More Mortgage Madness (Page 3)

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

Fed up, George and Veronica found Chip Parker, who has developed a national reputation for successfully wrestling with servicers in 250 foreclosure defenses. Parker filed papers challenging the foreclosure, and soon the Gallons got a package from American Home offering the workout they'd previously been denied. "All is forgiven," George summarizes. "They're charging me another $25,000, but we start fresh." As long as the Gallons waived their right to sue, that is. That's a controversial clause regularly slipped into loan workouts, which advocates argue is the final stop in a long line of predation. Servicers lure desperate borrowers into agreements that accomplish nothing more than making sure a judge never sees the ugly details of either the original loan or the fee frenzy of servicing.

At Parker's urging the Gallons rejected the offer, which led to a second foreclosure filing--despite the fact that the first one remained an open case. And it didn't end there. They got yet another offer from American Home, a forbearance deal--a five-year, interest-only repayment plan that would cost them $67,000 in additional interest. "I think the idea is to have the homeowner keep chasing his tail until he gives up in frustration," Parker complains, noting that nothing in the Gallons' case is unique among his clients. "The default servicer has no interest in modification, because they're not paid for modification."

Indeed, researchers argue that the servicing industry's pay structure creates perverse incentives that impede loan modification, even when modification is in the best interest of both the investor and the borrower. Every month a servicer must send investors an advance with its take from the loan pool. The servicer then recoups that advance, plus its fee, when it collects from the borrower. As long as loans are performing, this system works well. But when one-tenth of all loans stop paying, servicers are stuck with the hot potato. Every month a delinquent loan doesn't perform, the servicer gets burned more. Which makes foreclosure the fastest way for servicers to stop the damage. It halts the advances, plus they get to charge investors and borrowers new fees.

And that means, for now, the only way for borrowers to slow the race to foreclosure is to make it a costly process for servicers, too. Now that the Gallons have a lawyer, for instance, American Home has let the case languish. Parker says that's where every case he's taken in the past two years stands today: once a borrower exerts leverage through a countersuit, the servicer disappears. The case becomes too expensive to pursue and thus moves to the bottom of the pile. Counselors and lawyers all over the country echo Parker, arguing that servicers have ceded no ground without being forced through litigation.

* * *

Even when servicers offer help, they often bungle the deal so badly that borrowers can't accept it. Take the tail-chasing game Litton Loan Servicing put Maryann and John Myers through en route to foreclosure. After nineteen years in their home, the Jacksonville couple took out an $84,000 subprime refinance in 2003. They worked hard to keep up, but when John got laid off last spring, they fell behind.

The Myerses dutifully contacted Litton to work things out, and Litton offered them a repayment plan that increased their monthly bill by nearly $300. John still had his second job, so they signed on and tried to comply. Within two months they were in trouble again--"recidivists," as it were. Litton filed for foreclosure.

But the Myerses kept trying to work things out, so Litton offered them a forbearance agreement. It said that if the Myerses could make even higher payments--another $200 more--the foreclosure would go on hold. The agreement's language was harsh. Late fees would continue to mount. There would be no grace period on monthly payments. "Even the slightest default shall be considered a material breach," it warned.

The Myerses sent the agreement back the same day they got it. But later that day a messenger arrived at the door with an entirely different deal--an actual loan modification that would have saved their home. It would have rewritten the loan so that the Myerses' monthly payments were nearly two-thirds less than that of their original loan, with an interest rate of just 4.6 percent. It gave the Myerses one month to make the first payment.

Maryann, who answered the door, was befuddled. "I said to [the messenger], 'Sweetheart, can I have a copy?' And she said, 'I can't give it to you. If you don't sign it I gotta give it back to Litton saying you refused.'"

But the forbearance agreement, with its tough talk about no grace periods, demanded the Myerses send a down payment in the next four days. And John says an operator at "some 800 number" he called told him that the foreclosure would move forward until he paid the forbearance. That meant the Myerses would have to pay on both plans simultaneously until Litton got in sync with itself. But they could barely pay one, let alone both. So they sent in the forbearance money and painfully passed up the modification that would have actually helped.

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