Legally Hurting your Servicer in Three Easy Steps
I knowingly caused Bank of America ($BAC) to lose a little over $4000 on my home mortgage originated last year and, best of all, I did it legally. It is my duty to provide this public service announcement to the world at large since $BAC is a bank hated by everyone including the 99 per cent, anyone holding a Countrywide mortgage backed securities, and Rating Agencies. The trick to causing more pain to $BAC (or any other servicer) is to:
- Pay your mortgage off really early, especially in the first two years,
- Pay extra principal every month and,
- Pay in person with a check at a local branch on the 13th or 14th after the due date of the first of the month.
I did all three things above and $BAC lost a little over $4000 on their investment in my mortgage servicing sold to them from a small mortgage originator. There have been a large number of $BAC customers who are just like me because $BAC no longer buys mortgages or servicing from smaller originators.
(Skip to the end if you don’t want to read the finance/maths stuff)
Buying Servicing Rights and Fees
Most homeowners don’t know that servicing of mortgages can be, and often are, sold. One of the several thousand pages of documents signed at a loan closing allows the originator of the mortgage to sell the servicing to any bank it wants to as long as the terms of the mortgage don’t change. So like family, you can’t choose your servicer.
Mortgage servicers make money by taking a little bit of the interest you pay as a fee and the float (interest received for funds held before sending it out to investors) on payments. Borrowers typically pay by the first of the month while the servicers aren’t obligated (usually) to pay until the 15th of the month. Those 15 days allow servicers to make a few basis points of interest a month. The servicing fee (the part of the interest the borrower pays) for most prime mortgages is 0.25% for fixed rate mortgages and 0.375% for prime adjustable rate mortgages.
For instance, on the first payment of a $400,000 prime adjustable rate 3.25% mortgage, the servicer earns $125 ( $400,000 * 0.00375 / 12) plus the float of a few basis points on the principal and interest payment of $1,615.83 after subtracting the servicing fee.
The Multiple or Servicing Valuation 101
Servicing portfolios are typically valued using a multiple of the annual servicing fee received from the portfolio. The multiple is determined by the number of years the servicer expects the mortgage to exist and the likelihood of default. The higher the multiple the longer the mortgage will exist and the lower the likelihood of default. For instance the loan above would be worth $6,000 assuming a four multiple. Sharp finance types will quickly realise that over time the mortgage balance decreases over time so every month a servicer earns less money. The rate of decrease starts slowly but picks up over time. So for the first year and assuming scheduled amortization and no other fees, the servicer of the above mortgage doesn’t earn $1,500 in fees but $1,487.98. The second year the servicer earns $1,338.28 and so on.
Let’s assume (and not a bad assumption) that the servicer expects the above loan to last almost five years and has a very low likelihood of default, the servicing purchaser would assign a 3.5 multiple to the loan and pay $5,250. If everything went as planned, the servicer ($BAC) would have earned $7,162 gross plus the float on the 60 payments which adds another roughly two hundred dollars. Typically it costs less than $20 to service a primer borrower whether they pay by check in the mail or electronically. The net profit on this mortgage just under a thousand dollars. Any fees you pay are pure profit to the servicer.
A stick in the eye
My $BAC loan (a 5/1 adjustable rate loan) was originated in May 2011 by a small Midwest lender who then sold the loan to Freddie Mac and the servicing to $BAC. I was furious. It felt like I had married a beautiful girl to find out she has a drunk, deadbeat father who is still living off of some poorly defined past glory and in my home.
To exact my revenge in the only legally I could, I first started paying an extra $250 a month in principal. Yes it was costing $BAC only $0.75 a month but I considered it a victory. Then late last year, $BAC stupidly announced they were going to charge a $6 “convenience” fee for paying mortgages over the internet at anytime. Customers revolted and $BAC hastily retreated but my ire was raised. Annoyingly, $BAC did keep the fee for payments after the first of the month.
However, I knew by law they couldn’t charge any fee for a check presented at one of their branches if payment was before the 15th of the month. On the 13th or 14th of the following months, I paid my mortgage payment plus the extra principal at my local $BAC branch. Banks will tell you if you pay after the first of the month you are in default. That’s true however there is absolutely no negative consequence for paying two weeks late at the bank. Banks can’t report a delinquency until the day before the next payment is due. Banks can’t charge a late fee until the 15th. So therefore, I cost $BAC another roughly $200.
Using a branch costs a bank money. The more people that use the bank the more personnel they need to hire. I don’t know how much I cost them but it was worth my time.
Finally, two weeks ago I prepaid my mortgage which cost $BAC over $4000 of expected income and I was able to get my new mortgage to have a servicer other than $BAC.
Maybe one day $BAC might learn the lesson of never ever pissing off your best (prime) borrowers. We are smart and will switch to another bank in a heartbeat.
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