AS FORECLOSURES CONTINUE
to plague the subprime market, a little-known industry practice is further hurting homeowners who are already having trouble keeping up with their ballooning mortgage payments: excessive and questionable fees.
A recent study conducted by Katherine Porter, a law professor at the University of Iowa, found that mortgage lenders are charging delinquent borrowers with fees that go well beyond the typical late charge. Included in the bill are such things as faxing or emailing mortgage payment information, overnight delivery charges and unnecessary property inspections, among others.
After poring through 1,700 recent Chapter 13 bankruptcy cases filed by homeowners, Porter found that, in 70% of the filings mortgage creditors claimed they were owed more than what the borrower believed. On average, the gap was a whopping $6,309 all due to added fees. Even worse, four out of 10 mortgage companies didn't even submit proper documentation itemizing the charges. The one bright spot for these debtors: Once the bankruptcy court reviewed the cases, it threw out many of the fees.
In a recent case that involved the refinancing of a Wells Fargo mortgage that was in the midst of a Chapter 13 bankruptcy repayment plan, a court awarded $67,202.45 to the debtor, Michael Jones, after discovering that the bank had made a variety of accounting errors and charged him more than $15,000 in fees that the court deemed impermissible, according to court documents. In an emailed statement, Wells Fargo told us they cannot provide specific comment on this case as it is pending appeal, adding that "all of our practices and procedures in the handling of bankruptcy cases follow applicable laws and we stand behind our actions in this case."
Max Gardner, a consumer bankruptcy attorney in Shelby, N.C., says he encounters questionable fees in 95% of the bankruptcy cases he handles. "It's really an epidemic of fraud," he says. "I don't know how else to describe it. It's been going on for years."
And these fees aren't just limited to those on the verge of bankruptcy. Unsuspected and unexplained charges can be tacked onto a borrower's account as soon as they are late with a single payment, Porter says. And because the fees are rarely itemized, most folks don't even suspect they're being overcharged.
Dania Perez, a housing counselor at the Tampa Bay Community Development Program, a federally-certified counseling agency, recently met with a homeowner who was trying to bring her mortgage up to date after several late payments. The borrower complained that, in addition to late fees, she was charged another $1,000 for drive-by inspections. (Such inspections also known as broker price opinions take place when a lender wants to make sure that a house that might end up in foreclosure is in good condition). After requesting a breakdown of the fees charged, she discovered that her home underwent nine> inspections in one week. She's still fighting the charges. "I've told her she needs to contact an attorney," Perez says. "Clients can't do this kind of battling on their own."
The biggest problem is that homeowners are stuck in a legal gray area. If and when the mortgage company provides legal documents, they can be extremely difficult for the average consumer to decipher and retaining a lawyer often doesn't make financial sense if the disputed charges are less than the legal fees you'd incur.
Another issue is that mortgage companies simply don't have an incentive to provide good customer service and avoid charging egregious fees in the first place, explains Jack Guttentag, professor of finance at the Wharton School of Business, who runs a mortgage advice web site for consumers, mtgprofessor.com. Blame it on the credit markets, which have changed the way banks extend and service mortgage loans. Years ago, the banks that approved and originated loans also serviced them, meaning that they handled the borrowers' payments. Naturally, they had an interest in good customer service: If a customer wasn't happy with Bank A, they could go refinance with Bank B.
Today, the lender that originates the loan very rarely keeps it, says Guttentag. Rather, mortgage loans are bundled together into trusts and sold as securities to investors, such as hedge funds. The trusts select a third party, known as a mortgage servicer, to collect payments from borrowers. These servicers can be independent companies or the mortgage servicing arms of well-known lenders such as Countrywide or Wells Fargo.
As a result, consumers have absolutely no control over who's going to service their mortgage, Guttentag says. "They also can't get out of that relationship except by paying off the loan." Even if they refinance, who's to say that their new lender won't pass the loan to the same servicer they had before.
Fees, meanwhile, are a good source of income for servicers who get to pocket the money. (Other than that, they earn a percentage of the mortgage amounts they process, typically 0.25% of prime mortgages and 0.50% of subprime mortgages. They also collect interest on payments for the short period between receiving the customer's check and disbursing it to the investors.)
In her research, Porter came across a variety of egregious fees, such as $50 fax fees, $137 overnight delivery fees and $60 payoff statement fees. Even bigger charges kicked in when a servicer got an attorney involved either at the start of a foreclosure process or during bankruptcy. In one example, a borrower was charged $31,273 in attorney's fees. "Consumers who get behind, who make mistakes, are a very big source of profit for the servicer," she says.
What can borrowers do to protect themselves? Here's a quick guide.
1. Monitor your mortgage
Just as you should review your credit reports once every several months to prevent identity theft and look for errors, you should also monitor your mortgage statements and look for any added fees, says Gardner. Most statements don't include detailed explanations of the fees charged, but you can request a breakdown. Some of the most common fees include:
: These should be stipulated in your contract; typically it's a penalty of about 4% to 5% of your mortgage payment.
: When you're late with a payment, the servicer can send an inspector by your house, typically for a drive-by assessment of its value. Charges will vary by lender, but it's important to make sure your house hasn't been inspected too many times.
Property inspection, broker price opinion fees
: The servicer charges you when you request specific information, for example, the payoff amount if you are looking into refinancing.
Demand fees, payoff statement fees, fax or overnight-delivery fees
: You're charged whenever an attorney gets involved in your case. In loan modification negotiations, for example, consumers will not be charged closing costs, as is the case with refinancing a loan. But if an attorney needs to review documents the borrower would have to pay the fees upfront, according to Perez.
: If the homeowner falls behind on homeowners insurance payments, servicers can quickly replace their policy with one from an affiliated company, Gardner explains. These policies are often significantly more expensive than what you'd get if you shopped around.
2. Dispute questionable charges
Should you see anything on your statement that you don't understand, you're entitled to request an explanation of each charge under the Real Estate Settlement Procedures Act. You can request information about what the fees were charged for, who they were paid to, when they were incurred and, if attorney fees are involved, what exactly the attorney did, Gardner explains. The mortgage company has to respond within 60 days of receiving your letter.
3. Talk to your lender
If you miss a payment or know you're going to be late, contact your lender immediately, Porter says. Lenders are more open to negotiating with customers who have missed one or two payments than with borrowers who are three or more months behind. After three months, accounts are typically transferred over to a subservicer (an agency that deals with delinquent accounts) or a loss mitigation department whose main concern is to foreclose at the lowest cost to the lender.