Mortgage Fees in Chapter 13: Rules to the Rescue?

In a February post to Credit Slips, Katie Porter pointed out a recurring problem for U.S. debtors trying to deal with mortgage defaults through a Chapter 13 plan.  They can make all of the payments needed to cure their pre-bankruptcy defaults and all of the principal, interest, and escrow payments that become due while the case is pending, but still end the case substantially behind on their mortgages, due to additional fees and charges claimed to have accrued during the case, such as mortgagee’s attorneys fees, inspection fees, and late charges.  Professor Porter voiced support for  proposed legislation—the Foreclosure Prevention Act of 2008—that would require mortgagees to give notice of such post-bankruptcy fees while the bankruptcy case was still pending, so that debtors could either challenge the fees or provide for their payment under bankruptcy protection.  But the fee-notice provision was only one part of the proposed legislation.  The legislation also provided for modifying the terms of home mortgages in bankruptcy, and with opposition from mortgage providers, it failed to survive a filibuster threat. 

Perhaps a new bankruptcy rule on disclosure of mortgage fees—unconnected to mortgage modification— could deal effectively with the problem. Like the proposed legislation, a rule could require mortgagees to give reasonable notice of extra fees or charges that arise during the course of a Chapter 13 case and could provide that if the required notice is not given, the fees may not be assessed.  A streamlined procedure for resolving any disputes over the fees could also be implemented by rule.  Although the process of adopting a rule is long—generally at least three years—it has the advantage of being insulated from much of the political pressure brought to bear on Congress.  Moreover, in contrast to their response to mortgage-modification legislation, mortgage providers might support a rule on notice of post-bankruptcy mortgage fees.   Currently, local courts and individual judges have adopted a variety of methods for dealing with such fees (for example, Section B.2(b) of the model plan for the Northern District of Illinois).  A uniform rule on the question would offer reduced costs of compliance for mortgagees, as well as a level of protection for debtors.

Comments

[Mike Dillon]

Due respect, Your Honor, but I fear that the problems that Prof. Porter has brought to light in the mortgage industry (incredibly well, I might add) exist in far greater frequency OUTSIDE of bankruptcy than they do inside.

What Prof. Porter has documented is an issue known as Mortgage Servicing Fraud. The fraudulent process to steal my home in NH began on Day 1 when Fairbanks Capital Corp. began servicing my loan in 2001. I was one of 281,100 FTC-certified victims of Fairbanks (n/k/a Select Portfolio Servicing) as certified in USA/Curry v. Fairbanks ( http://www.ftc.gov/fairbanks ).

To the best of my knowledge, I am the first homeowner in the country to obtain both permanent injunctions and contempt orders against a mortgage servicer without having to file for Chapter 13 protection.

While I have endless gratitude for Prof. Porter's work, as without it Mortgage Servicing Fraud would continue to exist indefinitely below the radar of entirely too many, the issue at hand is not limited to the bankruptcy world. Simply put, Bankruptcy does not cause Mortgage Servicing Fraud, Mortgage Servicing Fraud causes bankruptcy.

Mortgage Servicing Fraud is a case of "Justice is only for those who can afford it." Most MSF victims simply cannot afford the $20,30 or 50k retainers asked of them by the law firms who may have the easiest access to the necessary resources to take on an MSF claim. That leaves only one option if they want to attempt to save their property - the automatic stay of a Chapter 13 petition. This is the reason that Mortgage Servicing Fraud shows up in the bankruptcy courts. Simple economics.

About a year ago, I received an e-mail from a Dime Savings Bank victim. Others may recall the time line better than I, but I believe Dime happened back in the mid 90's. The Dime victim informed me that my story was virtually identical to their story which unfolded 15 years earlier.

Mortgage Servicing Fraud is ultimately a securitization issue. It stems from the virtually boiler plate language used in the Pooling & Servicing Agreements of the RMBS prospectuses. This language allows unscrupulous servicers to literally manufacture default situations by holding payments until past due and all of the actions that Senator Schumer cited in his opening statement during the Judiciary hearing 05/06. http://judiciary.senate.gov/hearing.cfm?id=3327

Mortgage Servicing Fraud exists in a far greater scope outside of the bankruptcy world and it's laws. For anything to truly be done to rectify the blatant stealing of Americans' homes any legislation enacted absolutely MUST address Mortgage Servicing Fraud BEFORE it becomes a bankruptcy issue. Otherwise, those homeowners who fall victim to fraudulent mortgage servicers and are unable to obtain competent legal counsel outside of the protection of the bankruptcy system will continue to lose their homes to fraudulent foreclosure actions.

[Patches]

I see it all the time as well! I have friends come up to be at hockey games and ask me about problems with their mortgage co. receiving and posting payments. My favorite servicer of course!

What we do here pursuant to local rules is that if the debtor is behind on mortgage at the time of the filing of a chapter 13, not only do we include mortgage arrearage but also “pass thru” the debtors regular monthly payment. So the 13 Trustee pays pro rata on arrearage and other debts, ie. car, credit cards etc… and sends in the debtors regular monthly mortgage payment every month. Towards the end of the 13 the 13 Trustee files a notice declaring mortgage current and sets it for hearing. All of that is to combat “miss applied payments”. It works out well for most in that plan payments are deducted from wages so the debtors rarely ever become delinquent on post-petition mortgage payments. Another bonus is that Motions for Relief are becoming rare and if filed the 13 trustee usually joins in an answer.

I have been struggling though with having to modify plans due to a higher interest rate, tax rate and insurance rate increases. Most of that is because we propose low percentage plans for the most part. Then again some of the increases have not been due to any of that but the misapplication of payments by the servicers. I guess that’s good for the debtor because we can filter them better. My job is a bit more complicated though.

[Mike Dillon]

Patches, when clients come in are you, by any chance, pulling the 424b5s, 8-Ks, and 10-Ks on the RMBS if their loans are securitized? The PSAs contained therein potentially hold a large part of the key to why those payments have been "misapplied". Ctrl -F "additional servicing compensation" the next time you pull up an RMBS prospectus if you haven't already....

[Patches]

Thanks for the tip Mike. I would love to review that stuff for our debtors but........can you give that to me again but in English this time??? I may be looking at that stuff but I have no clue what that stuff is. Unfortunately for me by the time I get pay histories in the context of a chapter 13, they have already been filtered and re-hashed by the attorneys for the servicers. I would love to know what I am looking at though if I do get them.

I have to keep it simple here, and sometimes that means having the debtors bring in proof of every payment made. Why? Because I do not know how to read the pay histories and what the codes mean. If you can point me in the right direction I will be extremely grateful and in your debt.

You would think that after 13 years of doing this I would know what that stuff is..... but I don't. There are just so many other aspects about this biz that tax my attention. Every little bit helps though and every bit of insight I glean eventually filters down to our debtors. Like the other day, when I was talking with an Attorney for a mortgage servicer. The information I have received on this blog helped me negotiate a reduction on an arrearage POC by over 14k! Now, I didn’t say “well I learned on creditslips that...” I keep the information close to my vest and use the knowledge to form my questions. It’s nice to know the answers before I ask the questions in that particular situation. Yes, we could have made a big “to do” about the whole thing but it would have been extremely taxing on our debtors and this office. Sometimes the biggest victories in this Biz are the ones that go untold and unnoticed.

[Mike Dillon]

SEC filings, Patches... www.sec.gov. The language that allows, or more accurately, INCENTIVIZES servicers to commit Mortgage Servicing Fraud lives in the Pooling & Servicing Agreements of the prospectuses of the Residential Mortgage Backed Securities filed with the SEC. This is all public information, btw. And since roughly 80% of all mortgages are sld into the secondary market and securitized this affects the vast majority of borrowers having difficulty with servicers.

If attorneys, regardless of area of practice, are representing borrowers in default - especially if the borrower claims that they are NOT in default - they are doing a potentially huge disservice to their client by not procuring and examining any servicing agreement that may exist between the borrower's note holder and the servicer.

I'll take this off board to go into further detail so as not to bore others....