Consumer advocates have begun criticizing major mortgage lenders, such as Countrywide Financial Corp. and GMAC Financial, that also have in-house foreclosure businesses.
It is "mind-boggling" that in many states, people can lose their homes in foreclosure without any court hearing and that the foreclosure is done by a company with ties to the lender, says Ira Rheingold, general counsel for the National Association of Consumer Advocates in Washington.
"They should be completely objective and not have any financial interest in how the case is resolved," Rheingold added.
Bert Ely, a banking industry consultant in Alexandria, Va., disagreed, pointing out that lenders have every incentive to prevent foreclosures. If a foreclosure must take place, he said, lenders want it to proceed quickly and inexpensively.
"No legitimate lender wants to foreclose, and the reason why is that the losses are very substantial," he said. "Foreclosure is not a profitable activity, let me assure you."
Foreclosure is so costly to lenders — on average they recoup about two-thirds of a home's value — they should be able to foreclose using their own staff rather than having to hire outside attorneys, Ely said.
"The banks should be allowed to do it the cheapest way possible," Ely said.
Yet as interest rates and the foreclosure rate continue to rise, federal and state lawmakers and policymakers could be asked to scrutinize the vastly different foreclosure processes nationwide.
In 30 states, consumers can have their case heard by a judge. In the other 20 states, nonjudicial "trustees" generally oversee foreclosures, but state laws vary as to who can act as a trustee. In some states, the foreclosure company can serve as trustee.
Phillip Adleson, corporate counsel for the United Trustees Association, a California-based group of independent and in-house trustees, said in an e-mail that there is no factual data to show that borrowers are worse off when a bank handles a foreclosure.
"Particularly in states like California, nonjudicial foreclosures are highly regulated, leaving little discretion to the trustee," Adleson said. There is no evidence that banks with in-house trustees are more likely to foreclose than independent trustees, he added.
"In fact, the last thing most institutional lenders want to do is to acquire," are foreclosed properties, he said.
Consumer advocates say such arrangements make homeowners vulnerable to excessive foreclosure fees or losing their homes unnecessarily.
David Berenbaum, executive vice president of the National Community Reinvestment Coalition, a housing advocacy group in Washington, said many large lenders are trying to reduce costs by getting into parts of the mortgage business that have traditionally been run by third parties.
"They're looking to save costs wherever they can," Berenbaum said.
The NCRC is particularly troubled by what he calls "foreclosure mills," law firms that are overly aggressive in pushing financially distressed borrowers out of their homes, Berenbaum said.
Countrywide's Web site says its ReconTrust Co. business provides "impressive" timelines for foreclosure in seven western states.
According to GMAC's Executive Trustee Services Web site, lenders are offered "a broad variety of foreclosure management solutions," including "eviction services" in five western states.
Stephen Dupont, a GMAC spokesman, said in an e-mail that the company's mortgage and trustee arms are "focused on doing everything we can to help a borrower maintain their homeownership and avoid foreclosure."
Yet not everyone is convinced lenders have their borrowers' best interest at heart when financial distress hits.
"There need to be checks and balances to insure the lenders' interest, as well as the consumers interest is protected," Berenbaum said. "The focus should be on keeping consumers in their homes."
The Mortgage Bankers Association and Countrywide could not immediately be reached for comment.