NO ADVERTISING, GOVERNMENT OR CORPORATE FUNDING

  • Latest News
  • Pitch a Story
  • Work with a Journalist
  • Join the Blog Squad
  • Afghanistan
  • Africa
  • Asia
  • Baltimore
  • Canada
  • Egypt
  • Europe
  • Latin America
  • Middle East
  • Russia
  • Economy
  • Environment
  • Health Care
  • Military
  • Occupy
  • Organize This
  • Reality Asserts Itself
  • US Politics
  • Foreclosures on People Who Never Missed a Payment


    Yves Smith: Mortgage service industry makes more money from foreclosures than restructuring debt -   December 20, 2010
    Members don't see ads. If you are a member, and you're seeing this appeal, click here


    Audio

    Share to Facebook Share to Twitter



    TRNN is giving us real understanding of the issues and a way around the corporate news spin. - heylair
    Log in and tell us why you support TRNN

    Bio

    Yves Smith has written the popular and trenchant financial blog "Naked Capitalism" since 2006. Yves has spent more than 25 years in the financial services industry and currently heads Aurora Advisors, a New York-based management consulting firm specializing in corporate finance advisory and financial services. Prior experience includes Goldman Sachs (in corporate finance), McKinsey & Co., and Sumitomo Bank (as head of mergers and acquisitions). Yves has written for publications in the United States and Australia, including The New York Times, The Christian Science Monitor, Slate, The Conference Board Review, Institutional Investor, The Daily Deal and the Australian Financial Review. Yves is a graduate of Harvard College and Harvard Business School.

    Transcript

    Foreclosures on People Who Never Missed a PaymentPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay, coming to you today from New York City. Yves Smith, the creator of NakedCapitalism.com, in a recent blog wrote about foreclosures. And we've all been reading about people being foreclosed without any proper documentation or any proof they actually owed any money. But some people are being foreclosed who actually haven't missed any payments. Here's what Yves Smith wrote: "a significant number of their clients facing foreclosure has made every single ... payment." She goes on to say, "whether by mistake or design, when a borrower gets caught in the servicer hall of mirrors of compounding fees and charges, there is no way to appeal and pretty much no way out." Now joining us to talk about this type of foreclosure and the whole service industry in this area is Yves Smith, the creator of Naked Capitalism and author of ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism. Thanks for joining us.

    YVES SMITH, WRITER, FINANCIAL ADVISOR: Thanks for letting me be here.

    JAY: So talk a bit about this whole mortgage service industry and what role it plays.

    SMITH: Well, the mortgage servicing industry is a creation of this new process we have for doing mortgages called securitization. In the old days of banking, the borrower would go to the bank and get the loan, and the loan would remain with the bank. The change that we've had, which started in the 1980s and has now become the predominant way that at least first mortgages are done, is that you go to the bank, or you might even go to the mortgage broker, and you will get the loan with them. But instead of keeping the loan, they will sell it. And it usually goes not just directly to one party, but it will often go through a series, typically go through a series of parties, and eventually wind up with investors--it winds up in a little legal box called a trust. Now, that means somebody has to take care of, actually, again, playing some of the role that the bank used to pay of collecting the payments. So they're the person, they're the party that gets the payments, they're the party that credits the payments, and they're the party that takes the cash from all the different people they're dealing with and make sure that it goes to the investors in the proper way that the contract's set up.

    JAY: 'Cause now the people that now own this pool of mortgages aren't banks that used to have their own credit departments that could go collect the payments. So they've got to go hire somebody now to do the collections for them.

    SMITH: Well, it's--in some cases they go that route, but actually, if a borrower gets in trouble, they would then, for example, arrange for the loan to be foreclosed upon. So they would--they're actually intermediary companies [inaudible] tremendous amount of stuff is--of this is outsourced. So there's a well-known company called Lender Processing Services that provides a lot of the support to the servicers. The Lender Processing Services would then go hire a foreclosure mill to foreclose. I mean, basically, what the servicer would do at a certain point is say, gee, you're really behind. And the servicers tend to alert people that they're behind only very late in the process, where the payments have gotten so large that what's owed is--the borrowers are often very surprised if it's because of compounding fees that they're in that position.

    JAY: Let me get clear now. You've got a company that collects the payments, the mortgage payments.

    SMITH: That's correct. From the borrowers' perspective, they're the company that collects the money.

    JAY: And they work for the various banks or whoever owns this pool of mortgages now.

    SMITH: Well, they work for the various investors. So the different trusts that the--where the mortgages actually sit, the trusts hire the servicers.

    JAY: Right. So why is it in the servicers' interests to push people closer to foreclosure?

    SMITH: Well, some of this is--I think of this as almost being like a doomsday machine, like they have their little imperatives, and the fact that a foreclosure results isn't something they really care about. You know, their imperative is to keep costs down. Servicers are organized to be very big factories. So all the processes they have are extremely automated. And they have imperatives to maximize fees. Foreclosure happens to be more profitable to them than routine servicing of a loan. So if anything, if somebody gets in trouble, they don't have any incentive to prevent people from getting in trouble, and in fact they have incentives to get people in trouble. I mean, one of the things that they do, for instance, and this has been repeatedly documented, is that let's say you have a late fee. Now, sometimes these late fees are not bona fide late fees--the servicer might have applied your payment late. Servicers have also been found to hold payments, sometimes, to make them late.

    JAY: So they can--.

    SMITH: Then they collect late fees. Correct. So then what happens is--let's say somebody has--let's just pick a number. Say it's $75. The person incurs a late fee. That isn't going to be charged until the next month. The servicer, unlike a credit card, where you get a statement and say, you owe a late fee, the borrower doesn't know that they have a late fee. They the next month send in their regular payment. Under both federal law and the agreement that the borrowers sign, his payment, next-month payment, is supposed to go first to the mortgage interest and the mortgage principal. But instead, the servicer will take their fees out first, which makes the second-month payment short and, in theory, late because it wasn't full.

    JAY: So now they can charge another penalty

    SMITH: They can charge another penalty, and the way some of them set it up, they might even charge them two fees. Well, then if a borrower has been late twice under the agreement, the investors require them to get something called a broker price opinion, which basically is kind of worthless. But the--you know, some broker will basically drive by the house and write a broker price opinion. Now, those can range anywhere from $50 to as much as $250, depending on--.

    JAY: Now, is the service company making money out of that, too?

    SMITH: Sometimes those are inflated and they get kickbacks, but let's just assume that they don't. We're just looking at this from the borrower perspective. They're supposed to charge at $250 to the investor. Many times, they have been found to double dip and also charge the borrower.

    JAY: Blaming them for missing two payments [inaudible]

    SMITH: Payments, and then--and charging them when it's only the investor who's supposed to be paying it, not the borrower. So then suddenly you've got more fees, which has, again, not been disclosed to the--. So this whole thing keeps compounding.

    JAY: I'm not clear. Why does it become profitable to push them to foreclosure, then?

    SMITH: When the borrower goes into the foreclosure process, the servicer is permitted to charge additional administrative fees.

    JAY: To the trust.

    SMITH: And those come off the top. All the fees to the servicer come off the top. So, the additional work they get compensated for. In addition, when a borrower gets behind on payments--the seriously delinquent--the servicer still has to continue to pay the investors as if the borrower was paying on time. Normally when you have a borrower get in trouble in any other type of lending, the first thing the lender says is, gee, what should I do? Should I liquidate the loan? Should I just, you know, take what I can get? Or is there some way we can restructure the loan? I'm always better taking a half a loaf. If the borrower has enough income, I will be better served by taking less and restructuring the loan. So the investors would actually prefer that the loans be restructured. However, the servicer is continuing to have to advance principal and interest. The servicers don't get paid for modifying the loans. That's not part of these agreements. So they have no economic incentive to modify the loans. And the only way for them to recoup the money they keep sending to the servicer if the borrower gets in trouble is through the foreclosure, is by taking the house, so then they can repay themselves and send whatever's left back to the investor. So all their incentives favor foreclosure. They don't have any incentives favoring modification.

    JAY: But why is it in the interests of a service company like this to foreclose on someone who hasn't missed a payment?

    SMITH: Well, you can say that it's oftentimes administrative error, but there actually have been documented cases where the servicers would come in and basically make up documentation over and over again, trying to claim that the person was current.

    JAY: Person was "current"?

    SMITH: They were not behind. This is one of the things that's very disturbing, to see these banking executives get up and say, we never make a mistake; our foreclosures are all justified. You can look at--there are literally over--academics have been writing about this since 1998, about servicer-driven foreclosures, about how--whether it's in error and you can't get it straightened out, or it's actually something more malicious, where the bank has an incentive to foreclose--.

    JAY: To get hold of the property.

    SMITH: Well, to get additional fees. It's to get additional fees. And foreclosure's a much more profitable activity.

    JAY: There was hearings just in the last couple of weeks about this.

    SMITH: That's right.

    JAY: So is there any legislation, either in existence or pending, that would deal with this?

    SMITH: No, this really hasn't been addressed. I mean, this whole--one of the problems is it's like peeling back an onion: the more and more layers of the sort of peeling back, new problems that have been around but haven't been talked about are being exposed. And the banks have adopted this line that all borrowers are deadbeats. It's much more complicated. You know, yes, there's a large number of people who've lost their jobs, you know, some of them got in over their heads, some of them had other bad things happen, like, you know, medical bankruptcies, and they really can't afford their houses. But of the people who are fighting foreclosures, a very significant percentage of them it's either that they are victims of servicer error and can't get it straightened out, or that they have actually filed for bankruptcy. And in bankruptcy, everybody who is owed money is supposed to wait until the court sorts it out. They keep trying, the servicers keep trying to take the house, they keep trying to break the bankruptcy stay. And a lot of unsophisticated borrowers--or, rather, unsophisticated lawyers, somebody who might not be familiar, they will make deals with banks, a first deal, the first time the bank tries to do that. That's very unfavorable and makes it easier for the bank to get the house later on. The abuses are much larger than people recognize.

    JAY: And it's a crazy thing, because the more they foreclose, the more they depreciate the assets of houses they've already foreclosed on.

    SMITH: Well, that's--and that's why we're having such delays.

    JAY: Which is craziness.

    SMITH: Well, that's the other part, that, again, the blame in the media's being assigned the wrong place. One of the things that now places like The Wall Street Journal are writing about is, now what the average time from when somebody gets seriously in trouble to when they actually are foreclosed upon is 478 days. That's because the banks don't want to actually seize the houses until they can sell them. So they have perverse incentives, because they will still have to pay the real estate taxes and maintain the houses. So, on the one hand, they do want to ultimately get the house, but it's the banks themselves that want to draw out the process in many--and, again, it varies by markets. You know, in a--but in a market where they already have a lot of housing inventory, they really don't want to take any more houses right now. It's better for them to keep the borrower in the house, to have the borrower maintain the house, and to have the borrower be on the hook for the real estate taxes.

    JAY: And then eventually throw them out.

    SMITH: And eventually throw them out, when it's convenient for them.

    JAY: I think the word perverse is the right word. Thanks for joining us.

    SMITH: Thank you.

    JAY: Thank you for joining us on The Real News Network.

    End of Transcript

    DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


    Comments

    Our automatic spam filter blocks comments with multiple links and multiple users using the same IP address. Please make thoughtful comments with minimal links using only one user name. If you think your comment has been mistakenly removed please email us at contact@therealnews.com

    Comments


    Latest Stories


    Ukraine Transitional Gov't Moves Militarily To Reclaim Seized Buildings
    The Modern History of Venezuela: The Bolivarian Revolution - Edgardo Lander on Reality Asserts Itself (5/9)
    Obama Signs Directives to Reduce the Gender Wage Gap
    Eastern Ukraine Lacks Political Representation in Kiev
    Demystifying the Role of Mitigation in the Most Recent IPCC Report
    Hypersurveillance State Won't Prevent Another Boston Marathon Bombing
    The Modern History of Venezuela from 1973 to the Caracazo Massacre - Edgardo Lander on Reality Asserts Itself (3/9)
    Univ. of Maine Faculty Reinstated After Students Protest Against Cuts
    The Modern History of Venezuela from 1908 to 1973 - Edgardo Lander on Reality Asserts Itself (2/9)
    IMF Will Address Global Inequality, Says Managing Director Christine Lagarde
    Raising Big Banks' Leverage Ratio Good, But Not Nearly Enough
    TRNN Replay: Austerity Road to 19th Century
    Has Palestinian Maneuvering Revived Peace Talks?
    Late Jackson Mayor Lumumba's Son Wins Primary to Replace His Father, Runoff Election Ahead
    Quebecers Reject PQ and Elect a Liberal Government Representing Big Business
    TRNN Debate: Decriminalization vs. Legalization
    The Beginning of the Chavez Era - Edgardo Lander on Reality Asserts Itself (4/9)
    "Off With His Head": Court Upholds Obama's Power to Kill
    Workers at Nation's Top Hospital Strike For Fair Wages
    From Exile to Radicalization in Venezuela - Edgardo Lander on Reality Asserts Itself (1/9)
    Rwanda 20 Years Later: Genocide, Western Plunder of Congo, and President Kagame
    Ukrainian Protesters in the East Demand More Autonomy From Kiev Government
    Hunger Strikers Demand President Obama Halt His Record 2 Million Deportations
    Indian Parliamentary Elections - A Primer With Vijay Prashad
    West Looks to Carve Up Ukraine & Privatize Industries Held by Kleptocrats
    Where Are Israeli-Palestinian Peace Negotiations Headed?
    The Multiple Kingdoms of Saudi Arabia (5/5)
    Do the Afghan Presidential Elections Signify Progress?
    Republican Presidential Hopefuls Pay Homage to Billionaire Casino Tycoon Sheldon Adelson
    Will Extremist Lieberman Become Israel's Next Prime Minister?
    Why do the Saudis Want the US to Attack Iran? (4/5)
    Immigrant Advocates and Families Tell President Obama 'Not One More'
    Elections, Pipelines, and Protests - The Canada Panel
    Chris Hedges on "Israel's War on American Universities"
    Baltimore Residents Decry Lack of Affordable Housing
    Yellen Talks the Talk But Will She Walk the Walk?
    Hopkins Hospital Workers Speak Out against "Poverty Wages"
    Will Venezuela's New Floating Exchange Rate Curb Inflation?
    The European Central Bank's War on Wages is Pushing Europe's Economy to the Brink
    Supreme Court Decision Opens Floodgates for More Campaign Cash
    Charles Keating, the Financier Behind the Savings and Loan Scandal, Dies at 90
    Saudi Arabia and the al-Qaeda Monster (3/5)
    Maryland Residents Voice Opposition to Natural Gas Fracking Export Facility
    Supreme Court Ruling Gives Wealthy Individuals More Influence Over Elections
    What are the Saudis Afraid Of? - Madawi Al-Rasheed (2/5)
    Baltimore's MICA Adjunct Professors Set to Vote on Unionization
    Boycott of Israel Moving to Next Level?
    Hypocrisy Dressed Up as "Realism" Justifies American Alliance with Saudi Dictatorship
    Immigration Reform in the Shadows of Cesar Chavez's Legacy
    Leaked Senate Report Shows Use of Torture As "Ineffective"
    UN Report Says Climate Change Will Threaten Food Production Worldwide
    The Hypocrisy of US Calling for Enforcement of International Law
    How the Ecuadorian Economy Grew in a Global Recession
    'Shadows of Liberty' Trailer
    Kristina Borjesson on Why CBS Shut Down Her investigation into Flight 800 (2/8)
    Glen Ford on Racism in the American Media (3/8)
    Paul Jay on What Drives Corporate Media and What Drive The Real News (4/8)
    Creating a New Media Paradigm After Citizens United (5/8)
    Should The Left Engage with the Mainstream Media? (6/8)
    What Is the Financial Backing For The Real News? (7/8)
    Standing up to Character Assassination (8/8)
    Oligarchs, Fascists and the People's Protest in Ukraine
    TRNN Debate: Is Obamacare In the Interest of Workers?
    Too-Big-To-Fail Advantage Remains Intact For Big Banks
    Obama and the Saudi Agenda
    TRNN Replay: Investigating the Saudi Government's 9/11 Connection and the Path to Disilliusionment - Sen. Graham on Reality Asserts Itself pt 1
    The Iraq War's Real Legacy
    Petitions with 100,000+ Signatures Call for Snowden's Passport to be Reinstated
    We Need to Harness People Power - Andy Shallal on Reality Asserts Itself (4/4)
    BC Pipeline Fight and Quebec Elections - The Canada Panel
    Jonathan Schell - 1943-2014: Board Member of TRNN on Why We Need The Real News
    Teachers on Strike from the UK to Argentina
    Connecticut Poised to Become First State with $10.10 Minimum Wage
    Oil Spill Threatens Wildlife and Local Economy
    DC School Test Scores Up, But Poor Black Kids Are Doing Worse - Andy Shallal on RAI (3/4)
    Obama's Proposal To End NSA Bulk Data Collection Won't Protect Privacy
    How Google, Apple & The Biggest Tech Companies Colluded to Fix Workers' Wages
    An American Should be One that Questions Their Government - Andy Shallal on RAI (2/4)
    What's Driving Putin & Obama's Posturing on Ukraine?
    Hundreds of Students & Faculty Occupy College Campus to Fight Cuts to Public Higher Ed
    Due Process 'Impossible' In Harsh Death Sentencing Of Over 500 Muslim Brotherhood Members
    Has Anglo-American Capitalism Run Out of Steam?
    Being the "Other" in America - Andy Shallal on Reality Asserts Itself (1/4)
    TRNN Debate: Should Baltimore 'Ban The Box'?
    How Fallujah Became the Iraqi Government's New Battleground
    Why I Decided to Blow the Whistle on the NSA
    NASA Climate Predictions Show Serious Threat To Humanity
    Professor Who Teaches Israel-Palestine Conflict Accuses College of Violating His Academic Freedom
    CIA and NSA Wrongdoing Requires Independent Investigation, Says Former Church Committee Staff
    Are Tuition Breaks Enough To Combat High Student Debt And Low Graduation Rates?
    Industries Across the U.S. Are Stealing Wages From Their Lowest Paid Workers
    Who In Ukraine Will Benefit From An IMF Bailout?
    NSA Recording All International Calls From U.S.
    Israel "Making Lives Miserable" for Africans, Hoping They 'Self-Deport' (2/2)
    BP Gets Green Light to Drill in Gulf, But Has Safety Improved?
    Residents Still Not Drinking Tap Water Two Months After West Virginia Spill (1/2)
    Libya's Descent Into Turmoil Three Years After NATO Intervention
    From Pipelines to Peladeau - Canadian Report
    Israel "Making Lives Miserable" for Africans, Hoping They 'Self-Deport' (1/2)
    Congressional Progressive Caucus Budget Strikes Back Against Austerity
    Libya Three Years Later - Chaos and Partition
    Why Was Gaddafi Overthrown?
    Should Ukraine and West Accept De Facto Crimea Joining Russia? (2/2)
    Tony Benn Saw Socialism as the Culmination of Democratization
    Why Didn't Bush/Cheney Attack Iran and Can Obama Make and Sell a Deal? - Gareth Porter on Reality Asserts Itself (3/3)
    After Late Mayor Lumumba is Laid to Rest, What's Next for Jackson, Mississippi? (2/2)
    Crimea Referendum: Self Determination or Big Power Manipulation? (1/2)
    Sen. Graham: President Must Side with Openness About CIA and 9/11
    Manufacturing a Narrative for War - Gareth Porter on Reality Asserts Itself (2/3)
    Protesters Hit the Streets of Brooklyn to Demand $15 Minimum Wage
    Hammer: 'Moral Bankruptcy' Behind Massive GM Recall
    White House Withholds Thousands of Documents from Senate CIA Probe
    I Grew Up Believing in Time Magazine's Version of America - Gareth Porter on RAI (1/3)
    Western European Banks Vulnerable to Ukrainian Sovereign Debt Crisis
    TRNN Debate: What's Driving Inflation in Venezuela? (2/2)
    CIA vs. Senate: Who Is Obama Protecting?
    Will Tipped Workers Get Excluded Again From Minimum Wage Hike?
    TRNN Debate: What's Driving Inflation in Venezuela? (1/2)
    After Late Mayor Lumumba is Laid to Rest, What's Next for Jackson, Mississippi?(1/2)
    TRNN Replay: A Look at Who's Poised to Become No.2 at the Fed
    How Right-Wing Nationalism Rose to Influence in Ukraine (2/2)
    Netanyahu Attacks Boycott As Campaign Enters New Phase
    Moving Towards a Police State - Michael Ratner on Reality Asserts Itself (7/7)
    Fighting Reagan's Secret, Illegal Wars - Michael Ratner on Reality Asserts Itself (6/7)
    Puerto Rican Independence Movement and Cuba Further Radicalized Me - Michael Ratner on RAI (5/7)
    The Butcher of Attica - Michael Ratner on Reality Asserts Itself (4/7)
    MLK and a Radicalizing Moment in American History - Michael Ratner on Reality Asserts Itself (3/7)

    RealNewsNetwork.com, Real News Network, Real News, Real News For Real People, IWT are trademarks and service marks of IWT.TV inc. "The Real News" is the flagship show of IWT and Real News Network.

    All original content on this site is copyright of The Real News Network.  Click here for more

    Problems with this site? Please let us know

    Linux VPS Hosting by Star Dot Hosting