A 100-year-old two-bedroom cottage, worn but not beyond repair, with wind chimes hanging on the front porch and dogs barking out back, and a paneled living room adorned with trophies and dozens of family photos, was nearly lost to foreclosure—twice. Wilma and Terry Vaughn bought their home in 1985 with a $12,000 loan from an acquaintance, but over the decades, to help pay other bills, they mortgaged, and then refinanced, their home in Franklin County. And unwittingly, they fell victim to the largely unregulated mortgage servicing industry.
The Vaughns refinanced their home in 2003, which lowered their monthly mortgage payment to $363 from $410. While that helped their bottom line, it was only temporary. Their mortgage banker sold the loan to another bank without notifying the Vaughns. Wilma Vaughn mailed two mortgage payments to her original banker before she learned of the change; and for 18 months, the new lender charged the Vaughns late fees, as if they were two months behind on their payments. The lender threatened foreclosure. (On the advice of their attorney, the Vaughns declined to disclose the bankers, pending possible litigation.)
"They just tried to run a bunch of fees up on us and say we were running two months behind and we weren't," Wilma Vaughn says. "They finally admitted it was their mistake and said they were going to straighten out our credit, but I don't believe they ever did.
"They make it sound like all these people [in foreclosure] are in over their heads," she adds, "but they're in over their heads because these companies put them in over their heads."
With the bust of the subprime mortgage market, foreclosures have skyrocketed to the highest levels in history: 2 percent of homes in the United States were in foreclosure in the last quarter of 2007. But a substantial number of foreclosures are also being driven by situations like the Vaughns'.
Companies that process mortgages on behalf of the mortgage holder are known as "servicers," and are often the only entity a homeowner will have contact with. A primer published by the National Consumer Law Center describes common servicer abuses that result in huge losses for low-income homeowners: "misapplying mortgage payments, hitting customers with bogus late fees and charges, [and] prematurely launching foreclosure proceedings against homeowners."
"The only way servicers make more money on servicing loans is if they charge fees or if they shepherd loans through the foreclosure process," says Al Ripley, staff lawyer with the N.C. Justice Center. The profit margin for collecting only the mortgage is very small, but the fees can be a cash cow for servicers. "There is an incentive to charge fees that are not proper because they get paid more. There is an incentive to let loans be foreclosed because they make more money. There is not a single economic incentive for treating the borrower well."
For example, the servicing company charged the Vaughns "drive-by fees," the cost of paying someone to drive by the home to make sure it hadn't been abandoned. The servicer added the cost even though the Vaughns were making partial payments and were obviously still living in the home.
The Vaughns faced foreclosure a second time in 2007. As age and illness caught up with them, the Vaughns missed a mortgage payment as they waited for Social Security and disability checks to arrive.
"I called the lady and I told her I had mailed a payment and I would mail another payment before the end of the month," Wilma Vaughn says. "The payment I mailed them—they sent it back and said they wanted three months of payments. I sent them three months, but when I sent it, they had already put the house in foreclosure. They sent the payments back."
The Vaughns have a letter from the lender stating their $1,286 payment was unacceptable because it was not sent with certified funds, such as a bank cashier's check. However, the Vaughns had never bounced a personal check, and until then, the lender had always accepted that form of payment. The lender charged the Vaughns an additional $1,300 for legal fees related to the foreclosure.
"What was so bad was lying awake at night wondering what we're going to do if they take our house," she says. "If they ruin your credit and take your house, where are you gonna go?"
Wilma Vaughn had worked as a temporary secretary at Legal Aid of North Carolina and called the pro bono firm for help. Attorney Will Corbett took the case.
During the foreclosure proceedings, "the [Franklin County] clerk determined that the loan was not actually in default in that period," because the servicer had wrongfully refused the payments, Corbett says. "So the clerk dismissed the foreclosure, and that gave us the opportunity to revisit the settlement and made it illegal of them to demand the attorney's fees."
Corbett later pointed out that the ruling was a rare victory before the county clerk. He said foreclosure cases often have confusing and tangential factual issues that make foreclosure resolution difficult, but the Vaughns' claim was straightforward.
Still, the Vaughns' dispute continues. "The agreement was we would get back into the loan and they would drop those fees," Wilma Vaughn says. "Now they are trying to bill them into our escrow account and force us to have to pay them anyway."
The Vaughns now owe $39,000 on their home. They were paying $433.50 monthly, but that amount has been raised to $508—a 17 percent increase—more than the Vaughns can afford. On March 3, Corbett wrote the servicer a letter questioning nearly $2,400 in unexplained fees.
"The way the mortgages and all are set up, it's to their benefit to foreclose," Wilma Vaughn says. "I wish our leaders and legislators would do something to change that situation where it's in their benefit not to foreclose. It's a type of oppression in the United States when they can take your home and there is no law to protect you."