Analyzing the Loan Modification Process
by Karen Weise, ProPublica
Seventy-year-old Barbara Harris can’t help crying when she walks around her neighborhood. She says she hates seeing possessions piled up on front lawns — the remnants of foreclosure. Three times, the Harrises received foreclosure notices and thought they’d be next.
For two years, the Harrises have been trying to get Wells Fargo to modify their mortgage to something they can afford. But they face one big catch: Though Wells Fargo services their mortgage and is participating in the federal modification program, it doesn’t actually own their loan. And the investors that do own the loan, Wells Fargo told the Harrises, won’t allow the modification.
Like one in eight homeowners, the Harrises’ loan is part of a mortgage-backed security, a bundle of loans packaged together and sold off to investors. Ambiguous rules and the dispersed web of interests involved in securitized mortgages have created little accountability, leaving homeowners trapped. For homeowners with securitized mortgages, once they’re told an investor says no, there is little recourse.
A Problem for the Federal Program
Homeowners with securitized mortgages could be disproportionately denied modifications under the federal Making Home Affordable program. Under the program, participating mortgage companies must modify loans (PDF) for all qualified borrowers; the only exception is when a contract with investors prohibits the modification.
As ProPublica and other news outlets have reported, the program is off to a slow start. Even Treasury Department officials say the servicers are lagging. In written testimony to Congress on June 3, James Lockhart, the Federal Housing Finance Agency director, singled out securitized mortgages as "especially challenging" hurdles for the program.
Homeowners, housing counselors and legal aid attorneys say that servicers have pointed to agreements with investors as preventing loan modifications. Because the Treasury Department has not released information about the reasons why modifications are being denied, it is impossible to know the full extent of the problem.
This conundrum hits those most in need; homeowners whose loans were securitized by banks are five times more likely to be severely delinquent (PDF) on payments than other homeowners.
The Harrises provide a good example of how a loan is packaged and resold to investors, and how that makes it difficult to modify their mortgage.
A Bad Loan from the Beginning
After carpenter bees damaged the Harrises’ siding and roof in 2004, they decided to refinance their mortgage so they could cash in on some of their home’s equity to cover the repairs. Barbara Harris saw an ad for a mortgage broker in the Georgia Bulletin, the weekly paper of the Catholic Archdiocese of Atlanta. "I specialize in helping people. Good, bad, no credit … FHA, VA, St. Benedict’s Parishioner … Si Habla Espanol," the ad read.
Harris called the broker, Shawna Sullivan of White Star Mortgage. "She sounded very nice," Harris says. "We even discussed what parish she was in. And she said she could get a loan for us."
Harris was no longer working, and her husband was about to retire after a career of civil and military service. The Harrises say Sullivan told them not to mention that they would soon be relying solely on fixed income. She steered them away from a Veterans Affairs loan and eventually returned with an offer from Wells Fargo for a $234,600 loan with a 7.625 percent interest rate. That would give them $21,000 in cash.
Sullivan never told the Harrises that they had an adjustable-rate mortgage and their interest rate could rise to 13.625 percent, they say.
"Why would we agree to that?" Harris says. She admits that they didn’t read the fine print on the mortgage papers. "We really trusted her," she says.
Sullivan did not return our calls. Mark Collins, the CEO of America’s Mortgage Broker LLC, which owns White Star Mortgage, confirmed that the Harrises would have qualified for a VA loan. Collins said he could only speculate as to why Sullivan, who no longer works at the firm, steered the Harrises to a subprime loan.
In 2004, around half of subprime borrowers actually qualified for prime loans, according to an analysis by the Wall Street Journal.
Collins says it was reasonable for the Harrises to assume that their rate of 7.625 percent could be fixed, and that homeowners do not always understand that their loans will adjust. "You get so bombarded with so many papers and numbers, it’s really a shame," he says.
Stephen Krumm, the Harrises pro bono attorney from Atlanta Legal Aid, says, "An adjustable-rate loan is never appropriate for anybody who has a fixed income."
The Harrises’ monthly payment eventually jumped from $1,600 to $2,500.
From a Suburban Home to GSAMP Trust 2004-WF
The Harrises also didn’t know that in the months after they refinanced, Wells Fargo sold their mortgage to Goldman Sachs, which in turn bundled the loan and 2,827 others into a $435 million mortgage-backed security called "GSAMP Trust 2004-WF."
Goldman Sachs sold pieces of that security to outside investors. Now, Deutsche Bank is the trustee responsible for administering the security on behalf of investors, and Wells Fargo is the servicer on the loans, which means it collects the monthly payments and decides when to foreclose.
The names of investors who actually buy mortgage-backed securities aren’t publicly available, but typically they can be foreign governments, 401(k)s, college endowments and pension funds. In any given security, "there could be literally anywhere from one to commonly several dozen institutional investors, and those institutional investors will be representing literally thousands of pensioners and individual investors," says Bill Frey, head of Greenwich Financial Services.
‘The investors need their money’
Harris says she always heard a similar refrain when she called Wells Fargo: "They said the investors need their money, and how do we expect them to get their money if we don’t pay."
Spokesman Kevin Waetke says Wells Fargo is working with "the investor" to come up with a solution for the Harrises, but both Goldman Sachs (the issuer) and Deutsche Bank (the trustee) told ProPublica that they were not involved. Deutsche Bank spokesman John Gallagher said servicers are "solely responsible" for deciding all modifications.
Wells Fargo refused to provide additional information about the investor or how it works with investors. Experts say investors rarely are involved in an individual loan modification decision. "The investors are a convenient scapegoat," says Guy Cecala, publisher of Inside Mortgage Finance. "There's no way for investors to veto a loan mod."
Wells Fargo says "the investor" won’t waive past-due debt, which in the Harrises' case, adds up to over $80,000 in accrued interest, overdue debt and various fees. Krumm, the Harrises’ attorney, said Wells Fargo has proposed adding all this to the loan; the modified principal balance would be $314,000. Comparable homes in the Harrises’ subdivision have sold for between $86,000 and $140,000 this year, according to the real estate Web site Zillow.com.
Wells Fargo’s proposal offers monthly payments of $2,041 — $300 more than the Harrises would pay under a Making Home Affordable modification.
Latitude to Negotiate
Servicers like Wells Fargo rely on agreements with investors for guidance on when modifications are allowed. These pooling and servicing agreements (PSAs) are regularly cited as the reason a servicer can’t change a loan.
In reality, however, the contracts themselves generally don’t limit modifications. In a study due out this month, researchers at UC Berkeley’s law school looked at the contracts covering three-quarters of the subprime loans that were securitized in 2006. The researchers found that only 8 percent prohibited modifications outright. About a third of the loans were in contracts that said nothing about modification, and the rest set some limits but generally gave the servicers a lot to leeway to modify, particularly for homeowners that had defaulted or would likely default soon.
That’s the case in the contract (section 4.01) that covers the Harrises’ loan. Under the agreement, Wells Fargo has the authority to "waive, modify or vary any term" of a loan if the servicer makes a "reasonable and prudent determination" that the modification is in the investor’s best interest. It states that Wells Fargo must ask permission to modify only if the mortgage is not currently in default or in imminent danger of it.
"There typically is a fair amount of latitude to work with borrowers, which raises the question: Are servicers exercising their latitude?" says Pat McCoy, a law professor at the University of Connecticut.
The Threat of Lawsuits
Even though the PSAs generally are not very limiting, servicers still fear getting sued by investors. It has been one of the biggest obstacles to getting modifications, says a Treasury Department spokesperson.
"Servicers have indicated that they … are very concerned that if they do overmodifications of mortgage loans, that they would be subject to lawsuits," Tom Deutsch, the deputy executive director of the American Securitization Forum, said in a congressional hearing in November.
The contracts can be vague, and different investors often have different interests in the securities. "It causes the servicer to want to watch their back more," says Kurt Eggert, a law professor at Chapman University in Orange, Calif. Doing little or nothing can be safest.
"It is not the job of the person running the investment to worry about whether the homeowners or the bank that created the loan is happy with the transaction," says Greenwich Financial’s Frey, who sued Countrywide in the only major lawsuit over modification. Frey says investment managers have a legal, fiduciary obligation to do what will make investors the most money.
He knows it sounds harsh, but he points out that the ultimate investors are generally ordinary people, through retirement plans and pension funds.
Questionable ‘Safe Harbor’
The government has attempted to address some of the legal barriers to modifications, but challenges in modifying securitized loans persist.
In late May, President Barack Obama signed a bill that included a "safe harbor" provision designed to protect servicers from being sued by investors. The original draft of the legislation included a clause that provided protection "notwithstanding any investment contract between a servicer and a securitization vehicle or investor," but after lobbying efforts by Frey and other investors, Congress removed that clause from the final version of the law.
"It may not be as safe a harbor as they think," Frey says. "If they were to modify these loans en masse, and the safe harbor was not sufficient to protect them, the financial solvency of the firms would be called into question."
A Treasury Department spokeswoman said the administration believes it can reduce the fear of litigation by standardizing the requirements for modification and including a calculation to determine if investors make more money by modifying through the federal program than by foreclosing.
But now, five months into the program and two months after the new laws, homeowners still say servicers point to investors when denying Making Home Affordable modifications.
Holding Out Hope
"I do believe that the president has made it possible that someone in the situation like my husband and I to be reprieved and helped," Harris says. But with so many players, when people like the Harrises are told the investor won’t allow a modification, there’s little recourse.
ProPublica will continue our reporting on the Making Home Affordable program. If you plan to apply for a modification, or already have, please tell us your story.
ProPublica is America's largest investigative newsroom.
Follow ProPublica on Twitter: www.twitter.com/propublica
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Every other country, especially China and most of Europe have goverment incentives to protect it's industries. No matter what you call it it's a form of protectionism and its inevitable. We should stop being naive and take care of our own house. The only ones who win if we don't are the
hat tip to http://www.iamned.com t
I didn't read the fine print? For the interest rate?
Didn't know it was an ARM?
What are you, twelve?
If you don't read the interest rate and the payment schedule on a mortgage contract, normally found ON THE SAME PAGE!, you don't have any business signing the contract.
If not those two pieces of information, what are you reading?
People's stupidity amazes me.
For the record, I am a consumer, not a mortgage provider, and I have signed probably ten mortgages in my life. Fixed and adjustable rate. EVERY TIME, the MAIN thing I wanted to see was the interest rate, and the payment schedule.
While you can assign some blame for the agent feeding you false information, allegedly, when you sign an agreement in which you are obligated to pay hundreds of thousands of dollars, DO YOU THINK YOU MAYBE SHOULD READ IT? AND UNDERSTAND IT? If not, you should have had an attorney read it for you.
Signed, very little sympathy.
Wells Fargo has a history of lying about their contracts with investors. They're in control of far more than they would like the public to believe. I've refused to do business with them for over twenty five years on account of similar long standing tactics.
Same goes for B of A, who thirty years ago refused to cash a paycheck at the very same branch where my boss had his account. "You don't have an account with us." I was told. When I asked to start an account with that paycheck, they told me the check was insufficient to even open an account.
Their behavoir hasn't improved a bit since, so what I told them then I'll repeat now: I will never, under any circumstances do business with B of A. If B of A purchases a company with which I currently do business, my business with that company will be terminated, and I look forward to the day that B of A itself is terminated. That day cannot come soon enough.
Bush and his good buddies, the now very rich (but in dollars only),the Neocon Crew, failed the other human beings that lived down the street from him or them, in epic style, by initiating a war on a country that did not attack us and sending the sons and daughters off to that foreign land; some to fight, some to be maimed, some to die so that he and his profiteering friends could make great sums of dollars on that effort. There was nothing noble that was done here, as a matter of fact it was fully, totally and absolutely ignoble, but so few people do not understand the meaning of these words.
You posted to the wrong page. This page is about housing and not the war.
Congress Healthcare Benefits Must Cease
Please show your support by signing the petition http://www.petitiononline.com/la4tw339/petition.html and forwarding the link to as many of your email contacts as possible. Pass It On!
What?
How do you put a entire population into economic slavery?
Over Five Years Issue tons of debt then change the bankruptcy laws and withdraw the credit just as fast.
Under the Central Banking System you create money by taking on debt.
They suckered people into taking on debt to create money then stole the money.
Now they want the house back too.
Actually, people were stupid and paid too much for the house.
Now the more responsible people want the house.
How do you put a entire population into economic s1avery?
Over Five Years Issue tons of debt then change the bankruptcy laws and withdraw the credit just as fast.
Under the Central Banking FED System you create money by putting out debt for Americans.
No wonder America has moved from #1 Creditor to #1 Debtor Nation!
They suckered people into taking on debt to create money then sto1e the money.
Now they want the house back too.
That is amazingly concise and accurate. Government as ponzi scheme, insult to injury, cradle to grave.
Bush's Recession, Obama's Depression.
Republicans in large part have essentially been Democrat-Lite on fiscal matters for a long time but with the Obama
Admin and the current Dem controlled Congress what we have now is liberal fiscal policy on steroids when the economy and the nation as a whole can afford it least.
Obama thinks he's saving us but woe unto those being destroyed by someone convinced he's helping you. When his policies fail,
he wont stop, he'll only compound? his failed policies
Romeo, Obama's supposed Depression--which it is not--was Bush's. Obama has only been in office since January, a little over 6 months. The groundwork for this recession was laid by Bush and many years in the making. It started when he cut taxes for the Rich and increased government spending during times of prosperity, a very bad thing to do. He did lots of other stupid things.
George W. was like the irresponsible college freshman who rents an apartment and trashes it. The new tenant, a responsible young man moves in, finds the apartment all trashed. Now the new tenant has to have the mess cleaned up. But it wasn't his mess, was it?
You need to stop watching Fox News and get an education. Ignorance is never becoming of anyone.
For six months (and probably many more) Obama has been stuck in the position of keeping the bottom from falling out of our economy.
Bush(s) failed America.
We are seeing the U.S. coming apart at the seams, with the prostitute-like politicians, bankster-gangster-scamster, and too-smart-by-half Phd's, that wrote the oh-so-clever derivative and swap contracts (formulas), all working in unison to make certain that they get theirs, whilst Main St. Americans are being tossed into the street.
The weather start to turn cooler, then colder, soon, and I am concerned for the health and safety of those outside now.
I suppose that it is good that Grandad, Dad, and Brother are all deceased now, because this is not the America that they gave up years of their lives to fight for, and at least Dad and Brother then suffering with PTSD for the rest of their lives as a result of their service. My heart is so heavy.
The problem is simple:
They do NOT CARE about Main Street People!
Only the Wall Street EL1TES matter! They run the show!
How do you put a entire population into economic slavery?
Sowly Issue tons of debt then change the bankruptize laws and withdraw the credit just fast.
Under the Central Banking System you create money by taking on debt.
They suckered people into taking on debt to create money then stole the money.
Now they want the house back too.
Well SAID! Fanned! You defined the thinking precisely!
dadw5boys:
You, sir, have summed up the entire bankster/financial/slavery scam system in four sentences. Well done! If only the cable pundits were as informed, aware, or honest as you... or if only the masses would listen
Some of the banks want the home back because of the FRAUD in the orginal loan and are afraid someone will discover it and sue them.
I had a decent loan, and because of the drop in home values, qualified for the program. I don't have any other issues other than the drop in equity. It took me 5 months to get the loan approved, politely talking to the lender every other week. I got a 1.5% drop in my rate, saving me about $200 a month.
I was extremely lucky to hit the rates at the very bottom.
This program isn't meant to be a magic bullet. Look into your options, check the fees, and do the numbers. It can be a good deal.
When deadbeats get tossed out of their house for not paying their mortgage, the house goes back on the market and someone else buys the house.
THIS IS CALLED THE FREE MARKET!!!!!!!!!!!!!!!!!!!!!!!!!!
I rent and I was sorely tempted to buy a house at some crazy price. Now that prices are trying to come down to an affordable level, the government is trying to manipulate the free market and send my tax dollars to those that made the stupid decision to pay too much for their house.
It is not good for the economy to have overpriced housing and there is nothing good about a manipulated housing market.
It's my understanding that the banks realized they could make more money foreclosing and so they are refusing to modify loans.
There was an article exactly on this about a week ago. I also heard that they get money from the mortgage insurance companies if they foreclose. So to hell with the community, to hell with the United States' economy, they got theirs. That's all those "American" bankers care about.
If Congress and the President had supported and passed bankruptcy reform with cramdown two things would have happened immediately: foreclosures would have essentially stopped and loan modifications would have been completed rapidly to keep homeowners from declaring bankruptcy on their primary home mortgages.
This did not happen, so banks continue to happily jerk everyone around.
#1 The government want to keep the artificial-inflated-Prices-up By help the banking system.
#2 The banking system is happy, and cozy because they are NOT under-pressure for loses.
#3 The realestate is cheerleading all of the above to continue gauging everybody once again.
Now banks are holding REO homes with the idea of creating a demand in the market.
Unemployment is high
Salaries are disconected from prices
Credits are shut down
People in distress are not paying their property taxes, neither their mortgage
People falling out from the unemployment system
Begining with Reagan, When he say "the government is too big, and is the problem, And he went on with the "Free-Enterprise" and the Globalization idea, Creating a tremendus Gap among social-classes= More billionaires, less middle class, and more poors.
Than came along Clinton "The salesman of Illussions" with the Bridge to the millenium= More of the same, and sold out the country to the Asians, and outsourcing middle-class jobs to India/China plus the NAFTA- disgrace.
And finally the big Abomination from them all...Bush and his uncompetent gangsters that commited the biggest crimes in this country history, And his "ownership-Society"
Should I add more...? I guess you all agreed.
So now we have a president who is trying his best, but fall short because his soft silky gloves toward the enemies of the society, and State.
Mid-while the responssible-Crooks, and criminals still free.
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