowers.

As a home slides toward foreclosure, mortgage companies pay for many services required to take control of the property and resell it. They typically funnel orders for title searches, insurance policies, appraisals and legal filings to companies they own or share revenue with.

Ocwen established its title company, Premium Title Services, in part to keep more of the revenue flowing from foreclosures, said Golant, who was involved in starting the venture.

“It was hugely profitable,” she said. “Premium Title would charge for the title when it got transferred to Ocwen, then charge again when it got transferred to the new buyer, and then sell title insurance. It was easy money.”

Mortgage companies not only gain this extra business through their subsidiaries, but also collect reimbursement for the payments when the houses are sold.

The investors who own bad mortgages accept whatever is left. Investors typically don't notice how much they relinquish to the servicers, because fees are embedded in complex sales.

“It's under the radar,” Golant said.

Ultimately, the benefits of delinquency erode incentives for mortgage companies to dispose of troubled loans quickly, experts say, allowing distressed houses to decay and fall in value – a fact of little interest to the servicer.

“At the end of the day, it doesn't matter what the house sells for, because they don't take that loss,” said Golant. “Meanwhile, they are collecting all these fees.”

By Peter S. Goodman
July 30, 2009

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Price is a critical part of the equation. Some sellers price their homes low because they need a quick sale. If the price is below market, multiple buyers could step forward with offers. Sometimes an overpriced listing is reduced to market price or below and results in offers from more than one buyer.

Most multiple offers today are on low-end foreclosure properties. Investors make up a large part of the buyers in this segment of the market. In some areas of California and Florida, prices have fallen 40 percent since the market peaked in 2006.

HOUSE HUNTING TIP: Don't shy away from making an offer just because there is more than one offer. In some cases, a dozen or more buyers make offers on foreclosure properties that are listed at bargain prices. But, the highest bidder is not always the winner.

Even in non-distressed-sale situations, multiple offers in today's market don't always result in an overinflated sale price. For instance, a charming older home on a sought-after street in the Crocker Highlands neighborhood of Oakland, Calif., sold after only two weeks on the market with multiple offers. The property was listed for $1.3 million, and sold for $5,000 above that price.

There are far fewer financially qualified buyers in the home-buying market today than there were two years ago due to credit tightening, more rigorous financial qualification requirements and recent stock market losses.

In some areas, as many as one-third of home sale transactions fail to close, often due to the inability of buyers to obtain the financing they need.

Sellers who receive more than one offer should carefully consider all aspects of the offers, not merely the offer price. An offer from an all-cash buyer who doesn't need a mortgage to finance the purchase, and who can close quickly, should be taken seriously even if the price is lower than the other offer(s). However, some all-cash buyers -- who are fully aware of their strong position in this market -- feel they are entitled to a major price discount.

Whether or not you'll have success countering for a higher price will depend a lot on the profile of the buyer. Buyers who intend to occupy the property for the long term are more likely to pay more than will investors who base their purchase decisions on the numbers, not their emotions.

THE CLOSING: Sellers should try to keep greed out of their decision when faced with multiple offers. Today's buyers are willing to walk away from a negotiation rather than pay over market value, or it they think the sellers are unreasonable.

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