When you take out a home mortgage, auto loan, or any other type of collateral loan, you’re contractually obligated to adhere to certain requirements. After you sign the documents, they’re sent to a third-party vendor hired by the bank to track its loan portfolios. You may not realize a few things about your mortgage.
Your lender isn’t who actually services your loan.
- Borrowers aren’t the customers – lenders are, and collateral loans were nothing more than commodities, with production quotas and cost-per-loan servicing contracts trumping the needs of the borrower.
- Loan servicers profit from foreclosures – the money comes from the borrowers and government.
- Regulation isn’t as strict as it looks – loan servicers prepare reports in advance of any regulatory visit.
- There is no “Corporate Office” – when a customer service rep sends a request to the corporate office, it’s handled in the same building.
I know all this because I worked at one of the two loan trackers servicing over 90 percent of the collateral loans in the U.S. I was an operations manager, leading multiple teams, overseeing projects, maintaining databases, and writing processes and procedures used by the people servicing your loans.
1. The Bank Isn’t Your Mortgage Lender
In the United States, the lending institution actually financing a home mortgage isn’t actually the bank (Chase, Wells Fargo, etc.) in the vast majority of cases. The bank merely acts as a loan servicer, and the actual investor is either the U.S. government, through Fannie Mae, Freddie Mac (through an FHFA conservatorship), the VA, FHA, and more, or by private investors through mortgage-backed securities.
As loan servicers, these banks act as the face of the collateral loans, and because of this, the general public is used to simply referring to these middlemen as lenders. The media often uses the terms interchangeably as well, fueling the confusion.
If you want to refer to a bank as your mortgage lender, refer to the 11 government-sponsored banks providing liquidity to support housing finance – the Federal Home Loan Banks (also known as FHLBanks). The FHLBanks loan the money to local “lenders” who use it to finance the actual home purchase.
2. You’re the Commodity, Not the Customer
Because of the vendor-client relationship between loan servicers and lenders, the homeowner doesn’t factor into the equation. The loan tracker’s customer is the loan servicer, and the loan servicer’s client is the lender.
Your collateral loan is nothing more than an asset, and the service contracts (with their corresponding Service Level Agreements) dictate the servicing of your loan more than you ever could.
The government ultimately determines what standards need to be adhered to by loan services, so you’re better off appealing to your local congressman than your local bank rep if you’re facing a foreclosure or repossession.
3. Banks Make More Money If You Default
Loan servicers get paid to service the loan, regardless of whether or not the borrower pays. In fact, it’s actually better business if borrowers default – when a loan defaults, more servicing is necessary, and the servicer makes more money.
When the servicer handles a foreclosure (which is again performed by a third-party vender), the loan tracker places proprietary real-estate-owned (REO) insurance on the property, which costs 10x more than typical homeowners insurance.
Many mortgages in the U.S. are interest-only loans, in which payments during the first five to ten years don’t apply to the principle balance. REO insurance became prolific as millions of homeowners owed more than the property value after taking out interest-only loans.
By foreclosing on the property, the lender can then flip the house and get another occupant paying for it, while still holding the foreclosed borrower responsible for their term. This crams multiple mortgages into the same timeframe and the increased fees revolving around foreclosure maximize ROI for investors in the property, who would’ve gained only 4 percent or so if a single borrower paid on time.
4. Regulators Warned Us Before Surprise Visits
Working as an operations manager, I was often a part of workplace “tours” from prospective loan servicing clients and regulators, neither of whom ever saw the full picture. The shortest notice we ever got of one of these tours was two days, and middle management made it a priority to manufacture a great tour, ensuring reports are generated and work is left in queues to provide a seamless experience for the tourist.
I’ll never forget when two of our largest clients went bankrupt in 2008. Not two days after learning of the problems our clients were going through, they mailed all their scattered documents to our offices in order to get them off the premises before the government came in to audit them.
Although we were subject to “regulation” by FEMA for flood zoning issues during Hurricane Katrina, the FHFA, the NY Department of Financial Services, and many other state and federal regulators, ultimately nobody was watching what we did – they only saw what we showed them.
5. “The Corporate Office” Is a Myth
Even though as a loan tracker, I had the ability to manipulate your escrow account, loan status, and any other information on your loan’s history, I had no outside line that could be reached by customers. The only time I used a phone for outside communications was to speak to our corporate clients.
On the flip side, the customer service representatives you called for loan servicers went to our call centers where customer service representatives identified themselves as representatives from whichever bank you assumed was your lender. These reps could notate your account, but my team ultimately researched and modified the loan.
We weren’t sitting in some ivory tower – in fact, we worked in cubicles right next to each other, but you could never speak to me. Instead you were told your request was being forwarded to corporate, who would make the determination.
I don’t regret my time working in the finance industry. Like the average person, I didn’t know anything about mortgages, insurance, or banking going into my profession. I learned along the way and eventually realized I was a part of the problem.
Now I spend my time revealing the inner workings of the banks and bringing much-needed transparency to the industry.
Brian, a former business analyst in the mortgage industry, writes on ethics, regulations, and technology in the banking industry. His contributions have been featured in The STreet, Huffington Post, Forbes, Fast Company, Intuit, and other major outlets.