Mortgage Data Bought and Sold on the Secondary Market is No Longer Considered to be Reliable and Accurate.

Traditionally, the courts perceived certain kinds of records to be inherently accurate and trustworthy.  The Maryland Court of Appeals explained the view as follows:

The banking industry possesses qualities that assure the same degree of accuracy as public records. As with public agencies, banks have strong incentives to generate and maintain accurate account records. The nature of their business, as well as state and federal regulation, require that banks meticulously record the transactions that affect their customers’ accounts. Such information is the stock and trade of the banking industry. Additionally, the absence of an apparent motive of bank employees to fabricate also buttresses the General Assembly’s decision to equate the banking industry with a quasi-public agency. This factor provides a guarantee of reliability in the context of public records and, as we found in Bailey, acts as an indicator of the reliability of hearsay. Bailey, 327 Md. at 702-03, 612 A.2d at 293.

Chapman v. State, 331 Md. 448, 464 (1993).

Yet, with the explosion of new actors involved in the mortgage field (including large numbers of private equity firms) since the Great Recession and mortgage market crash of 2008, we have learned that the data transferred on the secondary mortgage market is prone to multiple mistakes and errors.  Not only do homeowners who are in disputes with their mortgage companies know about these problems, so do the regulators, insurers, and others who review the marketplace details on behalf of the public, investors, and regulators.  

This common understanding of the systemic data errors in the secondary mortgage market was described in a 2018 study of the Urban Institute recommending standardization in the marketplace.  Its report explained the consequences of the unreliable data now transferred in the marketplace as follows:

The lack of standards has meant that the names of servicing-related data fields and their usage, definitions, and format can vary from one servicer to another. Because software systems are built around a data model, a lack of standards leads firms to build custom systems, complicating the flow of data from one entity to another. A common example is the routine transfer of loan data when mortgage servicing rights (MSRs) are sold. Moving large volumes of incompatible data from one entity to another is cumbersome and time-consuming. Data lost or misinterpreted during the transfer can cause consumer harm or invite regulatory scrutiny, with the potential for fines.

More importantly, borrower harm caused by data inconsistencies and ambiguities can mean denial or delay in receiving loan modifications, erroneous foreclosures, or poor customer services…

This issue surfaced during the foreclosure crisis when hundreds of billions of dollars of servicing portfolios were transferred from one servicer to another in a short period (Kaul and Goodman 2016). Some were affected by widespread data errors that led to borrower harm through missed opportunities for loss mitigation, misapplication of escrow payments, or erroneous fees. Servicers incurred significant financial costs, penalties, and reputational harm (OIG 2014).

The Case for Mortgage Servicing Data Standards (Urban Institute, 2018) at Pages 5-6. 

A 2017 market survey of the servicing industry conducted by the Federal Housing Finance Agency, i.e. Future of Mortgage Servicing: Market Survey Results (Apr. 2018), identified the known challenges faced by the mortgage servicing market including that “[a]pproximately 60% of respondents indicated the key challenges for servicing transfers are ensuring data accuracy and completeness, and minimizing borrower impacts.”  Id. at 6.  More specifically the FHFA survey found,  

  • Respondents stated that varied data and document standards followed by different servicers leads to data inconsistencies and gaps during the [Mortgage Servicing Rights (MSR)] transfer process.  
  • Respondents also expressed that system limitations inhibit the ability to effectively execute MSR transfers.  
  • Servicer transfer processes can be manual and time consuming with the need to map every data field, even when transferring to the same servicing system.  
  • 50% of nonbanks also highlighted document custody as one of  their top three challenges in transferring servicing.  Id. 

The credit rating agencies who review the secondary mortgage market of residential mortgage-backed securities for investors also account that loans available on the secondary market are characterized by “impaired payment histories [which impact]…the servicer’s ability to foreclose and liquidate the property.” FitchRatings: Structured Finance, U.S. RMBS Non-performing Loan Criteria – Effective Aug. 12, 2016 to Dec. 1, 2016 at Page 6.  

Finally, the problems involved in the integrity of loan data in servicing transfers is well known by state-based regulators as well.  See e.g. Conference of State Bank Supervisors’ Proposed Regulatory Standards for Non-Bank Mortgage Servicers at Page 5, 11 (“Regulators and the industry have also recognized widespread data quality and integrity issues, especially in the context of transferring servicing rights. Non-bank mortgage servicers often struggle to integrate acquired loan portfolios and to locate legal and collateral documents associated with the transferred loans. All of these issues are exacerbated if a servicer’s operational capacity has not kept pace with its growth…[these issues involve not only] data mapping problems so often experienced during a large transfer but also the compatibility of the data”). 

Because the data reported by mortgage servicers is no longer inherently reliable, it is important for consumers to track their payments and communications with their servicers themselves.  A consumer’s records (i.e., canceled checks, bank statements, and communications logs) can be more accurate—especially if the borrower’s loan has been transferred over and over between non-bank servicers who perform no meaningful investigation to the data they have acquired and simply place the burden on the consumer to dispute the erroneous mortgage data they have incorporated into their own systems without any reasonable due diligence.