Nearly two years after the “robo-signing” scandal forced a reboot of the nation’s home-foreclosure process, mortgage servicers have begun the hard work of buffing up their industry’s tarnished image after years of making life miserable for Americans struggling to hold on to their homes.
Changing the industry’s bad behavior will be a slow and painful process for servicers who collect mortgage payments and manage the accounts on behalf of lenders, however. The inappropriate fees, mishandled accounts, shoddy paperwork and illegal foreclosures that first came to light after the 2007 housing crisis were long-standing problems that had gone largely unnoticed for years.
Whether it was obtaining loan modifications, arranging short sales, negotiating principal reductions or refinancing homes through the federal Home Affordable Refinance Program, mortgage servicers were more obstacle than facilitator during the housing meltdown, according to many housing advocates and consumer attorneys. And depending on whom you talk to, not much has changed.
“They’re a huge, inefficient, bureaucratic ship that doesn’t operate well, and it’s not going to turn itself around quickly. Just the day in, day out pulling of teeth you have to do (with servicers) is mind-numbing,” said Daniel Lindsey, supervisory attorney at the Legal Assistance Foundation in Chicago, which helps delinquent homeowners avoid foreclosure.
Jose Rodriguez, a foreclosure intervention counselor with the Mission Economic Development Agency in San Francisco, said it could still take more than a year to complete a loan-modification review.
“By the time we see clients who’ve tried it on their own, they’re ready to give up,” Rodriguez said. “We’ve witnessed clients that have easily taken at least two to two-and-a-half years to complete a modification request.”
David H. Stevens, the president and CEO of the Mortgage Bankers Association, acknowledged servicers’ recent deficiencies but said the industry had changed its business model and that progress couldn’t be denied.
"There are still mistakes being made, but it pales in comparison to what this environment was like in the early part of this housing crisis," Stevens said. “ . . . I think we are clearly on the precipice of that changing."
Early on, servicers admittedly were unprepared to handle the massive failures of unsustainable and exotic mortgages that had originated during the housing bubble. Failed lenders such as Countrywide Mortgage and Washington Mutual added millions more bad loans to servicers’ caseloads just as they were trying to ramp up their systems and staffing to handle the crisis, Stevens said.
But after the problems resulted in federal consent orders against 17 servicers, a near-nationwide moratorium on foreclosures, a $25 billion national settlement to address past improprieties and federal plans for mandatory industry standards, the situation is starting to improve.
The national settlement negotiated by the federal government and the states has forced the nation’s five largest servicers to beef up staffing, improve communication with borrowers, assign one person per account and provide greater accountability when executing foreclosure documents. Stevens called the requirements “extraordinary.”
"I’ve been in the financial services market for three decades," he said. "There’s never been standards like this."
Many of the settlement terms probably will become mandatory for the entire industry when the Consumer Financial Protection Bureau finalizes new standards for servicers later this year.
Announced in February, the terms of the $25 billion settlement call for Ally (formerly GMAC), Bank Of America, Citi, JPMorgan Chase and Wells Fargo to provide $17 billion in principal reductions and loan modifications, up to $3 billion in refinancing relief, $1.5 billion to borrowers who lost their homes and another $1.5 billion to participating states.
While the settlement is a "good first step," said Diane Thompson, an attorney with the National Consumer Law Center, she wonders whether the agreement might cause servicers to relax their consumer-friendly efforts, realizing that their punishment already has been delivered.
"I think there’s a real risk that the pressure on them to behave well has disappeared," she said.
As for the industry guidelines the Consumer Financial Protection Bureau has proposed, Thompson called them "very weak."
"They don’t go much beyond existing law and the clear and explicit literal mandates of Dodd-Frank. So if I was a servicer, I wouldn’t be particularly worried," she said, speaking of the 2010 financial overhaul law.
While most of the financial relief spelled out in the settlement is yet to come, the agreement is bearing some early fruit. Loan counselors and attorneys say they’re starting to see more loan modifications and principal reductions than at any time in recent memory.
“A year ago, I could count on two hands the number of principal reductions I’ve seen over the last five years. Now I’ve seen that many in the last six months. And that was before the settlement,” said John Groene, a neighborhood director at Neighborhood Housing Services of Chicago Inc., a nonprofit community revitalization agency.
Burt Hamrol of South San Francisco, Calif., is an early benefactor of the settlement. The 51-year-old carpenter recently received a letter that said he’d been approved for a $297,000 principal reduction by Bank of America, after several years of battling its mortgage servicers.
“When I opened up the envelope and read the letter, I started crying,” Hamrol said. “I’m going, ‘No way. Really?’ I’m just blown away by this.”
The unexpected turn should provide Hamrol with a happy ending to a near five-year odyssey that saw him denied loan modifications three times after his mortgage payment with Countrywide doubled from $1,800 to $3,600 per month.
Hamrol’s problems began in 2007, when he tried to refinance his interest-only mortgage to a fixed-rate plan. Countrywide offered the fixed rate for a three-month trial period, Hamrol said, but after that, the payments doubled.
When Bank of America took over Countrywide, Hamrol said, it tried to get him to pay the same amount, but he refused.
“They said that’s what it is because my house is worth all this money,” Hamrol said. “I told them the house is only 890 square feet. They said, ‘But you live in San Francisco in a desirable area.’ I told ’em I live in South San Francisco and it’s a horrible area.”
For 18 months, Hamrol said, he never paid the $3,600 mortgage. After being barraged with collection attempts and threats of foreclosure, he said, he put the home up for sale in 2009 and moved in with a friend for four months.
“It went from $699,000 to $599,000 to $499,000 to $399,000. I didn’t get one offer,” he recalled.
Hamrol eventually moved back home and began working with the Mission Economic Development Agency for a loan modification. The bank initially agreed to a three-month modification trial period at $1,800 per month, Hamrol said, but then he was denied permanent relief. Hamrol said the bank didn’t properly credit his payments. He was offered another trial modification, but was denied again after the trial ended.
At his wits’ end, Hamrol said, the nightmare finally ended several weeks ago, when he got a letter “out of the blue” from Bank of America that said it would knock $297,000 off his principal and lower his payments during yet another trial period to $2,200 per month at 2.5 percent interest.
“If this really happens, I’m gonna go to Ireland and kiss the Blarney stone or something. I can’t believe it. I’m going to make my payments in May, but I still don’t trust them,” Hamrol said.
Rick Simon, a Bank of America spokesman in California, was unfamiliar with the case but said Hamrol probably was one of several hundred people nationwide who’d received similar offers because they already were slated for relief under the settlement, as their paperwork and documentation were in order.
“These people are being helped in a way that wasn’t available two months ago, prior to the settlement,” Simon said.
Similar letters will go out over the next few months to some 200,000 other Bank of America borrowers as their eligibility under the settlement is determined, Simon said. Bank of America has provided more than 1 million loan modifications over the last four years, but Simon acknowledged that the program “hasn’t always gone as smoothly as we hoped.”
He said the high default rate on Bank of America trial loan modifications typically resulted from offering the plans without properly documenting borrowers’ ability to pay. The large number of borrowers who needed assistance was also a problem for the bank’s servicers, “but we’ve gotten better and better as time has gone along,” he said.