by Olga Pierce and Paul Kiel ProPublica,
Last February, with 6 million homeowners in danger of losing their homes, the mortgage industry was assembled at a luxury hotel in San Diego applauding themselvesâ€”literally.
â€œAs a group, we owe ourselves a round of applause,â€ said Yvette Gilmore, vice president of loss mitigation at Freddie Mac, citing the industryâ€™s efforts to avoid foreclosures, garnering loud clapping from the ballroom full of bank executives, lawyers and others in the industry.
That same weekend, nearby homeowner Alexis Burris was agonizing over the impending loss of her home. She had spent a year seeking help from the mortgage servicing company that handled her loanâ€”and that had the power to decide whether to save her house or foreclose on itâ€”but had found the servicer to be anything but helpful.
There were delays, numerous errors and the servicer â€œcontinually lost everything,â€ Burris said. â€œThere were some papers I had to send them 11 times.â€
Millions of others homeowners have been caught in the dysfunctional machinery of the loan servicing industry.
Yet the Obama administration bet the success of its foreclosure prevention program on the ability and willingness of that same troubled industry to help homeowners -- and lost. The program, overseen by the Treasury Department, has been characterized largely by lax enforcement and deference to banks. Instead, the program assumes that in return for modest incentives, servicers will develop the capacity to fairly and efficiently help homeowners modify their mortgages. But the industry hasnâ€™t made the changes, which would involve a hit to their bottom line.
And though the inadequacy of the governmentâ€™s incentives has become increasingly clear over time, the Treasury has not acted to change them. The programâ€™s payments to servicers continue to fall far short of what would be needed to overhaul the servicersâ€™ approach to homeowners, said Steven Horne of Wingspan Advisors, a company that specializes in handling troubled loans. Banks would have â€œto rewrite the business model, and itâ€™s not worth it.â€
On Thursday morning, federal regulators at the FDIC, Federal Reserve and Office of the Comptroller of the Currency said they found â€œcritical deficienciesâ€ in the way servicers do business and are considering sanctioning the industryâ€™s largest playersâ€”who are also the nationâ€™s largest banks. The flurry of tough talk comes after years of inaction by the Treasury Department.
Fixing the industry will require â€œdifficult changes and significant investments to rectify broken systems,â€ said Federal Reserve Governor Sarah Bloom Raskin in a speech last week. â€œI have seen little to no evidence of improvement in the operational performance of servicers since the onset of the crisis.â€
Over the past year, ProPublica has been exploring why the governmentâ€™s program has helped so few homeowners. So far, we have detailed the Treasury departmentâ€™s weak oversight, and how the administration quietly retreated from a plan to get tough on banks. In part 3, we will discuss reforms that could lead to more help for homeowners.
The stories are based on newly disclosed data, lobbying disclosures, dozens of interviews with insiders, members of Congress, and others. Today we tell the inside story of what happened when the fate of struggling homeowners was placed in the hands of the industry with little incentive to help: the mortgage servicing industry.
On paper, the governmentâ€™s Home Affordable Modification Program, or HAMP, was supposed to address one of the main roadblocks to modifying loans: The banks handling most mortgages often have little incentive to avoid a home going into foreclosure since they donâ€™t actually lose money when that happens.
Thatâ€™s because mortgage servicers, the largest of which are the nationâ€™s largest banks, donâ€™t own the vast majority of the loans they handle. So, they donâ€™t bear the loss if the loan goes to foreclosure. In fact, servicers often make money from foreclosure fees.
â€œForeclosure is the path of least resistance inside a servicing shop, because once it goes into that mode, all of the costs are essentially borne by third parties,â€ said Horne.
But when it comes to making modifications, servicers have to make big investments in staff and infrastructure to work effectively with homeowners. HAMP sought to defray some of those costs by paying servicers $1,000 per modification and up to $3,000 more over time if it was successful.
Before the foreclosure crisis, mortgage servicing was a highly profitable business for large banks. They were paid a flat percentage that more than covered the cost of cashing checks from homeowners. Servicing a typical loan cost the servicer about $48 a year, according to a new Federal Housing Finance Agency analysis, while for a typical $250,000 mortgage, the servicerâ€™s annual fee would be about $625 a year. Given the huge number of mortgages they handled, servicers made tens of billions of dollars in the years leading up to the crisis.
Ideally, â€œin good times, servicers are using some of the residual income to build out systems and procedures to handle the pressures that come with worse times,â€ said Fed Governor Raskin. â€œUnfortunately, as we have seen, this has not happened.â€
Instead of investing in technology upgrades or employee training, banks pocketed the profits.
When the default rate tripled, servicers floundered, and almost as soon as HAMP launched it became apparent they werenâ€™t up to the job.
Documents obtained by ProPublica via a Freedom of Information Act request show homeowners started calling a Treasury-sponsored hotline with complaints of servicer errors within weeks of HAMPâ€™s rollout. Servicers, who still relied on fax machines, were losing customer documents over and over. Others said servicers were charging them for modifications.
"There were definitely times where I'd check and see if someone faxed in documents and [their file] says they were declined because they didn't comply, but I was looking at their documents," said a Bank of America call-center employee, who didnâ€™t want to be identified for fear of losing his job.
More than 344,000 homeowners have been rejected from the program because the servicer said their documents were missing, the most common reason for denial.
â€œI think weâ€™ve made massive improvements in our ability to capture, retain, and index documents appropriately,â€ said Rebecca Mairone, a default servicing executive with Bank of America. â€œI mean, for our industry, and certainly for Bank of America, this was a new process for us.â€
Many problems have stemmed from the servicers forgoing upgrades on their decades-old payment processing technology.
Servicers were â€œmostly using a kind of mainframe-based technology that was basically initially developed to be glorified accounting technology,â€ Austin Kilgore, editor of Mortgage Technology magazine, said.
Better technology has existed all along, experts say. â€œThe tech is out thereâ€”itâ€™s difficult for a servicer to make enormous investments in technology, given the time frames, the compression and the volumes,â€ said Greg Hebner of MOS Group, a company that performs loan modifications for servicers.
The main industry solution to the problem of lost documents has been the HOPE LoanPort, a system that allows housing counselors to submit homeowner documents via a website. But even though the portal relies on off-the-shelf software, HOPE Now, a servicer-dominated alliance with counseling organizations and community groups, did not launch the system until November of 2009â€”about seven months after HAMP began.
Nine months later, only 1,400 full modification applications had been submitted through the system, said HOPE Nowâ€™s president Larry Gilmore. He said the volume would increase as more servicers and counseling organizations sign on. HOPE Now did not respond to requests for more recent numbers
The major servicers hired tens of thousands of employees to help handle the flood of phone calls, but the same cost-cutting approach kept pay low. Experience wasnâ€™t necessary.
"At this point, we just need people in the seats, even if they're not qualified," Robert Northway, a consultant from McLagan, told an audience of servicing industry professionals in February of last year.
Staffing up to process modifications â€œjust demolishes the bottom line,â€ says Duke Olrich, president of DRI Management Systems, a company that makes software for banks and other servicers. â€œThe whole name of the game is to keep employee costs to a minimum if you can.â€
Olrich says his company crafts its software so that even someone with no mortgage experience, â€œwho might have been flipping hamburgers two weeks ago,â€ can speak with a homeowner about a modification. When a homeowner qualifies for a payment plan, the software puts it in green.
Robbie Abalos was 20 years old when he worked in a CitiMortgage call center in Tucson, Ariz., last year, at $10.50 per hour, a typical wage for the job. He had no mortgage experience and says the training was â€œjust kind of a joke.â€ Abalos was advised not to â€œbend over backwardâ€ for callers, he says, because it cut down on the volume of calls he could handle.
A Citi spokesman said, â€œWe believe our loss mitigation training is quite substantial, including dedicated training for new hires and specialized materials designed to encourage a strong customer focus."
It was common industry practice to tie employees' pay to keeping calls short. Among the four largest servicers, calls with homeowners average around eight minutes, according to data the companies submitted to Congress last year.
Many employees tasked with working with homeowners were moved from collections departments, and multiple current and former servicing employees said the emphasis was still on collections.
â€œYour manager is telling you, â€˜Collect, collect, collect,â€™ â€ said Debra Foley, who also had no experience when she was hired by Countrywide near the end of 2008. â€œMost people want to stay in their house. So why arenâ€™t theyâ€â€”meaning banksâ€”â€œhelping?â€
Mairone said Bank of America, which acquired Countrywide in 2008, has since â€œcreated more of a distinction between what a collector does and then what a modification associate will do to help the customer.â€
Retaining experienced employees has also been a problem for servicers. Most of the large servicers reported to Congress last year that their call centers had annual turnover rates around 25 percent.
Industry representatives say they are doing the best they can, given the enormous numbers of homeowners lining up. â€œThe amount of effort being expended on this is tremendous,â€ said Vicki Vidal, a lobbyist for the Mortgage Bankers Association.
While an unnecessary foreclosure doesnâ€™t hurt the servicer, it does hurt investors who ultimately own the mortgages and who lose money when homes are sold for a fraction of the mortgage amount.
â€œWe do a lot of business for investors where they just want us to get the borrower on the phone and figure out what the heckâ€™s going on,â€ said Hebner, the loan modification contractor. â€œWe call the borrower, and the borrower says, â€˜Iâ€™ve been trying to call servicer ABC for the last 60 days, I couldnâ€™t get through.â€™ â€
Mortgage-backed securities investors risk unnecessary losses in the â€œhundreds and hundreds of billions of dollarsâ€ as a result of servicersâ€™ cost-cutting practices, said Hebner.
The Roots of the Governmentâ€™s Inadequate Incentives
Though HAMP relies heavily on incentives to get servicers to change, ProPublica has found a series of faulty assumptions built into the programâ€™s design.
During interviews with numerous experts, government officials and industry representatives involved in the programâ€™s design, no one could point to research that provided a basis for the servicer incentive structure. Instead, the number appears to have emerged from back-of-the-napkin calculations at a series of agency meetings.
â€œIt was just a guess that $1,000 might be enough,â€ said Karen Dynan, a former senior economist at the Federal Reserve.
When designing the program, decisionmakers wanted to ensure servicers were only paid for successful modifications because tax dollars were at stake. But it still costs servicers money to evaluate the more than 1 million homeowners who didnâ€™t ultimately receive a government modification. They get no incentive payments to offset that cost.
Treasury also overestimated the percentage of homeowners who would move from trial modifications, for which the servicer is not reimbursed, to permanent modifications. In October of 2009, Herb Allison, then head of TARP, estimated that a â€œbare minimumâ€ conversion rate should be 50 percent, and a successful rate would be 75 percent. So far, less than 40 percent of homeowners whoâ€™ve started trials have gotten a permanent modification.
Under Treasuryâ€™s original assumptions, servicers could have received upwards of $10 billion in government funds. As itâ€™s turned out, theyâ€™ve received $419 million two years into the program. Bank of America subsidiaries have received about $50 million of that, but told Congress in 2010 it would spend an estimated $350 million that year on HAMP-related expenses.
As the program struggled, the administration didnâ€™t move to increase the incentives. That would have been difficult politically. â€œThere was a sense that you could raise that payment, but it was coming at a pretty clear cost to the taxpayer, and it wasnâ€™t clear that it would make a big difference in the number of mods being done,â€ said Dynan, the former Fed economist.
Treasury and servicers insist that the industry has changed as a result of HAMP, claiming that customer service has improved and pointing out that modifications are in general more affordable than before the program launched.
â€œMaking Home Affordable has been the catalyst that has created more options for affordable and sustainable assistance than has ever existed before,â€ said acting TARP chief Tim Massad.
Those on the front lines, however, say those improvements are hard to see. In White Plains, NY, the non-profit Community Home Innovations arranged an event for about 100 homeowners meant to address many of the common problems they experienced with servicers. In June of last year, about 15 months into the program, the homeowners met face to face with a specially trained group of Bank of America employees, equipped with scanners that could immediately input customer documents that would be transmitted to a specially designated team.
Bank of America, the nationâ€™s largest servicer, promised the homeowners would get answers within two weeks to 45 days. Seven months later, about half are still waiting for a decision.
In light of the poor results, a Bank of America representative told Peter Spino of Community Home Innovations that it was suspending all similar events until they could fulfill their promises.
â€œWe are always cautious about committing to events when we have capacity constraints that do not allow us to meet the organizationâ€™s and customerâ€™s expectations,â€ said Bank of America spokeswoman Jumana Bauwens. â€œSince this particular event which took place last June, we have built up our tracking system, improved document collection and expanded the number of associates dedicated to processing loans from these type of events,â€ she said, adding that the bank had attended more than 90 events in the fourth quarter of 2010.
A push is under way to dramatically reform the servicing industry. Calling servicers â€œunprepared and poorly structuredâ€ to help homeowners during a sharp downturn, the Obama administration is considering changes that would pay servicers more for handling struggling loans, in the hope that this would buy better customer service for homeowners in trouble.
While the call for reform is a tacit admission the program fell short in changing the industry, these changes would only apply to loans made in the future. Burris and approximately 2 million other homeowners have already lost their home to foreclosure over the last two years.