WASHINGTON -- The federal government is engaged in a massive mortgage modification program that's on track to send billions in tax dollars to many of the very companies that judges or regulators have cited in recent years for abusive mortgage practices.
The firms, called mortgage servicers, have been cited for badgering, manipulating or lying to their customers; sticking them with bogus fees, or improperly foreclosing on them.
Mortgage servicers are the middlemen between homeowners and the investors that hold their mortgages, collecting homeowners' checks and disbursing payments for the mortgages, property tax and insurance. They're a necessary player for any modification.
The reliance on such companies points to an ironic paradox for federal regulators: Cleaning up the nation's financial crisis often rewards the firms that helped create the mess. Those Wall Street banks and mortgage servicing companies argue that they're best positioned to repair the damage they've helped cause. In the case of the mortgage program, the firms getting the taxpayers' money are, after all, the firms that control the troubled mortgages.
To make matters worse, the Government Accountability Office, Congress' watchdog, has said that the Treasury Department hasn't done enough to oversee the companies participating in what's known as the Home Affordable Modification Program, which emerged from the bank bailout bill Congress passed last fall.
The modification program has been slow to get off the ground. Since it began this spring, only 12 percent of a potential 3 million delinquent mortgages have begun the process of being reworked, or put into "a trial modification," according to Treasury Department data through August, the most recent available.
"We've consistently been behind this problem," said Mark Pearce, North Carolina's chief deputy commissioner of banks, who works with a state-level group of attorneys general from across the country. "Two years ago, maybe some were caught by surprise. But we still haven't gotten to a point where the servicers have demonstrated an ability to handle the problem."
Housing advocates say homeowners still face "reluctant lenders," said Irwin Trauss, an attorney who represents low-income homeowners for Philadelphia Legal Assistance. He recently testified at a hearing of the Congressional Oversight Panel, the watchdog that monitors the Treasury's Troubled Asset Relief Program, better known as TARP, or the bank bailout bill.
Trauss said that Bank of America, at least through July, told homeowners that they couldn't participate in the program when they should've been allowed to do so, and he alleges that Saxon Mortgage forced one of his clients into bankruptcy without providing a valid reason for turning down her modification request. Trauss' comments were echoed by other housing advocates, who've found mortgage servicers slow to respond and confused about modification rules.
"Servicers look for reasons to avoid making the modifications when they are most needed, rather than for opportunities to make them," Trauss said.
Saxon Mortgage said it couldn't comment on Trauss' testimony because it wasn't provided with specific details of the account in question. Bank of America said there could've been instances in which improperly trained employees were confused about the modification rules, but the vast majority of customers have been given proper information.
Although it's early in the Treasury Department's program, housing advocates say the servicer industry for years has resisted helping customers with modifications. Donna and Ronnie Fruia, of Troutman, N.C., learned firsthand how difficult it can be.
The couple was in the midst of a series of health crises, and three members of the family — the couple's son, Donna's mother and Ronnie — were in the hospital.
It was then that Donna got an urgent call that somebody from her mortgage company, CitiFinancial, had just showed up in her husband's hospital room, where he was recovering from a stroke.
"They said, 'Some guy's in there aggravating him,'" she said.
"At the time, I couldn't even really talk that good," Ronnie said. "But he wanted me to sign a bunch of papers."
The Fruias had been trying to get a mortgage modification from CitiFinancial. The company, however, was pushing the Fruias to accept a modification that wouldn't have cut their interest rate, they said.
Only after the episode in the hospital room and the involvement of state regulators did CitiFinancial cut the mortgage's interest rate from 11.5 percent to 5 percent, lowering their monthly payment from $985 to $602. The process took from the start of the year until July.
"They were the perfect candidate for someone with a subprime rate getting a modification," said Henrietta Thompson, who as housing coordinator for United Family Services, a United Way-funded organization in Charlotte, helped the Fruias. "I know if the banking commissioner hadn't gotten involved, it wouldn't have happened."
While CitiFinancial, a unit of Citigroup Inc. — one of the largest recipients of TARP bailout funds — said it couldn't talk about specific customers, it's "pleased" that the case was resolved.
"We have strict guidelines concerning the behavior of our representatives, and the incident you described would not be acceptable under our policies, even if well-intentioned," said Mark Rodgers, a spokesman.
It shouldn't have been a surprise that the mortgage service companies would have trouble executing wide-scale mortgage modifications. They generally aren't set up for the complicated business of reworking loans.
In 2007, an assistant attorney general in Iowa, Patrick Madigan, analyzed the looming mortgage meltdown and found that mortgage service companies have a "highly automated process, spending as little time as possible on an individual loan and preferably no time actually talking to the customer."
"Loan modifications, by contrast, are a time-intensive process that requires a great deal of individualized attention," he wrote. "In some situations, it may be easier and cheaper for a servicer to simply foreclose on a borrower than to try to fix the underlying problem."
Service companies had high turnover and employees who saw their jobs as akin to that of collection agents. Some were known to hang up on callers if they started to get tough questions, Madigan wrote. He urged mortgage service companies to hire far more staff and boost training.
That year, Iowa Attorney General Tom Miller convened a group of state officials (Iowa's Madigan helped coordinate the effort), who then contacted the nation's 20 largest servicers of risky subprime mortgages.
By September 2008, however, as the economy went into freefall, the mortgage industry's efforts had been "profoundly disappointing."
"Too many homeowners face foreclosure without receiving any meaningful assistance by their mortgage servicer, a reality that is growing worse rather than better," said a report from the State Foreclosure Prevention Working Group.
By this year, more federal and private efforts were under way to modify millions of troubled mortgages, and customer service was beginning to improve. Companies, though, were still having trouble getting the jobs done.
"It is difficult for homeowners to initiate productive discussions with lenders because many servicers lack the capacity to deal with a large volume of modifications," the Congressional Oversight Panel reported. "Servicers are generally understaffed for handling a large volume of consumer loan workouts."
The panel found that it's "unlikely" that mortgage servicers will be able to do all they're being asked to do: "Servicers are simply in the wrong line of business for doing modifications en masse," it said.
Madigan, the assistant Iowa attorney general, said in an interview that, "The mortgage industry has responded to this crisis with a series of half steps based on a notion that a turnaround in the housing market was just around the corner."
Under the Treasury Department's mortgage modification program, three parties can participate: the company that owns the loan, the company that services the loan, and the homeowner. All get a portion of the more than $20 billion that the federal government currently estimates it could spend to keep homes out of foreclosure.
While the Treasury said it's necessary to take in as many mortgage service companies as possible, the GAO found that the department wasn't doing enough to monitor the process.
In a July report, the GAO said that the department had "significant gaps in its oversight structure," and was short-staffed in the office monitoring the modification program. As of July — eight months into the program — the Treasury had filled fewer than half the positions in a key modification office. (Many of those jobs have since been filled, the department said.)
Beyond that, the government had conducted "readiness reviews" of only seven of 27 mortgage servicers the GAO examined; no more were planned. The reviews only included interviews with senior executives — and the information gathered wasn't verified.
"Treasury cannot identify, assess and address risks associated with servicers that lack the capacity to fulfill all program requirements," the GAO said.
Treasury said it's beefing up its review procedures and also said it recognizes many of the problems and has been working to correct them. "Clearly, we're not there yet," said Seth Wheeler, one of the Treasury officials who oversees the modification effort. "Clearly there's still inconsistent application of the program, even though we have made progress."
Several companies in the Treasury program have been cited by judges or regulators for having engaged in improper behavior with their customers.
They include Select Portfolio Servicing Inc., a Utah-based company formerly known as Fairbanks Capital Corp.; Countrywide Home Loans Inc., now a unit of Bank of America Corp.; Carrington Mortgage Services LLC, based in California; Saxon Mortgage Services Inc., a unit of Morgan Stanley; EMC Mortgage Corp., now a subsidiary of J.P. Morgan Chase & Co.; and Green Tree Servicing, a Minnesota company.
Ocwen Financial Corp., a Florida-based company that services more than 300,000 mortgages nationwide, could receive more than $200 million in TARP payments.
"Ocwen has screwed up my finances so bad you can't believe it," said Brad Rhoton, whose rental properties in the Houston suburbs are part of a nationwide lawsuit against Ocwen. "It's been the most maddening process you can imagine."
Rhoton's lawsuit charges that Ocwen constantly misapplied Rhoton's mortgage payments and tacked on unnecessary fees and insurance, causing his accounts to fall behind.
So far under the Treasury's modification program, Ocwen has started trial modifications in 8 percent of potential mortgages — below the national average and well below some other servicers.
Paul Koches, a company spokesman, said the number is misleadingly low. Ocwen, he said, has set rigorous standards in documenting its modifications and is therefore likely to have a far higher share of its modifications stick than other companies. He said that Ocwen undertook its own loan modification program in 2007 and has beefed up its staff substantially since then.
As for the suits against it, Koches said they represent a fraction of the firm's customer base, and many were copycat lawsuits that tried to paint Ocwen with the same brush as other mortgage servicer firms. He said the company continues to vigorously defend itself against lawsuits.
Over the years, Ocwen has lost other lawsuits and has been slapped down by a federal judge for its conduct.
In one Texas bankruptcy case, for example, a federal judge blasted Ocwen after it tried to pass the cost of a $1,000 sanction onto the customer it was cited for mistreating. When the judge found out, he said, "Ocwen's course of conduct in this proceeding bordered on the outrageous." He fined the company an additional $27,500.
The case was far from isolated, however. A jury in Galveston, Texas, ordered the company to pay $11.5 million, and one down the coast in Corpus Christi ordered it to pay $3 million for unfairly foreclosing on homeowners (both cases were then settled in the appeals process for undisclosed amounts).
In both cases, the plaintiffs were on the edge financially, and so when Ocwen added extra fees to their accounts, they quickly fell behind.
That was part of their strategy, plaintiffs' attorneys said. One of the key witnesses before both juries was a former Ocwen account officer who said the company trained its sights on customers who had substantial equity in their homes. In those cases, the company had the most to gain if customers lost their homes in foreclosure.
"We didn't treat the people very well, but the money was pretty good," the former account officer, Ron Davis, testified during one of the trials. (Davis couldn't be reached for further comment.)
The motive, he said, was simple: force people into foreclosure as a way to earn higher bonuses.
"We would call the customers and ask them what bridge they were going to live under," Davis testified.
Ocwen lost that lawsuit. A Texas jury found that the company engaged in "fraudulent, deceptive, or misleading" tactics that it called "unconscionable." The case involved an elderly Texas woman the bank tried to evict from her home even after a local judge had ordered it not to. The jury awarded her $11.5 million, which was reduced to $1.8 million, according to Ocwen's Securities and Exchange Commission filings; the case was settled during appeals.
Outside the courts, federal regulators in 2004 approached Ocwen to request that the company enter into a formal supervisory agreement under which it promised to improve its customer service. It required, for example, that Ocwen beef up its ombudsman to take customer complaints; adopt a "borrower-oriented customer service commitment plan"; take reasonable actions to see if homeowners already have hazard insurance before adding it to customers' accounts; and regularly report to federal regulators about outstanding customer complaints.
Koches of Ocwen said the agreement was merely an attempt to formalize many of the steps the company was already taking — and that the company and federal regulators wanted avoid the kind of problems other firms had experienced.
Later that year, however, Ocwen took steps to ensure that such regulatory decisions wouldn't come again.
It successfully petitioned to have itself removed from oversight by the Office of Thrift Supervision, thus ending their supervisory agreement hatched just months before, according to Ocwen's regulatory filings. Ocwen said it removed itself from OTS oversight for business reasons unrelated to their supervisory agreement and that it continues to follow the intent of the agreement.
(This article is part of an occasional series on problems in mortgage finance.)
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