Mortgage Servicing Problems for Prepayments

[Joanne98]

posted by Adam Levitin

With all the problems in the mortgage industry caused by defaults, it's easy to forget that the traditional bugbear of mortgage lenders isn't credit risk, but prepayment risk. If a lender contracted for a 6% return and the loan is prepaid, there's a chance that the best return the lender can get now is say 4.5%.

As it turns out, prepayments can cause just as many problems for servicers as defaults. Recently, one of my relatives laid into me with this story about her problems getting her servicer to correctly credit her prepayments. The servicer has been crediting them all to interest, not to principal, so the loan balance isn't getting paid down (and the servicer is making more money that way, at the expense of the investors). What's worse, is that the servicer says it can't correct the problem because some of the prepayments were made before it acquired the servicing rights. And, the servicer says that if it corrected the problem, it would result in the account being listed as 30-days late and credit reported because the servicer did not make an automatic withdrawal one month because it treated the prepayment as a regular (but partial) payment (even though the total prepayments should put the loan way ahead on its original amortization schedule).

Put another way, the servicer is saying that they cannot produce an accurate payoff balanceand that if the homeowner demands one it will result in her being credit-reported incorrectly.

http://www.creditslips.org/creditslips/2009/02/mortgage-servicing-problems-for-prepayments.html