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Predatory Lending Has an Ugly Tail End

courtesy of linda yvonne (flickr)

courtesy of linda yvonne (flickr)

Talk about burying the lede. The NYTimes has run a story which purports to be about the plans by the Treasury Department to pressure banks to do more to renegotiate delinquent mortgages. It has all sorts of blather from Treasury about using “embarrassment” as tool to get banks to do what they were given $75 Billion dollars to do under the federal Making Home Affordable Program.

The real story though, does not come out until the very bottom of the article. The real story is the continuing fraud being perpetrated on both the Government and consumers by the banks and other “mortgage servicers.” Predatory lending has an ugly tail end.

Some lawyers who defend homeowners against foreclosure assert that mortgage companies are merely stalling, using trial loan modifications as an opportunity to extract a few more dollars from borrowers who would otherwise make no payments.

“I don’t think they ever intended to do permanent loan modifications,” said Margery Golant, a Florida lawyer who previously worked for a major mortgage company, Ocwen Financial. “It’s a shell game that they’re playing.”

According to the Times, this federal bailout was intended to save 4 million homes from foreclosure, yet there are only approximately 650,000 homes in the program to date. A previous report showed that ONLY 2,000 of the then 500,000 in process had their loan modifications made permanent.

The process was SUPPOSED to work like this: you and your lender agree to a reduced payment amount. You enter into a trial period where you 1) are filling out paperwork to prove up your income, and 2) that you are able to faithfully make the payments. At the end of the trial period, they reduced payment become a permanent recast of the mortgage.

This program was originally aimed at “liar’s loans,” loans where no income verification was done before lending the money. These high cost, often subprime, loans often had a low introductory rate and a huge escalation in interest a year or two into the loan. People took them out thinking they could refinance before the payment escalation hit.  Because the housing bubble burst, the value of their houses did not go up, and many now owe more than the current market value of their house.  This is known as being “underwater” on your mortgage. Treasury’s theory was if you took the interest rate back down, the homeowner would continue to be able to afford the payment.

The government incentive for this was $1,000 at the time the terms were renegotiated, plus another $1,000 per year for up to 3 years. I’m guessing they believed that after 3 years home prices would go back up and homeowners would then be able to sell or refinance. Of course, $1,000 payment from the government is hardly a meaningful incentive to forgo many thousands of dollars of interest. These renegotiations often took the form of deferred interest payments. That is, adding the interest onto the principle amount cause the base amount of the mortgage to continue to grow and grow.

This was a dumb idea on several fronts:

1)      The loan servicers don’t give a damn if the loan defaults. In fact, perversely, it is to the servicer’s short term benefit if the loan does go into default because the servicer is then entitled to all kinds of additional fees.

2)      The reason the servicers don’t care if the loan goes into default, is that the servicers don’t own the mortgage; so if the mortgage is suddenly worthless, the servicer is not the one taking the loss, the owner of the mortgage is.

3)      The owners of these mortgages that have been pooled together and sold off as securities are pension funds and municipalities and college endowments. They don’t own a specific mortgage, just a percentage of a pool of thousands of mortgages held in trust for their benefit. They will take the loss if the mortgage defaults. Or will they?

4)      Don’t forget all those “credit default swaps” that we had to bail out AIG for. Many Mortgage Backed Securities have insurance policies on them that are supposed to pay some or all of the loss if the security fails. The insurer has no power to recast the mortgage to mitigate that loss, though. However, the insurers have, or expect, government bailouts and back up guarantees to prevent an insurance industry collapse.

5)      What about the Trustee who holds all these mortgages for the benefit of the pension plans, etc., who bought the mortgage backed securities? You would think as a fiduciary for the security holders that the Trustee would have some incentive to mitigate the losses by getting a reduced, but flowing, income stream rather than no income stream at all. But often the trust agreement does not give the Trustee the power to recast these loans.

So, who suffers? The homeowner who does not have a person to negotiate with, the pension funds and school districts who may face a total loss if their securities don’t have insurance or if the government does not bail out the specific insurance company that wrote the credit default policy on their particular security; and of course, the taxpayers because Treasury keeps just giving away and giving away more and more money with no actual performance standards or benchmarks.

This allows the servicers to scam homeowners who naively thought there might be some help in this government program, don’t forget all those extra fees the servicers collect when the loan goes into default. They get paid extra for every dime they collect after the event of default.

But the mortgage companies that collect payments from homeowners — servicers, as they are known — generally do not own the loans. Rather, they collect fees from investors that actually own mortgages, and their fees often increase the longer a borrower remains in delinquency.

Under the Treasury program, borrowers who receive loan modifications must make their new payments on a trial basis and then submit new paperwork validating their income to make their modifications permanent.

But borrowers and their lawyers report that much of the required paperwork is being lost in a haze of bureaucratic disorganization. Servicers are abruptly changing fax numbers and mislaying files — the same issues that have plagued the program from its inception.

“People continue to get lost in the phone tree hell,” said Diane E. Thompson, a lawyer with the National Consumer Law Center

Oh, and you want to know the part that really galls me? The servicers are using the modification program as a way to extract financial information from homeowners, to obtain information about income and assets, including that of people in the household who are not obligated under the mortgage. This is information that the servicer is otherwise not entitled to demand under the fair Debt Collections Act and which they therefore obtain by trickery. Sometimes in this sham “loan modification” the servicers get other family members, who were not originally obligated under the mortgage, to sign as additional obligees.

Why? Because after the homeowner fails to graduate from the trial period, the servicer is still going to put the homeowner in foreclosure, kick the homeowner out and sell the house. However, because of the collapse of the housing market, the sale of the house is unlikely to cover the outstanding debt, resulting in a deficiency judgment.

The servicer will now be able to use the asset information it obtained during the renegotiation phase to go after any other assets or income the former homeowner may have. If other family members signed as new-co-obligees, the servicer now has additional people to go after to collect, people who never took out a loan in the first place.

Yet Treasury still thinks this plan, which by its own metrics is an obvious failure, and which loan servicers are using to circumvent consumer protections and further prey upon the desperation of homeowners and their families, just needs a little tweaking.

Capitol Hill aides in regular contact with senior Treasury officials say a consensus has emerged inside the department that the program has proved inadequate, necessitating a new approach. But discussions have yet to reach the point of mapping out new options, the aides say.

“People who work on this on a day-to-day basis are vested enough in it that they think there’s a need to do a course correction rather than a wholesale rethink,” said a Senate Democratic aide, who spoke on the condition he not be named for fear of angering the administration.

[emphasis added]

Gah!  After eight years of a buffoon Decider in Chief prattling on about “stay the course” with one failed policy after another, I have no patience hearing this drivel from Treasury now. Apparently the Senate grows impatient for effective measures, too.

Within the Senate, some discussion now focuses on pursuing legislation that would create a national foreclosure prevention program modeled on one started last year in Philadelphia. That program forces mortgage companies to submit to court-supervised mediation with delinquent borrowers aimed at striking an equitable resolution before they are allowed to proceed with the sale of foreclosed homes.

Some Democrats say the time has come to reconsider a measure opposed by the Obama administration: giving bankruptcy judges the right to amend mortgages as a means of pressuring lenders to extend reductions.

The banks had their chance to do the right thing. They either cannot or will not. I don’t care which it is. The time to let the banks solve this in their own way, while taxpayers just keep throwing good money after bad, has passed.

The original rational for TARP was for the Government to buy up these toxic mortgage backed securities. If the government had stuck to the plan, the government would be able to undo the trusts and renegotiate the mortgages with homeowners; and when the mortgages were recast a reasonable level, repackage them into more stable securities for resale.

BTW, if I were a college endowment administrator, or a small town Mayor, or a union pension fund administrator and owned mortgage backed securities, I would be trying to find all the other investors in that particular pool and band together to force the trustee for that pool to start behaving in a commercially reasonable manner. I’m not so sure those trustees have been acting in the best interests of the trust beneficiaries, ya know what I mean?

[Earlier posts in this series and related links at Kouril’s Foreclosure Fraud Resources]

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Cynthia Kouril

Cynthia Kouril

Cynthia Kouril is a former Special Assistant United States Attorney in the Southern District of New York under several different U.S. Attorneys, former counsel to the Inspector General for the N.Y.C. Department of Environmental Protection where she investigated threats to the New York City water supply and other environmental crimes, as well as public corruption and fraud against the government, former Examining Attorney at the N.Y.C. Department of Investigation and former Capital Construction Counsel at New York City Parks and Recreation.
She is now in private practice with a colleague whom she met while at the USA Attorney's Office. Ms. Kouril is a member of the Steering Committee, National Committeewoman and Regional Coordinator for the New York Democratic Lawyers Council, a member of the Program Committee of the Federal Bar Council and a member of the Election Law Committee at the Association of the Bar of the City of New York. She is active in several other Bar Associations.
Most important of all, she is a soccer mom.