Tuesday, April 29, 2008

New York Times editorial on foreclosure prevention

Waiting (Too Long) for Relief

Published: April 29, 2008

A year into the worst foreclosure crisis since the Depression, the House only now is getting serious about a foreclosure prevention bill.

It is bad enough that it will be weeks or months or next year before Congress actually passes a final relief measure. Worse is that the measure is more supportive of the mortgage industry, whose shoddy practices stoked the crisis, than of troubled homeowners, threatened communities or taxpayers who may have to foot the bill.

The measure, pushed by Representative Barney Frank, the Financial Services Committee chairman, is too much carrot and too little stick. It would guarantee troubled loans that are refinanced by lenders, provided the lenders reduce mortgage balances to an amount equal to 85 percent of the property’s current value.

Participation by lenders would be voluntary. If they or other parties to the loan — like mortgage investors — did not want to reduce the loan balances, they could continue with foreclosures. That is what has happened with other voluntary approaches.

Congress could fix that big flaw by finally allowing bankrupt borrowers to have their mortgages modified under court protection. Lenders would have a real incentive to participate in the bill’s rescue plan if they knew that borrowers had the option of going to court, where a judge could change the terms of a mortgage.

Amending the bankruptcy code will go nowhere without a push by the Democratic leadership, especially House Speaker Nancy Pelosi. The Senate is enfeebled by its bare Democratic majority and a cozy relationship with mortgage industry campaign donors. House members, too, would be loath to displease industry donors unless pushed by the leadership.

The leadership must also make it clear that lawmakers will no longer indulge the overwrought objections of the mortgage industry to the bankruptcy fix. Mainly, the industry claims that credit will dry up and mortgage costs will rise if borrowers are allowed, even temporarily, to modify their loans in bankruptcy. All other secured debt, like vacation homes and rental properties, can be modified in court and that has never frozen credit. The industry issued many of same dire warnings in the mid-1980s when the law was revised to allow farmers to have their mortgages modified in bankruptcy court. None of the supposed dangers came to pass.

Those and other issues have all been vetted before the House and Senate Judiciary Committees, and the bills those committees produced go to great lengths to meet all of the industry’s concerns. It is now up to Ms. Pelosi and her fellow Democratic leaders.

Copyright (c) The New York Times Company. All rights reserved.

Monday, April 21, 2008

Piling On: Borrowers Buried by Fees

Published: April 20, 2008

Slowly but surely, a handful of public-minded bankruptcy court judges are drawing back the curtain on the mortgage servicing business, exposing, among other questionable practices, the sundry and onerous fees that big banks and financial companies levy on troubled borrowers.

It isn’t a pretty sight, if you are a borrower. But shining a light on this dark corner certainly qualifies as progress.

The cases come out of bankruptcy courts in Delaware, Louisiana and New York, and each one shows how improper, undisclosed or questionable fees unfairly penalize borrowers already struggling with mortgage debt or bankruptcy.

Given the number of new borrowers falling daily into the foreclosure mire, dubious practices by servicers are beyond troubling. Foreclosure filings rose 57 percent in March over the same period in 2007, according to RealtyTrac, the real estate and foreclosure Web site. It also said that banks repossessed more than 50,000 homes last month, more than twice the amount of one year earlier.

If even one of those repossessions was owing to improper fees or practices, that would be one too many.

The case out of the Eastern District of Louisiana, overseen by Judge Elizabeth W. Magner, is especially depressing. It involves Dorothy Chase Stewart, an elderly borrower and widow whose original loan of $61,200 was serviced by Wells Fargo. Judge Magner cited "abusive imposition of unwarranted fees and charges," and improper calculation of escrow payments, among other things. She found Wells Fargo negligent and assessed damages, sanctions and legal fees of $27,350.

The heart of the case is that Wells Fargo failed to notify the borrower when it assessed fees or charges on her account. This deepened her default and placed her on a downward spiral that was hard to escape. And Wells Fargo's practice of not notifying borrowers that they were being charged fees "is not peculiar to loans involved in a bankruptcy," the court said.

During a 12-month period beginning in 2001, for example, Well Fargo assessed 13 late fees totaling $360.23 without telling Ms. Stewart or her late husband, whose name was on the loan before he died. Even though the terms of the mortgage required that Wells Fargo apply any funds it received from the Stewarts to principal and interest charges first, the late fees were deducted first. This meant that the Stewarts' mortgage payments were insufficient, making them fall further behind — and keeping them subject to more late fees.

Then there were the multiple inspection fees Wells Fargo charged the borrowers. Because its computer system automatically generates a request for property inspections when a borrower becomes delinquent — to make sure the property is being kept up — the $15 cost of the inspections piled up. The court noted that the total cost to the borrower for one missed $554.11 mortgage payment was $465.36 in late fees and property inspection charges.

From late 2000 and 2007, Wells Fargo inspected the property on average every 54 days, the court found. But the court also determined that inspections charged to Ms. Stewart had often been performed on other people's properties. Of the nine broker appraisals charged to Ms. Stewart from 2002 to 2007, two were said to have been conducted on the same September day in 2005 when Jefferson Parish, where the Stewart home was located, was under an evacuation order because of Hurricane Katrina.

The broker appraisals were conducted by a division of Wells Fargo that charged more than double its costs for them, the court found. It concluded that the charges were an undisclosed fee disguised as a third-party vendor cost and illegally imposed by Wells Fargo. The bank also levied substantial legal fees and failed to credit back to the borrower $1,800 that had been charged for an eviction action but that had been returned by the sheriff because it never occurred.

While Wells Fargo claimed that the borrower owed $35,036, the judge said the actual figure was $24,924.10. The judge ordered Wells Fargo to provide a complete loan history on every case pending with her court after April 13, 2007.

A Wells Fargo spokesman said the bank "strongly disagrees with many aspects of the recent bankruptcy rulings in New Orleans and plans to appeal these matters. Wells Fargo continuously works to enhance its bankruptcy procedures to comply with the requirements of the bankruptcy courts throughout the country."

The second illuminating case emerged in federal bankruptcy court in Delaware and involved a problem that lawyers representing troubled borrowers say they often encounter: fees levied after a borrower has satisfied all obligations under a Chapter 13 bankruptcy and the case is discharged.

Mortgage lenders argue that their contracts allow them to recover all the fees and costs they incur when a borrower files a Chapter 13 bankruptcy plan, even those not approved by the court and charged after a case is resolved. But borrowers contend that because such charges have not been approved, they should be disallowed.

Judge Brendan Linehan Shannon put forward this example: If a lender imposed $5,200 in charges on a borrower to cover weekly property inspections and the court disallowed $4,000 of it, lenders still contend that they have the right to try to collect fees after the case concluded that the court did not approve.

"This cannot be," the judge wrote. "If the court and the Chapter 13 Trustee fully administer a case through completion of a 60-month Chapter 13 plan, only to have the debtor promptly refile on account of accrued, undisclosed fees and charges on her mortgage, it could fairly be said that we have all been on a fool's errand for five years."

Finally, borrowers can be cheered by an opinion written this month by Cecilia G. Morris, bankruptcy judge in the Southern District of New York.

The case involved Christopher W. and Bobbi Ann Schuessler, borrowers who had $120,000 of equity in their Burlingham, N.Y., home when their bank, Chase Home Finance, a unit of JPMorgan Chase, moved to begin foreclosure proceedings. The couple had filed for personal bankruptcy protection, which automatically prevents any seizure of their home.

But the bank moved for a so-called relief from the bankruptcy stay, and claimed the couple had no equity.

The Schuesslers got into trouble because Chase had refused a mortgage payment they tried to make at a local branch. Testimony in the case revealed a Chase policy of accepting mortgage payments in branches from borrowers who are current on their loans but rejecting payments from borrowers operating under bankruptcy protection.

The Schuesslers did not know this. When Chase rejected their payment, they briefly fell behind on their mortgage, according to the court documents. Then Chase moved to begin foreclosure proceedings.

"Without informing debtors, Chase Home Finance makes it impossible for JPMorgan Chase Bank branches to accept any payments," Judge Morris wrote. "It appeared that Chase Home Finance intended to commence an unwarranted foreclosure action, due to 'arrears' resulting from Chase Home Finance’s handling of the case in its bankruptcy department, rather than any default of the debtors."

Court documents also state that Chase was unable to show that it had tried to communicate with the borrowers before it began efforts to seize their home. The judge concluded that the way Chase deals with bankruptcy debtors is an abuse of the process. She instructed Chase to pay the borrowers' legal fees.

Thomas Kelly, a Chase spokesman, conceded that the bank had made some mistakes in the Schuessler case, especially the fact that the branch teller had not advised the borrowers where to send their payment when it was rejected.

"Payments from customers in bankruptcy require special handling under bankruptcy law so tellers are requested to tell customers to mail in the payment or call the toll-free number on the back of the form," he said. "In light of the judge’s concerns we are reviewing our practices." He also said the bank had followed industry practice in moving to foreclose quickly "so we could meet the guidelines for servicing loans for investors."

"These cases clearly indicate that bankruptcy courts are no longer being fooled by the maze of fees, firms and flim-flams of the mortgage servicing industry," said O. Max Gardner III, a lawyer who represents borrowers in Shelby, N.C. "The servicers and their lawyers should recognize the clear and present danger of these decisions while they still have time to turn their ships around and do the right thing."

Copyright (c) 2008 The New York Times Company. All rights reserved.

Monday, April 14, 2008

Bankruptcy Code Section 503(b)(9)

Section 503(b)(9) was introduced to the Bankruptcy Code by BAPCPA and it provides that goods that are shipped and received by the Debtor within 20 days of the bankruptcy filing are deemed to be administrative claims. However, § 503(b)(9) is silent as to the timing of that payment. The introductory language to § 503 provides that “after notice and hearing,” a § 503(b)(9) claim may be allowed, therefor some commentators have indicated that Court approval may be required for the payment of an administrative claim. Other commentators have indicated that it’s unclear, and that in fact administrative claims may be paid by the Debtor without Court order.

Another issue raised in this area of the law regards reclamation letters. BAPCPA § 546(c) provides that a creditor may send a letter reclaiming goods shipped within 45 days of the bankruptcy filing. Generally, the goods are not returned by the Debtor to the vendor, however, the vendor would be given an administrative claim under § 503(b)(9) for the portion of the reclamation claim that was received by the Debtor within 20 days of the bankruptcy filing.

Another issue regarding reclamation demands or claims is that they may be impacted by DIP financing. Section 546(c) provides that reclamation claims are subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof and case law indicates that there is something called a “Priority Lien Defense,” which provides that a DIP lender or other secure lender would have a higher priority to be paid than a reclamation creditor, and therefore if there is no carve-out in the DIP order for reclamation claims, reclamation creditors would not be able to be paid during the pendency of the case or receive their goods back and they would be paid pursuant to a confirmed Chapter 11 plan if monies were available, i.e. what this means is that if the business is liquidated and there are not sufficient monies to pay secured creditors and reclamation creditors, then secured creditors would take priority over reclamation creditors.

In fact, the commentators indicate that the § 503(b)(9) administrative claim therefore may be more valuable to a creditor than the reclamation claim. In this area of the law, it’s extremely important for counsel to a creditor to (i) review the DIP order to determine to whether monies are provided to pay administrative creditors and the treatment of reclamation claimants and (ii) the liens of other secured creditors.

Monday, April 07, 2008

More Consumers Are Behind on Their Loans

More Americans have fallen behind on consumer loans than at any time in nearly 16 years, as credit problems once concentrated in mortgages have spread into other forms of debt, according to the American Bankers Association.

In a quarterly study, the association said the percentage of loans at least 30 days past due rose to 2.65 percent in the fourth quarter, from 2.44 percent in the third quarter and 2.23 percent a year earlier.

The rate of delinquencies was the highest since a 2.75 percent rate in the first quarter of 1992.

"There’s no question that the economy is weakening beyond housing, resulting in the loss of household purchasing power," said John Lonski, chief economist at Moody’s Investors Service.

"Deterioration of household credit should continue through 2008, though the rate may moderate," he said. "If it intensifies, then the current recession may prove more severe than anticipated."

The association’s chief economist, James Chessen, attributed the jump in the delinquency rate largely to auto loans.

Late payments on "indirect" auto loans, which are made through dealerships, totaled 3.13 percent, the highest on record. Delinquencies on direct auto loans rose to 1.90 percent, a 2 ½-year high.

Credit and debit card delinquencies rose to 4.38 percent, from 4.18 percent in the third quarter, after four consecutive quarterly declines.

Delinquencies on home equity loans rose to a 2 ½-year high of 2.39 percent, and on home equity lines of credit delinquencies rose to 0.96 percent, matching a level last seen in the fourth quarter of 1997.

The association’s study covers more than 300 banks that extend a majority of outstanding consumer loans. It covers direct auto, indirect auto, home equity, home improvement, marine, mobile home, personal and recreational vehicle loans.

Copyright(c) 2008 Reuters. All rights reserved.