Not only borrowers were hurt by sloppy mortgage servicing.

In her Sunday Times Fair Game column, "Opening the Bag of Mortgage Tricks," Gretchen Morgenson writes about an untold story of sloppy mortgage servicing practices—the impact on mortgage investors.
“[B]orrowers aren’t the only ones concerned about potential mischief. Investors who hold mortgage securities are increasingly worried that servicers may be putting their interests ahead of those who own the loans.

“A servicer might, for example, deny a loan modification to a borrower because it also owns a second mortgage on the same property and doesn’t want to write down that asset, as required in a modification. Levying outsize default fees is another tactic — the fees typically go to the servicer, not the lender, but they can still propel a property into foreclosure more quickly. And foreclosures aren’t a good outcome for investors. “

The result in once such case was a federal jury’s award to investors of several millions of dollars in punitive damages.

How did it happen?

After a mortgage servicing company collapsed, a “small firm called Compass Partners bought the servicing rights to these assets for $8 million. A short time later, Silar Advisors, a company overseen by Robert Leeds, a former Goldman Sachs executive, got involved by financing Compass. Compass/Silar began servicing the loans for the investors.”

“Almost immediately, the plaintiffs in the suit contended, Compass/Silar started siphoning off money owed to investors holding the loans. Among the servicer’s tactics, the plaintiffs said, were improperly charging default interest, late fees and loan origination fees that reduced amounts due to investors.”

In addition, when borrowers tried to renegotiate or pay-off defaulted loans, the servicing company refused to negotiate. “In other cases when Compass/Silar urged the investors to modify troubled mortgages, the servicer reaped undisclosed fees in the deals.”

“A Silar spokesman said the firm was pleased that the jury awarded only $79,000 in compensatory damages to the plaintiffs but was disappointed by the punitive-damages assessment. “The jurors are to be commended for their careful consideration of the facts in a very lengthy trial,” the spokesman said. He declined to comment as to whether Silar was currently servicing any loans.”

“It is obvious that we are in the litigation stage of the financial debacle of 2008. That usually means shining the light on dark corners and watching what scurries away. The view may not be pretty, but at least in this case, investors got some recompense in addition to an education.”

A former employer gave me this saying about the business place - In some markets the bulls eat, in some the bears eat, but the pigs always get the garbage.

What do you think?

Read the full column, Opening the Bag of Mortgage Tricks.

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