Exploiting Borrowers Amidst the Foreclosure Crisis

Posted by Antoine Morris, Drum Major Institute at 3:05 PM on May 8, 2008.

On Tuesday, May 6th, a Senate Judiciary subcommittee held a hearing on abusive practices perpetuated by mortgage lenders in the bankruptcy court system. Businesses and consumers often turn to bankruptcy courts as they liquidate their assets in an effort to workout reasonable payment plans with their creditors. For families on the brink of losing their homes, bankruptcy courts play a key role in allowing at-risk homeowners one last chance to keep their homes.

In recent months, however, some mortgage services such as Calabasas, California based Countrywide Financial Corporation have come under intense scrutiny for foreclosing homes prematurely only to pile on unnecessary and costly fees on borrowers during bankruptcy proceedings.

Steve Bailey, the Chief Executive for Loan Administration at Countrywide, however, disputed those allegations. In a prepared statement before the Senate Judiciary Committee’s Subcommittee on Administrative Oversight and the Courts, he said, "Countrywide is committed to helping our borrowers avoid foreclosure whenever they have a reasonable source of income and a desire to remain in the property."

He also claimed, "Recent media reports alleging that mortgage servicers are systematically charging excessive fees and using the bankruptcy process to push borrowers into foreclosure or abusing the process more generally are inaccurate." Bailey attributed any perceived abuses to no more than run of the mill "individual employee errors."

Countrywide's track record of overcharging borrowers facing foreclosure and during bankruptcy proceedings, however, suggests otherwise. One New Jersey couple who owned their home for the last 10 years were served with foreclosure papers by Countrywide and were inexplicably charged expensive flood insurance that they could not afford and did not need. It took months to resolve the error. Meanwhile, they fell behind on her mortgage payments.

In several other instances, the mortgage company has also been accused by attornerys representing borrowers and U.S. Trustees in bankruptcy courts of inflating overdue mortgage payments and fabricating documents to bolster their claims and collect more money in bankruptcy court.

Robin and John Atchley's experience with Countrywide seems to be emblematic of these very same abuses. In 2004, the Atchley's moved from a mobile home to what Robin Atchley described as her family's dream home in Waleska, Georgia. After securing a home loan from American Freedom Mortgage her mortgage was sold to Countrywide. During Mrs. Atchley's grieving period after her sister's death, she took unpaid leave from her job at the U.S. Postal Service. Soon afterwards, the Atchleys fell behind on their mortgage payments by about three months worth.

Apparently, that was enough for Countrywide to initiate foreclosure proceedings against the Georgia family and create what Atchely called a "tug of war" over her home. The Atchleys hoped the bankruptcy court would allow her and her husband to pay off her debts and keep their home. But the Atchley said all Countrywide wanted to do was " take advantage of our predicament and to profit from our struggle." In fact, at one point, Countrywide alleged that the Atchley's owed an extra $14,000 on her home loan and $2,250 for other unspecified fees.

Neither of those extra charges were substantiated once they were vigorously challenged by her attorney.

Katherine Porter, a bankruptcy law expert who has studied 1700 bankruptcy cases, told the Subcommittee that the Atchleys suffered an all too common fate. Porter said of the bankruptcy cases she researched "mortgage servicers disregard(ed) bankruptcy law" more than half the time.

Mortgage services frequently misapply payments during the bankruptcy case or fail to disclose post-bankruptcy attorneys fees and property inspection charges or simply not itemized their fees at all in an effort to overcharge borrowers. Porter contends that such a pattern of falsifying or withholding documentation demonstrates a deliberate attempt to manipulate a system intended to help those trying to avoid financial ruin.

An unpersuasive defense from Bailey of Countrywide's treatment of the borrowers like the Atchleys led Senator Chuck Schumer, chairman of the Subcommittee, to conclude "Companies know that the hapless homeowner is too poor, too unsophisticated or too overwhelmed to challenge often blatantly fraudulent demands for payment."

The Atchleys eventually lost their home and are currently living with other family members until they can save enough money to rent a place of their own.

Tagged as: mortgage foreclosure, subprime, bankrupty