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February 2, 2004
"I'm very unhappy with the lender
servicing my mortgage, would you spell out the procedures for changing
lenders?"
Bad news, the only way to change the lender
servicing your loan is by refinancing. Unless you have other reasons to
refinance, that is a costly way to get a new lender, especially when you have no
way of knowing that the new one will be better than the old one. There should be
a better way, and I will suggest one below.
With some exceptions, the quality of
servicing ranges from poor to abysmal, for reasons that are no secret. The
financial incentives to provide good service to customers, which work in other
sectors of our economy, don�t work for loan servicing. The firm servicing
mortgages will not get more customers by improving service quality, only higher
costs. And the firm providing minimal service or less will not lose customers,
because their customers are locked in.
While this problem has been around for some
time, the development of the sub-prime market in the 90s raised the stakes
significantly. Sub-prime borrowers, unable to meet traditional underwriting
requirements, became a profitable source of business at higher prices than those
paid by prime borrowers.
Mortgage credit thus became available to a
group that had previously been excluded from the market, which was a plus.
Unfortunately, this group was also highly vulnerable to a number of sharp
practices that left some worse off than if they had never borrowed. These
practices came to be called "predatory lending."
Sub-prime loans had to be serviced, and some
of the firms doing the servicing adopted practices as outrageous as those used
by predatory loan originators. Here are some:
*They purchased overpriced homeowners�
insurance, even though the borrower already had a policy, and paid for it by
increasing the borrower�s balance so it would not be noticed for a period,
if ever.
*They failed to credit borrowers for extra
payments.
*They held scheduled payments past the
grace period before posting them, thus collecting late fees.
*They imposed prepayment penalties on
borrowers who were refinancing, even though the notes stated that there was no
such penalty.
*They failed to report good payment history
to the credit reporting bureaus, thus preventing borrowers from improving
their credit scores.
*The statements provided borrowers were
late, and so poorly designed that even an expert found them incomprehensible,
thus making it difficult for borrowers to detect their shenanigans.
Predatory servicing is even easier to get
away with than predatory lending, since the customer has already been landed and
has no place to go.
While numerous legislative and regulatory
actions have been taken at the Federal and state levels to curb predatory
lending, predatory servicing has been relatively immune until recently. In a
much-publicized action last year, the Federal Government sued Fairbanks Capital
Corporation for a series of practices similar to those cited above, and won an
injunction against continuation of the practices, along with a $40 million fine.
Such suits are useful but won�t stop
predatory servicing because there is too much money to be made. Predatory
servicing won�t go away until it starts resulting in lost customers. That will
happen when borrowers are empowered to select another lender to service their
loan.
I estimate there are roughly 38 million
homeowners who have a long-term relationship with a servicing agent that they
did not choose. Their loan provider was either a mortgage broker, or a lender
who subsequently sold the servicing. These borrowers should be empowered to opt
out.
To avoid undue disruption and encourage
rational decisions, the opt-out option should become effective only after (say)
6 months of servicing, and should apply only once. If the servicing agent is
changed, however, the borrower should receive a new opt-out option, exercisable
after 6 months with the new servicer.
If borrowers have the right to opt out, many
firms with servicing capacity will vie for the privilege of serving them. The
stream of income generated by servicing contracts has value. Ordinarily, these
contracts must be purchased for anywhere from 1/2% to 2% or more of the balance.
An opt-out contract would be free.
To win the favor of opt-outs, servicers would
be obliged to compete. Since servicers are paid by lenders rather than by
borrowers, they will compete with service, which is exactly what is needed.
Firms with efficient and courteous support people, short waits, easy-to-read
statements, etc., will draw opt-outs from firms that have served them badly. The
market would, at long last, begin to work for the borrower.
Copyright Jack Guttentag 2004 | 
