One day you make a reservation on an airline. You probably don’t love sitting in airplanes (who does?) but you’ve gotten used to it by now. Though you gripe about the legroom, you’re comfortable with the airline you’ve chosen. Then you arrive at the airport and you’re surprised to find that instead of the flight you expect, you’re going to be put on a totally different airline. Not Southwest or Delta. More like Aeroflot. Or Air Bolivia.
That’s more or less the situation with your mortgage servicer. The mortgage servicer is the company that collects your monthly payment and — this is going to be the important part — is responsible for modifying your loan, imposing penalty fees or foreclosing if you stop paying. Most often that’s the company you got your mortgage from–the bank that approved your mortgage and that’s listed on the documents you signed when you closed on your house.
Except that the mortgage servicing rights (MSRs, as they’re called in the business) can get sold. And that’s where, for many folks with Bank of America mortgages, the fun begins. Servicing mortgages is itself a valuable business. Part of the payment on each loan, generally about 0.25% of the loan amount each year, goes to the servicer. So do fees and penalties that pile up with missed payments. Servicers end up with a lot of leeway to make things easier or harder for homeowners in trouble, granting modifications or tacking on fees, or both.
Bank of America is now in the midst of one of the biggest transfers of MSRs in history, selling servicing rights for about $215 billion of loans to Nationstar Mortgage Holdings Inc. There is some backstory here: about half the loans involved are owned or guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Bank of America agreed to a $10-billion-or-so settlement with Fannie over who was responsible for the problems with the massive defaults on loans from the mortgage boom era. It also agreed to sell the servicing rights on those loans, ensuring that Fannie and the bank can stop bickering (as in, litigating) over those mortgages once and for all.
You might think, after six years of public outcry over mortgage shenanigans linked to Bank of America and Countrywide that a lot of folks would be happy not to deal with Bank of America anymore. Alas, for Bank of America’s borrowers this could be something of a frying-pan-and-fire situation.
We don’t have a huge amount of insight into just how different mortgage servicers treat customers — just about all have innumerable complaints. In theory all of them have to keep to certain standards; a Bank of America spokeswoman noted in an email that successor servicers like Nationstar have to stick to any modification that Bank of America made, and abide by the terms of the national mortgage settlement for any loans included in the settlement.
Though, one objective measure of the relative ease of dealing with a servicer is the proportion of loan modification requests approved. By that measure, having Nationstar service your loan may not turn out to be such a great deal. Nationstar has processed 306,660 applications and approved 67,875, or about 22 percent.
Here’s a comparison with other major loan servicers, based on data through May:
Nationstar 22% approved
Bank of America 45%
JPMorgan Chase & Co. 30%
Ocwen Loan Servicing 24%
Nationstar approves loan modifications at a lower rate than any other servicer of its size, far lower than the Big Bad Banks most people think of in connection with the mortgage crisis, and half that of Bank of America. All those numbers, incidentally, are for trial modifications; not all those approved start the trial, and some trial modifications don’t become permanent. The final tally — for all the banks, not just Nationstar — of loans that get modified is lower (the tally is also self-reported; if a bank loses your application, that doesn’t show up here). You can see the full data at the Treasury department’s website.
I contacted Nationstar spokesman John Hoffman to explain this, and got a response of refreshing candor. Hoffman said that he’d asked but “we just didn’t have background on how or why,” a rare admission in the corporate world. So give Nationstar credit there.
Not too much credit, however, because admitting that you don’t know why you’re denying so many applications isn’t exactly the same as changing behavior. Hoffman said that as Nationstar starts servicing more Bank of America loans onboard, he expects the percentage of approvals will increase. So far there isn’t exactly much evidence of that. In May, the latest month for which data are available, Nationstar approved 601 modification requests and denied 4,216, an approval rate of just 12.5%. (According to Hoffman, Bank of America started transferring loans to Nationstar in February; the May cohort doesn’t include any Bank of America loans.)
The mortgage servicer switcheroo seems to flummox even the sophisticated counterparties that investment banks are always talking about. Nationstar is currently enmeshed in litigation with an investor over whether it had the right to sell loans on which it took over servicing rights. The abuses of the biggest banks bailed out after the mortgage crash have by now been well documented. Judging by the numbers on loan modifications, the folks like Nationstar who are now buying up servicing rights to those mid-2000s vintage mortgages are not doing better.