More Mortgage Madness (Page 2)

Research support for this article was provided by the Investigative Fund at The Nation Institute.

Many of the players in the global economic collapse have filled mysterious, difficult-to-comprehend roles. Not mortgage servicers. Their role is clear and familiar. If the recession were a gangster movie, they'd be the big, bumbling guys who barge in and threaten to off you if you don't pay your gambling debts.

Lenders who originate loans rarely handle the month-to-month work of managing them. They hire contractors to collect and process payments and to manage foreclosures for loans that default. So when lenders started rapidly unloading loans on investors, the investors hired "third-party" servicers to manage their massive loan pools. It was good business: by one count, lenders pooled and sold 8 million nonprime loans in 2005 and 2006 alone. As a result, according to OTS, 91 percent of all outstanding home loans are now serviced by third-party banks and firms that don't own the note.

But the subprime explosion coincided with a dramatic restructuring of the mortgage servicing industry. In 1989 the five largest firms controlled just 7 percent of the market. By 2007 they controlled 46 percent. After Bank of America's July 2008 merger with Countrywide, the top three servicers--arms of Bank of America, Wells Fargo and Chase--controlled 48 percent of the nation's $11.5 trillion in mortgages.

Automation and outsourcing followed this consolidation, allowing the mega-servicers to process huge numbers of loans without increasing costs. Like the brokers originating the loans, they shoved as many mortgages as possible through their software programs. They outsourced everything from tax processing to call centers. They hired low-skilled workers to do what amounted to data entry, then overburdened them and skimped on training. And it all worked brilliantly. "In good times, the servicing business has been profitable," a Federal Reserve Board working paper on the industry bluntly concluded last year.

Why shouldn't it be? Most of the firms absorbed by the big banks had specialized in subprime loans. And servicers generally get paid twice as much to manage subprimes as primes, based on the idea that subprime loans require more work--frequent contact with borrowers and specialized labor. But the boom obscured these costs; because very few loans demanded more than collecting and processing more and more payments, few firms invested in developing the kind of skills necessary to service subprime loans--doing so would have undermined the savings from consolidation, outsourcing and automation.

The industry's business model fell apart, however, when the default rate shot up to more than 10 percent--a number that's getting worse fast, according to OTS. Subprime loans continued failing at high rates last year, but now prime loans are hemorrhaging, too. OTS found that delinquency among formerly stable prime loans more than doubled in 2008, to 2.4 percent, with the most significant rise happening in the fourth quarter.

The industry has tried to blame borrowers for its unsuccessful effort to save these failing loans; people who redefault are called "recidivists." But the OTS data offer damning evidence to the contrary. The problem is that a surprising number of workouts have done nothing to change the loans; more than half are merely repayment plans that give borrowers more time to catch up. Which leaves people like the Gallons in an exhausting, no-win game of chase, in which separating predation from plain incompetence is nearly impossible.

* * *

Jacksonville was once a sea of relative calm in Florida's economic maelstrom. It had a diverse economy, with everything from financial services to a deep-water port. But ultimately the regional waterfront drew the city into Florida's turn-of-the-century real estate explosion. New developments spawned a booming construction industry packed with well-paid jobs. In 2008 one in five of those jobs disappeared. Last fall Forbes magazine predicted that Jacksonville--in the heart of Duval County, where joblessness recently hit 9.7 percent--would be the national "foreclosure capital" of 2009.

Investment properties and second homes have undeniably driven up Florida's foreclosure numbers, but Jacksonville is a place where thousands of people are losing the roof over their heads. The resulting loan defaults so overwhelmed the Housing Partnership of Northeast Florida, says vice president of lending services Richard Paige, that he had to retrain homeownership counselors to do loss mitigation instead. "Early in this process, we were seeing people who were victims of just horrible loans," Paige explains. "But now I would say well over half of what we're seeing, they were in affordable loans" and lost their job.

The Gallons managed to keep up with their $200,000 subprime refinance until late 2007, when they started missing payments and piling up late fees. In February 2008, George called their servicer, Option One Mortgage, an H&R Block subsidiary managing $53 billion in subprime loans at the time. "I says, 'Well, things are kind of tight with me right now. What can I do to bring my mortgage current?'" recalls George, a jowly 62-year-old with a pencil mustache and graying mane.

The person George spoke with told him to apply for a loan modification, which meant digging up a dozen documents establishing income and expenses. So they did. "March goes by; I don't hear anything. April, I'm thinking no news is good news, so I send them a payment."

But no news was bad news: the following month's payment came back with a notice that the Gallons had been foreclosed upon. The surprise notice came from American Home Mortgage Servicing, which had absorbed Option One in May 2008. That fact alone sent George reeling. "I'm paying Option One. All of a sudden, American Home Mortgage tells me that my loan modification--that I sent to Option One--has been denied?" When he called and asked why his application failed, he says an agent told him it was short one document. "You mean to tell me you asked for twelve pieces of documents and you got eleven, and you didn't have the courtesy to pick up the phone or drop me a line?"

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