At your service? - Washington Times, DC
BY Jeremy Herron and Stephen Bernard
October 30, 2007
A cancer diagnosis forced Lindsey Jennings to give up his government job. With less income, Mr. Jennings feared he might lose the home he and his wife, Pearl, built near Atlanta almost 20 years ago. So he asked for help.
But Mr. Jennings, who needed to lower his monthly mortgage payment, was rejected for a loan modification. The snub didn't come from the mortgage lender, but from a less likely source — the company that collects and processes the payments, the loan servicer.
All mortgage and student-loan payers know their servicer — it's the company that collects their monthly payments. The companies are an integral part of the complex mortgage sector with a relatively simple role, like a corporate payroll department.
But as the housing crash ravages the mortgage sector, millions of servicing contracts are changing hands as parent companies go bankrupt or pare back their lending activities. Amid the turmoil, even homeowners who pay their mortgages on time face the real possibility of falling behind on insurance or property-tax payments because of clerical errors at the servicer.
Tom Shaner, executive director of the Maryland Association of Mortgage Brokers, said homeowners should immediately learn whether their taxes and insurance are rolled into their mortgage.
"What's happening is a number of people either don't understand homeownership and this tax thing, or have had a home before and really didn't think about where the escrow was," Mr. Shaner said. "So they got the tax bill and are assuming the lender is paying it."
The local government can seize a home for nonpayment of taxes, even if a homeowner has been paying his or her mortgage, he emphasized.
"So you want to look real fast and check with your lender — are my taxes and my insurance in an escrow with your bank, or do I need to pay them directly?"
Mr. Shaner blamed the difficulties generally to "a combination of lenders, brokers and consumers [who] made choices or gave bad advice."
Homeowners such as the Jenningses, who try in good faith to salvage a troubled mortgage, find many servicers — the only point of contact for payers — unwilling, and in most cases not even able, to renegotiate terms.
"Sometimes we believe folks in the industry just aren't listening," said David Berenbaum, executive vice president of National Community Reinvestment Coalition (NCRC), an advocacy group that helps borrowers refinance or modify their mortgages.
One problem is that servicing operations are not designed to cater to customers, said Guy Cecala, publisher of Inside Mortgage Finance.
"They are like a factory," he said.
A recent survey by Moody's Investors Service showed that only 1 percent of loans to people with poor credit records that reset in the first three months of the year were modified. With 2 million of those subprime loans scheduled to reset in the next year, requests for modifications are certain to increase.
Some of the largest servicers are adapting, but Moody's said the changes are too slow to prevent a spike in defaults.
Chase Home Finance, a unit of JPMorgan Chase & Co. and the third-largest servicer with contracts for $722.8 billion worth of loans, said it has bolstered its staff that directly deals with customers in recent months. It also warns homeowners a few months ahead of when rates are scheduled to change.
Chase has some flexibility to modify loans on its own, but does have to run some requests by the mortgages' owners, said spokesman Thomas Kelly.
"The servicer is obligated to guide their actions by what's in the best interest of the owner," said Larry Platt, a lawyer with K&L Gates specializing in mortgage financing and consumer credit issues.
In most cases, the investor wants to avoid foreclosure — especially when that means taking possession of a property that is losing value. But if a "workout" merely forestalls the inevitable, that ultimately makes the foreclosure more costly.
Even if a servicer offers a modification that can help the borrower, it is "a clinical, unemotional cost calculus — there's not a social factor that is included in the analysis," Mr. Platt said.
That's partly the reason loan servicing remains a profitable corner of the mortgage market. But many of the largest servicers — eight of the top 30 — were or are in the process of being bought in the past year. That means servicing for loans with a value of $913.6 billion — or about 9 percent of the market — will change hands, which can cause clerical problems.
That's what happened with two of Patricia Walshe's loans. Ms. Walshe, who owns several investment properties in Frederick County, Md., discovered last month she was behind on her property taxes even though she had paid her mortgage on time. Her servicer, American Home Mortgage Corp. (AHM), had sent bad checks to the county. That meant Ms. Walshe faced having to pay, for a second time, half of the $8,000 annual tax bill on the two properties.
Ms. Walshe had few options. Her situation was resolved when, after nearly a month, the county received certified checks from American Home — 10 days before it would have started charging her interest.
Lori Decker, director of the treasury for Frederick County, said the second installment is due Dec. 31 and the county "still remains concerned that this will happen again."
If it does, Ms. Walshe said she would talk to her lawyer — and she would probably have an excellent case, said Anthony Sabino, a business and law professor at St. John's University.
"This is simply not supposed to happen. It's mind-boggling," he said. "If AHM took the funds out of those escrow accounts, the law has been seriously broken."
American Home did not return calls seeking comment.
A similar problem occurred with other American Home loans — though the affected home owners never learned they were at some risk. On Aug. 24, the servicer stopped making tax and insurance payments altogether for 4,547 loans it serviced for Freddie Mac. The government-sponsored mortgage financier seized the escrow accounts before American Home filed for bankruptcy, but the servicer would not release the account information, so Freddie Mac had no addresses to which to send the money.
Freddie Mac eventually settled with the company, clearing the way to pay $2.4 million in delayed property taxes and insurance premiums.
John Facada, a mortgage loan officer for Alliance Home Funding in Fairfax, Va., said there are ways to avoid such problems.
"Pay the loan servicer yourself," he said. "A lot of lenders want that but they feel that the homeowner would be hard-pressed to come up with a big chunk of money at one time."
Another option would be to "find out who actually owns the loan and then see if they can have a different servicer who can work on that, " Mr. Facada said. *
Mr. Shaner urged homeowners to always try to work something out before knowingly defaulting on payments.
The Jenningses are still in their Atlanta-area home — for now. With NCRC's help, they were able to arrange a two-year plan. The consumer group persuaded the servicer to drop demands for an upfront payment.
The Jenningses now have a fixed interest rate for two years — a workout similar to the type Chase offers. The couple is worried they will fall behind again when their loan adjusts, unless they refinance before then.
*Naive advice coming from a loan officer, assuming he knows how securitization works. Yeah, just tell investors you want to work with servicers who do not engage in Mortgage Servicing Fraud.....he makes the impossible sound so simple.