August 6, 2007
In 2003, Dianne Brimmage refinanced the mortgage on her home in Alton, Ill., to consolidate her car and medical bills. Now, struggling with a much higher interest rate and in foreclosure, she wants to modify the terms of the loan.
Lenders have often agreed to such steps in the past because it was in everyone’s interest to avoid foreclosure costs and possibly greater losses. But that was back when local banks held the loans and the bankers knew the homeowners, as well as the value of the properties.
Ms. Brimmage got her loan through a mortgage broker, just the first link in a financial merry-go-round. The mortgage itself was pooled with others and sold to investors — insurance companies, mutual funds and pension funds. A different company processes her loan payments. Yet another company represents the investors as the trustee.
She has gotten nowhere with any of the parties, despite her lawyer’s belief that fraud was involved in the mortgage. Like many other Americans, Ms. Brimmage is a homeowner stuck in foreclosure limbo, at risk of losing the home she has lived in since 1998.
As the housing market weakens and interest rates on adjustable mortgages rise, more and more borrowers are falling behind. Almost 14 percent of subprime borrowers were delinquent in the first quarter of 2007. Investors, fearful that these problems will hurt the overall economy, have retreated from the stock and bond markets, creating major sell-offs.
And the very innovation that made mortgages so easily available — an assembly line process known on Wall Street as securitization — is creating an obstacle for troubled borrowers. As they try to restructure their loans, they are often thwarted, lawyers say, by strict protections put in place for investors who bought the mortgage pools.
This impasse could exacerbate the housing slump, pushing more homeowners into foreclosure. That would lead to a bigger glut of properties for sale, depressing home prices further.
“Securitization led to this explosion of bad loans, and now it is harder to unwind and modify them even where it is in the best interests of both the borrower and the investors,” Kurt Eggert, an associate professor at the Chapman University School of Law in Orange, Calif., said in an interview. “The thing that caused the problem is making it harder to solve the problem.”
Creating difficulties is the complex design of mortgage securities.
Some homeowners have problems simply identifying who holds their mortgages. Others find the companies that handle their loan payments, known as servicers, are unresponsive, partly because modifying loans cuts into profits.
Even if circumstances suggest fraud when a loan was made, lawyers say, the various parties protect each other by refusing to produce documents.
Compounding the problem is a law stating that when a loan is passed to another party, that entity cannot be held liable for problems.
“I don’t think there is anything in the entire securitization process that is at all focused on the borrower’s interest,” said Kirsten Keefe, executive director of Americans for Fairness in Lending. “Everything they do is, ‘How are we going to make a profit, and how are we going to secure ourselves against risk?’ ”
The idea of pooling loans and selling them to investors dates back to 1970, but the practice has exploded in recent years. At the end of last year, $6.5 trillion of securitized mortgage debt was outstanding.
More than 60 percent of home mortgages made in the United States in 2006 went into securitization trusts. Some $450 billion worth of subprime mortgages, those made to borrowers with weak credit, went into securitizations last year.
Fifteen years ago, the last time the housing market ran into stiff trouble, government-sponsored enterprises like Fannie Mae did most of the work pooling and selling mortgage securities. These enterprises readily agree to loan modifications.
But not so in the private issues pooled and sold by Wall Street, which has fueled the extraordinary growth in the market.
The process begins with the entity that originates the loan, either a mortgage broker or lender. The loan is assigned to a company that will service it — collecting borrowers’ payments and distributing them to investors. Sometimes the servicer is affiliated with the lender, creating potential conflicts if a loan goes bad.
A Wall Street firm then pools thousands of loans to be sold to investors who want a steady stream of cash from loan payments. The underwriters separate them into segments based on risk.
Once a trust is sold, a trustee bank oversees its operations on behalf of investors. The trustee makes sure that the terms of the pooling and servicing agreement are met; this document determines what a servicer can do to help distressed borrowers.
The agreements require that any modifications to loans in or near default should be “in the best interests” of those who hold the securities.
But there is wide variation in how many loans can be modified. Some trusts have few curbs; others allow no more than 5 percent of mortgages to be changed.
Some trusts limit the frequency with which a loan can be modified or dictate a minimum interest rate. The variations help explain why borrowers are having difficulty.
Ira Rheingold, executive director of the National Association of Consumer Advocates, says companies in the chain should be held responsible. “Because Wall Street is responsible for the mess we are in, they need to bear some of that burden,” Mr. Rheingold said. “Why should people who have been funding these bad loans get a free pass?”
For now, the burden falls on people like Ms. Brimmage, a former forklift driver at an Owens-Brockway Glass Container plant in Godfrey, Ill., that closed last fall. A borrower in good standing since 1998, she said a local broker persuaded her to combine her debts in a fixed-rate loan of $65,000 in 2003.
But at the closing, she was presented with an adjustable-rate mortgage from the Argent Mortgage Company, carrying a low teaser rate for two years. When she objected, the broker assured her that rates would fall and she could get a better fixed-rate loan later. She said she believed him.
Rates did not fall. Still, Ms. Brimmage made her payments until illness struck in 2005. She then had difficulty paying the mortgage and liquidated part of her 401(k) retirement fund to keep current. Last September, she received a foreclosure notice from AMC Mortgage Services. Argent, which made the loan, and AMC are units of ACC Capital Holdings, a private company.
Clarissa P. Gaff, a lawyer for Ms. Brimmage at the Land of Lincoln Legal Assistance Foundation, hopes to cut her client’s loan and reduce the interest rate. The monthly payments have risen to $691 from $414, as the rate has jumped to 11.25 percent from the original 6.3 percent.
But the servicer has not agreed. Deutsche Bank, the trustee of the security holding the loan, says it is unable to help because it is neither the servicer nor the lender.
AMC Mortgage Services says Ms. Brimmage must pay the full amount. A spokesman for the company said that it had worked with her for two years and that it is in the interests of all involved in a mortgage to keep a loan current.
Ms. Gaff said some documents indicate that the mortgage broker who arranged the loan may have violated truth-in-lending requirements. The broker’s employer has been barred from doing business in Illinois and a handful of other states.
“We have run into this in any number of cases,” Ms. Gaff said. “The bank that holds the note as trustee claims to have no information relating to the servicer or the loan originator in spite of the fact that documents show all the parties have been working together for ages. It insulates them from liability.”
Imperiled homeowners are especially disadvantaged if they live in a state — like Georgia, California, Texas and 18 others — where foreclosures can take place without a judge’s oversight. A loan servicer in these places can push for quick foreclosure, sometimes in 40 days. Fast turnarounds are in a servicer’s interest because securitization pools do not cover the costs of modifying loans.
Lawyers trying to assist distressed homeowners sometimes find that these proceedings have been started without proof of ownership.
“There is some sort of confusion with regard to ownership in virtually each one of my subprime cases,” said Howard D. Rothbloom, a lawyer in Marietta, Ga., who represents low-income people battling foreclosure. “Securitization has made it so complicated that everyone in the process is able to say that they don’t know what’s going on. The effect is, no poor person can afford to litigate this type of matter to bring it to a resolution, and therefore they lose their home.”
Mamie Ruth Palmer, an elderly woman in Atlanta, filed for bankruptcy in 2002 to stop a quick foreclosure sale. On Ms. Palmer’s behalf, Mr. Rothbloom is suing the trustee, Bank of New York, as well as HomEq Servicing, which withdrew its registration to do business in Georgia last fall. Mr. Rothbloom argues that Ms. Palmer’s lender levied improper costs, including $11,500 in legal fees.
Ms. Palmer is still in her home and makes mortgage payments to a bankruptcy trustee, Mr. Rothbloom said, but he has been unable to reach a settlement. Her loan stands at $51,500.
Bank of New York, like Deutsche Bank, says that the trustee’s function is an administrative one and that it is not responsible for foreclosures. HomEq did not return a phone call seeking comment.
Mr. Rothbloom said he has had cases where homeowners received foreclosure notices from entities that could not prove ownership.
“I am sure there are a lot of people who are no longer living in their homes where there was a flawed foreclosure,” Mr. Rothbloom said.
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