Randy and Jennifer Rimstad of Minnetonka, Minn., refinanced their home mortgage in 2004 to replace a 50-year-old furnace and pay for their youngest daughter's wedding. In May, their interest rate jumped to 8.55% from 5.55%, pushing their monthly payment from $1,654.81 to $2,295.68, and the Rimstads buckled under an adjustable-rate mortgage they say they didn't understand and could ill afford.

Then came the collection nightmare that tacked on an additional $700 or so in monthly payments.

On Dec. 5, Option One Mortgage, a Kansas City, Mo., unit of H&R Block, foreclosed because the Rimstads owed more than $18,000 in late charges and attorney's fees on top of their past-due payments. After 24 years under the same roof, the Rimstads face an uncertain future.

"I don't know what will happen to us," says Randy, 57. "We don't have anyplace to go."

Option One says it can't comment on the specific amount owed but said it has been working with the Rimstads and will continue to "explore options toward a solution."

'Foreclosure factories'
Millions of other families in the United States could soon find themselves in the same dire straits. About $1.2 trillion in adjustable mortgages will shift to higher rates in 2006 and 2007, more than half of which are to borrowers with less-than-perfect credit, or subprime borrowers, like the Rimstads.

These loans already are defaulting at unprecedented rates. Lenders are in large part responsible because they sold risky and unsuitable mortgages to unsophisticated borrowers. In some cases, of course, careless borrowers shoulder some of the blame. But some say there's another force at work: aggressive servicing tactics.

"Predatory servicing has attracted little attention, yet in many respects it is more vicious and the adverse consequences are more far-ranging," says Jack M. Guttentag, a professor of finance emeritus at the University of Pennsylvania's Wharton School.

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Mortgage servicers collect and record monthly payments as well as manage insurance and tax payments on about $10 trillion in mortgage debt outstanding. They also manage defaults and collections when loans go bad. Critics of the industry, such as Rawle Andrews Jr., a bankruptcy attorney with Andrews & Bowe in Washington, D.C., call them "foreclosure factories."

Servicer abuse is not new. Still, regulators had hoped the industry would have cleaned up its act since 2003, when the Federal Trade Commission and the Housing and Urban Development Department slapped a record $40 million fine on Fairbanks Capital in one of the worst cases of predatory servicing, which involved many of its 500,000 customers. Says Kurt Eggert, a professor at Chapman University School of Law in Orange, Calif.: "The FTC hoped by nailing Fairbanks it would send a message to the whole industry. It hasn't yet."

Huge errors and software glitches
Any number of predatory practices, from not crediting payments to prematurely initiating foreclosure proceedings, can send struggling home buyers over the edge.

"In the subprime market, it's a huge deal because they're already in a loan that is very expensive. If you live paycheck to paycheck, the penalties of delinquency sink you deeper," says Alfred Ripley, a legal counsel for consumer and housing affairs at the North Carolina Justice Center in Raleigh, a nonprofit that helps low-income families statewide.

Ivy Jackson, a Housing and Urban Development director, is bracing for a lot more consumer complaints. "The speculation is the servicers don't have enough people to handle the volumes. We're hearing that they're not set up to service (exotic) loans."

Bureaucratic mistakes and software glitches are no small problem in the servicing industry. Huge errors stem from the massive turnover of ownership alone. Servicing rights for any individual mortgage are valued separately from the actual loan and are often sold repeatedly by banks and third-party servicers without customers having a clue or a choice.

Still, there is no rule that says the old servicer must transfer the entire record to the new servicer. Often borrowers aren't informed of a change, and they use their original payment coupon book and send checks to the old address. The checks usually get sent back to the borrower, while the new servicer chalks it up as a late payment, deducts a penalty from the mortgage and marks it as underpaid. After a few months of this, the loan is recorded as delinquent. But the customer may not know anything is wrong because servicers aren't required to send a statement, and if they do, it is often incomplete. A foreclosure notice can be the first indication of any trouble.

One Housing and Urban Development investigator says in a recent case a borrower faced foreclosure because 19 mortgage payments were missing. "The servicer found all 19 payments in what we call a 'miracle' because we got involved," the investigator says.