Don’t trust those servicers

By Felix Salmon
December 30, 2009
Michael Powell has real-world examples of why it's really just better to walk away than it is to try to deal with evil and/or incompetent mortgage servicers:

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Michael Powell has real-world examples of why it’s really just better to walk away than it is to try to deal with evil and/or incompetent mortgage servicers:

Aurora, which has a $116 billion loan portfolio, was a subsidiary of Lehman Brothers before that firm went bankrupt…

Tom Vellucci, 54, is one of the four plaintiffs in the lawsuit, and a soldier in this army of the potentially dispossessed. Once a maintenance man for an insurance company, with a modest home in Floral Park, Queens, he lost his health and then his job. When a tenant stopped paying rent, he fell behind on his mortgage. A so-called rescue firm offered to negotiate better terms and wheedled Mr. Vellucci and his wife, Maria, out of $8,000 in fees.

When the inevitable foreclosure notice arrived in March, the Velluccis called Aurora Loan Services and asked for a break. The company, he said, responded by piling on legal fees and giving them a four-month trial agreement that did not reduce their monthly payment.

The Velluccis say they drained their savings making payments. Then the couple asked Aurora if they could revise their mortgage terms under the Obama rescue plan. They say the company refused, saying their mortgage was not eligible because it was owned by investors.

Aurora makes a similar statement about investor-owned mortgages on its Web site. These claims are not true. The Obama program requires companies to make an effort to modify such mortgages.

Sitting on a bench in the Queens courthouse, where he has become a regular, Mr. Vellucci ran his fingers through thick black hair and shook his head. “We kept trying to pay on faith, all faith, so we could prove we were honest people,” he said. “Now all we look like is stupid.”

I can’t find the statement on the Aurora website, but I don’t doubt that it’s been as obstructionist as it possibly can be:

Leonard N. Florio, a court-appointed referee, oversees such sessions in that dusty room in Queens. He is a chatty man and punctilious about not taking sides. But as he watched Mr. Ali, the Ozone Park homeowner, load his piles of bills and receipts back into his shopping bags, he could not help noting a pattern.

“I have yet to see an attorney for a servicer cut a deal,” he said. “Update this, update that. I mean, what’s the holdup?”

What we’re seeing here is the mortgage equivalent of credit-card sweatboxes: servicers who make sure to drain homeowners’ savings before they foreclose, since they know that they won’t chase homeowners after foreclosure, even in recourse states. By holding out the promise of a modification tomorrow, they make sure to squeeze every ounce of blood out of the homeowner before finally snatching the home away anyway.

So this is what I’d like to ask Megan McArdle, and others who like to extoll the moral virtues of paying one’s debts: just how much of your life’s savings should you give these snakes before they take your house?

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Comments
10 comments so far

Two parties enter into an agreement where party A loans money to party B so party B can buy a house. If party B can not make payments every month, for whatever reason, then the house gets turned over to party A, who will sell it. If the house is worth more than what party B owes party A, then party A sells the house and gives the amount over what is owed to party B. If the house sells for less than what party B owes, then party A loses money.

So what’s the moral issue here? Two parties have a contract, and parts of the contract that neither party wants to see realized actually happen, but that’s why they have all those parts to the contract.

I would think it is in the best interest of lenders to try to keep property values as high as possible, to minimize losses. I would also think that minimizing foreclosures would help maintain property values by reducing the supply of homes for sale. But hey, I haven’t lost hundreds of billions of dollars loaning money so maybe I don’t know what I’m talking about.

Posted by OnTheTimes | Report as abusive

I totally agree, when the “owners” saw their economic prospects changing, the solution was to sell the house. That’s what my uncle did 40 years ago when he lost an important contract for his business. But I guess today’s different- “It’s not my fault I got sick and lost my job and then the tenant moved out; and it’s not my fault I have no financial backup plan. No, the bank should do everything for me so that I suffer no losses- because in the 21st century- that’s what the taxpayer is for.

Posted by Anonymous | Report as abusive

Way to oversimplify to the degree of missing the point, OTT & Anon…

This is not about home-owners wanting to bilk the system, it’s about parasites who systematically feed on those who couldn’t quite hack it on their own, who expected help when help is what was literally offered.

Aurora Loan Services is a shady organization whose website leads off with pictures of trees and the name of The President Of The United States in an attempt to bolster the impression that it can help troubled home-owners sort out their financial problems. But what it does instead is eat them alive.

You can huff and puff in hindsight all you want about the little pigs who oughtn’t to have bought a house in the first place, but if in your reading of this story the last man standing should be the Big Bad Business Model of institutional usury then, sorry but it must be said – a plague on both your houses.

Posted by HBC | Report as abusive

HBC, I don’t think you understand what I was saying. My point is that it isn’t immoral for borrowers to walk away from their mortgages. The last sentence of Felix’s post:

“So this is what I’d like to ask Megan McArdle, and others who like to extoll the moral virtues of paying one’s debts: just how much of your life’s savings should you give these snakes before they take your house?”

implied that many believe there are moral reasons for people to pay off underwater or budget-destroying mortgages. I’m saying the mortgage is a two-way contract, which means both sides have options. I don’t believe people should be made to feel guilty or that they’ve done anything wrong for exercising those options.

I said nor implied nothing about homeowners wanting to bilk the system, only that they should make use of whatever options they have that make sense, just like the banks would.

Posted by OnTheTimes | Report as abusive

Felix,
Bravo! I have been following this debate much of the year as someone who is most likely headed down this path herself. Along the way I have tried to be frank with friends and family about how we (as a country and personally) got here and where it is likely to end up (not in tragedy, but serious losses that will take time to recover from). At first I drew blank stares and pity. Now these ideas are going mainstream and people are starting to get it.

We Americans need to return to our pragmatic, no-nonsense roots if we are to find our way out of this morass. I am ready to take my hits (which are significant) but I don’t appreciate being tut-tutted (or worse) by self-righteous jerks who claim clairvoyance after the bubble burst. I also don’t need or want the government to intervene clumsily in the market, thereby making it impossible to plot the safest path out personally and collectively.

The only way forward is to let prices fall to where real people can afford real houses. Government is doing us a profound disservice by trying to keep real estate propped up on the edge of a cliff. Let us take our hits and then begin the process of rebuilding. “Extend and pretend” is no way to begin a new decade if we hope to make it significantly better than the last one.

Posted by LadyGodiva | Report as abusive

Hi Felix, here’s my two cents:

I think the servicers are incompetent, not evil, though some of the actions of their employees are evil. Why?

RMBS servicing was designed to fail in an environment like this. They were paid a low percentage on the assets, adequate to service payments, but not payments and defaults above a 0.10% threshold.

Contrast CMBS servicing, in which the servicer kicks dud loans over to the special servicer who gets a much higher charge (over 1%/yr) on the loans that he works out. He can be directed by the junior certificateholder (usually one of the originators) on whether to modify or foreclose, but generally, these parties are expert at workouts, and tend to conserve value. The higher cost of this arrangement comes out of the interest paid to the junior certificateholder. Pretty equitable.

Here’s my easy solution to the RMBS problem, then. Mimic the CMBS structure for special servicing. An RMBS special servicer would have to be paid a higher percentage on assets than a CMBS special servicer, because he would deal with a lot of small loans. The pain of an arrangement like this would get delivered where it deserves to go: to those who took too much risk, and bought the riskiest currently surviving portions of the RMBS deal.

The underfunded RMBS servicers may be doing the best they can. They certainly aren’t making a bundle off this. As a former mortgage bond manager, I always found the RMBS structures to be weaker than the CMBS structures, and wondered what would happen if a crisis ever hit. Now we know.

Posted by DavidMerkel | Report as abusive

I totally agree with the first post regarding the moral issue of walking away – there is none. The contract is a simple agreement that says the borrower will either:

a) make monthly payments
OR
b) relinquish the house to the bank

In many cases today, choice b is the better choice. And by relinquishing the house, the borrower is fulfilling the contract.

Businesses make this type of decision all the time without there ever being this imaginary moral dilemma. To LadyGodiva: you don’t need to explain anything to anybody – just say that you are making the wise business decision.

Posted by forecasts | Report as abusive

The Path of the Law
by Oliver Wendell Holmes, Jr.
10 Harvard Law Review 457 (1897)

“Nowhere is the confusion between legal and moral ideas more manifest than in the law of contract. Among other things, here again the so-called primary rights and duties are invested with a mystic significance beyond what can be assigned and explained. The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it — and nothing else.”

Posted by maynardGkeynes | Report as abusive

Your light vitriol toward Megan on this topic misses the point. You seem to have the impression she’s a hard hearted Victorian who thinks contracts only go one way, and slackers be damned.

Megan McArdle hardly needs me to put words in her mouth, but the point behind her argument in this regard isn’t the difference between right and wrong, moral and corrupt. It’s that if everyone gets in the habit of doing so, the market will change, prices for credit will go up, and availability of credit will go down.

I’ve yet to see you attempt a dissection of that. I wonder why that is?

Posted by MPatton | Report as abusive

I agree with the first post.

But it’s illustrative of how far “morality” has declined that we no longer think the borrower has an obligation to service the debt! Walking away and handing the house to the bank is acceptable.

Posted by Anonymous | Report as abusive
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