Countrywide's 'workouts' fall short, critics say

NEW YORK (CNNMoney.com) -- As the nation's largest home lender and subprime debt collector, Countrywide has been the No. 1 whipping post of the mortgage crisis.

Many consumer advocates say that Countrywide's "loan workouts" with troubled subprime borrowers are insufficient in number and substance. Countrywide, in a detailed response to CNNMoney.com, disagrees.

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In Countrywide's capacity as a mortgage servicer, it collects mortgage payments, handles defaults and foreclosures, and works out deals with delinquent borrowers. Such workouts can include lowering the interest rate on a loan or spreading out past-due loan payments over the life of the loan.

Countrywide (Charts, Fortune 500) recently reported that it has completed 35,000 workouts this year, a number that George Goehl, executive director of The National Training Information Center (NTIC) called "a drop in the bucket" when compared with the hundreds of thousands of borrowers who are delinquent.

Goehl's group, along with the Neighborhood Assistance Corporation of America (NACA) and the Association of Community Organizations for Reform Now (ACORN), assist subprime borrowers with adjustable-rate mortgages (ARMs) that are resetting to much higher rates. And all three have said Countrywide has been the most frustrating loan servicer to work with.

"Countrywide is the poster child for all that's wrong with this industry," said Bruce Marks, NACA's founder and CEO. "They refuse to restructure loans to what is affordable to homeowners."

ACORN Housing Director Michael Shea said that while his group is "often able to get workouts" from Countrywide, his team is "very frustrated" with the company because "it takes a long time - months" to deal with a case.

And, Shea said, the company relies heavily on "repayment plans" for its workouts. Such a plan may stave off foreclosure by letting delinquent borrowers pay off what's past-due over 12 months in addition to their regular mortgage payment. While the servicer is making a concession by not demanding payment all at once, delinquent borrowers have to pay substantially more than their regular monthly payment. And if they fail to pay in full and on time, the lender can reinstate foreclosure proceedings.

One of the biggest complaints from NTIC counselors is that what loan workouts Countrywide does provide serve more as foreclosure postponement than real prevention. "They refuse to make ARMs fixed for the remainder of the loan. Instead, they are only agreeing to do so for 12-24 months, if at all," said Mark Seifert, executive director of the Cleveland-based NTIC affiliate, The East Side Organizing Project (ESOP), in an e-mail.

Countrywide's alleged preference for shorter-term loan modifications in Siefert's experience "is very different from what we see from our lender/servicer partners where EVERY mod includes making the ARM a fixed rate going forward."

NTIC and its affiliates have partnerships with four servicers: Chase, Citi, Ocwen and Select Portfolio Servicing (SPS). "They're showing absolute diligent effort to help homeowners stay in their home, not band-aid solutions," said Michele Rodriguez Taylor, who heads NTIC's foreclosure-prevention program.

On Wednesday, Treasury Secretary Henry Paulson announced the formation of a new alliance of mortgage servicers, lenders, counselors and investor groups. The alliance, which counts Countrywide as a member, is intended to coordinate efforts and develop best-practices guidelines for dealing with subprime loan workouts. But those guidelines have yet to be finalized, a spokesperson for the Financial Services Roundtable said, and until they are each member will continue to follow their own policies in dealing with troubled borrowers.

In an e-mail response to CNNMoney.com regarding borrower advocates' allegations, Countrywide said the company "is doing as much as, if not more than, any servicer in the industry, striking the appropriate balance between the interests of borrowers and investors whenever they can."

Of the 9 million loans it services, Countrywide said about 450,000 were 30 days or more delinquent; of those 80,000 were pending foreclosure. The company said it has completed 35,000 loan workouts, and that counselors are working with about 60,000 delinquent borrowers.

"Our goal is to increase the workout number and we are working diligently to encourage borrowers to contact us or a nonprofit counseling agency at the first sign of trouble," the company said.

Countrywide noted that it does twice as many loan modifications as repayment plans, and is currently working on 1,000 loan modifications that involve lowering the interest rate on an ARM, but it did not indicate whether the lower rates would be permanent or temporary.

Countrywide also noted that it received the highest ranking for its workout programs from both Freddie Mac and the Department of Housing and Urban Development (HUD), which evaluates servicers based on their use of workouts to avoid foreclosures.

Spokesmen for both agencies said, however, that their rankings only apply to the loans Freddie Mac owns and those that HUD oversees - namely those insured by the Federal Housing Administration. In both cases, however, the loans are prime mortgages, not subprime.

According to data from National Mortgage News, Countrywide services nearly 750,000 subprime loans, which account for 8.6 percent of all the loans it services.

While borrower advocates have focused the brunt of their criticism on Countrywide, they are far from unanimous in giving high marks to Countrywide's subprime competitors, an indication that one counseling group's experience with a lender can be very different from another's.

Borrower advocates' main contention, however, is that Countrywide and other subprime players should be more willing to bend to keep borrowers in their homes since they saw fit to make the loans in the first place. And practically, they say, loan investors will lose more money in foreclosure than they would with a modification.

At the same time, some acknowledge that regardless of whether their loan is modified, some borrowers could lose their homes anyway because their financial situation is otherwise precarious.

"It all comes back to affordability," said Richard Pittman, housing services coordinator for ByDesign Financial Solutions, the Los Angeles branch of the Consumer Credit Counseling Service (CCCS). "As recently as 12 months ago, some were refinancing themselves out of their problems. A lot of them were just kidding themselves. They were fine through their second refi, but the third refi caused them problems."