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Monday, September 23, 2013

Buy a House, Make Your Payments, Then Discover You've Been Foreclosed On Without Your Knowledge



      
      

Buy a House, Make Your Payments, Then Discover You've Been Foreclosed On Without Your Knowledge

 

This should never happen, but it did, thanks to the sordid mortgage servicing industry.

 
 
 
Photo Credit: Shutterstock.com/iQoncept

 
 
 
 
A few months ago, Ceith and Louise Sinclair of Altadena, California, were told that their home had been sold. It was the first time they’d heard that it was for sale.

Their mortgage servicer, Nationstar, foreclosed on them without their knowledge, and sold the house to an investment company. If it wasn’t for the Sinclairs going to a local ABC affiliate and describing their horror story, they would have been thrown out on the street, despite never missing a mortgage payment. It’s impossible to know how many homeowners who didn’t get the media to pick up their tale have dealt with a similar catastrophe, and eventually lost their home.

As finance writer Barry Ritholtz has explained, home purchases involve a series of precise safeguards, designed to protect property rights and prevent situations where borrowers who are perfect on their payments get evicted. “In a nation of laws, contract and property rights, there is no room for errors,” Ritholtz writes. “The only way these errors could have occurred is if several people involved in the process committed criminal fraud.”

Any observer of the mortgage industry since 2009 is no stranger to foreclosure fraud, and the fact that virtually nobody has paid the price for this crime. But the case of the Sinclairs involves a new player in that rotten game: Nationstar. Unheralded just a few years ago, the firm, owned by a private equity behemoth, has been buying up the rights to service mortgages, accepting monthly payments and distributing the proceeds to the owners of the loan, taking a little off the top for itself.

Nationstar has racked up an impressively horrible customer service record in its short life, failing to honor prior agreements with borrowers and pursuing illegal foreclosures. The fact that Nationstar and other corrupt companies like it are beginning to corner the market for mortgage servicing should trouble not only homeowners, but the regulators tasked with looking out for them. It didn’t seem possible that a broken mortgage servicing industry could get worse, but it has.

Nationstar is at the forefront of a massive shift in mortgage servicing. In the past few years, the largest servicers were arms of major banks, like JPMorgan Chase, Wells Fargo, Bank of America, Citi and Ally Bank. Those were the “big five” servicers sanctioned for an array of fraudulent conduct in the National Mortgage Settlement, which mandated specific standards for servicers to follow, like providing a single point of contact for customers and an end to “dual tracking,” when a servicer offers a trial modification to a borrower and pursues foreclosure at the same time.

The banks realized that they could sell the servicing rights and evade these standards, along with the higher labor costs associated with implementing them. What’s more, they would avoid new, higher capital requirements associated with holding servicing assets, allowing them to give bigger dividends to shareholders and bigger bonuses to executives.

So the big banks started selling off their servicing rights, not to other banks, but to specialty financial services firms like Green Tree, Nationstar, Walter Investment Management and Ocwen, all of whom are in kind of an arms race to become the biggest servicer.

Last October, Ocwen purchased the entire servicing portfolio of Ally Bank, covering about $329 billion in loans. Ocwen has also purchased part of JPMorgan Chase’s servicing, as well as a slice from OneWest Bank; it is attempting to dominate the market.
Nationstar acquired business from Bank of America and Aurora Bank in 2012, and more in 2013. Wells Fargo is poised to sell some servicing rights as well, and Nationstar will surely bid for those rights. As of June 30 of this year, Nationstar has the right to collect on $318 billion worth of home loans—growing three-fold in under two years—and it will seek to add even more in the future. The company, majority owned by the private equity firm Fortress Investment Group, recently raised $1.1 billion in capital to buy up more servicing rights from banks around the country.

This means that homeowners victimized by big-bank servicers, who were supposed to get a commitment to honest treatment as part of the National Mortgage Settlement, instead got their servicing rights sold to companies no longer bound by the terms of that settlement. So homeowners lose all of their protections, and often have to start back at square one with their new servicer. For example, if a borrower was in process on a loan modification with their old servicer, the new servicer can choose to simply not recognize that modification, and demand the full monthly payment under threat of foreclosure. This is a very common practice.

What’s more, this new breed of non-bank servicers scooping up all these servicing rights has proven themselves as a bunch of cheats profiting off their customers. Green Tree Servicing has a terrible record of ripoffs. Ocwen has been sued in state court over its practices, including an innovative scam involving sending homeowners a check for $3.50, and claiming that cashing the check automatically enrolls the customer in an appliance insurance plan, which costs $54.95 a month.

Fitch, the credit rating agency, wrote in a research note in June that the growth of non-bank servicers “may pose challenges to a potential orderly transfer of servicing,” and that the involvement of private equity firms “raises questions” about the ultimate endgame for these servicers. In effect, servicing has shifted from big banks to private equity and hedge funds, and neither really have the customer’s needs in mind.

Nationstar is no different in the non-bank servicer space. While the company promised California that it would adhere to all settlement obligations on the servicing rights it purchases, the Sinclairs were subjected to familiar abuse. The family paid their mortgage on time since purchasing their home in 2003. Last year, they received a loan modification. But their servicer sold the rights to Nationstar, and Nationstar didn’t honor the modification. In June, the Sinclairs sent in their mortgage payment, and Nationstar sent it back in full. Then it sold the home. When questioned, Nationstar claimed the Sinclairs didn’t notarize one page of their modification, which turned out to be untrue.

It was a clear attempt to find an excuse to deny the modification and push the Sinclairs into foreclosure. Mortgage servicers actually make more money with foreclosures than with loan modifications, because of how their compensation structure works. Servicers load up various foreclosure fees on homeowners that they get to keep, and they get paid off first in a foreclosure sale. A loan modification simply cuts their percentage balance on the loan.

This is not Nationstar’s only scam. The Consumer Financial Protection Bureau, which recently started examining non-bank servicers, put out a report this summer on the illicit practices of these firms. CFPB found that servicers like Nationstar often failed to inform homeowners about the change in servicing rights when they are transferred, meaning that the homeowner kept paying the wrong servicer. This is a clever way to facilitate late fees; just don’t tell the customer where to send their money.

Servicers also delayed property taxes paid out of escrow accounts, making borrowers late on those taxes and triggering more delinquency fees; failed to refund insurance premiums and other fees due back to borrowers; did not communicate properly with borrowers in need of a loan modification; lost documents solicited from borrowers for that process and made it impossible to complete the applications; failed to even properly file documents associated with the transfer of servicing rights; and charged customers default fees “without adequately documenting the reasons for and amounts of the fees,” and neglected to waive certain fees or interest charges.

CFPB also found that non-bank servicers like Nationstar had no comprehensive compliance management system in place to ensure that they followed all applicable consumer protection laws. Many didn’t even have formal, written policies or independent auditors. They hadn’t been subject to any examination prior to CFPB, so this stands to reason.

Nationstar is being sued in New York’s Supreme Court for auctioning off non-performing loans that it would rather not service at a severe discount, shortchanging investors in the process. The company’s auction sales, made with an online auction company that its private equity parent firm has a “business affiliation” with, end up allowing Nationstar to recoup its take, with all the losses falling on the underlying loan owners. So Nationstar has managed to infuriate both sides of the mortgage deal, the lenders and the borrowers, with its unscrupulous practices.

Getting examiners inside these “specialty” companies is a start, and new servicer rules coming from CFPB in January would cover non-bank servicers as well. But no regulator has the resources to deal with such flagrant abuses. Mortgage servicing is a sewer, and it needs to be completely overhauled from the ground up. If Nationstar represents the future, then until it faces real penalties or an expulsion from the industry for its conduct, private property rights in America will have to be seen as theoretical. Just ask the Sinclairs.

David Dayen is a freelance writer based in Los Angeles, CA. Follow him on Twitter at @ddayen.

Friday, September 20, 2013

Homeowners vs. Big Bad Banks


THE AMERICAN PROSPECT

 

Homeowners vs. Big Bad Banks

AP Photo/Michael Dwyer, File
 
 
In June, six former employees of Bank of America's loan-modification department testified in court that since 2009, they had been instructed to lie to struggling homeowners, hide their financial documents, and push them into foreclosure. In the most egregious example, the employees said they were offered Target gift cards as a bonus for more foreclosures, which generated lucrative fees for the bank. The employees, who were in charge of implementing the government’s Home Affordable Modification Program (HAMP) at the bank, described the same deceptive practices across the country.

Two weeks ago, U.S. District Court Judge Rya Zobel dismissed the case, denying class-action certification to 43 homeowners in 26 states who suffered because of similar conduct. “Plaintiffs have plausibly alleged that Bank of America utterly failed to administer its HAMP modifications in a timely and efficient way,” Zobel agreed, adding that vulnerable homeowners had to wade through a “Kafkaesque bureaucracy,” and that the legal claims of missing documents, arbitrary denials, and deliberate misinformation “may well be meritorious.” But she would not grant class-action status because of differences in the individual cases. Homeowners are now free to pursue cases on their own, but the advantage of class-action suits is that they put expensive and burdensome litigation within reach for victims; if these homeowners had the money to sue powerful banks, they probably wouldn’t have needed a loan modification in the first place.

A decade ago, homeowners may not have faced the same hurdles in litigation. But a more stringent test for class-action certification, formed by precedents reaching all the way to the Supreme Court, has become another tool for large corporations to resist accountability. Class-action suits can have a societal benefit, exposing systemic wrongdoing and bringing an end to it. But if nobody can acquire class-action status, the courthouse doors have been effectively shut to a large number of Americans.

Without class actions, individuals face the hurdle of asymmetrical legal warfare, pitting a resource-constrained victim against a deep-pocketed corporation. And because individual damages are far lower than in a case affecting thousands or millions of people, it becomes difficult to find a lawyer willing to take the case. “Low-value claims mean a lot to individuals living paycheck to paycheck,” said Michelle Schwartz, an attorney at the Alliance for Justice, a progressive organization focused on the judiciary. “But banding together is the only way to get into court. A personal lawyer on a mission might take the case, but they would have to bankrupt themselves in order to do it.”

The most dramatic example of how courts have restricted class-action suits is the 2011 Supreme Court ruling, Wal-Mart v. Dukes. Led by former store-greeter Betty Dukes, 1.5 million women banded together to argue gender discrimination in pay and promotion policies at the world’s largest retailer. They pursued class-action status to sanction Wal-Mart because they could better show the reduced pay and fewer opportunities for advancement for women as a pattern and practice. “Standing on their own, you might not see the pattern, but when you see this has happened to hundreds or thousands—or in the case of Wal-Mart, 1.5 million people—you can make the case that it’s not an isolated incident,” says Schwartz.
     
But the Supreme Court reversed three lower-court rulings and denied class-action status in Wal-Mart v. Dukes, essentially arguing that the retailer had discriminated against so many women that they couldn’t possibly have all faced the exact same type of marginalization. Moreover, the Court set a precedent that limits class-action certification. Whereas before, class-action certification mainly hinged on whether the claims boiled down to a common question—whether gender discrimination had occurred, for example—in the Wal-Mart v. Dukes ruling, the Court said plaintiffs must prove whether the commonality of those claims was the most important factor in the case. That required law firms to obtain evidence, previously confined to the discovery phase, showing that the similar nature of the claims was the most relevant factor in the case. This adds to the expense of the class action at the outset, and heightens the burden on the plaintiffs in order to get certification for a class-action suit.

This has led to predictable consequences. Circuit Courts of Appeal have followed the Wal-Mart precedent, denying class-action status in multiple cases. Class actions involving securities law hit a 14-year low in 2012, and accounting class actions last year were nearly cut in half.  In 2012, employers settled fewer class-action discrimination suits than at any time over the past decade, and the top ten settlements of the year totaled $48.65 million, compared with $346.4 million in 2010, before Wal-Mart. Meanwhile, the Wal-Mart women started pursuing claims 12 years ago, and none of them have had their day in court yet.

In the Bank of America case, Judge Zobel determined that individual borrowers had to jump through so many hoops in the loan-modification process—certifying they lived in the residence and could not afford their monthly payments, documenting their income, making required trial payments, and potentially seeking credit counseling—that no two cases were similar enough to grant certification as a class. In other words, the very convoluted nature of the process at Bank of America protected the company from the suit. Additionally, Judge Zobel cited discrepancies on whether certain members of the class actually made their trial payments on time, turned in the correct documents, or lived in the homes being foreclosed upon, arguing that these inconsistencies would have to be litigated individually. But that grants tremendous discretion to the bank to simply muddy up the records (which they are in fact accused of doing) and evade class action on the larger question of denying eligible borrowers a loan modification. In a tragicomic example, Bank of America claimed that one plaintiff, Aissatou Balde, did not seek credit counseling when required; Balde claims that she never obtained credit counseling because the phone number Bank of America gave to her for their credit counselor was faulty.

While the judge cited the proliferation of mortgage-related cases working through courts to argue that “individual plaintiffs are normally well-motivated to bring any claims they might have in order to save their homes,” the reality is that almost all of these plaintiffs don’t have the funds to pursue a case against Bank of America on their own.

Zobel cited the Wal-Mart case near the end of her ruling to bolster her argument that “there is no commonality where plaintiffs did not suffer the same injury from the same practice.” But Wal-Mart is far from the only example of the Supreme Court limiting class-action cases. The 2011 ruling in AT&T Mobility v. Concepcion allowed companies to make their customers sign contracts forcing any complaints to go through a “mandatory arbitration” process, taking away an individual’s right to sue whether alone or in a class action. Numerous other cases have constrained class actions in recent years. “They’re creating an impenetrable fortress around corporations and the Supreme Court is helping them do it,” said Schwartz. As Elizabeth Warren noted in a speech last week at the AFL-CIO convention, a recent study found that the five conservative Justices are among the top ten most pro-corporate in the past 50 years, and that Justices Samuel Alito and John Roberts are numbers one and two. “Sooner or later, you’ll end up with a Supreme Court that functions as a wholly owned subsidiary of big business,” Warren said.

Class-action suits are an imperfect way to get restitution for a group of individuals. The real remedy to stop homeowners from being snookered by banks is for law enforcement to start throwing executives in jail. But class actions can bring to light systematic illegal activities and can lead to legitimate changes in corporate behavior. Reforms to the tobacco industry and auto safety have come from class actions. “They’re really acting as a private Attorneys General, bringing cases on behalf of the public, and it’s often a way you can bring an end to wrongdoing,” says Schwartz of the Alliance for Justice.

Sadly, the actual attorney general has walked off the playing field when it comes to prosecuting financial fraud. In the Bank of America case, the ex-employees delivered a road map for what the company did and how they did it, even naming specific executives who directed the conduct and citing documentary evidence in the form of email communications. But it took victims attempting to certify a class-action suit, not a federal investigation, to bring these misdeeds to light. And because of the way in which big business has pushed the courts to their side, even that class action will amount to nothing.