Loan servicers reject attempts to renegotiate mortgage terms

NEW YORK — A cancer diagnosis forced Lindsey Jennings to give up his government job. With less income, Jennings feared he might lose the home he and his wife, Pearl, built near Atlanta almost 20 years ago. So he asked for help.

But Jennings, who needed to lower his monthly mortgage payment, was rejected for a loan modification. The snub didn't come from the mortgage lender, but from the loan servicer.

All mortgage and student-loan payees know their servicer, the company that collects their payments. The companies are an integral part of the complex mortgage sector with a relatively simple role.

But as the housing crash ravages the mortgage sector, millions of servicing contracts are changing hands as parent companies go bankrupt or pare back their lending activities. Even homeowners who pay on time face the possibility of falling behind on insurance or property tax payments because of clerical errors at the servicer.

Homeowners, who try to salvage a troubled mortgage, are finding many servicers unwilling or unable to renegotiate terms.

"Sometimes we believe folks in the industry just aren't listening," said David Berenbaum, executive vice president of National Community Reinvestment Coalition, an advocacy group that helps borrowers refinance or modify their mortgages.

The Jenningses contacted NCRC after their servicer, Orange, Calif.-based AMC Mortgage Services, rejected attempts to work out an arrangement, even after they filed for a hardship exemption.

Like many homeowners, the couple refinanced their home three years ago, with AMC's former sister company Ameriquest Mortgage Co., to lower their payments, but got caught short when their adjustable rate rose and Lindsey took ill. For a year, they pestered AMC, but missed several monthly payments, Pearl said.

AMC made an offer, but the servicer stipulated that any renegotiation include an upfront payment of at least $3,000. "We were already in trouble with our payments, how could we afford that?" she said.

'A factory'

One problem is that servicing operations are not designed to cater to customers, said Guy Cecala, publisher of Inside Mortgage Finance. "They are like a factory," he said.

A recent survey by Moody's Investors Service showed only 1 percent of loans to people with poor credit records that reset in the first three months of the year were modified. With 2 million of those subprime loans scheduled to reset in the next year, requests for modifications are certain to increase.

Some of the largest servicers are adapting, but Moody's said the changes are too slow to prevent a spike in defaults. The NCRC's Berenbaum said most modifications are impractical and do not take into account the needs of individual customers.

As of Sept. 1, the Jenningses' servicer is Citi Residential Lending, a unit of Citigroup that acquired AMC from ACC Capital Holdings. The company would not comment on the Jennings case, citing confidentiality. In an e-mail, a spokeswoman said Citi works with customers to "understand their circumstances and to explore possible solutions that make sense for all parties."

The other party is the loan owner, the investor pocketing interest on the mortgage who hired the servicer.

"The servicer is obligated to guide their actions by what's in the best interest of the owner," said Larry Platt, a lawyer with K&L Gates specializing in mortgage financing and consumer credit issues.

The investor wants to avoid foreclosure, especially when that means taking possession of a property that is losing value. But if a workout merely forestalls the inevitable, that ultimately makes the foreclosure more costly.

Whether a servicer offers a modification that can help the borrower is "a clinical, unemotional cost calculus. There's not a social factor that is included in the analysis," he said.

Bad checks

That's partly the reason loan servicing remains a very profitable corner of the mortgage market. But eight of the top 30 servicers have been or are in the process of being bought in the past year. That means servicing for loans with a value of $913.6 billion, about 9 percent of the market, will change hands, which can cause clerical problems

That's what happened with two of Patricia Walshe's loans. Walshe, who owns several investment properties in Frederick County, Md., found out last month that she was behind on her taxes even though she had paid her mortgage on time. Her servicer, American Home Mortgage Corp., had sent bad checks to the county. That meant Walshe faced having to pay for a second time half of the $8,000 annual tax bill on the two properties.

Her situation was resolved when the county received certified checks from American Home 10 days before it would have started charging Walshe interest. Lori Decker, director of treasury for Frederick County, said the second installment is due Dec. 31, and the county "still remains concerned that this will happen again."

If it does, Walshe said she'd talk to her lawyer. And she would probably have an excellent case, said Anthony Sabino, a business and law professor at St. John's University.

"This is simply not supposed to happen. It's mind-boggling," he said. "If AHM took the funds out of those escrow accounts, the law has been seriously broken."

American Home did not return calls seeking comment.

A similar problem occurred with other American Home loans, although the homeowners never found out they were at some risk. On Aug. 24, the servicer stopped making tax and insurance payments altogether for 4,547 loans it serviced for Freddie Mac. The government-sponsored mortgage financier had seized the escrow accounts before American Home filed for bankruptcy, but the servicer would not release account information, so Freddie had no addresses to which to send the money. Freddie settled with the company, clearing the way to pay $2.4 million in delayed property taxes and insurance premiums.