naked capitalism

Gretchen Morgenson has an important piece tonight which describes how US Trustee Program, which is the arm of the Department of Justice which oversees bankruptcy courts, has found ongoing servicing abuses in bankruptcy courts which are an order of magnitude worse than claimed by mortgage servicers and their mouthpieces among the Federal banking regulators. And it’s funny how a real prosecutor has managed to find significant problems in a mere six months, when the 50 state attorneys general effort, which has undertaken no investigation, is rushing to get a deal done. If the leader of that effort, Tom Miller of Iowa, instead had gotten to work when the effort was formed last October rather than having tea and cookies with the Treasury Department, they might have something to show by now.

Note that this article provides support what this blog and foreclosure defense attorneys have said: that servicers are engaged in a significant amount of overbilling, via charing impermissible or inflated fees. And experts have pointed out that in addition to these junk fees and/or excessive fees, the servicers apply payments in a manner contrary to Federal law and the terms of the mortgage (to fees first rather than principal and interest first) which leads to fee pyramiding:

The other problematic area showing up in the trustees’ inquiries relates to what Mr. White calls improper default servicing fees. These include charges for legal work, property inspections, insurance and appraisals.

Often, the fees charged to troubled borrowers are not even specified. Trustee program officials found a defaulted borrower who was charged $10,260.50 in “prior service fees” with zero documentation. In another case, a borrower fell behind after the lender doubled his escrow payments with no explanation or justification. Then the bank filed a motion to lift the bankruptcy stay so that it could foreclose.

But it turns out I’ve been giving them too much credit. They also just make up the numbers:

In other cases, proofs of claim filed by servicers are just wildly off base. In one matter, a bank claimed to the court that a borrower owed $52,043. After the borrower objected and a trustee asked for documentation, the amount owed dropped to $3,156.

In other cases, proofs of claim filed by servicers are just wildly off base. In one matter, a bank claimed to the court that a borrower owed $52,043. After the borrower objected and a trustee asked for documentation, the amount owed dropped to $3,156.

I wonder about the timing. Have the phony consent decrees and the shambolic 50 state AG negotiations motivated the heretofore not very vocal director of the Trustee’s executive office, Clifford White, to speak up?

The Trustee’s effort obtained information from 95 field offices in 88 districts. Not surprisingly, the banks have been uncooperative and have engaged in stonewalling. One of their tactics is to provide only narrow responses to discovery demands, and refuse to turn over information relating to policies and procedures.

And there is good reason why. The “errors” happen too often for them to be by accident. And as we have stressed, servicers are highly routinized. They aren’t set up to do much of anything on a one-off basis.

Mistakes happen, of course. And loan servicers like to contend that if errors occur, they are rare and honestly made. But after sifting through the data produced by this investigation, Mr. White disagreed that problems are rare. “In Senate testimony, an executive from Countrywide said its error rate was 1 percent,” Mr. White recalled. “The mortgage servicer industry error rate might be 10 times higher, based on the number of cases we are looking at.”

“There are continued flaws in the process, and they are not merely technical,” Mr. White continued. “Those flaws undermine the integrity of the bankruptcy system. Many homeowners have been harmed, including where the lender has come in and said ‘we want to lift the stay and go back into foreclosure proceedings,’ even though they lacked a sufficient basis to do it.”

He went on: “There are enough examples of this to know that we are not dealing with small numbers.”

It’s increasingly obvious that a concerted coverup is in progress. I gather they forgot to send the memo to the US Trustee.