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Mortgage Servicing and Loan Modifications: 1.2.2.2 Mortgage Broker
Traditionally, mortgage brokers acted as an intermediary between borrowers and lenders. They did not originate loans. Instead, mortgage brokers were merely middlemen bringing home purchasers or homeowners and lenders together. Brokers operated on behalf of borrowers and attempted to find them the best loans available. This type of arrangement created a special duty on the part of the broker to act in the best interest of the borrower.75
Mortgage Servicing and Loan Modifications: 1.2.2.3 Loan Officer
Loan officers are employees of financial institutions who assist home buyers or homeowners in selecting a mortgage loan product offered by their institutions. They are essentially in-house salespeople for banks or mortgage companies. Until recently, loan officers were not required to be individually licensed (although their institutions would generally be licensed entities). Many loan officers must obtain an individual license after undergoing pre-licensing training and passing an exam.80
Mortgage Servicing and Loan Modifications: 1.2.2.4 Mortgage Electronic Registration System (MERS)
The Mortgage Electronic Registration System (MERS) is an electronic registry and clearinghouse established to track ownership and servicing rights in mortgages. For many home loans, MERS, as “nominee” for the lender, is the mortgage owner of record or the beneficiary on a deed of trust. MERS typically has no legal or beneficial interest in the promissory note. Prior to 2012, mortgage servicers often initiated foreclosure proceedings in MERS’s name and served documents on borrowers stating that MERS was foreclosing on their homes.
Mortgage Servicing and Loan Modifications: 1.2.2.5 Real Estate Agent
Real estate is often sold through real estate agents or real estate brokers (not to be confused with mortgage brokers, see § 1.2.2.2, supra). They list the property in newspapers, circulars, and computer databases. The agents usually represent the seller of the property.
Mortgage Servicing and Loan Modifications: 1.2.2.6 Appraiser
Originators, or in some cases mortgages brokers, hire an appraiser or appraisal management company (AMC) to determine the value of the property. AMCs are essentially brokers for appraisal services. They administer networks of independent appraisers to perform appraisals.
Mortgage Servicing and Loan Modifications: 1.2.2.7 Closing Agent or Attorney
The mortgage loan closing or settlement is usually conducted by an agent for the lender.85 Often this agent is an attorney. The name and address of the closing agent, also known as the settlement agent, is listed on the HUD-1 settlement statement or closing disclosure. Homeowners are sometimes under the mistaken impression that the closing agent works for them. This is not surprising since the homeowner pays the agent’s bill for conducting the closing and other pre-closing activity, such as searching title and preparing documents.
Mortgage Servicing and Loan Modifications: 1.2.2.8 Escrow Agent
If all of the monies from the loan proceeds are not distributed at the loan closing, the closing agent is usually responsible for holding the remainder until certain events occur. If it is a home improvement loan, it is common for the remaining proceeds to be paid to a home improvement contractor once work is completed.
Mortgage Servicing and Loan Modifications: 1.2.2.9 Private Mortgage Insurance Companies
Mortgage insurance is common in mortgage transactions involving home purchases. When the borrower’s down payment is less than twenty percent of the purchase price, private mortgage insurance is generally required. The cost of this insurance is added to the borrower’s monthly payment and escrowed by the lender. If the borrower defaults, the mortgage insurer will pay the lender some of the monies not recouped in the foreclosure process.
Mortgage Servicing and Loan Modifications: 1.2.2.10 Government Mortgage Guarantors
There are special government programs that provide mortgage insurance or guarantees to lenders who make mortgage loans to homebuyers who meet certain criteria. These programs are offered by the federal government (the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development; the Rural Housing Service, which is part of the U.S. Department of Agriculture; and the Department of Veterans Affairs) or by a state housing finance agency. Under these programs, the insurance covers close to 100% of losses.
Mortgage Servicing and Loan Modifications: 1.2.3.1 Introduction
After a mortgage loan transaction has been consummated a new set of players frequently comes onto the scene. The rise of the secondary mortgage market and the securitization of mortgage loans created an entirely different cast of characters that play roles during the lifespan of a mortgage loan.
Mortgage Servicing and Loan Modifications: 1.2.3.2 Secondary Mortgage Market
The secondary market is not a place like Wall Street. Rather, this term describes the phenomenon by which originating lenders sell their loans to buyers (often called investors), usually in bulk. This enables mortgage companies specializing in home equity lending to originate large numbers of loans with a comparatively small capital base. Some originators may obtain a line of credit from a major bank or firm, originate mortgage loans, sell the loans to the secondary market, and repay the credit line.
Mortgage Servicing and Loan Modifications: 1.2.3.3 Loan Owner
The loan owner is the entity that has the present right to receive payments on the note. When the owner is also the mortgagee or beneficiary of a deed of trust, it has the right to initiate foreclosure proceedings upon default by the borrower.90
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: 1.2.3.5 Mortgage Servicers
The servicer acts as agent for the owner of a mortgage loan. A servicer collects the monthly payments and interacts with the homeowner on behalf of the loan owner. It may hold monies in escrow to pay the property taxes, homeowner’s insurance, or other similar expenses.
Mortgage Servicing and Loan Modifications: 1.2.3.6 Default Services Providers
Mortgage servicers commonly outsource default services to third parties.
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.