Julie King, Real Estate Agent
eXp Realty
Administering loans between the time of disbursement and the time the loan is fully
paid off. Servicing includes collecting payments from the borrower, maintaining payment records,
providing borrowers and investors with account statements, imposing late charges when the payment is
late, and pursuing delinquent borrowers. In many cases, servicing agents also pay property taxes and
insurance with money placed in escrow by the borrower. The Poor Quality of Servicing Overall: From a
borrower perspective, the quality of servicing is generally low. The Department of Housing and Urban
Development (HUD) reports that two of every five complaints they receive from borrowers involve
servicing issues. J.D. Powers and Associates, which measures consumer satisfaction with business
services of many kinds, reports that only 10% of borrowers are happy with their servicing agent. The
financial incentives to provide good service, which work in other sectors of our economy, don't work
for loan servicing. The borrower selects a lender or mortgage broker, not a servicing agent. The
major focus is the price of the loan. Rarely if ever does the expected quality of servicing come into
the picture. Information on the quality of servicing is not generally available, and even if it was,
the borrower has no way to know that the lender making the loan will also be servicing it. Most loans
are sold shortly after origination, and while servicing sometimes is retained by the seller, often it
isn't. In addition, servicing contracts are bought and sold in an active market, much like bonds.
This means that any borrower at any time can find his loan
suddenly being serviced by a different
firm. The fact that borrowers have little say in who services their loan would not be so bad if they
could fire their servicing agent for poor performance, but they can't. The only way to rid yourself
of a servicing agent is to refinance, but then you are gambling that the new one will be better,
which is a bad bet. Since borrowers can neither choose nor fire their servicing agents, quality of
service has no impact on an agent's bottom line. For most, there is no business reason to provide
quality service to borrowers. Quality Servicing by a Few: A few enlightened firms have adopted the
view that the borrowers they are servicing are potential customers for new services. A business
strategy of 'targeted cross-selling' requires attention to service quality. A borrower who is miffed
because his taxes weren't paid on time is a poor candidate for cross-selling. Unfortunately, this
approach has not made major inroads in the industry. Predatory Servicing: At the opposite pole are
the servicing predators, whose business strategy is to extract as much additional revenue from the
borrowers they service as the law allows. Here is an outrageous example: A borrower made his monthly
payment on the 16th of the month one day after the grace period. Without notice, the lender imposed a
late charge on that payment, and then proceeded to collect that charge by deducting it from the
following month's payment. That payment was made on time but recorded as late because of the
deduction of the late charge from the previous month, which generated still another late charge.
Seven consecutive payments were made on time but recorded as late because of the deduction of late
charges on the prior payments. Predatory servicingagents who purchase servicing will examine each
note to determine whether they are entitled to shorten the grace period or raise the late fee. If
there is some excuse for considering the property to be under insured, the agent will purchase
over-priced insurance and add the cost to the loan balance. Extra payments to principal will not be
credited in a timely fashion and the borrower will not know because monthly statements are
incomplete. Servicing for Borrowers: Under existing arrangements, servicing systems are designed to
meet the needs of lenders and they won't meet the needs of borrowers until they are redesigned for
that purpose. This is possible and may be in the cards. Borrowers must be willing to pay for the
service. A servicing system for borrowers (SSB) would not replace existing servicing systems. The
firms providing the services described below could be called 'second-tier servicers.' Borrowers would
make their payments to second-tier servicers, which would then make payments to the primary
servicers. With the payments going through its hands, the second-tier servicer has command of
information on the borrower's payment history. In contrast to the primary servicer, however, the
second-tier servicer will use the information to provide useful services to the borrower. Access to
Payment History: The major purpose is to provide peace of mind that the lender is properly crediting
mortgage payments. The SSB would allow borrowers to monitor their accounts continuously and the
'what-if' capacity would allow them to experiment with different future payment patterns. Access to
Details of ARM Rate Adjustments: The major purpose is to provide peace of mind that the new rate has
been properly calculated. The SSB would show thedetails of the ARM rate adjustment, rather than just
the resulting new rate, which is all borrowers get now. Borrowers will also be able to forecast what
the new rate will be months in advance so they can prepare for a possible refinancing. Cost-Reduction
Refinance Opportunities: The purpose is to flag profitable refinance opportunities. The SSB would
continually monitor the relationship between the borrower's interest rate, current market rates, and
the borrower's credit as affected by his or her mortgage payment record. Cash-Raising Opportunities:
The purpose is to provide borrowers who request it with a tool for assessing alternative ways to
raise cash. The system would already know many of the required data inputs, including the borrower's
existing mortgage balance and terms, as well as current market terms. Other data inputs, such as the
amount of cash needed, would be entered by the borrower. PMI Termination: The purpose is to give the
borrower a 'heads-up' that it may be possible to terminate mortgage insurance. Automatic termination
under the federal legislation passed in 1999 does not take account of extra payments to principal or
house price appreciation. Earlier termination that does take account of these factors requires that
the borrower take the initiative. Alternative Payment Options: The purpose is to allow borrowers to
pay biweekly, bimonthly, or weekly. Borrowers may prefer one of these options because they find the
schedule more convenient or because they want to build an early payoff plan around shorter payment
periods.
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