WASHINGTON — Billions of dollars the government is spending to help financially pressed homeowners avert foreclosure is passing through — and enriching — companies accused of preying on the people they're supposed to help, an Associated Press investigation has found.
Mortgage servicers are middlemen who collect monthly payments from homeowners and funnel the money to the banks or investors who hold the loans. As the only link between borrowers and lenders, they're in the best position to rework the terms of loans under the government's $50 billion mortgage-modification program. The servicers are paid by the government if the changes keep homeowners from falling behind on payments for at least three months. But the industry has a checkered history.
The biggest players in the servicing industry — Bank of America, Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. — all face litigation, some of which has led to settlements with homeowners. All will receive federal money to modify loans.
But the industry's smaller players, which specialize in servicing riskier subprime loans and loans already in default, face harsher accusations that they systematically abused borrowers.
The government says it has no choice but to partner with the servicers because they are the only link between borrowers and the investors who indirectly own their mortgages through securities. When President Barack Obama announced the plan, called the Home Affordable Modification Program, in March, he said it would help up to 4 million homeowners avoid foreclosure. But only about 200,000 loan modifications are under way.
Without government aid, servicers don't have enough financial incentive to modify mortgages. Each year, they earn about one-quarter to one-half percent of the value of the loans they service, so the larger the mortgage, the more they make. They earn less if the loan is modified, usually by lowering the interest rate or principal or adjusting the term.
The servicers also make money through late fees, or by foreclosing. The paperwork necessary to execute a foreclosure can generate hundreds of dollars in fees for some servicers.
An AP analysis of the 38 servicers the government is paying to help vulnerable homeowners found that:
• At least 30 face lawsuits from homeowners and advocates claiming they charged illegally high fees, prematurely foreclosed on homes and engaged in illegal collection practices.
• At least 14 have been accused of misleading customers before the program began about whether they would qualify for loan modifications or how low their new payments might be. In many such cases, servicers are accused of telling borrowers not to make payments because their applications for modifications were pending — and moving to foreclose anyway.
• At least three of the companies settled federal predatory collection allegations by pledging to correct their behavior.
"There is no question that there have been significant abuses by servicers, and a big part of that is there's no one who is carefully monitoring their work to make sure that they're not taking advantage of borrowers," said Kurt Eggert, a law professor at Chapman University in Orange, Calif.
In the past, loan servicing was a sleepy corner of the mortgage industry. Servicers did little more than open envelopes containing mortgage payments and forward money to investors.
The business became far more profitable during the housing boom. The proliferation of mortgages sold to risky, or subprime, borrowers created an opening for the servicing business. They specialized in collecting from people less likely to make timely payments, and profited as late fees mounted.
Servicers sometimes face frivolous lawsuits. But many servicers in line for government money are accused of systematic abuses.
As part of its 2003 settlement with regulators, mortgage servicer Select Portfolio promised to end practices including collecting illegal fees and forcing borrowers to buy insurance. But the company, now owned by the investment bank Credit Suisse Group, has since been named in dozens of lawsuits alleging similar violations.
Select Portfolio spokesman Craig Bullock said the company doesn't comment on inquiries "about our practices and so forth."