La Mesa's Heather McGuire bought a condo in 2006, got married the next year, and before long got into a fight — not with her new husband. She moved in with him. Her battle — still raging — is with the U.S. mortgage finance apparatus, which despite federal government reform efforts, still has a perverse economic incentive to push a home into foreclosure, where the fees are fat.
McGuire, who is a public school special educator, is finding that out, despite the claims of one mortgage servicing company that it is not trying to string her along.
After initially renting her condo out, she put it up for sale in a depressed market. In spring of last year, she tried to get a loan modification, which is a deal with the lender to make the borrower’s payments more affordable.
Strike one. McGuire has a first and a second loan on the property — both made through the former IndyMac Bank of Pasadena, which massively churned out Alt-A loans — ones made without verification of borrowers’ financial information. They are called liar loans. IndyMac drowned in the lies and was seized by the Federal Deposit Insurance Corporation (FDIC) in July of 2008. Then that agency recruited billionaire financial swingers such as George Soros and John Paulson to form a successor, OneWest Bank. The agency took over many of the bad loans and agreed to share in the losses.
OneWest and its predecessor demanded that McGuire supply reams of documents for the loan modification, then thumbed it down on a technicality that, she says, it had known about from the very beginning. “These guys [Soros, Paulson, et al.] have no motivation to do a loan modification,” says Bob Hertzog, president of Summit Home Consultants in Phoenix. “The FDIC subsidizes them. They paid pennies on the dollar [for the failed institution] and are guaranteed 80 percent of the loss that they take for the next ten years.” The federal agency denies that it made an overly generous deal.
A New York state judge said OneWest’s actions in one foreclosure were “harsh, repugnant, shocking and repulsive.”
When OneWest finally rejected her for a loan modification, McGuire tried to get a short sale, in which the lender agrees to take less than what is owed on the mortgage. Partly because of new federal incentives that went into the rulebook this year, short sales are burgeoning across the United States. Lenders often prefer to take a loss on the sale rather than be burdened with handling a foreclosed home.
McGuire’s first mortgage had moved from OneWest to Freddie Mac, or Federal Home Loan Mortgage Corporation, which buys mortgage loans, securitizes them, and sells them to investors. Such securitization almost drove the world’s financial system off the cliff in 2008, when the beleaguered Freddie was seized by the U.S. government.
Freddie is willing to do McGuire’s short sale. But first, the company that services the second loan must agree. Strike two. The servicer is a major hang-up in many short sales. Lenders or holders of the pools of securitized mortgages pay loan-servicing companies to service the debt — collect payments of interest and principal from borrowers.
Diane Thompson of the National Consumer Law Center says that servicer fees, such as late fees, create an incentive to “keep borrowers in default and ultimately give the servicer an incentive to complete a foreclosure.”
Wrote Peter Goodman of the New York Times last year, “Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue — fees for insurance, appraisals, title searches and legal services.”
Freddie says that it will do McGuire’s short sale if the servicer of the second mortgage, Green Tree Servicing of St. Paul, Minnesota, will settle for a payment of $3000. (It could still pursue McGuire for the $53,000 face of the loan.) But Green Tree wants $7450, not $3000. Brian Yui of HouseRebate.com, who is handling the matter for McGuire, says, “I told her not to make this side payment,” which he considers a violation of industry guidelines.
Green Tree’s general counsel, Brian Corey, explains that his company wants 5 percent of the anticipated home sale price. But others in lending administration say that 10 percent of the unpaid principal is the industry standard. In this case, that would be a lower sum. Corey denies that there is such an industry standard.
McGuire wrote her congressman, Duncan Hunter, whose aides passed the message on to Freddie. She wrote that Green Tree is “asking that I (or the buyer) send…$4450 in advance so that the funds will not have to show on the HUD-1 Settlement Statement, and then they will issue a short sale approval of the $3000. I would be responsible for the remaining balance of the debt.”
So was Green Tree asking that misleading information be passed on to the federal government’s Housing and Urban Development monolith? In a carefully worded letter to me, Corey stated that “Green Tree adhered to its written policy that representatives must ‘never provide instructions to settlement agents or the customer on how to fill out the HUD-1 settlement statement.’”
Green Tree is not telling the truth, says McGuire. Before I talked with her, she had told other people that Green Tree wanted information withheld from the HUD-1 document.
She says that on the day Green Tree received its copy of the complaint letter sent to Hunter, an executive phoned her. She was visiting her parents in Pennsylvania when he called. “This man was so nasty that I was sitting in the subway with my mother crying,” says McGuire. The Green Tree executive “told me that he has cancelled my short sale; they won’t even accept the $3000.” She says he warned her that Green Tree would get her $53,000 “voluntarily or involuntarily.”
I asked Corey if that call was made. His reply: “Ms. McGuire was told that if the short sale lien release offered by Green Tree was not accepted, then Green Tree would neither release its lien nor participate in the transaction and would consider pursuing collection alternatives.” Rough translation: our way or the highway, basically, as McGuire says.