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he New York Times
March 30, 2008
The Foreclosure Machine
By GRETCHEN MORGENSON and JONATHAN D. GLATER
NOBODY wins when a home enters foreclosure neither the borrower, who is
evicted, nor the lender, who takes a loss when the home is resold. Thats
the conventional wisdom, anyway.
The reality is very different. Behind the scenes in these dramas, a small
army of law firms and default servicing companies, who represent mortgage
lenders, have been raking in mounting profits. These little-known firms
assess legal fees and a host of other charges, calculate what the borrowers
owe and draw up the documents required to remove them from their homes.
As the subprime mortgage crisis has spread, the volume of the business has
soared, and firms that handle loan defaults have been the primary
beneficiaries. Law firms, paid by the number of motions filed in foreclosure
cases, have sometimes issued a flurry of claims without regard for the
requirements of bankruptcy law, several judges say.
Much as Wall Streets mortgage securitization machinery helped to fuel
questionable lending across the United States, default, or foreclosure,
servicing operations have been compounding the woes of troubled borrowers.
Court documents say that some of the largest firms in the industry have
repeatedly submitted erroneous affidavits when moving to seize homes and
levied improper fees that make it harder for homeowners to get back on track
with payments. Consumer lawyers call these operations foreclosure mills.
They get paid by the volume and speed with which they process these
foreclosures, said Mal Maynard, director of the Financial Protection Law
Center, a nonprofit firm in Wilmington, N.C.
John and Robin Atchley of Waleska, Ga., have experienced dubious foreclosure
practices at first hand. Twice during a four-month period in 2006, the
Atchleys were almost forced from their home when Countrywide Home Loans,
part of Countrywide Financial, and the law firm representing it said they
were delinquent on their mortgage. Countrywides lawyers withdrew their
motions to seize the Atchleys home only after the couple proved them wrong
in court.
The possibility that some lenders and their representatives are running
roughshod over borrowers is of increasing concern to bankruptcy judges
overseeing Chapter 13 cases across the country. The United States Trustee
Program, a unit of the Justice Department that oversees the integrity of the
nations bankruptcy courts, is bringing cases against lenders that it says
are abusing the bankruptcy system.
Joel B. Rosenthal, a United States bankruptcy judge in the Western District
of Massachusetts, wrote in a case last year involving Wells Fargo Bank that
rising foreclosures were resulting in greater numbers of lenders that in
their rush to foreclose, haphazardly fail to comply with even the most basic
legal requirements of the bankruptcy system.
Law firms and default servicing operations that process large numbers of
cases have made it harder for borrowers to design repayment plans, or
workouts, consumer lawyers say. As I talk to people around the country,
they all unanimously state that the foreclosure mills are impediments to
loan workouts, Mr. Maynard said.
LAST month, almost 225,000 properties in the United States were in some
stage of foreclosure, up nearly 60 percent from the period a year earlier,
according to RealtyTrac, an online foreclosure research firm and
marketplace.
These proceedings generate considerable revenue for the firms involved:
eviction and appraisal charges, late fees, title search costs, recording
fees, certified mailing costs, document retrieval fees, and legal fees. The
borrower, already in financial distress, is billed for these often
burdensome costs. While much of the revenue goes to the law firms hired by
lenders, some is kept by the servicers of the loans.
Fidelity National Default Solutions, a unit of Fidelity National Information
Services of Jacksonville, Fla., is one of the biggest foreclosure service
companies. It assists 19 of the top 25 residential mortgage servicers and 14
of the top 25 subprime loan servicers.
Citing accelerating demand for foreclosure services last year, Fidelity
generated operating income of $443 million in its lender processing unit, a
13.3 percent increase over 2006. By contrast, the increase from 2005 to 2006
was just 1 percent. The firm is not associated with Fidelity Investments.
Law firms representing lenders are also big beneficiaries of the foreclosure
surge. These include Barrett Burke Wilson Castle Daffin & Frappier, a
38-lawyer firm in Houston; McCalla, Raymer, Padrick, Cobb, Nichols & Clark,
a 37-member firm in Atlanta that is a designated counsel to Fannie Mae; and
the Shapiro Attorneys Network, a nationwide group of 24 firms.
While these private firms do not disclose their revenues, Wesley W. Steen,
chief bankruptcy judge for the Southern District of Texas, recently
estimated that Barrett Burke generated between $9.7 million and $11.6
million a year in its practice. Another judge estimated last year that the
firm generated $125,000 every two weeks or $3.3 million a year filing
motions that start the process of seizing borrowers homes.
Court records from 2007 indicate that McCalla, Raymer generated $10.4
million a year on its work for Countrywide alone. In 2005, some McCalla,
Raymer employees left the firm and created MR Default Services, an entity
that provides foreclosure services; it is now called Prommis Solutions.
For years, consumer lawyers say, bankruptcy courts routinely approved these
firms claims and fees. Now, as the foreclosure tsunami threatens millions
of families, the firms practices are coming under scrutiny.
And none too soon, consumer lawyers say, because most foreclosures are
uncontested by borrowers, who generally rely on what the lender or its
representative says is owed, including hefty fees assessed during the
foreclosure process. In Georgia, for example, a borrower can watch his home
go up for auction on the courthouse steps after just 40 days in foreclosure,
leaving relatively little chance to question fees that his lender has
levied.
A recent analysis of 1,733 foreclosures across the country by Katherine M.
Porter, associate professor of law at the University of Iowa, showed that
questionable fees were added to borrowers bills in almost half the loans.
Specific cases inching through the courts support the notion that figures
supplied by lenders are often incorrect. Lawyers representing clients who
have filed for Chapter 13 bankruptcy, the program intended to help them keep
their homes, say it is especially distressing when these numbers are used to
evict borrowers.
If the debtor wants accurate information in a bankruptcy case on her
mortgage, she has got to work hard to find that out, said Howard D.
Rothbloom, a lawyer in Marietta, Ga., who represents borrowers. That work,
usually done by a lawyer, is costly.
Mr. Rothbloom represents the Atchleys, who almost lost their home in early
2006 when legal representatives of their loan servicer, Countrywide,
incorrectly told the court that the Atchleys were 60 days delinquent in
Chapter 13 plan payments two times over four months. Borrowers can lose
their homes if they fail to make such payments.
After the Atchleys supplied proof that they had mad
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