On the surface, the three homes appear to have just one thing in common: foreclosure.
One was purchased for $1.4 million in Plymouth, Mich., a city that sometimes appears on Money magazine's list of the best places to live. Another, bought for $290,000, is in Paterson, N.J., in a neighborhood where the poverty rate runs twice the national average. A third seized home, once valued at $929,000, is on the outskirts of Oxnard, a Southern California coastal town that fades into farmland.
Dig a bit deeper, though, and there's another common thread, one that speaks to a stark reality of the protracted foreclosure process.
Each of the three homes, acquired years apart, cost more to repossess and liquidate than they were worth, according to an analysis by RangeMark Investment Management Inc., a Greenwich, Conn., investment adviser.
"The property is never worth zero, but there were fees added to the loan balance that exceeded the amount invested by the trust," said Ritu Chachra, a RangeMark managing director, who analyzed securitized loans in which the loss severity for investors exceeded 100%. "The longer a loan stays in a trust and is not liquidated, the longer the servicer has to tack on these miscellaneous fees."
Though still rare, loss severities above 100% have been "on the rise since 2009," Chachra said. These extreme examples underscore a more widespread issue: legal costs, property upkeep and assorted servicer fees are compounding the losses from home-price declines.
Ultimately these expenses are paid by investors — or by taxpayers through Fannie Mae and Freddie Mac, which reimburse servicers for all charges as long as they "are actual, reasonable and necessary," according to the government-sponsored enterprises' guidelines.
Private investors in mortgage-backed securities complain that loan servicers' incentives are not aligned with their own and that the servicers do not provide loan-level data or a breakdown of charges and fees that ultimately come out of bondholders' cash flow.
"Servicers generate significant servicing and late fees throughout the delinquency and foreclosure process," said Chris Katopis, executive director of the Association of Mortgage Investors, a trade group that represents institutional investors that held a combined $300 billion of asset-backed securities at June 30.
Evidence in court cases also suggests that some servicers have padded fees or steered foreclosure-related business to in-house divisions or affiliates. "Servicers generate profits through affiliated companies during the process of repurchasing, insuring and liquidating homes from distressed homeowners," Katopis said.
RangeMark's clients include insurance companies and hedge funds. To calculate loss severities, it bought loan-level data from a third party (the servicers did not provide it to the investors), matched it to clients' mortgages and estimated how much the underlying homes had dropped in value by looking at overall price declines in their ZIP codes, Chachra said.
"Foreclosure costs should not be more than 3% to 5%, so if the losses are higher we think there is either appraisal fraud or losses the servicer has tacked on," she said. "We need to know more about how the loans are serviced, but the servicers would be scrutinized more if they shared their data."
Many of the fees charged by servicers are relatively small. But with defaulted borrowers staying in their homes an average of 18 months before heading to foreclosure, according to Lender Processing Services, every $40 monthly late fee, processing charge or broker price opinion fee compounds total losses.
"The longer this drags on, the more fees are involved for the attorneys and the servicers themselves," said Steven Gillan, the executive director of the American Alliance of Home Modification Professionals, an Astoria, N.Y., company that helps servicers with the government's loan modification program. "The servicers always argue that they're not making money on foreclosures, but all the late fees and penalties are tacked on to the final value of the property, which increases the losses."
One defaulted borrower in Lindenhurst, N.Y., owed $249,000 to Wells Fargo & Co. and was charged more than $5,300 in fees, including $716 in late fees, a $210 index number fee and a $35 fee to "discontinue" the foreclosure process, according to a letter sent to the borrower in June by the law firm of Steven J. Baum PC in Buffalo, N.Y. The firm, which has represented dozens of banks in foreclosures, did not return calls seeking comment.
Tom Goyda, a Wells Fargo spokesman, said the charges for court and attorneys' fees vary depending on the borrower and jurisdiction.
"Those fees are all pass-throughs and are not marked up in any way," Goyda said.
Servicers and industry experts have rejected claims that fees are excessive.
Faith Schwartz, a senior adviser and former executive director of Hope Now, an industry group, said she is not surprised that losses on some loans now exceed 100% loss severity because of price declines, particularly in Florida and Nevada. "Every month you hold a loan is lost cash flow, interest and carrying costs," Schwartz said. "I don't think the heavy material charges are in fees."
Longer timetables caused by foreclosure moratoriums have added significantly to costs, she said.
Roughly a third of the 5 million borrowers who were delinquent on their mortgage at Sept. 30 had been delinquent for more than a year, according to LPS.
Borrowers rarely challenge foreclosure fees, which vary by case and by state, consumer advocates say.
But excessive fees have been a major problem in personal bankruptcy cases where servicers are required to provide proof of their charges in court, said John Rao, an attorney at the National Consumer Law Center, a nonprofit in Boston.
"For some homeowners the question is why are they even in foreclosure?" Rao said. "We refer to it as a snowball effect, where a homeowner has been fighting over some late fees or a problem with an escrow account, then the servicing gets transferred or there is an error, and suddenly the borrower is in default."
In one Chapter 13 bankruptcy case from 2007, Wells Fargo assessed $6,000 in fees on a New Orleans homeowner in foreclosure whose actual arrears on monthly payments were only $154.11, court documents show. Wells ordered nine broker price opinions from Premiere Asset Services, a division of the bank that manages real estate owned properties. Though BPOs typically cost $50 each, Wells charged the borrower $1,330 for the property valuations. It produced records for just two of the charges, court documents show.
The case is being appealed by Wells, Goyda said, and he would not comment further.
O. Max Gardner, a North Carolina consumer bankruptcy lawyer, said servicers "double-dip, triple-dip and charge fees on things that aren't even real."
In a Nov. 12 speech, Sarah Raskin, a governor of the Federal Reserve Board, admonished servicers for padding late fees, BPO fees, property inspection and attorneys' fees, and for inappropriately assessing force-placed insurance. "The servicer makes money, to oversimplify a bit, by maximizing fees earned and minimizing expenses," Raskin said, adding that "a foreclosure almost always costs the investor money, but may actually earn money for the servicer in the form of fees."
Tara Twomey, a lecturer at Stanford Law School who is also an attorney at the National Consumer Law Center, said the main problem is that investors have limited ability to sanction servicers.
"In the end, the servicers are going to recoup all their costs and there is nobody to check their ability to levy fees," Twomey said.
