Consumers captive to bad home mortgage system

Many U.S. consumers have no choice and are held captive to home mortgage-related companies that are often aggressively fast, commit errors in paperwork and refuse to answer questions, and whose continuing problems are holding back the country's economic recovery, a top U.S. regulator said on Friday.

For mortgage servicing firms - which are often linked with some of the nation's biggest banks and have been under fire over the past year for making mistakes on foreclosures - nothing much has changed since the start of the financial crisis in 2007, said Sarah Bloom Raskin, a member of the Board of Governors at the U.S. Federal Reserve.

With few adequate remedies to provide meaningful recourse in the event errors occur--after all, it's not as if consumers have a choice regarding who does their servicing--many consumers find themselves captive to practices that have emphasized speed and aggressive timeframes over responsiveness, accuracy, and completeness, she said.

Well, now it seems to me we have reached a point where this sign of failure is hindering our economy's ability to rebound, she said.

Lenders in today's market often don't hold on to their loans, selling off the rights to service them.

In many cases, the company that you send your payment to is not the company that owns your loan, according to the Federal Trade Commission's website.

Mortgage servicers earn fees for their day-to-day management of a mortgage loan account, including collecting and crediting monthly loan payments, and in some cases handling an escrow account.

While it's relatively cheap to service performing loans, costs start climbing when a loan becomes non-performing, she said. Those costs include collections, loss mitigation,foreclosure, the maintenance and disposition of real-estate owned properties, which can be high.

When too many loans go bad, the servicers may not be ready for all the workload.

Suffice it to say that when servicers misapply payments, lose paperwork, file incorrect foreclosure affidavits, or simply do not answer the phone or make available knowledgeable staffpersons, there are consequences to the consumer, Bloom said.

Bloom said federal banking agencies are set to release a report indicating that widespread weaknesses exist in the servicing industry which pose a risk to the servicing industry, foreclosure process, impair the functioning of the mortgage markets and reduce accountability to homeowners.

She proposed that instead of a yearly fee, servicers earn quite modestly for routine processing of payments of performing loans and be required to have either significant capacity for loss mitigation and the other work involved with non-erforming loans, or business relationships with third parties, such as specialty servicers.

A possible scenario is that there would be specialists for both types of loan processing, she said.