Bankruptcy Judges Not Afraid of Difficult Task of Holding Servicers Accountable

Judge Shea-Stonum of the Bankruptcy Court for the Northern District of Ohio (Eastern Division) issued an interesting opinion chastising Countrywide for its systemic servicing shortcomings. Among other interesting tidbits, including requiring each servicer to attach a prescribed worksheet to a proof of claim, she notes that the servicers have absolutely zero incentive to serve the homeowner (

One problem with relying on the mortgage servicing industry to voluntarily improve its
practices is the industry’s incentive to increase costs. Its interests are not aligned with the borrower,
nor even in some circumstances with its investor.7
Mortgage servicers do not have a customer relationship with homeowners; they work
for the investors who own the mortgage-backed securities. Borrowers cannot shop
for a loan based on the quality of the servicing, and they have virtually no ability to
change servicers if they are dissatisfied with the servicers’ conduct. The only exit
strategy for a dissatisfied borrower is refinancing the mortgage, and even then, the
homeowner may find the new loan assigned to the prior servicer. Because their
customers are the trustees who hire them to collect on behalf of investors, servicers
have few reputational or financial constraints pushing them to work to satisfy
homeowners with their performance.
In fact, servicers have a financial incentive to impose additional fees on consumers.
Mortgage servicers earn revenue in three major ways. First, they receive a fixed fee
for each loan. Typical arrangements pay servicers between 0.25% and 0.50% of the
note principal for each loan. Second, servicers earn “float” income from interest
accrued between when consumers pay and when those funds are remitted to
investors. Third, servicers often are permitted to retain all, or part, of any default
fees, such as late charges, that consumers pay. In this way, a borrower’s default can
boost a servicer’s profits. A significant fraction of servicers’ total revenue comes
from retained-fee income. Because of this structure, servicers’ incentives upon
default may not align with investors’ incentives. Servicers have incentives to make
it difficult for consumers to cure defaults.
Porter, supra note 2, at 126-27.

7 Indeed, as noted in the prior Memorandum Opinion in this case, an apparent
driving force in Countrywide’s failure to document the satisfaction of Ms.
O’Neal’s note and to release the mortgage was Countrywide’s internal pursuit of
its own fees that amounted to 56 % of the short-sale proceeds.

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