Mortgage servicers collect and process payments from homeowners, as well as handle loss mitigation (foreclosure avoidance) applications and foreclosures for defaulted loans. However, mortgage servicers often make grievous errors when it comes to managing homeowners’ accounts. Read on to learn about common abuses and errors perpetrated by the mortgage servicing industry.
To fully understand the serious problems that can occur in the mortgage servicing industry, you must first understand the players involved in a residential mortgage loan.
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 servicer. Mortgage servicers manage loan accounts on behalf of the mortgagee. The servicer typically handles:
Unfortunately, servicers often engage in harmful servicing practices that can cause a borrower to default on the loan or otherwise lead to foreclosure. Below are some common problems perpetrated by mortgage servicers.
One of the duties of a mortgage servicer is to collect and process payments from the borrower. However, in some cases, a mortgage servicer may:
Mortgage contracts generally allow a loan servicer to charge fees under certain circumstances, such as when the borrower is late on a payment or is in foreclosure. A few examples of these types of fees are:
However, servicers sometimes charge excessive fees or incorrect amounts to the account, which unfairly increases the total balance owed by the borrower. Learn more in Challenging Late & Other Fees in Foreclosure.
Most mortgages and deeds of trust require homeowners to maintain hazard insurance coverage on their property. The property owner will generally purchase a homeowners policy to meet this requirement. However, if the homeowner lets the coverage lapse, the mortgage servicer can obtain insurance coverage at the homeowner’s expense. This is called force-placed insurance. Usually, the servicer adds the cost of the force-placed insurance to the loan payment. (Learn more about force-placed insurance.)
Sometimes, a mortgage servicer may force-place insurance coverage even though the borrower already had other coverage in place. Since force-placed insurance is expensive, it can increase the monthly payment by a large amount. As a result, a homeowner who is already behind in payments or is facing financial difficulties may go into foreclosure when it becomes even more difficult to keep up with the monthly payments.
Dual tracking occurs when the mortgage servicer proceeds with foreclosure while simultaneously working with the borrower on a loan modification. With dual tracking, the foreclosure may be completed even though the loan modification application is still pending.
Efforts have been made to address and correct this problem:
Escrow accounts are established to ensure that real estate taxes and homeowner's insurance get paid. Along with the monthly mortgage payment for principal and interest, the servicer collects funds from the borrower that will be used to make payments for these expenses on behalf of the borrower. But, in some cases, the servicer neglects to make the tax or insurance payment.
Consequently, a homeowner could lose his or her home to a tax foreclosure or face difficulties with uninsured property damage. Additionally, any late fee imposed by the taxing authority or reinstatement fee imposed by the insurance company could improperly be charged to the borrower’s account. These fees could possibly lead to an escrow shortage, which in turn would increase the borrower’s monthly payments.
The abusive practices and errors mentioned in this article represent just a few of the typical offenses that mortgage servicers have been known to commit. There are, of course, others. If you have been the victim of abusive mortgage servicing practices and are facing foreclosure, you should speak to a qualified attorney who can advise you what to do in your particular situation.
For more information on challenging a foreclosure in court, see our article Should You Fight Your Foreclosure in Court?