Mortgage servicers enrich themselves on "helping" pressed homeowners

According to an Associated Press investigation, billions of dollars, which the government is spending to help financially pressed homeowners avert foreclosure, are passing through and enriching companies accused of preying on the people they're supposed to help. The AP found that each year the companies, known as mortgage servicers, earn about one-quarter to one-half % of the value of the loans they service. So the larger the mortgage is, the more they make. Besides, the servicers make money through late fees, or by foreclosing. The paperwork necessary to execute a foreclosure can generate hundreds of dollars in fees for some servicers.

Furthermore, the investigation reveals that at least 30 servicers have been accused in lawsuits of harassing borrowers, imposing illegal fees and charging for unnecessary insurance policies. Thus, the biggest players in the servicing industry, such as Bank of America, Wells Fargo, JPMorgan Chase and Citigroup, all face litigation, some of which has led to settlements with homeowners. All will receive federal money to modify loans. Nevertheless, the industry's smaller players, which specialize in servicing riskier subprime loans and loans already in default, face harsher accusations that they systematically abused borrowers.

As the only link between borrowers and lenders, they're in the best position to rework the terms of loans under the government's $50 billion mortgage-modification program. The servicers could pocket more than $5,500 for each loan they modify, under the Treasury program. However, they won't be paid until the homeowners have made timely payments for three months. The Treasury Department spokeswoman Jenni Engebretsen said in a statement that it has to work with all servicers, no matter what their records. Refusing to work with a bad player would "deprive homeowners who have mortgages with that servicer from getting modifications."

Under the loan-modification program, 38 servicers will earn fees to help reduce the monthly payments of homeowners facing foreclosure. The goal is to modify mortgages so homeowners' payments don't exceed 38% of their gross monthly income. In addition, an AP analysis of the 38 servicers the government is paying found that:

•At least 30 face lawsuits from homeowners and advocates claiming they charged illegally high fees, prematurely foreclosed on homes and engaged in illegal collection practices. Most of the lawsuits allege violations of laws that protect homeowners in foreclosure and prevent debt-collection abuse. Treasury's program requires servicers to comply with these laws.

•At least 14 have been accused of misleading customers before the program began about whether they would qualify for loan modifications or how low their new payments might be. In many cases, servicers are accused of telling borrowers not to make payments because their applications for modifications were pending — and moving to foreclose anyway.

•At least three of the companies settled federal predatory collection allegations by pledging to correct their behavior. They have since been sued hundreds of times by homeowners who allege the same illegal practices.