December 16, 2009 / 9:27 PM / 10 years ago

UPDATE 2-Ohio sues Barclays' HomEq on mortgage servicing

(Updates with Barclays comment)

By Al Yoon

NEW YORK, Dec 16 (Reuters) - Ohio’s attorney general on Wednesday filed a lawsuit against the mortgage servicing unit of Barclays Capital that expands an attack on mortgage companies that he says are failing the state’s troubled homeowners.

Attorney General Richard Cordray said his suit charges Barclays Capital Real Estate, which does business as HomEq Servicing, with using unfair and deceptive agreements and violating state consumer law.

It is the third lawsuit filed by Cordray against mortgage servicers and the first of his to tackle a large Wall Street investment firm that profited from buying and packaging risky mortgages during the housing boom.

Servicers have had “ample time” to make a difference in preventing foreclosures, Cordray said. “Unfortunately, many servicers have instead repeatedly chosen to aggravate the crisis through noncompliance and excuses.”

Barclays Capital, a unit of Britain’s Barclays Plc (BARC.L), bought HomEq Servicing from Wachovia Corp at the height of the housing market in mid-2006 as it sought growth in the profitable business of securitizing loans by bundling them together and selling them to investors as bonds.

Cordray alleges HomEq devised unfair and deceptive agreements that released itself of all liabilities and required borrowers to waive their rights to defenses and pay more fees. He also accuses HomEq of violating Ohio’s Consumer Sales Practices Act through incompetent customer service and failing to offer timely and affordable options to cut losses.

“HomEq believes this is a meritless complaint which it will defend vigorously,” a spokesman said. “HomEq is committed to quality customer service and to working with financially distressed borrowers to help them remain in their homes.”

Mortgage servicers collect and distribute monthly loan payments, or manage collections and foreclosures after a default. Loans packaged into bonds by Wall Street are the result of some of the easiest underwriting standards and were an early trigger of the worst housing crisis since the Great Depression.

Fixing the bonds through refinancing or loan modification has been a centerpiece of efforts by the Obama administration to stop foreclosures that are damping economic growth.

Cordray said addressing the failings of servicers is critical. “As long as that goes on the economic recovery will be difficult,” he said.

Cordray since July has also sued Carrington Mortgage Services and American Home Mortgage Servicing, which are also big servicers of private mortgage bonds. Cordray has said he would sue all servicers if he had to, but hoped that most would step up efforts to avoid litigation.

Servicers including HomEq are under fire from the government for delivering disappointing results under the U.S. Home Affordable Modification Program, known as HAMP, which aims to prevent millions of foreclosures by easing loan terms. Only 4.3 percent of homeowners with trial modifications have so far received permanent payment reductions, with many falling behind, or caught up in documentation or underwriting.

Loans in private securities packaged by Wall Street during the housing boom are among the toughest to modify because contracts may prohibit or limit changes.

Most loans being modified by HAMP are either held on bank balance sheets or in bond programs of Fannie Mae and Freddie Mac, which are controlled by the government stewards of HAMP, according to a loan modification source. (Additional reporting by Juan Lagorio; Editing by Leslie Adler and Diane Craft)

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