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Donna and Ronnie Fruia learned firsthand how difficult it can be to get help modifying a mortgage.
The couple from Troutman were 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.
That's when Donna got a call that somebody from her mortgage company, CitiFinancial, had shown up in her husband's hospital room, where he was recovering from a stroke.
"At the time, I couldn't even really talk that good," Ronnie said. "But he wanted me to sign a bunch of papers."
The Iredell County couple had been trying to get a mortgage modification from CitiFinancial. The company, however, was pushing them 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 11.5percent to 5 percent, lowering their monthly payment from $985 to $602. The process took from the start of the year until July.
Housing advocates say the mortgage servicer industry has long resisted helping customers with modifications. Now, the federal government is engaged in a massive program that's on track to send billions in tax dollars to an industry that has been criticized for abusive mortgage practices.
Some of the money is going to the very companies that judges or regulators have cited in recent years. The firms have been cited for badgering, manipulating or lying to their customers; sticking them with bogus fees; or improperly foreclosing on them.
The middlemen
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.
The reliance on such companies points to a 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.
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.
"We've consistently been behind this problem," said Mark Pearce, North Carolina's chief deputy commissioner of banks, who works with a state-level group of attorneys general from across the country. "Two years ago, maybe some were caught by surprise. But we still haven't gotten to a point where the servicers have demonstrated an ability to handle the problem."
Help for the Fruias
The Fruias "were the perfect candidate for someone with a subprime rate getting a modification," said Henrietta Thompson, who helped the Iredell couple as housing coordinator for United Family Services, a Charlotte nonprofit. "I know if the banking commissioner hadn't gotten involved, it wouldn't have happened."
While CitiFinancial, a unit of Citigroup - 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 spokesman Mark Rodgers.
'Reluctant lenders'
Many homeowners still face "reluctant lenders," said Irwin Trauss, a lawyer 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 Charlotte-based Bank of America, at least through July, told homeowners they couldn't participate in the program when they should've been allowed to do so. He also 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.
Time-intensive process
It shouldn't have been a surprise that the mortgage service companies would have trouble executing wide-scale mortgage modifications. They generally aren't set up for the complicated business of reworking loans.
In 2007, an assistant attorney general in Iowa, Patrick Madigan, analyzed the looming mortgage meltdown and found that mortgage service companies have a "highly automated process, spending as little time as possible on an individual loan and preferably no time actually talking to the customer."
"Loan modifications, by contrast, are a time-intensive process that requires a great deal of individualized attention," he wrote. "In some situations, it may be easier and cheaper for a servicer to simply foreclose on a borrower than to try to fix the underlying problem."
Service companies had high turnover and employees who saw their jobs as akin to that of collection agents. Some were known to hang up on callers if they started to get tough questions, Madigan wrote. He urged mortgage service companies to hire far more staff and boost training.
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 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 was doing too little 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 - including Countrywide Home Loan Servicing, now a unit of Bank of America, and Saxon Mortgage Services, a unit of Morgan Stanley - have been cited by judges or regulators for having engaged in improper behavior with their customers.
Lawsuits against firm
Ocwen Financial, a Florida-based company that services more than 300,000 mortgages nationwide, could receive more than $200 million in TARP payments.
"Ocwen has screwed up my finances so bad you can't believe it," said Brad Rhoton, whose rental properties in the Houston suburbs are part of a nationwide lawsuit against Ocwen.
Rhoton's lawsuit charges that Ocwen constantly misapplied Rhoton's mortgage payments and tacked on unnecessary fees and insurance, causing his accounts to fall behind.
So far under the Treasury's modification program, Ocwen has started trial modifications in 8 percent of potential mortgages - below the national average and well below some other servicers.
Paul Koches, a company spokesman, said the number is misleadingly low. Ocwen, he said, has set rigorous standards in documenting its modifications and is therefore likely to have a far higher share of its modifications stick than other companies. He said that Ocwen undertook its own loan modification program in 2007 and has beefed up its staff substantially since then.
As for the suits against it, Koches said they represent a fraction of the firm's customer base, and many were copycat lawsuits that tried to paint Ocwen with the same brush as other mortgage servicer firms. He said the company continues to vigorously defend itself against lawsuits.
Over the years, Ocwen has lost other lawsuits and has been slapped down by a federal judge for its conduct.
In one Texas bankruptcy case, for example, a federal judge blasted Ocwen after it tried to pass the cost of a $1,000 sanction onto the customer it was cited for mistreating. When the judge found out, he fined the company an additional $27,500.
The case was far from isolated, however. A jury in Galveston, Texas, ordered the company to pay $11.5 million, and one down the coast in Corpus Christi ordered it to pay $3 million for unfairly foreclosing on homeowners (both cases were then settled in the appeals process for undisclosed amounts).
In both cases, the plaintiffs were on the edge financially, and so when Ocwen added extra fees to their accounts, they quickly fell behind.
