At the start of this year, nearly one in four mortgages was underwater and 4.5 million mortgages were seriously delinquent. And today, some studies estimate that as many as 10 million borrowers are at risk of defaulting on their mortgages in the coming years.
One of the problems that has made things even harder for struggling homeowners is the state of the mortgage servicing industry, which collects payments on behalf of the owners of the loans. This industry has never had a requirement, or a strong incentive, to meet the needs of consumers. Even before the crisis, there were already problems with bad practices and sloppy recordkeeping.
When the financial crisis hit, however, things got much worse. When millions of borrowers started to fall behind, many servicing businesses that had been built and focused primarily on the good times began to crumble under the weight of the growing crisis. To borrow a moral from Aesop’s fables, the servicing industry was all grasshopper and no ant, for it was simply not prepared to weather the lean periods of the financial cycle. The earlier problems with recordkeeping and other systems made it harder to sort out borrower problems. And instead of investing in new personnel and processes, too many mortgage servicers took shortcuts that made things far worse for homeowners in trouble.
The problems that resulted from these shortcuts are virtually unbelievable unless you have experienced them for yourself. I have heard the same kinds of stories from hundreds and hundreds of people from my days in Ohio where we created dozens of county “Save Our Homes” task forces to work directly with homeowners as they dealt with these frightening and overwhelming situations.
Picture every bad customer service experience you have ever had: calls going unanswered, glacially slow processes, mistakes made and not fixed, a kaleidoscopic cast of human beings who never seem to deal with you more than once, your paperwork submitted and lost repeatedly. Now, multiply that mountain of frustration exponentially, and you can begin to get an inkling of the scope of the problems that Americans face: house by house, neighborhood by neighborhood and community by community.
Consider for a moment the impact of these problems on families. We are not talking here about a $10 overcharge on a utility bill. We are talking about the largest single investment that people will make in their lifetimes, and a matter that goes far beyond a mere economic investment. We are talking, specifically, about people’s homes. A place consecrated by a deep bond that only the passage of time—and the precious enjoyment of time—can create in an enduring way. The swing-set your children loved. The deck you built with your own hands. The door that swung shut behind you every day you went to work, to earn the money to make the payments to keep the place you called your own.
And it is not just consumers who suffer. Mortgage investors do not benefit from a broken system where servicers do not fulfill their obligations or make reasonable efforts to mitigate losses. And this failed business model widened the pain of the housing crisis and destroyed an incalculable measure of consumer trust in financial businesses, perhaps in a lasting way.
The severity of the problems people have experienced is further compounded by the fact that consumers often have no say in choosing their mortgage servicers. At the time they take out the mortgage, they usually know who is lending them the money, but later the servicing rights may have been bought and sold, perhaps multiple times, perhaps with scant notice to the consumer. If the service is shabby and the servicer is indifferent, their customers have no ability to vote with their feet and select another provider who will treat them better.
Abraham Lincoln once said, “The legitimate object of government is to do for a community of people whatever they need to have done but cannot do at all or cannot do so well for themselves in their separate and individual capacities.” And so today the Consumer Financial Protection Bureau is launching our effort to protect consumers where they do not have the power to protect themselves.
The mortgage servicing rules we are considering reflect two basic, common sense standards—no surprises and no runarounds. They would apply to all mortgage servicers regardless of how they are organized, including banks, thrifts, credit unions and nonbank servicers.
We envision a world where homeowners can expect fair and reasonable treatment when they fall behind in their payments, and genuine efforts are made to help them stay in their homes. Simply put: We intend to require mortgage servicers to put the “service” back in servicing.
Our first set of rules would address the root problem that transparency is often lacking in the mortgage servicing market. These rules are designed to arm consumers with the information they need to avoid costly surprises. We want to make sure that at all times consumers know how much they owe, what they are paying, and how their payments are being applied. And if consumers fall behind on their mortgage, we want them to know what their options are to make the best of a difficult situation. Unfortunately, too many consumers today do not have the right information at the right time.
Our rules would change that by requiring servicers to send every customer a clear monthly mortgage statement, summarizing the key terms like the interest rate and principal obligation; the amount of and due date for the next payment; and recent transaction activity, including itemization of fees and charges. It may seem amazing that we would have to impose such basic requirements, but in this market we do. Other rules we are considering would require servicers to provide earlier warnings before interest rates change on adjustable-rate mortgages.