DAN A. BAILEY JR. was desperate when he sat down on May 19 to send an e-mail message to his mortgage lender, the Countrywide Financial Corporation, pleading, yet again, for help.
Behind on his payments and fearful of losing his home of 16 years — a 900-square-foot bungalow in Wilmington, N.C. — Mr. Bailey had spent the previous six months unsuccessfully lobbying Countrywide, at the time the nation’s largest home lender and loan servicer.
Mr. Bailey, 41, promised in his e-mail message that he would pay every nickel he owed if Countrywide would modify his mortgage in a way that allowed him to keep his home. He sent the message to a grab bag of Countrywide e-mail addresses, which he had received from http://www.LoanSafe.org, an online forum for borrowers.
Among the recipients of his e-mail was someone he had never heard of before: Angelo R. Mozilo, Countrywide’s co-founder and chief executive. Lo and behold, Mr. Mozilo replied — inadvertently, as it turned out.
“This is unbelievable,” Mr. Mozilo said in his message. “Most of these letters now have the same wording. Obviously they are being counseled by some other person or by the Internet. Disgusting.”
Within days, Mr. Mozilo’s e-mail was widely circulated on the Internet and in the news media, offering a rare instance when candid comments from a powerful C.E.O. entered the public realm. For Mr. Bailey, however, the disdain that Mr. Mozilo expressed was depressingly familiar.
After all, Mr. Bailey had received little else from Countrywide after he began trying to renegotiate an adjustable-rate loan that he could no longer afford. Until then, he says, the only guidance the lender provided was a suggestion from an employee of Countrywide’s “home retention team” that he cut back on groceries to pay his mortgage.
“I told her that I probably spend $10 a day on groceries,” Mr. Bailey recalls. “And she said ‘Maybe you can eat less.’ ”
As record numbers of homeowners try to avoid foreclosure, the responses of big lenders and loan servicers like Countrywide are drawing increased scrutiny. While these companies maintain that they’re doing all they can to help imperiled borrowers, critics contend that homeowners routinely meet roadblocks.
Many borrowers have trouble even reaching a workout specialist; others soon find that the modifications they received are as unaffordable as the mortgages they replaced. Some homeowners, eager to sell their homes before the value falls further, say they are impeded by loan servicers’ inaction or incompetence.
“We continue to rely on lenders to fix the problems they created by making reckless loans in the first place, but it’s clear that foreclosures keep rising,” says Deborah Goldstein, executive vice president of the Center for Responsible Lending, a nonprofit group that assists borrowers. “We need federal regulators to step in or court-supervised loan modifications — any solution that might standardize the process better.”
With two of the nation’s most important mortgage concerns, Fannie Mae and Freddie Mac, continuing to falter last week — raising the possibility that they may need a federal bailout or takeover — foreclosure problems are likely to become even more complex.
Countrywide, which administers $1.48 trillion of loans across the United States, finds itself at the center of the foreclosure mess. As of the most recent quarter, 2.67 percent of the loans that Countrywide services were more than 90 days delinquent. (The Bank of America Corporation acquired Countrywide on July 1 and is now overseeing the Countrywide portfolio.)
Lenders and servicers like Countrywide are inundated with requests for help from borrowers who cannot afford their loans. Alas, these companies’ operations weren’t set up for such work; servicing units were originally intended to collect monthly checks from borrowers and then disburse the payments to mortgage holders. During the boom years, there was little need to advise borrowers or restructure loans.
Now, however, the demand from borrowers, politicians and regulators for these services is enormous — and growing ever larger. The nation’s 27 biggest lenders have joined what is called Hope Now, an alliance meant to help borrowers stay in their homes.
A vast majority of modifications industrywide offer a temporary and modest interest rate reduction, accompanied by an increase in the overall principal owed because of added — and what critics contend are often bogus — fees larded onto the loan in the delinquency period. Because the principal increases, sometimes substantially, new monthly payments can wind up only slightly lower than those of the original loan.
And if new fees for underwriting, document preparation and title searches are added, savings can quickly shrink or disappear.
“The fact is, little is known about the effectiveness of the loan modifications or workouts that are being provided by servicers,” Ms. Goldstein says. “Hope Now’s data provides no clue if its members’ efforts are resulting in long-term, sustainable solutions for homeowners.”
BOTH Bank of America and Countrywide are members of Hope Now. Jim Mahoney, a Bank of America spokesman, said the company is committed to keeping as many people in their homes as possible.
Bank of America is “taking a very hard look at the ongoing foreclosure mitigation efforts that have been under way at Countrywide,” Mr. Mahoney said. “We have outlined a projection to work out $40 billion worth of Countrywide loans and we are really rolling up our sleeves.”
Through the first six months, Countrywide has performed 86,000 loan modifications, Bank of America said; it is completing more than two workouts for every completed foreclosure.
To be sure, not all homeowners can benefit from a restructured loan; renting is a better option for some. And almost everyone agrees that speculators, who bought houses on the gambit that they could flip them to a higher bidder, deserve no special assistance.
That said, foreclosures are vastly outnumbering loan workouts today, a year and a half after the subprime mortgage debacle began creeping into the headlines. In May, for example, even as Hope Now conducted 70,000 loan modifications, an estimated 85,000 families lost their homes to foreclosure. That same month, 276,000 loans either entered or completed foreclosure.
According to an April report by the State Foreclosure Prevention Working Group, a unit of the Conference of State Bank Supervisors, a regulatory alliance, about 70 percent of delinquent borrowers weren’t getting help in renegotiating their mortgages.
“Based on our analysis,” the working group reported, “the collective efforts of servicers and government officials to date have not translated into meaningful improvement in foreclosure prevention outcomes.”
Even when borrowers receive modifications, their loans can still be unaffordable or problematic. According to the working group, 32,000 loans that were recently modified are already delinquent again. One reason may be that very few modifications involve reducing the principal balance on the loan.
In California, an epicenter of the mortgage crisis, only 1.3 percent of loan modifications struck between January and May this year involved a reduction of principal, according to the state’s Department of Corporations. A total of 356 of 21,359 loan modifications in the month that ended May 17 involved a cut in the principal balance, it said.
With the housing bust in full swing, servicers are in something of a vise, to be sure. Their predicament is among the more thorny results of a securitization process that made so much money available for home loans.
When mortgages are pooled into a securitization trust, investors who own them rely on loan servicers to keep track of payments, loan payoffs and other administrative tasks. Servicers have a duty to investors to extract every dime they are owed from borrowers.
Because working out a loan can mean less income or outright losses for investors, servicers have been understandably reluctant to modify mortgages en masse. That could partially explain the small number of workouts done by lenders in recent months.
Even those borrowers lucky enough to receive loan modifications may still be imperiled by the new terms.
“Unless these are zero-cost, zero-added-principal loans, we really have to look closely at these workouts,” says Michael Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on home loans. “If they are adding anything to your principal, whether it is late fees or processing fees, you may not be far ahead and you could end up behind.”
But few borrowers, desperate to keep their homes under any circumstances, are likely to question the terms of a loan modification, said Moe Bedard, president of Loan Safe Solutions, a firm that performs forensic loan audits on mortgages for borrowers’ lawyers. “Fees are one of my biggest issues with loan modifications,” Mr. Bedard says. “Say you owe $32,000 in arrears that the lender is going to put on the back of the loan with a 6 percent rate. Nobody questions what the $32,000 is and lenders do not substantiate these fees.”
CONSIDER the loan modification Countrywide gave in May to Mr. Bailey, a photographer who is divorced and has no children. Immediately after he posted Mr. Mozilo’s e-mail on LoanSafe.org, Mr. Bailey said he received a call from Countrywide offering the assistance he had sought for so long. (Mr. Mozilo also sent him an apology via e-mail. “I hope and trust that you understand our sincere efforts to help those who are truly in need,” it said.) With the Internet lit up with chatter over Mr. Mozilo’s initial e-mail message, Countrywide pressed Mr. Bailey to sign the loan modification quickly, he said. The company also told him that if he spoke with the media about the modification, it would be rescinded.
“I signed their second paperwork,” Mr. Bailey says. “They were in such a rush to do it and I thought it was the only way I could save my house.”
On May 22, three days after Mr. Bailey sent his e-mail to Mr. Mozilo, he and Countrywide agreed to the loan modification. Under its terms, Countrywide added to the original principal the missed payments and fees Mr. Bailey owed as a result of his delinquency. The new loan is interest-only for three years and carries a rate of 6 percent. After that, the interest rate rises to 7 percent and principal is added to the payments.
Mr. Bedard has analyzed Mr. Bailey’s original loan, sold to him by Argent Mortgage, as well as the Countrywide loan modification. He found problems with both, he says.
For example, Countrywide didn’t provide Mr. Bailey with an assessment of total costs of the new loan, Mr. Bedard said. He’s now asking Countrywide to reduce Mr. Bailey’s principal and interest rate. But the company, he says, is declining to go that route.
Scott Silvestri, a Bank of America spokesman, said it could not comment on specific borrowers’ cases because of privacy constraints. But in general, he said, “Countrywide seeks to provide a meaningful explanation of the terms of each workout it offers, including capitalization of arrearages and fees, to the extent it is possible.”
Mr. Bedard, whose firm charges a flat fee to analyze loans, said he has found problems in at least 80 percent of the 300 mortgages he has examined so far for clients. These include failings in the notary process, and what he called violations of both the Truth in Lending Act and the Real Estate Settlement Procedures Act, or Respa. A common complication, he said, occurs when the interest rates or fees change between the time a borrower initially receives a cost estimate on the mortgage and when the borrower finally closes on the loan.
“It’s the Wild West again with these loan mods,” Mr. Bedard says. “A lot of people are getting mods that are unaffordable.”
When presented with these findings, Mr. Bedard said, most lenders and servicers quickly agree to a loan modification. Many of the deals that his firm has arranged have initial interest rates in the 3 percent range.
Using what is known as a qualified written request under Section 6 of Respa, LoanSafe also asks the servicers whose loans it is examining to detail the amounts owed by a borrower as well as asking it to justify all fees.
“Magically, when we do that, we will get an offer of a modification and those fees often go away,” Mr. Bedard says.
Because servicers must answer such requests within 60 days, Mr. Bedard suggests that all borrowers make them. (A sample letter is on the Web site of the Department of Housing and Urban Development, at http://www.hud.gov/offices/hsg/sfh/res/reslettr.cfm.)
Borrowers and their lawyers say that even as regulators turn up pressure on lenders to modify loans, reaching workout representatives remains difficult.
Carrie Mateos, 38, scrimped for years to save enough money for a down payment and a cash cushion to buy a home in Miami. In June 2007, she and her husband, Daniel, got two loans totaling $409,000 from Countrywide that helped them realize that dream. Both had sterling credit scores at the time.
At the closing, Ms. Mateos says she discovered that the loan terms had changed from the initial estimate; the interest rate was higher on the first loan, for example. Because they were in the midst of the closing, the couple felt that they had to sign the documents.
Weeks later, Ms. Mateos was laid off from her job as an office manager. By last January, she still hadn’t found work and the couple’s $80,000 rainy-day fund had dwindled to $5,000. To raise money, Ms. Mateos had three yard sales, even selling the family’s dining-room and living-room furniture.
But Ms. Mateos said she was worried that they would soon fall behind on their mortgage. In March, she called Countrywide to ask if she could skip one payment and make it up in the following months. She had found a new job but said she knew that it would take some time to rebuild the family’s finances.
Getting through to someone at the company was almost impossible, she said; calling the toll-free number it provided meant “being bounced around the Countrywide black hole.”
“They would transfer me to their Hope department, then they would send you to customer service, then to loan retention,” she added. “I would send stuff to them certified mail and get back the forms saying they had received it. But they would tell me they didn’t get it.”
WHEN she finally got through to a person at the company, she was told that, under company rules, Countrywide couldn’t do anything until the Mateoses were at least three months behind. “Then I find out you don’t have to be three months behind; you just have to have a hardship,” she says. “I was showing I had a hardship; I just wanted them to help me get back on track.”
Although the Mateoses were never behind on more than one payment, the fees started climbing. In May, she said, Countrywide offered to reduce the couple’s first mortgage payment to $2,242 from $2,405 for two months but that they would then owe $5,299 at the end of the third month. That meant the deal would cost the couple an extra $2,568, because of what Countrywide called “fees and adjustments.”
The couple declined.
Now Ms. Mateos is questioning Countrywide about why the interest rates on her original loan changed before the closing. “It’s frustrating,” she says. “They’re trying to get away with giving as little help as possible.” http://www.nytimes.com/2008/07/13/business/13mail.html?hp