[Note: This post by attorney Brian Mahany originally appeared in the National Law Review. It is repreinted here with permission from the the NLR.]
The recent onslaught of bad press about nonbank mortgage servicer Ocwen is just the tip of the iceberg. Ocwen may be on everyone’s radar these days but the explosive growth of nonbank servicers in general has regulators concerned. A report from the inspector general of the Federal Housing Finance Agency (FHFA) outlined serious risks for homeowners and the government. The FHFA regulates both Fannie Mae and Freddie Mac, the two largest residential mortgage guaranty companies in the United States.
For those not familiar, a mortgage servicer collects payments on behalf of the banks and trusts that own the loans. The servicer also maks sure that homeowners insurance remains current and that property taxes are paid. Once, many banks handled these functions internally but the advent of large mortgage pools and mortgage backed securities resulted in the creation of a new industry, nonbank mortgage servicers. So called nonbank specialty servicers handle mortgages that are delinquent or in foreclosure.
Things became so bad that last year New York sought to block Bank of America from handing over loan servicing duties to Ocwen.
As little as 4 years ago, the ten largest mortgage servicers were banks. Now half of those banks have been bumped out by nonbank servicers, companies like Ocwen, Nationstar, Walter Investment Company, PHH Mortgage and Quicken Loans.
Part of the problem rests with the government. When millions of Americans were underwater on their mortgages and seeking HAMP loan modifications, it became painfully obvious that many banks’ servicing platforms were ill-equipped for the job. The government recommended to banks to sell the servicing rights to third parties, particularly for loans that were under water. Unfortunately, the “remedy” may have been worse than the disease it was designed to cure.
Often, high risk borrowers slip between the cracks when a distressed loan is passed from the lender to the specialty servicer. Worse problems, however, come from the vertical integration present within the servicing industry.
Ocwen, for example, long had affiliate relationships with companies that managed distressed properties and with forced place insurance. Keeping a homeowner underwater means more profits for the specialty servicer.
Nationstar did the same thing under the guise of providing “wraparound servicers.”
Even without any affiliate relationships, inherent conflicts of interest also exist. Banks want to see the loan become profitable and keep expenses down. If the loan fails, they might be stuck holding the bag. Specialty servicers, however, make their money by keeping the loan in special servicing. The longer the loan is distressed, the more the servicer is paid.
Unlike banks which are highly regulated, mortgage servicers are still largely unregulated. That has created the perfect storm for distressed homeowners. Loan modifications that are improperly denied, gross overcharges for property “preservation” and forced place insurance and frustrated homeowners who can’t get anyone to answer the phone.
We know of some instances where the servicer has managed to take title to the property and get paid from Fannie or Freddie on the nonperforming loan.
Whistleblowers and the False Claims Act
Enter whistleblowers. Last year whistleblowers brought over 700 False Claims Act lawsuits, many against the financial sector. One such suit against SunTrust collected $418 million for the government including $50 million to the federal and state governments for improper loan servicing practices.
Whistleblowers who bring claims under the False Claims Act can earn up to 30% of whatever the government collects from the wrongdoer. To qualify, one must have original knowledge or information about the fraud. Successful whistleblowers are usually insiders or former employees but not always.
Whistleblowers are also entitled to stong anti-retaliation protections under federal law.
To obtain an award, one must first file a complaint under seal in federal court. The government is then afforded an opportunity to review and intervene. If the government does not take over the case, it is often possible for the whistleblower to do privately.