MURRIETA, CALIF. — When Lesliane Bouchard took out a mortgage in 2008 to buy a home in Riverside County, she specifically requested a Federal Housing Administration loan. The 8th-grade English teacher and former foster parent thought a government-insured loan would offer the most protection in a falling housing market.
Then, a year ago, Bouchard became partially paralyzed from a car accident and she had to stop working. She immediately called her mortgage servicer, First Mortgage Corp. of Ontario, Calif., and asked for a loan modification.
She quickly found herself in a Kafkaesque world in which her request for a modification dragged on for months, putting her in a deeper financial hole.
Her case eventually reached her congresswoman, Rep. Mary Bono Mack, R-Calif., who attempted to intervene, before telling Bouchard in a letter last month that all efforts to help her had "been utterly exhausted."
Federal government officials agreed to review Bouchard's case this month, after being contacted by American Banker, but have said that her $266,000 mortgage balance is now too high for her to qualify for additional government loan-modification programs.
Years after the housing crisis started, Bouchard's case illustrates several reasons that it may not end anytime soon. This impasse between a homeowner, her servicer and the government agencies backstopping her loan has become a familiar story, with little resolution and plenty of blame being tossed around.
Homeowners are still falling behind on their mortgage payments, as unemployment remains high and the economy falters. Despite the ongoing housing crisis, many mortgage servicers are still doing little to help borrowers avoid delinquency and foreclosure, and in some cases are even exacerbating the problems of homeowners at risk of default.
Meanwhile, the multitude of government programs that were intended to remedy this situation are inadequate for many of the homeowners who need them most. Some borrowers with government-backed mortgages are finding themselves in a much worse position than they would be in if a bank owned their loan, because the government's criteria for loan-modification programs are so restrictive. In many cases those modification programs lack any sort of enforcement to ensure that servicers act in a timely manner or adhere to guidelines.
First Mortgage Corp. took nearly nine months to review Bouchard's loan mod application. By that time her principal balance had mushroomed by more than $21,000, 8% more than what it was when she first became delinquent on her payments.
"This home is all I have left," says Bouchard, who is bedridden and cannot walk. "My career is gone, my independence is gone. I just want to keep my home."
Bouchard says FMC overestimated her income by $2,000 a month, failed to take into account a $1,000 monthly medical insurance payment and repeatedly asked for documents that she had submitted to the servicer and credit counselors in March.
Kristiane Chappell, Bouchard's 30-year-old daughter, says FMC allowed the loan mod application to expire several times and then refused to contact the family.
"Every time we tried to get them to act on the modification sooner, they just wouldn't get back to us," Chappell says. "The question is, how does this company get federally insured money when they aren't following the rules?"
FMC claims Bouchard did not turn in paperwork, which she disputes, and says she engaged in an "adversarial" relationship after her representatives sent the servicer "mean-spirited emails."
FMC president Clement Ziroli Jr. also blamed the delay on FHA's restrictive loan-modification programs.
"We're in shackles here," says Ziroli, whose company services $3 billion in mortgages and specializes in originating loans to California teachers.
"Our best interest as a company is to have loans in service forever, so there's a big disincentive for us to have any issues like this. But we have to follow the protocol," he says. "I cannot create something for Mrs. Bouchard that I can't do for someone else. We have to distance ourselves from her personal issues and apply FHA guidelines across the board."
Consumer advocates say servicers like FMC often fail to comply with FHA regulations and face little or no enforcement actions. Servicers can take so long to approve a modification — or in Bouchard's case, drag the process out for months before denying one — that borrowers end up falling further behind on their payments and are ultimately forced into foreclosure.
"The way FHA is set up: it's a timely process and when the timing is messed up, some of the benefits of the program cannot be obtained," says Carrie Dettmer Slye, a staff attorney at the Legal Aid Society of Southwest Ohio, who works on FHA cases. "This happens every day where the servicer was not timely in their decision-making."
The mortgage servicing industry has been under intense scrutiny since last year, when many large banks were found to be systemically cutting corners in their foreclosure-related procedures. Employees at several top servicers were found to be robosigning hundreds of foreclosure documents a day without verifying the underlying information.
Even as the banks were in talks with state officials to settle claims related to robosigning practices, American Banker found in August that many servicers were still fabricating documents that should have been signed years ago and submitting them as evidence to foreclose on homeowners.
State attorneys general had been pushing for the servicers to pay more than $20 billion, but those settlement talks fell apart in recent weeks.
Meanwhile, Bouchard and other borrowers are exhausting most of their normal resources as they try to stay in their homes.
The Department of Housing and Urban Development oversees the FHA and its loan-modification programs. When initially contacted by American Banker about Bouchard's case, HUD spokesman Lemar Wooley said HUD reviewed FMC's notes and found "no proof" of "the borrower's claim of delay."
He said in a later conversation that since HUD does not "deal directly with the borrower, we do have to rely on what the servicer tells us unless there is a reason to question it."
After requests for additional comment by American Banker, a HUD officer contacted Bouchard to find out more about her case. Chappell says she has spoken directly with Matt Martin, program director of loss mitigation at HUD's National Servicing Center in Oklahoma City, Okla. They are still discussing possible solutions, but Martin has said that Bouchard's mortgage balance is too high for her to qualify for other modification programs, according to both Chappell and Wooley.
Those talks are occurring after Bouchard and Chappell made many other, unsuccessful efforts to get the loan modified. Though HUD requires servicers to conduct a face-to-face interview with each borrower within 90 days of a loan going delinquent, no such interview took place. Bouchard also claims FMC failed to investigate all the modification options it could offer, including applying to the government's Hardest Hit Fund for unemployed borrowers.
Early this year, Chappell contacted credit counselors at the nonprofit organizations Springboard and the Housing Opportunities Collaborative, who referred her to the Urban League, more than 100 miles away in San Diego.
The Urban League put her in touch with Henry Miles, a HUD-approved counselor, who contacted George Kenner, a realtor at Keller Williams. Miles and Kenner called and sent emails to FMC for several months before FMC suspended a foreclosure sale in July and put Bouchard on a temporary payment plan.
Chappell also contacted Bono Mack's office and requested an audit of the servicer. By that time, FMC says it had received threatening emails from Chappell and Kenner. The servicer refused to talk with Miles and instead negotiated a modification in July with a member of Bono Mack's staff. FMC did not directly negotiate with Bouchard or her designated representatives, including her daughter, Miles or Kenner.
"Someone at FMC just decided to say no, and they don't want to back down," Miles says. He says it is "standard practice" for a politician's staff to hold conference calls with a HUD-approved counselor and a servicer on loan workouts. Usually they are able to find a modification that works, he says.
In August, Bono Mack's office notified Bouchard that FMC had offered her a loan modification and put her on a three-month trial payment plan. But her loan balance had ballooned to more than $266,000 while her servicer dragged out the process. She now owes more than $13,000 in delinquent interest, $5,000 in taxes and insurance, and $3,000 in foreclosure fees.
The modification FMC offered her would lower her mortgage payment by $50 per month.
Joe Sanders, FMC's chief of default servicing, says Bouchard qualified only for a "traditional FHA mod" that dropped her interest rate to 4.6%, from its current 5.5%. Sanders said that because Bouchard "hadn't made payments for such a long time," she did not qualify for the government's Home Affordable Modification Program. Hamp would have allowed 30% of the principal balance to accrue interest-free for five years.
FMC's Ziroli says he could not offer a lower interest rate because FHA loans are pooled into Ginnie Mae securities, and a mortgage loan that had been modified to that extent would not qualify for securitization. (Such loans typically have to be purchased out of a Ginnie pool.)
"Who is going to buy a 2.5% modified FHA loan?" he asks. "It can't happen."
A servicer can buy a loan out of a Ginnie pool once it is delinquent by three payments, and the loan can be put back into a security once it is modified, a Ginnie spokeswoman said.
Ziroli says he would be willing to contribute $5,000 if someone would raise money to pay down Bouchard's principal balance.
Because the loan is insured by the government, FMC will suffer no loss from a foreclosure. The servicer will be reimbursed 100% from FHA's mortgage insurance fund for all fees, and for advancing principal and interest payments to Ginnie investors for nearly a year. Assuming the FHA does not find a problem with the loan and force FMC to repurchase it, the ultimate cost of a foreclosure will be borne by taxpayers.
Ken Johnson, a spokesman for Bono Mack, said his office is no longer involved in the case because Bouchard rejected FMC's mod offer. Johnson said that because "there is now a contract dispute between Bouchard and her mortgage company," the House Ethics Committee advised Bono Mack to back off.
"It cannot appear that we are putting any undue pressure on any bank or mortgage company," Johnson said. "We have made a number of overtures on her behalf and pleaded with the mortgage company to take her extenuating circumstances into consideration."
The dispute between Bouchard and FMC reflects a broader debate over how much servicers are paid, and how much they are willing to do to assist struggling borrowers. Consumer advocates have long complained that servicers have a disincentive to do any meaningful workouts, and instead are encouraged to rack up fees and costs because they are guaranteed to get all their money back after a foreclosure. Servicers incur massive up-front costs advancing principal and interest payments to investors on behalf of defaulted borrowers, but their advances are repaid ahead of the first investor.
The sheer volume of defaulted loans has sparked a broader debate about servicer pay and incentives to prevent foreclosures.
"Homeowners are very alone," says Dettmer Slye of the Legal Aid Society. "They do not have the support of the servicers or of the government."
Because California is a nonjudicial foreclosure state, Bouchard cannot file a defense against foreclosure in court. Attorneys in Ohio and other judicial states have successfully argued in court that a failure to comply with FHA guidelines is a defense against foreclosure, Slye says.
Moreover, mortgage servicers do not follow any special protocol for dealing with handicapped people as required by the Americans With Disabilities Act. At one point, FMC taped a foreclosure sale notice to Bouchard's front door, but because she cannot walk, she did not see the notice for several days, she says.
Riverside County has one of the highest foreclosure rates in the nation. It ranked fifth among top metropolitan areas for new defaults, according to the data firm RealtyTrac Inc. in Irvine, Calif.
Bouchard bought her home in Murrieta, Calif., for $250,000 in 2008. It was recently assessed at just $190,000.
"No one in the government or at her servicer has come to help," Kenner says. "And it's not for a lack of trying."
