WASHINGTON — Billions of dollars the government is spending to help financially pressed homeowners avert foreclosure is passing through — and enriching — companies accused of preying on the people they’re supposed to help, an Associated Press investigation has found.
The companies, known as mortgage servicers, are middlemen who collect monthly payments from homeowners and funnel the money to the banks or investors who hold the loans. As the only link between borrowers and lenders, they’re in the best position to rework the terms of loans under the government’s $50 billion mortgage-reduction program. The companies earn a fee for every successful loan modification.
But the industry has a checkered history. The Associated Press found that at least 30 servicers have been accused in lawsuits of harassing borrowers, imposing illegal fees and charging for unnecessary insurance policies. More recently, the companies also have been criticized for not helping homeowners quickly enough — delays that lead to more fees for homeowners and profits for servicers.
The biggest players in the servicing industry — Bank of America, Wells Fargo &Co., JPMorgan Chase &Co. and Citigroup Inc. — all face litigation, some of which has led to settlements with homeowners. All will receive federal money to modify loans.
But the industry’s smaller players, which specialize in servicing riskier subprime loans and loans already in default, face harsher accusations that they systematically abused borrowers.
“The irony is, in essence, the government is paying servicers to do their job, which is to do loan modifications where appropriate,” said Kurt Eggert, a law professor at Chapman University in Orange, Calif. “And that’s not a part of their job they were ever especially good at.”
The government says it has no choice but to partner with the servicers because they are the only link between borrowers and the investors who indirectly own their mortgages through securities.
When President Barack Obama announced the plan, called the Home Affordable Modification Program, in March, he said it would help up to 4 million homeowners avoid foreclosure. But only about 200,000 loan modifications are under way. That led Treasury Secretary Timothy Geithner last week to summon 25 mortgage-servicing executives for meetings at which he got them to promise to deliver 300,000 more loan modifications by Nov. 1.
Under the loan-modification program, 38 servicers will earn fees to help reduce the monthly payments of homeowners facing foreclosure. The goal is to modify mortgages so homeowners’ payments don’t exceed 38 percent of their gross monthly income.
Without government aid, servicers don’t have enough financial incentive to modify mortgages. Each year, they earn about one-quarter to one-half percent of the value of the loans they service, so the larger the mortgage, the more they make. They earn less if the loan is modified, usually by lowering the interest rate or principal or shortening the term.
The servicers also make money through late fees, or by foreclosing. The paperwork necessary to execute a foreclosure can generate hundreds of dollars in fees for some servicers.
Under the Treasury program, the servicers could pocket more than $5,500 for each loan they modify. But they won’t be paid until the homeowners have made timely payments for three months. The servicers will also get government money to give to mortgage investors to compensate them for reducing the loans. How much will depend on what it costs the investors to modify the loan.
The largest mortgage servicing abuse lawsuit was brought against Select Portfolio Servicing, which was accused of imposing illegal fees and charging borrowers for insurance they did not need.
The company paid $55 million in 2003 to settle charges brought by the Department of Housing and Urban Development and the Federal Trade Commission. It is eligible for up to $660 million under the Obama plan — some to keep and some to pass on to investors and homeowners.
Most complaints against servicers allege similar abuses. Servicers often dispose of the harshest charges by settling without admitting guilt, as Select Portfolio did in 2003.
An AP analysis of the 38 servicers the government is paying to help vulnerable homeowners found that:
At least 14 have been accused of misleading customers before the program began about whether they would qualify for loan modifications or how low their new payments might be. In many such cases, servicers are accused of telling borrowers not to make payments because their applications for modifications were pending — and moving to foreclose anyway.
At least three of the companies settled federal predatory collection allegations by pledging to correct their behavior. They have since been sued hundreds of times by homeowners who allege the same illegal practices.
“There is no question that there have been significant abuses by servicers, and a big part of that is there’s no one who is carefully monitoring their work to make sure that they’re not taking advantage of borrowers,” Eggert said.
In the past, loan servicing was a sleepy corner of the mortgage industry. Servicers did little more than open envelopes containing mortgage payments and forward money to investors.
The business became far more profitable during the housing boom. The proliferation of mortgages sold to risky, or subprime, borrowers created an opening for the servicing business. Servicers specialized in collecting from people less likely to make timely payments, and profited as late fees mounted.
Servicers wanted this business so much that they sometimes bid more than they could reasonably expect to make back for handling a pool of loans, said Daniel Hedges, an attorney with Mountain State Justice Inc., a nonprofit West Virginia law office that represents homeowners facing foreclosure.
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