Foreclosure fraud: How you can be driven to default even though you pay on time
- October 14, 2010
- 4 comments
- Posted in Latest Posts, Real Estate, Savings & Debt
The new, 49-state investigation into foreclosure frauds comes as no surprise to people who follow the mortgage service business. Shoddy, deceptive paperwork has plagued homeowners for years. In the industry’s slimy underside, firms push borrowers into default and foreclosure, even when they’ve been making payments on time.
Their business model makes defaults profitable, says Marie McDonnell who has been auditing mortgages for accuracy since 1986. The ugly chain of deception starts with the way a servicer might handle your escrow account.
A mortgage service company collects your monthly payments, deducts a fee, and passes the remainder to the investors who own the loan. The majority of the servicing is done by big banks, such as JPMorgan Chase, Wells Fargo, and Bank of America. Your payments usually include a sum for property taxes and homeowners insurance premiums, which goes into an escrow account. The servicer uses that account to pay the taxes and premiums as they come due.
However, every homeowner should check his or her mortgage escrow account — right now – for one of two wrongs.
First, the servicer might be putting more into escrow than you actually owe, hoping you won’t notice. That gives the bank extra money to earn some interest on. Or second, you might owe more than you realize. That leads to underpayments, default, fat late fees owed and, eventually, foreclosure.
As an example of the first case, take Nathalie Martin, who teaches bankruptcy law at the University of New Mexico. She recently noticed an unusual change in her escrow account. Her property taxes had risen by about $60 a month, yet her servicer — without notice, she says – had started withdrawing an extra $120 from her account. The same thing was happening to some of the clients of the university’s law clinic, who were seeking help with loan modifications or foreclosure notices.
When Martin called her servicer (and actually got a live body instead of a machine), she was told that the extra $60 was a “voluntary” payment on her part. Voluntary? Not likely. The servicer had simply helped itself to her money. You’re supposed to get a notice 30 days before an increase, but servicers don’t always send it out, McDonnell says. Or the borrower overlooks it.
Martin complained and the extra charge was stopped. Her advice to homeowners: Every time your taxes or insurance premiums rise, calculate how much you’ll have to pay over the next year and divide by 12. That’s the amount that servicers should be charging for your escrow each month. They’re allowed a little extra only if there’s a shortage of money in the account they have to prove it.
Also, be sure check your monthly mortgage statements, if you get them (some servicers send statements only once a year). Homeowners with fixed-rate mortgages might not open the envelopes, because they don’t expect their payments to go up. But the servicer might raise your escrow payment — and overcharge you — in advance of a tax change. You have to watch them every minute.
If you accidentally underpay, you fall into a cruel trap.
This happens when you don’t realize that your escrow payments are going to rise. When you make your next payment — at the old rate — it won’t be enough to cover the escrow plus the mortgage payment due.
You might expect the servicer to use the money to cover your mortgage and notify you that the escrow amount was short. But that’s not the way it works. Instead, the bank puts your payment into a “suspense” account.
None of the money is applied to the mortgage due. You’re recorded as being in default. A late fee is charged and your false, bank-manufactured delinquency is reported to the credit bureau. “That’s a theft of mortgage payments,” McDonnell says.
If you don’t realize what’s happening because the servicer doesn’t send monthly statements (or you don’t check your statements), you’ll send the same payment the second month. There’s now enough money to cover the first month you “missed” but not enough for the second month. You’ve officially defaulted again.
At this point, the servicer will probably send you a pre-foreclosure notice, demanding all the past payments due, plus interest and fees. If you can’t come up with a lump sum to settle the demand immediately, you might be foreclosed before you can even begin to straighten out the mess. “It’s a train out of control,” McDonnell says.
There’s another way that a sloppy (or calculating) servicer can force a default. If you pay for homeowners insurance directly, without going through the escrow account, the bank might conclude you’re uninsured. It will buy the insurance for you, without telling you — and again, your regular monthly payment might fall short. The same thing could happen if you let your insurance lapse.
Even worse, the banks buy the insurance from an entity that they have a relationship with, paying two or three times the premium that a homeowner would pay directly, mortgage expert Jack Guttentag says.
McDonnell has audited many mortgages that predatory servicers have pushed into default, even though the homeowners always paid on time. The banks’ incentive? High fees for late payments and for managing the foreclosure process. She believes that defaults became a profit center around 1995. Ever since 2005, servicers have been putting up “absolute resistance” to working thing out with the consumer, “even when I can prove servicer wrongdoing,” she says.
You might be tempted to blame the errors and fraud that led to the current foreclosure freeze on the sheer volume of defaults. In fact, in this poorly regulated industry, the servicers have been getting away with abuse for a very long time. They need to be added to new Consumer Financial Protection Bureau’s lengthening list.
Read more on foreclosure fraud:
Who pays for a foreclosure freeze? We the taxpayers do.
Foreclosure mills: What they do to the housing market
Thinking about a mortgage default? Beware the taxes due
Mortgage tip: Sometimes it’s smarter not to pay
Tags: mortgage default, mortgage escrow accounts, Mortgage foreclosure, mortgage fraud, mortgage servicers
Well, I have another way. In the course of your loan being bundled, pooled, and sold over and over again, these lending institutions (and servicers) often fail to follow the rules by not only assigning the loan to the next one, but by failing to properly record that Assigment in the County and State in which the property in located. CHECK YOUR PUBLIC RECORDS, NOW!! Go onto your county’s clerk of court’s website and check the land records or even better, actually go to your local Clerk’s office and view the entire file of everything in your name that’s been recorded on you and your home. There should be properly filed in YOUR CORRECT NAME, the original mortgage, riders to the mortgage, a Deed. The Note is not filed; the lender keeps the original, hence the problem with the current issues. SOME OF THESE ISSUES COULD BE SOLVED IF THE LENDERS/SERVICERS OR WHOMEVER HAS THE DAMN FILE, WOULD BE REQUIRED TO FILE THE ORIGINAL NOTE WITH THE LAND RECORDS CLERK IN THE COUNTY IN WHICH THE PROPERTY IS LOCATED. Anyway, as your file has passed from one to the other, THEY HAVE FAILED TO FILE, TO PROPERLY RECORD, THESE ASSIGNMENTS. Why is this important, because an Assignment gives the successive person, entity, the right, title and interest in your mortgage loan. And, pursuant to your mortgage documents, you gave them the right to do this,,, SO, MAKE THEM MAKE IT RIGHT! MAKE SURE THEY HAVE FILED THESE ASSIGNMENTS. If they have not properly filed an Assignment in your name on your property in your County, in the County in which the property is located, then they DO NOT HAVE A LEGAL RIGHT TO ENFORCE ANYTHING! THEY HAVE NO LEGAL RIGHTS AT ALL! GO TO AN ATTORNEY!! Or, you can do it yourself by telling the judge to look at the RECORD; they have no Assignment that’s been properly recorded! Lastly, if they suddenly come up with an Assignment AFTER they’ve sued you, they are suing you without standing because they did not have the right to sue you in the first place. Take Care out there….. Go to an attorney and understand what this means or could mean to you…. because this is exactly what has happened to me! Not only did they not have the proper Assignments, the originator of my loan never assigned my loan to the first one, so everyone thereafter was a fraudulent transfer and bingo,,, I win!!! Now, I am not looking for a free-ride, no not at all! But, what I am looking for is for everyone to play by the same rules. If I showed up at a court without the original note or the proper assignment of that note, the judge would laugh at me and dismiss it in a heartbeat. Come on you stupid lenders/servicers let’s get some backbone here. There is certainly enough business without having to screw things up so badly that you make it impossible for anybody to regain their lifes back. Play by the same rules as everyone else!!! And, please remember these rules that I teach my employees and those around me….”YOU DON’T GET WHAT YOU DON’T ASK FOR!” AND…. “THE RECORD SPEAKS ON ITS OWN MERIT!” No assignment, no lawsuit. Take Care, Good Luck, Talk to an attorney about what is specifically happening to you, but do look at your records, make them get it right… you would be made to have it right!
Thanks, Heather, you got it exactly right.
I am hoping you can help me. I have had a mortgage since 2002 and the amount of the mortgage is 100,000 on a 550,000 home. The problem started from the beginning. (I didn’t know until now) The escrow payment was miscalculated and I have continually been “short.” I was told that the mortgage company need to notify me the first year the escrow was short and recalculate it properly. This has never been done. I would receive yearly coupon books and the amount due went from $1350.00 per month to now over 2700.00 per month. When asked about this problem the bank says it is an escrow problem. Did the bank have any obligation to fix this problem and calculate it properly when they initially found out? I am now forced into foreclosure and don’t know where to turn. I even received multiple coupon books for the same year with no answers to which one I should pay. This mortgage was initially with BNY and sole to Everhome. I need some help and I am not sure if my lawyer is really experienced in this matter. Thank you for any help you can give me.
You’re a victim of a foreclosure mill. I wish I could help, but only a lawyer might be able to put a stop to foreclosure. This is more of the rotten, shoddy, banking that’s be stealing away people’s homes. Regulators haven’t even begun to address these frauds, they continue under the radar.