Charlie Nilsen Authorization cloudy
Part One of a Two-Part Series
Donna Edwards’ home loan came from a company that is now out of business.
Danielle and Jedadiah Tinlin fell behind on payments on their $230,000 adjustable-rate loan due to a temporary loss of work. But when the Norwood couple tried to contact their lender to work out a repayment plan, they couldn’t get a return phone call – though they did get regular statements about their mounting debt.
“I was getting hysterical,” Danielle Tinlin said. “After three months, they returned a check we sent, saying it wasn’t the exact amount owed.”
Such stories illustrate differences in the current subprime mortgage crisis compared with the early 1990s, when a home market slump also forced thousands of borrowers to come up with alternative payment plans or face foreclosure.
Today, home prices are falling again, but borrowers with subprime loans whose interest rates are adjusting upwards are the most affected, according to the Federal Reserve Bank of Boston. Many wouldn’t have gotten mortgage credit a decade ago.
In some cases, “people got put into products they shouldn’t have had, or wound up in homes they couldn’t afford,” said Charlie Nilsen, New England region manager for Chase Home Finance.
Another difficulty borrowers are experiencing in the current crisis is not knowing who to call about possibly restructuring the terms of a loan. In addition, loan servicers are not always responsive to such inquiries and may not be authorized to change the terms of a loan. And with many subprime lenders are going out of business, there may be no one to answer.
Part of the change is that as recently as 1990, local banks and credit unions controlled nearly 80 percent of the state’s home mortgage market. Today, non-bank mortgage lenders control almost 80 percent of the loan market, according to a 2006 report prepared for the Massachusetts Community Banking Council. With the arrival of mortgage companies on the lending scene, and the advent of the secondary investor market, mortgages today are trading hands more frequently.
Nilsen’s own employer, which services $530 billion in mortgage loans for 2.3 million customers nationally, is one of the top three U.S. originators and servicers of mortgage loans. Subprime loans make up just under 10 percent of its total business.
Nilsen said he’s not surprised by stories such as the Tinlins’ because today’s mortgage market involves so many loan assignments to servicers and buyers of loans on the secondary market that it’s hard to know who’s authorized to restructure a mortgage.
“It’s become cloudier now who’s authorized to work things out,” Nilsen said.
Loan servicers – independent companies or other loan companies that lenders sometimes authorize to issue statements and make deals on their behalf – can be restricted by their contracts with lenders, their own policies or other parties in the type and number of deals they make, according to Credit Suisse, an investment bank that purchases subprime loans.
Their April 2007 report, “The Day After Tomorrow: Payment Shock and Loan Modifications,” which reviewed 30 servicing agreements between major investors or loan originators and servicers, said loan servicers asked to modify a loan may be bound to adhere to specific loss mitigation procedures, maximum numbers of modifications allowed, minimum interest rates to which a loan can be reduced, or instituting trial modifications before making them permanent.
They also found about 40 percent of modifications – trial or permanent – don’t work, and the borrowers end up in foreclosure despite the changes in loan terms. Often this is because lenders are “looking on a very short-term basis” and are “not as concerned about long-term affordability,” said Chris Leonard, the campaign director for Massachusetts Association of Community Organizations for Reform Now (ACORN).
Odette Williamson, a staff attorney with the Boston office of the National Consumer Law Center, which provides technical assistance to nonprofit agencies that help borrowers in trouble, said NCLC has found the loans most likely to work out are those held in the original lender’s portfolio.
“People rarely get in trouble with banks and credit unions,” she added. “But if they do, the workout possibilities are strongest there” because the loans are more likely to be held in those institution’s portfolios rather than sold to a third party, as is often the case with non-bank lenders.
Subprime borrowers in arrears on payments would benefit most from a workout agreement, or permanent modification to the terms of an existing loan terms, since they’re less likely to be able to refinance due to tightening credit standards and credit problems resulting from their defaults. Restructuring an existing loan also would benefit such borrowers because they would not have pay the closing costs that would result from refinancing into a new loan, said Robert Pulster, executive director of Ensuring Stability through Action in our Community (ESAC), in Jamaica Plain.
Ready to ‘Fight’
ESAC, though, is finding it increasingly difficult to do either, Pulster said, because loan servicers are difficult to work with.
Edwards said her loan was sold to another company earlier this year after her original lender, New Century, went bankrupt. She has since been in touch with that company, EMC Mortgage Corp., a Bear Stearns investment bank affiliate.
“I spoke to a person, and they were talking about forbearance. They wanted a large sum of money which I did try to accumulate, but it didn’t happen,” she said. When she tried to work out something else, she said, “I got a runaround.”
One month, she called 10 times, she said, and waited on hold for more than a half-hour each time.
Even when a loan is not assigned to a third-party servicer, the going is not always smooth for borrowers seeking to resolve payment difficulties.
The Tinlins, whose primary loan was serviced by the lender, Florida-based Everhome Mortgage, say even after negotiating a partial workout agreement they had checks returned because the lender said they weren’t for the full amount owed. ESAC, on the Tinlins’ behalf, disputed interest payments and money held in escrow for property taxes, that it said was excessive. The couple’s lawyer, Ann Brennan, on one occasion waited a month for the company’s response to an e-mail, Danielle said.
Leonard said Dorchester-based ACORN’s experience has been different. It’s become “a lot easier” for ACORN to work out modifications with lenders because the group has made advance arrangements with major national mortgage firms including Everhome, New Century, Ameriquest and Countrywide.
“Sometimes, you really have to fight for [a workout],” Leonard said, but added that in 2006, ACORN helped prevent “thousands” of foreclosures nationally by negotiating restructuring of loan terms.
Subprime loans generally can be “worked out” through some type of forbearance agreement in which a lender allows a borrower to catch up on payments during a certain time period; waives certain fees; or permanently modifies loan terms such as limiting how much an adjustable interest rate goes up, according to NCLC.
The Credit Suisse researchers wrote that they expected permanent modifications to “proliferate” in the next two years, as interest rates on loans originated in the last couple of years begin to adjust. They predicted such modifications could “alleviate the widely anticipated wave of foreclosures.”
“Sometimes you have to go over peoples’ heads,” Leonard added, to get a workout that works. ESAC, for example, called government loan investor Fannie Mae after they ran into a brick wall with Everhome.
The Tinlins, who had $60,000 in equity in their Norwood home, were unable to restructure their loan but managed to refinance with Brookline Bank earlier this month.
Edwards filed for bankruptcy earlier this year. For now, she remains in her home, and is working with ACORN to try to modify her loan. She also has called the Division of Banks, which is working to arrange a temporary stay on the foreclosure process.
