One of the most shocking aspects of the foreclosure mess has been the rogue behavior of mortgage servicers. In case you're new to this sorry story, mortgage servicers are the middlemen who handle, well, the servicing of mortgages once money has been lent to a homeowner by a bank. In effect, banks have outsourced the persnickety business of collecting mortgage payments, managing property tax escrow accounts, making sure that homes are insured, and all the rest.
Oh, and if a homeowner can't make payments any longer, mortgage servicers handle the foreclosure process.
In normal times, when most homeowners are keeping up with their payments, mortgage servicing is a relatively easy and profitable business. Of course, though, we aren't living in normal times. Instead, think Grapes of Wrath -- particularly in places like Nevada and Florida.
One result of the foreclosure epidemic is that mortgage servicers have emerged from the back office of the housing world to become point in dealing with millions of beleaguered homeowners. And because their business model never imagined such intense demands, the mortgage service industry has cut corners left and right to keep making money -- abusing homeowners in the process. (See my past posts on this nasty industry.)
Nightmare stories about mortgage servicers have become legion in recent years -- from endless errors and lost paperwork around mortgage modification requests, to unannounced foreclosures, to surprise interest rate hikes, to “force-placed” insurance, whereby mortgage servicers compel homeowners to buy home insurance at inflated prices (and often, allegedly, reap financial benefits thanks to ties with insurers). The dysfunctionality of mortgage servicers is one reason why efforts to modify home loans and stop foreclosures have been such an abysmal failure. Indeed, it's been shown that mortgage servicers can actually benefit from foreclosures, because it means more fees for them. A 2009 report by the National Consumer Law Center found that: "A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified, and no penalty, but potential profit, if the home is foreclosed.”
That report came out three years ago, but little was done to change the perverse incentives favoring foreclosures or rein in mortgage servicers. Sick stuff.
Finally, the Consumer Financial Protection Bureau yesterday announced a comprehensive set of proposed rules to regulate this shadowy industry. Among other things, the rules would require servicers to provide clearer mortgage statements, give warning of interest rate hikes, provide more choices about home insurance, make sure homeowners had a fair chance to avoid foreclosure, keep better documentation, and -- importantly -- answer the damn phone when desperate underwater homeowners call up.
The rules are slated to go into effect in January 2013. This crackdown on one of the worst parts of the mortgage industry is further testament to how Dodd-Frank is starting to make a real difference in people's lives.
The CFPB remains a very young agency. But nearly every week, we're seeing more evidence that it's not afraid to use is formidable powers.