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In the Sub-Prime of Life

Debra Murray may have saved a lot of homes from foreclosure, but she couldn't save her own.

As a research specialist for Houston-based Litton Loan Servicing, a mortgage payment collection agency, Murray was in charge of combing through troubled loans to see what went wrong where. Every month, more than 300,000 borrowers throughout the country are obligated to send monthly payments to Litton, totaling a portfolio of $43 billion.

With that many payments, mistakes are unavoidable. And in the world of subprime loans, a simple error such as a misapplied payment can snowball into a force that knocks a customer out into the street. If the simple error isn't caught in time, the customer can be royally, if not legally, screwed.


subprime lending

It was Murray's job to catch these mistakes, notify the proper departments and stop the foreclosure machine.

Murray says there were more than enough mistakes to keep her busy. She wrote letters to borrowers explaining discrepancies and detailing their loan status, and Litton graded her punctuation and grammar monthly. With a red pen, Murray's department supervisor would scold the researchers for misplaced commas and dangling participles, ignoring the fact that they might have saved a borrower's home from foreclosure.

Like many of the people whose loans she investigated, Murray was a first-time homeowner with a subprime loan. In 2004, three years after she started at Litton, Murray, her husband and their three adult sons moved into a four-bedroom home in a quiet subdivision in southwest Houston. She entered into the kind of adjustable rate mortgage behind the surge of 1.2 million foreclosures for 2006; the kind with a sweet two-year teaser rate that would mushroom in month 25 and reset every six months beyond. In Murray's case, that meant a jump from a 7.3 percent interest rate in March 2004 to about 11.3 percent by February 2007.

But Murray's troubles started well before month 25.

Like every other subprime borrower, Murray has no control over which company services her loan. That decision is made by investors who might never meet the borrowers but who know their profile: Their credit is spotty, their paychecks are modest and there's a good chance their skin is of a darker hue. And despite the fact that Murray is incorrectly listed as “white” on her loan application, she fits that profile.

Murray's loan wound up in a $900 million pool of mortgages and other receivables that back bonds sold by Lehman Brothers. That pool was originally serviced by Ocwen Financial but was ultimately switched to Litton. Besides servicing subprime loans, Litton also invests in about 80 percent of its portfolio through parent company C-BASS.

As soon as Murray found her loan had been switched to Litton, she wanted it transferred. She believed that Litton made too many mistakes, and she didn't want to wind up like one of the borrowers in her thick stacks of troubled loans. She says she talked with superiors who said the loan could not be transferred.

A sinking feeling became outright panic, Murray says, when her husband and two of her sons lost their jobs and she defaulted on her loan — well before her teaser rate expired. (One of her sons had worked at a law firm that files foreclosures for Litton).

“I know they're going to fire me — that's the first thing you think in your head,” she recalls months later. “They don't want this.”

She was right. After falling four months ($4,000) behind, Murray was fired, and Litton began the process of repossessing her home. She's now one of the Litton borrowers seeking class certification in a lawsuit filed in a California federal court. They accuse Litton of forcing them into foreclosure by assigning predatory fees. And those who talk to Murray often walk away with one question: If that's how Litton treats its employees, how does it treat debtors it doesn't even know?

Texas reported 156,876 foreclosures in 2006, more than any other state, according to foreclosure marketplace tracker RealtyTrac. That's one out of every 51 homes, giving Texas the fourth-highest foreclosure rate in the country.

Depending on whom you ask, the subprime loans behind many of these foreclosures are predatory packages destined for failure, a saving grace for people who've been turned away from conventional loans or a conspiracy among the shadow-cloaked cabal comprising the investor-lender-broker-underwriter complex.

If the foreclosure boom associated with the subprime market were the work of one master power like the Illuminati, things might be easier. Instead, the market is a constellation of dubious lenders, brokers, servicers and investment trusts, each of which has just enough involvement to make a bundle and just little enough to plead plausible deniability when the whole structure collapses.

However, there are those who say that not all subprime lenders are predatory, and that these loans can work well for responsible people with realistic expectations.

Denetta Williams, the broker who helped close Murray's loan, says that while there are genuine victims of subprime lending, Murray wasn't one of them. She says Murray would've qualified for a conventional loan on a smaller house, but was dead set on a four-bedroom, $127,000 home. Moreover, the loan's 7.3 percent introductory interest rate was more than fair, Williams says.

Williams, who is black, says that while there are blacks who have been outright ripped off by predatory lending, the subprime market has also given the black community a chance it didn't have before. In many cases, she says, the sob stories that drive media reporting are examples of basic whining, not victimization.

“Nobody made them go and buy that house,” she says, later adding that when the “underclass” blows a true opportunity, they make it a “‘poor me' situation...It's the American dream. They're giving you a chance. And time after time they blow it and then they go and blame the establishment. And it's not the establishment.”

Subprime loans took off in the 1990s and exploded after 2000, according to Prentiss Cox, associate professor of clinical law at the University of Minnesota. That year, subprime loans made up eight percent of all mortgage loans. By 2006, subprime loans accounted for 22 percent of a $6.5 trillion market.

Simply put, there are a lot of people who can benefit from originating a loan for an unsophisticated, first-time homebuyer with sketchy credit. It doesn't matter if they can identify a balloon payment, and it really doesn't matter if they can actually afford the house, because by the time the Sheriff is auctioning it off, most of the interested parties have been paid.

“The reason there's an explosion of foreclosures is there was an explosion of incredibly stupid and risky lending over the last ten years and particularly over the last three years,” Cox says.

Enter securitization. Unlike the bank-and-borrower mortgage of yesteryear, when a single lender oversaw the entire life of a loan, the advent of mortgage-backed securities allowed lending institutions to shift risk to investors. The mortgage company can sell the loan to a Wall Street firm like Lehman Brothers, which bundles thousands of loans into a pool with different tiers of credit risk, called tranches. The firm then sells bonds backed by the mortgages to investors, who make money off the loan payments. The loan pool is held by a special-purpose vehicle — a trust established to keep the pool at arm's length from the sellers of the bonds and the investors. The firm then hires a master servicer to collect the payments from conventional, healthy loans, while a special servicer deals with the subprime. If the borrower defaults, it's the servicer who has to handle the foreclosure. Often, as in Litton's case, the special servicer or an associated entity is also an investor.

With so many investors wanting a piece of the market, some loan originators have put quantity ahead of quality and churned out the kind of loans that Cox bemoans. Many subprime loans are “stated income,” in which the borrower plucks a number out of the air and everyone looks the other way. Tack that onto an adjustable mortgage rate, where the borrower is enticed by a low initial interest rate, and the loan practically sells itself.

This system got hundreds of thousands of people with questionable credit into houses — it just hasn't kept them there.

In April, when proponents and critics of the subprime loans associated with securitization testified before the Senate Banking Subcommittee, Lehman Brothers made sure it would be heard. In his statement, David Sherr, managing director of Lehman's securitized products, explained: “While this subcommittee is focused on very recent instances of foreclosure, please remember that for three decades, mortgage-backed securities have provided, and continue to provide, great benefits to the average American...It cannot be emphasized enough that no participant in the securitization process has any incentive to encourage the origination of loans that are expected to become delinquent.”

Additionally, he testified, “Servicers are ramping up their home retention teams both with respect to early intervention for at-risk borrowers and loan modification programs for borrowers that are in financial crisis.”

But sometimes foreclosure is unavoidable, and when it comes to that, the servicer has to play the heavy. The servicer is the only entity the borrower sees kicking them out of their house. And while servicers are not interested in owning real estate, they are not beholden to the borrower; they work for the sellers of the securities, and their flexibility in working out payment arrangements for troubled loans is spelled out in their contract with those sellers.

In many cases, the servicer is given a lot of flexibility to help borrowers out of a jam — that is certainly the case with the loan pool that Murray's loan fell into. For that pool, Litton is allowed to waive or defer missed payments and refinance loans once they go into default. It's because of this latitude that Litton CEO Larry Litton Jr. sees his company as the last line of defense for the borrower. And that's why, he says, Litton saved 70,000 people from foreclosure last year and is projected to save 95,000 this year. Unfortunately, he says, the satisfied majority is often overshadowed by the civil suits and online complaints of a bitter few who didn't like hearing that Litton wouldn't offer a free ride. However, it's difficult to tell if it's the borrowers who don't like what they hear, or if it's Litton.

Larry Jr. is a friendly guy with a twang who drifts in and out of a downright down-home feel when he talks about what his company does and his pride in that work.

Founded in 1988 by his father — “the most solid citizen you will ever meet,” Larry Jr. says — the company began with five employees handling a few thousand Texas loans. Today, Litton's 1,500 employees handle more than 300,000 loans in 50 states, making Litton one of the top 20 servicers in the country. The company consistently receives high grades from rating agencies like Moody's and Standard & Poor's.

Larry Jr. often finds himself playing myth-buster, trying to make people understand that Litton does not profit from foreclosure. He says that, with legal and real-estate-related fees, the company spends about $50,000 foreclosing a home. And while Litton might recover much of that from the sale of the house and the collection of those fees, Larry Jr. says it's not in anyone's interest to foreclose on a home.

“We would always rather have someone in that house, making a payment,” he says, adding later, “When the borrower don't pay, we pay...At any given time, we have half a billion dollars of our money outstanding that we've had to advance.”

And in the end, he says, “I sleep well at night. I believe we have the best business practices in the industry today. I think our people believe in those business practices — I'm very, very proud of that.”

When Larry Jr. and Litton publicist Donna Marie Jendritzen said they wished the media could hear from some of the 70,000 borrowers whose homes Litton saved last year, the Press asked how that wish could be fulfilled. What resulted might be indicative of an apparent disconnect between how Larry Jr. believes his collectors treat borrowers and how they are actually often treated.

Jendritzen said federal privacy laws would make it difficult to find some satisfied souls to talk, but she would see what she could do. Ultimately, she rounded up two borrowers in Cleveland, Ohio, who explained, or tried to explain, their loan histories in a conference call.

The borrowers were calling from the offices of a nonprofit housing advocacy group called East Side Organizing Project, which acts as a liaison between distressed borrowers and their servicers. Only one of the two borrowers said he resolved his issues directly with a Litton representative. In that case, Antonito Bradley fell behind a number of times over a two-year period. Litton ultimately waived his fees and knocked $21 off his monthly payments; the missed payments were calculated back into the principal. He does not expect to fall behind again.

“They gave me a second chance, basically,” he said.

In what was supposed to be the second testimony to Litton's ability to work with borrowers, Luvonia Menefee said Litton doubled her monthly payment without telling her why.

“They upped it to $1,400 [from $669],” she said. “I wondered, ‘How could you do this?' And then that was when I could not get nobody, you know, to call back. It was always, ‘I'll call you back.' I couldn't get no explanation, so I stopped paying.”

Menefee said that, while she had the money, “I was not going to send money somewhere where no one could tell me where it was going.”

After seven months of not paying and not getting an explanation for the increase, she was notified that Litton was going to foreclose.

“Finally, my brother-in-law told me about ESOP,” she said, “and this is when I went to them. And they was like my communicator.” ESOP got on the horn to Litton and got them to knock $1,026 off her monthly payment.

“If it wasn't for ESOP, I wouldn't have been...able to smile again,” Menefee says.

When asked if a Litton borrower could get the same results if they weren't lucky enough to live in Cleveland, with ready access to ESOP, she said, “It's hard to say.”

To get more positive statements about Litton's willingness to work with borrowers, one would need to check the company Web site's “Customer Testimonials” section, the title of which erroneously implies that Litton's customers are the borrowers and not the sellers and investors perched at the top of the ladder.

Some examples:

Thank you all for everything. You all are wonderful folks. — B.T.

I have been very happy with your company in the short time that I have been with Litton — L.H.

Thank you for helping me save my home. God bless you. — F.L.

B.T., L.H. and F.L. could not be reached for further comment.

If anything, Litton is consistent in the kind of suspension of disbelief it takes to think Menefee's story is a testament to Litton's good nature. A partial review of the 1,000 complaints Litton borrowers filed with the Federal Trade Commission in 2006 details rude customer service and the inability of Litton employees to explain excessive fees that seemed to appear out of nowhere.

A 2006 case from the Ninth Circuit U.S. Bankruptcy Appellate Court in Seattle helps illustrate the split between what Litton states are easy-to-understand monthly statements and what other people might consider hieroglyphics.

The case involved a married couple who filed for bankruptcy and disputed an additional $30,000 that Litton said they owed. The appellate court's ruling included statements from the trial judge, who repeatedly asked Litton's lawyers to provide clear itemized statements, and, apparently unsatisfied with what the lawyers presented, finally said, “Well, I don't get it,” and ruled in favor of the borrowers.

When Litton appealed, the appellate court was similarly puzzled over the mysterious $30,000.

“We agree with the trial court that what Litton provided was gibberish,” the opinion states. Elsewhere in the ruling, the judges state that, in addition to being “gibberish,” Litton's paperwork might also be classified as “sketchy.”

When asked about that description, Larry Jr. said, “Number one, we do not use gibberish. I would completely disagree with that characterization.” He said the majority of judges involved in Litton litigation have no problem understanding the company's itemized statements.

A few months before the Seattle judges were scratching their heads over the unexplained $30,000, a judge in a federal district court in Philadelphia was trying to get his arms around a seemingly spontaneous $40,000 that popped up on another borrower's bill. The only clue to the riddle was Litton's description of the sum as “other fees due.”

When that amount appeared on her bill, according to the adjudicator's decision, the borrower asked her lawyer to write to Litton, seeking an explanation. Litton's response was to send a letter directly to the borrower saying her lawyer was not authorized to represent her. (Naturally, since Litton did not believe the woman's lawyer was allowed to represent her, the lawyer did not receive a copy of that letter.)

The adjudicator found that Litton violated state and federal laws mandating that borrowers receive accurate statements and answers to questions about their bills. He ordered Litton to pay the borrower $31,000, the bulk of which was for “suffering.” The decision was later dismissed and the parties settled out of court.

It's not surprising that these problems were revealed after the borrower filed for bankruptcy, which is often the only chance a person has to save his home from foreclosure. Between January 2002 and April 2007, more than 5,000 Litton customers in Texas have filed for bankruptcy.

When Litton fired Murray, the company offered her a $6,000 severance package if she signed an agreement stating she would not sue or otherwise complain to a third party. Since Litton claims to spend about $50,000 on a typical foreclosure, the company was prepared to spend upwards of $56,000 to fire a borrower who owed $4,000. (Murray declined the severance package).

Larry Jr. said he could not discuss Murray's case, and when he was asked if it was company policy to fire employees who were also serviced by Litton, he said, “Do you want employees...who are having their own difficulties counseling consumers that have difficulties...?” (Technically, Murray did not counsel consumers; she was a researcher.)

However, Larry Jr. said he understands that Litton employees often deal with borrowers experiencing a crisis, and the employees are sensitive to that.

“There's no excuse for bad service,” he says. “We don't have an obligation to give [borrowers] an answer they like every time. But we have an obligation to listen to the problem, try to develop a solution to the problem that's reasonable and then try to execute that.”

Yet there are bound to be borrowers who just won't budge.

“Sometimes people aren't interested in keeping their homes, or people have unreasonable expectations,” he says. “Unfortunately, we're not always able to accommodate those expectations.”

In her detailed complaint to the Better Business Bureau of Greater Houston, Murray says her supervisor was anything but sensitive. Over several private meetings, she wrote, her supervisor told her to “shut up” and, in one instance, asked Murray, “How did you get the house?” If that is to be believed, it would appear that a Litton superior has no understanding of the predatory loans that critics and federal agencies have said make up a significant amount of loans serviced by his very own company.

According to Larry Jr., there are just plain bitter borrowers who blame Litton for their own irresponsibility. Ostensibly, these are the kind of borrowers attempting the class action suit filed in California in 2005. The suit alleges violations of the Real Estate Settlement Procedures Act and unjust enrichment, among others.

The suit alleges that “Litton has engaged in a scheme by which it fails to accurately service its borrowers' loans and then falsely claims that the borrower is in default and collects unwarranted fees from its customers.”

Specifically, the alleged scheme includes misapplying or failing to apply payments, prematurely referring accounts to collection, and forcing insurance policies on homes that are already insured. (The attorneys who filed the suit did not return multiple Press calls seeking examples of evidence the attorneys had to support these claims. The attorneys haven't said how many plaintiffs they have, and the judge in the case hasn't yet ruled on if there are enough for a class action.)

In an unrelated action, the Federal Trade Commission and HUD accused Salt Lake City-based servicer Fairbanks Capital Corp. of similar actions in 2003. Without admitting any wrongdoing, Fairbanks agreed to pay $40 million into a trust for borrowers that the government agencies said were victims of fraud. Fairbanks' founder and CEO also agreed to pay $400,000. Fairbanks now conducts business as Select Portfolio Servicing.

While Larry Jr. says the Fairbanks case was the exception, not the rule, in the servicing industry, the industry has its fair share of critics.

John Ventura, a former private attorney who heads the Texas Consumer Complaint Center at the University of Houston's School of Law, has experience trying cases against Litton.

“I didn't find any evidence of outright fraud,” he says. “What I found was that their systems, and the employees that worked those systems, just did not do a very good job. And accounts were messed up, payments were not properly credited or escrow accounts were messed up, and because of those things, it became a problem for the consumer that they found almost impossible to correct.”

He says servicers tend to think of foreclosed borrowers as “collateral damage” that ultimately does not harm the bottom line.

“It's just inherent, I think, in mortgage servicers, that in order to be profitable for their investors and everything, they have to hire people that may not be all that competent and their systems may not be set up to really be able to tend to the individual needs of a particular homeowner,” he says.

When told that Litton claims to have saved 70,000 homeowners from foreclosure last year, Ventura says, “I guess the next question would be: ‘Why were there 70,000 homes...that needed saving' Is there something wrong with the way these loans were set up that just from inception makes them not workable? Doesn't it strike you as strange that somebody would have to save 70,000 homes?”

Ventura's boss, consumer attorney Richard Alderman, says that servicers are just following their part in a scripted ruse against naive borrowers.

“More and more, we're allowing businesses to do whatever they want and then just saying, ‘well, you poor idiot, why didn't you protect yourself?'” He likens subprime lending and servicing to the “tin man” scam.

“That was the scam of the '50s and '60s, selling aluminum siding to people who couldn't protect themselves, who a slick salesperson knew could con them into buying something they didn't need and then taking their house if they didn't pay,” he says. “And we didn't have a problem deciding that this process was bad...that people were being taken advantage of...and we did something about it. But I think the world has changed where now I'm afraid what we would've said is, you know, ‘Too bad, you shouldn't let people con you into that, and if you lose your house, well, you can always rent an apartment somewhere.'”

However, there are situations where the person — not the loan — is to blame, says Williams, who brokered Murray's loan.

Unlike the naive borrowers who are sitting ducks for predatory lenders, Murray worked in the industry and knew exactly what she was getting herself into, Williams says. Moreover, servicers like Litton regularly give distressed borrowers multiple chances to catch up. There are examples of real victims who warrant a news story, she says.

As for Murray, Williams says: “She knew better.”

In April, Federal Reserve and other federal bank regulators asked lenders to take extra measures to help borrowers locked into subprime loans.

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In response, the heads of mortgage giants Fannie Mae and Freddie Mac said they would help these borrowers refinance their loans. Fannie May CEO Daniel Mudd said the institution would extend loan terms from the current maximum of 30 years to 40 years. Freddie Mac CEO Richard Syron announced plans to buy approximately $20 billion of subprime loans, and lender Washington Mutual said it would refinance $2 billion in loans, switching some adjustable rate mortgages into 30-year fixed rate loans.

Murray and her family moved out of their home last week. She says she and her husband are staying with her father, while the kids are crashing with friends. It's not perfect, but it's better than before, as the family struggled to make arrangements by the move-out deadline. “I'm in limbo,” Murray had said then.

Unfortunately, she was not one of the 70,000 borrowers Litton claims to have recently saved.

“There's a lot of people out there who have homes because of the great work [of] our 1,500 people here that believe in what they do every day,” Larry Jr. says. “I wish I could help everybody.”

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