Foreclosure

US Veterans Got a Mortgage Break. Now They’re Losing Their Homes

A Covid-era program gave borrowers a year without mortgage payments. Some are finding their lenders would rather foreclose than let them pick up where they left off.

By Caleb Melby, Polly Mosendz, and Ann Choi

November 9, 2023 at 12:01 AM EST

Sharelle Rosado didn’t give a lot of thought to the legal solicitations piling up at her front door earlier this year. She’d recently gotten a speeding ticket and figured lawyers were offering their services. It wasn’t until she began opening the letters that she realized the mail was much more serious: Her house was in foreclosure.

Rosado is savvy about homeownership. She’s a licensed real estate agent and the one-time star of the Netflix show Selling Tampa, which tracked the staff of her all-female, all-Black brokerage. Her clients count on her expertise. Yet she was bewildered that her lender was moving to take her four-bedroom house outside Tampa.

It turned out to have everything to do with a Covid-era mortgage program that allowed borrowers with federally backed loans to postpone payments for a year or longer and then, at the end of this forbearance period, apply to pay the arrears over time. About 8.5 million homeowners availed themselves of the program, including about 445,000 military veterans such as Rosado, a former Army paratrooper whose loan was backed by the US Department of Veterans Affairs.

In March 2022, after her 12-month forbearance ended, Rosado filled out what’s known as a loss-mitigation application—essentially a report on her financial status, used to determine her eligibility for a repayment plan—and sent it to her lender, United Wholesale Mortgage. UWM approved her application and sent her a loan-modification agreement, under which she would resume her monthly payments and the payments she’d skipped would be due when the mortgage was paid off.

There was one problem: Rosado was recently divorced, and UWM wanted her ex-husband to sign the document, too. She and UWM came to an agreement, she says, that her ex didn’t need to co-sign the modification if he would instead sign a quitclaim deed, a document confirming he no longer had an ownership stake in the house. After some delay, he signed, and in August of that year, Rosado sent her signed agreement along with the quitclaim. The next month her mortgage payment of $1,282.77 was posted to her account, which she took as proof that the matter had been resolved. Not so: She was told there were still paperwork problems with her modification. She says she sent the quitclaim again.

Rosado says she had no idea the company intended to seize her home until the legal solicitations arrived on her doorstep in March. After a final failed attempt to get her loan modification approved, she faced two unappealing choices: immediately pay more than $45,000 in arrears and fees or lose her house. “I was pissed,” Rosado says. “This is embarrassing. I’m not about to lose my house.” She paid.

In a written statement, a UWM spokeswoman said the company “works hard to assist borrowers, even distressed borrowers, in servicing their loans,” but that Rosado’s account was incomplete. She said the signed agreement Rosado sent in August 2022 was an old version, and under the VA’s requirements she needed to submit a divorce decree in addition to the quitclaim. The company said it had “attempted telephone contact” with her 35 times last year and 43 times this year. Rosado says that UWM didn’t ask her for a divorce decree prior to foreclosing and that she didn’t receive any voicemails saying her file was incomplete.

At first, it looked as if the entire episode was an expensive fluke. But Rosado began hearing from friends she’d met while serving at Fort Bragg (now Fort Liberty) in North Carolina who were having their own troubles getting their loans modified. They had some things in common, including signs of financial vulnerability, such as disability, unemployment or divorce. The lenders had things in common, too: Most were nonbank companies, which issued more than 80% of the 746,000 VA loans written last year. Over the past decade, as traditional banks have retreated from the $12 trillion US mortgage market, these lenders, which mostly operate online and outside the scrutiny of bank regulators, have stepped into the void.

The mortgage forbearance program was a feature of the 2020 Coronavirus Aid, Relief and Economic Security Act, known as the Cares Act. It covered a large majority of the mortgages in the US, because most mortgages are backed by federal programs. Loan-modification agreements typically offered one of two options: The arrears would be added to the mortgage, extending the repayment period while keeping the monthly cost affordable; or, as in Rosado’s case, the arrears would be lumped into a balloon payment due when the mortgage was paid off. But the government didn’t require lenders and servicers (companies that buy and manage loans) to approve those agreements. Or to make the process straightforward and easy.

Across the US, about 4,000 veterans whose mortgages had been in the forbearance program had lost their homes as of mid-October, according to ICE Mortgage Technology Inc. Some 6,000 more are in foreclosure; 34,000 others are marked delinquent. Not all the foreclosure actions were the result of loan-modification denials. But the figures don’t include thousands of borrowers, like Rosado, who paid a lump sum, sometimes under duress.

The problem isn’t limited to veterans. Other homeowners who took part in the forbearance program have faced similar difficulties. About a half-million of them are delinquent or facing foreclosure, and an additional 87,000 have lost their homes. But the actions against veterans are notable given the lengths policymakers and regulators have gone to get them into homes and keep them there.

“If I didn’t have that money, I’d be with some of those other people, losing everything”

The Cares Act, a $2.2 trillion economic stimulus bill, was rolled out within weeks of the pandemic’s onset. The mortgage forbearance element in the act was broad and homeowner-friendly: Borrowers didn’t have to prove they were hard up, and mortgage companies couldn’t say no. So lenders and servicers lost a huge chunk of their primary revenue stream, and the legislation contained no bailout for them. Many were unhappy. “It’s frankly frustrating and ridiculous that we do not have a solution in place,” Jay Bray, chief executive officer of the lender Mr. Cooper Group Inc., formerly Nationstar Mortgage, told CNBC in April 2020. “There is going to be complete chaos.” His company had a strong balance sheet, Bray said, but others in the industry would “start seeing problems soon.” (Instead, interest rates fell, millions of people refinanced their mortgages, and lenders made a lot of money.)

As borrowers began to exit forbearance, in early 2021, the mortgage companies needed to help them craft repayment plans, which involved more people, more paperwork and more cost. The rollout of those plans was rocky at best. Some borrowers encountered insurmountable roadblocks, with their homes on the line. Conventional wisdom has long held that lenders prefer what are called workouts, such as loan modifications, rather than foreclosing on homeowners, which can be time-consuming and expensive. But home prices were skyrocketing, the product of a Covid-inspired desire for more space, historically low interest rates and a flood of government money. “Right now, because of the property values, they don’t mind foreclosing,” Safora Nowrouzi, a lawyer in California who handles foreclosure cases, says of lenders. “And that’s why denials are much higher.”

Borrowers, lawyers and advocates describe a rudimentary playbook: requests for documents that have already been submitted, assurances that an application is complete only for it suddenly to be reopened, envelopes that don’t contain promised documents, loans transferred to different lenders and other paper-shuffling moves that force borrowers into delinquency, increase the size of their arrears and narrow their options. Borrowers are “lulled into inaction, because they’re led to believe that the lender is working something out,” Nowrouzi says.

The Consumer Financial Protection Bureau, which monitors lending practices, says it’s unable to track how many loss-mitigation and loan-modification applications go awry, or how many are denied. But complaints from service members prompted the agency and the US Department of Justice to issue a warning in December 2021 to lenders and mortgage servicers citing borrowers who had “suffered negative impacts.” The letter described “incorrect or confusing communications” and mandatory lump sum payments as things that could run afoul of protections in the Cares Act. Borrowers with government-backed loans, the warning letter said, “generally cannot be required to repay their forbearance amount in a lump sum payment if they indicate that they cannot afford to do so when exiting forbearance.”

The letter doesn’t appear to have had the desired effect. In a report that covered transactions through March 2023, the agency again made clear that something was amiss. It said it had identified lenders that delayed homeowners’ applications and that “borrowers could not reasonably avoid injury because servicers controlled the processing of applications, and borrowers reasonably expected servicers to enroll them in the options they applied for.” The report didn’t identify any lenders by name, and no enforcement actions were taken. But the agency said the unnamed companies had “ceased the practice and developed improved policies and procedures.”

That hasn’t been the experience of veterans and advocates who spoke to Bloomberg Businessweek. “Instead of bringing attention to the damage inflicted, it conceals it,” Roberto Rivera, a consultant in New Jersey who works with attorneys whose clients are going through the loan-modification process, says of the agency’s reports. A spokesperson for the CFPB says it doesn’t make supervisory interactions with companies public.

Even after everything, Rosado considers herself lucky. Her circumstances had changed since she bought her home in 2020—the Netflix show plus a recent engagement to former Cincinnati Bengals wide receiver Chad “Ochocinco” Johnson—and she could afford the one-time payment. “If I didn’t have that money, I’d be with some of those other people, losing everything,” she says.

One of those other people is Monica Rosario, a retired Army captain. When it came time to modify the loan on her three-bedroom townhouse in Fayetteville, North Carolina, she was going through a divorce and between jobs. The divorce proceedings put her taxes in disarray, so Rosario, a colon cancer survivor, sent bank statements to her lender, Freedom Mortgage Corp., showing that she was still receiving disability benefits from the Army and was able to make monthly payments. She says the documentation never seemed to stay in her file. Freedom denied her loan-modification application and told her earlier this year that she had to pay $15,000 or lose her home, she says. She didn’t have that much money on hand and forfeited the house in a short sale in July.

Her home was listed for sale at 53% more than the price she paid. Rosario, who now rents across town, says she’s so wracked with depression that she’ll go days without stepping outside. “I still don’t understand how I was expected to pay that money so suddenly and continue on with my life,” she says. “It doesn’t make any sense.” A spokesperson for Freedom, one of the largest originators of VA loans last year, declined to comment.

“The risk of being sued and the risk of being dinged by the CFPB is baked into their business model”

Someone who last bought a home a decade ago would scarcely recognize the mortgage market today. The changes began with the 2008 global financial crisis, which was triggered by risky mortgage lending practices. In the aftermath, down payments once again became standard for most conventional mortgages, variable-interest-rate loans fell out of favor with both lenders and borrowers and income-verification standards were tightened.

Those reforms also made the business of writing mortgages less profitable for banks, which at the time underwrote the majority of home loans. Borrowers with higher credit scores and larger down payments can still count on bank loans; they’re desirable customers who, in addition to being unlikely to default, can be sold on more lucrative services, such as wealth management. For other clients, a new generation of companies sprouted up. Nonbanks, sometimes called shadow banks, don’t take deposits and are subject to much less regulation. They figured out they could make a profit lending to not-quite-prime homebuyers. Of course, the nonbanks need money to run their businesses. They often get it in the form of credit lines from many of the same banks that pulled back from the messy business of underwriting.

Last year, nonbanks accounted for 60% of all US home loans. The two biggest, Rocket Cos. and United Wholesale Mortgage, originated more than $255 billion of mortgage debt—more than Wells Fargo, JPMorgan Chase and US Bancorp, the top three bank lenders in 2022, combined.

John Bell, who manages the VA’s home-loan program, praises the role nonbank lenders have played in the VA mortgage business. “Thank goodness we had some of these nonbanks that raised their hand and were wanting to get into the business when banks backed out,” he says.

Many mortgage companies love VA loans. They’re backed by the government, the VA doesn’t set minimum credit score requirements, and down payments often aren’t necessary. Even closing costs can be borrowed, sending loan-to-value ratios as high as 103.3%. The result: VA borrowers often begin homeownership owing more than their home is worth, creating a long earnings runway for lenders.

Nonetheless, veterans who’d been waved through when they applied for their mortgage found their lenders weren’t going to make things easy when it came time to modify their agreements. Lawyers and housing advocates say that, depending on the state, trying to beat lenders in a he-said, she-said battle over who dropped the ball in a loan modification can be almost impossible. Those who succeed say borrowers must rigorously document their cases if they have any hope of winning. And there’s a growing sense that federal agencies, far from preventing abuses, may be making things worse with complex rules that befuddle lenders as well as borrowers. “The misinformation they’re giving on those phone calls is so sickening,” says Rivera, the consultant, of calls that customers have with their lenders. “There’s nobody there who has read the guidelines. It’s absurd.”

Absurd could describe Rosie Bennett’s situation. She got forbearance for the mortgage on her home in Coeur d’Alene, Idaho, in July 2020, the month before the death of her husband, who served as a Navy medic in the 1950s. The reprieve gave Bennett, who’s 79 and has multiple sclerosis, time to settle her affairs.

In January 2022 her mortgage servicer, Dovenmuehle Mortgage Inc., mailed her an envelope that she expected to contain her loan-modification agreement. But the envelope was empty, according to a lawsuit she filed against Dovenmuehle in federal court in Idaho. Bennett says she contacted the company several times to ask for the agreement and was told it would be sent. She continued making monthly payments, but the paperwork never came. In May 2022 the company sent a notice saying Bennett would be foreclosed on if she didn’t pay $33,529 within a month.

Dovenmuehle started foreclosure proceedings in June. In October the company transferred Bennett’s loan to PHH Mortgage Corp. She says she reached a modification agreement with PHH, only to have it rescinded this January. She was told she “needed to have her deceased husband execute and record” a document transferring his ownership in the house to her and was again threatened with foreclosure, according to the lawsuit, which also names PHH as a defendant.

Spokespeople for Dovenmuehle and PHH say they complied with all applicable laws and guidelines. The PHH spokesperson says, however, that the company no longer intends to foreclose. Bennett is pursuing her lawsuit anyway. The two-year saga has rattled her. “I’m just such a nervous wreck right now,” she says. “My whole body is just shaking all the time.”

One possible takeaway: Choose your lender carefully. But Bennett hadn’t contracted with Dovenmuehle or PHH. She and her husband had gotten their mortgage from Federal Savings Bank, based in New York. There are no rules preventing banks from selling mortgages or hiring nonbanks to service them. “This is the one consumer contract where you don’t get to pick who you do business with,” says Marc Dann, Bennett’s lawyer and a former Ohio attorney general, who now specializes in consumer lending cases. “She can’t say ‘Oh, I don’t like Dovenmuehle. I’m going to go down the street to Wells Fargo.’ She can’t do that.”

Settlements from cases such as Bennett’s tend to be small, and there’s little disincentive to avoid abusing borrowers, Dann says. “The risk of being sued and the risk of getting dinged by the CFPB is baked into their business model,” he says. “We could really use another 1,000 law firms doing the work that I do. At that point, maybe we would have an impact on the behavior of these companies.”

Lewis Rutherford’s maddening journey to a foreclosure notice began more than a year ago. A 63-year-old truck driver who played keyboards in bands at US Army bases across Europe in the 1980s, Rutherford hadn’t always paid his mortgage on time. After exiting forbearance, he thought he could avoid future problems by sending money in advance to his lender, Caliber Home Loans Inc. But when he sent $3,333 in August 2022 to cover three months of payments for his home in New Castle, Delaware, about $2,500 appeared to go missing.

Rutherford was irate and refused to make additional payments until the matter was resolved. In March, before he could get to the bottom of it, Caliber sold his loan to Shellpoint Mortgage Servicing. Rutherford says a Shellpoint representative told him the company had no record of his advance payments. With his money still missing, Rutherford insisted he wasn’t going to make any additional payments until the matter was straightened out. That’s a risky strategy for any borrower in a fight with a lender. In May, Shellpoint moved to foreclose.

What Rutherford didn’t know was that Caliber and Shellpoint were owned by the same company, Rithm Capital Corp. The paperwork Shellpoint said it couldn’t find existed within the same corporate family. As he fought to keep his home, “Rithm had one of its best quarters ever,” its CEO told investors in August. The company, which has been rolling up finance businesses for years, is now closing in on an acquisition of Sculptor Capital Management, a $33 billion hedge fund.

“Something ain’t right with these people,” Rutherford says. “If they see an opportunity to snatch a house, they will.”

He says that in June, after he told Shellpoint he’d spoken to Businessweek, the company said it didn’t need to foreclose on him after all. Court records show the company withdrew its foreclosure case a week later. A spokesman for Rithm’s mortgage division says the company made an error in how it applied Rutherford’s advance payments. “We have since corrected this error and are actively addressing any potential credit reporting impact caused by this issue,” the spokesman said. “In addition, we are ensuring that no other borrowers were negatively affected by this issue.”

In Charlotte, Makeda Young, a major in the National Guard who’s studying to be a physician assistant, took matters into her own hands. She says she paid more than $19,000 to clear her forbearance arrears after delays by her lender, Mr. Cooper, pushed her into default. Records show her application for a modification was accepted three times, followed by demands for documentation that Young says she’d already provided, ultimately leading to a foreclosure warning and her credit score dropping by 111 points.

Not all borrowers are meticulous record keepers, but Young is. She compiled a dossier of all documents and emails and pulled her phone records to show how many hours she’d spent dealing with the company. In June she took her case to the consumer protection unit of the North Carolina Department of Justice, which contacted Mr. Cooper. In a letter, the company told the agency it had tried to reach Young on several occasions and that she hadn’t responded. But Young sent her phone logs to state officials in an email describing Mr. Cooper’s description of events as “misleading and inaccurate.”

It worked. In a new letter, Mr. Cooper described Young’s efforts to get her loan modified and erased its claims that she’d been delinquent, which restored her credit score. A spokeswoman for Mr. Cooper says Young’s application ultimately was denied after all documentation had been received. The company “is committed to finding solutions to keep our customers in their homes” the spokeswoman said.

“I’m going to make sure they investigate every single case,” Young says. She’s been documenting her efforts on Facebook. One post highlights the portions of Mr. Cooper’s letter that portrayed her as a nonresponsive customer and an amended letter showing she had in fact been in frequent contact with them. And there’s a tearful video after Mr. Cooper relented.

The replies show how common the problem has become. “Dealing with this RIGHT NOW!!!” wrote one borrower. “This just HAPPENED TO ME!!!!” posted another. “My folks in NC whom are Veterans are going thru the almost same scenario real time. Thank you Sista! ARMY STRONG!”