Limiting Abuse and Opportunism by Mortgage Servicers

Abstract

This article discusses the opportunistic and abusive behavior of some servicers of residential mortgages toward the borrowers whose loans they service. Such abuse includes claiming that borrowers are in default and attempting to foreclose even when payments are current, force-placing insurance even when borrowers already have a policy, and mishandling escrow funds.

The causes of such practices and the market forces that can rein them in are discussed. A case study of one mortgage servicer describes its unfair treatment of borrowers and the reforms imposed by federal regulators and other market participants. Both regulatory agencies and rating agencies appear to have increased their scrutiny of servicers' behavior, and states have passed new legislation to limit abuse. This article concludes with a discussion of proposals for further reform should these steps prove inadequate.

Keywords: mortgage servicers, securitization, subprime, predatory lending

JEL Classification: D18, G21