Will John H. have his home on Thanksgiving Day? Or will CitiMortgage have sold it at a foreclosure auction the day before? This week is the fourth time John (who declined to use full name) is facing an imminent foreclosure date since he approached CitiMortgage about modifying his mortgage in December, 2008. But if Citi (C) had honored its first trial modification agreement with John -- or even its second -- he would never have had the stress of investors ringing his doorbell, looking to bid on his home, even once.
Here's his story, and it's particularly telling as a refutation of the common assumption that folks in John's predicament either deserve what they're getting for buying a home they could never really afford anyway or, perhaps worse, that they're merely debt deadbeats who are no longer making their mortgage payments by choice.
Back in December 2008, John H. (pictured) was small-business owner with perfect credit and a house he could afford. It was his first house, and John put his heart and work into it, as first-time homeowners usually do.
John's clients were commercial real estate lenders. He did inspections for potential deals prior to financing, and throughout construction when deals went forward. During a deal's progress, his inspections would trigger -- or deny -- disbursement of the next loan installment. Prior to a deal's closing, his inspections would influence the decision to lend in the first place.
In total, over the 10 years he's been in the industry, he has controlled the disbursement of over $12 billion in commercial real estate and construction loans.
Unfortunately for John, when the real estate bubble burst, commercial real estate deals stopped closing. And lenders stopped paying for the preclosing inspections they had hired John to do. Although most of the lenders stopped paying his invoices, his biggest account receivable was his mortgage company's affiliate, CitiCommercial Capital, which eventually owed John's company over $100,000 for work it had hired him to do.
Citi Told John to Default
So, John went to see his lender, Citi Residential Mortgage, to try to head off trouble. In essence, he told it: "My customers aren't paying their bills because the deals we're working on aren't closing. I'm current with you now, but I don't know how long I can stay that way. Can we modify my loan?" CitiMortgage told John it couldn't help him until he was three months in default.
Although Citi didn't explain its reason for telling him to default, it's a common command from mortgage servicers and is often -- but not always -- traceable to the agreement the servicer has with the investors in whatever mortgage-backed security ostensibly owns the loan. That agreement may stipulate that only people three or more months in default are eligible for modifications. However, the advice seems to be far more universal than such contracts would require.
Citi Residential Mortgage declined to comment on John's case, citing privacy concerns.
Citi Lost His Modification Contract. . .
In any case, John did as he was told and didn't make a payment for three months -- January, February and March, 2009. Then he asked for a modification, and eventually, in May, Citi offered one. John accepted and held up his end of the bargain by making the three trial payments, for June, July and August. But when he asked Citi to make the modification permanent, Citi in effect reneged.
Citi refused to make the modification permanent because it claimed it didn't have a trial modification agreement with John, or if it did, it said it had lost the contract. John replied that he could fax over his copy, but Citi insisted on a new trial modification.
John still hoped that his clients would make good on their debts to his company. Until they did, however, he struggled to pay his employees. Not only was revenue down, but his commercial lines of credit -- for which he had a spotless history -- were sharply reduced, just as many consumers with good credit saw credit card companies drastically lower their card limits. As a result, John used a second mortgage on his house to make payroll.
. . . Not Once, but Twice
So, John once again signed up for a trial modification with Citi, and it had the same terms as his original one. Again, he made the three payments. Again, after asking for his successful trial modification to be made permanent, he was told that Citi didn't have his signed trial modification contract. Again, it didn't matter that John could fax it over. Citi told him he would have to start all over.
Throughout both modifications, John repeatedly asked for statements from Citi that would show how his payments were being applied and what principal, interest and fees might be accruing. But he never received one. As a result, John had no way of knowing how bad things were getting, or what effect the trial modification was having.
Before he could focus on trying with CitiMortgage again, however, he had to deal with the crisis that had developed with his business from his clients' failure to pay their bills, and the related impact on his personal finances. So, in January 2010, he reorganized his business and then declared personal bankruptcy. Throughout his bankruptcy, John kept in touch with Citi about his mortgage, although he was no longer making payments on it. He explained to me that absent a modification agreement and a statement showing the status of his loan -- principal, interest and fees -- making payments was like throwing money into a black hole.
The First Foreclosure Showdown
Once his bankruptcy was discharged in May 2010, John again sought a mortgage modification. Citi asked for financial information, which John promptly provided. But until early August, Citi didn't confirm a trial modification offer in any manner. In fact, for awhile it continued to insist he was in bankruptcy even after he proved the bankruptcy had been discharged.
On or around Aug. 8, John got a shocking phone call from Citi: Your house is listed for foreclosure sale on Aug. 12. Oh, and the person you've been dealing with at Citi no longer works here. If you want to save your house, we need lots more documentation immediately. (Arizona is a nonjudicial foreclosure state, and although John should have received notice that the house was listed for foreclosure sale earlier, he didn't.)
John managed to send Citi the information it asked for, by email, using the "read receipt" option. On the morning of Aug. 12, as investors hoping to buy his home at the foreclosure auction knocked at his door, Citi claimed it hadn't received the information he'd sent. However, armed with his "read" receipts proving the emails had in fact been received and opened, John got Citi to delay the foreclosure sale by a month.
The Second Foreclosure Showdown
Citi told John it needed to review his file. John continued to email the person who had been working on his case, but got no response. While waiting to hear from Citi, John closed his company and took a job with a very large firm in the same industry, bringing his clients with him.
Also around this time, a Citi website that John could log into showed he had accepted a third modification with identical terms to the first two. Despite repeated requests, John could not get written confirmation and papers to sign from Citi. After three weeks, with the new foreclosure date approaching, the person John had been dealing with told him he no longer worked on his case.
The new person wanted yet more financial information about John's business. When John explained about his job, the Citi loan counselor said the job's income didn't count because it was future income, so a modification was impossible.
John got a lawyer, and the lawyer contacted the loan counselor. The loan counselor responded that he couldn't talk to John's attorney without a letter of authorization. So John wrote one and sent it five minutes later. The loan counselor's response was ironic in the extreme, given the banks' paperwork problems exposed in the robo-signing scandal. The counselor said John's authorization letter wasn't in the right format: Instead of having a date at the top, it had to be on the bottom by John's signature.
John redid the letter and emailed it again. Later that day, the loan counselor told John that the counselor no longer worked on his case, and his lawyer needed to talk to legal. On Sept.13, the morning of foreclosure sale, again with investors ringing the doorbell, John heard from his lawyer that the foreclosure was postponed for another month.
The Third Foreclosure Showdown
At this point John contacted his congressman, Harry Mitchell (D, who lost his bid for reelection on Nov. 2), and Attorney General Terry Goddard. After someone from Rep. Mitchell's office contacted Citi, a new team -- the "executive" team -- was assigned to handle John's situation. Citi asked for paystubs from his new job.
When Citi next offered him a modification -- this time on Oct. 20, the day before his third foreclosure sale date -- Citi offered terms worse than his original mortgage: The principal was higher and the interest rate the same, resulting in a monthly payment $300 more than his original mortgage. (Again, since John has not seen a statement of his account from Citi since he went into default on Citi's instruction, he has no idea if the new principal balance is accurate.) Moreover, Citi insisted that John make his first payment under the new modification that morning to stave off the foreclosure. Finally, Citi demanded that John execute the contract for the new modification as soon as he got it.
John made the payment and saved his house for the third time.
For obvious reasons, John found the new modification terms and the immediate-payment demand frustrating. Even worse, on that Citi website he can log into, the message still shows him as accepted for a new modification on his original terms. When John received the new modification contract on Oct. 27, rather than execute and return it by Oct. 29, as Citi demanded, he told Citi that he would review it and give it to his attorney, to the Arizona attorney general and to Rep. Mitchell to look over first. Nonetheless, John said he would return the executed contract and make the scheduled December payment by Dec. 1.
Despite John's payment for November and his promise to pay for December by Dec. 1, Citi listed his house for foreclosure on Nov. 24, the day before Thanksgiving.
Although CitiMortgage declined to comment about John's specific situation, it has given me this broader statement:
In order to qualify for HAMP, a customer must make all the required monthly payments during the trial payment period. If the borrower does not do so, they are ineligible for this type of modification. In order to qualify for a traditional modification, we require that the monthly payment, based on the debt to income ratio, be no lower than 31%. If it is lower, the borrower is considered to have sufficient income for a regular payment. If there are arrearages [unpaid amounts] on an account due to missed payments, the modified payment may increase as a result. Modifications and their terms are determined according to the borrower's current, updated financial information, not on past financials.
Reading between the lines, it sounds to me as if Citi is saying: 1) John didn't make his payments during his trial payment period. 2) John now makes too much money in his new job to qualify for his original modification terms.
In response, with his bank statements in hand, John says he did make all the required trial payments. When the trial modifications ended and he had no agreement in place with Citi, then it's true he didn't make his payments, but had there been an active agreement in place, he would have continued to make the payments.
John also notes that if CitiCommercial Capital had paid his company's invoices, he might never have needed a modification in the first place.
He points out that had Citi never told him to go into default and then had not lost his original modification agreements, twice, John would never have missed a monthly payment.
As to point two, John acknowledges that at his new job he makes enough money that his original modification terms would be less than 31% of his income. But he wonders: If either of his successful trial modifications had been made permanent, would Citi have automatically increased the "permanent" modification terms to reflect his new income? Or if he lost his new job, would Citi then automatically lower his modification terms?
John also notes that over the past two years, he has spent 185 hours -- which he can document -- dealing with Citi's modification process. Given that his time is normally billed out at $250 per hour, that represents $46,250. In addition, John has spent $4,000 in CPA and legal fees trying to deal with Citi. Those amounts dwarf any missed monthly payments during the time no agreement was in place, John points out.
At this point, despite being $150,000 or so underwater, John wants to stay in his home, if Citi will honor the modification terms it originally offered him. If not, John wants to do a short sale (sell the house for less than the remaining mortgage balance due). After all, his new job is based in Southern California, and it would be easier to live there. In fact, John would like to buy a Citi short sale near his job, using in part the $50,000 or so he "invested" in the modification process. He wants to do a short sale rather than be foreclosed on because he's trying to rebuild his credit.
John emailed Citi regarding his short-sale idea on Nov. 18, but as of now he hasn't heard back. Despite trading some voice messages in the past couple of weeks, the only recent communication of substance is a letter John received from Citi several days earlier. The letter is both painfully ironic and yet typical of Citi's handling of his case.
Citi sent John a "HOPE NOW" form letter dated Nov. 5, six days after sending him the loan modification offer requiring $300 a month more than his original mortgage. The form letter tells John to "call today" because he "could receive the lower payment or another mortgage solution" that he needs, and "save hundreds of dollars each month and avoid foreclosure when [he] sign[s] the final paperwork for any option [he] choose[s]!"
What a great Thanksgivings Day present it would be if that letter turns out to be sincere.