With the downturn of the housing market a couple of years ago and the resulting rash of foreclosures across the United States, many American families are filing bankruptcy in an effort to keep their houses.
And experts estimate that more than two million families will lose their homes to foreclosure before all is said and done.
Unfortunately, the Chapter 13 bankruptcy judges have noticed an upsetting trend among the mortgage servicers and foreclosure-executing companies involved in Chapter 13 bankruptcy cases filed by struggling homeowners.
A study recently published by law professor Katherine Porter shows that a startling number of mortgage servicers and lenders are taking advantage of Chapter 13 bankruptcy petitioners by demanding unnecessary and excessive fees throughout their bankruptcy filings or foreclosure proceedings. Read on to learn how to protect yourself.
In today's mortgage market, most mortgage loans are securitized by large investment companies: basically, lenders sell borrowers' debt to investors. Investors pay lenders a lump sum in exchange for gradual payments from the borrower, often in the form of mortgage payments.
Mortgage servicers are the middlemen in the loan repayment/collection process. When a property is foreclosed upon, the mortgage servicer is responsible for producing proof of ownership by the investor and documentation of how much is owed by the borrower.
Like mortgage servicers themselves, this loan market model is relatively new. And that means that legislation regulating mortgage servicing has not yet had a chance to catch up with mortgage servicing practices. This limited loan-servicer regulation and oversight leads in turn to inadequate information offered by mortgage servicers during foreclosure proceedings, which can hurt Chapter 13 bankruptcy petitioners.
Porter's study shows that mortgage servicers earn most of their income in the following ways:
While the housing market was booming, mortgage servicers made a lot of money solely from the large volume of subprime mortgages being originated. The other two sources contributed less significantly to income.
Now that the housing market is in a slump, though, fewer loans are being originated, which means mortgage servicers have to get their money elsewhere. The fees connected with late payments and delinquencies can provide that income.
But many bankruptcy judges have noticed that some fees appearing in the paperwork of Chapter 13 bankruptcy filings seem questionable at best, including such examples as:
To get the best deal on a loan, borrowers can "shop around." Not so with a loan's servicer. The only chance a borrower has of getting a new servicer is to refinance the loan-and even this method isn't guaranteed. According to Porter's research, 40% of complaints to the Department of Housing and Urban Development involve mortgage servicing gripes. A mere 10% of borrowers consider themselves happy with their mortgage servicers.
As middlemen in the borrowing/lending game, mortgage servicers are not directly responsible to borrowers. And increased fees paid by borrowers translate to increased revenue for mortgage servicers.
The dearth of new loans is hurting lenders, too, which means servicers are getting laid off. As a result, fewer servicers can lead to cut corners and lowered overall loan servicing quality, factors that have been linked to foreclosures.
There are two main reasons why mortgage servicers have been charging excessive fees without consequence.
Porter's research reveals that nearly all legal action taken in response to excessive mortgage fees happens in bankruptcy court. Though no definitive conclusion has been reached as to the cause of this, Porter theorizes that many borrowers are better able to determine what they do and do now owe after consulting with a bankruptcy attorney and getting a debt discharge from a bankruptcy judge.
But, according to one bankruptcy trustee, most questionable servicing fees are completely ignored in bankruptcy court.
When money is tight, many families must choose between paying to file the documents contesting fees that could be legitimate and paying fees they might not owe.
A few government agencies have noticed the abuses in the mortgage servicing industry, and are already taking action.
The Office of the Trustee, the part of the Department of Justice that oversees bankruptcy filings in the US, has promised to take steps to stop illegal practices of mortgage servicers, including the filing of false or inaccurate claims, the charging of unnecessary fees and the failure to acknowledge discharged debts.
The Federal Trade Commission (FTC) has yet to take any specific corrective action, but it has declared that mortgage servicing abuse is a serious concern for homebuyers.