The Servicer Benefits by Your Default
Servicers benefit when you default because they make more money than if you make timely payments. When a mortgage servicer services debt for a securitized trust they make a steady fee based on the total sum value of all the loans they service for that trust. When missed payments are added as principle to your balance it 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 in fees.
Besides the increased value of the loan pool, mortgage servicers make additional fees if a borrower defaults in the form of late fees or “process management fees.” 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. The servicer charges these fees to the borrower and collects them directly from the borrower without any benefit to the beneficiary.
Servicer Trick # 1: Lying You into Default
You may have stopped paying your mortgage because an employee of your lender lied to you on the phone and told you that stopping payments was the only way to get a loan modification and you weren’t aware that person got a bonus for lying. Maybe another employee said you were “in review” for a loan modification when the servicing rights to your loan had already been switched to a new lender, which you did not realize until months later. You were probably extremely frustrated when the person helping with your modification was switched every three months so that you had to start all over again without realizing your lender has an automated system to do this.
A borrower does not need to be in default to request a modification or forbearance. 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 on your payments as well.
Servicers Incentivize Employees to lie to borrowers
When you call your mortgage servicer and a nameless voice on the end of a phone tells you: “I’m not supposed to tell you about this, but…” that’s a red flag. These service workers are paid minimum wage and only receive bonuses when they achieve the required result for their employer – and that is foreclosure. The secret that the nameless voice on the phone will not tell you is that they will receive a bonus in their paycheck for every borrower they help that goes into foreclosure and no bonus if the loan is modified.
Servicer Trick # 2 Ruined Credit
Some borrowers are tricked into defaulting to be eligible for mortgage assistance even though they are clearly ineligible. One of the things that might make you ineligible is having substantial equity in your property, and this is information is available to the representative on the phone with just a few keystrokes. The servicer does not record phone calls to protect you; they record them to monitor the service representatives who might be tempted to tell you the truth.
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 you default reporting of the missed payment to the credit bureaus is automatic. Once you are reported to the credit bureaus, even if you do have equity in your property you will be prohibited from refinancing with a regular refinance. The borrowers are now trapped and at the mercy of their servicer to refinance through a predatory modification.
Servicer Trick # 3: Delay
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 a notice of any deficiencies. This is the first of many delaying tactics.
Once your application is received the servicer will tell you 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 as usual. They are trying to keep you in default as long as possible since the longer you stay in default the more profitable it is for them.
Servicers Have Another Reason for Delaying You
The servicer also benefits if they keep you in default for 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 # 4: Shell Game
In our practice at Advocate Legal, 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 suddenly and inexplicably added to the end of your loan. We have seen this trick played most often with clients for whom English is a second language.
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 the 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 strategically figures out who can’t afford to fight back and that’s who they do this too. A borrower has to weigh the cost of suit against the increased balloon payment they will have to make.
Besides the non-English speaking, this is a trick often played on the elderly and the 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 # 5: Servicer Switch
Many clients come to us at Advocate Legal when their servicing rights are switched in the middle of the loan modification process. The switch may occur just as they have a complete application submitted; it may happen after they are approved for a modification, but the contract has not yet been sent to them; and it may happen a few months after they are approved and have made one or two payments on their trial modification. Whenever it happens, the new mortgage servicer will somehow not be able to find or honor your approved modification. This a great scheme for servicers because they get the funds from the government for modifying your loan and then profit from the sale of your servicing rights, gifting the new servicer with your inevitable foreclosure.
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. 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, 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. The borrower has little choice but to bring a lawsuit, however lawsuits have been successful against this trick.
Servicer Trick # 6: Trial payments plus servicer switch
California law views a trial modification as an enforceable agreement which means that if you satisfy the conditions of the trial modification the servicer must offer you a permanent modification. If the servicer has taken your trial payments and then refuses to give you a modification, you can sue them for breach of your agreement even if they have switched you to a different servicer. Many servicers get around this by accepting trial payments right before they switch you to another servicer.
It took the courts a little bit of time to catch on to what the servicers were doing, but now that foreclosure related cases account for over seventy-percent of all litigation in state courts, the judges have more experience with these cases. In a case in the federal court in the Northern District of California where Wells Fargo refused to provide a permanent modification to a homeowner that had successfully made their trial payments, the court found these to be unfair and deceptive practices and allowed the homeowners to amend their complaint to allege damages. See: Sutcliffe v. Wells Fargo Bank, N.A., 283 F.R.D. 533 (N.D. Cal. 2012).
Servicer Trick # 7: Dual Tracking
Dual tracking is one of the most popular and well-known tactics that mortgage servicers engage in to delay and trick borrowers into a foreclosure sale. This occurs when the mortgage servicer continues to go forward with the foreclosure process even as they claim to be reviewing the borrower’s modification application. In California, this means the servicer will record a Notice of Default, a Notice of Trustee’s Sale, and schedule a foreclosure sale date while the borrower is “in review” for a modification. When the borrower questions this process, the representative that answers the phone will tell them not to worry as the borrower becomes more and more anxious. Finally it will be a few days before the sale when the servicer tells the borrower that their modification is denied, but now it is too late for them to exercise any options to avoid the foreclosure except for a bankruptcy. In a case against Wells Fargo a California Presiding Justice Butz of the Second District accurately described this as “the double cross.” Bustos v. Wells Fargo Bank, N.A., 39 Cal. App. 5th 369, 376, 252 Cal. Rptr. 3d 172, 175 (2019)
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.
For the number one trick that servicers like to play on borrowers see Refusal of Payment.
Contact Experienced Attorneys for Skilled Guidance
If you act quickly in response to one of these servicer tricks there will be time to avoid foreclosure and seek other solutions. With over a decade of experience, our experienced attorneys and staff at Advocate Legal can guide you through this process.