You broke it, you fix it? Subprime players get tax money to fix subprime mess
This article first appeared in the St. Louis Beacon, Aug. 24, 2009 - Firms that fed off the subprime lending frenzy that devastated the banking system are lining up to collect up to $21 billion in taxpayer funds meant to bail out borrowers now in trouble on their loans.
The funds come from the federal government's Home Affordable Modification Program (HAMP), begun in February by the Obama administration to coax lenders into modifying mortgages that might otherwise result in foreclosure. According to a Center for Public Integrity analysis of public records, of the 25 top participants in the program, at least 21 specialized in servicing or originating subprime loans. (Check the Beacon for a closer look at CitiMortgage.)
Among those on the list:
- At least two firms settled charges in the past brought by federal regulators of illegal collection practices, while another was placed under federal supervision before voluntarily surrendering its bank charter;
- A subprime subsidiary of top-bailout recipient American International Group Inc.(AIG);
- Two former subsidiaries of Merrill Lynch & Co. and one former subsidiary of Lehman Brothers, investment banks that helped underwrite the subprime boom, and;
- A subsidiary of the now-sold, former No. 1 subprime lender in the nation, Countrywide Financial Corp.
Mortgage lenders and servicers have been reluctant to participate in foreclosure-prevention programs despite their role in creating the subprime debacle. Intense pressure from Congress and the White House hasn't worked either. The stick has not been effective, so the Obama administration is offering a carrot -- billions of dollars in incentive payments to lenders and loan servicers to encourage them to participate.
The plan is different from the government's primary bank bailout scheme, in which taxpayers bought stock in troubled financial firms. In the foreclosure relief program, there will be no return on investment for taxpayers, at least not directly.
Backers argue that it is essential to contract with subprime specialists to modify subprime loans, but others have raised serious questions as to whether paying them to do it with public dollars sends the wrong message -- that mortgage companies (and borrowers) whose actions contributed to the near-collapse of the financial system are deserving of public funding.
And, more importantly, some question whether loan modification programs -- particularly those that involve subprime mortgages -- are even effective.
"It's tough to say whether we will actually get anything in return," says Mark Calabria, director of financial regulation studies at the Cato Institute. "One category of borrowers will cure anyhow. One category, even with the modifications, will probably fail again. You're probably looking at not more than one-third of the borrowers who will go through the modifications that will ultimately be sustainable."
A $50 Billion Bailout
The Home Affordable Modification Program will use up to $50 billion in federal bailout funds to help as many as 4 million homeowners stay current on their mortgages. Under the plan, participating mortgage companies agree to drop homeowners' payments to 38 percent of their monthly income. The Treasury Department then matches dollar for dollar a further reduction to 31 percent of monthly income.
Borrowers are enrolled in a three-month trial period. If they keep up their payments, they qualify for a permanent modification. Once the trial period ends, the servicers can start collecting incentive payments. To date, none has reached the three-month mark, so no incentives have been paid out.
Servicers receive an upfront $1,000 incentive payment for each eligible modification plus $1,000 each year for three years if the borrower stays in the program. The borrower may receive a $1,000 payment to be applied toward the principal for five years.
The program also seeks to reach borrowers before they get into trouble. Lenders qualify for a $1,500 one-time payment for modifying a loan that is still current while servicers can collect $500.
The Treasury Department did not respond on the record to specific questions from the center, but spokeswoman Meg Reilly in a written statement said more than 270,000 modifications are in effect and more than 430,000 loan-modification offers have been extended to borrowers thus far.
"HAMP provides meaningful incentives to servicers to help overcome the challenges and competing demands they face in considering and completing loan modifications," the statement reads in part.
Loan servicers -- the companies that calculate what's owed, collect payments, and handle foreclosures -- are key to the success of the program. They must agree to participate before a borrower may qualify. The servicer and the lender may be the same company, but not always.
As of Aug. 11, 41 entities had qualified to collect a maximum of $20.6 billion in incentives, according to data from the Treasury Department. Not all the cash will go to servicers. The total includes the maximum total of payments to loan servicers as well as lenders and borrowers. So the actual total for those companies listed below will be less.
Subprime Memory Lane
The list of top recipients is like a walk down subprime memory lane. Here are the leading HAMP participants, with the amount of taxpayer-funded incentives they are slated to receive:
1. Countrywide Home Loans Servicing LP, Simi Valley, Calif. $5,182,840,000
No. 1 by a wide margin, Countrywide also led the center's list of the top 25 subprime lenders. Now known as BAC Home Loans Servicing, LP, Countrywide is now owned by Bank of America, which will receive any incentive payments due the company. Bank of America, thanks to its purchase of Merrill Lynch, also owns program participants Wilshire Credit Corp. and Home Loan Services Inc. Maximum funds for Bank of America total nearly $6.9 billion.
2. J.P. Morgan Chase Bank NA, Lewisville, Texas $2,699,720,000
JPMorgan Chase & Co. was No. 12 on the center's subprime lender list. It owns EMC Mortgage Corp., another program participant. EMC was a former subsidiary of Bear Stearns, the first major U.S. investment bank to falter last year. JPMorgan picked up EMC when it bought Bear Stearns (with government help) last year. Including the EMC total, JPMorgan could collect around $3.4 billion.
3. Wells Fargo Bank NA, Des Moines, Iowa $2,410,010,000
Wells Fargo & Co. is ranked No. 8 on the center's subprime list. Wells owns Wachovia Bank, which qualified for the program under two different names, and ranked No. 19 on the center's subprime list. Total funds potentially going to Wells are about $3.1 billion.
4. American Home Mortgage Servicing, Inc., Coppell, Texas $1,272,490,000
American was formerly a unit of American Home Mortgage Investment Corp., No. 22 on the center's subprime list, before the company filed for bankruptcy. The loan servicing business was bought by billionaire Wilbur Ross Jr.
5. CitiMortgage, Inc., O'Fallon, Mo. $1,079,420,000
CitiMortgage is part of Citigroup Inc. The banking giant, Citigroup, owes its survival to billions of dollars in cash infusions from the U.S. government. Citigroup ranked No. 15 on the center's subprime 25 list. It was also a major player in the mortgage-backed securities market.
6. GMAC Mortgage, Inc., Ft. Washington, Pa. $1,017,650,000
GMAC Mortgage Inc. is part of GMAC LLC, which received $5 billion in federal bailout money in late December 2008, and another $7.5 billion this past May. GMAC at one time was controlled by hedge fund Cerberus Capital Management, but Cerberus reduced its stake when the government made its huge investment in the lender. GMAC originated billions in subprime loans under several names, including Residential Funding Co. and Homecomings Financial. It ranked No. 20 on the center's subprime list.
7. Bank of America, NA, Charlotte, N.C. $804,440,000
Bank of America, another major bailout recipient, bought No. 1 subprime lender Countrywide in July 2008 for $4 billion after lending the mortgage company $11.5 billion the previous year. It also bought Merrill Lynch, and with it, two subprime servicing subsidiaries. Maximum funds going to the bank, lenders and borrowers total nearly $6.9 billion.
8. EMC Mortgage Corp., Lewisville, Texas $707,380,000
EMC was part of Bear Stearns, which J.P. Morgan bought with assistance from the Federal Reserve Bank of New York last year. Prior to the purchase in 2008, Bear Stearns agreed to pay $28 million to settle Federal Trade Commission charges of unlawful mortgage servicing and debt collection practices.
9. HomEq Servicing, North Highlands, Calif. $674,000,000
HomEq was created "by subprime lenders for subprime lenders," according to the company's website. The servicer was bought by British banking giant Barclays Bank PLC for a reported $469 million from Wachovia Corp. in 2006.
10. Select Portfolio Servicing, Salt Lake City, Utah $660,590,000
Select Portfolio was formerly known as Fairbanks Capital Inc. In November 2003, Fairbanks agreed to pay $40 million to the Department of Housing and Urban Development and the Federal Trade Commission for "unfair, deceptive, and illegal practices in the servicing of subprime mortgage loans." The company was purchased by Credit Suisse First Boston in late 2005. Credit Suisse spokesman Duncan King told the center the "entire management team" has been turned over since the settlement.
Others participants worth noting include:
12. Saxon Mortgage Services, Inc., Irving, Texas $632,040,000
Saxon Mortgage Services Inc. is a subsidiary of Morgan Stanley that specializes in servicing subprime loans. Morgan announced in August 2006 - the tail end of the subprime boom - that it would buy Saxon for $706 million. Saxon at the time both serviced and originated subprime loans. Morgan was also a major underwriter of securities backed by subprime loans.
13. Ocwen Financial Corp., Inc., West Palm Beach, Fla. $553,380,000
In April 2004, Ocwen Federal Savings Bank's chairman and CEO William C. Erbey signed a "supervisory agreement" with the federal Office of Thrift Supervision promising to improve the organization's loan-servicing practices, which had included "force placed" hazard insurance and objectionable fees. Barely a year later, Ocwen gave up its bank charter, thus terminating the agreement. Erbey earned $2.3 million in total compensation in 2008. Ocwen is also the subject of approximately 64 lawsuits accusing the servicer of abusive collection practices, according to the firm's filings with the Securities and Exchange Commission. Ocwen Executive Vice President and General Counsel Paul Koches said the surrender of its bank charter had nothing to do with the supervisory agreement and the company has nevertheless continued to follow all of the servicing practices set forth in the agreement, and has improved on many of them.
14. Aurora Loan Services, LLC, Littleton, Colo. $459,550,000
Aurora was part of Lehman Brothers, the investment bank whose failure started the panic of 2008, and serviced the investment bank's considerable subprime lending portfolio. Lehman and its subsidiaries rank No. 11 on the center's subprime list. The bank was also among the largest underwriters of subprime mortgage-backed securities on Wall Street. Aurora was not part of the bankruptcy.
15. Wilshire Credit Corp., Beaverton, Ore. $453,130,000
Wilshire was bought by Merrill Lynch for $52 million in 2004. Merrill, another symbol of last year's banking meltdown, was staggered by subprime lending losses and bought by Bank of America in a controversial transaction that resulted in congressional hearings. Another Merrill servicing subsidiary, Home Loan Services Inc., qualified for $447,300,000, ranking it 16th.
18. Carrington Mortgage Services, LLC, Santa Ana, Calif. $131,020,000
When No. 3 subprime lender New Century Financial Corp. of Orange County, Calif., filed for bankruptcy protection in April 2007, the firm's mortgage billing and collections unit was sold to Carrington for $188 million in August.
25. MorEquity, Inc., Evansville, Ind. $23,480,000
MorEquity is a subprime lending subsidiary of American International Group Inc., the top recipient of government bailout funds. AIG was best known for contributing to the crisis through the sale of "credit default swaps," a form of unregulated insurance that investment banks purchased in the hope they would be protected from losses.
Of the 25 top participants in the foreclosure relief program, only four firms -- RG Mortgage Corp., PNC Bank, Bayview Loan Servicing LLC, and Bank of America -- did not qualify as servicers or originators specializing in subprime loans, according to Center research. However, PNC did buy National City Bank, a major subprime lender through its ownership of First Franklin Corp. (No. 4 on the center's subprime 25 list), reportedly with help from government bailout funds last year.
The collapse of the subprime lending market was the catalyst for the financial meltdown nearly a year ago. The risky mortgages were bought by investment banks, packaged into securities and sold to investors worldwide. Once the loans started going into foreclosure, the dominoes started falling.
While the larger economy appears to be edging back from the brink, the numbers of foreclosures, as well as foreclosure rates, have kept climbing. According to RealtyTrac data, there were 1.9 million foreclosure filings in the first six months of this year --- a 9 percent increase from the previous six months and nearly 15 percent above the same period last year. That means in the last six months one in every 84 homes had at least one foreclosure filing.
In the first quarter of 2009, 7.2 percent of mortgages were seriously delinquent, according to a Mortgage Bankers Association survey, compared with 6.3 percent in the previous quarter and 1.9 percent in the first three months of 2005.
Subprime mortgages are failing at a far higher rate than mortgages in general.
More than 36 percent of adjustable-rate, subprime mortgages were considered seriously delinquent in the first quarter of 2009, compared with 33.8 percent the previous quarter and 5.2 percent in the first quarter of 2005.
Even more worrisome for the mortgage modification program is the abysmal rate of success for loan modifications to date. According to a survey by the Office of the Comptroller of the Currency and the Office of Thrift Supervision, after one year, only 29.5 percent of modified loans were still "current," or being paid off on time. Thirty-three percent were "severely delinquent" and 17 percent had gone to foreclosure.
The Treasury Department's Reilly said modifications are only one "one piece of the administration's broader effort to bring relief to struggling homeowners and stabilize the housing market." For example, another program is a $10 billion insurance plan to guard against further declines in home values.
But if the modification plan is not successful and mortgages simply go back into foreclosure, say critics, it could go down in history as a colossal waste of public money that prolonged rather than ended the nation's still-critical housing crisis. "We're going to be spending billions without a clear guideline of how many foreclosures we're actually avoiding," warns the CATO Institute's Calabria.
Kat Aaron contributed to this story. This story was produced by the Center for Public Integrity.