Mortgage Papers and Foreclosure
At first, Nancy Perez thought it was a neighbor's house on fire.
She and her two children were returning from dinner at Perez's parents' house on June 19, 2005. It was already past 9 p.m., and she tried turning onto the small Spring Branch street where she lived, only to find it barricaded and full of smoke. Sitting there in her car, she couldn't see much — until a worried neighbor emerged from the smoke and screamed at Perez: Where are your children?
Perez told the woman that Ian and Isabella were sound asleep in the back seat. The woman peeked through the back windows and clapped a hand to her chest, relieved. A split second later, she shouted: Your house is burning!
Perez said no, it couldn't be her house. She killed the ignition and got out of the car for a closer look. Her neighbor's husband appeared and Perez accepted his offer to take the kids to the couple's house, where they wouldn't have to see anything. Then it finally hit Perez that, yes, it was her house in those flames. Suddenly her chest was tight, her legs rubbery. She was dizzy and shaking. Time became an abstract thing. Now a firefighter was there, handing her a brown paper bag to breathe in while he asked questions. Now her neighbor was back, asking Perez for her mother's phone number, and then all of a sudden Perez's mother was there, and her husband was checking on the kids.
After firefighters extinguished the blaze, they led Perez through the charred innards of her 1,600-square foot home, sloshing along saturated carpet, nearly gagging from the stench of smoke.
Perez quickly filed a claim with her insurance company, and after an inspection, Liberty Mutual cut Perez a check for $28,448 in August. As bad as the damage was, Perez expected the house to be restored in a reasonable amount of time, and for things to get back to normal. But, she claims, it wouldn't be long before she discovered that the worst thing to happen to her home was not the fire, but mismanagement among the mortgage servicers — the companies charged with collecting monthly payments — on her $76,000 loan. In the three years before the fire, the servicing rights for Perez's loan had fallen into a mortgage merry-go-round between IndyMac Bank and Countrywide Financial, before landing with Wells Fargo.
Each time the servicing rights changed hands, Perez claims, the servicer selling the loan kept a payment that should have been forwarded to the new servicer. This, coupled with Wells Fargo representatives' conflicting statements as to when the bank acquired the servicing rights, appears to have created a chain reaction of procedural errors that kept Perez's house from being rebuilt, which led to foreclosure, which led to Perez suing Wells Fargo, and which led Wells Fargo to countersue Perez. And, after sitting vacant since June 2005, Perez's house suffered another fire in July 2008. That time, it was a total loss. (The 2005 fire was ruled an arson by Houston Fire Department investigators. The case is still open. No information was available for the 2008 fire.)
Characterizing the spirit of the lawsuits is the easy part: Wells Fargo believes Perez lost her house because she's a deadbeat. Perez believes she lost her house because she was beholden to idiots. Digging for the truth is messy and migraine-inducing, and in that way, it's a lot like the structure of mortgage-backed securities itself — that bizarre investment practice that collapsed in on itself, dragging much of the economy down with it.
First, some number stew.
In June 2002, Perez put down $4,000 on her first home and closed on a $76,000 mortgage. She got a 7 percent fixed rate over 30 years; the national average for the same loan during that period was 6.7 percent. Her monthly payment, after taxes and insurance, was $825. At the time, she was an office manager for a copy machine distributor, making $38,000. (In a strange coincidence, her next job was with Wells Fargo, working as an assistant to the head of the Houston region's community banking division. She worked there from 2003 until she was fired in 2005, for allegedly working after hours without recording the extra time in a log. In a deposition, Perez stated that, before she was fired, she filed a complaint against her boss regarding "sexual behavior." After her termination, she sued Wells Fargo for wrongful termination, and the matter was settled confidentially. )
The four-bedroom, one-bathroom wood-framed home offered a great rear porch and a big backyard. Her son was two years old; Perez and the boy's father had been a couple since 1997, but they didn't get married until August 2003. The day after the wedding, Perez's daughter was born. The couple separated in 2005.
Perez's mortgage was through IndyMac Bank, an institution that would go on to become one of the biggest bank failures in history. In October 2008, IndyMac was seized by the federal government, and the FDIC assumed control. (The FDIC sold IndyMac in March to an investment group called IMB Management.)
IndyMac began as a real estate investment trust within Countrywide Financial, an institution founded by Dick Loeb and Angelo Mozilo. IndyMac declared its independence in 1997. Although the companies were separate, Loeb was IndyMac's chairman, and several of Mozilo's kids became IndyMac executives.
IndyMac grew quickly and became a specialist in "Alt-A" loans, considered less risky than Countrywide's subprime specialty. (Not all of Countrywide's loans were subprime; those who qualified for the "Friends of Angelo" program — like Senators Chris Dodd, the chairman of the Banking Committee, and Kent Conrad, chairman of the Budget Committee, received special rates. Other Friends of Angelo included former HUD Secretary Alphonso Jackson and former Secretary of Health and Human Services Donna Shalala.)
With severe real estate and credit turmoil in the second half of 2007, Countrywide feared for its liquidity and sought millions in credit from other banks, causing its stock to plummet and sparking rumors that the once-mighty institution would be forced into bankruptcy. But, in 2008, Bank of America stepped in just in time and bought the beleaguered lender for $4.1 billion in stock.
Shortly after the acquisition, Countrywide settled lawsuits filed by 11 state attorneys general accusing the company of deceiving borrowers by deliberately and deceptively steering them into unaffordable loans packed with hidden fees. As part of the settlement, Countrywide set aside $8.4 billion to aid approximately 400,000 troubled loans.
About two months after Perez closed on her mortgage with IndyMac, Countrywide became her mortgage servicer. Perez says she mistakenly made two payments to IndyMac when she should have paid Countrywide, but IndyMac never transferred the payments. In 2004, when Countrywide sold the servicing rights back to IndyMac, Perez claims, the same thing happened. So by the time Wells Fargo got the servicing rights, she was four months delinquent.
The name "Wells Fargo" did not appear on her mortgage statements, because the bank's third-party mortgage servicing arm is called America's Servicing Company. It services more than 22,000 loans, totaling more than $1.8 billion. And ASC was responsible for collecting payments from Perez and several hundred other borrowers who were pooled together in a home equity trust of 1,911 mortgages managed by HSBC Bank.
As with any other borrower with a securitized loan, Perez was perhaps the least important part of the equation. The investment terms of these mortgage bundles are dictated by pooling and servicing agreements (PSAs), which calculate projected returns on different risk groups.
The transfer of servicing rights is supposed to be seamless, with the borrower receiving ample notice. But the amount of bureaucracy, with different departments of different divisions operating in different parts of the country, is fertile ground for confusion — on behalf of both borrower and servicer.
To wit: Perez forwarded the first insurance check she got to ASC. On September 15, she received a letter from ASC stating that the check had been deposited. However, the check was never actually deposited. In early October, Liberty Mutual had to cancel the still-outstanding check per fraud-prevention policies and cut a new one. This time, ASC actually deposited the check and, in November, issued the first of what were to be three disbursements for Perez's home repair.
After the fire, Perez and her kids moved in with her mother, and then into an apartment just up the road from the burned house. Shortly after ASC issued the first draw from the insurance check in November, Liberty Mutual's agreement to cover Perez's living expenses through mid-November expired.
This leaves a three-month delay between when Liberty Mutual completed its estimation of Perez's damages and when ASC deposited an insurance check.
Although one of the months might be attributable to ASC's apparent goof in mishandling the original check (an allegation Wells Fargo representatives disagree with), the rest is a gray area.
Perez claims that, after Liberty Mutual explained that insurance checks could only be issued to the borrower and the servicer, she had a difficult time finding out who her servicer was. She says that when she called IndyMac to provide information about the fire, customer service reps told her IndyMac was no longer her servicer, and that she was now with ASC. And, according to Perez, ASC reps bounced her back to IndyMac. This was apparently not resolved until August. (IndyMac representative Amy Kniss told the Houston Press that the last record the company has regarding Perez is a June 25, 2005, call where she and the customer service rep discussed the fire. Kniss said the notes do not indicate Perez ever filed a claim with IndyMac.)
Although Perez saved a lot of the correspondence between her and Wells Fargo, she says the first fire destroyed any records supporting her claim that IndyMac and Countrywide wrongfully kept payments. During her deposition, the attorney for Wells Fargo asked Perez if she was attempting to recover the alleged payments from IndyMac. Perez's response: "No, because I don't have any more proof...If I had paper, then I would be able to pursue it. If I go before a judge, they're going to say, 'Where's your proof?' and I'm going to say, 'It's up in smoke.'"
In a written statement, Wells Fargo spokeswoman Debora Blume claimed that Perez's story "is inconsistent with Wells Fargo's records. Contrary to Ms. Perez's contention, our records indicate that Ms. Perez was notified by Wells Fargo Home Mortgage, doing business as America's Servicing Company (ASC), that the servicing of her loan had been transferred from IndyMac Bank to ASC on Aug. 3, 2005. Additionally, it is customary that IndyMac would have notified Ms. Perez that it was transferring her mortgage servicing relationship." (Blume said she could not discuss Perez's situation in detail because of the pending litigation.)
Representatives of IndyMac and Deutsche Bank (the bank that actually bought Perez's loan) back up Blume's statement that Wells Fargo did not acquire servicing rights until August 2005. However, after Perez filed suit, Wells Fargo Operations Analyst Erin Persons stated in a deposition that Wells Fargo acquired servicing rights in June 2005. Persons stated that she knew this because she reviewed a "system executive screen" called "MAS 1" — the company's "system of record." (Persons also stated that there is a lag time between when servicing rights are transferred to Wells Fargo and when they're actually "boarded." During this blackout period, no record is kept regarding calls or letters, if any, between the borrower and Wells Fargo. Persons was sure this lag could not take two months, but that it could "possibly" be a month.)
However, according to Persons, that same "system of record" showed no indication of Wells Fargo depositing an insurance check in September, despite the fact that Wells Fargo mailed such a letter to Perez. Persons testified in the deposition that she was only aware of Liberty Mutual's October check.
Ultimately, it's just another example of what appears to be a rule in the world of securitized mortgages: The servicer, responsible for thousands of mortgages nationwide that add up to billions of dollars, is never extremely confused, and therefore never makes a mistake — honest or otherwise. The borrower, responsible for one monthly payment to one entity, is always wrong.
In the wake of the mortgage meltdown, servicers have kept a relatively low profile.
Yet, for the most part, servicers have the power and discretion to alter the course of a loan. Servicers have the power to modify or foreclose. And while much of the crisis is blamed on subprime mortgages, even prime or Alt-A loans are not immune to questionable servicing.
Critics say it's partly because borrowers are simply stuck with servicers. They cannot choose based on performance, so what incentive is there for servicers to treat people reasonably?
"The mortgage servicing industry is really fundamentally broken when it comes to serving the needs of borrowers," says Tara Twomey, an attorney with the National Consumer Law Center and Amicus Project Director for the National Association of Consumer Bankruptcy Attorneys. "Consumers have no ability to use market forces to change their servicer if they're unhappy..."
Twomey believes the problem is in the structure of mortgage-backed securities themselves, which ties one mortgage to different entities with often conflicting interests. In this world, a "prepayment" — a borrower's payment to principal above the monthly requirement — is good for the borrower, but bad for investors, who hope to make money over the anticipated lifetime of the loan.
And while most servicers say that their goal is to keep borrowers in their homes and that they'd gladly take a bullet before kicking granny into the street, the parameters of their pooling and servicing agreements imply otherwise.
"I think there's this common misperception that everybody loses in foreclosure," Twomey says, adding later, "It is clear that the investor loses on a foreclosure, and it's clear that the borrower loses on a foreclosure. It is less clear whether servicers lose in a foreclosure, because...they're not taking a hit on the lost value, per se."
FDIC Chairman Sheila Bair said much the same when testifying before the House Financial Services Committee in September 2008, explaining that "another skewed economic incentive is that a number of these pooling and services agreements require servicers to advance a certain amount of principal and interest and taxes and insurance when a loan becomes delinquent, and this puts a...cash flow strain on the servicer, and frequently the fastest way to recoup that is to go to foreclosure quickly, because they're repaid off the top when the loan does go to foreclosure."
The key to every borrower's loan is in these pooling and servicing agreements, but it's unlikely a borrower would ever see one — and even then, it would be difficult to decipher who actually owns the mortgage. However, the owner is practically irrelevant to the borrower, since the only entity that has direct contact with the borrower is the servicer.
The pooling and servicing agreement and corresponding prospectus for the $187 million mortgage trust that includes Perez's Alt-A loan (as well as prime and subprime ones) is somewhat enlightening. For one thing, the prospectus pretty much kicks off with a warning that a bunch of the loans are radioactive. Not only did the underwriting guidelines of some of the loans not conform to federal guidelines, in many cases they didn't even conform to the originators' own guidelines. Naturally, these are referred to as "Scratch & Dent Mortgage Loans."
The prospectus gives reasons for why investing in scratch and dents is like doing business with a dude selling TVs out of his van. Namely, the loans had "deficiencies in legal documentation or are missing documents," or they were signed using appraisal figures that (whoops) turned out to be "inaccurate."
Also, both prepayments and delinquencies are bad: If a loan is prepaid in full, the servicer must advance a portion of the shortfall in interest payments to investors. The same holds true for any monthly delinquencies.
And while Wells Fargo has a fixed servicing fee based on principal payments, the real gravy appears to be its ability to levy and collect "assumption fees, modification fees, extension fees, non-sufficient funds fees, late payment charges, customary real estate referral fees and other ancillary fees." Such "ancillary fees" might include a $20 phone payment charge, for those who can't mail a timely payment. (There's a $10 fee for online payments, but because ASC at one point shut down its Web site for at least a year, that was not an option.)
Of course, PSAs generally afford servicers the right to waive late fees and modify loans, as long as adjustments don't harm yields to investors. But, according to the results of a 2008 study conducted in part by members of the Board of Governors of the Federal Reserve System, "Loan modification is labor intensive and thus raises servicing costs, which in turn make it more likely that a servicer would forego loss mitigation and pursue foreclosure, even if the investor would be better off if foreclosure were avoided."
The expense, according to the study, is largely because "servicers currently lack adequate staff and technology; unfortunately, servicers have few financial incentives to expand capacity." (This might be one reason why, per the study, the number of foreclosures initiated even on prime mortgages jumped from 307,000 in 2004 to 553,000 in 2007.)
But Bob Strickland, Wells Fargo's director of investor relations, would take issue with the report. In a third-quarter 2008 investor conference call, Strickland assured shareholders that, "To better assist our customers in these challenging times, we have extended our hours, participated in more than 150 face-to-face forums, and stopped the foreclosure sale for customers we believe might be eligible for the Help For Homeowners Program."
He went on: "We continue to work closely with our borrowers on case-by-case solutions that align with their individual needs while also continuing to work with investors to find streamlined modification programs to assist more borrowers. Of every ten customers who are 60 or more days delinquent, seven worked with us to find a solution, two declined our help, and the remainder were either unreachable or a solution simply could not be found. We do have solutions that work — refinancing, payment reductions, repayment plans, short sales, and others. Most importantly, 60 percent of these customers improved their delinquency status and averted foreclosure. All of these efforts have resulted in more customers receiving loan modifications during 2008, double the number from last year."
Of course, pooling and servicing agreements do not let servicers color outside the lines of the original mortgage.
In the prospectus related to Perez's mortgage, the servicer is able to hold any insurance proceeds in a special account, and the money may be "released to the borrower in accordance with the servicer's normal servicing procedures, subject to the terms and conditions of the related mortgage and mortgage note."
As is the general rule with mortgages, the contract is between the borrower and the lender. Any transfer of servicing rights is not supposed to alter the terms of the mortgage. Perez's mortgage allowed the lender, originally IndyMac, to hold insurance proceeds and disburse them after inspection, "provided that such inspection shall be undertaken promptly."
But there appears to be plenty of wiggle room in determining whether a company's "normal servicing procedures" conflict with the original contract. Wells Fargo disburses insurance proceeds in three steps: There is an immediate first payment; a second payment after 30-50 percent repair; and the final payment.
In her deposition, Persons explained that the second payment is referred to as a "50 percent inspection." It is crystal clear that Persons knows that a "50 percent inspection" actually means "30 to 50 percent." What's not clear is if those below Persons's pay grade — say, customer service reps — know that. When Perez requested her second draw, the call log notes indicate customer service reps told Perez things like "funds are normally not released until 50 percent work is done."
Perez told the reps that she could not reach 50 percent without a second draw. Wells Fargo allows exceptions if the contractor provides supporting documents, and if an inspection confirms it. However, Wells Fargo did not inspect the property until September 2006 — right after Perez filed suit.
In November 2005, Liberty Mutual stopped paying Perez's rent, stating that five months should have been enough time to complete repairs. Perez was now responsible for rent, as well as mortgage payments on a vacant, fire-damaged house.
And Wells Fargo was getting fed up. Perez had been delinquent on several occasions, including those payments she claimed were wrongfully kept by IndyMac and Countrywide, and once when she lost her job. While it appears that, through late fees, servicers make more money off troubled borrowers, these borrowers can be annoying. They tend to make a lot of phone calls. And while servicers generally try their best to frustrate callers via automated voice-prompts and terminal hold times, some borrowers actually endure, finally reaching a human being. And that human being is forced to listen to excuse after excuse, and after a while, it must be difficult for customer service reps to figure out who has had a legitimate financial drawback, and who's just a loser.
Day after day, Wells Fargo's mortgage-servicing employees have to listen to people who say they just need an extension, or argue that they made last month's payment on time but it was held, and now there are late fees. They say they wish they had the couple extra bucks.
Prime, subprime, Alt-A — it seems like anybody can feel the crunch. Like Wells Fargo. In October 2008, the bank was having a hard go at it and just needed a few bucks to make it through the next few months. Can happen to anyone. Fortunately, they didn't have to deal with foreclosure, because they could turn to a rich uncle for help. It's good to know people. That uncle floated them $25 billion.
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