The Register-Guard: Critics say system favors foreclosure over mortgage aid

Foreclosures will outstrip loan modifications for homeowners in trouble this year at an estimated 2 million foreclosures to 1.7 million completed modifications.

The reason, according to attorney Diane Thompson with the National Consumer Law Center, is that the companies that service the loans — doing the paperwork, sending out bills, and collecting monthly mortgage payments — make more money on foreclosures than modifications, and servicers are running the show.

Servicers make money when the investors pay them a small percentage for the routine work of collecting and passing through the mortgage payments. But servicers make more money with foreclosures because they get to keep all of the late fees they collect, as well as a host of other fees associated with foreclosure, Thompson said.

“The easiest way for servicers to make money continues to be through fees that get tacked on in a foreclosure process, not through anything else,” she said. “And there’s no penalty for their failure to pursue a modification.

“Until you make it cost them something not to pursue a modification, then you’re going to see them continue going down the path of least resistance which is to do foreclosure.”

A spokesman for Wells Fargo, which services mortgages, disagreed, saying this is not true for his company. Communications consultant Jason Menke said in an e-mail that the bank forecloses only after it considers all available options for keeping a customer in a house — and the bank’s foreclosure rate is three-forths of the industry average.

Spokesmen for two other large loan servicers, Deutsche Bank and Bank of America, did not respond to calls seeking comment.

Meanwhile, homeowners caught in the squeeze are suing the servicers for first holding out the possibility of loan modification, and then putting the property in foreclosure.

Some of those homeowners are not even in default, said Jeffrey Norton, a New York attorney who represents homeowners in housing-related lawsuits. Those homeowners are keeping up payments by draining their retirement accounts and asking parents for loans, he said, but they’re paying the mortgage on borrowed time.

“You call your loan servicer and say, ‘I want a loan modification.’ They say, ‘You’re going to have to go into default for 60 or 90 days before we’ll consider modification,” Norton said. “The (homeowners) are desperate and so they do it.”

Homeowners in default are put on dual tracks — one leading to a loan modification and the other to foreclosure. That’s because the servicers want to avoid being penalized by credit-rating agencies for moving too slowly on troubled loans and thereby not protecting investors. Each track is handled by a different department within the bank structure.

“What I’m hearing from people is that they were trying to work something out — like a reamortization or forbearance — and in the middle of all that, the bank just foreclosed,” said real estate broker Elliott Braaten, who handles sales of foreclosed properties in Eugene-Springfield.

“A lot of people have been caught unaware of what was really going on. There was a lack of communication. People thought they were working it out and some of them did, but a lot of them didn’t,” he said.

A recent spate of lawsuits — including a potential class action suit in Massachusetts — are now charging that the companies that service loans never intended to complete loan modification with the homeowners, and that that amounts to a breech of contract.

A homeowner in Bend, for example, challenged his servicer in Deschutes County Circuit Court and got a settlement that said he would pay a lump sum of $10,000 to his lender and the bank would stop foreclosure action and remove negative comments from the man’s credit record.

The man spoke for this story on condition of anonymity. But the 33-year-old man said he could not get paperwork from the bank to complete the deal.

He said he was unsure where to send the $10,000, and his attorney advised him not to send in the money until the settlement was completed.

“I just wanted this over and done with and behind me,” he said.

What finally came was a knock on the door: It was a process server with a new foreclosure notice.

“All of a sudden, out of the blue, they foreclosed on the house (again),” the man said.

The Bend man said he couldn’t figure out at first why his lender, Deutche Bank, didn’t complete the modification. Investors stand to lose a lot more when a house is sold in foreclosure than when a loan is modified because foreclosed houses sell at a big loss — an average of $77,935 — while a loan modification is relatively cheap, about $3,300, according to the Joint Economic Committee of Congress. But the Bend homeowner initially took out his loan with Indymac, which went out of business in 2008 and was taken over by the Federal Deposit Insurance Corp. Some of its assets, including the Bend man’s loan, went to Deutche Bank — with the FDIC guaranteeing the loan.

“Why would (Deutche Bank) take less money to modify a loan with somebody, when they could just foreclose on you and get the full amount from FDIC?” he said.

“Now I know that the FDIC is guaranteeing all this, it makes a little more sense.”