The Next Crisis for Servicers - Dealing with Screw-Ups
The refi boom of the past two years has been manna from heaven for residential lenders. Many a mortgage banker and broker have been originating loans hand-over-fist, raking in fees and making a darn good living. All the rumors you've been hearing about loan brokers becoming millionaires this year are probably true. The mortgage production market has never been better.
As for the mortgage servicing side of the business, well, readers of this publication know it's been a different story, a story of servicing impairment charges and writedowns, firms pulling their collective hair out trying to bring in new business while existing loans run out the back door.
In short, mortgage servicers haven't enjoyed the party. With interest rates on the rise once again, servicing professionals are starting to think the business soon will return to normalcy. Things will improve. Maybe so, but there's some dark storm clouds on the horizon for servicers and it has nothing to do with the refis and run-off. It has to do with "service."
Yes that's right, service, as in making sure the principal, interest and taxes (not to mention insurance payments) are passed onto the proper parties - promptly. And correctly.
Over the course of the past year, I've heard too many complaints from friends, neighbors and relatives who have had run-ins with their servicing companies. I hear these complaints because they know what I do for a living and they think I might be able to do a little story on their woes. (And all of these folks are "A" paper credits.)
Actually, I won't do that, but I will detail what some of these complaints are while imploring you to make sure your company is doing its job properly. Complaint No. 1: A consumer refinanced his loan and his previous mortgage servicer never paid his property insurance, resulting in no coverage. The insurance company then contacted the consumer demanding immediate payment. The consumer went to his old servicer asking why the insurance was never paid. The servicer, who had been escrowing for insurance, insisted it had been paid but could offer no proof o receipt of payment, nothing.
Complaint No. 2 and this one is a classic: Consumer goes offshore for three months, setting up means by which her mortgage will be paid in her absence. Right before she comes back, a neighbor discovers that the city is selling her real estate tax lien at public auction. The neighbor, doing some leg work for his friend, discovers the mortgage company had not paid her real estate taxes even though, you guessed it, the company had been escrowing for it.
Twenty years ago this same thing happened to my uncle in Uniondale, N.Y. My cousin, reading an ad in Newsday, a Long Island newspaper, saw his father's tax lien up for sale. My uncle, a successful businessman who had never missed a mortgage payment in his life, almost blew a gasket. After a lot of yelling on his part and a telephone call from his attorney to the bank, the mess was resolved.
I've heard variations on these complaints from several others. Another classic is the servicer miscalculating the mortgage insurance payments at the closing table. On one closing, a friend of mine (using private mortgage insurance) thought his monthly MI payment would be about $70 a month. When the deal came down, he was presented with a new calculation of about $300 a month. To this day it's still unclear who screwed up, the lender-servicer or the good folks at the MI. (The closing attorney blamed the lender-servicer.)
So, what's the point? Why am I dragging out all these new and old horror stories? I would just like to warn the servicing side of the industry to get its act together. Stop cutting servicing costs by cutting bodies. Get more customer people working the phones - and make sure they're in the U.S. and not in India. Train them properly and buy them the best computers you can afford.
The mortgage refinancing boom is coming to an end and that means the focus will shift a bit more to your operations. Also, many state attorneys general are busy investigating the servicing practices of subprime firms, especially servicers. (Does the name Fairbanks Capital ring a bell?)
Once the AGs finish with the subprime boys, they'll move to the conventional side of the equation. Over the past five years, many a class-action attorney has turned to the mortgage industry, realizing there's "gold in them thar hills." In other words, lawyers target the mortgage industry because in the words of bank robber Willy Sutton, "That's where the money is." Make sure your servicing shop isn't on the wrong side of law.
Paul Muolo is executive editor of Mortgage Servicing News and its affiliate, National Mortgage News. He can be e-mailed at: Paul.Muolo
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