Arthur and Alberta Bailey are about to lose their home near New Orleans, and their mortgage company says one thing stands in the way of relief: The investors who own their mortgage won’t allow any modifications.
It’s a story heard again and again across the country as desperate homeowners try to participate in a federal program created to foster loan modifications and prevent foreclosures. Loan servicers say their hands are tied by Wall Street.
Federal officials, bank officers, housing counselors and investors themselves say that excuse is cited far more often than is justified. In fact, they say, few mortgage deals include such restrictions.
Consider the case of the Baileys. Litton, a subsidiary of Goldman Sachs, services their loan, and Litton’s contract with investors has no clear language banning modifications. In fact, documents show that over 115 other mortgages [1] from the same investment pool have already been modified.
Even the representative of investors in the Baileys’ mortgage says only the servicer can decide when to modify loans. While he couldn’t comment on an individual case, Bank of New York Mellon spokesman Kevin Heine says it’s “misinformation” to say that investors make these decisions.
Servicers can pass the buck because one mortgage often involves many different companies. During the housing bubble, banks often sold mortgages to investors on Wall Street so they wouldn’t have to keep the loans on their own books, freeing them to make even more loans and protecting them from those that went bad. They then hired servicers to handle the day-to-day work of collecting payments from homeowners – and to decide when to modify loans. Now loan servicers have been inundated with requests from homeowners trying to avoid foreclosure through the government’s $75 billion mortgage modification program. The Treasury Department estimates that 1.7 million homeowners should qualify for help.
For homeowners, it can be difficult to understand who is responsible for what. This confusion gives servicers a ready excuse for refusing modifications.
Indeed, nobody knows the exact extent to which servicers are passing blame on to investors. Some housing counselors estimate that 10 percent of the denials they see are attributed to investors; others say they see as many as 40 percent. Either way, tens of thousands of homeowners may be affected, their attempts to modify their mortgage wrongly denied.
The prevalence of such false claims by servicers is a “legitimate concern,” said Laurie Maggiano, the Treasury Department’s director of policy for the modification program. “It’s been very frustrating for us.”
Investors are also dismayed, saying servicers are not acting in their best interests. “This is one of those rare alliances where investors and borrowers are on the same page,” according to Laurie Goodman, senior managing director at Amherst Securities, a brokerage firm that specializes in mortgage securities. She says investors have “zero vote” in determining individual loan modifications and, instead of foreclosures, prefer sustainable modifications that lower homeowners’ total debt.
Investor-owned mortgages represent more than a third of trial and permanent modifications in the government’s program [2]. Under the program, servicers must modify the loans of qualified [3] borrowers unless contracts with investors prohibit the modification, or if calculations [4] determine that the investors won’t benefit from a modification. Investors’ contracts rarely prohibit modifications, and at times, ProPublica found, they have been blamed for denials even though other mortgages owned by the same investors have been modified.Even when contracts with investors do have restrictions, servicers don’t appear to be following federal requirements that they ask investors for waivers to allow modifications.
Such requests “never happen,” says David Co, a director at Deutsche Bank’s department that oversees 1,600 residential securities, the complex bundles of mortgages sold to investors.
Treasury’s Maggiano says the government is investigating investor denials and considering greater consequences for servicers that wrongfully deny modifications. Servicers’ compliance and accountability have been a major problem for the government’s program. Treasury has threatened penalties before, but it hasn’t yet issued any [5].
Whose decision is it?
“The very phrase ‘investor restriction,’ I think, is deliberately confusing,” says Joseph Sant, an attorney with Staten Island Legal Services, which represents homeowners in foreclosure. “What we’re talking about are not business entities or people, but inert documents.”
Typically, financial institutions set up mortgage-backed securities as a trust — legally their own entities — and then sell bonds from the trust to investors, which can range from mutual funds to pension funds. At the same time, they sign up trustees to manage the security and hire divisions of their own banks or other companies to act as servicers that work directly with homeowners.
While servicers often tell homeowners that investors decide whose loans can be adjusted, Heine, the spokesman for Bank of New York Mellon, one of the largest trustees that administer mortgage securities, says the responsibility to modify loans “falls squarely to the servicer.”
And the contracts that servicers often blame are usually not a roadblock. A report by John Hunt, a law professor at the University of California, Davis, looked at contracts [6] (PDF) that covered three-quarters of the subprime loans securitized in 2006 and found that only 8 percent prohibited modifications outright. Almost two-thirds of the contracts explicitly gave servicers the authority to make modifications, particularly for homeowners who had defaulted or would likely default soon. The rest of the contracts did not address modifications.
Jeffrey Gentes, an attorney at the Connecticut Fair Housing Center who works with hundreds of homeowners across the state, estimates that in 80 percent of the cases in which he has seen the servicing contracts, no language prevents modifications as the servicers have claimed.
Homeowners’ advocates say that when they successfully disprove a contractual restriction, the servicer just gives another reason for denying the modification. “The investor is cited first until the borrower can prove it otherwise,” says Kevin Stein, associate director of the California Reinvestment Coalition, which helps low-income people and minority groups get access to financial services.
Sant, the Staten Island attorney, says a servicer told one client that the contract with investors forbade extending the length of the mortgage, one key way monthly payments can be reduced through government’s program. But the government has addressed the objection, ruling that if a servicer can’t extend the length of a mortgage, it can still give a modification and just add a balloon payment to the end of the loan. Sant pushed back on the servicer’s attorney, who dropped that reason for denial and instead said the homeowner had failed the computer model [4] that determines eligibility. Sant currently is reviewing the case to determine how to proceed.
Continue reading ….ProPublica
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