Archive for March 15th, 2012

Servicers and FHA Payoffs: The Root of Foreclosure Evil

For years, I’ve been frustrated beyond belief at the common misperception that delays in foreclosure cases are a result of homeowners or their attorneys.  Any contention that homeowners are the cause of delay is a complete and utter farce, and, slowly but surely, I’m developing the evidence to prove it.  In fact, it’s becoming apparent that servicers are the root of all evil in the foreclosure context.

To begin, let’s recount a conversation I just had with a plaintiff’s attorney.  I presented what I thought was a very reasonable settlement proposal in a foreclosure case when he said he “doubted” that Bank of America would agree to what I was proposing.  I looked at the file and responded: “Who said anything about Bank of America?  The Plaintiff is Bank of New York Mellon, as Trustee.”  His response?  “Bank of America is the servicer, and Bank of America is our client.”


I’ve lamented this problem previously, coining servicers “the Wizard Behind the Curtain.”  Essentially, I’ve come to realize that servicers are the ones controlling the foreclosure arena, not the plaintiffs who are typically named in those cases (who often don’t even realize those cases are pending).  To illustrate, as in my conversation above, it’s clear the servicers are the ones pulling the strings, even when the owner of the Note is named as the plaintiff.

Servicers are the ones driving the foreclosure train, not Plaintiffs.   

I wish foreclosure judges started forcing plaintiffs’ lawyers who appear before them to identify their clients.  I’m certain, in most cases, they’d be forced to admit their “client” is a servicer, not the plaintiff identified in the lawsuit.

As you contemplate the significant role of servicers in the foreclosure arena, let me bring you back to my recent blog titled Banks Want Real Estate.  In it, I showed that nearly 90% of the purchasers at foreclosure sales aren’t third-party purchasers, but the “plaintiffs” who prosecuted the foreclosure.  In that blog, I openly wondered why that was so.  Why would plaintiffs routinely bid far in excess of a property’s fair market value at a foreclosure sale, essentially shutting out every possible third-party purchaser and ensuring title reverts back to the plaintiffs?

The answer is beginning to unfold, and it’s an awful, awful picture.

Apparently, the vast majority of mortgages entered during the heyday are insured by the Federal Housing Administration (FHA).  So when there’s a foreclosure, and the mortgage isn’t paid, the FHA cuts a check.  The bigger the judgment amount, the bigger the check.

Think about that dynamic.

The FHA insures these mortgages. 

The bigger the judgment amount, the bigger the check. 

With this in mind, is there really any doubt why servicers are happy to proceed so slowly with foreclosure cases?  The longer a case proceeds, the longer the servicer can tack on default interest at 18% to the judgment amount.  Of course, this increases the amount of the judgment and increases the amount of the FHA payoff.

Want to know why foreclosure cases so often have so many garbage fees and costs associated with them (service of process on unnamed tenants when the property is homestead or abandoned, forced place insurance at ridiculously high rates, etc., etc.)?  The more junk costs that get added into a file, the greater the judgment amount, the more that gets collected from FHA.

I’m going to dig more into these problems, and my analysis will start with the documentation from the AG settlement.  At this point, it seems that “robo-signing” was nothing more than a distraction and that the real issue in the AG settlement was the banks’ failure to provide clear title to the FHA in exchange for the monies FHA was paying these servicers after foreclosures were finished.

This is disgusting stuff, and I assure you that I’ll comment more when I can.

Mark Stopa

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