When you obtain a home mortgage, auto loan, or other sort of collateral loan, you are contractually bound to follow certain standards. Following your signature, the documents are forwarded to a third-party vendor employed by the bank to manage its loan portfolios. You may be unaware of certain aspects of your mortgage.
Your lender is not the party responsible for servicing your debt.
- Borrowers are not the consumers; lenders are, and collateral loans were treated as commodities, with production quotas and cost-per-loan servicing contracts prevailing over the borrower’s interests.
- Loan servicers profit from foreclosures because they receive funds from debtors and the government.
- Regulation is not as onerous as it appears – loan servicers prepare reports in advance of any regulatory inspection.
- There is no such thing as a “Corporate Office” – when a customer service representative sends a request to the corporate office, the request is handled in the same building.
1. The Bank Is Not the Lender of Your Mortgage
In the vast majority of cases in the United States, the lending institution funding a home mortgage is not a bank (Chase, Wells Fargo, etc.). The bank serves as a loan servicer, whereas the actual investor is either the United States government, via Fannie Mae, Freddie Mac (under FHFA conservatorship), the VA, or the FHA, or private investors via mortgage-backed securities.
As loan servicers, these banks represent the collateral loans, and as a result, the general public has grown accustomed to referring to these middlemen simply as lenders.
Additionally, the media frequently uses the terms interchangeably, adding to the misunderstanding.
If you want to refer to a bank as your mortgage lender, you can do so by referring to the Federal Home Loan Banks, a group of 11 government-sponsored banks that provide liquidity to support housing finance (also known as FHLBanks).
The FHLBanks lend the funds to local “lenders,” who then utilise the funds to finance the actual property purchase.
2. You Are a Product, Not a Customer
Because loan servicers and lenders have a vendor-client relationship, the homeowner is irrelevant. The loan tracker’s customer is the loan servicer, who in turn is the lender’s customer.
Your collateral loan is merely an asset, and service contracts (together with their associated Service Level Agreements) control how your loan is serviced far more than you could.
The government ultimately decides the criteria that lending services must follow, so if you’re facing foreclosure or repossession, you’re better off contacting your local congressman than your local bank representative.
3. Banks Profit More When You Default
Loan servicers are compensated regardless of whether the borrower pays. Indeed, it is profitable for lenders if borrowers default – when a loan defaults, additional servicing is required, and the servicer earns more money.
When the servicer handles a foreclosure (which is also handled by a third-party vendor), the loan tracker insures the property with proprietary real-estate-owned (REO) insurance, which is 10 times the cost of standard homeowners insurance.
Many mortgages in the United States are interest-only loans, which means that the principal balance is not affected by payments made during the first five to 10 years. REO insurance became widespread as a result of millions of homeowners owing more than the value of their homes due to interest-only loans.
By foreclosing on the property, the lender can then resell it and charge another occupant, while still holding the foreclosed borrower accountable for the remainder of their term.
This crams numerous mortgages into the same timeframe, and the additional expenses associated with foreclosure maximize the return on investment for property investors, who would have gained only around 4% if a single borrower paid on time.
4. Regulators Forewarned Us About Unexpected Visits
As an operations manager, I was frequently invited to participate in “tours” of the workplace by prospective loan servicing clients and regulators, neither of whom ever saw the entire picture.
The shortest notice we ever received for one of these tours was two days, and middle management made it a priority to manufacture an excellent tour, ensuring that reports are prepared and work is queued to ensure a flawless experience for the tourist.
I’ll never forget when in 2008, two of our largest clients declared bankruptcy.
Not two days after learning of our clients’ difficulties, they shipped all their scattered documents to our offices in order to remove them from the premises before the authorities audited them.
Although we were “regulated” by FEMA for flood zoning issues during Hurricane Katrina, the FHFA, the New York Department of Financial Services, and numerous other state and federal agencies, ultimately nobody watched what we did – they only saw what we presented them.
Related: 5 Ways to Decrease Loan Stress
5. “Corporate Headquarters” Is a Myth
Even though I had the authority to change your escrow account, loan status, and any other information about your loan’s history as a loan tracker, I had no outside line that customers could contact. I used a phone for external communications exclusively when speaking with our corporate clients.
On the other hand, the customer service people you spoke with regarding loan servicers were transferred to our call centres, where they identified themselves as representatives from the bank you assumed was your lender.
These representatives may have the ability to notate your account, but my team eventually researched and changed the loan.
We weren’t in some ivory tower – in fact, we shared cubicles – yet you could never speak to me. Rather than that, you were informed that your request would be referred to corporate, which would make the final determination.
I have no regrets about my time spent in the finance industry. As is the case with the normal person, I entered my profession knowing nothing about mortgages, insurance, or banking. I discovered along the way that I was a contributing factor to the problem.
Now, I devote my time to exposing the inner workings of banks and bringing the industry’s much-needed transparency.