Errors by Mortgage Servicer Prior to Default

It is possible that a mortgage servicer may mishandle payments or other issues relating to the loan and that a loan may be put into default even though the homeowner has not missed any payments.  A mortgage servicer is the company that handles and processes the mortgage payments and deals with the day-to-day issues regarding the loan and security instrument.  There are any number of ways that the servicer could mishandle the loan, but two of the more common ways would include misapplication of the mortgage payment or improper handling of the escrow account.

Pay particular attention to the possibility of misapplication of payments when the loan changes from one mortgage servicer to another.  Just because you make your monthly payments to “Bank A” or “Bank B” does not mean that these companies own the loan.  Many times these big mortgage companies are simply “servicing” the loan for another entity that actually owns the Note.  It is not uncommon for there to be changes in the servicer of the loan.  If a company servicing your loan changes, you should get a “hello/goodbye” letter from both the old servicer and the new servicer.  

In this situation the possibility exists that the new servicer does not input all the information regarding the loan properly in their system or that errors are made during the transfer.  If the new servicer believes that payments or other monies are owed on the loan at the time of the transfer, it will most likely apply the first part of the next mortgage payment you make to any leftover “fees”.  This in turn will mean that you did not make your mortgage payment in full, which will cause you to be late on your payment, incur late fees, etc.  This is just one of any number of examples of how a mortgage payment might be improperly applied.  If you believe that your mortgage company has applied a payment improperly or not in accordance with your note and security instrument, it would be important to speak to an attorney in your area as soon as possible to keep the situation from spiraling out of control.

An escrow account is an account set up on many mortgages loans where the mortgage company will collect from the borrower payments to be paid for property taxes and insurance on the property.  This money is collected each month to assure that these fees are paid as they come due each year.  The possibilities for error by the mortgage company in handling the escrow account are also numerous.  One possibility exists where a mortgage company improperly believes that the borrower has failed to maintain homeowner’s insurance on the property.  Most security instruments provide that a lender is allowed to put “force-placed” insurance on the property in the event that the borrower fails to maintain insurance.  This type of insurance is usually much more expensive than regular homeowner’s insurance.  This insurance premium is usually paid from any amount being held in the trust account.  This would create a deficiency in the escrow account.  When a borrower makes his normal mortgage payment in this situation, the servicer is likely to use those funds to reimburse the escrow account, creating a default on the note.

If you believe that your servicer has committed such an error, it would be important to take swift action to avoid getting further into default and to avoid a possible foreclosure.

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