Mr Wave Theory is a retired Silicon Valley venture capitalist
Not a day goes by when you don’t hear of another Accredited Home Lenders Holding Co. (LEND) or New Century Financial Corporation (REIT) (NEWC) blowup. You know the mortgage industry is having a tough time when they resort to questionable billing practices to make money. I learned this first hand with Auroral Loan Services (aka Lehman Brothers LEH). Aurora Loan Services stopped sending me mortgage statements electronically last year and I wasn’t receiving statements by mail either. However, due to the convenience of auto pay, I was comfortably paying my bills every month automatically. Then, out of the blue, I got a call from them. I unexpectedly found that the tax rate on my home went up. Not a big problem, only a few hundred bucks right? Wrong.
Because of this little change in taxes, Aurora Loan Services took my payment and held it “in suspense.” Let me translate that for you. They held my payment and basically sat on it for 2 months – collecting interest on it – instead of paying down my principal and interest. Not only did they get the interest on my money, they also charged me 2 late fees (because they hadn’t “received the payment”)! Is this outrageous or what?
Being a techie, I checked Google for Auroral Loan Services hoping to get to their website. Instead I found a link to a RipoffReport on Aurora Loan Services. When I clicked through, I saw 85 consumer complaints filed against Aurora Loan Services on RipoffReport.com for the same thing that happened to me all related to “dishonest billing practices”!
So, what did they do with my money? And how are they getting away with it?
After they “discovered” that they had been sitting on my money for 2 months, Aurora applied my payment entirely to paying down the principal on my mortgage. And guess what that means? It means they didn’t apply the payment to the regular payment of interest + principal. That meant I would have to make an extra payment because the payment hadn’t been made!
Not a problem right? Wrong. What happens if I don’t do it? Late fees start kicking in! It’s a snowball effect and it all started when they forgot that I had paid!
Why does Aurora Loan Services force homeowners to accelerate payments?
Simple. All mortgage lenders today want to get paid faster because they see risk in the mortgage market. Unlike Accredit Home Lending and New Century Financial, they want to get paid sooner rather than later on their loans – and everyone knows that a dollar today is worth more than a dollar tomorrow.
What is the financial impact of applying my mortgage payment entirely to principal?
Easy. On every mortgage payment, there is a principal payment and a interest payment. In the early years of a mortgage, most of the payment is applied to interest rather than principal. That means if you say owed someone $1000 per month, $300 of that would go to principal and $700 would go to interest. Since most of the money is going to interest, the lender isn’t getting paid back their principal in the early years. It’s only in the later years that this turns the other way around.
So what happened here? Auroral Loan Services applied my payment for my mortgage entirely to the principal. Basically the lender was asking me to accelerate my payment of my mortgage back to them – without rewriting the contract. Instead of paying say $300 to principal and $700 to interest, they were trying to take the entire amount of $1000 for principal. Accelerating the principal payment gets the lender paid quicker than the term of the loan that was agreed upon and they were attempting to change the term of the loan.
Doing this to home owners one at a time is the reason why they’ve been able to get away with this dishonest practice. It’s completely wrong. If you go to the bank to borrow money, you sign a contract and that contract stipulates everything from the interest, term, and payment amount. Changing it after the ink is dry is akin to tearing up the contract and rewriting it.
If you are a financial type, you know why Aurora Loan Services is doing this. Mortgage servicing companies serve thousands or tens of thousands of home loans and mortgages. Getting an extra payment from each loan would reduce the duration of their loan portfolio quite dramatically. (Duration = riskiness). An extra payment here or there isn’t much, but on the scale they are doing it, I’d say many consumers are being squeezed. This constitutes a real serious fraud in the mortgage lending industry that is being perpetrated by one of the largest lenders in America. Aurora may sound like a small name, but they are owned by Lehman Brothers. It’s understandable why Lehman doesn’t use their own name to operate this business. After all, what kind of public company would want their name to be listed on Ripoff Report.com?