Skip to main content

Search

Mortgage Servicing and Loan Modifications: 1.2.3.4.1 In general

Securitization is the process of packaging loans as securities and selling the rights to the future income stream to investors.101 These rights are pooled in a variety of different ways so that the income stream from a single loan may be divided up and sold as part of two or more different securities. The borrowers’ monthly payments on the loan cover the return to the investors.

Mortgage Servicing and Loan Modifications: 1.2.3.4.2 Players

This subsection lists various players in one type of securitization transaction. But it is important to note that securitizations can be structured in many different ways and the parties involved can be given many different names. It is equally important to realize that these different entities are not unrelated or independent of each other. Instead, an intentionally complex web of relationships was worked out in an attempt to insulate various parties from the conduct of the originating lender.

Originator/Lender. The originator of the loans.

Mortgage Servicing and Loan Modifications: 1.2.3.4.3 Documentation

The primary contractual document underlying a securitization transaction is the pooling and servicing agreement (PSA). The PSA establishes the securitization loan trust and the various classes of bondholders. It contains the obligations of the servicer and the various “representations and warranties” of the parties to the transaction. In addition, there are other documents associated with the transaction including one or more mortgage loan purchase agreements, an interim servicing agreement, an underwriting agreement, a warehouse agreement, and an insurance agreement.

Mortgage Servicing and Loan Modifications: 1.2.3.7 Lender’s Foreclosure Attorney

The lender’s foreclosure attorney is also an agent with delegated authority from the mortgage owner, although usually the attorney is hired by the servicer. The attorney may appear in the process when the servicer instructs the attorney to accelerate the debt and proceed to foreclosure. The homeowner usually pays the fee for this attorney because the mortgage or loan note specifies that this cost can be passed onto the borrower. However, in most jurisdictions the homeowner cannot be required to pay more than “reasonable” fees.121

Mortgage Servicing and Loan Modifications: 1.2.3.8 Foreclosing Trustee

In states that use a deed of trust as the underlying security instrument for a home loan, the borrower technically conveys title to the property to a trustee who holds the property for the benefit of the originator. The trustee is typically a title company, escrow company, or other local company specializing in foreclosure services. In certain jurisdictions foreclosure law firms are designated to serve as trustees.

Mortgage Servicing and Loan Modifications: 1.2.3.9 REO Management Companies

The term “REO” stands for real estate owned. It refers to property that is in possession of the mortgage owner as a result of foreclosure. Owners and/or servicers may outsource the management of these properties to a specialized company. REO management companies may be responsible for preserving and monitoring property after foreclosure, marketing and selling property, and dealing with homeowners that remain on the property after the foreclosure.

Mortgage Servicing and Loan Modifications: 1.3.1 In General

Mortgage servicing is the management of mortgage loans from the time they are originated until they are satisfied or foreclosed. The vast majority of residential mortgage loans are managed by “servicers” for the benefit of the loan owners. Servicers exist primarily to collect and process payments. They are also responsible for sending monthly statements, keeping track of account balances, handling escrow accounts, engaging in loss mitigation, and prosecuting foreclosures. In effect, servicers provide the critical link between mortgage borrowers and mortgage owners.

Mortgage Servicing and Loan Modifications: 1.3.2 Servicer Compensation

Customarily, the servicer collects a monthly fee in return for the services provided. This fee is based on the outstanding principal loan balance and typically ranges from twenty-five basis points (prime loans) to 50 basis points (subprime loans).124 For example, a securitized loan pool with an outstanding balance of $900 million and a thirty-eight basis point servicing fee would generate yearly income of approximately $3.42 million for the servicer. In addition, the servicer is entitled to keep “float income” and ancillary fees.

Mortgage Servicing and Loan Modifications: 1.3.3 Servicer Cost Structure

Numerous costs go into servicing residential mortgage loans including personnel, technology, and overhead costs. Servicing performing loans, which is highly automated, is less expensive than servicing non-performing loans, which is more labor-intensive. In order to reduce costs, particularly with respect to non-performing loans, many servicers have offshored or outsourced critical servicing functions.

Mortgage Servicing and Loan Modifications: 1.4.1 Introduction

The life of a mortgage loan presents many opportunities for servicer error and abuse. In general terms, abusive servicing occurs when a servicer seeks to collect unwarranted fees or other costs from borrowers, engages in unfair collection practices, or through its own improper behavior precipitates borrower default or foreclosure.132 The effect of mortgage servicing errors and abuses can be severe.

Mortgage Servicing and Loan Modifications: 1.4.2 Errors and Abuses During the Life of a Mortgage Loan

Servicing errors and abuses can occur at any time during the life of the loan including before default. Many times, pre-default abuses such as the misapplication of payments or improper force-placed insurance, if not corrected by the servicer, can lead the borrower down the path to default. While these abuses may be common before default, they can occur at any time. As a result, advocates are encouraged to engage in a rolling analysis of the potential errors and abuses regardless of the borrower’s exact situation.

Mortgage Servicing and Loan Modifications: 1.4.3 First Steps

When borrowers seek assistance with mortgage related problems it is important to perform an initial review of the case to determine any immediate needs before moving onto a more thorough analysis. Borrowers present cases in many different stages: some seek legal guidance prior to default, and others may not seek assistance until after a foreclosure sale has been completed. Some borrowers have detailed records, including loan documents, evidence of payments, and notes of telephone conversations with the servicer.

Mortgage Servicing and Loan Modifications: 1.4.5 Analyze for Servicing Claims

The servicer’s actions can lead to a number of potential legal claims. These may provide a basis for affirmative claims, for opposing a nonjudicial sale or for defending against a judicial foreclosure. Claims against servicers can also result in monetary relief when raised in a complaint or counterclaim. Mortgage servicers are more heavily regulated today than they were before the foreclosure crisis. Federal and state laws now provide concrete remedies when servicers fail to comply with many basic servicing obligations, including obligations pertaining to the conduct of foreclosures.

Mortgage Servicing and Loan Modifications: Bankruptcy to Stop Foreclosure

Automatic Stay

  • • Answer to Application for Abandonment of Real Estate
  • • Complaint Seeking Damages for Violation of Automatic Stay and Unfair Trade Practices
  • • Letter to Creditors Giving Notice of Stay
  • • Motion to Reimpose Stay After Relief from Stay Has Been Granted

Claims

Litigated Case

Mortgage Servicing and Loan Modifications: Foreclosure Defense

FHA, VA Loans

  • • Answer to FHA Home Foreclosure
  • • Document Requests re FHA Home Foreclosures
  • • Memo in Opposition to Summary Judgment re FHA Home Foreclosure
  • • Veteran’s Letter to VA Concerning Mortgage Foreclosure

HAMP-Related Defenses and Claims

Failure to Convert Trial to Permanent Modification

Mortgage Servicing and Loan Modifications: Tax Issues

  • • Alternative Letter to Lender’s Attorney That 1099 Notice Not Required
  • • Letter Explaining That No IRS Form 1099 Should Issue on a Contested Liability
  • • Letter to Client re Tax Liability
  • • Letter to Client re Tax Liability (Involving Qualified Principal Residence)
  • • Letter to Lender’s Attorney That 1099 Notice Not Required
  • • Settlement Agreeme

Mortgage Servicing and Loan Modifications: Wrongful Foreclosure, Collection Abuse

  • • Amicus Brief in Case Where Bank Failed to Provide 90-Day Notice of Foreclosure
  • • Brief and Reply Brief Applying FDCPA to Foreclosure of a Deed of Trust
  • • Class Complaint for FDCPA Claims Against Purchaser of Mortgage Loan
  • • Complaint Against Mortgage Servicer for Foreclosing When Promising a Modification
  • • FDCPA Complaint Applying to Foreclosure of a Deed of Trust