Realty Check

Do Mortgage Firms Really Benefit From Foreclosures?


An article in the New York Times today, suggesting that loan servicers would rather collect hefty fees on loans in delinquency and foreclosure than modify those loans, set off a bit of a firestorm in the community that oversees all those modifications.

Folks at the Mortgage Bankers Association, who only yesterday had been defending servicers who were hauled before the Treasury Dept for a little kick in the you know where, expressed some disbelief.

David Kittle, Chairman of the MBA:

The New York Times story is a gross misrepresentation of reality. The fees that servicers collect on delinquent loans barely offset the additional resources our servicers have to spend on delinquent borrowers. When a borrower misses his payment, the servicer still has to make a full principal and interest payment to the investor or mortgage holder. The fees cover the interest costs of those advances. The alternative is to have the banks pass on those costs to the borrowers who are paying their mortgages on time every month. To try and make a case that servicers make more money when a borrower is in delinquency is just plain wrong.

And I also just happened to be talking with Faith Schwartz, executive director of the Hope Now Coalition, the private sector alliance of mortgage servicers, investors, mortgage insurers and non-profit counselors. She expressed genuine surprise at the article's premise.

My sense is they are missing that the majority of fees assessed through delinquency are passed through third party fees--some do go to the bottom line, but many will go to the third party for appraisal information, legal fees, and title searches. Many companies have minimized ancillary fees, but there are real charges associated with foreclosure filings and use of third parties who do work regarding the delinquency.

After two years of working on this issue with servicers, counselors and investors who all want to avoid more foreclosures and REO's, my sense is this would not drive servicers to operate in a different direction than trying to modify or refinance loans to minimize foreclosure.

Oh, and by the way, I was speaking with Schwartz about a new report from Hope Now that shows a troubling new trend in foreclosures, no doubt due to job losses:

There were 93,924 foreclosure sales in June, an increase of more than 13% from the prior month. For the first time since HOPE NOW began collecting data, prime foreclosure sales in June outpaced subprime sales by two-to-one. HOPE NOW survey data suggests a peak in subprime foreclosure sales occurred a year ago, Q2-2008. The largest gain in reported prime loan foreclosure sales occurred in the recently ended second quarter of 2009 at 154,108.


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