Sometimes, Mortgage servicers don't play fair....

Consumers need to recognize that the company which accepts their mortgage payments is emphatically not the same company that owns their mortgage. Typically, as soon as the borrower becomes committed to the mortgage loan , the loan is sold into a "securitized trust". The securitized trust is filled with other similar loans. The trust is held and maintained by a trustee on behalf of far-flung investors who own shares in the trust. One of the primary duties of the trustee is to enter into a "pooling and servicing agreement" with a suitable "servicer". The servicer is a separate company which purports to have sufficient expertise to act as the "front" to the mortgage. The servicing company is the "face" of the mortgage as perceived by the consumer/borrower. The servicer receives and keeps track of payments from the borrowers on behalf of the trustee for the benefit of the investors. The servicer typically has the discretion to add late fees, to declare a default, and to decide whether or not to foreclose. In the case of a loan in default, the servicer is sometimes bound by "servicing guidelines" promulgated by HUD, or in other cases by Fannie Mae or Freddie Mac.

Due to the manner in which the servicer is usually related to the trustee pursuant to the "pooling and servicing agreement", the servicer can have little incentive to employ measures to help struggling borrowers. Oftentimes, servicers make more money when borrowers default, due to late fees, property inspection fees, broker price opinion (BPO) fees, and other fees which servicers are authorized to charge to the mortgage account. For this reason, servicers can sometimes become "predatory".

This leads us to the Businessweek article which inspired this post.

Later posts will develop the concepts of securitization and predatory servicing in greater detail.