Tens of millions of Americans with mortgages have been put in a tough spot by the coronavirus crisis. As of May 3, around 4 million homeowners were in forbearance plans, and mortgage delinquencies were on the rise. Many more consumers will likely seek forbearance or loan modifications in the weeks and months ahead.
This means that millions of Americans are about to spend a whole lot more time with their mortgage servicers, the companies that are responsible for reviewing loan modification and forbearance requests, as well as processing payments, managing escrow accounts, and overseeing other day-to-day tasks on behalf of the investors who own the mortgages.
Americans are reaching out to their servicers with complicated, high-stakes questions and problems. For example, the CARES Act signed into law in March included provisions requiring mortgage servicers to grant homeowners forbearance, or a temporary pause in payments. But the provision only applies to the 70 percent of mortgages that are federally backed, and only if a homeowner asks for forbearance. As this Consumer Reports guide describes, simply finding out whether your mortgage is covered isn’t easy, and some CARES Act provisions themselves aren’t entirely clear. Consumers who don’t have a federally backed mortgage face an even more bewildering array of forbearance options.
How mortgage servicers respond to these requests could make the difference in whether Americans are able to avoid unnecessary stress or costs, or even keep their homes. To ensure that American homeowners are protected during this critical time, policymakers must put in place protections against foreclosure and unfair mortgage fees, and the Consumer Financial Protection Bureau (CFPB) — the federal agency tasked with protecting consumers in the financial marketplace — must ramp up its efforts to monitor the servicing industry and enforce existing rules.
Aggressive action to protect consumers is critical because the mortgage servicing industry has a poor track record of caring for consumers’ needs. Even in the best of times, mortgage servicers have been found botching their most basic functions. And during the 2008 financial crisis, servicers failed their customers badly — losing track of payments, charging fictional fees, and “robo-signing” foreclosure documents. In 2012, a 50-state investigation resulted in a $25 billion settlement with the country’s five largest servicing companies: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial (formerly GMAC) for these and other actions.
While we are only at the beginning of the current crisis, early evidence suggests that consumers might once again not be getting the help they need.
Perhaps the best window into consumer treatment comes from the CFPB’s Consumer Complaint Database, which publishes complaints consumers submit dealing with all corners of the financial marketplace, including mortgage servicers. Since March 1, the database has published more than 3,000 mortgage servicing complaints. Although the volume hasn’t noticeably increased since pre-coronavirus months, many of the complaints describe consumers seeking help dealing with pandemic fallout, and running into problems with servicers.
Some of these complaints were recently compiled in an American Banker article. The article found some complaints describing mortgage servicers that failed to abide by CARES Act provisions; others complaints describe servicers that are only offering the bare minimum of support, like forbearance plans that require immediate and full repayment of skipped payments once stay-at-home orders are lifted. If these complaints are right, then trouble is brewing in the mortgage servicing world.
Why is it that mortgage servicers seem to fail their customers, again and again? One reason, as the financial crisis helped reveal, is that the very structure of the modern industry creates problematic incentives for servicers. Today, the vast majority of mortgages are “securitized,” which means they are pooled together and sold to investors as financial assets. Because the servicers merely funnel mortgage payments to investors, their incentives don’t necessarily align with helping borrowers pay off their mortgages and stay in their homes. A study in the Yale Journal on Regulation put it like this:
Servicers have no stake in the performance of mortgage loans, so they do not share investors‘ interest in maximizing the net present value of the loan. Instead, servicers‘ decision of whether to foreclose or modify a loan is based on their own cost and income structure, which is skewed toward foreclosure.[pdf]
In other words, many of the mortgage servicers who are now tasked with helping millions of Americans keep their homes might not be all that interested in doing so.
Potentially making matters worse is the fact that many servicers are themselves now in financial straits. As millions of Americans are granted forbearance, and tens of billions of dollars of mortgage payments are delayed, many servicers are reportedly finding themselves on the brink of insolvency. The implications for consumers are not at all clear — but it’s easy to imagine that a wave of servicer bankruptcies, and the resulting transfers of mortgages from company to company, could create confusion for homeowners seeking relief.
So what does this all mean for today? Are borrowers once again doomed to deal with inept or abusive treatment from mortgage servicers at a time of economic crisis? As it turns out, there’s good news and bad news.
The good news is that today, unlike in 2008, we have the CFPB, which was formed in the wake of the financial crisis as the first federal agency with the sole mission of protecting consumers in the financial marketplace.
The creation of the CFPB meant a sea change for regulation of servicers.[pdf] Before, oversight was split between two federal agencies, the Federal Trade Commission and the Department of Housing and Urban Development (HUD), and neither did a great job. Once the CFPB took over, it started clamping down on many of the worst mortgage servicer practices, returning millions of dollars to consumers in the process.
The CFPB also passed mortgage servicing rules to provide substantial new protections for borrowers.[pdf] These rules forced servicers to do a far better job providing timely information to consumers about their payment status, giving notice about rate changes, helping consumers deal with delinquencies, and more.
Given the problematic incentives faced by the mortgage servicing industry, strong rules and enforcement are critically important for homeowners — more than ever during an economic crisis.
The bad news is that today, under the Trump administration, enforcement is lacking. A Consumer Federation of America report found that CFPB mortgage-related actions dropped sharply under Trump-appointed CFPB directors.[pdf] And one of the CFPB’s first moves during the onset of the coronavirus crisis was to loosen rules for the mortgage industry.
So, as the coronavirus pandemic continues to play out, there is a real question as to what homeowners can expect. Unlike 2008, we now have a powerful federal agency with the ability to stop the abuses that were a driving force behind the surge in foreclosures during the financial crisis. Yet we don’t know whether the CFPB will actually deliver the response it is capable of.
To protect consumers, the CFPB must step up to fully carry out its mission and policy-makers should take a few other important steps:
First, there simply should not be any foreclosures or evictions for as long as the coronavirus crisis continues. Guaranteeing all homeowners access to forbearance, and passing a total moratorium on foreclosures — for everyone, not just those with federally-backed mortgages — would be a good start. Renters badly need protection, too.
Second, if the servicing industry does indeed face a crash, no consumer should face fees or penalties of any kind from the resulting confusion. The CFPB recently released guidance for servicer best practices during mortgage transfers — but an extremely close watch will be needed to determine whether those and other servicer standards and rules are up to the task of protecting consumers during this exceptionally chaotic and risky time.
Finally, for as long as this crisis continues, consumers must be shielded from the full range of consequences that could result from problems paying their mortgages — including damaged credit reports, and abuse from debt collectors.
Just a decade ago, we saw the devastating consequences of putting consumers at the mercy of an inept and poorly regulated mortgage servicing industry. Millions lost their homes, and many more suffered financial and emotional stress. As we work to get through this new crisis, there’s no reason to make that same mistake all over again.
Image via pxfuel
 Specifically, mortgage complaints tagged as relating to issues “Trouble during payment process” and “Struggling to pay mortgage.”