Yesterday we saw that even with strong Administration and Congressional pressure for lenders to modify loans, and modest financial incentives to loan servicers achieving successful workouts (we’ll return to those below), as chronicled in this Wall Street Journal, many people – at least, the Journal had no trouble finding plenty – are waiting as impatiently as those who expected to get free Kentucky Fried Chicken some months back.

That’s a big oupsie, isn’t it?

Actually, despite the Journal’s chastisement of Saxon for ‘falling behind,’ an extraordinary number of loans have been dealt with:

This always presumes that you’re supposed to modify all these loans, doesn’t it?

Saxon so far has completed nearly 17,000 loan modifications where borrowers have submitted income verification and other documentation and made their first payment.

All of you have already been accommodated

In fact, Saxon’s been accelerating its procedures in a manner that, were it applied to new loans, would be accused of recklessness:

In total, it has given initial approval of 28,000 modifications where the borrower has provided spoken information about income, a process that underscores the government’s desire to move things along quickly.

Once upon a time, that approach was called a no-doc loan or a liar’s loan.

Trust me, the sign is lying, not me!

I presume Saxon’s smart enough not to convert an initial approval into a final without the borrower’s documentation.  Certainly Mr. Meola’s loaded with experience:

Charged with beefing up Saxon’s operations is Mr. Meola, an accountant who held senior mortgage positions at Citigroup Inc., PNC Bank, Washington Mutual Inc. and New Century Financial Corp.

Having been the EVP of home lending at a subprime lender that went massively bankrupt in April, 2007 is certainly experience, but is that of the comforting kind?

We’re experts, we have experience

Mr. Meola, 52, is the author of a how-to management guide, which offers tips on communications and staying positive.

I shouldn’t mock that, but how can a blogger resist?

“Always look on the bright side of life”

He joined Morgan Stanley in the spring of 2007 [After New Century's bankruptcy – Ed.] as chief operating officer of its residential mortgage business as the firm was in the midst of a massive spurt of loan originations and securitizations.

Despite the Journal’s understandable sympathy toward Mr. Meola, leaping from a bankrupt lender to another lender rapidly buying the same product, and in vintages that we now know were among the worst – well, that’s not what would lead my resume.

‘Massive spurt’?  Really?

That growth had enabled Morgan Stanley to climb up the rankings of subprime-mortgage sales. Within a few months, Mr. Meola and Morgan Stanley effectively stopped making subprime loans as the industry collapsed.

Perhaps Mr. Meola was the voice of caution.  That he is still at Morgan Stanley suggests so.

At the time it was purchased in 2006, Saxon’s portfolio totaled 165,000 loans for an unpaid balance of $26 billion. As of June 30, 2008, the portfolio had grown to 342,404 loans, the bulk of which were subprime, with a balance of $56.9 billion.

Even if Mr. Meola turned off the tap in September 2007, outstanding commitments would have taken some months to close, and the portfolio would swell. 

That swelling’s still hurting

The 2006 vintage averaged $157,500 apiece; the 2008 vintage $166,000, or 2.5% annual increase in loan size – basically keeping up with inflation. 

Another inference in Mr. Meola’s favor is this:

Part of the problem at Saxon is that it didn’t ramp up its ability to modify loans as early as other servicing companies. A spokeswoman for Saxon says that when Morgan Stanley purchased the company in 2006, it lacked enough employees and systems to undertake massive numbers of modifications. It wasn’t until the spring of 2007 – after its portfolio of subprime loans had already started to sour [And after New Century had gone bankrupt, and Mr. Meola had joined Morgan – Ed.] – that Saxon began to focus on modifying loans.  Not until the fourth quarter of 2008 did Saxon boost its capacity to handle a large flood of requests.

We’re under water

Nor would there have been a huge reason to do so, as until that time there was no Federal relief to change the workout equation.  The offers are generous:

Some Saxon borrowers have gotten swift modification approvals. Lorraine Rodriguez, a hospital worker in Anaheim, Calif., called Saxon in mid-May. Following an hour-long call, she says, Saxon told her she had been approved for a three-month trial modification starting June 1, cutting her mortgage rate to about 5% from 9.5%. Her monthly payment was cut 42%, to just below $1,900.

Monthly payment cut from $3,275 to $1,900, saving you $1,375 a month.  Who can argue with that? 

The new rate “is still a high amount and is tough for us,” says Ms. Rodriguez, 57.

If a 42% debt service cut is still ‘tough,’ how ever did you buy the property in the first place?

Ambition, that’s how

If anything, Saxon’s been too generous:

Saxon’s borrowers’ rate of so-called re-defaulting — or defaulting on a loan after it’s been modified — has also been higher than most.

Translation: We promised you’d reform, we gave you a break, now you’re in the soup again.

Higher is not better

Of the loan modifications made by Saxon in the first quarter of 2008 where monthly payments were decreased by more than 20%, 34% of the amount owed was delinquent by 60 days or more 10 months after the modification, according to Credit Suisse Group.

The ‘20% drop’ is a shorthand for ‘modifications big enough to be meaningful.’  For every three borrowers to whom Saxon offered a concession – again, a free, no-cost concession – one out of those three went back in default.

One of those three balloons pops

That compares with an average of 27% delinquent for the 18 servicers Credit Suisse analyzed.

If Saxon’s having 1 in 3 redefault, while the average is 1 in 4, Saxon’s being too nice.

[Treasury Secretary Geithner] said the agency would begin publicly reporting each firms’ results starting in August –

Perfectly appropriate, but what statistics will be reported and what inferences will be drawn from them?

– and that Freddie Mac, the government-controlled mortgage buyer, would be auditing a sample of declined requests to make sure no borrowers were denied incorrectly.

An ex post facto audit with a standard of zero defects?  Why not just jail me now?

Do not collect $1,000 reunderwriting fee

Saxon is certainly trying:

Mr. Meola says in the fourth quarter of 2008 he had ordered Saxon to upgrade its call-center systems, improve training and make sure callers were routed to the right employees.

The company has retrained 659 employees on how to implement the government program. It has invested in a new, high-speed scanning software system, which can scan up to 125 documents a minute. Before the change, it took 20 minutes to upload the same amount of documents.

Mr. Meola reviews a sample of calls into the Saxon call center, including analyzing wait times. His checklist, which monitors customer dealings in 30-minute intervals, includes counting the number of denials and available agents.

Scoring based on how many agreements are reached is self-adjusting; you can always hit whatever ratio you want just by telling your people to be easier or tougher.

Just modify it, okay?

He’s been deflecting criticism from some watchdogs. In April, for example, Saxon executives convened at the Fort Worth unit of the Better Business Bureau. The agency, after receiving a spike in complaints from Saxon customers, had given the company an “F” based on the complaints.

Sitting in a small conference room, members of the bureau told Saxon executives of complaints about service, billing and miscommunications during refinancing, according to an agenda for the meeting. More than 300 people had lodged complaints in the year ending early 2009.

Sorry to be repetitive, but these people are asking for unilateral relief.  Patience is a virtue.

Won’t, can’t … or shouldn’t?

Mr. Meola says complaints spiked after Saxon took over a portfolio of 80,000 loans from a troubled rival in 2007.

No good deed goes unpunished. 

We’ll make your loan conform

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When you’re denied something, a chasm separates being told I won’t help you from I can’t help you.

It ought to be easy, oughtn’t it?  Hard-working people who suffer temporary setbacks deserve mercy from their lender.  For the lender, mercy will be good business, as those hard-working folks will gratefully repay their new obligations, saving the lender foreclosure expense, uncertainty, and loss on resale.  All will be well.

If only it were so …

We love fables and epics because they form neat narratives with right and wrong, triumph and tragedy, winners and losers, and those narratives reinforce our world views. 

Reality is more complex, especially when it comes not in spies but in battalions and, as revealed in this Wall Street Journal, it’s by no means clear who should be relieved, and what form that relief should take.  The Journal set it up in time-honored link-high-and-low fashion. 

Can they possibly be linked?

Start with the high:

Morgan Stanley chief John Mack recently made a new friend, he told shareholders in April — a Southern woman who had benefited from the big bank’s stepped-up efforts to modify loans under a new federal program aimed at keeping borrowers in their homes.

“I’m now invited – if I ever visit Memphis, Tennessee – to drive two hours south to have dinner with her and her family,” Mr. Mack said.

How far south of Memphis?

Meet the low:

Steve Applegate of Lake Mary, Fla., has tried without success to modify his $750,000 home loan through Saxon Mortgage Services Inc.

Before you get out your handkerchiefs for Mr. Applegate, let’s see his home:

Mr. Applegate in front of his house

Saxon is Morgan’s single-family loan servicer.

An April Credit Suisse Group analysis of how quickly companies have renegotiated loans ranked Saxon last among 18 mortgage-servicing firms. Saxon has modified just 6% of the loans it oversees that originated between 2005 and 2007.  

Isn’t there a middle group here, Saxons?

By contrast, Litton Loan Servicing, a Goldman Sachs Group Inc. unit, modified 28% of its loans.

Is this a race?  Shouldn’t the number of loans needing modification vary based on how good one’s portfolio is?  Wouldn’t a better measure be “percentage of non-performing loans”?  Or “percentage of non-performing loans that are salvageable”?

Actually, that question invites another, deeper one.  A loan is a contract entered into by willing parties.  (We’re omitting from this discussion those who were defrauded or duped into loans, as there’s no suggestion that such happened to Mr. Applegate or anyone else referenced in the Journal article.)  If a loan is to be modified, what’s the justification for modifying the loan, and whose perspective(s) should decide? 

We all have standing!

The borrower.  We know why the borrower wants it – the borrower gains an unalloyed benefit, one to which he or she is not contractually entitled.

The lender.  Lenders should modify loans only if they think it is in their interest to do so, compared with their alternative of enforcing and foreclosing.

The government.  This is the wild card, because the government’s objectives are larger:

Such firms are at the center of a grand government experiment aimed at halting foreclosures and the collateral damage they cause neighboring homes.

New foreclosure notices will total 2.4 million this year, which could trigger price drops in 69.5 million nearby homes, estimates the Center for Responsible Lending, a financial-services research and policy firm.

Not all markets are equally at risk of collateral damage; they are highly concentrated in a few places, such as Mr. Applegate’s Florida, or marginal neighborhoods whose homeownership rates (and prices) were inflated.

Don’t be in the orange states

At an average decline of $7,200 a house, that translates to a potential drop of $502 billion in total U.S. property values.

As the old math joke goes, I’ve got one foot in boiling water, the other in ice, on average I’m comfortable.

The government plan, rolled out in February and called the Home Affordable Modification Program, or HAMP, will pay mortgage-servicing firms to modify mortgages and find other ways to keep people in their homes.

Another four-letter acronymic program, to follow TARP, TALF, HERA, ARRA, and PPIP.  Now with 33% more letters than previous TLAs!

But the program’s sheer scale and the speed with which it was rolled out has created a new set of problems for some of the 27 firms charged with carrying it out.

Hampered by scale?

I look great but I pose new problems, don’t I?

Are we surprised that the lenders are swamped?  There are two reasons.

“Now listen closely – you need a bailout”

1. Workouts are much more difficult, and slower, than underwriting new loans. 

Unless, that is, you simply want to give the money away without regard to whom is deserving and whether the restructuring will work.

Staff lacked the training and experience to modify so many sour loans.

During the housing boom, Saxon’s mortgage-servicing employees did little more than send monthly statements in the mail and track down delinquent borrowers.

Servicing means coupon-clipping and matching payments to loans.  It’s highly routine, algorithmic, scalable, and electronic.  Servicing platforms (the term of art these days for companies or business units) handle enormous volumes of transactions, all on an entirely automated and standardized basis.

Loan servicing, 1996-style: we use the same architecture, just faster hardware

Workouts are the antithesis of loan servicing – customized rather than standard, small-scale rather than aggregatable. 

Under HAMP, reworking a single loan can be a time-consuming process with many steps, from:

·         Calculating a borrower’s debt-to-income ratio

·         Figuring out which type of modification works best for each borrower

·         [Choosing the appropriate form of restructuring – lower interest, lower principal, or a combination]

·         [Sizing the new loan or loan payments]

·         Negotiating with investors who own different slices of the loan pool

[Rearranged from the Journal's jumbled list.]

That means many employees need to be trained in an entirely new set of skills.

Loan specialists need to study multiple guidelines, online tutorials and a HAMP data dictionary with terms such as “underlying trust identifier.”

This is more than simply training, it’s a whole new type of activity, one that usually requires more brain power, and therefore a higher-grade executive. 

Yes, you’ll be able to write on a whiteboard

Now, firms like Saxon are under pressure to stem foreclosures at all costs.

Saxon also has a financial incentive: The government is paying servicers:

$1,000 for each loan they modify

Another $1,000 annually for up to three years if borrowers stay current.

At $4,000 per modified loan, only about 2.5% of the unpaid principal balance (based on Saxon’s a$166,000 average loan) – not enough to encourage profligacy, particularly as three-quarters of it is paid only if the borrower stays current.  Rather, it’s a token of recompense to Saxon for upgrading their infrastructure and bringing in modification specialists to replace mindless servicing.

In all, the U.S. could provide as much as $18.6 billion to the mortgage industry, investors and borrowers.

Add to that the conflicting objectives – help the borrower, get a good loan, avoid being ambush-profiled in the Wall Street Journal or New York Times – and you have a high-stress job.

In May, shortly after the government program kicked off, Anthony Meola, Saxon’s chief executive, gave his employees a call to arms.

Mr. Meola was previously EVP of Home Lending at New Century, whose April, 2007 bankruptcy [featured at the time on the blog – Ed.] was an enormous early-warning indicator of trouble ahead. 

Sir, we’re picking up a subprime lender’s bankruptcy

He then spent a few years as a motivational speaker (he was certainly motivated J ) before landing this post.

Standing atop a makeshift stage in the middle of Saxon’s call center in Fort Worth, Texas, Mr. Meola barked into a microphone: “You are getting a chance to help preserve the American dream. Think about what you could do — you can save someone’s home!”

A man with a mission:

Mr. Meola, outside the firm’s New York headquarters

2.  Relief is free, so everybody wants some.

As so often happens, the vaporware outruns the fulfillment.  As we saw with the Free Kentucky Fried Chicken fiasco, offer something at no cost and everybody wants one – and many become irate and litigious if they are not satisfied.  All that uprush of demand sweeps the undeserving and the hangers-on along with the desperately worthy.

By the time the Obama administration and Treasury Department launched HAMP, Saxon was having trouble keeping up with requests for modifications, even as it attempted to get up to speed.

The company, based in Irving, Texas, has hired or expanded contracts with four outside companies to help handle the influx, and it recently added a late shift from 4 pm to 11 pm to manage the extra work.  

Systems designed for one load level cannot handle a peak load a full order of magnitude larger:

Even the volume of paperwork at one point grew unwieldy — an internal audit in mid-May found that Saxon’s scanning equipment was overloaded with materials sent in by borrowers, leading to delays and lost documents.

Any time load increases torrentially, the system can temporarily crash.

Here come the applications

Yet there is growing concern among some lawmakers that loan modifications aren’t moving fast enough.

I doubt that lawmakers have ever tried modifying a loan. 

[I have, and it's serious negotiating, made harder when the counterparty – the borrower – is unsophisticated, because you spend what seems eternities explaining the basics, the simplest principles, even the lexicon. – Ed.]

In late June, 20 Democratic senators wrote to Treasury Secretary Timothy Geithner, whose agency is the architect of the housing program, to ask him to put more pressure on mortgage-servicing firms.

“Close your hands around the sensitive parts, and squeeze”

The group cited a recent report from a foreclosure program administered by NeighborWorks America, a Washington network of affordable-housing organizations, that found homeowners still were being forced to wait, on average, 45 to 60 days for help.

NeighborWorks is a great group, so I trust their data, which nevertheless invites the question, what’s a reasonable interval?

On July 9, Mr. Geithner sent a message to the mortgage-servicing firms that have signed up for the modification program and told them to ramp up their efforts. “We believe there is a general need for servicers to devote substantially more resources to this program,” Mr. Geithner wrote, including adding staff and call centers.

Tell me something I don’t already know.

“Today’s lesson is mighty important, remember?”

[Continued tomorrow in Part 2.]

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A running of the formerly-bulls?

That’s the possibility suggested by a slightly credulous Boston Globe article chronicling how the tranche warfare over the John Hancock building is heating up:

The John Hancock Tower will be auctioned off to the highest bidder next month after lenders moved to foreclose on owner Broadway Partners, which has defaulted on some of its debt payments on the building and two others it purchased in 2006.

‘Will’ is a more confident verb than I would use.  ‘Is scheduled to’ is more accurate.  Lots could happen.

Lots of bounces in these dice yet

A group of Hancock lenders kicked off the foreclosure process Friday by hiring a New York firm, SL Green Realty Corp., to arrange for the auctioning of the building on March 31.

The ‘group’ emergence is a phenomenon of securitization.  As I previously posted, here’s what’s really going on:

Why would some want foreclosure, others want delay?  Very simply, because some think they’re in the lifeboat (fully collateralized) and others behind them in the queue think they’re headed for the icy waters.  (A primer on who’s-who is here.)  The legal system that governs default-enforcement imagines that capital sits in a simple vertical stack where each layer (from lowest and most senior to highest and most junior) is distinct from the one below and held by an individual counterparty (investing lender). 

In the middle column, the senior lender is the ‘hard’ debt, and the junior is behind and ahead of the equity

Today’s tranches, though, are not unitary counterparties – the tranche may be pledged or sliced into pieces each of which is held by a different and divergent entity.  (Imagine our horizontal layer of debt being sliced vertically into several pieces side by side.)

With securitized debt, the counterparty is not unitary but fragmentary, even atomized – it’s scattered to the four winds (literally; many securities are owned by offshore investors) and some elements may even have been lost. 

So who’s in charge?

Starting a foreclosure will help find out.

The disputed $700 million of debt in the Hancock battle is mezzanine debt that was divided up among nine investors. With real-estate values declining, not all of the investors would be paid off in a liquidation.

Probably it’s these nine who are pressing, as part of tactics to gain control.

As a result, investors who believe they would be in the money are pressing for an immediate foreclosure, according to people familiar with the matter.

Such investors include Five Mile Capital Partners, led by former real-estate financier Steven Baum, and Normandy Real Estate Partners, founded by property investor Finn Wentworth. Mr. Wentworth also is a founder of the New York Yankees’ YES Network.

For now, some of them have joined forces to start the clock ticking:

Only a last-minute deal to extend the loans on the building could prevent it from being sold.

Last-minute deals are a specialty of capital-crunch showdowns.

Lots of ticks left

An executive with Broadway Partners of New York said those negotiations are ongoing. “We continue to own the [Hancock] and are having an open dialogue with our lenders at this difficult financial time,” said Jonathon Yormak, a principal at the New York firm.

“We continue to operate the building!”

“You’re not fooling anyone, you know.  Can’t you just take him now?”

“It’s against regulations!”

Ironically, Broadway Partners is exactly the same kind of critter as those foreclosing it.  From their web site:

Broadway Partners is a private real estate investment and management firm headquartered in New York. The firm invests in high quality office properties in select markets nationwide. Since 2000, Broadway Partners has acquired office assets exceeding 17 million square feet

Broadway Partners has an exceptionally strong team comprised of seasoned professionals with significant real estate transactional, operating and investing experience. The firm’s equity partners represent a cross section of both domestic and international institutional, and private investors.

The team when they were a happier section, not a cross section

Our extensive pipeline combined with our focused investment strategy allows us to be extremely selective on the deals we bid and buy.

Very selective in choosing the property – maybe not so selective in the financial structure:

Broadway Partners purchased the building in December 2006 for a record $1.3 billion – much of it borrowed – making a bold bet that its value would continue to rise as red-hot office rents in Boston escalated to $100 a square foot and beyond.

December, 2006, as we know now, was virtually the top of the office market.

Yormak probably wishes they had been a little more selective here

The move to auction off the Back Bay landmark, a prized asset once thought immune to the economic downturn –

Journalistic hyperbole – ‘thought immune’?

– is a towering symbol of the turmoil that continues to ripple through the nation’s largest banks and real estate companies.

‘Towering turmoil ripple’?  Yikes.

You are the financial architect …

The Hancock is now estimated to be worth between $700 million and $900 million, a sharp drop in value since it last changed hands two years ago.

As I previously posted, the value drop has set off a food fight among the capital providers

What makes this delicious, at least to an innocent bystander, is that the warring factions are conceptually on the same side of the table.  They’re all capital providers, not capital consumers, and they all want to be paid, even as none of them wants to drive the bus.

Upon further reflection, fully occupied office buildings are among the easiest buses to drive. 

“This is happening in every major city where deals were capitalized this way, with lots of short-term, highly leveraged debt,” said Bob Clifford, partner at the real estate investment firm Goedecke & Co.

Pete Goedecke, who’s seen it all

In January, Broadway defaulted on some of its debt, leading to a series of negotiations among multiple lenders that own interests in the Hancock. Those talks resulted in a move late last week to call for an auction to sell the building and two others Broadway bought, in Los Angeles and Washington, D.C.

Broadway’s default was an acknowledgment of reality.  Once they knew that default was inevitable, any money they put in pre-default would count for nothing, so it was better to keep the powder dry, and get everybody else’s attention.

Real estate executives said the pool of possible buyers for the building is limited because of tighter underwriting standards and the difficulty of raising capital in the down economy.

It’s not residential, so the three always-open stores – Fannie Mae, Freddie Mac, and FHA – are of no help.  As the global de-leveraging continues, nobody’s going to want to write an $800 million check for the Hancock right now, as it will slurp up too much cash.  Who then?

Current lenders in the building could be in the best position to own the Hancock.

Let’s make it simpler: the Hancock’s next lender will be one of its current capital providers.  Most likely these two:

Contrariwise, it might be the otherguy

Two of those lenders, Normandy Real Estate Partners and Five Mile Capital Partners, have previously asserted that an appraisal of the Hancock determined that they own a controlling portion of the building’s debt, which was divided among multiple parties.

Because of that position, Normandy and Five Mile have the best opportunity to buy out other lenders and take control of the building. A spokesman for Normandy declined to comment yesterday. Executives with Five Mile could not be reached.

Ten days ago, I predicted these folks will probably double down:

When the counterparty is dispersed, the multiplicity of holders means that no one is in charge, leaving the loan servicer compelled to do what the documents say.  And the documents say enforce all your rights, waive none of them.

So somebody is likely to start foreclosing on the sponsor, and somebody else is likely to sue to enjoin the foreclosure.

According to people familiar with the matter, Five Mile and Normandy believe that they are the controlling holder and are moving to hire a special servicer that would launch a foreclosure proceeding. That move is expected this week.  A joint venture led by the two firms bought the debt in mid-2008 at a discount from Lehman and RBS with seller financing. 

It seems likely that Normandy and Five Mile foresaw this, and believe they can wipe out everybody behind them and capture the upside when the property market comes back.

There goes your secured position

But other creditors are arguing over the appraised value and who is in control, according to these people. They may go to court to try to block the foreclosure action.

Meanwhile, the lawyer’s meters turn …

At least $750 an hour for each meter …

Other lenders on the building, including Petra Capital Management, BlackRock Inc., and RBS Greenwich Capital, a unit of Royal Bank of Scotland Group, declined to comment yesterday. Another lender, the John Buck Co. of Chicago, could not be reached.

Maybe I’ll own it in the end!

Buck’s a wild card, for reasons I explained before:

We’re prepared to throw mud to get what we want

Mr. Buck [who is a developer – Ed.] is perhaps the cat among the pigeons.  While all the others see the building only as a source of headaches to be endured on the way to money, he sees it as an opportunity to build his business.  Nobody forecloses with quite the relish of a real estate entrepreneur who bought the debt at a discount.

Here’s another fearless prediction: it won’t be gaveled down to foreclosure on March 31.  Too many players, too many moves to make.

Check

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Are you obligated to negotiate with me?

Okay now, bank, let’s negotiate

That appears to be the premise behind litigation recently filed by Lori and Mark Pestana of Westford, MA.  As reported in the Boston Globe:

A Boston-area couple who are in foreclosure, despite their herculean attempts to prevent it, have filed a lawsuit against Washington Mutual, one of the nation’s largest mortgage servicing firms.

I shall make several telephone calls on your behalf!

The cynical newspaper reader observes that these herculean efforts, as we shall see, occurred after the initial defaults – and that the defaults were apparently voluntary.

In the suit, filed in Suffolk Superior Court, Lori and Mark Pestana of Westford allege the loan servicer was unresponsive to their repeated phone calls and to their applications to negotiate an arrangement that would have allowed them keep their house out of foreclosure.

So there’s the question: must the lender negotiate?

The suit is seeking class-action status on behalf of thousands of Washington Mutual borrowers in Massachusetts.

Their allegations echo those of other borrowers who dealt with customer service departments at major loan servicing firms. Loan servicing firms accept payments and handle mortgage duties on behalf of lenders or the Wall Street investors who hold the loans.

The firms, inundated with loan delinquencies and foreclosures, often don’t respond to phone calls or letters and fail to accept late payments, renegotiate loans, or approve house sales that would avert foreclosures, some borrowers and agents have said.

I’d be surprised if lenders fail to accept payments, unless the payments come, as they sometimes do, with a self-serving note saying, “This check tendered in full payment of …”  I have always understood that the lender can cash such a check, writing its own commentary editorial gloss, but perhaps that’s inaccurate.

“I feel like we were just sucked in and caught in a vortex that we couldn’t get out of,” Lori Pestana said about trying to prevent Washington Mutual, or WaMu, from foreclosing on a $275,000, fixed-rate mortgage.

Loan payments going down the drain?

A fixed-rate mortgage?  Somewhere in here, my cynical mind then asked this question, How did the Globe get hold of this story?  Not from WaMu, whose external communications department crafted this gem:

WaMu yesterday said it is “fully committed to helping our customers stay in their homes” and that “foreclosure is a last resort.”

How’s that for public communications?

In other words, WaMu said nothing. 

The suit, filed one week ago, indicates the Pestanas would not have gone into foreclosure if they had reached someone at WaMu with authority to resolve their problem.

The Pestanas always had the option of paying their loan in full.  ‘Resolve their problem’ has to be a code phrase for get relief short of making full payments on time.

From the scraps available in the story, I tried to determine if the Pestanas had followed AHI’s advice to delinquent borrowers:

When the servicer calls – or writes, or emails – all of her inquiries boil down to her search for the answer to two questions:

1. Why are you in trouble?

2. What’s the best way out?

The answer is, Sort of.

After the couple missed their August 2007 payment, Mark Pestana, a human resources specialist, and Lori Pestana, a business consultant whose work had slowed, still felt they could get current on their loan.  One option might have been dipping into retirement savings, they said.

Why did the Pestanas not do this?  They apparently claim they thought something more favorable was on offer:

After reading on WaMu’s website that it would assist distressed borrowers with loan modifications, Lori Pestana [1] called and [2] was told they could not qualify until their payments were 50 days late. To become eligible, they [3] stopped paying and applied for help on Oct. 9, 2007.

Every picture tells a story?

Every workout request comes with a story attached.  Stories are beguiling; something in human nature makes us dive critically into them, even if they are or may be entirely irrelevant.  Whether by circumstance or by selective design (more on this below), as stories go, this is a good one – we were current until we defaulted because you told us to! – guaranteed to elicit instinctive sympathy. 

Not everybody is sympathetic

Suspending for now the critical fourth question [Unmentioned, and being left as a temporary exercise for the reader – Ed.], I’ve put brackets around three key factual questions:

1.  Whom did they call?  Anyone who’s ever had a consumer complaint knows that telephoning is frustrating and unreliable.  I’ve gotten into the habit of always asking each person I reach to give me their name and their phone number, because if you’re disconnected, you’re nowhere. 

That Ms. Pestana says she called implies the Pestanas have no written record of their communication – a significant minus to their putative case. 

Although the Pestanas said they were told they would get an answer in four to five weeks, a Nov. 13 letter from the Boston law firm Harmon Law informed them they were in foreclosure. Harmon Law represented WaMu in the foreclosure, the suit said.

The foreclosure notice, obviously, was in writing.

The Pestanas said they tried at least twice to determine the amount they could pay to reinstate their loan, but Harmon Law either did not call back or could not give them an amount. Another time, Harmon Law refused a $12,000 payment, because it was $3,000 short of the total payoff amount, the suit said.

We all have personal experience with friends or business acquaintances who were supposed to do something they did not want to do, who tell us “I called half a dozen times,” yet when we check, the source says, “Nobody ever called me.”

In January, Lori Pestana called WaMu again but was “caught up in an endless telephone loop,” the suit said; she left a message but no one called her back.

Perhaps the Pestanas have contemporaneous written notes.  Probably not.

Something like this, of the right date, would help, wouldn’t it?

Do those actions sound herculean to you?

2.  What were they told?  A year ago, a study I recall reading found that something like 20% of all telephone answers the IRS gave inquiring taxpayers were wrong.  Yet as the service repeats in all its administrative guidance and in every tax court filing, ignorance of the law is no excuse.  It’s up to the taxpayer to file correctly, even if incorrectly advised.

Here even more questions arise.  Who told the Pestanas?  Was the statement [must be fifty days in arrears] accurate?  Even if it was, were other conditions (e.g. default interest and penalties) attached to the loan modification offer?

Doubtless the Pestanas’ counsel will come armed for bear on these questions – still, there they are.

3.  When they stopped paying, did they explain why?  Evidently the Pestanas, who were current on their mortgage, voluntarily stopped making the payments.  Unless more evidence is adduced, this is rock-brain dumb; the one thing you don’t do is cease paying your mortgage unless your lender has had plenty of notice that you intend to do so and has acquiesced – preferably in writing.  As I put it back then:

Conclusion: keep your eyes on the prize.  Although a lender is not your friend, neither is the lender your enemy.  Loan servicers want to do something that’s good for the company, safe for themselves personally, and likely to work.  They make these judgments based largely on statements you make and evidence you provide to support those statements. 

They care about the answers to two questions:

Why are you in trouble?  Whatever explanation you give, it had better be the truth.

What’s the best way forward?  Your goal is to demonstrate that foreclosure, although administratively reliable, is a very risky financial path, whereas modifying with you, however it may sting, is reliable.

My problem with the Pestanas’ story as presented is lack of verifiability.  The events presented are the actions they say they took a year ago – evidently, without any contemporaneous written communication from WaMu or the loan servicer.

In court, you also have to verify

Finally, there’s a fourth question, not explicitly mentioned but actually the most important of all:

[Continued tomorrow in Part 2.]

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