VOL. 122 | NO. 152 | Tuesday, August 14, 2007
Attorneys Employ Creative Methods To Stem Foreclosures
KRISTINA DOSS | Dow Jones Newswires
WASHINGTON (Dow Jones/AP) - A bankruptcy filing alone may not be enough to help homeowners stave off a foreclosure for good, but it does buy attorneys like O. Max Gardner III time to come up with creative ways to help them keep their homes.
"You stop the bleeding with a bankruptcy filing," said Gardner, who has a consumer-bankruptcy practice in North Carolina. "Then, my practice looks for some way to legally attack the mortgage so that we can get it into a mortgage that the homeowner can afford."
Gardner said he often hunts for fraudulent activity such as improper disclosures and fees charged by lenders and uses that as leverage to force the lender to change the terms of the loan. "We've had to get creative so that we can still help our clients," he said.
A sharp rise in borrowers with blemished credit histories defaulting on their mortgage loans has sent the subprime mortgage industry into turmoil. A total of 925,986 foreclosure filings - default notices, auction sale notices and bank repossessions - were reported on 573,397 properties nationwide during the first six months of the year, up more than 55 percent from the first six months of 2006, according to a report released last month by research firm RealtyTrac.
A slew of subprime lenders such as New Century Financial Corp., Ownit Mortgage Solutions Inc. and People's Choice Home Loan Inc. have filed for bankruptcy in the past year amid the shakeout. The turmoil also has led
homeowners, desperate to keep their homes, to file for bankruptcy.
Attorneys like Gardner have to work with a Bankruptcy Code that limits what they can do for clients who are behind on their mortgage payments and facing the real possibility of losing their homes.
If they place their clients in a so-called "fresh start," or Chapter 7, bankruptcy proceeding, unsecured debts such as credit card and medical bills can be wiped away. However, secured debt, such as mortgage loans, remains intact and the client must find a way to foot the bill.
Lawyers could also place their clients in a Chapter 13 proceeding, which enables consumers to come up with a payment plan for the missed mortgage payments.
But, Gardner said, the Chapter 13 formula doesn't work if the homeowner still can't afford the mortgage payment in the future, a problem made worse if a homeowner has an adjustable-rate mortgage poised to reset.
"For people who are coming to see me now, the Chapter 13 formula doesn't work because the new payment they'll have to make when the reset date hits is 50 percent to 100 percent higher," Gardner said. "They can't make that."
The key to staving off a foreclosure for the long term is getting the mortgage loan modified into a product the homeowner can afford, attorneys say.
Changing an adjustable-rate mortgage to a fixed loan, getting the interest rate reduced and eliminating a stockpile of fees that are sometimes tacked on to the principal balance are all things that can help toward that goal.
But that's where lawyers run into another problem: Loan servicers, charged with collecting the mortgage payments for the investors that own the loans, have the ability to voluntarily modify the loan in an effort to keep the homeowner in their home. "It's whether or not they choose to do it is the problem," said M. Erik Clark, a partner at Borowitz, Lozano & Clark LLP in California.
"There is nothing in the bankruptcy code that forces them to restructure the mortgage loan, so if they want to dig their heels in and say they don't want to, then it's not going to get done," he said.
Sometimes loan servicers "incorrectly" believe they can't discuss modifying the loan after a homeowner files for bankruptcy because it would look like they are trying to collect on their debt, which is barred by bankruptcy law, he said.
"Historically, what we have been faced with is that if we have a client in Chapter 13 that needs a modification, the starting point for the servicer is that we had to dismiss the Chapter 13," Clark said.
Clark said that's not a step he's willing to take because it removes the protection that bankruptcy provides the homeowner and leaves it "up to the goodwill of the mortgage servicer, and in my experience that is not a good thing to do."
But that doesn't mean all hope is lost. Lawyers like Clark and Gardner have a few tricks up their sleeves.
"When you find that (lenders) have committed a variety of servicing errors, you can file an adversary proceeding against them," Clark said. An adversary proceeding is a lawsuit filed in a bankruptcy proceeding.
Among the "errors" that attorneys can look for is whether there was proper disclosure when the consumer signed up for the mortgage loan.
"They put these little stickers that say sign here and here and most people just sign," Gardner said. "Do they really know that it was an adjustable-rate mortgage or that it would double in several years?"
Another thing that attorneys watch out for are improper fees.
"Something you see all the time are late charges," said Frank Coxwell, a partner at Coxwell & Associates PLLC in Mississippi. Lenders "are not allowed to file late charges, they are not supposed to be charging for property inspections and appraisals every single month."
"I've settled about 12 of these adversary proceedings in the past two months," Coxwell said. "I'm still filing more."
Gardner agrees these tactics are working.
"Up until recently lenders haven't been really cooperative in modifying loans, and we've had to employ litigation in order to force them into that position," Clark said. "Now, we're in a position where the value of houses are going down and the amount of non-performing loans are skyrocketing, so it becomes in their own self-interest to try and rewrite the loans to keep them performing."
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