Common Mortgage Servicer Violations in Loan Modifications
Mortgage servicers handle loan modification applications from homeowners. Unfortunately, mortgage servicers sometimes make serious errors when processing loan modification requests. This can cause a number of problems for a homeowner, such as missing out on getting a modification or even a wrongful foreclosure.
Read on to learn about the most common mortgage servicer violations when it comes to loan modifications and find out what to do if any of these things has happened to you.
Understanding the Parties in Mortgage Transactions
To fully understand the errors that can occur in the mortgage servicing industry, you must first understand the players involved in a residential mortgage loan transaction.
Mortgagor. The mortgagor is the individual (the homeowner) who borrows money and pledges the home as security to the lender for the loan.
Mortgagee. The mortgagee is the lender. The mortgagee gives the loan to the mortgagor.
Mortgage Investor. An investor buys loans from lenders. By purchasing mortgage loans from lenders, the mortgage investor provides the lender with funds to use to make additional loans.
Mortgage servicer. Mortgage servicers manage loan accounts on behalf of the mortgagee or investor. The servicer typically:
- sends the monthly mortgage statement to the homeowner
- collects and processes payments
- tracks account balances
- manages the escrow account
- reviews loan modification applications, and
- pursues foreclosure when the mortgagor stops making payments.
Basically, a servicer acts as the agent of the owner of the loan (the mortgagee or investor).
Understanding Loan Modifications
A loan modification is a permanent change to the loan terms to reduce the monthly payments in order to make the loan more affordable for the borrower. In a loan modification, the lender may agree to do one of more of the following:
- reduce the interest rate
- convert from a variable interest rate to a fixed interest rate, or
- extend of the length of the term of the loan.
Common Violations in Loan Modifications
Below are some common problems that mortgage servicers perpetrate in the loan modification process.
Failing to Process the Application in a Timely Manner
Many homeowners have experienced lengthy delays when waiting for the servicer to make a decision on whether or not to grant a loan modification. In some cases, the servicer doesn’t tell the homeowners that they are missing documents necessary for the loan modification decision. In others, the servicer simply doesn’t get around to reviewing the request in a timely manner.
Federal mortgage servicing rules, effective January 10, 2014, aim to reduce these delays. Under these rules, when a mortgage servicer receives a loan modification application from a homeowner 45 days or more before a foreclosure sale, it must:
- review the application
- determine if the application is complete or incomplete, and
- notify the borrower within five days stating that the application is complete or incomplete. (If incomplete, the servicer must describe the information needed to complete the application.)
If the servicer receives a complete application more than 37 days before a foreclosure sale, it must review the application and determine if the borrower qualifies for a loan modification within 30 days. (Learn more about New Federal Rules Protecting Homeowners With Mortgages.)
Telling Homeowners They Have To Be In Default
During the foreclosure crisis, it was commonplace for mortgage servicers to tell homeowners that they couldn’t get a modification unless they were late in payments. Sometimes but not very often servicers still make this statement. However, it is not usually true. For most modification programs, you may be either behind in payments or simply in danger of falling behind on your mortgage payments.
Requiring a Homeowner to Resubmit Information
In some cases, servicers ask homeowners to submit and then resubmit information when applying for a loan modification. This is especially true in the case of income verification documents (such as paystubs and profit and loss statements), which can quickly become outdated in the eyes of the servicer.
In addition, servicers may also sometimes ask borrowers to resubmit documentation when the paperwork gets lost.
If this happens to you, you should resubmit any duplicate information that the servicer requests, but be sure to keep a record of when you sent it, who you sent it to, and send it by some method that you can track.
Using Incorrect Income Information In Processing the NPV (Net Present Value)
When a servicer evaluates a borrower for a loan modification, it looks at financial information about the borrower, the loan, and the property (such as the borrower s income, the unpaid principal balance on the loan, the property s fair market value, etc.). It then sometimes makes a comparison between
- the estimated cash flow the investor will receive if the loan is modified, and
- the investor s cash flow if the loan is foreclosed.
If the investor would be better off if the servicer forecloses on the loan, rather than modifies the loan (this is called NPV or net present value negative), then the servicer doesn’t have to modify the loan. Sometimes servicers make a mistake when calculating the NPV. (The NPV model is complicated, however the CheckMyNPV.com website simplifies the analysis by allowing users to input their own information and receive an immediate NPV assessment.)
Failing to Convert a Trial Modification into a Permanent Modification
Many loan modifications start with a three-month trial period plan. So long as you make three on-time payments during this period, the modification is supposed to become permanent (assuming you still meet the eligibility criteria).
When a servicer promises to modify an eligible loan, homeowners who live up to their end of the bargain expect the servicer to keep that promise. However, many homeowners who have successfully made their trial mortgage modification payments have been unable to get the servicer to make the modifications permanent.
Servicing Transfers in the Middle of a Modification
Servicing transfers are common in the mortgage industry. In some cases, the new servicer fails to honor the modification agreement with the previous servicer.
To address this, recent mortgage servicing rules require the old servicer to send the new servicer:
- any information showing the current status of discussions with a borrower regarding a loan modification, and
- any loan modification agreements entered into with the borrower.
Under the federal rules, the new servicer must also have policies and procedures in place to ensure that it honors existing loan modification agreements.
When You Should Hire an Attorney
Mortgage servicers that commit any of the violations mentioned in this article could cause you to (among other things):
- incur increased fees and costs in order to avoid foreclosure
- lose your savings in a fruitless attempt to get a loan modification
- be wrongfully foreclosed upon, and/or
- miss out on the opportunity to pursue other alternatives to foreclosure, such as a short sale or deed in lieu of foreclosure. (Learn more about alternatives to foreclosure.)
If your mortgage servicer has committed any of the violations mentioned in this article or is otherwise improperly handling your loan modification, you should speak to a qualified attorney who can advise you what to do in your particular situation.