Vindictive servicer of the day: ING Direct

By Felix Salmon
December 29, 2010
fan of American Homeowner Preservation, which has found a clever way of keeping underwater homeowners in their homes while minimizing the loss to their lenders. Even the red-in-tooth-and-claw capitalists at Goldman Sachs can understand that. But not, it seems, the idiots at ING Direct:

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I’m a longstanding fan of American Homeowner Preservation, which has found a clever way of keeping underwater homeowners in their homes while minimizing the loss to their lenders. Even the red-in-tooth-and-claw capitalists at Goldman Sachs can understand that. But not, it seems, the idiots at ING Direct:

ING Direct, the Dutch bank and internet-based mortgage lender, has objected to American Homeowner Preservation’s program to keep families in their homes, and ING will no longer consider AHP short sales. “ING DIRECT will also be adding your company to our exclusionary list as your company strictly finds investors to keep sellers in their home, while the bank takes a significant loss. This is against ING DIRECT’s short sale policies and guidelines, and as such you will no longer be able to work on this short sale file or any future ING DIRECT accounts,” Adam Agostinelli of ING Direct Retail Asset Management advised in an email to AHP.

If you cut out the excess verbiage, this basically boils down to “you try to keep homeowners in their homes, so we’re not going to deal with you”. Most companies would recognize this, and determine that if their short-sale policies barred sales to AHP, then they should change those policies as fast as possible. Not ING, which has come to the inhumane and self-defeating conclusion that the policies must always come first, even if they make no sense.

ING does allow short sales, of course, where the house is sold, often to an investor, in satisfaction of the loan. If ING were rational, it would want to get as much money as possible out of such a short sale, and therefore make the house as attractive as possible to as many potential buyers as possible. Instead, it is going out of its way to exclude the one set of buyers which actively wants to buy houses in short-sale situations: AHP-backed investors who intend to lease the home back to the current owners.

This is vindictiveness, plain and simple. ING might get more money if it played ball with AHP, but the homeowner wouldn’t suffer as much. Clearly, if ING is going to take “a significant loss”, then it needs an element of suffering on the part of the borrower — it’s a modern-day Shylock, demanding a pound of flesh which can do it no good whatsoever. ING gets no extra money if the homeowner is evicted as part of the short-sale proceedings. To the contrary, it will probably get less, since AHP makes its offers at full market price and doesn’t need to worry about the owners trashing the place when they’re forced out of their home.

Theoretically, AHP could try to do an end-run around ING’s absurd policies. It could give the family in question a place to camp out for a few weeks after being evicted, buy the house out of foreclosure for less than it was offering as a short sale, and then reinstate the family under its original terms. ING would get less money for the house, and on top of that pay large amounts of money to foreclose on the house, evict the family, and then sell the house. It’s a highly unattractive option for all concerned, especially the family which would have to move all of their stuff twice, and suffer the uncertainty of knowing whether they would be able to get their home back or not. In comparison, the AHP solution is a clear improvement for everybody, which leaves the inescapable conclusion that Adam Agostinelli and his paymasters are stupid, sadistic, or some combination of the two.

It’s worth mentioning the moral-hazard response only to dismiss it. I haven’t actually heard this argument made in any seriousness, but theoretically it could be made: if ING Direct allows short sales where the borrower stays in their home, then that reduces the cost of default, makes default more attractive, and therefore is liable to increase the default rate across the rest of ING’s portfolio. But if bankers think like that, they’re doomed.

AHP deals only with houses which are deep underwater, and where there is no way that the borrower can or even should attempt to pay off their mortgage in full. Maybe taking out the original loan was a bad idea, but that’s no crime, and doesn’t deserve gratuitous extra punishment. In all of AHP’s cases, the bank will end up selling the home at a loss. If it wants to minimize that loss, it should work with AHP. If it wants to maximize that loss, it should ignore AHP. In either case, its decision will make no difference whatsoever to other underwater borrowers and their propensity to default.

There’s one other possibility here. Maybe ING Direct is the servicer of the loan but not the beneficial owner of the loan, which has been securitized. In that case, it’s not ING which would get the benefit of a higher sale price, it’s the owners. On the other hand, if ING goes through elaborate foreclosure and eviction proceedings, it can charge those owners fees all the way along the process. Of course, the servicer is meant to be operating on behalf of the owners, but as we’ve seen many times, bondholders have no real ability to monitor what servicers do in their name, and have no control over what the servicers do even if they do find out. If foreclosure proceedings are a profit center for ING rather than a cost center, then suddenly its decision makes a lot more sense. If you can’t make money off the borrowers, make money off the lenders instead!

Comments
74 comments so far

If I’m not mistaken, prepayment penalties should allow brokers to offer low-fee/no-fee refinancing. Of course those loans come with a higher interest rate, allowing them to resell the loans for a profit sufficiently high to cover the fees they would otherwise charge. The prepayment penalty (usually for a fixed period of time?) ensures time to recover that margin.

I agree that they ought to be outlawed, though. Better to be up-front about the costs of the loan you are offering. Whether the borrower pays the prepayment penalty or the higher interest rate, they’ll be no better off than if they had paid the fees up front.

You aren’t the only one receiving daily offers of refinancing. Keep a recycling bin near your mail slot, and remember the essential principle, “There ain’t no such thing as a free lunch.” If somebody approaches you trying to sell something, and it sounds great, then RUN to check your wallet and count the family silver.

Posted by TFF | Report as abusive

I am persuaded that nearly all commentators here are narrowly isolated by their class. Virtually all posters on the forum appear utterly out of touch with the over-whelming majority of all Americans. The comments may apply to the top 10 or 15 percent income levels in the USA, but they certainly don’t match the financial reality for 85 percent of the families in the country. I am strongly reminded of the kind of comments a reader will see in the New York Times, where a severe censor lurks to delete anything that isn’t liberal rarefied.

Try reading the comments in the Washington Post. There you will see a broader range of views, expressed far more bluntly. I don’t know the number of non-performing loans well enough to discern what is a majority and what is not, and I also strongly suspect the number differs from state to state. What I do know is that over the past almost three years, the majority of foreclosures have been on homes where the family was completely incapable of ever paying the mortgage, and the loan application was deliberately fraudulent, on the part of the applicant and the broker.

The fact that no one, or too few, in the finance sector and in the general public, has ever been charged with these crimes, let alone convicted, has made many Americans very angry. Whether that anger is now being unjustly carried over to middle-class families who got caught in unlucky circumstances is, again, beyond my competence to assess. That the anger is still there in the taxpaying electorate is certain. The comments here give me probable cause for the reasonable suspicion that nearly all the posters are simply unaware of what the vast majority of Americans feel.

The stories told here are clearly very important to the people living them. But they are totally irrelevant to the huge majority of the American population, and to the finances and economy of the USA. The foreclosed mortgages of 10 percent of the country’s households, the families with the smallest number of children, will not have any significant effect of the American economy, no matter how expensive the loans were.

Posted by FirstAdvisor | Report as abusive

“What I do know is that over the past almost three years, the majority of foreclosures have been on homes where the family was completely incapable of ever paying the mortgage, and the loan application was deliberately fraudulent, on the part of the applicant and the broker.”

FirstAdvisor, can you back up this claim?

From statistics that I’ve read, the majority of foreclosures that are currently in the process involve the loss of income. Either unemployment or salary cuts. (Or unemployment followed by a new job at a lower salary.) I would be interested in data that demonstrates otherwise.

I suspect that the fraudulent loan apps wiped out almost immediately. The only reason for somebody to take out such a loan in the first place would be so they could bet on (what seemed to be) an endless spiral of price appreciation. Once housing prices started falling in 2007-2008, there would be no reason for the perpetrator of that fraud to make any payments at all.

As for the “vast majority of Americans”, I try to avoid using popular opinion as a basis of fact.

Finally, if you foreclose on 10% of the outstanding loans, you’ll wipe out many if not most of the banks. I don’t see how that can AVOID having a significant effect on the economy.

Posted by TFF | Report as abusive

TFF –

Well, yes, of course, people can waffle over qualifiers, question exact numbers, doubt extrapolated generalization, use all the standard tricks of glib rhetoric in the 2,500-year-old lexicon. All those stunts are meaningless. The failure of the huge numbers of subprime mortgages are what caused the global financial crisis. Asking a commentator to back the claim that those mortgages were the majority at the time of the bubble-burst is a trifle silly, if not senseless. There is always the question of just how far a glib debater can stretch a denial before he only makes himself look confused. Denying the self-evident facts, proved over and over again during the past three years, and common knowledge around the entire world, doesn’t exactly make anyone look very bright.

Prove of that allegation is in your belief that a foreclosure on 10 percent of all outstanding mortgages would cause a collapse of the financial system. That assertion is not only laughably untrue, it’s also contradicted by the reality that more than 10 percent of all mortgages in the US have already been foreclosed on. For verification, anyone with access to the internet can check the pertinent figures with the financial and consulting firms who track that sort of thing. I imagine that if you googled, ‘us mortgage foreclosures’, you would likely find the information you don’t know. I can’t be bothered, because I already have read those many, many reports saying so over the past three years, and I’m not easily impressed by glib rhetoric, empty of validity or content.

Posted by FirstAdvisor | Report as abusive

FirstAdvisor, I simply asked for evidence. If you have none, then I would encourage you to resort to empty rhetoric.

Oh, that’s exactly what you did. :)

I didn’t actually say you were wrong, but it is becoming patently obvious that your words are backed by nothing but hot air.

Posted by TFF | Report as abusive

I hate to do FirstAdvisor’s legwork for him, but did dig up this interesting paper. It suggests that he may be half right, at least for certain markets.

http://www.federalreserve.gov/pubs/feds/ 2010/201035/201035pap.pdf

Makes me wonder where his personal experience is based? The dynamics in Florida or Nevada may be very different from the dynamics in New Jersey.

Posted by TFF | Report as abusive

I have no idea what kind of juvenile games of one-upmanship you want to play. If that’s how you get your kicks, fine. You asked for evidence and I suggested you google, ‘us mortgage foreclosures’. You can read the hundreds, if not thousands of reports and papers written on the subject over the past three years, that everyone else in the world has already read. If you don’t want to look at the evidence I’ve offered when you asked for some, I have no reason to care. I’m not being paid to be your high school teacher.

Posted by FirstAdvisor | Report as abusive

FirstAdvisor, you stated that, “What I do know is that over the past almost three years, the majority of foreclosures have been on homes where the family was completely incapable of ever paying the mortgage, and the loan application was deliberately fraudulent, on the part of the applicant and the broker. ”

That’s a pretty strong claim to be making, so I figured you might have some evidence. I asked for the evidence, and you got your ruffles up. Try googling “us mortgage foreclosures” yourself and you’ll see that what pops up does NOT support your claim.

Funny thing. When I ask Danny_Black or y2kurtus for details backing a claim that they’ve made, they give me a link. Usually quite an informative link. I’ve learned a lot from them.

You might learn from them too?

And evidence? You’ve offered none. Without evidence, your wild claims carry no weight. Sorry!

Posted by TFF | Report as abusive

What luck! Found another link for you:
http://online.wsj.com/article/SB10001424 052748704610904576031632838153532.html

Unfortunately the article doesn’t exactly support your claim. Who should I believe? FirstAdvisor who offers no links and no evidence? Who claims that if I look hard enough I’ll find hundreds of thousands of research papers supporting his bloviation? Or the Wall Street Journal?

Posted by TFF | Report as abusive

@Sam_Dobermann says that the mortgages are not insured but only the securities which contain many mortgages.
Basically insuring the gold box but not the gold within. As it is only a container it is really valueless.
If no one owns a whole mortgage when they are securitized no one is legally able to foreclose.

What I have been trying to get to, is for a mortgagor to be sold up requires the mortgagee to take legal action to enforce the contract.
If the banks have sold the mortgage they do not have the legal right to foreclose.
I would have assumed that the investor would own the mortgage and have possession of the title deeds but according to Sam that is not the case.

Does anyone know who owns the mortgages and has legal ownership of the title deeds.

Posted by Sinbad1 | Report as abusive

Sinbad, *somebody* owns the mortgages. I think the securitization is run through a “trust” that holds/owns the mortgages and writes the securities as claims on its holdings.

Have read something about individual mortgages being put back to the banks (from the trusts) for foreclosure? The greater problem is that the notes seem to be getting lost in the shuffle.

Posted by TFF | Report as abusive

Thanks TFF, assuming you are correct it must be the trust managers who are playing hardball.
ING may have nothing to do with setting the conditions to refinance or anything else it is all down to the unknown trust managers. A lot of trust managers seem to be located in the Cayman Islands. I assume that is to avoid tax. They seem to be run by investment banks like Goldman Sachs etc but I wouldn’t bet money on that.

So ING might not be the cause of Mr Salmon’s woes they are just an agent, the trust is the culprit.

I still think that there is insurance against loss and that is why they want to foreclose and auction the properties. Because until the auction the loss is debatable only at auction do the losses become quantifiable.

If as Sam says Freddie and Fanny are the insurers it means that the taxes you pay are being used to evict you from your house.

Sorry if I seem a little dense but things are a bit more straight forward here in Australia. When you get a mortgage from a bank it is a deal between you and the bank there are no other parties involved. They keep your title deed in their safe.
If you have a problem you go and talk to the bank manager, when you finish paying the loan you can go and pick up the title deed. They also wont allow you to commit more than 25% of your salary so you don’t bite off more than you can chew.
The downside is you can’t just walk away, if they sell you up and they come up short, you owe that money to the bank and they will chase you for the cash.

Posted by Sinbad1 | Report as abusive

Sam, I don’t think we have PMI then in the UK and when i responded I was talking about CDS on the tranches because of the comment about AIG – I have no idea if they also do PMI but I guess in retrospect they probably do.

I have to admit I completely confused about what we are talking about now when we say “insurance”. Agency backed bonds have a credit wrap, which the the agencies charge for. But this has nothing to do with the banks and certainly doesn’t incentivise the investors to throw the owner out – they don’t care because they get the flows under the credit wrap – and has nothing to do with CDSes.

As for what bankrupted the more famous writers of credit protection it was not so much paying out for defaults but rather as the cash drain as collateral triggers kicked in as the price declined, which then trigger credit ratings of the insurer to go down, which then affected the CDS value which then triggered the price of the underlying name to go down because there was now doubt about the value of the protection which caused more collateral calls. As for AIG what actually bankrupted them was the brilliant idea for their treasury to invest the securities lending money in higher yielding MBS tranches for a few more bips.

Again can’t say in the US but there is a small justification in the UK for prepayment fees. For fixed rate mortgages, the banks will typically hedge the underlying interest rate risk with interest rate swaps which themselves cost money. That said with a well managed Treasury desk the cost of that to the borrower should be relatively small and I suspect well out of whack with what they actually were being charged. The real reason for the fees is to discourage you from doing a refi. The less prepayment risk in the underlying mortgages the more valuable the bonds backed by them are.

Posted by Danny_Black | Report as abusive

Sinbad, please don’t take my word on anything. I’m confused by the whole thing myself, with many of the same questions that you raise.

If I understand it correctly, borrowers generally deal with the “servicer” of the loan. The servicer has the right and obligation to manage the loan for the benefit of the trust. But the servicer is NOT the trust, may have different direct incentives, and may be looking over its shoulder constantly, fearful of raising objections from the trust. Meanwhile, I assume the trust would have legal representation or something, but it is just a “shell corporation”. Few people or no people assigned to its operations. Hard to deal with entities that don’t exist.

And yes, Freddie and Fannie may very well be directly involved in foreclosures. I’m not sure. If they are insuring the loan, then it could conceivably make sense to dump a non-performing loan on the insurer for disposal.

Your system sounds an awful lot like my current mortgage. I know exactly the safe where the title deed is kept, and backed the mortgage with my full personal faith (not merely the collateral).

I’m guessing you’ve never seen prices double over a five year period, though? Hard to achieve that kind of frothy growth without leverage and securitization.

Posted by TFF | Report as abusive

TFF, the basic schematic is this:

Borrower B borrows from originating bank O. O sells it to trust T, including rights and cash flows. O now normally has no further role. T assigns a servicer S who has the job of collecting the mortgage payments and fees and passing them on the the trust. S is a separate legal entity from either T or O. To buy those mortgages T issues bonds to investors. The investors receive the tranched cashflows but they have no rights to the mortgage don’t “own it” nor do they have a direct say typically in foreclosures or not. What they may have a say in is the costs involved and the recovery price. To foreclose T and S need to agree under most agreements with the trust.

Important things that seem to get lost in the chatter:

1) O typically no longer plays a part, although S might be part of the same group ABC loans and ABC servicing they are separate legal entities.
2) The rights and the ownership of the note goes from O to T and stops there. None of the downstream investors “own” any part of the mortgage. They simply have rights to the cashflows.
3) What I understood by insurance was CDS which is written on the ***cashflows***, not the mortgages.

As for mortgages getting put back, typically the trust has a clause saying that mortgages that T bought that do not conform to some standard can be sold back to O at par. In this case the mortgage is back on O’s balance sheet and it has the cashflows and the rights – which typically are worthless in put backs.

Sinbad1, most of the trusts are not “run” by GS but rather large custodian banks such as Deustche, HSBC, BoNY. That is because trusts are an economy of scale business on razor thin margins.

Alot of the note business is due to the fact the lawyers paid to foreclose are on a fixed fee and fixed timescale and the vaults of the trusts are like Fort Know. Getting the actual note is time-consuming, expensive and nowdays incredibily risky – imagine if you lose that note! So lazy people trying to make money on the fixed fee don’t bother and just write an affadavit saying it is lost. Just in case it is not clear I am not condoning the practice.

As for Freddie and Fannie being the insurers, again I am afraid you seem to misunderstand how it works. Borrower B defaults, the GSE – Ginnie, Freddie or Fannie – pays out to the investor what he would have got had the guy not defaulted. The investor doesn’t know or care what happened to B. Freddie and Frannie then have to make up as much as they can from that mortgage. If as you say they make more money doing some sort of deal then it is their choice. Again, to foreclose on a securitised loan BOTH S and T have to agree.

Also I think you are misinformed about Australia:

http://www.rba.gov.au/publications/fsr/2 004/sep/pdf/0904-1.pdf

What other countries don’t have is essentially huge goverment players in the market that the US has.

Posted by Danny_Black | Report as abusive

Wow, very informative!

Thanks for the clear outline, Danny_Black.

Posted by TFF | Report as abusive

Fort Knox not Fort Know

Posted by Danny_Black | Report as abusive

Danny_Black thanks for the concise outline, also thanks on showing me how things have changed in Oz since I paid a mortgage.

Posted by Sinbad1 | Report as abusive

I was interested in AHP based on this article. It sounded like a potentially good investment.

So I did some research.

http://www.ohio.com/news/39714627.html

Port officials say they have had too much difficulty getting answers about the [American Homeowners' Preservation] and its leaders. Also, Indianapolis Housing Police said Monday that they are pursuing fraud charges against Jorge Newbery, the man who provided the financial backing for the group.

Newbery, who has had trouble with housing projects in Columbus and Beaumont, Texas, would receive a commission on the real estate deals, and his role with AHP would be limited, Blumberg said.
======================================== ==========

I guess that “limited” part didn’t last – he’s running the company now.

Mr. Salmon, I think you should do some basic research before plugging an investment opportunity on your blog – people might actually take it seriously and lose some real money.

Posted by mfriedma | Report as abusive

mfriedma: Please note that the article you have linked to was published in February 2009. At the time, American Homeowner Preservation Inc. was a non-profit 501c3 entity to which I was a consultant. The intial plan was that AHP Inc. would be funded with tax-exempt municipal bonds issued by the Summit County Port Authority and underwritten by Gardnyr Michael Capital. The SCPA induced $12,500,000 in bonds in September 2008, but the bond market and all financial markets become challenged by early 2009, which made a successful bond sale unlikely. This, along with the SCPA’s concerns and AHP’s then-unproven concept, resulted in the bond issue being abandoned. I had arranged pre-development financing for the initial funding of AHP Inc. As the concept was promising, the for-profit American Homeowner Preservation LLC was created in mid-2009 and I became Director.
As to the Indianapolis story, I previously was the managing member in Keystone Towers LLC, which purchased the high rise apartment complex Keystone Towers at auction in 2003 and proceeded to renovate. However, in the midst of the renovation, we sold the complex and the subsequent owner was unable to complete the renovation. As a result, some Section 8 subsidies were accepted during a period in which Keystone Towers did not meet Section 8 Housing Quality Standards and the Indianapolis Housing Police wanted $55,000 in subsidies back. After the referenced article came out, I had my attorney contact the IHP and provide documentation showing that I had did not have an interest in Keystone Towers during the time the complex was out of compliance. As a result, no charges were ever filed and this matter was resolved. My background includes buying and renovating properties, starting with four units in South Central Los Angeles in 1992 and eventually 1,100 units in Columbus in 2002. I rolled almost all my money into the Columbus project and earned a commendation form the Ohio House of Representatives for my work on this project. However, just weeks after completing the project, the complex was decimated by an ice storm and I ended up in a battle with insurers, the City, lenders and creditors, which paralyzed me financially and required that I sell most of my properties, including Indianapolis and Beaumont. On a positive note, this experience honed my crisis management and creditor negotiation skills, which have been put into use at AHP.
As to AHP LLC, we charge no fees to homeowners, investors buy the homes directly from the homeowners with policies of title insurance and AHP earns a $2,000 Program Fee per transaction, plus shares in the brokerage commission and a portion of the repurchase option mark-up. All investor funds are wired to the title company, and rents are paid by the familes either directly to investors or to property management companies designated by investors. Thus, as the investors own the homes outright, there is no ability for AHP to do anything which could impede an investor’s investment. In fact, in order to realize the back-end fee, AHP has a significant incentive to see that these investments succeed.
The first AHP home sold to a private investor in May 2009 and thus far not a single former homeowner has been evicted. Whenever a family has been late, AHP has worked with the family to make a payment arrangement to catch up. We can provide multiple references of satisfied homeowners and investors.
Personally, I am hold real estate licenses in nine states(two are brokers licenses and seven are salespersons), and hold a FINRA securities license as well as an insurance license. My oldest license is 21 years old and all are in good standing. We are affiliated with ReMax, Realty Executives or Keller Williams in each of the states and carry E&O insurance in each state. AHP has an A- rating with the Better Business Bureau, and the only reason that this is not an A is because AHP has not been in business long enough.
I hope this satisfies your concerns and that you reconsider investing in a home through American Homeowner Preservation. Anyone can feel free to contact me at (800) 555-1055, j.newbery@ahphelp.com, or at 7162 Reading Road #608, Cincinnati OH 45237 if they have any questions on anything. Thanks.

Posted by JorgeN | Report as abusive

“The national law firm of Lieff Cabraser Heimann & Bernstein, LLP, is investigating complaints by mortgage loan borrowers that ING Direct breached its promise to allow them to refinance their loans for a flat fee of $750 per refinancing after the first year of their loans.”: http://www.lieffcabraser.com/cases.php?C aseID=238

Posted by JayDub2 | Report as abusive

If I’m not mistaken ING Direct is indeed the servicer of the loan but not the beneficial owner of the loan.

However ot so much because it has been securitized, but because ING Direct is owned by ING Netherlands. That one has been bailed out by the Dutch government. One bailout was that the Dutch taxpayers are now 80% liable for these specific morgages. So 80% of the losses are not theirs …

Pretty ironic, that ING Netherlands got in trouble pretty much only because of these ING Direct USA mortages. And now ING Direct USA bites this hand that saved them.

But because ING Direct USA will be sold this or next year, as part of the bailout agreement and related EU regulations, those guys don’t give too much about a good relationship with the Dutch or their mothercompany.

Posted by PeterRG | Report as abusive

PeterRG, as a servicer it does not directly care about losses on mortgages. It typically gets paid a monthly fee based on a percentage of the ***loan***, plus some fees. The only reason it would care about losses on selling the underlying collateral is because if that sale doesn’t cover the loan principal then their fees come out of the investors pie which means the investors will query everything.

ING as a group needed bailing out because it made bad loans. Nothing to do with the servicer.

Posted by Danny_Black | Report as abusive

I know this if off topic but I’m looking into starting my own blog and was curious what all is required to get set up? I’m assuming having a blog like yours would cost a pretty penny? I’m not very web savvy so I’m not 100% sure. Any tips or advice would be greatly appreciated. Thank you

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