How to Make Money by Screwing Your Customers

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The mortgage servicing industry has always been a bit of a black hole. Servicers aren’t the folks who make loans, package loans, or invest in loans. Rather, they’re the folks who collect payments and handle the routine administrative work after loans have been packaged up and sold off as securities. Basically, they do the gruntwork.

So they had little to do with creating the mortgage crisis of the aughts. However, despite their unglamorous middleman role, they’ve been one of the chief obstacles to fixing the mortgage crisis over the past few years. The reason is fairly simple: they make more money by screwing borrowers who are in trouble than they do by trying to come up with solutions. David Dayen explains:

In general, servicers are paid through a percentage of the unpaid principal balance on a loan. This creates problems when a borrower gets into trouble and can no longer afford their payments. There are many modifications to help a borrower in such a bind, the most sustainable, successful type being direct reductions of the principal, for obvious reasons. But forgiving principal cuts directly into servicer profits by cutting the unpaid principal balance, so most servicers shy away from it. Moreover, servicers collect structured fees — such as late fees — which make it profitable to put a borrower in default and keep him there. And foreclosures don’t hurt a servicer, because they make back their money owed, along with all fees, in a foreclosure sale, even before the investors for whom they service the loan. The investors take whatever losses result from a foreclosure; the servicer makes out just fine.

So there you have it. Servicers don’t like simple principal reduction because that reduces their fees. Conversely, servicers do like it when borrowers get jerked around a lot because that increases their fees. And if it all ends up in foreclosure? That may be too bad for the investors, but servicers make lots of money from foreclosures. The bottom line is simple: servicers do best when distressed borrowers are (a) milked for a while and then (b) foreclosed on.

So naturally, that’s what usually happens. The new Consumer Finance Protection Board has recently taken a crack at reforming this obviously absurd situation, but they probably don’t have the legal authority to do much about it. However, David suggests that Fannie Mae and Freddie Mac probably do. Unfortunately, they aren’t doing anything:

The FHFA/HUD servicer compensation process is showing few signs of life. They announced the initiative two years ago, and released a discussion paper in September 2011, inviting public comment on a couple broadly rendered alternatives, including a “fee for service” model where servicers would get paid a flat rate for performing loans, presumably encouraging them to keep the loans current. As is typical for these regulations, practically all of the public input on the discussion draft came from the mortgage industry. They objected to changing the system before they had new requirements in place, like the 2012 National Mortgage Settlement and the CFPB servicing standards. In addition, they made the usual complaints about undermining the market and increasing costs for borrowers.

Perhaps as a result, basically nothing has been done on servicer compensation since the fall of 2011. Officially, HUD spokesman Brian Sullivan calls the joint project a “work in progress.” An FHFA spokesman told me that “consideration of the servicing compensation issue will continue as FHFA moves forward with the Build portion of the Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac.” And in a speech last December, FHFA Acting Director Ed DeMarco remarked that they “have already completed a substantial amount of groundwork on this subject,” and that “it remains for me an important part of the work ahead.”

This has long been one of the most frustrating aspects of the mortgage crisis. Everyone understands that the incentives at work in the servicing industry are completely screwy, but no one has both the authority and the political will to change it. It’s sort of a nutshell version of our entire political system these days.

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WHO DOESN’T LOVE A POSITIVE STORY—OR TWO?

“Great journalism really does make a difference in this world: it can even save kids.”

That’s what a civil rights lawyer wrote to Julia Lurie, the day after her major investigation into a psychiatric hospital chain that uses foster children as “cash cows” published, letting her know he was using her findings that same day in a hearing to keep a child out of one of the facilities we investigated.

That’s awesome. As is the fact that Julia, who spent a full year reporting this challenging story, promptly heard from a Senate committee that will use her work in their own investigation of Universal Health Services. There’s no doubt her revelations will continue to have a big impact in the months and years to come.

Like another story about Mother Jones’ real-world impact.

This one, a multiyear investigation, published in 2021, exposed conditions in sugar work camps in the Dominican Republic owned by Central Romana—the conglomerate behind brands like C&H and Domino, whose product ends up in our Hershey bars and other sweets. A year ago, the Biden administration banned sugar imports from Central Romana. And just recently, we learned of a previously undisclosed investigation from the Department of Homeland Security, looking into working conditions at Central Romana. How big of a deal is this?

“This could be the first time a corporation would be held criminally liable for forced labor in their own supply chains,” according to a retired special agent we talked to.

Wow.

And it is only because Mother Jones is funded primarily by donations from readers that we can mount ambitious, yearlong—or more—investigations like these two stories that are making waves.

About that: It’s unfathomably hard in the news business right now, and we came up about $28,000 short during our recent fall fundraising campaign. We simply have to make that up soon to avoid falling further behind than can be made up for, or needing to somehow trim $1 million from our budget, like happened last year.

If you can, please support the reporting you get from Mother Jones—that exists to make a difference, not a profit—with a donation of any amount today. We need more donations than normal to come in from this specific blurb to help close our funding gap before it gets any bigger.

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