NEW YORK – A cancer diagnosis forced Lindsey Jennings to give up his government job. With less income, Jennings feared he might lose the home he and his wife, Pearl, built near Atlanta almost 20 years ago. So he asked for help.
But Jennings, who needed to lower his monthly mortgage payment, was rejected for a loan modification. The snub didn’t come from the mortgage lender, but from a less likely source – the company that collects and processes the payments, the loan servicer.
All mortgage and student-loan payees know their servicer – the company that collects their monthly payments. The companies are an integral part of the complex mortgage sector with a relatively simple role, like a corporate payroll department.
But as the housing crash ravages the mortgage sector, millions of servicing contracts are changing hands as parent companies go bankrupt or pare back their lending activities. Amid the turmoil, even home owners who pay their mortgages on time face the real possibility of falling behind on insurance or property tax payments because of clerical errors at the servicer.
Homeowners like the Jenningses, who try in good faith to salvage a troubled mortgage, are finding many servicers – the only point of contact for payees – unwilling, and in most cases not even able, to renegotiate terms.
“Sometimes we believe folks in the industry just aren’t listening,” said David Berenbaum, executive vice president of National Community Reinvestment Coalition, an advocacy group that helps borrowers refinance or modify their mortgages.
The Jenningses contacted advocacy group NCRC after their servicer, Orange-based AMC Mortgage Services, rejected attempts to work out an arrangement, even after they filed for a hardship exemption.
Like many homeowners, the couple refinanced their home three years ago – with AMC’s former sister company Ameriquest Mortgage – to lower their monthly payments, but got caught short when their adjustable rate rose and Lindsey became ill. For a year they pestered AMC for a break, but eventually missed several monthly payments, Pearl Jennings said.
At that point, AMC made an offer, but stipulated that any renegotiation include an upfront payment of at least $3,000.
“We were already in trouble with our payments, how could we afford that?” she said.
One problem is that servicing operations are not designed to cater to customers, said Guy Cecala, publisher of Inside Mortgage Finance.
“They are like a factory,” he said.
A recent survey by Moody’s Investors Service showed that only 1 percent of loans to people with poor credit records that reset in the first three months of the year were modified. With 2 million of those subprime loans scheduled to reset in the next year, requests for modifications are certain to increase.
Some of the largest servicers are adapting, but Moody’s said the changes are too slow to prevent a spike in defaults. And the NCRC’s Berenbaum said most modifications – like the one offered the Jenningses – are impractical and do not take into account the needs of individual customers.
Company adapts
Chase Home Finance, a unit of JPMorgan Chase and the fourth-largest servicer with contracts for $722.8 billion worth of loans, said it has bolstered its staff that deals directly with customers in recent months. It is also warning homeowners a few months ahead of when rates are scheduled to change.
Chase has some flexibility to modify loans on its own, but does have to run some requests by the mortgages’ owners, said spokesman Thomas Kelly.
As of Sept. 1, the Jenningses’ servicer is Citi Residential Lending, a unit of Citigroup that acquired AMC from ACC Capital Holdings. The company would not comment on the Jennings case, citing confidentiality agreements.
In an e-mail, a spokeswoman said Citi works with customers to “understand their circumstances and to explore possible solutions that make sense for all parties.”
The other party, of course, is the loan owner – the investor pocketing interest on the mortgage who hired the servicer to collect payments.
“The servicer is obligated to guide their actions by what’s in the best interest of the owner,” said Larry Platt, a lawyer with K&L Gates specializing in mortgage financing and consumer credit issues.
In most cases, the investor wants to avoid foreclosure – especially when that means taking possession of a property that is losing value. But if a workout merely forestalls the inevitable, that ultimately makes the foreclosure more costly.
Whether a servicer offers a modification that can help the borrower is “a clinical, unemotional cost calculus – there’s not a social factor that is included in the analysis,” Platt said.
That’s partly the reason loan servicing remains a very profitable corner of the mortgage market. But many of the largest servicers – eight of the top 30 – have been or are in the process of being bought in the past year. That means servicing for loans with a value of $913.6 billion – or about 9 percent of the market – will change hands, which can cause clerical problems.
That’s what happened with two of Patricia Walshe’s loans. Walshe, who owns several investment properties in Frederick County, Md., found out last month that she was behind on her property taxes even though she had paid her mortgage on time. Her servicer, American Home Mortgage, had sent bad checks to the county.
That meant Walshe faced having to pay – for a second time – half of the $8,000 annual tax bill on the two properties.
Walshe had few options. Her situation was ultimately resolved when, after nearly a month, the county received certified checks from American Home – 10 days before it would have started charging Walshe interest.
Lori Decker, director of treasury for Frederick County, said the second installment is due Dec. 31 and the county “still remains concerned that this will happen again.”
If it does, Walshe said she’d talk to her lawyer – and she would probably have an excellent case, said Anthony Sabino, a business and law professor at St. John’s University.
‘It’s mind-boggling’
“This is simply not supposed to happen. It’s mind-boggling,” he said. “If AHM took the funds out of those escrow accounts, the law has been seriously broken.”
American Home did not return calls seeking comment.
A similar problem occurred with other American Home loans – although the affected homeowners never found out they were at some risk. On Aug. 24, the servicer stopped making tax and insurance payments altogether for 4,547 loans it serviced for Freddie Mac. The government-sponsored mortgage financier had seized the escrow accounts before American Home filed for bankruptcy, but the servicer would not release the account information, so Freddie Mac had no addresses to which to send the money.
Freddie Mac eventually settled with the company, clearing the way to pay $2.4 million in delayed property taxes and insurance premiums.
Pearl Jennings said AMC wouldn’t help because the servicer did not feel responsible for her family’s plight. “They said it wasn’t their fault,” she said.
The Jenningses are still in their Atlanta-area home – for now. With NCRC’s help, they were able to work out a two-year plan with AMC. The consumer group persuaded the servicer to drop demands for an upfront payment.
The Jenningses now have a fixed interest rate for two years – a workout similar to the type Chase offers. The couple is worried they’ll fall behind again when their loan adjusts, unless they refinance before then.
But the Jenningses savaged their credit rating by missing payments during the year it took to find a workout. With the housing slump expected to extend into 2009, their options are certain to be limited.
