MORTGAGE NIGHTMARES: Loan Servicing Snafus Can Create “Living Hell” for Homeowners

If you think you’ve got problems with your mortgage lender, don’t go crying to Michael Crawford about it. He’s had more trouble with his than a hound dog has fleas.

Thanks to a bizarre series of mishaps that was triggered when Crawford’s mortgage payment crossed paths with a notice that his loan had been sold to a different lender, the 44-year-old contractor has been locked in a yearlong battle that has left his credit record in a shambles and forced him to pay thousands of dollars for a lawyer to save him from foreclosure.

“I’ve been put through living hell, and I didn’t do anything wrong,” said Crawford, who lives in Vista, in northern San Diego County. “I’m not some deadbeat who suddenly decided to quit paying his loan--I had never even missed a payment.

“And the scary thing is, what happened to me could happen to anybody. “

Indeed, with 40 million mortgage loans outstanding today, the seemingly minor human errors and paperwork snafus that threatened to put Crawford out on the street could have happened to virtually anyone.

In fact, it’s surprising that such foul-ups don’t occur more often, considering that, on top of the millions of existing mortgages, about 5 million or so new loans are taken out each year while 5 million are paid off.

That means that the nation’s 17,000 banks, savings associations, other financial institutions and “loan servicing” companies that specialize in processing mortgage payments must handle nearly 500 million monthly checks each year--as well as the mountain of paperwork needed to open or close another 10 million accounts.

“The numbers are staggering,” said Bill Glavin, a spokesman for the U.S. Department of Housing and Urban Development (HUD).

“When you’re talking about 40 million borrowers and hundreds of millions of payments, you’re definitely going to have a lot of people who aren’t happy with the service they receive from the company that handles their loan.”

Range of Problems

Borrowers’ problems range from the trifling to the terrifying: rude customer-service representatives, questionable late-payment penalties and impound account overcharges. A few homeowners, like Crawford, have even been pushed to the brink of foreclosure because a lender mishandled a single payment.

Still, Glavin and other experts say, it’s impossible to determine exactly how many borrowers have a beef with the company that processes, or “services,” their payments--whether it’s the lender who initially made the loan, a different company that purchased it or an outside firm that contracts to process the borrower’s checks.

Although HUD and other agencies that regulate lending institutions get thousands of complaint letters every year, they admit that only a fraction of all disgruntled borrowers bother writing to the government.

Even lenders themselves can’t say exactly how many complaints they get, in part because some problems are handled at individual branches while others are sent to large, regional customer-service centers.

“There’s no scientific way to say how many people have some sort of trouble with their lenders,” said Bob O’Toole of the Mortgage Bankers Assn. of America, one of the nation’s largest lenders trade groups.

“But believe me, the number is pretty small when you consider how many millions of loans we have to take care of.”

O’Toole and more than three dozen other experts interviewed for this series blame many of the problems that borrowers encounter on lenders’ dependence on computer systems and the trend toward handling disputes through regional centers instead of their branch offices.

Some also admit that the widespread practice of buying and selling loans on the “secondary market” has created a new set of potential problems that didn’t exist 20 years ago, while the growing practice of contracting with outside companies to process monthly payments has also become a common source of consumer complaints.

Computers Repeat Errors

Ironically, many of the complaints that borrowers have today stem from the same technological advancements that experts say have led to an overall improvement in service.

--True, computers have allowed financial institutions to slash their overhead costs and save millions of hours of time. But these high-tech machines are also unforgiving boxes devoid of human rationale.

“The trouble with all this automation is that computers tend to repeat or even magnify errors,” said Larry Powers of Consumer Loan Advocates, an Illinois-based company that checks for billing errors on borrowers’ accounts.

“A computer can’t think for itself. So if it makes a mistake, it’s probably going to repeat its mistake month after month until someone finally catches it and straightens it out.”

--The industry’s trend toward consolidating payment-processing operations in huge regional centers instead of handling most of the work at neighborhood branches has, in some ways, made problems that arise even harder to resolve.

For example, borrowers who have a billing problem today usually can’t drop by their nearest branch to have a clerk clear up the trouble.

Instead, they have to call a customer-service department that’s often located far away--perhaps even in another state--over a toll-free line that always seems to be busy.

--The chances of having a problem with your lender have also been raised by the explosive growth of the “secondary market” for mortgages over the past 20 years.

The secondary market works much like the New York Stock Exchange: It allows lenders to buy and sell mortgages as easily as you can buy shares of IBM or General Motors stock.

By selling the mortgages they make to companies such as the Federal National Mortgage Assn. (Fannie Mae), the Federal Home Loan Mortgage Corp. (Freddie Mac) or big Wall Street firms, lenders get the cash they need to make new loans and limit their exposure to future interest-rate swings.

In 1970, when today’s secondary market was in its infancy, lenders sold $22-billion worth of mortgages. By 1990, according to HUD, lenders were selling about $250-billion worth of loans every year.

Service Problems

Customer service problems occur much less frequently when a lender sells a loan but continues to process the borrower’s monthly payments.

But the chances of trouble are dramatically increased when a loan is sold and a new company assumes the monthly servicing duties.

For example, the new company might miscalculate the outstanding balance of the loan when it’s transferred and subsequently charge the borrower too much interest over the remaining loan term.

Or a borrower’s payment might not be promptly credited to his account if he mails his check to the old address.

--Those same types of problems, as well as others, can occur when a lender keeps a loan but contracts with another company to process its monthly payments.

About 1,000 companies now offer their loan-processing services to banks and S&Ls;, and some experts say that the use of these outside loan servicers has become the single largest source of borrower complaints.

Although the servicer has to make an up-front payment to the lender--sometimes millions of dollars--to acquire the rights to service a portfolio of loans, it makes money in the long run because it gets to keep about one-half of 1% of each payment it processes before sending the remainder along to the lender.

One-half of 1% might not seem like much. But with the nation’s 40 million loans representing a combined $2.5 trillion in outstanding mortgage debt, HUD estimates that loan servicing now generates nearly $10 billion a year in revenue.

Because of the growth of the secondary market and in the number of servicers, HUD believes that about 80% of all loans made this year will either be sold to another financial institution or their servicing duties will be transferred to another company.

“Your chances of having trouble (with your mortgage) are multiplied when a new lender or servicer suddenly comes into the picture,” said Michelle Meier of Consumers Union, a Washington-based advocacy group.

Questionable Late Fees

Among the most common complaints that borrowers have with their loan servicers, whether it’s the original lender or a new company that has begun processing their payments, are:

* Questionable late fees. Although a borrower may get slapped with a late charge simply because the mail is a little slow, chances of being hit with a penalty are increased when a loan is transferred or sold to another company.

The new company may be on the other side of the country, forcing the borrower to write the mortgage check earlier in the month to make sure it gets to the bank on time.

Or, the new servicer might not provide a grace period--something the previous lender may have allowed even if it wasn’t contractually obligated to do so.

Some borrowers even accuse lenders or their servicers of intentionally holding their checks until the due date has passed so the company can tack on a late charge.

* Being forced to keep too much money in impound accounts.

Lenders usually require borrowers who make a down payment that’s less than 20% to have these accounts, which are automatically tapped when hazard-insurance or property-tax bills are due.

Federal law allows lenders to require an extra two months’ worth of impound charges in the accounts in case a bill comes due but there’s not enough money set aside to pay it.

However, some law-enforcement officials and private attorneys have won multimillion-dollar settlements from several loan servicers after suing them for allegedly overcharging on the accounts.

“It’s a widespread problem,” said California Deputy Atty. Gen. Al Sheldon, who joined government lawyers from 11 other states to win a $100-million settlement from GMAC Mortgage Corp. earlier this year after charging the company with systematically forcing borrowers to keep too much money in their impound accounts.

* Poor customer service. Complaints here run the gamut, from rude service clerks to paperwork foul-ups that force homeowners to spend hours trying to resolve problems that they didn’t create. Borrowers are especially annoyed when their loan is transferred and the new company doesn’t provide the same level of service that their old lender did.

Some of these customer-service problems are trivial: Borrowers might complain because their lender didn’t include a pre-addressed envelope in their monthly statement, or because they have to wait a few minutes before a service representative can answer their phone call.

Major Problems

Other problems are more serious.

According to a 1990 report on mortgage-servicing problems conducted by the General Accounting Office, one couple’s $21,000 insurance claim was rejected because their homeowners policy was canceled after their servicer neglected to pay the premiums.

Several other borrowers were threatened with foreclosure after their servicers failed to properly credit payments to their accounts or failed to tap their impounds to pay for property taxes.

Although GAO analysts didn’t find any borrowers who actually lost their homes because their servicer did a poor job, they “definitely found that problems were widespread enough to merit congressional action,” said U.S. Rep. John J. LaFalce (D-N.Y.), who ordered the study.

The legislation that LaFalce introduced as a result of the GAO’s findings was eventually incorporated into the Housing and Community Development Act of 1990, which was signed into law about two years ago.

Among other safeguards, the law requires that lenders give consumers at least 15 days’ notice before a transfer can take place, as well as the name of a contact person at the new institution and a toll-free number that the borrower can call.

Further, a homeowner can’t be charged a late fee in the first 60 days after the transfer becomes effective if he makes his payment on time but mistakenly sends it to the old lender.

“There’s actually some good consumer-protection laws concerning loan transfers already on the books, but borrowers just don’t know about them,” said Powers, the consumer-loan analyst in Illinois. “As a result, they get pushed around by their lenders.”

Loan Transferred

Take the case of Michael Crawford, the contractor who nearly lost his home through no fault of his own. His story is a prime example of what can go wrong when a loan is transferred from one institution to another.

Crawford borrowed about $90,000 from a nearby branch of Commonwealth Mortgage Co. of America to refinance his Vista home in March, 1990.

The mortgage was sold a few months later to United Savings Assn. of the Southwest, a Dallas-based S&L; that also services loans for other lenders across the country.

Crawford sent his monthly payments to United until May of last year, when United sent him a letter informing him that his loan had been transferred back to Commonwealth. But after attempting to call Commonwealth, Crawford found out that it had gone out of business.

A customer-service representative at United couldn’t explain the foul-up, but told Crawford that the bank would accept his June payment and then forward it to the proper owner of the loan as soon as it could figure out who the owner was. So he mailed the check to United.

Ironically, a computer at United’s headquarters knew that Crawford’s loan had been sold to Trans-world Mortgage in Houston, but the customer-service representative that he had talked to didn’t have access to that information.

In fact, the computer had already generated a letter telling Crawford to send his next check to Transworld, but it arrived at his home a day or two after he had mailed the payment to United.

“I guess our letter and Mr. Crawford’s check crossed paths through the mail,” said Mark Helm, United’s senior vice president of loan administration.

“If the letter had arrived just a few days sooner, Mr. Crawford could have sent his check directly to Transworld and all of us could have avoided a whole lot of trouble.”

When Crawford’s check for June arrived at United, a clerk apparently mishandled it and didn’t attach a notice ordering that the payment be forwarded to Trans-world, Helm said.

As a result, the check was instead sent to United’s “accounts payable” department and deposited until someone could figure out where the money should be sent or the rightful owner--Transworld--stepped forward to claim it.

About three weeks later, on July 11, Crawford sent his July payment directly to Transworld. But Trans-world returned the check two weeks later, saying that it wouldn’t accept his July payment until it was paid for June.

2nd Check Returned

After getting assurances from United that it would forward the June payment it had collected to Transworld, Crawford sent Transworld a check for $1,528.30--$764.15 for the payment that was rejected in July and $764.15 for August.

Again the check was returned, and again Transworld demanded a payment for June.

Crawford said he made numerous calls to both United and Trans-world in an effort to clear matters up, “but they just couldn’t get their act together.”

“The people at United told me month after month that they’d forward the missing payment to Transworld, but they never would. And Transworld wouldn’t accept any of my checks because they said I still owed them for June.”

In September, Transworld notified Crawford that his account had been forwarded to the company’s legal department to begin foreclosure proceedings. Crawford got a lawyer for himself.

“Everything was sort of put on ‘hold’ for the next few months, while the attorneys and the banks went back and forth,” Crawford said.

According to banker Helm, United finally sent Transworld a check for the missing $765.15 June, 1991, payment in May of this year. Transworld cashed it June 2.

Exactly what happened next is unclear, because officials at Trans-world refuse to talk about Crawford’s case.

However, it appears that Trans-world failed to tell the company it had hired to handle the foreclosure that the missing check had been received, because Crawford came home from an overnight trip on June 20 to find a “Notice of Trustee’s Sale” tacked to his door.

‘YOU ARE IN DEFAULT UNDER A DEED OF TRUST,” the notice began, and went on to explain that Transworld had ordered Craword’s home to be sold to the highest bidder at an auction on the steps of the county courthouse in July.

Realizing that he was now perilously close to losing his home through foreclosure, Crawford hired another lawyer for a $2,500 retainer and quickly got a temporary restraining order to stop the planned sale.

Crawford and his new attorney, George Finley of Encino, returned to court in August and got a judge to permanently stop the foreclosure proceedings. They also sued Transworld for damaging Crawford’s credit record.

No trial date has been set because the two sides are trying to negotiate an out-of-court settlement.

“My credit is ruined because Transworld told the credit agencies that I haven’t made a mortgage payment in months,” Crawford said.

“These people have put me through living hell for a year, and it’s just not fair. I shouldn’t have to pay an attorney thousands of dollars to straighten out a problem that I didn’t create.”

Ongoing Negotiations

Mark Hyatt, a spokesman for Transworld, said he couldn’t comment on Crawford’s problems because of the ongoing settlement negotiations.

“All I can say is, we’ve been working with him for a long time,” Hyatt said. “We can’t really talk about this and then have his lawyer turn around and use it against us in court.”

Still, bankers and lawyers say, few disputes between borrowers and lenders wind up before a judge.

In part, that’s because most squabbles involve relatively small sums of money: Borrowers usually can’t justify the time or expense involved in suing their lenders, especially if the company is headquartered in another state.

“How is a little guy like you or me going to sue some giant bank that probably has a bunch of fancy lawyers?” asked Michael Steiner, who ran into several problems after the loan on a rental home he owns in Oceanside was sold to a Maryland-based servicer two years ago.

“The answer is, you don’t.”

Steiner took his loan out about eight years ago from First Nationwide Bank, in part because it had several local offices and his past dealings with the lender had been pleasant.

But two years ago, First Nationwide transferred Steiner’s loan to Standard Federal Savings Bank and ordered him to begin sending payments to Standard Fed’s headquarters in Gaithersburg, Md.

Problems began immediately, Steiner said.

Unlike First Nationwide, Standard Fed didn’t give him a loan-coupon book: Instead, he claims, it sent monthly statements that often arrived too late for him to make an on-time payment. Sometimes, he said, the statement didn’t arrive at all.

To avoid being hit with a late fee, Steiner would photocopy a previous month’s statement and attach it to his check for the payment that was currently due.

Two years in a row, Steiner said, Standard Fed failed to meet the federally set Jan. 31 deadline for providing a summary of the finance charges he had paid the year before. The delays held up the completion of his tax return, he said.

Line Always Busy

Steiner would sometimes spend more than an hour trying to contact Standard Fed’s customer-service department on its toll-free phone line, but it was almost always busy.

And on those rare occasions when he was able to “talk to a live person,” Steiner said, “they either didn’t know what I was talking about or said the only guy who could fix my problems wasn’t in.”

Frustrated by two years of “nothing but hassles,” Steiner finally spent $1,000 to refinance his mortgage with another lender and rid himself of Standard Fed.

But the refinancing wasn’t complete until he suffered one final indignity:

Standard Fed demanded $57 for an “unpaid late fee” from proceeds of the new loan, even though Steiner claims to have a canceled check showing that the servicer had deposited the disputed payment well before its due date.

“I knew the late charge wasn’t fair, but I had to get rid of these guys,” Steiner said. “I just paid the charge and gave up.”

Jim Scymanski, Standard Fed’s senior vice president, said that some records concerning Steiner’s mortgage may have since been eliminated from the company’s computer system because the loan was paid off last year.

Lenders routinely “purge” all but the basic information concerning paid-off loans from their databases to save space in the computer’s memory, he said.

“But based on the information I have, Mr. Steiner was a good customer who had only one late payment,” Scymanski said.

“If he says he had trouble reaching us on our toll-free line, I have to assume that he’s telling the truth. And if he says his statements came late or didn’t come at all, I’d have to give him the benefit of the doubt--but frankly, I don’t see how that could have happened on a regular basis.”

Steiner isn’t the only homeowner who has had trouble with Standard Fed.

Disgruntled Customers

According to records of the Office of Thrift Supervision, which regulates more than 2,000 S&Ls;, the agency received more than 400 inquiries or complaints from consumers about Standard Fed in the first 90 days of this year alone.

The number of disgruntled Standard Fed customers was probably much higher, an OTS official said, but most borrowers--like Steiner--didn’t bother to file formal complaints with federal regulators.

Still, the 400 letters and telephone queries that the OTS received were enough to trigger an agency review of Standard Fed’s customer-service records.

The review uncovered a number of shortcomings in Standard Fed’s loan-servicing operations, including a staff that apparently was too small to handle the company’s 625,000 customers.

It also found that interdepartmental communication at Standard Fed was so poor that up-to-date accounts were sometimes being sent to the collections department for the initiation of foreclosure proceedings.

In July, OTS officials reached an agreement with Standard Fed that called for the company to hire more staff, improve its billing procedures and speed its response to customer inquiries.

But that agreement was essentially rendered null and void last month , when Standard Fed was seized by federal regulators from the Resolution Trust Corp.

Standard Fed’s borrowers shouldn’t look for a big improvement in the quality of the service they get anytime soon: An RTC spokesman said it will take a few months for the agency to sort through all the records, which--ironically--will then have to be transferred to the institution that eventually buys Standard Fed’s loan portfolio from the government.

Although Standard Fed’s problems might seem like an extreme example of the troubles plaguing the loan-servicing industry today, it’s not.

“The Standard Federal episode isn’t an isolated incident, not by any means,” said Mark Berneko, an RTC spokesman.

Berneko said his agency has been forced to take direct control of 49 lenders this year, and that another 28 could be seized or ordered sold over the next two months. But that’s better than last year, when the RTC took over 147 institutions.

Meantime, the OTS expects to sign “supervisory agreements” with another 200 lenders and servicers this year, ordering them to improve service to their customers.