Rolling in Dough, Still Kicking Out Families

There's no place like home for the holidays. But this year, Phil and Barb Kubes and their three children will have to settle for memories of Christmas past.

Last month, the Omaha, Neb., family was forced out of their home of 12 years after falling drastically behind on mortgage payments. Having failed to reach a workable solution with Litton Loan Servicing, the Houston-based company that collects their mortgage debt, the Kubes were foreclosed upon and told to vacate.

They ended up renting a house across town.

"It's comfortable," Barb Kubes said. "But it's not home."

Litton is by no stretch the largest loan servicing company -- essentially the mortgage industry's version of a collection agency -- but it is among the ones coming under the most heavy fire in the wake of a housing crisis that continues to roil the country.

Litton, unfairly or not, has drawn the wrath of legions of homeowners, homeowner advocacy groups, lawmakers, labor unions and class action attorneys alike. One glaring reason Litton has attracted so much of the scorn directed at loan servicing in general: It is owned by Goldman Sachs, proverbial poster child for Wall Street's excess and its percieved indifference to the plight of average Americans.

"Upset," Barb Kubes said, choking back emotion, when she was asked how she felt when she found out Litton was owned by massively profitable Goldman Sachs.

It didn't help that her hometown hero, Warren Buffett, the so-called Oracle of Omaha, invested $5 billion in Goldman shares during the height of the crisis last year.

"I'm surprised Warren Buffett would have anything to do with them," she said.

With the exception of maybe AIG, no firm has come to symbolize Main Street's disgust with Wall Street practices more than Goldman. In a move that caused a global backlash, Goldman has said it expects to set aside more than $20 billion for bonuses and other forms of employee compensation and benefits at the end of the year.

Critics of Goldman's compensation practices say the firm has no business handing out billions to bankers and traders after having been the beneficiary of numerous forms of federal assistance, including TARP money (that Goldman has since paid back) as well as billions in FDIC-guaranteed loans and another $13 billion in taxpayer money given to AIG that was ultimately paid to Goldman.

Though it will derive only a tiny fraction of the billions it expects to earn this year from revenues produced by Litton, Goldman nevertheless finds itself, albeit indirectly, connected to a highly controversial issue at the crux of the housing crisis: Widespread failure by banks to allow homeowners to modify their loans.

A recent study by the Federal Reserve Bank of Boston showed banks have little incentive to modify loans to help homeowners avoid foreclosure because of one simple reason that at this time of year perhaps only Ebenezer Scrooge could appreciate: Loan modification is not profitable for lenders.

No Interest in Avoiding Foreclosure

Because mortgages are typically sold off to third party investors, the entities that service the loans, such as Litton, do not have a vested interest in avoiding foreclosure, according to Julia Gordon, senior policy counsel at the Washington, D.C.-based Center for Responsible Lending.

"Loan servicers make their money on late fees, so there is a perverse incentive for them not to work out solutions," Gordon said. "Meanwhile, there is zero incentive for them to help a family stay in their home. This is really a deep, serious problem and it has been for a long time."

Litton is a part of the problem, Gordon says, but "they are by no means the worst of the bunch."

Gordon actually pointed out that Litton is viewed as having responsive staff and a commendable call center. But one major labor figure seems to disagree with the assessment that Litton is to be commended for anything.

Demanding Disclosure

In a letter sent a few weeks ago to Goldman CEO Lloyd Blankfein, Andy Stern, president of the Service Employees International Union, took the Wall Street firm to task over its Litton arm, acquired in December 2007, just as the housing market was taking a turn toward disaster.

Stern specifically asked that Goldman fully disclose all of the details of its Litton loan portfolio, including the number of loans currently in foreclosure and the number of loans that have been modified so far.

In an effort to encourage loan servicers to modify more loans, the Treasury earlier this year set up a program within TARP called the Home Affordability Modification Program, or HAMP. According to the SEIU, citing Treasury, Litton has modified only 12 percent of the loans eligible to be modified through the government program.

A spokesman for Goldman referred all questions to Litton.

Litton spokeswoman Donna Marie Jendritza said she could not comment on the Kubes' situation, citing legal reasons. She said, however, that Litton "tries to help people stay in their homes to the extent it is possible" and that foreclosure is "always viewed as a last resort."

Jendritza also took issue with any suggestion that Litton makes money off of late fees.

"Servicing loans is costly," she said. "If there is any money being made from fees it is nominal. We just don't buy into claims that we don't have an incentive to keep people in their homes. Foreclosure is always a last resort."

She would not elaborate on how Litton makes most of its money if not by way of fees. Goldman does not break out how much it makes from Litton.

Collecting payments from delinquent homeowners is not a business that is ever going to attract many fans, especially not after the biggest housing market collapse in generations and not with unemployment still at 10 percent.

A recent survey by the Mortgage Bankers Association found that as of the second quarter of 2009 there were 6 million loans either past due or in foreclosure.

While many people tend to assume that banks, or bank-owned servicers for that matter, have more incentive to work things out rather than foreclose, economists at the Boston Fed found that there is actually far more incentive to foreclose.

That's because banks realize that there is a greater probability that borrowers who get approved for a loan modification will re-default.

In a speech earlier this month, Federal Reserve Board Governor Elizabeth Duke addressed the issues surrounding loan servicers, which have not always been the most visible part of the mortgage business.

"Responses to this current crisis ... including attempts to make large-scale loan modifications ... have pointed to the critical role that servicers play through their direct interaction with borrowers," Duke said. "Yet, there have been problems. Many servicers did not have, and some may still not have, adequate systems and personnel in place to deal with the sheer scale of the foreclosure crisis. Servicers are concerned about the competing interest of investors and the threat of litigation for pursuing alternatives to foreclosure. In turn, some investors have questioned servicers' incentives."

What Phil and Barb Kubes said angered them most was that Litton from the start, they had the feeling that Litton had no interest in helping them work out a payment plan.

"I bent over backwards to try to work something out so we could keep our home," said Barb Kubes, recalling, in at times agonizing detail, weeks of calls, more calls, transferred calls, forms, faxes and frustration inflicted, she said, by an array of people on the other end of a telephone who repeatedly failed to even pretend to be trying to help.

"Litton, literally, was impossible to deal with," she said.

Litton, Kubes said, refused to accept a Chapter 13 personal bankruptcy plan approved by a judge that reorganized the family's debts, including back mortgage payments. Mortgage payments going forward were not part of the settlement.

Last month, a judge in Suffolk County, New York was so outraged by a loan servicer's behavior in failing to work out a loan modification that he ordered that the entire amount owed on the home, around $525,000, be erased, essentially awarding the family the home free of charge.

Barb Kubes insisted she was treated deplorably. At one point in a conversation with an unnamed Litton servicer a few weeks before Thanksgiving, Kubes was supposedly told "if you can't afford the F***ing house we'll just take it."

"I said 'excuse me?'" Kubes recalls. "At that point, I was in tears."

Kubes said Litton reps eventually told her they were not accepting any more payments from her because certain crucial forms and documentation that could have given her a modification were not received. Kubes said she downloaded and filled out the forms and faxed them in along with documentation of her pay working for Union Pacific.

But Litton later claimed, she said, that they did not get them, one of numerous instances in which Litton said key paperwork did not make it to them.

Kubes claimed that during her seemingly endless phone odyssey she was transferred from Litton's loan mitigation division, to bankruptcy division, to foreclosure, with agents and their superiors on the end of the line always claiming ultimately that she had to speak with someone else.

"Loan servicing companies are notorious for tricks and traps," explained CRL's Gordon, though not specifically pointing fingers at Litton.

Indeed, in the fall of 2005, long before the housing crisis began, Litton was the target of a class action suit filed in federal court in Los Angeles by the law firm of Lieff Cabraser Heimann & Bernstein in which Litton was accused of numerous dubious tactics, including misapplying payments, failing to credit payments in a timely fashion, charging unwarranted late fees, prematurely attempting foreclosure regardless of legal grace periods and failing to provide customers with proper information.

Litton ultimately forced the Kubes out of their home, which is now for sale for $45,000 less than what the Kubes owed on it. So far the house has not sold.

"I just don't understand why they wouldn't help us work this out," she says. "We wanted to stay in our home. We loved that home."

Three Days to Leave

The final stakes through the Kubes' heart are, at cursory glance, at the very least perplexing, and at worst, some might argue, heartless.

A few days before Thanksgiving, Kubes got a "notice to quit" letter stuffed into her door like a Dominos pizza flyer. Filled with legal jargon and official language, it informed her she had three days to get in touch with an Omaha foreclosure attorney, Eric Lindquist, who was working for Litton.

Lindquist did not return calls to

"I was told by someone in his office that a notice to quit letter was like an eviction notice," Kubes says. "But I said 'like an eviction notice?' What does that mean? No one told me what it meant and I didn't know what my options were."

She said that without getting a date in court or so much as an explanation from Lindquist as to what her options were, the Kubes were next told by a real estate agent who showed up on their doorstep that "Litton's bank in New York" had bought their house and that they had three days to leave.

The Litton spokesman denied that was even plausible, because as a servicer it does not buy property. In some cases when property is not purchased in foreclosure, Litton will revert to an industry practice known as "Real Estate Owned" and work with a local realtor to sell a foreclosed property.

The real agent then offered her $1,400 cash for the keys. "Cash for keys" is a common loan servicing practice to help people get through the difficult period of eviction, and not a tactic to entice someone to leave, the Litton spokeswoman said.

Kubes said she knew in her heart she was making a mistake but at the same time she was done fighting. Broke, nervous about having some form of a roof over her head, her husband out of work, she took the money and turned over the keys. Then the family moved out.

Financially, one could argue that things didn't entirely turn out all that badly for the family, since they no longer owe the $167,000 on the house.

But the Kubes lost thousands that they invested into it over the past decade, and, more than anything, they lost their home, a place they loved.

It was the only home that their youngest, Casey, 8, had ever known. It was where they spent the past 12 Christmases.

A defender of loan servicers might argue that, emotions aside, the family simply could no longer afford it.

Barb Kubes's response: "We miss it."