Brad Miller’s been tracking his particular white whale for over a decade. But he hadn’t found the right harpoon with which to slay it. Until last week.
Miller is a former congressman from North Carolina, who co-authored the legislation creating the Consumer Financial Protection Bureau. Since leaving Congress, he’s been working on litigation to finally bring to justice the mortgage companies that damaged millions of lives during the foreclosure crisis. And last week, he filed an innovative lawsuit against Ocwen, one of the nation’s largest mortgage-servicing companies. (A servicer operates as an accounts-receivable department for home loans. This is the company you make your check out to.)
We know about Ocwen from a series of state and federal enforcement actions. It has paid billions in fines for repeated, routine violations of consumer financial laws. Its computer system “lacks the basic system architecture and design necessary to properly service loans,” which is a bad look for a company that primarily services loans. This led to inaccurate monthly statements, an inability to correct simple errors, and illegal foreclosures over payments short as little as a few cents.
To Ocwen, the fines were minimal enough to be a cost of doing business. The company was threatened with expulsion from multiple states but reached settlements that enabled it to keep its business license. And, as we’ve learned over the past decade, it’s very, very difficult for any homeowner to fight one of these mortgage behemoths in court.
But there’s another side of the equation. Ocwen doesn’t own the loans it services; investors in mortgage-backed securities do. During the housing bubble, investment banks bundled thousands of mortgages together and created bonds that were sold all over the world to sovereign-wealth funds and pension funds and institutional investors. Servicers were then hired to handle day-to-day operations. Whenever a homeowner was pushed into an unnecessary foreclosure, that hurt investors as well, because they paid all legal costs and the value of the foreclosed home dropped. Servicers actually got paid in full, so they had incentives to foreclose. But investors got as abused as the families being put out on the street, losing most of their investments.
Unfortunately, there was little they could do about this. “The governing documents say that as a matter of contract law, the investors can’t sue,” said Miller. Instead, they had to rely on a trustee, which had legal custody of the mortgages, to represent their interests. The trustees hired the servicers and were supposed to monitor them. Investors were the beneficial owners of these mortgages, but the trustees were the legal owners. Technically, the investors could sue if enough of them banded together to hold 25 percent of the value of the bonds, but no investor knew who the others were, and no lists of investors were ever created or disseminated. So it was up to the trustee to be the representative if the servicer did anything shady.