Busted: Bankers and The Global Economy

May 19, 2008

Mortgage Vultures and Congress

In a recent hearing on mortgage servicing, Senators probed Countrywide Mortgage on exactly how mortgage servicers make their profits. Servicers earn revenue through a fee that is a percentage of the mortgage, float income from interest on temporarily-held funds, and through retained fees like late charges and other fees paid by borrowers.

Senator Charles Schumer described the addition of these fees as “piling on”. Mr. Schumer is convinced that a “vulture mentality” is developing among mortgage servicers as defaults rise. Senator Schumer called Steve Bailey of Countrywide to task for attempting to deny that mortgage servicers profit everyday from delinquent homeowners, even when borrowers and loan holders might benefit if the family retained its home, rather than struggle to pay an avalanche of default costs.

The president of Countrywide, David Sambol, pointed out in 2007 that increased operating expenses in tough times are fully offset by increases in income in their mortgage servicing operation. How? Profits are made through greater fee income from items like late charges and from internal vendor functions in foreclosure trustee, default title services and property inspection services.

Defaults do not cut into profits. Fee income tending to “fully offset” increased operating expenses suggests that in at least some cases, a servicer will make money when a loan is non-performing, especially when a loan is repeatedly non-performing but ultimately the borrower resumes payment, for example, in cases involving bankruptcy.

“In-sourced vendor functions” are highly suspect. Congress suspects that agents bloat their actual costs of collection to build a profit margin. This is illegal. Most mortgages only permit the recovery of “costs,” which most courts read to mean actual costs incurred, not some amount chosen to “offset” the costs of servicing delinquent loans.

Recent legal opinion of bankruptcy judges, combined with the statements of Countrywide suggest that Senator Schumer is generous in calling servicers’ practices “piling on.” The concepts of “predatory practices”, “outright fraud” and “ripping off” are more appropriate terms.

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