In the wake of the Robo-Signing Scandal, Lawmakers are calling for a formal investigation in to Foreclosure practices. They are asserting that Lenders are "routinely failing to respond in a timely manner, misplacing requested documents, and misleading both borrowers and the government about loan modifications, forbearances, and other housing related applications."
Based upon my experiences as a Southern New Hampshire Real Estate and Short Sale Specialist who routinely works with distressed homeowners, I believe these assertions are correct.
Apparently, many members of the California Democratic Congressional Delegation are "particularly perplexed" by the behavior of Lenders in light of the many incentives Congress and the Obama administration have offered to these companies to avoid foreclosures where financially viable, including subsidies and loan guarantees from taxpaying homeowners. In fact Delegation Chair, Rep. Zoe Lofgren said, "The excuses we have heard from financial institutions are simply not credible three years into this crisis. It is time that banks are held accountable for their practices that have left too many homeowners without real help".
I don't think there's anything perplexing about it at all and I don't believe we have any hope of untangling this mess until we stop confusing Servicers with Banks and/or the Investors that actually own the loans.
The advent of the secondary market where loans are bought and sold, in whole or in part, gave rise to the Servicing Industry. Contrary to the way it might seem, Servicers, entities that exist to accept payments from borrowers, are usually distinct from either the Originator of the loan or the Investor (the party that stands to lose money if the loan fails).
Even Bank of America recently disclosed that it only "owns" about 20% of the portfolio it services.
Since what is in the best interest of the Servicer is frequently at odds with what is in the best interest of either the Investor or the Homeowner and since it is through the Servicer that any request for a Modification or a Short Sale must pass, we have a situation where we have left the fox in charge of guarding the hen house.
Servicer compensation is complex and varies depending upon the Pooling and Servicing Agreements in place for any given pool of loans.
However, as I mentioned in my earlier post The Elephant In The Room Or Why You Can't Get Your Permanent Loan Modification, most Servicers receive the majority of their income based on a percentage of the outstanding principal balance of the entire loan pool which is typically calculated on all loans, even non-performing ones.
That, accompanied by the fact that accounting rules require immediate recognition of a loss on a permanent loan modification, may go a long way toward explaining why Servicer's are so quick to put borrower's into endless Trial Modifications, where the difference between what they should be paying and what they are paying gets added to their loan balance thereby growing the Servicers loan pool, and so hesitant to approve permanent modifications.
When it comes to Short Sales, many people are "particularly perplexed" about why the "Bank" doesn't, in the end, approve many short sales. After all, "they'll lose more money if they have to foreclose".
However, in comparing a Short Sale to a Foreclosure from the Servicer's perspective, the scales are frequently weighed more heavily toward foreclosure since most Pooling and Servicing Agreements allow the Servicer to retain the fees charged to a delinquent borrower in the event of foreclosure. The Servicer collects the fees once a foreclosure is completed before the Investor receives any payment.
That is not the case on a Short Sale.
Additionally, many servicers make money on Default Management Fees on the "Asset" after foreclosure.
So, the only time a Servicer would favor a Short Sale would be if the payments made by the Investor to them for performing a Short Sale were larger than what they could expect to make from borrower fees and REO management fees.
This combination may be the perfect recipe to cause Servicers to steer distressed homeowners away from programs like HAFA and the FHA Preforeclosure Sales Option, which actually give the homeowner a fair shot at getting the home sold prior to foreclosure, and toward a traditional short sale which is a convoluted, opaque and time consuming process which frequently ends in failure.
It's terrible for the homeowner, the Investor that loses money and the taxpayer but great for the Servicer who racks up late fees and penalties during the many months of "evaluation" which they then get to collect upon foreclosure along with future REO management fees.
Unless, and until, we address the underlying issue of Servicer compensation the piecemeal fixes that have been offered up will continue to fall short.