A few months ago, Ceith and Louise Sinclair of Altadena, California, were told that their home had been sold. It was the first time they’d heard that it was for sale.
Their mortgage servicer, Nationstar, foreclosed on them without their knowledge, and sold the house to an investment company. If it wasn’t for the Sinclairs going to a local ABC affiliate and describing their horror story, they would have been thrown out on the street, despite never missing a mortgage payment. It’s impossible to know how many homeowners who didn’t get the media to pick up their tale have dealt with a similar catastrophe, and eventually lost their home.
As finance writer Barry Ritholtz has explained, home purchases involve a series of precise safeguards, designed to protect property rights and prevent situations where borrowers who are perfect on their payments get evicted. “In a nation of laws, contract and property rights, there is no room for errors,” Ritholtz writes. “The only way these errors could have occurred is if several people involved in the process committed criminal fraud.”
Any observer of the mortgage industry since 2009 is no stranger to foreclosure fraud, and the fact that virtually nobody has paid the price for this crime. But the case of the Sinclairs involves a new player in that rotten game: Nationstar. Unheralded just a few years ago, the firm, owned by a private equity behemoth, has been buying up the rights to service mortgages, accepting monthly payments and distributing the proceeds to the owners of the loan, taking a little off the top for itself.
Nationstar has racked up an impressively horrible customer service record in its short life, failing to honor prior agreements with borrowers and pursuing illegal foreclosures. The fact that Nationstar and other corrupt companies like it are beginning to corner the market for mortgage servicing should trouble not only homeowners, but the regulators tasked with looking out for them. It didn’t seem possible that a broken mortgage servicing industry could get worse, but it has.
Nationstar is at the forefront of a massive shift in mortgage servicing. In the past few years, the largest servicers were arms of major banks, like JPMorgan Chase, Wells Fargo, Bank of America, Citi and Ally Bank. Those were the “big five” servicers sanctioned for an array of fraudulent conduct in the National Mortgage Settlement, which mandated specific standards for servicers to follow, like providing a single point of contact for customers and an end to “dual tracking,” when a servicer offers a trial modification to a borrower and pursues foreclosure at the same time.
The banks realized that they could sell the servicing rights and evade these standards, along with the higher labor costs associated with implementing them. What’s more, they would avoid new, higher capital requirements associated with holding servicing assets, allowing them to give bigger dividends to shareholders and bigger bonuses to executives.
So the big banks started selling off their servicing rights, not to other banks, but to specialty financial services firms like Green Tree, Nationstar, Walter Investment Management and Ocwen, all of whom are in kind of an arms race to become the biggest servicer.
Last October, Ocwen purchased the entire servicing portfolio of Ally Bank, covering about $329 billion in loans. Ocwen has also purchased part of JPMorgan Chase’s servicing, as well as a slice from OneWest Bank; it is attempting to dominate the market.
Nationstar acquired business from Bank of America and Aurora Bank in 2012, and more in 2013. Wells Fargo is poised to sell some servicing rights as well, and Nationstar will surely bid for those rights. As of June 30 of this year, Nationstar has the right to collect on $318 billion worth of home loans—growing three-fold in under two years—and it will seek to add even more in the future. The company, majority owned by the private equity firm Fortress Investment Group, recently raised $1.1 billion in capital to buy up more servicing rights from banks around the country.
This means that homeowners victimized by big-bank servicers, who were supposed to get a commitment to honest treatment as part of the National Mortgage Settlement, instead got their servicing rights sold to companies no longer bound by the terms of that settlement. So homeowners lose all of their protections, and often have to start back at square one with their new servicer. For example, if a borrower was in process on a loan modification with their old servicer, the new servicer can choose to simply not recognize that modification, and demand the full monthly payment under threat of foreclosure. This is a very common practice.
What’s more, this new breed of non-bank servicers scooping up all these servicing rights has proven themselves as a bunch of cheats profiting off their customers. Green Tree Servicing has a terrible record of ripoffs. Ocwen has been sued in state court over its practices, including an innovative scam involving sending homeowners a check for $3.50, and claiming that cashing the check automatically enrolls the customer in an appliance insurance plan, which costs $54.95 a month.
Fitch, the credit rating agency, wrote in a research note in June that the growth of non-bank servicers “may pose challenges to a potential orderly transfer of servicing,” and that the involvement of private equity firms “raises questions” about the ultimate endgame for these servicers. In effect, servicing has shifted from big banks to private equity and hedge funds, and neither really have the customer’s needs in mind.
Nationstar is no different in the non-bank servicer space. While the company promised California that it would adhere to all settlement obligations on the servicing rights it purchases, the Sinclairs were subjected to familiar abuse. The family paid their mortgage on time since purchasing their home in 2003. Last year, they received a loan modification. But their servicer sold the rights to Nationstar, and Nationstar didn’t honor the modification. In June, the Sinclairs sent in their mortgage payment, and Nationstar sent it back in full. Then it sold the home. When questioned, Nationstar claimed the Sinclairs didn’t notarize one page of their modification, which turned out to be untrue.
It was a clear attempt to find an excuse to deny the modification and push the Sinclairs into foreclosure. Mortgage servicers actually make more money with foreclosures than with loan modifications, because of how their compensation structure works. Servicers load up various foreclosure fees on homeowners that they get to keep, and they get paid off first in a foreclosure sale. A loan modification simply cuts their percentage balance on the loan.
This is not Nationstar’s only scam. The Consumer Financial Protection Bureau, which recently started examining non-bank servicers, put out a report this summer on the illicit practices of these firms. CFPB found that servicers like Nationstar often failed to inform homeowners about the change in servicing rights when they are transferred, meaning that the homeowner kept paying the wrong servicer. This is a clever way to facilitate late fees; just don’t tell the customer where to send their money.
Servicers also delayed property taxes paid out of escrow accounts, making borrowers late on those taxes and triggering more delinquency fees; failed to refund insurance premiums and other fees due back to borrowers; did not communicate properly with borrowers in need of a loan modification; lost documents solicited from borrowers for that process and made it impossible to complete the applications; failed to even properly file documents associated with the transfer of servicing rights; and charged customers default fees “without adequately documenting the reasons for and amounts of the fees,” and neglected to waive certain fees or interest charges.
CFPB also found that non-bank servicers like Nationstar had no comprehensive compliance management system in place to ensure that they followed all applicable consumer protection laws. Many didn’t even have formal, written policies or independent auditors. They hadn’t been subject to any examination prior to CFPB, so this stands to reason.
Nationstar is being sued in New York’s Supreme Court for auctioning off non-performing loans that it would rather not service at a severe discount, shortchanging investors in the process. The company’s auction sales, made with an online auction company that its private equity parent firm has a “business affiliation” with, end up allowing Nationstar to recoup its take, with all the losses falling on the underlying loan owners. So Nationstar has managed to infuriate both sides of the mortgage deal, the lenders and the borrowers, with its unscrupulous practices.
Getting examiners inside these “specialty” companies is a start, and new servicer rules coming from CFPB in January would cover non-bank servicers as well. But no regulator has the resources to deal with such flagrant abuses. Mortgage servicing is a sewer, and it needs to be completely overhauled from the ground up. If Nationstar represents the future, then until it faces real penalties or an expulsion from the industry for its conduct, private property rights in America will have to be seen as theoretical. Just ask the Sinclairs.