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The ‘foreclosure factories’ vise
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Others aren't so lucky. Consumer lawyers say the system preys on the ignorance of borrowers and creates an opportunity to add false fees and charges not authorized by law or their mortgage contract. "The subprime servicer has found the perfect class of people with spotty credit records who are less likely than others generally to stand up for themselves," says attorney Robert C. Hilliard, a partner with Hilliard & Munoz in Corpus Christi, Tex. "And they are relentless about scaring the living daylights out of these people."
Hilliard has brought four cases against West Palm Beach, Fla.-based Ocwen Financial Corp., which, with a $50 billion portfolio, is among the 10 largest subprime servicers. (Two were successful, one was dismissed, and a fourth is in early stages.) In one case, a Galveston County jury in Texas awarded Sealy Davis, a widowed grandmother who was a nurse's aide at a children's hospital, $11.5 million after finding that Ocwen committed fraud in servicing her home-equity loan. Ocwen's general counsel, Paul Koches, says an offer to cancel the entire debt and permit Davis to keep her home was rejected early on. "They were bent on a litigation strategy to play the jury sympathy card against a deep-pocket defendant," he says. The case is on appeal.
Paying on time isn't enough to protect customers from some wily servicers. A servicer might even pocket an extra payment and never credit it to a borrower. "I have audited loans where the consumer has made all payments on a timely basis, and yet the servicing company manufactured a default and, in some cases, completed a foreclosure," says Marie McDonnell, an Orleans (Mass.)-based mortgage finance analyst who specializes in the auditing of mortgage loans.
For borrowers with financial woes, the servicing maze is the most difficult to navigate. Fifty-seven-year-old Lynda Al- len, who makes $51,000 a year, says her monthly paychecks were erratic in 2002, and she fell behind. When she tried to come clean and make good with Houston's Litton Loan Servicing, she says the company billed her $33,000, including penalties, to cover four monthly mortgage payments that would have totaled $13,000 otherwise. She still pays Litton, but filed personal bankruptcy four years ago to protect the home she has lived in for the last 13 years. She fears "they'll take my home" when she emerges from bankruptcy.
Litton says it won't comment on specific loans because of privacy issues. But given the surge in defaults, the pressure is high to keep people in their homes, says Larry B. Litton Jr., chief executive of Litton Loan Servicing, which services loans worth $60 billion. "We are...trying to lower credit losses. The last thing we want to do is raise the bar and make it more expensive for borrowers to stay in their homes." Litton says the company can lose up to 50 cents on the dollar if loans go bad, and is willing to renegotiate interest rates and waive fees. "If a consumer is really motivated to keep their home, nine times out of 10 we can help that borrower stay in their home," he says.
Not all players are so generous. McDonnell says when a consumer runs into some trouble causing him or her to be late for just one payment, the default rules written into the servicer's software appear to drive the loan mercilessly toward foreclosure. "It's as if there is zero tolerance for a delinquency, so that a payment made past the grace period is recognized as a default. At that point, payments are refused," she says. McDonnell is fighting to rescind the Rimstads' loan under alleged violations of the Truth in Lending Act.
Servicers have also been known to tack on charges for insurance that isn't required or that the homeowner already has. The customer remains oblivious because he or she doesn't get a statement. Then when the mortgage payment isn't enough to cover the new policy, the entire mortgage payment gets placed in a so-called suspense account. The servicer then reports the borrower as delinquent and charges a late fee. Says Guttentag: "They should record the payment and record a deficiency in the escrow account, which they are entitled to do. But to make the payment late because they put it in the escrow account is in my view a terrible abuse."
Such may have been the case with Vanessa Gholson of Dinwiddie, Va. Her attorney, Dale Pittman, says 98 different people at Chase Home Finance tried to sort out why Chase bought flood insurance for Gholson unbeknownst to her, and then marked her delinquent and charged her late fees when her regular mortgage payment wasn't enough to cover the new policy as well. Eventually, Chase, a unit of JP-Morgan Chase & Co., refused her mortgage payments because it wanted her to pay the delinquent amounts. Next, it hired a law firm to pursue foreclosure. A Chase spokesman says the bank purchased Gholson's mortgage from another lender, and the contract indicated that she needed flood insurance. Gholson says she lives nowhere near a flood plain. After 2 1/2 years of fighting, Chase settled with Gholson in December for $25,000, including legal fees. Says Gholson, 43, who works three jobs to pay $721 a month for her $86,000 four-bedroom house: "I work too hard to let them take my house from me."
Critics argue the fundamental business dynamics of servicing inspire wrongdoing. First, consumers have no choice about who ends up as their servicer, so market forces don't push servicers to compete on quality. Also, while some banks hold servicing rights along with loans, others are sold to third-party servicers who don't have the same incentive to maintain a good relationship in order to sell such other products as a checking account or investments. Says North Carolina attorney Ripley: "It's a fixed return for that buyer, so if they want the asset to perform, they have an incentive to generate as much fee income off of each loan as possible."
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