Loan Servicers Sloppiness Exposed
For quite some time, there have been complaints that the reason why so many homeowners have defaulted, and foreclosure levels are so high, is because “they don’t have enough skin in the game.” The theory is that homeowners who have put little-to-nothing down on their home purchase are more likely to default than those who’ve contributed a substantial down payment, because they have less to lose if their home goes to foreclosure. By extension, it is believed that those with larger down payments will exert more effort to avoid foreclosure and keep their homes.
This line of reasoning seems both logical and intuitively on-target. So, let’s apply the same thinking to the loan servicing industry.
In my avoid foreclosure series, one of the things that I focus on is that loan servicers are pretty lax in their standard of care when it comes to handling loans in default, and properties headed to foreclosure.
One of the fundamental reasons for this sloppiness, in my opinion, is that the loan servicer has very little to lose if a property goes to foreclosure. The monthly servicing fee on any one given loan is a very small portion of the monthly payment. If your measly little loan is worth somewhere between $65-200/month to a servicer, exactly how motivated do you expect them to be to give you a loan modification and help you to avoid foreclosure?
Add to that the fact that they’ve got tens to hundreds of thousands of loans to service, and it’s clear why a servicer might prefer to see you go, rather than help you to keep your home. And, your loan is eating up resources, so they’re probably losing money on your file. Add to that the fact that they have to advance to the investor the payments you haven’t made, they’ll probably recoup those costs more quickly by foreclosing than completing a loan modification.
So, I’m having difficulty seeing why this lack of skin in the game theory isn’t being applied to servicers. Recently, Calculated Risk had a story on Banks Sell Some REOs in Bulk below Market Prices. It seems that some servicers have let a few homes go for significantly less than “fair market value,” whatever that means in today’s climate. Apparently, some investors have been buying these REO homes and then flipping them without having to improve the properties.
For many years, the problem with the handling of REO’s is that the lenders were asking retail prices for homes that were in awful condition. Miraculously, they were often getting these prices. Instead of selling the properties to competent professionals who would buy them at reasonable cost and make the necessary improvements, they were foisting them on retail buyers. Many of these homeowners-to-be were financially unsophisticated, with weak credit scores and more mechanical skill than capital. They’d buy these homes with the easy financing that was available at the time, and later find themselves woefully short of cash to make the needed repairs. This eventually led to a glut of repairs in really awful shape, which were increasingly difficult to unload.
Now, the pendulum has swung in the opposite direction in some cases. Faced with bloated inventories, these homes are being packaged and sold in bulk. Occasionally, a home is re-sold for significantly less than its retail value. Well folks, when you buy in bulk, you’d best have a few gems in there, or it’s not worth making the purchase.
For those completely aghast at this prospect, I suggest you pick up a copy of Thomas Sowell’s “Basic Economics” and read the section on the value of middlemen. While it’s popular to bash middlemen who take a cut of potential profits, holding out for the last dollar on every single piece of inventory is inefficient and would likely cost more in the end to collect than letting a few good ones go with the bad ones. And believe me, there are a LOT of bad ones in every bunch.
The actions of some servicers that I’ve seen border on a violation of fiduciary duty. And some have clearly crossed the line. The crux of the matter, in my opinion, is the low margin in this business, leaving servicers with very little interest in any one given loan.
The excuse that some lenders offer is that, “We’re swamped.” or “We service X million loans.” This sounds to me like, “We’re big, so we suck.” Of course, out of the other side of their mouths, they’re promoting their size as an asset to potential borrowers who are in search of a home loan.
On the other hand, I recently dealt with a “Mom and Pop” shop that seemed hell-bent on foreclosure, looking for any excuse possible to take away the home, rather than offer a loan modification to a borrower who would have been a slam dunk at any major servicer.
Of course, this particular investor had very little “skin in the game” themselves, having just acquired the note for what was likely pennies on the dollar. Funny what a game changer “skin” is in the area of loan modifications for those who want to avoid foreclosure.
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Tags: "skin in the game", loan servicers, loan servicing, REO