Servicer Tricks During Modification
Servicer Trick # 1
Tricked into Default
You have to be in default before you can get a loan modification.
It is not true that a borrower needs to be in default before they can get a loan modification. Most modification programs only require that you show you are in danger of falling behind in payments, but you don’t have to actually go into default, in order to qualify. For example, to qualify for a modification under the Home Affordable Modification Program (HAMP), you only need to show that you are at risk of imminent default and that the mortgage you’re seeking to modify is on your primary residence. You can also qualify for most in-house (sometimes called “proprietary”) loan modifications if you’re current in your payments as well.
The servicer benefits if you default
Servicers make their revenue from servicing your loan on behalf of the beneficiary. When a servicer works for a securitized trust they make a steady fee based on the total sum value of all the loans they service for the trust. Missed payments are added as principle to your balance which increases the loan pool which increases the servicer’s fee. The longer your loan stays in default, the more arrears you build up, the larger your loan balance gets and the more money the servicer makes.
Servicers make additional fees if a borrower defaults in the form of late fees or “process management fees.” The servicer charges these fees to the borrower without any supervision by the beneficiary.
Servicers provide incentives to trick borrowers into foreclosure
Servicers tell borrowers that they need to be in default and often this advice is given by nameless voices on the telephone. This person says: “I’m not supposed to tell you this.” What the person on the phone doesn’t tell you is the bonus they receive in their paycheck for every borrower they talk to that goes into default.
In fact some borrowers that were tricked into defaulting this way were not eligible for loan modifications for various reasons that would have been apparent after a few questions asked and answered. One of the things that might make you ineligible is having equity in your property, and this is easily discerned by asking a few questions. The reason the person on the telephone didn’t tell the borrower they were ineligible, or ask the questions that might help the borrower, is because they might be fired for telling the truth. There is evidence that servicers reward agents that trick borrowers into foreclosure and that supervisors listen in on calls to make sure agents tow the line.
Missed Payments are a Trap for Borrowers
When a servicer tells a borrower to default they are not guaranteeing a loan modification. The servicer also isn’t promising that they won’t report you as late to the credit bureaus. The servicer does not warn you that when a borrower defaults, reporting of the missed payment to the credit bureaus is automatic.
Many a borrower is surprised when after being told by their servicer to default in order to get a modification their credit cards begin to be cancelled and their credit limits slashed. If a borrower has equity in their property they will be prohibited from refinancing or selling their property. The borrowers are now trapped and at the mercy of their servicer.
Servicer Trick # 2
Delaying your modification until it is too late for you to get a modification
While you are attempting to get your modification the servicer will send you letters saying they want to help you and telling you about available programs. They will give you a single point of contact as required by California Civil Code §2923.7(a) and a phone number to call, but never an email. You may get to talk to your single point of contact or you may not. You will rarely get an email for your single point of contact which would allow you to create a paper trail.
The servicer will always provide you with a fax number where you can send your loan modification application, but they will rarely give you a phone number where you can call to see if your fax was received. This means that you have to wait for a letter saying that your faxed application was received and notice of any deficiencies. This is the first of many delaying tactics.
Once your application is received the servicer will tell you if documents are missing. The servicer will take as long as possible to send you a letter stating that your application was incomplete. The servicer will delay so long that your bank statements and pay stubs are no longer current and then send you a letter saying you that you need to resubmit these items because your information is no longer current. The servicer may do this repeatedly until it feels like they are intentionally trying to drive you insane, but for them it is only business.
Servicers benefit by not modifying
The increased profit that a servicer makes when you default starts with the late fees or “process management fees” they add to your loan balance. Missed payments are also added as your principle balance which increases the servicer’s fee from the beneficiary because it increases the net value of the loan pool they are servicing. The longer your loan stays in default, the more arrears you build up, the larger your loan balance gets and the more money the servicer makes.
The servicer also benefits if they keep you in default more than a year which is why they delay you past that time. After two (2) years of default there are no government modifications that you can be eligible for which means that you are at the servicer’s mercy to take one of their “in-house” modifications. These modifications are often as predatory as the original loan you were trying to modify and they are designed to fail as was your original subprime loan.
Servicer Trick # 3
Now you See it Now you Don’t Modification
In our practice we have seen many instances where a borrower receives a modification, makes payments on the modification for a year or more, and then has the modification withdrawn by the servicer. This may come in the form of a new modification contract sent to you in the mail or a letter with an addendum to your contract. The result is usually a balloon payment, or an increased balloon payment, added to the end of your loan.
When a servicer changes a previously granted loan modification they usually point to a clause in the contract that allows them to correct any mistake they find. These types of clauses are similar to those put into mortgages to allow a lender to call in a Promissory NOTE if there are mistakes in the borrower’s application such as false statements constituting mortgage fraud. In loan modification contracts servicers persistently use these types of clauses to claim they made a mistake when they simply want to charge you more money.
Once you have taken a modification you can’t default and expect any statutory protection because the Homeowner’s Bill of Rights only protects borrowers that are applying for a first time for a loan modification. The only way for a borrower to defeat this last minute shell game is to sue the servicer for breach of contract and many clients can’t afford to do this. The servicer figures out who can’t afford to fight back and that’s who they do this to. A borrower has to weigh the cost of suit against the increased balloon payment they will have to make.
This is a trick played on the elderly and poor. It’s win-win for the servicer because they will either get more money from you or force you to default. In the end they’ll get their balloon payment or they’ll get your house.
Servicer Trick # 4
Switching Servicers in the Middle of a Modification
Many clients come to us at Advocate Legal when their servicing rights are switched in the middle of a loan modification. The switch may occur just as they have a complete application submitted; it may happen after they are approved for a modification; and it may happen a few months after they are approved and have made one or two payments on their trial modification. After all their hard work, the rug is effectively pulled out from under them.
If the borrower is not yet approved for a modification the new servicer will tell them they have to start over. If the borrower has been approved for a modification, the new servicer will refuse to honor it. If the borrower is in the middle of a trial modification, the servicer will refuse their payments. All of this is wrong, but a borrower has little choice but to bring a lawsuit.
California law holds that a lender may not foreclose during a loan modification. That means they can’t foreclose when your application is approved, or when your application is pending. Switching servicers is a way to get around this law and avoid modification.
California law also views a trial modification as an enforceable agreement. This means that if you satisfy the conditions of the trial modification the servicer must offer you a permanent modification. If the servicer that you get switched to refuses to honor your trial modification, you can sue them for breach of your agreement.
If your servicing rights are switched after a submitted application you will have no choice but to submit your application again. The servicer won’t be able to foreclose, but they will be able to delay you. If they proceed with foreclosure while reviewing your application, that is a violation of statute.
If your servicer switches you in the middle of a trial payment plan and the new servicer refuses to accept your payments, you should sue immediately for breach of an existing agreement. Trying to work with your new servicer is usually a mistake because the delay works in their favor. Filing litigation immediately will stop your arrears from building up.
Servicer Trick # 5
The Servicer Starts Refusing Payments
Many clients come to us at Advocate Legal when their servicer stops accepting their payments. Sometimes the servicer will add insurance or taxes to your loan payment and suddenly return your checks because you are paying the wrong amount. In some cases when the servicer stops accepting payments they will give no reason at all.
When a servicer stops accepting your payments most times they will offer you a loan modification. This will ensure that you don’t seek a legal remedy for their breach of your loan contract. Borrowers are lured into a longer default by the promise of a lower payment they never asked for.
When a servicer stops accepting your payments it seems illogical that they would actually make more money, but they do. This is because your default adds to the principle balance of your loan and also allows them to rack up penalties and fees which they will either charge to you or the beneficiary. If you cure your default, or you accept a forced loan modification, the servicer’s penalties and fees will be added to your principle balance. If you default and foreclose they will collect those fees [off the top(creaming fees)] before any money gets paid to the investor.
When the servicer stops accepting payments from a widow or widower it is usually with the excuse that you are “not on the loan,” which is true but also irrelevant. When a servicer stops accepting loan payments from a surviving spouse because he or she was not on a party to the mortgage they are effectively calling in the Promissory NOTE which is illegal by federal statute. To delay the surviving spouse from seeking a legal remedy, the servicer will offer a loan modification, and eventually stop accepting those payments using the same argument that you are “not on the loan.”
When the servicer stops accepting your payments it’s a trick to push you into foreclosure and most people fall for it. This is because it is human nature to use your mortgage money for the extra things you want and not put it in the bank to eventually pay your mortgage or an attorney. It is also hard for most homeowners to accept what is happening to them when they haven’t done anything wrong.
If you act quickly after a servicer stops accepting your payments you have a good chance to get your loan reinstated and legal fees awarded by the court. This is because by acting quickly you have shown the court that you are the victim and all you want is to pay your mortgage. The longer you wait, the more likely the court is to believe the servicer when they come into court and say that it was you that stopped paying.
 Sutcliffe v. Wells Fargo Bank, N.A. (N.D.Cal. 2012) 283 F.R.D. 533