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February 3, 2003, Revised December
13, 2004
Dissatisfaction With Mortgage
Servicing
The letter below
is typical of many I have received on this theme.
"I
have had 3 mortgages by 3 different lenders, and the service I received after
the loans closed ranged from poor to abysmal.
Have I had particularly bad luck� or is this a system-wide problem?�
It
is a system-wide problem.
Servicing includes
the collection of payments, maintaining accurate records of payments and
balances, and often paying the borrowers� taxes and insurance. Servicers also
go after borrowers who are delinquent, and take their house if they
default.
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 home mortgage servicer.
Why Mortgage Servicing Is Bad
The problem is that
the financial incentives to provide good service, which work in other sectors of
our economy, don�t work for loan servicing. A house painter, for example, is
constantly under pressure to perform well. If he doesn�t have good references
from previous clients, you won�t hire him.
If the job is done poorly, you can resist paying.
Even if you pay for a poor job, you won�t hire him again and won�t
provide a reference.
The mortgage
borrower�s relationship with the firm that services her loan is very
different. The borrower does not
select the servicer. She selects a lender or mortgage broker, and the major focus
is the price of the loan. If
service quality enters the equation, which it might if the borrower follows the
recommendation of a real estate agent, it is about getting the loan closed on
time. Rarely if ever does the quality of servicing come into the picture.
Neither mortgage
brokers nor real estate agents care about servicing.
Even if they did care, they can�t help borrowers find quality servicing
because most of the lenders originating loans do not service them.
More loans than not are sold shortly after origination, and while
servicing sometimes is retained by the seller, often it isn�t.
Shopping for a
mortgage loan is thus a little like shopping for a tail. You find the best one
you can, and when you get it home you realize it is attached to a dog, of
uncertain disposition, who you will be obliged to keep for many years.
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. With
no warning, your dog disappears and there is a new one in the crate.
Borrowers Can't Fire Their
Servicer
The fact that
borrowers have little say in who services their loan would not be so bad if they
could fire their servicer for poor performance, but they can�t.
See Borrowers Should Be
Able to Fire Mortgage Servicers.
The only way to rid yourself of a servicer is to refinance, but then you
are gambling that the new servicer will be better, which is a bad bet.
Since borrowers can
neither choose nor fire servicers, quality of service has no impact on the
servicer�s bottom line.
There is no business reason to provide quality service to borrowers.
For many years I
have been reading articles in the trade press about how all this was about to
change. Mortgage servicers have
discovered, or so it was claimed, that all these borrowers in their servicing
files were potential customers for new services.
Servicing files were a gold mine of information that would be used for
�targetted cross-selling�.
The trouble is, a
borrower who is miffed because his taxes weren�t paid on time, or because his
last payment was presented on the 14th but held to the 16th to trigger
a late charge, is a poor candidate for cross-selling.
Except in isolated cases, this vast untapped market has remained
untapped.
The one
significant exception has been widespread efforts to alert borrowers to the
possibility of a cost-reducing refinance. The
focus of these efforts is to identify borrowers who are likely to refinance with
someone else, so that the existing servicer can retain them.
This hardly qualifies as quality servicing.
The bottom line is
that 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 may happen some day, but I would not hold my breath. See A
Servicing Systems For
Borrowers?
Copyright
Jack Guttentag 2004
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