Lawsuit Reveals How a Middleman is Blocking Mortgage Modifications for Homeowners

Lawsuit Reveals How a Middleman is Blocking Mortgage Modifications for Homeowners

by Paul Kiel ProPublica

Pamela Jeter of Atlanta, Ga., has been trying to get a mortgage modification for more than two years. She seems like an ideal candidate. She has shown she can stay current with a reduction in her monthly mortgage payments. Everybody would seem to win. Even the investors who ultimately own her loan think she should be able to get one. So, why is Jeter facing foreclosure?

A bank that she didn’t even know is involved with her loan has thrown up a roadblock to modifications. At least tens of thousands of other homeowners have shared a similar plight. Jeter’s case is a window into a broken system where even though the actual investors, when asked, say they want to allow modifications, the bank that acts as their representative has refused to allow them.

Two big banks act as middlemen between the homeowners like Jeter who make payments and the mortgage-backed securities investors who ultimately receive them. The banks’ jobs were supposed to be relatively hands-off, devoted more than anything to processing homeowner payments. When the housing bubble burst, they faced new demands.

One of those middleman roles is well-known to homeowners: the mortgage servicer [1], responsible for collecting homeowner payments and evaluating requests for a modification.

But it’s another middleman that’s proven the real barrier for Jeter: the trustee, who is supposed to be the investors’ representative, making sure the servicer is maximizing investors’ returns and distributing checks to them. HSBC is the trustee for the pool of loans of which Jeter’s is a part — and it’s refused to approve any modifications for loans like hers, saying the contracts around the mortgages simply don’t allow it.

The good news for Jeter is that, in what seems an unprecedented step, her servicer OneWest has taken HSBC to court in order to allow modifications. It filed suit in June of last year [2].

But in a sign of just how convoluted the mortgage world has become, OneWest is also pushing to foreclose on her. A recent sale date was avoided only after her lawyer threatened to sue.

Jeter’s loan was typical of the boom years. In order to help pay for improvements on her home in 2007, she’d refinanced into an interest-only adjustable-rate loan. That loan was bundled with thousands of others by a Wall Street bank and sold off to investors (pension funds, hedge funds, banks etc.).

That’s where the trouble started. In Jeter’s loan pool and nine others, the contracts laying out the servicers’ responsibilities and powers contradict each other. OneWest’s lawsuit seeks to sort out that contradiction.

One document, a private contract between the servicer and the Wall Street bank that bundled the loans, explicitly forbids servicers from modifying loans in the pools in a way that would reduce homeowner payments. But other contracts — that investors could see — explicitly allow such modifications.

It’s become a familiar problem [3] during the foreclosure crisis, dealing with the aftermath of the banks’ corner-cutting and sloppy paperwork of the housing boom.

No one appears to have tried to sort out this mess until 2009, when OneWest requested that HSBC, the trustee, allow modifications. The administration had just launched the Home Affordable Modification Program (HAMP) [4], which pays servicers and investors subsidies to encourage affordable modifications. Under the program, modifications occur only when they will likely bring a better return to investors than foreclosure.

But HSBC refused to authorize any modifications, saying the contracts prohibit them. It’s obligated to act in investors’ interest, and it feared getting sued by those who didn’t want to cut homeowners’ payments. The dispute dragged on for months. Ultimately, HSBC offered to allow modifications only if OneWest accepted the risk of getting sued by investors, but OneWest wouldn’t.

OneWest was in an increasingly difficult situation, it says in its suit [2]. It faced potential suits from investors if it modified loans, and if it didn’t, homeowners in the pool might sue.

In late June 2010, with HSBC still not budging, OneWest filed suit, asking a federal judge to decide whether modifications should or should not be allowed.

The case suggests that when investors themselves are asked, they will approve modifications. HSBC polled the investors in the 10 pools [5] after the suit was filed. A large majority favored allowing modifications. Based on those results, HSBC said in a court filing in January [6] that it did not oppose OneWest’s request for a judge to intervene and that if the judge declared modifications were allowed, that would be fine with them.

In the meantime, 3,000 homeowners like Jeter whose mortgages are caught up in the dispute have been unable to get any reduction in payments. When OneWest filed its suit, it said at least 800 of the loans seemed eligible for an affordable government-sponsored modification but couldn’t actually be modified because of HSBC’s stance. Those homeowners “are facing the possibility of losing their homes through potentially avoidable foreclosures every day,” it said [2].

It’s not clear how many of those homeowners have since been foreclosed on. OneWest said in a statement that it had no choice in pursuing foreclosure: It’s “contractually obligated to continue servicing loans in accordance with the terms of the underlying securitization documents.”

The suit is remarkable not only because it seems unique — close observers said they hadn’t seen another example of a servicer going to court against a trustee — but also because it lays bare a relationship that is usually a mystery to homeowners and investors in securitized mortgages.

It’s often hard for homeowners to tell if a servicer is correctly citing an investor restriction when denying a modification. Servicers have cited investor restrictions when denying modifications for at least 30,000 homeowners, according to a ProPublica analysis of Treasury Department data. A Treasury spokeswoman said auditors examining such denials had found they were almost always legitimate. That’s not an experience shared by homeowner advocates.

While there are clear cases where the contracts prohibit modifications, homeowner advocates say servicers often falsely claim their hands are tied [7], blaming “the investor” when there’s really no restriction on modifying loans. In a number of cases, said Jeff Gentes, an attorney at the Connecticut Fair Housing Center, servicer employees have told his clients that there was an investor restriction, when a little bit of digging showed that’s not true. We reported on this problem last year [7].

That’s also an experience shared by OneWest homeowners. Briant Humphrey of southern California says OneWest told him repeatedly for months that an investor in his mortgage wouldn’t allow a modification. But that doesn’t appear to be true. OneWest declared in its suit [2] against HSBC that, of the 500,000 or so mortgages it services, the only ones not eligible for possible modification were the loans at issue in the suit. Humphrey’s loan is not one of them.

His case is notable for another reason: Humphrey happens to be friendly with one of the Treasury officials in charge of HAMP, Laurie Maggiano. After narrowly avoiding a foreclosure by declaring bankruptcy, Humphrey was able to speak with Maggiano, and he credits her with finally getting higher level attention at OneWest. His case is currently in review again.

Overall, investor restrictions have been a relatively minor problem compared to the many other barriers homeowners have faced in a quest for a modification. They represent about 2 percent of the 1.9 million total homeowners who’ve been denied [8]. In most cases, the contracts written when the securities were sold give the servicer clear authority to provide modifications.

In the cases when there actually is a restriction in the documents, the servicer is supposed to at least try to get permission. The HAMP rules require the servicer to send a letter to the trustee requesting that modifications be allowed.

But even that small step has proven too much for many servicers. Last summer, a director at Deutsche Bank, one of the largest trustees, told ProPublica that such requests “never happen.” [7] Deutsche Bank did not respond when asked if that was still the case.

In cases where there’s a clear contractual bar to modifications, the servicer and trustee could take the initiative to change the contracts by having the investors vote on it or, if voting isn’t required, amend the contract themselves.

But in general, said Gentes, the housing attorney, servicers are slow to investigate and eliminate bars to modification. Servicers are paid a low, flat rate per loan and are motivated to keep costs down [1]. “The costs of removing an investor restriction are often borne by the servicers, and so extensive amendment rules often mean that servicers won’t pursue it.”

Trustees, who get paid even lower fees, are no different, said Bill Frey of Greenwich Financial Services, which specializes in mortgage-backed securities. “They’re very, very prone to inaction.”

Both, as middlemen, don’t bear the loss when a home is foreclosed on.

As for Jeter, eight months after OneWest filed suit to allow modifications, she is facing foreclosure for the fifth time.

Self-employed, she hit trouble in 2008 because of the recession. After failing in attempts to refinance into a conventional loan, she started talking to her servicer, then called IndyMac, about a modification. (OneWest [9] was formed from the remains of the failed bank IndyMac. It has recently been under scrutiny from regulators [10] for its foreclosure practices, along with other of the country’s largest servicers. )

An employee told her she had to miss several payments in order to qualify for a modification — a common experience for homeowners [11].

“I hadn’t done anything like that before,” she said. “It was a crazy thought.” But because she’d been assured that was the only path to a modification, she did it.

Several months later, OneWest put her on a six-month temporary payment plan that cut her payments almost in half from $3,500 to $1,850.

She made those payments, but still there was no modification. “I regret to inform you that your particular loan is in a group of loans that the investor will not modify,” a OneWest employee wrote her in an October 2009 email, telling her to either pay off her mounting late payments or face foreclosure.

The modification application process continued, however, and the reasons for denial proliferated. She was told at one point to get more income, so she took in tenants. She was asked over and over for the same paperwork — as we’ve reported, a typical experience [11]. In all, she says she’s applied for a modification about 10 times.

“It’s been pure hell,” she said. “I’ve heard every excuse in the book.”

Because of the mounting arrears and slumping housing market, she now owes more than her home is worth.

The effort has been a constant preoccupation for years now, and she’s communicated with other frustrated OneWest homeowners across the country. Turning OneWest’s fears of homeowner lawsuits into reality, she hired a lawyer who prepared a suit in case OneWest attempted to foreclose. In March, OneWest postponed seizing her home at the last minute. OneWest has offered another temporary payment plan, but Jeter is wary that it will end like the last one, with her payments simply lost. Currently, her home is set to be foreclosed next week.

In the meantime, HSBC and OneWest are awaiting a ruling in their lawsuit. The judge’s ruling could, as HSBC says in a filing [6], “cut that Gordian knot” and allow OneWest to provide a modification. The question for Jeter is whether that would come too late.

Follow on Twitter: @paulkiel [12]

~

4closureFraud.org

Comments
8 Responses to “Lawsuit Reveals How a Middleman is Blocking Mortgage Modifications for Homeowners”
  1. Dave says:

    One West Bank, Fannie Mae and MERS Defendants v Brown Motion to Dismiss DENIED.
    First Circuit Court State of Hawaii Honorable Judge Bert I. Ayabe sees the validity of our complaint Civil no. 11-1-0941-05.
    Perhaps my being in compliance and current on my modification with One West Bank and the concurrent sale of my mortgage to Fannie Mae for $10 in Texas didn’t sit right with the judge. It doesn’t pass the smell test. My attorney Dubin Law / Frederick Arensmeyer successfully argued (1) Breach of contract, (2) cancellation under the Federal-Truth-in Lending Act (TILA) (3) unfair and deceptive acts and practices and (4) quiet title for wrongful foreclosure, to the judges satisfaction to allow our lawsuit to continue. No small feat when you are up against these huge government backed institutions.
    This judge shows the courage, insight and compassion to allow David to face Goliath. So many have been denied their 5th amendment rights being stripped of their property never to have their day in court.
    I wonder if the judge had seen this video with regard to the obscene deal One West struck with the FDIC. Some of the details are explained very well in this short video:

    http://youtu.be/UlEZDDwKv7o

    This deal is worthy of a Congressional Hearing.

    http://youtu.be/UlEZDDwKv7o

    “I have never seen a fraud scheme that was so extensive, so pervasive, and had so many different areas of fraud throughout the machine. I have yet to see a single aspect of the banking industry that does not have fraud in it,” said Nevada Deputy Attorney General John Kelleher.
    ONEWEST BANK, F.S.B. V DRAYTON – BROOKLYN JUDGE ARTHUR SCHACK IS A LOCAL HERO, DECISION CASTS LIGHT ON FRAUDULENT MORTGAGE PAPERWORK
    The self-described “little judge from Brooklyn” has dismissed another foreclosure case, this time in favor of an East New York homeowner who did not even have a lawyer.
    Schack ruled Thursday that California’s OneWest, the last of several banks that relied on an admitted “robo-signer” to transfer the $492,000 mortgage on Covan Drayton’s Hemlock St. home among them, failed to prove it even owns the property in question.
    http://4closurefraud.org/2010/10/27/onewest-bank-f-s-b-v-drayton-brooklyn-judge-arthur-schack-is-a-local-hero-decision-casts-light-on-fraudulent-mortgage-paperwork/

    Read more: http://www.businessinsider.com/judge-slams-indymac-cancels-defendants-mortgage-2009-11#ixzz1eiXancWZ

    Judge Slams Indymac, Sets Aside Defendant’s $292,500 Mortgage

    Judge Jeffrey Spinner said that it became clear to the court at a September 2009 settlement conference — one that had been postponed five times due to Indymac’s failure to “cooperate” — that Indymac “had no good faith intention whatsoever of resolving this matter in any manner other than complete and forcible devolution of title…”

    Read more: http://www.businessinsider.com/judge-slams-indymac-cancels-defendants-mortgage-2009-11#ixzz1eiYA3O00

    Fletcher v One West Bank Case 1:10-cv-04682
    In the United States District Court for the Northern districtof Illinios
    Pg. 8 line 24
    24. IndyMac has routinely failed to live up to its end of the TPP Agreement and offer
    permanent modifications to homeowners. In February 2010, the U.S. Treasury reported that
    IndyMac’s parent company had 112,200 HAMP-eligible loans in its portfolio. Of these loans, just
    3,087 were granted permanent modifications (approximately 2.75%) even though many more
    homeowners, including Plaintiff, had made the payments and submitted the documentation
    required by the TPP Agreement.
    25. By failing to live up to its obligation under the TPP Agreement, IndyMac is leaving
    homeowners in a complete state of confusion regarding the status of their homes and is preventing
    homeowners from pursuing other avenues of resolution, including using the money they are
    putting towards TPP payments to fund bankruptcy plans, relocation costs, short sales or other

    5
    The eligibility criteria for HAMP, as well as the formula used to calculate monthly mortgage
    payments under the modification, are explained in detail in SD 09-01. Generally speaking, the
    goal of a HAMP modification is for owner-occupants to receive a modification of a first-lien
    loan by which the monthly mortgage payment is reduced to 31 % of their monthly income for the
    next five years.
    http://www.abbeyspanier.com/images/Complaints/indymac-complaint.pdf

    IndyMac/OneWest Bank Denied Bid to End HAMP Class Action Lawsuit
    Memorandum opinion and order:
    http://blog.abbeyspanier.com/2011/07/21/indymaconewest-bank-denied-bid-to-end-hamp-class-action-lawsuit/
    Click end of second paragraph in red

  2. Mary says:

    IMPORTANT QUESTION NO ONE HAS ADDRESSED YET:

    WHY IS THE MONEY YOU ARE PAYING NOT GETTING TO THE INVESTORS?

    I KNOW, DO YOU?

    PARTIAL PAYMENTS AFTER 90 DAYS INVOKE THE ‘DEFAULT EVENT’ SILENT AGREEMENTS.

    ‘RECONSTITUTED SERVICING AGREEMENTS’ ‘UNASSOCIATED DOCUMENTS’ ‘MISCELLANEOOUS EXHIBITS’ WHERE EVERYONE CHANGES ROLES AND RESPONSIBLITIES AND PLACE THE ‘LOAN#’S INTO A ‘LOAN TRUST’ OR ‘CERTIFICATE’ OR ‘TRUST FUND’ OR ‘NOTHING’ AND KEEP MONEY AS MASTER SERVICER.

    IT’S IN THE AGREEMENTS, THAT THE MASTER SERVICER GETS TO KEEP THE PROPERTY AND/OR CASH AS EXPENSES.

    WHY CAN’T YOU FIND A GOOD FORECLOSURE DEFENSE ATTORNEY WHO WILL REVIEW THE STATE LAWS AND ISSUE A CEASE AND DESIST TO BRING THE MATTER FOR REVIEW BEFORE THE COURTS?

    IF YOU HAVE NOT CHECKED WITH YOUR COUNTY CLERKS / RECORDERS, PLEASE CHECK TO SEE WHAT DOCUMENTS MAY HAVE BEEN FILED BY ROBO-MILLS AND ROBO-SIGNERS SINCE YOU TOOK OUT YOUR MORTGAGE LOAN.

  3. l vent says:

    The real reason there are no loan modifications? THE GSE Fannie/Freddie nor the servicers own the loan because of the FRAUDULENT INDUCEMENT and the ORIGINATION FRAUD which was the cover up they used to hide their GOVERNMENT SPONSORED involvement. They would be committing more fraud by giving a homeowner a fraudulently induced loan mod.
    Fannie/Freddie are investors in the fraud which makes our loans UNCONSTITUTIONAL and ILLEGAL. CONgress contrived the PONZI SCHEME in their backrooms because CONgress is infiltrated with UN/NEW WORLD ORDER MEMBERS who are posing as AMERICANS, they are a fraud and want to DESTROY AMERICA. CONgress also invested in this fraud. THE GSE FANNIE/FREDDIE were the ORIGINATORS/INVESTORS in the fraud, THE BIGGEST PONZI SCHEME HEIST OF THE AMERICAN PEOPLES WEALTH IN HISTORY, and they are also the FRAUDCLOSERS. They have been hiding behind the scenes and have been using perps all along like BANKSTERS, MORTGAGE SERVICERS, TITLE INSURERS, CRIMINAL ATTORNEY NETWORKS, FRAUDCLOSURE MILLS, to hide behind and COVER-UP THEIR GOVERNMENT SPONSORED FRAUD and TERRORISM.
    RESCIND OUR LOANS, THEY ARE UNCONSTITUTIONAL. THESE LOANS NEVER EXISTED BECA– USE OF THE ORIGINATION FRAUD THAT WAS — USED TO HIDE THE GSE FANNIE/FREDDIE’S UNCONSTITUTIONAL INVESTMENT IN OUR LOANS AS WELL AS THE JUDGES, POLICEMAN, AND FIREMAN’S PENSION FUNDS THEY SOLD THE FRAUDULENT MBS’s to. THIS HAS CREATED AN UNCONSTITUTIONAL CONFLICT OF INTEREST.
    RESCIND OUR LOANS!!! GIVE THE STOLEN HOMES BACK TO THE PEOPLE AND THE STOLEN MONEY. THE JIG IS UP. THE AMERICAN PEOPLE KNOW THE TRUTH!
    WE WERE SET UP TO FAIL. DEFRAUDED, AND THEN WE WERE ROBBED BY THE GSE, FANNIE/FREDDIE WHO ALSO INVESTED IN THE FRAUD. This does not even include the WALL STREET DERIVATIVES FRAUD or THE FEDS QE1&2. or the MASSIVE TARP BAILOUT FRAUD or the many,many other INUMERABLE frauds they used to deceptively cover their asses. The JIG IS UP. .

  4. foreclosed on by One West Bank says:

    OK-

    I have googled every way I could think of and the only suit with Onewest Bank FSB vs HSBC was on 6-22-2010, NY Southern District Court, Judge Denise Cote. The issue was the Economic Stabilization Act.

    I also checked scribed, nothing is notated for this suit.

    The only thing that comes up under searches is the above article on various sites.

    Could the author of this article let us know where we can find the contents of this suit?

    Generally, I take the articles up on 4closurefraud as reliable. Does the moderator check into the facts stated or where the information is cited? I am very interested in learning more about this lawsuit and if, it is in fact, as the author eludes to.

  5. foreclosed on by OneWest Bank says:

    This article is very confusing.

    I believe I know Pamela and she was working on a class action lawsuit against OneWest.

    Am I to glean from this article that OneWest services loans for some other bank, in addition to its own investors?

    OneWest is not publicly owned. It was formed by a group of 7 investors: George Soros, Michael Dell and others. You can find this information on the FDIC website. I would be VERY surprised if these are the investors that encourage mods. They got a sweetheart deal from the FDIC where they get a large % of their losses. Again go to the FDIC website. This has been on many blogs before

    As far as I have seen Deustch services loans for OneWest, not the other way around as indicated above.

    I was foreclosed on and never missed a payment. I, too, had the miss a payment to qualify conversations with OWB. I paid every “reduced” payment on time. They insisted the investors wanted me to apply for HAMP, which we didn’t want, nor could qualify for. The rep would not process the called in payment unless we applied for HAMP. We did. She never processed the payment and 3 months later they foreclosed. Interesting enough, no one could identify the missed payment, and told us we must be in foreclosure for SOME reason. It was a nightmare. I am not going to sue for wrongful foreclosure.

    I will check into the HSBC suit. This may apply to only a very small % of OWB loans.

    What are the qualifications of the person writing this article? It has many gaps and seems to favor OWB over the homeowner, unlike any articles regarding OWB I have previously read.

  6. kym says:

    Finally someone that has been doing the same thing I’ve been doing for almost 3 years. Hey Jeter don’t feel alone on this mary go round. You can get on but cant get off. Nov 2008 Country Wide Mortgage went out of business and Bank of America bought all there mortgages. That was when I had to apply for a mod loan due to health problems. I’ve had to reapply ever 3 months and continued to resend the same paperwork with it. Dec 2010 the Hamp program disapproved me due to many payments behind, now I’m i my 2nd review with an in house program to get me a mod loan. Ok now I’m just pissed off so I to have hired a lawyer to see what my options are. I also found that Bank of America never filed a Assignment of Mortgage when they took over my mortgage which basically means they don’t have authorization to even offer me a mod loan. We’ll see happens, love to keep in touch to see what happers to Jeter.

  7. Mary says:

    Note: SERVICER “IndyMac” is One-West

    Servicer OneWest taken HSBC to court in order to allow modifications suit filed in June of last year
    OneWest is also pushing to forelose on her.

    Loan pool with nine other loan pools, the contracts laying out the servicers’ responsibilities and powers contradict each other.

    OneWest’s lawsuit seeks to sort out that contradiction.

    One document, a private contract between the servicer and the Wall Street bank that bundled the loans, explicitly forbids servicers from modifying loans in the pools in a way that would reduce homeowner payments.
    But other contracts — that investors could see — explicitly allow such modifications.

    Question did Geither and President Barak Obama know about these contradicting agreements?”Home Affordable Modification Program (HAMP) which pays servicers and investors subsidies to encourage affordable modifications knew about these agreements?”Under the program, modifications occur only when they will likely bring a better return to investors than foreclosure.

    HSBC “TRUSTEE” refuses to authorize any modifications, saying the contracts prohibit them.
    It’s obligated to act in investors’ interest, and it feared getting sued by those who didn’t want to cut homeowners’ payments.

    HSBC IS TRUSTEE OF?
    ‘ORIGINATION DISCOUNTED LOANS SOLD USING DIFFERENT SALES AGREEMENTS (DIFFERENT LOAN#’S)

    SO WHAT IS HSBC A TRUSTEE OF?

    THE ‘RECONSTITUTED SERVICING AGREEMENT? Default Event loan#’s the Servicing loan#’s
    OR the actual POOLING & SERVICING AGREEMENT which contains the loan#’s of the INVESTOR?

    The party trying to seize her home is doing so in the name of?
    Trustee?

    Why can’t an emergency motion bring forth the fact that the actual owner of the debt has not produced the authenticated documents proving they are the owner of the debt casting shadows for the SERVICER and/or SUBSTITUTE TRUSTEE is or is not the lawful party owed the debt has not been resolved?

  8. This is why it is so important to Lawyer up and begin your defense ASAP… Our financial Freedom under the Tyranny of Evil Men who would do anything under the blanket of the system for the system, including selling America piece by piece …which does include the family Home. Stay educated and defend yourself America!

    http://diligencegroupllc.net/

    American Middle-class Homeowner

    –AMH

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