WASHINGTON — The federal government is engaged in a massive mortgage modification program that's on track to send billions in tax dollars to many companies that judges or regulators have cited in recent years for abusive mortgage practices.
The firms, called mortgage servicers, have been cited for badgering, manipulating or lying to their customers; sticking them with bogus fees; or improperly foreclosing on them.
Mortgage servicers are 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 an ironic 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.
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To make matters worse, 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.
Housing advocates say homeowners still face "reluctant lenders," said Irwin Trauss, an attorney 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 the bank bailout bill.
Trauss said that Bank of America, at least through July, told homeowners that they couldn't participate in the program when they should have been allowed to do so, and he 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 have 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.
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 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 currently 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 wasn't doing enough 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.