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A Mortgage Paper Trail Often Leads to Nowhere
By GRETCHEN MORGENSON
WITH home prices in free fall and mortgage delinquencies mounting, pressure to modify troubled loans is ratcheting up.
But lawyers who represent candidates for modifications say the programs are hobbled by the complexity of securitization pools that hold the loans, as well as uncertainty about who actually owns the notes underlying the mortgages.
Problems often emerge because these notes — which are written promises to repay the full amount of a mortgage — weren’t recorded properly when they were bundled by Wall Street into pools or were subsequently transferred to other holders.
How can a loan be modified, these lawyers ask, if the lender cannot prove that it actually owns the note? More and more judges are asking the same thing about lenders trying to foreclose on borrowers.
And here is another hurdle: Most loan servicers — the folks responsible for handling all the paperwork surrounding monthly mortgage payments — aren’t set up to handle all of the details involved in a modification.
Loan servicing operations are intended to receive borrowers’ payments; producing loan histories and verifying that payments were received or junk fees were not applied is considerably more labor intensive. This cuts into profits.
“These servicers are not staffed up and they don’t have a chance in the world to do the stuff they are supposed to do,” said April Charney, a consumer lawyer at Jacksonville Legal Aid. Many servicers continue to stonewall troubled borrowers who ask for a history of their loan payments and fees, she said.
“This is your biggest, hugest expense — your home — and when you ask for a life-of-loan history your servicer tells you to get lost,” she said. “And when you ask for a list of charges in the loan history that’s not going to happen.”
So even if loan modifications were to rise rapidly, it is unclear that borrowers can trust what lenders tell them about what they owe.
Consider a federal bankruptcy court case in Colorado. It involves two borrowers who got into trouble on their loan but agreed, under a bankruptcy plan, to make revised mortgage payments to get back on track.
The lender in the case is Wells Fargo, and last Monday the judge overseeing the matter took a tough stance on the bank’s recordkeeping and billing practices.
In June 2004, Brandon M. Burrier and Denon A. Burrier received a $183,126 loan for a property in Arvada, Colo. The note was later transferred to Wells Fargo, court filings show.
The Burriers fell behind on their loan and in February 2007, they filed a Chapter 13 bankruptcy, agreeing to pay $12,000 that Wells Fargo said they owed. Chapter 13 bankruptcies allow debtors to retain their property and work out a repayment plan based on their income and the level of their indebtedness.
The Burriers’ payment plan was confirmed by the bankruptcy court in August 2007; last December, a second plan requiring higher payments was approved by the court.
Two months later, Wells Fargo told the court that the Burriers had failed to make four of their payments and that it should be allowed to begin foreclosure proceedings.
The Burriers denied that they had missed payments, but in April, to keep their home, they agreed to make double payments to cover the ones Wells Fargo claimed they had missed.
If the borrowers could prove that the mortgage checks were submitted, Wells Fargo said, their account would be credited and they would no longer have to make up the payments. The proof required by Wells Fargo and approved by the court was “valid, accurate and true copies” of the front and back of the checks the borrowers sent in.
Last August, the parties were back in court, with Wells Fargo stating that the borrowers had failed to comply with the deal. Ms. Burrier testified that she had asked her local bank repeatedly for proof of the payments made to Wells Fargo, but had had no luck. The payments to Wells Fargo were processed electronically, she learned, and that meant it did not return the checks to her bank.
The borrowers did produce bank statements showing that the checks Wells said were missing were actually cashed by “WFHM,” an entity that they assumed was Wells Fargo Home Mortgage.
But Tara E. Gaschler, the lawyer representing the borrowers, said that Wells Fargo continued to maintain that it hadn’t received the money.
The bank flew in an expert to testify that all checks received by Wells Fargo from borrowers in Chapter 13 cases were processed by hand, Ms. Gaschler said. “Even when presented with bank statements, they told the court there must be some mistake,” she added.
Finally, Wells Fargo demanded that the Burriers provide the routing number of the account at Wells Fargo that their money went into. If they could not, the bank said, they would have to keep making extra payments.
But Sidney B. Brooks, the judge overseeing the case, was clearly dismayed by the bank’s performance.
In his opinion, he fumed that Wells Fargo had asked the borrowers for canceled checks as proof of payment, even though such checks were often not available. Wells Fargo’s request for canceled checks was especially troubling, the judge said, given that the bank was a proponent of the 2003 law that allowed banks to stop returning canceled checks to customers.
The only institution that could have the original checks is Wells Fargo, he concluded.
“The payments have, evidently, been lost in a black hole of the creditor’s organization or through accounting mismanagement,” the judge wrote. “This is a major lender/mortgage loan servicer where the left hand does not know what the right hand is doing — the collection department does not know what the check processing and accounting departments are doing.”
Because this is not the first time the judge has encountered problems in Wells Fargo’s operations, he is considering sanctions on the bank.
“This dispute might portend a widespread abuse of collection practices or creditor overreaching,” he wrote, “demanding of debtors what it, the creditor itself, is unable to provide: accurate and reliable record keeping and billing practices.”
A spokesman for Wells Fargo said: “We are currently reviewing the court’s opinion to determine whether or not an appeal is appropriate. The Burrier case is quite factually specific, and we disagree with the court’s conclusions. We are confident that our payment processing practices are accurate and sound.”
Ms. Gaschler says that this kind of dispute is becoming more common in her practice and that borrowers wind up losing too often.
“A lot of times clients don’t keep cancelled checks or maybe their bank account was closed and they can’t go and get the proof,” she said. “The bank gets that extra money for as long as the debtor can keep it up and when they can’t they are pushed out of their homes.”
While judges are starting to see how flawed loan servicers’ systems can be, those rushing to modify loans may not be as aware of the problems.
In the interests of fairness, modification programs should require life-of-loan histories from servicers and a justification of each entry. New loans, especially ones backed by taxpayers, are no place to bury dubious fees or extra borrower payments to cover those that were allegedly, but not actually, missed.
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