‘Perception equals reality’ is a commonly used phrase. If enough people believe a ‘fact,’ then it becomes a ‘truth.’
While debating the phrase may be an interesting academic exercise, its application in the real world of mortgage servicing is proving painful. The perception is ‘us’ against ‘them.’ Sadly, ‘us’ is the American homeowner, and ‘them’ is the mortgage servicing industry. The national blitz of negative articles, television reports, lawsuits and proposed legislation presents an enormous challenge to the reputation of the mortgage industry.
Headlines such as "Dubious Fees Hit Borrowers in Foreclosures" in the Nov. 6 edition of the New York Times only serve to pour fuel on the fire. The article discussed an analysis of Chapter 13 bankruptcy fees conducted by Prof. Katherine Porter of the University of Iowa, which concluded that half of the loans examined contained questionable charges. The article suggests that loan servicing is ‘extremely lucrative’ and that extraneous fees are added to the accounts to gouge borrowers. That article and other troublesome media reports are eroding the credibility of the mortgage servicing industry and have prompted further action by courts and legislators.
For example, the bankruptcy courts in both Vermont and Kansas have enacted standing orders requiring mortgage servicers to provide monthly statements of account information to borrowers in bankruptcy. The stated intent of both orders is to ‘encourage the flow of information as to what is being received and applied between creditor and debtor, and if a problem arises, it can be addressed immediately.’
The orders are a result of a perception that borrowers are not receiving the necessary information on their accounts. While only a perception, the practical effect of these orders is still undetermined. The fact that bankruptcy judges perceive these orders necessary reveals an erosion of their faith and trust in the servicing industry.
Judges are not the only bankruptcy officials asking hard questions. Bankruptcy trustees are now scrutinizing attorney fees and questioning the application of payments. In one extreme example, a mortgage creditor lost over $500,000 in checks paid by a Chapter 13 trustee over 16-month period. Many trustees have commented on this case, asking whether this is an isolated incident or evidence of further issues. This case is frequently cited by the debtors' bar as yet another example of the mortgage servicing industry manufacturing or creating defaults – another mistaken perception.
An even more ominous threat lurks on the horizon. Legislation recently introduced in the House of Representatives – the Emergency Home Ownership and Mortgage Equity Protection Act of 2007 – proposes to erase the protection currently provided to claims secured by a debtor's principal residence in certain bankruptcy cases.
This bill would allow bankruptcy judges to modify interest rates, cram down the outstanding balance of a mortgage to value and change terms of the obligation that would survive the bankruptcy case over the life of the loan.
Testimony before the House subcommittee corroborated the perceived need for relief for borrowers and congressional control over an industry allegedly incapable of policing itself. This legislation is detrimental to the secondary market, will have numerous unintended consequences and faces stiff opposition. Nevertheless, the proposed legislation shows congressional reaction to public perception.
These current examples of efforts to monitor and control the servicing industry are not unique and likely the tip of the iceberg. As servicers, it is paramount to remember it is only a perception of ‘us against them.’ Of course, this is not reality. Borrowers are our customers. Contrary to media reports, a foreclosure is always the last resort, as it results in a loss for all parties.
However, the current climate portrayed in the media is that the borrower is no longer culpable for his own default. Instead, the mortgage servicing industry has lost credibility and is bearing the consequences of rising foreclosures.
How can the mortgage servicing industry regain its credibility? How can the industry prevent perception from transforming reality? The focus must be on the fundamentals of quality servicing. Borrowers and the public must be educated about the mortgage servicing industry. If the industry cannot change public perception, there are many entities – including Congress – that are prepared to change the realities to fix the perceived problems.
Daniel A. West is the managing attorney of the St. Louis office of South & Associates PC, headquartered in Overland Park, Kan. He practices primarily in the areas of bankruptcy law, collection and related litigation, and has more than 10 years of bankruptcy and collection experience. He can be reached at Daniel.West@SouthLaw.com or (314) 655-7001.