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Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
Servicing

Outrageous jury award reveals contempt for mortgage lenders

Borrowers need saving, from themselves

August 14, 2014
KEYWORDS CFPB / Mortgage / PHH / servicing
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There are so many news stories today that demonstrate how out of whack things have become in America today that it would be impossible for anyone to point even 1% of them out to you.

But this one example I gladly bring to your attention if you have not seen Kate Berry’s article of Aug. 13 in American Banker, “How a $600 Servicing Error Snowballed into a $16M Jury Verdict.” To me, this story points to the fact that such a jury verdict reflects consumer contempt for mortgage lenders.

Now, to be sure, consumers deserve protection from unscrupulous individuals and companies. No right-minded individual would dispute this fact. And there certainly were many individuals and companies that should have been watched and regulated more closely leading up to the housing crash and its aftermath, since the “greed factor” was at play on so many levels during its boom and subsequent bust.

Certainly there is no need to spell this out in detail to the readers of HousingWire.

But as Ms. Berry’s piece reveals, the pendulum has swung much too far in favor of consumers when “big bad banks and servicers” are involved.

And I quote, “A jury last month awarded $16.2 million in damages to a California homeowner who waged a three-year battle to block a foreclosure by the private-label mortgage servicer PHH Corp. The verdict is among the largest ever awarded in a mortgage case and $6 million more than PHH’s mortgage servicing business earned in the second quarter.”

According to the plaintiff’s attorney, noted Berry, it all started with a $616 shortfall in an escrow account.

Do the words “ludicrous” or “outrageous” come to mind? They most certainly did when I first read the aforementioned article. How is such a jury award for punitive damages justified given that the actual compensatory damage award was $514,000?

Were there mistakes made with regard to servicing processes and procedures, especially with respect to loan modifications and the entire foreclosure process?

Absolutely. Were some egregious or even malicious? Ditto.

Was it widespread within the mortgage servicing industry? Of course not.

But with most things perception becomes reality. How else could another recently created government agency be formed with the intent of helping to protect consumers, but instead crushes private business and ultimately hurts many of the same consumers it was created to protect?

As Ms. Berry points out, this large judgment that hammers PHH comes amid concerns regarding potential crackdowns by the Consumer Financial Protection Bureau on servicers who fail to adapt stringent new rules requiring better communication with borrowers who are in default.

After all, it was the lenders’ fault that the economy and housing industry collapsed, right?

Wrong – we all know that it started with government dictates and grew from there. It is well documented and doesn’t need to be rehashed here. But consumers have been led to believe by the government and its media accomplices that it was the “Banks” who hurt them.

To put things in perspective, back in the early and mid-1990s when I entered the mortgage servicing industry, a “short sale” was known as a “short payoff.” Back then, and for many years prior and after that period, a short payoff was nearly impossible to obtain from a lender unless there was a severe hardship involved.

The lenders’ position was that the borrower (consumer) had signed a binding contract – they were “obligated” to fulfill the terms of said contract. The same was true regarding any loan modification or “workout.”

But following the recent housing crash and the entrance of a new federal administration, loan modifications, short sales and other foreclosure alternative programs were not only encouraged by the administration, it was demanded that lenders were proactive in this regard and that actual foreclosure was to be avoided at all costs.

This sea change in how banks treat borrowers who are in default has contributed to a mindset that many in our country share today that the only reason they are in foreclosure is that their lender MUST have done something or some things that were not only perhaps ethically and morally wrong, but illegal.

It rarely occurs to these folks that it was because they stopped making their mortgage payments for whatever reason that they found themselves in foreclosure. Circumstances surrounding why they stopped varied, of course, and some are tragic, but the fact remains that it was their actions in most all cases that caused them to default on their contractual obligation.

Maybe some of these people should have been more diligent in understanding the contracts that they signed. Maybe they should have researched market conditions and projections before they purchased their home, and even “investment properties.”

Perhaps so many of them should not have treated their illusory “equity” as an ATM machine to buy goodies and place their largest investment, their home, in jeopardy.

Perhaps consumers need protection... from themselves.

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