David and Marilyn Baldwin live in the same modest house in rural Pennsylvania where David grew up. David's brother lives in a house behind them, while his cousin owns a farm visible from the couple's front door. They've lived there for 25 years, but when I went to interview them in April, they were on the verge of losing their home.
A battle with congestive heart failure and diabetes forced David to leave his job as a car salesman in August of 2007. He and Marilyn -- both in their early 60s -- tried to keep up on their mortgage as best they could until David's disability payments started arriving in April of 2008. But once they started receiving the checks, it became clear their existing mortgage was now beyond their means.
"We didn't think that Dave was going to be at a point where he'd have to be on disability," Marilyn said. "We always paid it before, we just can't do it now."
In February of 2009, newly inaugurated President Obama unveiled a foreclosure prevention program called Making Home Affordable, promising to keep "up to 3 to 4 million" borrowers from losing their homes. But like a similar initiative adopted under the Bush administration, the Obama plan is flawed because it relies on the housing industry itself -- namely the industry's debt collectors, known as mortgage servicers -- to fix the problem. And like the Bush plan, it isn't working especially well, as the Obama administration's own numbers now show. While 1.5 million homes have gone into foreclosure in 2009 as of June 30, just 235,247 borrowers have been granted trial loan modifications under the Obama plan since its inception, according to an Aug. 4 U.S. Treasury Department report.
Helping homeowners is not what mortgage servicers do. Making Home Affordable asks mortgage servicers to identify troubled borrowers and fast-track them to relief. But servicers specialize in squeezing borrowers for money, and have never been interested in devising long-term solutions for people in trouble. The poorly paid individuals, some of them offshore, that they hire to contact homeowners are not trained to renegotiate loans. Obama's program, like the Bush plan, is strictly voluntary -- if servicers don't want to participate, they don't have to. As in the Bush plan, servicers who do participate face no penalties for failing to assist qualified borrowers, and no government agency is policing servicers to make sure they live up to the terms of the contract. Meanwhile, they actually benefit from letting homes fall into foreclosure, because foreclosure means they are guaranteed an upfront payment from the sale of the home.
"Nothing has changed," says Daniel Lindsey, an attorney with Legal Assistance Foundation of Metropolitan Chicago who heads the group's home ownership preservation effort.
The Baldwins' loan is handled by CitiMortgage, a mortgage servicer owned by Citigroup Inc., the foundering finance behemoth that has received $45 billion in direct bailout funds from the U.S. government and hundreds of billions in federal guarantees. As a condition for taxpayer support, Citi agreed to implement a major borrower relief effort, and was one of the first companies to adopt Obama's anti-foreclosure plan when it was unveiled earlier this year.
In April of 2008, when the Baldwins realized they were in serious financial trouble, Citi was signed on to the Bush administration's private-sector mortgage fix-it plan, Hope Now. Hope Now was a coalition of banks organized by then-Treasury Secretary Henry Paulson. Members of Hope Now held several splashy press conferences in late 2007 and early 2008 encouraging people who were having trouble paying their mortgages to contact their loan servicers and work out a new arrangement.
But there wasn't much more to Hope Now than press conferences. The government's role was that of a cheerleader, encouraging servicers to help borrowers, but providing no guarantees or penalties. The data for the program -- the stats on the number of loans modified -- was even collected by the Financial Services Roundtable, a lobby group for the banking industry that pushed hard against multiple congressional efforts to reduce foreclosures. (The data collected by the Financial Services Roundtable gives Hope Now credit for loan modifications from July 2007, even though the program wasn't announced until Oct. 10, 2007.) Servicers were free to do what they wanted with troubled borrowers, and usually, that meant foreclosure.
But in April 2008 David and Marilyn Baldwin did what Hope Now encouraged them to do and contacted their loan servicer. David had earned about $50,000 a year when he was working, but only receives $1,800 a month on disability. Marilyn takes home $1,000 a month driving a van for the local public school district, putting their $2,250 monthly mortgage payment well out of reach.
Citi wasn't interested in helping.
"They told me flat-out, they wouldn't accept any partial payments," David said. "To put it plainly, they've been jerking me around ever since."
Over the next several months, Citi alternately cut off contact with the Baldwins for weeks on end, and made threatening phone calls to demand money. The company repeatedly insisted that the Baldwins would lose their house if they didn't pay up everything they owed in full, immediately. Sometimes the bank would make vague promises of debt relief, but always refused to put any agreement in writing, or even specify the terms of a solution over the phone. The mantra was always the same: Send us the full payment, and send it now.
"This woman told me, 'If you can't send me this money and we can't arrange this right now, then we can't help you. Don't bother calling me anymore,'" David said.
Hope Now bragged about helping 1 million families avoid foreclosure in 2008 by modifying their loans, at least according to the figures assembled by the Financial Services Roundtable. That's more than the Obama plan has modified -- but the Hope Now modifications were apparently crap.
Economists at the Boston Federal Reserve published a paper last month indicating that only 8.5 percent of seriously delinquent borrowers received any kind of loan modification in 2007 and 2008, while only 3 percent received a loan modification that actually reduced their monthly payment. A lot of this so-called help actually drove borrowers deeper into debt and increased their monthly bills. Instead of cutting the interest rate or the loan principal -- that is, the total amount the borrower owes -- servicers would add missed payments and penalty fees to the principal, resulting in more overall debt and higher monthly bills for borrowers. According to an analysis by the Center for Responsible Lending, an advocacy group that promotes fair lending practices, less than 20 percent of the loan modifications reported by Hope Now actually reduced borrowers' monthly payments.
When David and Marilyn felt like they had reached a dead end with CitiMortgage, the couple got in touch with the National Community Reinvestment Coalition (NCRC), a nationwide borrower advocacy group that helped the couple consider their legal options and fend off foreclosure proceedings for nearly a year, until the Obama plan, Making Home Affordable, took effect in 2009.
Servicers participating in Making Home Affordable are supposed to determine if a troubled borrower meets a set of minimum criteria for relief, and then immediately reduce her monthly payment to 31 percent of her monthly income. If she can make the reduced payment for three months, it becomes permanent and she keeps the house.
Under the Obama plan, unlike the Bush plan, servicers don't get to pick and choose who gets offered relief, or the terms of the relief. If a borrower meets the standards, she has to be enrolled in the program. The criteria are straightforward: The borrower has to live in her home and must actually be having trouble paying off her mortgage. Modifying the loan to the program's standards must be cheaper for investors than foreclosure. The program provides servicers with two incentives to make modifications. If the servicer will reduce the borrower's payment to 38 percent of her monthly income, the government will fund the reduction to 31 percent. Taxpayers are also paying servicers $1,000 for every mortgage modified under the plan.
"There's more meat on the bone, but it's in the form of sweeteners and encouragement," says NCRC president John Taylor. "It's all carrot and no stick."
Borrowers and housing counselors who have been through the plan report intense and prolonged difficulties from working with servicers, and routine violations of the plan's rules. Servicers frequently demand that borrowers waive their legal rights to challenge servicer actions in court in exchange for an Obama plan modification, attempt to steer borrowers into modifications much less helpful than the Obama plan modification, mislead borrowers about the terms of the Obama plan and refuse to enroll qualified borrowers in the program. The program provides no penalties for failure to follow through.
In other words, that means that for a homeowner who needs a loan modification, dealing with mortgage servicers is little different in 2009 than it was in 2008. It's still a version of call center hell.
Talking to a mortgage servicer is like haggling with the phone company -- except over hundreds of thousands of dollars, your credit rating and your future financial security. When you call a servicer, you're first treated to an electronic call management system. A digital voice warns you that you are talking to a debt collection service and any information you offer will be used for those purposes. The voice then asks you for information about your loan, your house and yourself. Once this is over, you listen to hold music while you wait for an actual person to answer the phone. Depending on the servicer and the time of day, it can take 15 minutes just to get through to an actual human being.
When and if the caller does get through to a live person, many borrowers are simply told they cannot be helped and need to send in payments. But some borrowers get placed on hold and referred to another person in another department and another expert. This can happen several times before you speak to someone with the corporate authority to actually help you. Sometimes calls dead-end in an answering machine. Servicer employees often take down borrower information and take weeks to get back to them. And servicers rarely assign specific people to handle individual borrower cases, so every time a borrower calls, they're subjected to the same bureaucratic mess.
Should the caller ever have a substantive conversation with an employee at the call center, however, the person on the other end of the line is not a mortgage expert, but simply a poorly paid, hourly employee whose prime directive is debt collection. "Most loan servicing personnel are poorly paid debt collectors, not credit analysts," says Raj Date, a former executive with Capital One Financial who now heads the Cambridge Winter Center for Financial Institutions Policy. "It's just not a skill set that is at all aligned with what they're trying to get done here."
This is all part of the servicer business model. Servicers aren't banks, although they're often owned by banks. They don't make mortgages or buy the crazy securities mortgages are packaged into. Since they communicate directly with borrowers, servicers are usually described as a customer service business, but the truth is, they're more like specialized investment speculators. Servicers bid on contracts called mortgage servicing rights, which can be bought and sold. These contracts give the owner the right to collect payments from borrowers and skim a little off the top before forwarding the money to the investors who purchased the mortgages. If a borrower gets into trouble, the servicer is responsible for limiting any losses for investors, but the key to the servicer business is figuring out which pools of mortgages to bid on, and making the right bid. Working with troubled borrowers to avoid foreclosures is a secondary concern.
"Servicers' contribution to corporate profits is often more tied to their ability to keep operating costs low than their ability to reduce losses," wrote mortgage consultant and Louisiana State University finance professor Joseph Mason in a paper published in March.
Labor expenses are kept to an absolute minimum, which means fewer people answering the phones, and less expertise. The people answering the phones can be making as little as $8 an hour.
Different servicers have different standards. Christopher Orlando, a spokesman for Carrington Mortgage Services, an independent servicer who specializes in subprime loans, insists that his company has faster response times and higher staffing levels than most prime servicers, because they set up their business to be involved with customers who are more likely to have trouble paying their loans.
"We are structured for more active and regular communications with our customers, which made us well-equipped to manage the current crisis," says Orlando. According to Treasury data, Carrington has agreed to modify 597 mortgages under the Obama plan guidelines, about 4 percent of the loans the company services that Treasury believes are eligible for the plan.
Most subprime servicers are better known for boosting their bottom line at any cost. Before subprime specialist IndyMac failed in the summer of 2008, the company had spent years outsourcing much of its servicing operations, including customer calls, to India. And many of the prime servicers Orlando references service a lot of subprime loans. The Baldwins received their loan from subprime lender Ameriquest, and the loan was sold multiple times before CitiMortgage began handling it.
When Christopher and Crystal Nndouechi of Jacksonville, Fla., heard about the Making Home Affordable plan, they'd been stuck in the Hope Now impasse for months. The couple -- both teachers -- had stable jobs, but their mortgage had an adjustable interest rate that reset in May of 2008, resulting in dramatically higher monthly payments.
The Nndouechis' loan is serviced by Countrywide, a major subprime servicer whose parent company, Bank of America, has received $45 billion in government bailout funds, plus hundreds of billions in federal guarantees. Like Citi, Bank of America agreed to adopt a rigorous anti-foreclosure plan as a condition for taxpayer support, and was among the first servicers to agree to the Obama plan. According to the Treasury, the company has agreed to just 27,985 trial modifications under the program, roughly 4 percent of the seriously delinquent mortgages the company services that Treasury thinks are eligible. Bank of America did not return multiple calls for comment for this story.
When the couple called Countrywide about the Obama plan, the company told them they were not eligible. So the Nndouechis' NCRC representative went to bat for them, but Countrywide again insisted that nothing could be done. When NCRC enlisted a lawyer to fight on the Nndouechis' behalf, Countrywide finally acknowledged that the family did in fact qualify for the Obama plan.
"I thought if we went to Countrywide in good faith, I thought they would do what they could," Christopher said. "But it wasn't like that. The NCRC attorney went through this intense negotiation. They were even trying to give him the runaround."
But just one week after agreeing to enroll Christopher and Crystal in the Obama program, Countrywide told the couple that, while they were in fact eligible for the plan, company guidelines barred the NCRC lawyer from representing the Nndouechis in negotiations. As a result, Countrywide was going to deny them relief -- even though the family actually qualified.
This aggression is deeply ingrained in the culture of mortgage servicers. And ultimately, it's probably not something that would be cured by retraining or upgrading the industry's call center employees.
Most of the mortgages that servicers handle are owned by Wall Street hedge funds and major banks. "Wall Street made a ton of money on securitized mortgages," says Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project, an economic advocacy group based in New York City. "The servicers that got the big contracts were those that would collect most aggressively. So it wasn't in their culture to work with a borrower and try to find something that was in their interest. They would just move as aggressively as possible."
If the servicers could not collect, they would still win -- by foreclosing. When borrowers stop making payments, the servicer is required to advance the interest payments to investors out of its own pocket. Once the servicer forecloses, it gets to recoup those payments from the sale of the home. But if the servicer works out a loan modification, it doesn't get to recoup its out-of-pocket advances until the borrower actually pays them back, which can take a very long time, particularly if the borrower his missed several payments.
"The investor losses may be very large, but the servicer will almost always benefit by completing a foreclosure sale," wrote Valparaiso University Law School professor Alan White in a paper published in January.
So servicers opt to stonewall borrowers and foreclose on them, even when doing so sacks investors with massive losses. In March of this year, with the Baldwins scheduled to lose their home to foreclosure on April 16, Citi told the family they were prequalified for a new aid program. The company said it would postpone the foreclosure on their home until June 16 while their house was reappraised, but only if the family made a full $2,250 payment. Once again, Citi refused to detail the terms of any future relief, so the Baldwins took the NCRC's advice and declined to pay. The very next day, their local paper featured a notice informing the entire town that their home would be foreclosed on in mid-April. When I interviewed the family on April 5, no appraiser had come by to evaluate their home after an entire month, and Citi had dropped out of contact.
"We're hoping that nobody comes and puts locks on our doors on April 16," Marilyn said. "They won't eve let you come and take any of your belongings after that."
When I called Citi for comment, a spokesman told me that the company helped four out of five distressed borrowers it serviced in 2008, and claimed Citi's "loss mitigation successes" outnumbered foreclosures by more than 10-to-1 in the first three months of 2009. According to the Treasury, CitiMortgage has implemented 27,571 modifications under the Obama plan, about 15 percent of the number of seriously delinquent mortgages the company services that Treasury thinks are eligible.
When I contacted the Treasury Department for a comment on the success or failure of Making Home Affordable, a spokesperson directed me to the Aug. 4 report and accompanying press release, but declined to comment further. The press release claims the program is meeting Treasury's expectations. "This pace of modifications puts the program on track to offer assistance to up to 3 to 4 million homeowners over the next three years," Treasury says.
In the meantime, the foreclosure situation is growing increasingly bleak, pushing the entire U.S. economy deeper into recession. The foreclosure proceedings initiated on more than 1.5 million homes between Jan. 1 and June 30, 2009, represents a 15 percent increase from 2008, itself a dismal year for foreclosures. The Center for Responsible Lending estimates that 2.4 million homes will be lost to foreclosure in 2009, and 9 million by the end of 2012.
The numbers indicate that the modification program is not keeping pace with foreclosures, and that while the rate of modifications ticked up as soon as Obama took office, it has fallen since. In addition to the Treasury Department's figures, Alan White has been tracking a database of 3.5 million subprime and Alt-A mortgages since late 2008. In November, the Valparaiso professor found that servicers modified just 21,219 mortgages, while 233,000 homes were in the foreclosure process. The Obama plan has not altered those numbers significantly. In 2009, modifications peaked at 23,749 in the month of February. In June, there were just 18,179 modifications, compared to 281,560 homes in foreclosure.
Ultimately, what is most disturbing about the Baldwin and the Nndouechi cases is the fact that both are actually success stories. Countrywide eventually sent the Nndouechis paperwork for their Making Home Affordable modification. In late May, after more than a year of talks with CitiMortgage, the Baldwins were finally approved for the plan -- and given less than 24 hours to mail in their payment or be foreclosed on. This, incidentally, also violates the Obama plan. While servicers are processing a Making Home Affordable application, they have to suspend any foreclosure proceedings. The eventual enrollment of both families, of course, underscores the absurdity of the delays and diversions Citi and Countrywide deployed to deny them access. But more important, neither family would have made it through the process on their own. Even with intensive and prolonged legal assistance from a borrower advocacy group, getting relief was a tremendous struggle, making it easy to see why both Hope Now and the Obama plan have proved so disappointing.
"Everyone out there says, 'Call your lender!,'" says Paula Sherman, a foreclosure prevention counselor with Virginia-based nonprofit Housing Opportunities Made Equal (HOME). "But for the average borrower doing this themselves, it's impossible. They just don't get the help they're promised."