What Are Mortgage Server Banks?

Mortgage service banks go after delinquent borrowers and initiate foreclosure proceedings.

Mortgage service banks handle routine processing tasks for the lender holding the loan. A crucial conflict of interest arises when the servicer also owns a mortgage on the same property.

Function

Mortgage service banks manage your mortgage account on the lender's behalf. According to the Federal Trade Commission, servicers collect monthly payments, monitor escrow accounts, and manage delinquencies and foreclosure proceedings.

Servicing Costs

The cost of servicing increases as delinquencies and defaults rise. Chasing past-due payments costs servicers time and money. Loan-servicing employees spend more time managing a delinquent account than one that is paid timely. Under-reporting delinquencies allows servicers to alleviate cost pressures.

Effect on Loan Modifications

Servicers act on the lender's behalf, but create a conflict of interest when they hold second mortgages on the same properties. Delaying delinquencies and defaults on first mortgages means servicers collect payments made on their own second mortgages. Gretchen Morgenson of The New York Times states that the conflict of interest exists because "the Treasury Department never forced the second-lien holders who service troubled primary mortgages to reduce the amount they are owed by borrowers, even though such a move would give them a better shot at keeping their homes."

References

• Federal Trade Commission: Mortgage Servicing: Making Sure Your Payments Count
• Bloomberg: Writedowns on Mortgage Servicing Make Even JPMorgan Vulnerable
• New York Times: Fair Game - In the Mortgage Drama, One Role Is Enough