CROOK ALERT 6--THE FORECLOSURE FACTORY IN THE MORTGAGE SERVICING RACKET Published 12-22-06

THE MORTGAGE SERVICING RACKET

THE PREDATORY TACTICS OF SOME MORTGAGE SERVICERS INCLUDING JP MORGAN CHASE ARE SQUEEZING HOMEOWNERS ACCORDING TO AN EXCELLENT BUSINESS WEEK ARTICLE BY MARA DER HAVANESIAN 12-25-06

Randy and Jennifer Rimstad of Minnetonka, Minn., refinanced their mortgage in 2004 to replace a 50-year-old furnace and pay for their youngest daughter's wedding. In May, their interest rate jumped to 8.55% from 5.5%, pushing their monthly payment from $1654 to $2295, and the Rimstads buckled under an adjustable rate mortgage they say they didn't understand and could ill afford. Then came the collection nightmare that tacked on another $700 or so in monthly payments.

On Dec. 5, OPTION ONE MORTGAGE CORP., a Kansas City (Mo.)-based unit of H&R BLOCK INC., foreclosed because the Rimstads owed more than $18,000 in late charges and attorney's fees, on top of their past-due payments. After 24 years under the same roof, the Rimstads face an uncertain future. "I don't know what will happen to us," says Randy, 57. "We don't have any place to go." Option One says it can't comment on the specific amount owed, but that it has been working with the Rimstads and will continue to "explore options toward a solution."

Millions of other families in the U.S. could soon find themselves in the same dire straits. some $1.2 billion in adjustable mortgages will shift to higher rates in 2006 and 2007, more than half of which are to borrowers with less-than-perfect credit, or subprime borrowers, like the Rimstads. these loans already are defaulting at unprecedented rates. Lenders are in large part responsible because they sold risky and unsuitable mortages to unsophisticated borrowers, In some cases, of course, careless borrowers shoulder some of the blame. But some say there's another force at work: agressive servicing tactics, "predatory servicing has attracted little attention, yet in many respects it is more vicious and the adverse consequences are more far-reaching," says Jack M. Guttentag, professor of finance emeritus at the University of Pennsylvania's Wharton School.

Mortgage Servicers collect and record monthly payments as well as manage insurance and tax payments on some $10 trillion in mortgage debt outstanding. lthey also manage defaults and collections when loans go bad. Critics of the industry, such as Rawle Andrews Jr., a bankruptcy attorney with Andrews & Bowe in Washington, call them "foreclosure factories."

Servicer abuse is not new. Still, regulators had hoped the industry would have cleaned up its act since 2003 when the Federal Trade Commission and the Housing and Urban Development Dept. slapped a record $40 million fine on FAIRBANKS CAPITAL CORP. in one of the worst cases of predatory servicing, which involved many of its 500,000 customers. Says Kurt Eggert, a professor at Chapman University School of Law in Orange, Calif.: "The FTC hoped by nailing FAIRBANKS it would send a message to the whole industry. It hasn't yet."

SOFTWARE GLITCHES

Any number of predatory practices from not crediting payments to prematurely intitiating foreclosure proceedings, can send struggling home buyers over the edge. "In the subprime market, it's a huge deal because they're already in a loan that is very expensive. If you live paycheck to paycheck, the penalties of delinquency sink you deeper," says Alfred Ripley, legal counsel for consumer and housing affairs at the North Carolina Justice Center in Raleigh, a non-profit that helps low-income families statewide.

Ivy Jackson, a director at the Housing & Urban Development Dept., is bracing for a lot more consumer complaints. "the speculation is the servicers don't have enough people to handle the volumes. "We're hearing that they're not set up to service [exotic] loans. "

Bureaucratic snafus and software glitches are no small problem in the servicing industry. Huge errors stem from the massive turnover of ownership alone. Servicing rights for any individual mortgage are valued separately from the actual loan and are often sold repeatedly by banks and third-party servicers, without customers having a clue or a choice.

Still, there is no rule that says the old servicer must transfer the entire record to the new servicer. Often borrowers aren't informed of a change, and they use their original payment coupon book and send checks to the old address. The checks usually get sent back to the borrower while the new servicer chalks it up as a late payment, deducts a penalty from the mortgage, and marks it as underpaid. After a few months of this, the loan is recorded as delinquent. But the customer may not know anything is wrong because servicers aren't required to to send a statement, and if they do, it is often incomplete. A foreclosure notice can be the first indication of any trouble. One HUD investigator says in a recent case a borrower faced foreclosure because 19 mortgage payments were missing. "The servicer found all 19 payments in what we call 'a miracle' because we got involved," says the investigator.

A TERRIBLE ABUSE

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-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 connsumer 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 Mcdonell, 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 Allen, 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 penalites, 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, 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 50c on the dollar if loans go bad and is willing to renegotiate interest rates and waive fees. "If a customer 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," sahe says. McDonnell is fighting to recind the Rimstads' loan under alleged violationjs 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 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 & COMPANY, 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 21/2 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 4-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 not choice about who ends up as their servicer, so market forces don't push servicedrs to compete on qauality. 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."

April 2008 Harvard Law Professor Makes the Case for Credit Regulations

 

Harvard Law professor Elizabeth Warren makes the case for

credit regulation.

http://harvardmagazine.com/2008/05/making-credit-safer.html

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16 comments

Kenneth D. Pettingill 9 years ago

Wow, you hit the nail right on the head. What could end up happening is sub-prime lender/servicers will begin to go belly up.......remember the S & L scandal?

There are always going to be times when a debtor just can not meet monthly obligations. Lenders and servicers most certainly DON'T benefit from defaults, in fact, managing the default channel of sub-prime loans is labor intensive and costly. Loss mitigation strategies reduce the number of delinquencies, but sub-prime loss mitigation requires substantial resources and a retooling of currently accepted collection practices. The foreclosure process is the final stage and a necessary vehicle for lenders to recoup their investment dollars.

Anyone in a negative situation is encourage to reach out to their lenders for advice and alternatives to avoiding the foreclosure process, but understand the hard fact of life, if a payment arrangement or some loan modification work-out can not be reached, the only alternatives are DIL (deed in lieu) or to go through the foreclosure process (not recommended).


Nye Lavalle 9 years ago

In 1999 I coined the term predatory servicing to describe the criminal acts of many banks and special servicers in America in victimizing elderly, disadvantaged and minority Americans. However today, we see that virtually every segment of American consumers and borrowers are being increasingly victimized by the servicers and their partners in crime.

Thanks for the fine article and if I or any of my cohorts can ever be of support, kindly feel free to contact me or visit the web site listed above!


EnTrust 9 years ago

Thx for the article. It seems that the situation is only going to continue to get worse. They are now introducing legislation to address.


Ralph Deeds profile image

Ralph Deeds 8 years ago Author

Good advice. Thanks for the comment!


John 8 years ago

Acquiring a cash advance loan is easy and simple, but the repayment terms are very strict in these cases. First, the full amount of the loan along with the heavy rate of interest should be paid dot on time. If a person fails to do so, he might get into some real trouble. Since the rate of interest in cash advance loan is quite high, the total amount of repayment becomes really big. And for some, the repayment on time becomes impossible, which amounts to a further increase of the interest rate. Some borrowers pay the principal amount and keep the interest for future repayment. This leads to a situation where the payable interest mounts up to become larger than the principal amount. Thus the borrower may get himself stuck in a never-ending loop of debt. A thorough knowledge about one's own capability and a good market research can strike out this problem while opting for a cash advance loan. http://advancemagnumcash.pixieinfo.com


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Ralph Deeds 8 years ago Author

thanks for the knowledgable comment!


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Ralph Deeds 8 years ago Author

Payday loans should be avoided like the plague. Likewise home equity loans except in special, unusual circumstances.


Don 8 years ago

We found that Chase Home Equity loan servicing depts are unavailable for borrowers to attempt foreclosure prevention and workout. All Chase outlets are secretive about that. Any contact or phone numbersthey give out is to high pressure collectors who have no authority to work out a foreclosure solution. Don not.aging@yahoo.com


Ralph Deeds profile image

Ralph Deeds 8 years ago Author

I had a bad experience with my home mortgage with Chase several years ago when they claimed, inaccurately, that I had allowed my homeowners policy to lapse and they unilaterally purchased a policy covering my house at a price, as I recall, five times what I had already paid for similar coverage. It took me nearly a year and many phone calls and letters to get them off my back.


Murray 8 years ago

Borrowers are facing alot of problems by the increasing rate of interest month by month, And becoming difficult to them even to repay the money to the lender with high interest, so people should be carefull the lenders, Thanks for sharing the post.


Ralph Deeds profile image

Ralph Deeds 7 years ago Author

I don't know the answer to that question. Help may come if Obama is elected along with a Democrat majority in the House and Senate.


Ralph Deeds profile image

Ralph Deeds 7 years ago Author

I have a dream house

By Elizabeth Jacobson

From an affidavit by Elizabeth Jacobson, a former loan officer at a Maryland branch of Wells Fargo, submitted in support of a federal lawsuit brought by the city of Baltimore against the bank. The city filed the lawsuit in January 2008, claiming that Wells Fargo targeted African Americans in Maryland for high-interest subprime mortgages, which have since forced many homeowners into foreclosure. The affidavit was submitted in June. Asked for comment, Wells Fargo said that it believes the “lawsuit lacks merit” and stated that “race is not a factor in the pricing and products we offer.”

I worked directly with loan applicants to make subprime loans. Much of my business came from referrals from Wells Fargo loan officers who were on the prime-loan side of the business. These loan officers were known as “A reps.” For several years I was the top subprime-loan officer at the company. My pay was based on commissions and fees from making these loans. In 2004, I grossed more than $700,000 in sales commissions.

The commission and referral system at Wells Fargo was set up in a way that made it more profitable for a loan officer to refer a prime customer for a subprime loan than make the prime loan directly to the customer. I knew that many of the referrals I received could qualify for a prime loan. It was in my financial interest to figure out how to qualify referrals for subprime loans. Moreover, in order to keep my job, I had to make a set number of subprime loans per month.

There were various techniques that were used to qualify the A-rep referrals for subprime loans. One way was to tell customers not to put any money down on the loan and borrow the entire amount, even if they could afford a big enough down payment to qualify for a prime loan. Another technique would be to tell the customer that the only way to get the loan closed quickly would be to submit it as a subprime loan. Some A reps actually falsified loan applications in order to steer prime borrowers to subprime-loan officers. One means of falsifying loan applications that I learned of involved cutting and pasting credit reports from one applicant to another. I was also aware of subprime-loan officers who would cut and paste W-2 forms. I reported this conduct to management and was not aware of any action taken to correct the problem.

Federal Housing Administration (FHA) loans, like other government-insured loans, offered lower interest rates that are closer to prime rates. Subprime-loan officers were required to have a subprime borrower sign a “Benefit to Borrower” statement that stated that the borrower may qualify for a government-insured loan but did not want it because it was too much paperwork. In fact, subprime-loan officers were never trained in how to make FHA or government-insured loans. We asked for this training, but Wells Fargo refused to provide it.

I know that Wells Fargo Home Mortgage tried to market subprime loans to African Americans in Baltimore. I am aware from my own personal experience that one strategy used to target African-American customers was to focus on African-American churches. Wells Fargo had a program that provided a donation of $350 to the nonprofit of the borrower’s choice for every loan the borrower took out with Wells Fargo. Wells Fargo hoped to sell the African-American pastor or church leader on the program because Wells Fargo believed that church leaders had a lot of influence over their ministry and in this way would convince the congregation to take out subprime loans with Wells Fargo.

I remember being part of a conference call that took place in 2005 where Wells Fargo sales managers discussed the idea of going into black churches in Baltimore to do presentations about our subprime products. On that call we were told that we “have to be of color” to come to the presentation. The idea was that since the churchgoers were black Wells Fargo wanted the loan officers to be black. I was told that I could attend only if I “carried someone’s bag.” Subprime-loan officers did not target white churches for subprime loans. When it came to marketing, any reference to “church” or “churches” was understood as code for African-American or black churches.

I complained many times about what I thought were unethical or possibly predatory loan practices that Wells Fargo was engaged in. Managers never took any action to respond to my concerns. In my office we morbidly joked that we were “riding the stagecoach to Hell.”


DOWD 5 years ago

The MORTGAGE horror STORIES I have read are always about someone who already had questionable credit, BUT WE BOTH HAD a 750 credit score!!!...for over 30-years STRAIGHT!!! These MORTGAGE horror stories are always debateable...depending on who's side you are on..you get to spin the tale in your favor/opinion, BUT my story has no "gray area"!!! According to the FORENSIC AUDITOR it is cut and dry!!!...AND Chase MORTGAGE ADMITS TO the simple $465 dollar error they made in 2004!!! YET they knowingly filed WRONGFUL foreclosure in 2006...I hired an Attorney to stop the wrongful foreclosure, Our attorney helped get us to Mediation in 2007, BUT CHASE eventually bought off our Attorney and gave him more jobs, we understand, he has to eat!!!!...At Mediation in 2007, VP Deborah Baker stated that CHASE would pay for damages but within the week, under the advice of Chase Attorneys they changed that decision...In CHASE'S OWN WORDS told to our faces, Chase "is holding us hostage until we drop the "case"...CHASE said "since we needed our good credit, that our credit was CHASE's leverage against us...to make us drop the case"...But CHASE'S ATTORNEY'S are keeping the case open to "milk" CHASE's deep bailed-out pockets...and CHASE is allowing it to happen...unchecked!!! During these 6-years, we have had other attorneys, who learned of the case, attempt to work "probono" but time and expenses always get the best of them... We cannot do anything!!! Government-Bailed-Out Big Business Chase Mortgage has TOTAL control over our lives!!! THEY REALLY ARE HOLDING US HOSTAGE!!!...WE CAN NOT USE OUR Veteran (VA) benefits!!!!, OUR CREDIT IS beyond DESTROYED!!!! WE WON'T BE ABLE TO RECOVER IT DURING OUR LIFETIME!!! Futher, in 2009,CHASE paid off the arbitrator, blocked our efforts to file a humiliating bankruptcy, in 2009, and are STILL PAYING attorney's to keep the case open, IT's 2010!!! AND WE SEE NO END IN SITE!!!!...IT CLEAR TO SEE WHO IS BENEFITING from all of this...THE CHASE ATTORNEY'S...WHY SHOULD THEY CLOSE THE CASE...CHASE HAS UNLIMITED DEEP POCKETS!!!! WE ARE JUST NOBODY!!! OH, PEOPLE TELL US BOTH, THANK YOU FOR SERVING YOUR COUNTRY, BUT THEY DON'T HELP YOU, WE SERVED A COMBINED 40-YEARS AND ALL OF OUR EARNED BENEFITS ARE LOST TO CHASE's simple error...We write letters...EVEN TO THE PRESIDENT...we respond to emails send to us by well meaning friends and probono attorneys...maybe someday a change will come...Keep in mind anyone can verify the validity of all I've said...it's a matter of public record!!!! You check it out...BOTTOM LINE: CHASE has spent nearly a million dollars to "hold us hostage" (like a BULLY!!!) over a $465 dollars mistake, on a $50,000 piece of property...for 6-YEARS!!! And us TAX PAYERS HAVE FOOT THIS BILL, BECAUSE OF THEIR MISMANAGEMENT!!! Thank you for this opportunity to write


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Ralph Deeds 5 years ago Author

Thanks for your comment. As I mentioned above I had a bad experience with Chase several years ago. I'd never do business with them again nor with any Wall Street bank if I could avoid it.


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Ralph Deeds 4 years ago Author

Is anyone going to be held legally accountable for the financial crisis? When the Securities and Exchange Commission announced recently that it was settling fraud charges against Citigroup for a paltry (for Citigroup) $285 million, the only person actually named in the S.E.C.’s charges was Brian Stoker.

Never heard of him? He’s a 40-year-old Harvard Business School graduate and, until 2008, was a midlevel director in Citigroup’s “CDO structuring group” (he denied the charges and didn’t reach any settlement agreement). Charles Prince, the since-departed Citigroup chief executive at the time of the alleged misdeeds, isn’t mentioned. Four other Citigroup executives, including at least two senior to Mr. Stoker, are described in the complaint as being involved in the dubious transactions yet remain unnamed and uncharged.


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Ralph Deeds 4 years ago Author

Citing extensive abuses of troubled borrowers across Massachusetts, the state’s attorney general sued the nation’s five largest mortgage lenders on Thursday, seeking relief for consumers hurt by what she called unfair and deceptive business practices.

Martha Coakley, with her staff in Boston, accused lenders of “deceptive and unlawful conduct.”

In addition to creating a new and significant legal headache for the banks named in the suit — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and GMAC Mortgage — the Massachusetts action diminishes the likelihood of a comprehensive settlement between the banks and federal and state officials to resolve foreclosure improprieties.

Also named as a defendant in the Massachusetts suit was the electronic mortgage registry known as MERS, an entity set up by lenders to speed property transfers by circumventing local land recording officials.

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