Dubious Fees For Homeowners Facing Foreclosure

The New York Times today took a look at the work of Katherine M. Porter, associate professor of law at the University of Iowa, and bankruptcy specialist. She’s been taking a closer look at the fees that some loan servicers are charging homeowners who are in foreclosure. She’s determined that some of the fees are “questionable.”

From the NYT:

Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question.

“Regulators need to look beyond their current, myopic focus on loan origination and consider how servicers’ calculation and collection practices leave families vulnerable to foreclosure,” said Katherine M. Porter, associate professor of law at the University of Iowa.

In an analysis of foreclosures in Chapter 13 bankruptcy, the program intended to help troubled borrowers save their homes, Ms. Porter found that questionable fees had been added to almost half of the loans she examined, and many of the charges were identified only vaguely. Most of the fees were less than $200 each, but collectively they could raise millions of dollars for loan servicers at a time when the other side of the business, mortgage origination, has faltered.

In one example, Ms. Porter found that a lender had filed a claim stating that the borrower owed more than $1 million. But after the loan history was scrutinized, the balance turned out to be $60,000. And a judge in Louisiana is considering an award for sanctions against Wells Fargo in a case in which the bank assessed improper fees and charges that added more than $24,000 to a borrower’s loan.

At the risk of sounding paranoid, with an estimated 2 million Americans set to lose their homes before this mortgage crises is over, it’s important to keep an eye on an industry that needs to milk every last penny out of the mess that it has created.


Dubious Fees Hit Borrowers in Foreclosures
[NYT via Credit Slips]
(Photo:David Lienemann for The New York Times)

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  1. canerican says:

    What do you mean the industry created the mess? The mess was created by people who wanted to live well beyond their means and are now looking for an easy way out. In all honesty there should be more fees for people who are choosing to foreclose. I feel bad for the 5% of people who didn’t try and live beyond what they were capable of and just hit some hard luck like bad health or got scammed or whatever. But for the 95% who didn’t bother: A) look into what they were signing, and now are stuck in debt they can’t pay, or B) Chose do get a house they couldn’t afford, too bad. Deal with it. The sad part is that its all gone for them in 7 years. I’m not cold hearted but some people need to take responsibility for their own decisions. I have made mistakes in my life. I don’t go around blaming the person who encouraged me to pick up a bad a stock, I blame myself for being an idiot and not doing better research.

  2. BigNutty says:

    Most homeowners would never be able to figure out whats legitimate and whats not in these cases. I would never sign a contract without understanding completely every word and fee. That’s what lawyers and other professionals are for. I think it would be well worth the fee.

    Would you as a first time home buyer handle the whole transaction yourself without any professional advice or someone to look over the contract?

  3. ReccaSquirrel says:

    @canerican: If you build it, they will come.

    It was the loan industry that started offering customers balloon mortgages. Customers didn’t come to the banks begging something like that to be offered.

  4. JKinNYC says:

    @ReccaSquirrel: Sorry, that’s a cop out. If I brew beer, does that mean you have to get shitfaced? Some people definitely got screwed and suckered, but most of the horror stories I’ve heard were people who bought outside their means and did something stupid.

    Part of being a good consumer is taking responsibilty for your mistakes. Corporations are not always 100% culpable. (Just most of the time).

  5. cde says:

    @JKinNYC: If you serve/sell someone alcohol, you are just as responsible for them getting wasted and killing someone as they are. Being that you make a profit off of it, and have a better grasp of the situation, you have more responsibility then they do. That applies equally to bars and beer as it does to banks and morgatges.

  6. JKinNYC says:

    @cde: So how much blame can we give the people who took out the loans here? I’m not trying to say the banks aren’t responsible. All I’m trying to say is that most of the people who took out the loans – almost all of them – have some culpability in their own demise.

    Credit cards are the same way. The companies that offer them can be awful, but ultimately, if you take responsibility for your own finances, you don’t have these problems.

    If there was legitimate trickery, obfuscation, or intimidation, its a different story. Merely offering a product does not remove all responsibility from the consumer to act responsibly.

  7. TechnoDestructo says:

    AND he ruined Star Trek! Man I hate this guy!

  8. JiminyChristmas says:

    @canerican: So, the mortgage industry didn’t help create this mess? Come on, this is definitely a ‘takes two to tango’ situation.

    The mortgage originators wrote loans to risky borrowers, and they charged them higher interest rates which reflected this risk. They were raking in the cash. As long as house valuations kept going up the game was on because the borrowers could refinance or otherwise get cash out of the house…even though they couldn’t fundamentally afford the property.

    Well, when the housing values stopped going up, the creative financing that kept the game of musical chairs going vanished. That’s when all the people who bet everything on being able to get a timely refi deal found themselves with no options. Their ARM reset, or their balloon payment was coming due and there wasn’t a bank in the world that would give them a new loan.

    All the while the banks were cooking up nifty things like SIVs: securitized investment vehicles. That meant they could originate loans, package them into securities, and then sell them on Wall Street. As a result, mortgage underwriting standards went out the window.

  9. Buran says:

    @TechnoDestructo: How so? I don’t see the names Brannon or Braga anywhere.

  10. sleze69 says:

    I feel so bad for these people who are getting bailed out of their irresponsible ARM loans. As a person who got a fixed rate loan, I will actually have to pay for what I agreed to.

  11. canerican says:

    @JiminyChristmas:
    I didn’t say they didn’t help to create this anywhere in my post. But this wasn’t a unilateral agreement, I would find it hard to believe it if you said that some people were literally forced to take an ARM. Therefore they are responsible for not research housing market futures, and what exactly they were getting into. I strongly doubt that it is the bank’s responsibility to inform their customers that an Adjustable Rate Mortgage is adjustable both ways. I’m sorry that’s a cop out.

  12. SuperSally says:

    @canerican

    No, they weren’t forced, nor did anyone put a gun to their collective head, but back when we were house shopping five years ago we had lenders trying to do everything they could to convince us that ARMs make good sense and balloon loans were totally the way to go. They were doing everything they could to talk us into it. I’m not sure why we didn’t go that route, seeing as how we had very little house buying experience–but it wouldn’t have been so we could afford a shinier better house. It would’ve been because that’s the routine everyone was dancing at that time. We ended up getting a fixed rate, thank goodness, but it wasn’t from lack of lender’s trying to convince us otherwise.

    Especially builder/lenders! That’s a whole can of worms in itself! If they thought they could get you into one of their homes they’d do everything they could to lend you money on an adjusting mortgage. I especially remember the line, “It (the rate) will go up in a few years, but that’s okay, because your income will go up as well.”

  13. SadSam says:

    There is so much blame to go around I’m not sure we need to fight about it… I’ll blame the banks, wall street, the bush admin (lack of regs), the federal reserve, mortgage industry, real estate agents, builders, state governments, local governments, appraisers, title insurance industry, and of course the actual buyer. All these folks have some blame for this mess, depending on the individual circumstances some have greater blame for certain problems.

  14. NoWin says:

    @cde: “Being that you make a profit off of it, and have a better grasp of the situation, you have more responsibility then they do.”

    Wrong. It takes TWO to make a LEGITIMATE deal. Do not confuse legitimate with im-moral, unethical, unresearched or just PLAIN STUPID choices or elections made from either side of that table.

  15. Tux the Penguin says:

    @BigNutty: People can easily figure out home loans. Go good “Mortgage Payment Calculator” and use it to figure out how much home you can afford. Then go to a broker and ask for a basic 30-yr note for that amount. Then buy a home for that amount. The problem grows when people want to get more home than they can afford, thus needing to dwell into “exotic” loans. Sure, the brokers have some of the blame, but they were making loans to people too.

  16. Myron says:

    @canerican: “I’m not cold hearted”

    Gee, you sure sound cold hearted.

    Buying a house is the biggest purchase most people every make. And people only do it a few times in their life. When you are buying a house the mortgage broker or bank has an advantage. They do this everyday. They seem to have expertise you do not. They tell you what you can afford. They tell you how they product they are selling, a mortgage, is going to work out for you. At the same time, your real estate agent and the mortgage broker have great financial motivation to get you to buy. And like any salespeople they will use all their persuasion to get you to buy, even if you can’t really afford it.

    So don’t be so quick to put all the blame on the folks who got stuck in mortgages they can’t afford. The odds were stacked against them to begin with and they got suckered. I’m not saying they are blameless, but damn, have a heart.

  17. Daniel-Bham says:

    I’ve seen more than one closing as I work in an industry affected by this mess. Many lenders are extremely quick to approve about anyone for a loan, and sometimes a letter stating that you mow grass on the side sometimes to make the extra money for the payment they are worried you cannot afford will get you approved.

    Both consumers and lenders are at fault here. Lenders who will loan to anyone with a pulse, and consumers who will borrow beyond their means.

  18. mac-phisto says:

    ok, let’s separate this issue from the subprime mess if we could. people enter foreclosure for a variety of reasons & ARM adjustments are only a part of that. job loss, health issues, divorce, death – these issues also play a major role in foreclosures.

    a lender should be able to recover costs associated with servicing a defaulted loan where they can, but it most certainly should not be a revenue source. regardless of where you stand on the whole “who’s responsible for the burst” debate, this should be universal.

    fees associated with a defaulted loan are supposed to be tied to specific expenses (lawyers, appraisal costs, legal service, etc.). why does it matter? a bank cannot profit from a foreclosure. they can recover money owed, but any amount collected above that is to be returned to the borrower. by tacking on made-up fees, they’re violating the law (at least in conn.) & taking money that is not due to them. if your state doesn’t have similar laws in place, you should be advocating for them.

    foreclosure can happen to anyone whose life takes a turn for the worse. banks shouldn’t be using hardship as an opportunity to fill their pockets.

  19. Trai_Dep says:

    Sigh.

    It’s human nature to be optimistic. It’s a cornerstone of the US, even.

    However, it’s a bank’s job to only make loans to credit-worthy people. Of COURSE some people – either innocently or not – might make applications beyond their means. It’s an intregal part of loaning, since before history. Big Daddy’s job is to say, “Nice try – come back later once you make enough to afford this. And we KNOW this because we have highly-trained, highly-paid professionals to judge these things.”

    That’s why it’s the bank’s fault: their whole reason for existing is to winnow the wheat from the chaff. Wag your fingers at the people taking out loans, but drop heavy bricks on the ones that turned a blind eye and let them.

  20. ideagirl says:

    @JiminyChristmas: Well put, thank you.

    That is exactly what happend to the people I know who are now in mortgage trouble. Evereybody (including my brother, a mortgage broker) kept telling me I should dump my “high” 7.5% 30 yr fixed mortgage for a lower interest loan, and just refi at the end of the term. That’s what they did, but I passed…now I am the only person in my family who is not facing foreclosure. Unfortunately, he bought ito his company’s hype, and passed it on (as is his job). They all trusted this “good information from a professional.” It has been very hard for me not to say “I told you so…”

  21. CumaeanSibyl says:

    @mac-phisto: Why do we have to rehash this every time anything having to do with subprime mortgages comes up? I swear, every damn time.

    Hey, anybody wanna know why foreclosure rates are so high in certain states, like Michigan? Because we have no fucking jobs. Every time you see GM or Ford in the news closing down more plants, that’s another wave of foreclosures in the making. In my area of the state it’s Big Pharma cutting a couple hundred jobs a year. Don’t act like the super-scandalous headline stories you hear about spoiled flippers out in California or wherever are representative of the entire country.

    Sure, some people still took on ARMs that weren’t smart, but they’d have a lot better chance of being able to pay that higher adjustable rate if they still had their jobs. It’s the economy, stupid.

  22. mac-phisto says:

    @CumaeanSibyl: amen to that. i guess it can’t be helped since it’s tagged “subprime meltdown” & everyone’s looking for a rug to cover the dirty reality that financial ruin can happen to anyone.

  23. WarrenERock says:

    I wonder if Katherine M. Porter considers the amount the NYTimes charges for legal advertising “questionable.” The NYTimes charges thousands per foreclosure for legal and auctioneer ads. Who do you think pays for this?

    When a debtor waits until the eve of foreclosure to declare bankruptcy, and remains in default, these adds must be run twice.

    In America who would lend money if you didn’t have to pay it back? None of us would be able to afford a house without lenders.

    In America no one can be deprived of property without due process of law. Due process costs money. In order to do a foreclosure all parties who have an interest in the property must be notified. In order to be notified, they must be known. If the debtor is dead, heirs must be notified. These are a few among the many fees and expensed incurred. Recording fees in Massachusetts, thanks to M. Romney, can run into the thousands. Foreclosure is expensive and is an expense the consumer agrees to pay when they get a mortgage.

    I suggest that Ms. Porter’s forensic research is at best incomplete. Perhaps she needs to look at foreclosure from the front looking forward, rather than the end looking backward.

  24. WarrenERock says:

    @ReccaSquirrel: Just because someone in the marketplace offers a service or product, does not obligate anyone to buy it. We live in a market economy. Buy what you want. But, caveat emptor…let the buyer beware.

    Your comment is as much an inditement of our educational system as our banking and lending system.

    Your finances are no ones responsibility but your own.

    I have no doubt that abuses exist on both sides. We are hearing a lot about the “Big Bad Banks”, but I don’t hear about any investigations or of bank fraud which is rife.