Foreclosure Mills

I learned a long time ago that although everybody has a collateral loan and/or insurance, it’s rare for anybody to understand how any of it actually works.

In the aftermath of the foreclosure crisis of the 2000s, several key patterns emerged. Although mortgage-backed securities took the brunt of the blame, the problem is systemic and throughout the mortgage supply chain.

If you’re unfamiliar, mortgage-backed securities were basically bonds backed by mortgage loans. Because of predatory lending at the time, many people qualified for loans they couldn’t afford. This led to a high rate of defaults from these subprime loans, which led to the investments based on them tanking.

Here’s Margot Robbie in a bubble bath explaining it on The Big Short.

But it’s wrong to only blame the Wall Street investors who bet on these subprime mortgage-backed securities. They were downstream of the foreclosure crisis. Three other big problems were discovered in the 2010s in these processes: foreclosure mills, robosigning, and force-placed Insurance.

Foreclosure mills essentially describe the foreclosure-for-profit nature of that end of the mortgage business. It’s a term meant to describe how foreclosure processes were refined and automated in an assembly-line manner similar to how a factory mass produces any other goods. I know this because I worked in such a foreclosure mill for Balboa Insurance under Countrywide Home Loans and personally helped refine their automated rules.

Robosigning was a process uncovered by whistleblower and foreclosure victim Lynn Syzmoniak. TLDR – loan servicers outsource a lot of loan servicing to third-party vendors. One process was retrieving missing paperwork for foreclosures, which was outsourced to a company called DocX. The company routinely recreated paperwork robosigned by a woman named Linda Green, whose name inevitably appeared on foreclosures for everybody.

Force-placed insurance is the issue I blew the whistle on back in 2011. When you get a collateral loan (mortgage or auto), it has insurance requirements. If you don’t meet them, the loan servicer force-places its own property insurance policy. These policies are often backdated and cost up to 10x more than a consumer policy while only covering the lender’s interest. Because the payment is rolled into your mortgage payment via escrow, it can double or triple your monthly payment.

And even the 2009 HAMP program did nothing to help this situation because you couldn’t get a loan modification when your escrow was negative from force-placed insurance. I can dive into the math of loss ratios and insurance but it gets wonky fast.

So, everybody is acting like everything from the subprime mortgage crisis is fixed. But it never was – some players shifted around, the 50 State Attorneys General collected $25 billion (both Lynn and I took part in the settlement via our respective AGs), and some other regulators got some money from fines. But the mortgage industry continues to profit, and we’re going to see the effects hit in the form of another foreclosure crisis through the 2020s.

All of these components of the foreclosure mills still exist: mortgage-backed securities, force-placed insurance, and robosigning. Despite the fines and the settlements, all of this has still been happening the entire time. Force-place insurance increases foreclosures, which ultimately makes profits for everybody.

Don’t even get me started at the savvy real estate agents and loan originators who added fractional points to your mortgage so they get paid from each monthly payment you make.

We may not have noticed for another decade if not for the pandemic.

And now we are in an economy where homes are unaffordable and interest rates are on the rise. Government funding ran out, and prices are up everywhere from grocery stores to gas pumps.

Foreclosure for profit will be a defining moment of this decade. They’re already up 150%.

People tend not to care until it happens to them, but you’re going to hear about it as soon as regulators find a way to take their cut again. But the foreclosure mills will never stop. It’s too profitable.

Think about it: if I sell you a $200,000 house and give you 30 years to pay, I only make $300,000 or so. But if I find a way to foreclose on that house every 10 years, I can triple that profit. Each individual borrower would still be responsible for the full mortgage while I get to stack the debts and make the government pay while destroying your credit.

And pulling it off is easy. I lose your insurance paperwork for your $1,200 annual policy and decide you owe me $12,000 now. And escrow collects insurance ahead of time, so you’ll owe another $12,000 in less than a year. That’s $1,000 a month extra on your mortgage and even if you do pay it, I’ll catch you on property taxes. Over time, that hole in the escrow will overcome you, and the house is mine. Most people are easy to financially overwhelm over the course of a decade.

Basically, the loan servicers are making money from both the borrower and tax payers to make our lives miserable. They get away with it because, as I said at the top, people are generally not well educated on how their collateral loans and insurance actually work.