WASHINGTON — The federal government is engaged in a massive mortgage modification program that’s on track to send billions in tax dollars to many of the very companies that judges or regulators have cited in recent years for abusive mortgage practices.
The firms, called mortgage servicers, have been cited for badgering, manipulating or lying to their customers; sticking them with bogus fees, or improperly foreclosing on them.
Mortgage servicers are the middlemen between homeowners and the investors that hold their mortgages, collecting homeowners’ checks and disbursing payments for the mortgages, property tax and insurance. They’re a necessary player for any modification.
An Ironic Paradox
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The reliance on such companies points to an ironic paradox for federal regulators: Cleaning up the nation’s financial crisis often rewards the firms that helped create the mess. Those Wall Street banks and mortgage servicing companies argue that they’re best positioned to repair the damage they’ve helped cause. In the case of the mortgage program, the firms getting the taxpayers’ money are, after all, the firms that control the troubled mortgages.
To make matters worse, the Government Accountability Office, Congress’ watchdog, has said that the Treasury Department hasn’t done enough to oversee the companies participating in what’s known as the Home Affordable Modification Program, which emerged from the bank bailout bill Congress passed last fall.
The modification program has been slow to get off the ground. Since it began this spring, only 12 percent of a potential 3 million delinquent mortgages have begun the process of being reworked, or put into “a trial modification,” according to Treasury Department data through August, the most recent available.
Housing advocates say homeowners still face “reluctant lenders,” said Irwin Trauss, an attorney who represents low-income homeowners for Philadelphia Legal Assistance. He recently testified at a hearing of the Congressional Oversight Panel, the watchdog that monitors the Treasury’s Troubled Asset Relief Program, better known as TARP, or the bank bailout bill.
Trauss said that Bank of America, at least through July, told homeowners that they couldn’t participate in the program when they should’ve been allowed to do so, and he alleges that Saxon Mortgage forced one of his clients into bankruptcy without providing a valid reason for turning down her modification request. Trauss’ comments were echoed by other housing advocates, who’ve found mortgage servicers slow to respond and confused about modification rules.
“Servicers look for reasons to avoid making the modifications when they are most needed, rather than for opportunities to make them,” Trauss said.
Saxon Mortgage said it couldn’t comment on Trauss’ testimony because it wasn’t provided with specific details of the account in question. Bank of America said there could have been instances in which improperly trained employees were confused about the modification rules, but the vast majority of customers have been given proper information.
Although it’s early in the Treasury Department’s program, housing advocates say the servicer industry for years has resisted helping customers with modifications. Donna and Ronnie Fruia, of Troutman, N.C., learned firsthand how difficult it can be.
The couple was in the midst of a series of health crises, and three members of the family — the couple’s son, Donna’s mother and Ronnie — were in the hospital.
It was then that Donna got an urgent call that somebody from her mortgage company, CitiFinancial, had just showed up in her husband’s hospital room, where he was recovering from a stroke.
“They said, ‘Some guy’s in there aggravating him,’” she said.
“At the time, I couldn’t even really talk that good,” Ronnie said. “But he wanted me to sign a bunch of papers.”
The Fruias had been trying to get a mortgage modification from CitiFinancial. The company, however, was pushing the Fruias to accept a modification that wouldn’t have cut their interest rate, they said.
Only after the episode in the hospital room and the involvement of state regulators did CitiFinancial cut the mortgage’s interest rate from 11.5 percent to 5 percent, lowering their monthly payment from $985 to $602. The process took from the start of the year until July.
“They were the perfect candidate for someone with a subprime rate getting a modification,” said Henrietta Thompson, who as housing coordinator for United Family Services, a United Way-funded organization in Charlotte, helped the Fruias. “I know if the banking commissioner hadn’t gotten involved, it wouldn’t have happened.”
While CitiFinancial, a unit of Citigroup Inc. — one of the largest recipients of TARP bailout funds — said it couldn’t talk about specific customers, it’s “pleased” that the case was resolved.
“We have strict guidelines concerning the behavior of our representatives, and the incident you described would not be acceptable under our policies, even if well-intentioned,” said Mark Rodgers, a spokesman.
Under the Treasury Department’s mortgage modification program, three parties can participate: the company that owns the loan, the company that services the loan, and the homeowner. All get a portion of the more than $20 billion that the federal government currently estimates it could spend to keep homes out of foreclosure.
While the Treasury said it’s necessary to take in as many mortgage service companies as possible, the GAO found that the department wasn’t doing enough to monitor the process.
In a July report, the GAO said that the department had “significant gaps in its oversight structure,” and was short-staffed in the office monitoring the modification program. As of July — eight months into the program — the Treasury had filled fewer than half the positions in a key modification office. (Many of those jobs have since been filled, the department said.)
Beyond that, the government had conducted “readiness reviews” of only seven of 27 mortgage servicers the GAO examined; no more were planned. The reviews only included interviews with senior executives — and the information gathered wasn’t verified.
“Treasury cannot identify, assess and address risks associated with servicers that lack the capacity to fulfill all program requirements,” the GAO said.
Treasury said it’s beefing up its review procedures and also said it recognizes many of the problems and has been working to correct them. “Clearly, we’re not there yet,” said Seth Wheeler, one of the Treasury officials who oversees the modification effort. “Clearly there’s still inconsistent application of the program, even though we have made progress.”
Several companies in the Treasury program have been cited by judges or regulators for having engaged in improper behavior with their customers.