In the Sub-Prime of Life

According to Larry Jr., there are just plain bitter borrowers who blame Litton for their own irresponsibility. Ostensibly, these are the kind of borrowers attempting the class action suit filed in California in 2005. The suit alleges violations of the Real Estate Settlement Procedures Act and unjust enrichment, among others.

Specifically, the alleged scheme includes misapplying or failing to apply payments, prematurely referring accounts to collection, and forcing insurance policies on homes that are already insured. (The attorneys who filed the suit did not return multiple Press calls seeking examples of evidence the attorneys had to support these claims. The attorneys haven't said how many plaintiffs they have, and the judge in the case hasn't yet ruled on if there are enough for a class action.)

In an unrelated action, the Federal Trade Commission and HUD accused Salt Lake City-based servicer Fairbanks Capital Corp. of similar actions in 2003. Without admitting any wrongdoing, Fairbanks agreed to pay $40 million into a trust for borrowers that the government agencies said were victims of fraud. Fairbanks' founder and CEO also agreed to pay $400,000. Fairbanks now conducts business as Select Portfolio Servicing.

While Larry Jr. says the Fairbanks case was the exception, not the rule, in the servicing industry, the industry has its fair share of critics.

John Ventura, a former private attorney who heads the Texas Consumer Complaint Center at the University of Houston's School of Law, has experience trying cases against Litton.

“I didn't find any evidence of outright fraud,” he says. “What I found was that their systems, and the employees that worked those systems, just did not do a very good job. And accounts were messed up, payments were not properly credited or escrow accounts were messed up, and because of those things, it became a problem for the consumer that they found almost impossible to correct.”

He says servicers tend to think of foreclosed borrowers as “collateral damage” that ultimately does not harm the bottom line.

“It's just inherent, I think, in mortgage servicers, that in order to be profitable for their investors and everything, they have to hire people that may not be all that competent and their systems may not be set up to really be able to tend to the individual needs of a particular homeowner,” he says.

When told that Litton claims to have saved 70,000 homeowners from foreclosure last year, Ventura says, “I guess the next question would be: ‘Why were there 70,000 homes...that needed saving' Is there something wrong with the way these loans were set up that just from inception makes them not workable? Doesn't it strike you as strange that somebody would have to save 70,000 homes?”

Ventura's boss, consumer attorney Richard Alderman, says that servicers are just following their part in a scripted ruse against naive borrowers.

“More and more, we're allowing businesses to do whatever they want and then just saying, ‘well, you poor idiot, why didn't you protect yourself?'” He likens subprime lending and servicing to the “tin man” scam.

“That was the scam of the '50s and '60s, selling aluminum siding to people who couldn't protect themselves, who a slick salesperson knew could con them into buying something they didn't need and then taking their house if they didn't pay,” he says. “And we didn't have a problem deciding that this process was bad...that people were being taken advantage of...and we did something about it. But I think the world has changed where now I'm afraid what we would've said is, you know, ‘Too bad, you shouldn't let people con you into that, and if you lose your house, well, you can always rent an apartment somewhere.'”

However, there are situations where the person — not the loan — is to blame, says Williams, who brokered Murray's loan.

Unlike the naive borrowers who are sitting ducks for predatory lenders, Murray worked in the industry and knew exactly what she was getting herself into, Williams says. Moreover, servicers like Litton regularly give distressed borrowers multiple chances to catch up. There are examples of real victims who warrant a news story, she says.

As for Murray, Williams says: “She knew better.”

In April, Federal Reserve and other federal bank regulators asked lenders to take extra measures to help borrowers locked into subprime loans.

In response, the heads of mortgage giants Fannie Mae and Freddie Mac said they would help these borrowers refinance their loans. Fannie May CEO Daniel Mudd said the institution would extend loan terms from the current maximum of 30 years to 40 years. Freddie Mac CEO Richard Syron announced plans to buy approximately $20 billion of subprime loans, and lender Washington Mutual said it would refinance $2 billion in loans, switching some adjustable rate mortgages into 30-year fixed rate loans.

Murray and her family moved out of their home last week. She says she and her husband are staying with her father, while the kids are crashing with friends. It's not perfect, but it's better than before, as the family struggled to make arrangements by the move-out deadline. “I'm in limbo,” Murray had said then.

Unfortunately, she was not one of the 70,000 borrowers Litton claims to have recently saved.

“There's a lot of people out there who have homes because of the great work [of] our 1,500 people here that believe in what they do every day,” Larry Jr. says. “I wish I could help everybody.”