Bad news for bad guys in mortgage industry

Nation's Housing

November 23, 2003|By KENNETH HARNEY

CALL IT the new Ten Commandments for the American home mortgage industry, courtesy of a $40 million settlement with the federal government.

Mortgage companies shall not:

Count their borrowers' on-time payments as late or assess them bogus late penalties.

Foul up their customers' home loan escrow accounts by neglecting to make on-time payments of taxes and insurance.

Compel borrowers to buy a second hazard insurance policy at inflated premium costs when they know those borrowers have valid insurance coverage on their houses.

Wreck their customers' credit ratings by reporting false information about their delinquencies to the national credit bureaus.

Keep homeowners in the dark about how much they owe and when it's due.

Intimidate customers with predatory debt collection practices such as nonstop telephone harassment.

Stonewall borrowers when they seek account information or to complain.

Refuse to work out legitimate delinquencies through forbearance arrangements that allow borrowers with problems to get back on their feet, and stretch out or modify payment terms.

Stampede innocent homeowners into quick foreclosures.

Force customers to waive their legal rights as the price of avoiding foreclosure.

These may sound like barely minimal standards for home mortgage account administration. But they are at the core of new "best practices" guidance contained in the federal government's $40 million out-of-court settlement Nov. 12 with giant mortgage company Fairbanks Capital Corp.

Though legally binding only on Fairbanks, the code of practices is expected to be followed by all mortgage-servicing companies that want to avoid costly entanglements with the Federal Trade Commission and the Department of Housing and Urban Development. Both agencies investigated Fairbanks and signed the settlement agreement.

Utah-based Fairbanks, the country's largest servicer of subprime mortgages, also faces additional settlements of class action suits, state government investigations and individual litigation beyond the $40 million. Federal officials estimated that as many as 250,000 of Fairbanks' home loan customers may be victims under the terms of the settlement and could qualify for monetary relief from the $40 million fund.

Maryland officials, for example, said they received about 300 complaints from Fairbanks' customers and conducted their own investigation into the company. Maryland's office of financial regulation announced a separate settlement last week, saying customers here will receive refunds by Feb. 29 after Fairbanks conducts an audit of its accounts in this state.

Thousands of Fairbanks borrowers have complained to federal and state government agencies since late 2002, alleging unfair and deceptive practices. Fairbanks admitted no wrongdoing as part of the agreement but pledged to follow the new federal guidelines in its handling of all customers' mortgages from here on. Its founder and former chief executive officer, Thomas D. Basmajian, also agreed to pay $400,000, and still faces possible criminal charges from the federal government.

Fairbanks' majority stockholder, the PMI Group, estimates that forthcoming settlements with class action litigants could cost Fairbanks another $15 million.

Under the terms of the federal settlement, the FTC will administer the victims fund, paying out compensation to borrowers who can document harm by Fairbanks. But many victims - especially those who have lost their homes to foreclosure - say no amount of monetary compensation can relieve the pain inflicted by Fairbanks.

"What about the family breakdowns and divorces that [occurred] after Fairbanks took away people's houses?" said Irma Heras of Amarillo, Texas, in a post-settlement interview. "What about the damage done to people's health - the high blood pressure they got from fighting day and night to save their homes? Nothing can help them now; the damage has been done."

Assuming that each of the estimated 250,000 victims receives an equal share of the $40 million, that works out to just $160 apiece. But most victims can document far higher costs.

"It took me $11,000 to get out of that ordeal," said Jim Jones of Escondido, Calif.

Jones managed to keep his house out of foreclosure after Fairbanks began pyramiding late fees onto his mortgage debt, but only by agreeing to pay thousands of dollars in legal and other charges to Fairbanks, he said.

"Every one of those [now-prohibited] bad practices they did to me," Jones said.

For example, although he had a comprehensive insurance policy covering the house that cost him a premium of $551 a year, Fairbanks ignored that documented coverage and "force-placed" a second hazard insurance policy on the house that limited its coverage solely to Fairbanks' own loan balance but cost Jones an extra $1,800 a year.

Jones also said he experienced the full gamut of negative personal consequences - bad marks all over his national credit bureau files, family stress, business strains.

Jones doesn't expect to get much out of the $40 million settlement, and he is still a Fairbanks customer. But he's happy about two things: His mortgage company is going to have to be a model of fairness and accuracy, as a matter of ongoing federal oversight.

And "for all the time I got beat up by them, it's nice to see a little justice get done."

Ken Harney's e-mail address is kharney@winstarmail.com.

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