Mortgage servicers handle loan modification applications from homeowners. Unfortunately, servicers sometimes make serious errors when processing modification requests. This can cause a number of problems for a homeowner, like 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.
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:
Basically, a servicer acts as the agent of the owner of the loan (the mortgagee or investor). (Learn more about how mortgage servicing works.)
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:
(Learn more about loan modifications.)
Below are some common problems that mortgage servicers perpetrate in the loan modification process.
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:
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 federal laws that protect homeowners who're facing a foreclosure.)
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. But this is almost always incorrect. For most modification programs, you may be either behind in payments or simply in danger of falling behind (called being in danger of "imminent default") on your mortgage payments.
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—like pay stubs and bank 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.
Sometimes, a servicer makes an error in a calculation when evaluating a borrower for a loan modification, which leads to an improper denial.
NPV calculations. 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:
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.
Under federal law, if a trial or permanent loan modification is denied because of a NPV calculation, the servicer must include the inputs used in the net present value calculation in the denial notice.
Other calculations. Other kinds of miscalculations can lead to a modification error. For example, in 2018, Wells Fargo admitted that due to a computer glitch, it failed to give modifications to about 625 mortgage-loan borrowers—even though they qualified for relief. The bank eventually carried out foreclosures on 400 of those homeowners. (To learn more, see Wells Fargo Might Have Wrongfully Foreclosed on 400 Homes.)
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 are common in the mortgage industry. In some cases, the new servicer fails to review an already submitted loss mitigation application (that is, an application for a loan modification or other foreclosure avoidance option) or fails to honor the modification agreement with the previous servicer.
Under federal law, if a complete loss mitigation application is pending at the time of the transfer, but has not been evaluated, the new servicer has to review the application within 30 days of the transfer date.
Also, a servicing transfer doesn't affect a borrower's ability to accept or reject a loss mitigation option offered by the prior servicer. If a new servicer comes into the picture and the time frame for accepting or rejecting a loss mitigation option offered by the old servicer has not expired as of the transfer date, the new servicer must allow the borrower to accept or reject the offer during the unexpired balance of the applicable time period.
Mortgage servicers that commit any of the violations mentioned in this article could cause you to (among other things):
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.