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Foreclosure and Coerced Home Sales

Illustration by Monte Wolverton on Cagle Cartoons.

Mortgage Servicer Accused of Pushing Distressed Homeowners Onto Its Auction Site

When Benita Guzman moved from the San Joaquin Valley to Southern California to be closer to family, she was confident that her husband, Alfonso, would find work as a carpenter. The couple bought a $370,000 home in San Jacinto, California, in 2006 with $50,000 in savings, including money withdrawn from Alfonso’s retirement account.

But the housing bubble burst the following year. “Nobody was building houses anymore,” remembers Benita, 66. She took various jobs working in payroll, including on Native American reservations, but the couple was ultimately unable to keep up with mortgage payments. The Guzmans managed to hold on to their home for another decade, finally defaulting on their loan in 2018.

“We exhausted everything we could, including our marriage,” says Guzman. The couple divorced in 2019.

The Guzmans’ story, which began with a predatory loan and ended with the loss of their savings and marriage, is the kind that was repeated with numbing frequency in the years following the 2007-2008 mortgage meltdown. Nearly 10 million people lost homes in the foreclosure crisis, and California, with its overheated real estate market, was an epicenter of the devastation.

In a short sale their home would have gone to a first-time homebuyer. But foreclosure sales are geared toward investors able to pay in cash.

But the manner in which the Guzmans gave up their Riverside County house has not been documented in the press before. And it is the subject of a class action lawsuit filed in February 2021 in federal district court for California’s Central District that accuses Dallas-based Nationstar, which rebranded as Mr. Cooper, of violating consumer protection laws in a manner that prolonged the Guzmans’ ordeal and increased the damage to their credit. (Despite the rebranding, the company will be referred to as Nationstar throughout this story.)

This lawsuit and other legal and regulatory troubles faced by Nationstar illustrate the tremendous sway financial middlemen have over homeowners when they experience economic hardship. Nationstar, the nation’s largest nonbank mortgage servicer, allegedly leverages that power to support a $433 million subsidiary, Xome, brokering the sales of the same distressed properties whose loans Nationstar services.

The lawsuit alleges that Nationstar is pushing distressed borrowers by the thousands every year to use its subsidiary, an online real estate auction house called Xome. Its relationship with Xome represents a conflict of interest that is “staggering and completely unethical and illegal,” according to the complaint.

End of Forbearance

As of early February, the parties were working to settle the case, according to court documents. But in a 2020 filing with the Securities and Exchange Commission, Nationstar recognizes the potential for controversy created by its subsidiary. “Xome provides services to us which could create, appear to create or be alleged to create conflicts of interest. By obtaining services from a subsidiary, there is risk of possible claims of collusion or claims that such services are not provided by Xome upon market terms.”

In December, a Nationstar spokeswoman said via email that the firm would not comment upon ongoing litigation. She did not respond to a subsequent request for comment this week. In a September 2021 legal filing, Nationstar denied violating consumer protection laws and that the company “owed any fiduciary duties to Plaintiffs or breached any duties owed to Plaintiffs.”

The alleged conflict of interest impacts homeowners like the Guzmans, who pursue short sales in order to mitigate the damage to their credit of a loan default, according to their lawsuit. In a short sale, distressed borrowers sell their home for less than what they owe on their mortgage. A short sale is an alternative commonly offered to those facing foreclosure and was in widespread use during the 2007-2008 housing market collapse. In order to move forward with a short sale, homeowners require permission from their mortgage servicer.

Nationstar allegedly directed the Guzmans to proceed with the short sale and enter into a contract with a local realtor. In July 2019, the realtor found a buyer for the three-bedroom house. The buyer secured financing, a Veterans Administration loan, and was willing to pay $280,000 for what would be his first home purchase, according to the realtor, who asked not to be identified in this story.

But then, the Guzmans charged, Nationstar changed course, letting the Guzmans know in a letter that the short sale would need to be managed by Nationstar’s own subsidiary, Xome.

Launched in 2015, Xome promotes itself as an “end-to-end digital platform” able to manage all aspects of a real estate transaction, from making offers to securing financing to helping with home valuations, according to Housing Wire. For that service, Xome tacks on a hefty fee of at least 5% of the sale price of a property to what buyers are already paying their real estate agent.

Threatened with foreclosure, the Guzmans felt compelled to agree to list their home with Xome and to a fee, the lawsuit charges, that would ultimately inflate the price of their house and doom their efforts at a short sale.

Worse, the Guzmans’ real estate agent said Xome’s representatives interfered with her work. The company added paperwork requirements and mandated open houses in the middle of the week when prospective buyers were working. Such conditions “didn’t add any value,” she said. Xome is “out of state. They don’t really know how to manage the local market.”

In the end, Xome was unable to find a buyer who would pay a price that would satisfy the owner of the loan, according to the lawsuit. A mortgage servicer like Nationstar is the face of the loan, but the loan itself is often owned by an investor who has no contact with the homeowner. As a middleman, the servicer makes money from the fees it collects from borrowers when loan payments are made, loans are modified, or foreclosures occur. For the Guzmans, foreclosure became the only option.

By 2018, Benita Guzman was retired and living with her son in Arizona. She was subsisting on her social security income, about $13,000 per year. The hassles caused by the delays in selling the house had been costly and stressful, she said. “I kept signing papers and papers and papers, and I spent all kinds of money faxing,” she said. Xome’s alleged failure to accomplish a short sale was only one blow among many in a long and trying saga. “One minute it was OK, and the next minute it wasn’t,” Guzman said.

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The foreclosure had repercussions, according to Derik Lewis, an attorney with Aliso Viejo-based Vantis Law, who represents the Guzmans. “The foreclosure is much more damaging to their credit than a short sale,” he said. “It’s harder to rent, harder to bring your FICO back up, harder to get another mortgage.”

In the end, the house sold in early 2020 for $260,000, $20,000 less than the price the couple had secured with their agent for the short sale seven months prior. That meant that the Guzmans would need the lender to forgive more of their debt than if they had opted for the short sale, according to the suit.

By contrast, for Xome, the failure of the short sale made no real difference, according to the lawsuit. Even though the short sale failed, “When [Mr.] Cooper and Xome take a home through foreclosure and subsequently list it for sale, they can make upwards of an additional 6% of the value of the home,” according to the suit.

The Guzmans are not alone in their experience with Nationstar and Xome. Idris Amara, another party to the class action suit, had also secured a buyer for his Fontana home in a short sale after he defaulted on his loan in 2016. But after initially granting him permission to move forward with a short sale, Nationstar allegedly changed course and required him to participate in a short sale managed by Xome, according to the lawsuit. That short sale also failed. Amara now owes more than $14,000 to the homeowners’ association affiliated with the Fontana property he and his family had to give up, and has been contacted by a debt collector. That debt would have been retired had Amara been able to complete a short sale, Lewis maintains.

“It was really very, very depressing,” Amara says of the whole experience of losing his home in 2016 after his wife and son suffered health problems. His damaged credit meant he was unable to help his 22-year-old daughter rent her first apartment when she moved to Washington, D.C., to pursue a master’s degree.

He and his family now rent a home in Riverside. A workers’ compensation adjuster, he no longer sees a pathway to homeownership in today’s hot real estate market.

The relationship between Nationstar and Xome — an auction house that is a wholly owned subsidiary of a mortgage servicer — is unusual. “I know of nobody else that has that kind of setup,” said Jon Daurio, who runs Nikkael Home Loans, a mortgage broker in Tustin, California, and a veteran of the mortgage industry.

As the Guzmans and the Amara family have struggled, Nationstar has prospered. In 2012, when Nationstar made its mark cleaning up after the housing market collapse, it was not even among the top 10 mortgage servicers in the country and controlled just 1% of the market. Now it controls 6% of the market and is the country’s third largest mortgage servicer, behind Wells Fargo and JPMorgan Chase.

Nationstar has recently attracted other class action lawsuits and attention from regulators. The Consumer Financial Protection Bureau joined the attorneys general of all 50 states and the District of Columbia in announcing a $91 million settlement with Nationstar in December 2020. The settlement was viewed as a warning to other mortgage loan servicers not to take advantage of homeowners during the pandemic.

In its complaint, filed in federal district court in the District of Columbia, the CFPB alleged that between 2012 and 2016 Nationstar harmed tens of thousands of borrowers by failing to honor borrowers’ loan modification agreements and improperly increasing their monthly payments. The company also foreclosed on borrowers while their loss mitigation applications were pending in spite of the company’s promises that it would work with borrowers, according to the complaint.

Nationstar, for its part, described the 2020 national settlement agreement as old news: a resolution of “certain legacy regulatory matters” that “involved findings from examinations and discussions that were completed in 2014 and 2015,” according to its 2020 annual report.

A predecessor to Xome, Solutionstar, used an automated system to fraudulently charge borrowers for unnecessary property inspections that resulted in excessive fees, according to a class-action lawsuit filed in U.S. District Court for the Eastern District of California in 2016. Almost six years later, the case, which alleges that the former Nationstar subsidiary harmed tens of thousands of borrowers, is still in litigation.

In spite of the suits and the CFPB complaint, Xome has not drawn much media scrutiny. Nevertheless, Nationstar’s CEO Jay Bray showed some sensitivity about the optics of its auction house — and foreclosures more generally — on a recent earnings call after an investor raised questions about whether Xome’s relationship with its parent Nationstar represented a conflict of interest.

“So you’re not in a situation where you’re foreclosing and selling your own properties?” asked Henry Coffey, an analyst from Wedbush Securities, a Los Angeles-based investment firm.

Chris Marshall, Nationstar’s chief financial officer, made it clear that Nationstar did not own the properties subject to foreclosure. But soon after this question was posed, CEO Bray felt the need to address “the contentious nature of foreclosure.”

“The political argument is … get those homes back out into the market. There’s a shortage of homes, especially for low income and first time homebuyers,” said Bray, who stressed how successful the company has been in resolving customer issues.

In the short sale arranged by the Guzmans’ agent, their home would have gone to a first-time homebuyer. But foreclosure sales are primarily geared toward investors able to pay in cash. “People that are buying [foreclosed homes] typically have in their pocket a series of cashier checks,” said Daurio, the mortgage broker.

End of Forbearance

The Guzmans’ house was sold at a foreclosure auction in February 2020 for $260,000 to Catamount Properties, an LLC connected to the Southern California home flipping giant Wedgewood. Their former home — advertised on Redfin as a “LUXURIOUS detail-laden home [that] will quite simply leave you BREATHLESS!” — sold for $315,000 two months later.

Jessica Goodheart
Capital & Main