The Federal Reserve has proposed sweeping new rules to clean up the market for subprime and all forms of home mortgages, according to MarketWatch.com. The proposed rules would not help current borrowers holding a loan but aim to head off another lending crisis like the one that has hurt the subprime mortgage industry.

The rule proposals – including tightening rules on prepayment penalties and prohibiting creditors from making loans without verifying a borrower’s income – aim to strike a balance between protecting borrowers without causing lending to shrink. "We strive to protect borrowers from practices that are unfair or deceptive, but to do so without unintentionally causing responsible lending to shrink or unduly limiting consumer choice," said Fed Gov. Randall Kroszner, who is leading the central bank’s effort.

The proposals would prohibit lenders from granting mortgages to borrowers whose only means of repayment would be an increase in the value of the property. It also prohibits lenders from paying mortgage brokers fees for higher-rate loans.

Delinquencies in the auto loan market are ticking up to their highest level in several years, forcing lenders to tighten terms in some cases and raise interest rates, according to the Wall Street Journal. About 4.5 percent of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent as of the end of September, up from 2.9 percent the previous month, according to a Lehman Brothers survey of companies servicing these loans.

That is the biggest one-month jump in at least eight years. Lehman also said that 12 percent of subprime borrowers were delinquent on their 2006 auto loans as of September. That is the highest level since 2002 and up from 11.1 percent the previous month.

About $575 billion in loans for new and used cars are made annually, according to the National Automotive Finance Association. "Auto loan defaults tend to be event-driven, like a job loss or an unexpected health-care bill or a divorce," says Dan Berce, CEO of AmeriCredit Corp., one of the country’s largest subprime auto lenders.

In the second quarter, borrowers were at least 30 days behind on 2.77 percent of all auto loans made by nonbank lenders, according to the American Bankers Association. That was the highest delinquency rate since 1991.

The Mortgage Bankers Association said that the rate of homeowners going into foreclosure hit a record high in the third quarter of 2007, while those late with their payments rose to the highest level since 1986, according to CNNMoney.com. MBA reported that 0.78 percent of mortgages entered the foreclosure process in the three months ended Sept. 30, 2007.

That figure is up from 0.65 percent in the second quarter – the previous record high – and more than double the 0.32 percent rate a year earlier. The report also showed that 5.59 percent of borrowers are now at least 30 days late making their mortgage payments, while 1.26 percent of the borrowers were 90-plus days late and at risk of going into foreclosure. The homeowners entering foreclosure brought the total percentage of loans in the foreclosure process to a record high of 1.69 percent, or 768,000 homes.

By Aleksandra Todorova

AS FORECLOSURES CONTINUE to plague the subprime market, a little-known industry practice is further hurting homeowners who are already having trouble keeping up with their ballooning mortgage payments: excessive and questionable fees.

A recent study conducted by Katherine Porter, a law professor at the University of Iowa, found that mortgage lenders are charging delinquent borrowers with fees that go well beyond the typical late charge. Included in the bill are such things as faxing or emailing mortgage payment information, overnight delivery charges and unnecessary property inspections, among others.

After poring through 1,700 recent Chapter 13 bankruptcy cases filed by homeowners, Porter found that, in 70% of the filings mortgage creditors claimed they were owed more than what the borrower believed. On average, the gap was a whopping $6,309 — all due to added fees. Even worse, four out of 10 mortgage companies didn’t even submit proper documentation itemizing the charges. The one bright spot for these debtors: Once the bankruptcy court reviewed the cases, it threw out many of the fees.

In a recent case that involved the refinancing of a Wells Fargo mortgage that was in the midst of a Chapter 13 bankruptcy repayment plan, a court awarded $67,202.45 to the debtor, Michael Jones, after discovering that the bank had made a variety of accounting errors and charged him more than $15,000 in fees that the court deemed impermissible, according to court documents. In an emailed statement, Wells Fargo told us they cannot provide specific comment on this case as it is pending appeal, adding that "all of our practices and procedures in the handling of bankruptcy cases follow applicable laws and we stand behind our actions in this case."

Max Gardner, a consumer bankruptcy attorney in Shelby, N.C., says he encounters questionable fees in 95% of the bankruptcy cases he handles. "It’s really an epidemic of fraud," he says. "I don’t know how else to describe it. It’s been going on for years."

And these fees aren’t just limited to those on the verge of bankruptcy. Unsuspected and unexplained charges can be tacked onto a borrower’s account as soon as they are late with a single payment, Porter says. And because the fees are rarely itemized, most folks don’t even suspect they’re being overcharged.

Dania Perez, a housing counselor at the Tampa Bay Community Development Program, a federally-certified counseling agency, recently met with a homeowner who was trying to bring her mortgage up to date after several late payments. The borrower complained that, in addition to late fees, she was charged another $1,000 for drive-by inspections. (Such inspections — also known as broker price opinions — take place when a lender wants to make sure that a house that might end up in foreclosure is in good condition). After requesting a breakdown of the fees charged, she discovered that her home underwent nine inspections in one week. She’s still fighting the charges. "I’ve told her she needs to contact an attorney," Perez says. "Clients can’t do this kind of battling on their own."

The biggest problem is that homeowners are stuck in a legal gray area. If and when the mortgage company provides legal documents, they can be extremely difficult for the average consumer to decipher and retaining a lawyer often doesn’t make financial sense if the disputed charges are less than the legal fees you’d incur.

Another issue is that mortgage companies simply don’t have an incentive to provide good customer service — and avoid charging egregious fees — in the first place, explains Jack Guttentag, professor of finance at the Wharton School of Business, who runs a mortgage advice web site for consumers, mtgprofessor.com. Blame it on the credit markets, which have changed the way banks extend and service mortgage loans. Years ago, the banks that approved and originated loans also serviced them, meaning that they handled the borrowers’ payments. Naturally, they had an interest in good customer service: If a customer wasn’t happy with Bank A, they could go refinance with Bank B.

Today, the lender that originates the loan very rarely keeps it, says Guttentag. Rather, mortgage loans are bundled together into trusts and sold as securities to investors, such as hedge funds. The trusts select a third party, known as a mortgage servicer, to collect payments from borrowers. These servicers can be independent companies or the mortgage servicing arms of well-known lenders such as Countrywide or Wells Fargo.

As a result, consumers have absolutely no control over who’s going to service their mortgage, Guttentag says. "They also can’t get out of that relationship except by paying off the loan." Even if they refinance, who’s to say that their new lender won’t pass the loan to the same servicer they had before.

Fees, meanwhile, are a good source of income for servicers who get to pocket the money. (Other than that, they earn a percentage of the mortgage amounts they process, typically 0.25% of prime mortgages and 0.50% of subprime mortgages. They also collect interest on payments for the short period between receiving the customer’s check and disbursing it to the investors.)

In her research, Porter came across a variety of egregious fees, such as $50 fax fees, $137 overnight delivery fees and $60 payoff statement fees. Even bigger charges kicked in when a servicer got an attorney involved either at the start of a foreclosure process or during bankruptcy. In one example, a borrower was charged $31,273 in attorney’s fees. "Consumers who get behind, who make mistakes, are a very big source of profit for the servicer," she says.
What can borrowers do to protect themselves? Here’s a quick guide:

1. Monitor your mortgage

Just as you should review your credit reports once every several months to prevent identity theft and look for errors, you should also monitor your mortgage statements and look for any added fees, says Gardner. Most statements don’t include detailed explanations of the fees charged, but you can request a breakdown. Some of the most common fees include:

Late fees: These should be stipulated in your contract; typically it’s a penalty of about 4% to 5% of your mortgage payment.

Property inspection, broker price opinion fees: When you’re late with a payment, the servicer can send an inspector by your house, typically for a drive-by assessment of its value. Charges will vary by lender, but it’s important to make sure your house hasn’t been inspected too many times.

Demand fees, payoff statement fees, fax or overnight-delivery fees: The servicer charges you when you request specific information, for example, the payoff amount if you are looking into refinancing.
 
Attorney fees: You’re charged whenever an attorney gets involved in your case. In loan modification negotiations, for example, consumers will not be charged closing costs, as is the case with refinancing a loan. But if an attorney needs to review documents the borrower would have to pay the fees upfront, according to Perez.

Insurance-related charges: If the homeowner falls behind on homeowners insurance payments, servicers can quickly replace their policy with one from an affiliated company, Gardner explains. These policies are often significantly more expensive than what you’d get if you shopped around.

2. Dispute questionable charges

Should you see anything on your statement that you don’t understand, you’re entitled to request an explanation of each charge under the Real Estate Settlement Procedures Act. You can request information about what the fees were charged for, who they were paid to, when they were incurred and, if attorney fees are involved, what exactly the attorney did, Gardner explains. The mortgage company has to respond within 60 days of receiving your letter.

3. Talk to your lender

If you miss a payment or know you’re going to be late, contact your lender immediately, Porter says. Lenders are more open to negotiating with customers who have missed one or two payments than with borrowers who are three or more months behind. After three months, accounts are typically transferred over to a subservicer (an agency that deals with delinquent accounts) or a loss mitigation department whose main concern is to foreclose at the lowest cost to the lender.

Links in this article:

http://www.mtgprofessor.com

O. Max Gardner III

http://www.maxbankruptcybootcamp.com
http://www.maxgardnerlaw.com

URL for this article:
http://www.smartmoney.com/consumer/index.cfm?story=20071116

Lawmaker: House Judiciary Committee Could Vote on Bankruptcy Bill

WASHINGTON  — The U.S. House Judiciary Committee could vote on a bill soon that would make changes to bankruptcy law aimed at helping borrowers with subprime loans avoid foreclosure, the body’s chairman said.

"Time is of the essence," Rep. John Conyers, D-Mich., told reporters after a hearing on the topic. "If we’re going to do something, we’re going to have to do it right away."

Reps. Brad Miller, D-N.C., and Linda Sanchez, D-Calif., introduced a bill in September that would allow bankruptcy judges to change some mortgage terms on a borrower’s primary residence, potentially changing the interest rate and other features of a loan.

Consumer groups have thrown their full support behind the measure, saying that it could help 600,000 homeowners avoid foreclosure in the next two years.

The banking industry, however, has lobbied intensely against the measure, arguing that it would increase the cost of credit and create confusion in the secondary market because loan terms would be less reliable.

"Lenders, securitizers and loan servicers would have to take various precautions to avoid or offset the significant new risks (the bill) would impose," David Kittle, chairman-elect of the Mortgage Bankers Association, said at the hearing.

Conyers conceded that industry opposition to the bill could make it difficult to pass, but he said that it was necessary to help homeowners.

"We can talk all we want, but this bill is going to be tough to get through the House and the Senate," Conyers said.

Staff from the offices of Miller, Sanchez and Conyers planned to meet with Rep. Steve Chabot, R-Ohio, to try to negotiate terms of a compromise, Conyers said.

Chabot has introduced a more narrowly tailored bill related to homeowners and bankruptcy law, and Miller has said he is willing to compromise on his legislation if it could bring broader support.

"That’s what we’re working towards, but I don’t know if that’s a bridge too far or not," Chabot said in an interview.

The Miller-Sanchez bill received a broad endorsement at the hearing from Mark Zandi, chief economist at Moody’s Economy.com.

"Odds are quickly rising that a self-reinforcing negative dynamic of foreclosures begetting house price declines begetting more foreclosures will develop in many neighborhoods across the country," Zandi said. "There is no more efficacious way to short-circuit this cycle than adopting legislation to allow bankruptcy judges the authority to modify mortgages by treating them as secured only up to the market value of the property."

Consumer and business bankruptcy filings for the first three quarters of 2007 have eclipsed those reached for all of 2006, according to the Administrative Office of the U.S. Courts.

The 623,399 total U.S. Bankruptcies filed through Sept. 30, 2007 represented a
40.2 percent increase over the 444,789 cases filed over the same period in 2006.

Filings by individuals or households with consumer debt increased 40.2 percent to 603,139 for the nine-month period ending Sept. 30, 2007. That’s up from 430,364 filings during the same period in 2006.

Business filings for the nine-month period totaled 20,260, a 40.5 percent increase over the 14,425 filings over the same period last year.  Chapter 7 business liquidations totaled 13,290, a 57.6 percent increase.

"Bankruptcies are up sharply from a year ago this period, reflecting a growing vulnerability in household economics," Samuel J. Gerdano, executive director of the Alexandria, Va.-based American Bankruptcy Institute, says in a news release. "The continued stress on the housing market will likely fuel a continuation of this trend into 2008."

Washington Mutual got what it wanted in 2005: A revised bankruptcy code that makes people jump through more hoops to be able to walk away from credit card bills.

The largest U.S. savings institution didn’t count on a housing recession. The new bankruptcy laws are helping drive foreclosures to a record as homeowners default on mortgages and struggle to pay credit card debts that might have been easier to discharge under the old code, said Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank.

“Be careful what you wish for,” Westbrook said. “They wanted to make sure that people kept paying their credit cards, and what they’re getting is more foreclosures.”

Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. spent $25 million in 2004 and 2005 lobbying for a legislative agenda that included changes in bankruptcy laws to protect credit card profits, according to the Center for Responsive Politics, a non-partisan Washington group that tracks political donations.

The banks are still paying for that decision. The surge in foreclosures has cut the value of securities backed by mortgages and led to more than $40 billion of writedowns for U.S. financial institutions. It also reached to the top echelons of the financial services industry.

Even as losses have mounted, banks have seen their credit card businesses improve. The amount of money owed on U.S. credit cards with payments more than 30 days late fell to $7.04 billion in the second quarter from $8.37 billion two years earlier, according to data compiled by Federal Deposit Insurance Corp.

In the same period, the dollar volume of repossessed homes owned by insured banks doubled to $4.2 billion, the federal agency said. New foreclosures rose to a record in the second quarter, led by defaults in subprime adjustable-rate mortgages, according to the Mortgage Bankers Association in Washington.

`Let the House Go’

People are putting their credit card payments ahead of their mortgages, said Richard Fairbank, chief executive officer of Capital One Financial Corp., the largest independent U.S. credit card issuer. Of customers who are at least three months late on their mortgage payments, 70 percent are current on their credit cards, he said.

“What we conclude is that people are saying, `Honey, let the house go,”’
but keep the cards, Fairbank said recently at a conference in New York sponsored by Lehman Brothers Holdings Inc.

The new bankruptcy code makes debtors pass a "means test" to qualify for Chapter 7, the section that erases non-mortgage debt. Depending upon individual circumstances, it shifted some people with incomes higher than the median income for their area to Chapter 13, giving them up to five years to pay off non-housing creditors.

No Help Left

The court-ordered payment plans fail to account for subprime loans with adjustable rates that can reset as often as every six months, said Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys. Two-thirds of debtors won’t be able to complete their payback plans, according to the Center for Responsible Lending.
“We have people walking away from homes because they can’t afford them even post bankruptcy,” said Sommer, a Philadelphia- based bankruptcy attorney.
“Their mortgage rates are resetting at levels that are completely unaffordable, and there’s nothing the bankruptcy process can do for them as it now stands.”

Four million subprime borrowers with limited or tainted credit histories will see their mortgage bills increase by an average 40 percent in the next 18 months, according to the National Association of Consumer Advocates in Washington. About 1.45 million of those will end up in foreclosure by the end of 2008, said Mark Zandi, chief economist at Moody’s Economy.com, a research firm and unit of Moody’s Corp. in New York.

Lenders began the process of seizing properties on 0.65 percent of U.S.
mortgages in the second quarter, a record in a 35-year-old Mortgage Bankers study. The percentage of subprime borrowers making late payments increased to 14.82, a five-year high, from 13.77.

Bankruptcies Increase

Personal bankruptcies rose 48 percent to 391,105 in the first half of 2007 from a year earlier and Chapter 13 filings accounted for more than one-third of those, according to the American Bankruptcy Institute. In the first half of 2005, they were just 24 percent of the total.

Bad mortgages slashed Washington Mutual’s profit by 75 percent in the third quarter from a year earlier, the Seattle- based thrift said Oct. 5. Income from credit card interest rose 8.8 percent to $689 million in the same period. Washington Mutual shares tumbled the most in 20 years in early November after New York Attorney General Andrew Cuomo said the thrift had pressured real estate appraisers to assign inflated values to properties. Its dividend yield fell to 11 percent and the company traded at 0.74 price-to-book value.

Citigroup’s third-quarter earnings fell 57 percent on mortgage losses. Bank of America stopped so-called warehouse lending to mortgage brokers after its profit declined 32 percent in the same period.

JPMorgan reported profit growth of 2.3 percent in the quarter, the smallest in more than two years, after reducing the value of leveraged loans and collateralized debt obligations, investment packages of mortgages, by $1.64 billion.

`Unintended Consequence’

Washington Mutual spokeswoman Libby Hutchinson in Seattle, JPMorgan spokesman Thomas Kelly in New York and Bank of America spokesman Terry Francisco in Charlotte, North Carolina, declined to comment on the bankruptcy law.  “The law had an unintended consequence of taking away a relief valve that mortgage borrowers used to have,” said Rod Dubitsky, head of asset-backed research for Credit Suisse Holdings USA Inc. in New York. “It’s bad for the mortgage borrowers and bad for subprime investors because it means more losses.”

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was the biggest overhaul to the code in more than a quarter of a century. The old law, the Bankruptcy Reform Act of 1978 that was signed by President Jimmy Carter, had loosened requirements for debt forgiveness.

Financial companies began a coordinated lobbying campaign for bankruptcy reform in 1998 when the American Financial Services Association, a trade group representing credit card companies, joined the American Bankers Association to form the National Consumer Bankruptcy Coalition.

Lobbying Effort

Campaign contributions from the coalition and its members totaled more than $8.2 million during the 2004 election that gave Bush his second term in office. Two-thirds of the donations were given to Republicans who supported the bankruptcy changes, according to the Center for Responsive Politics.

The group, later renamed the Coalition for Responsible Bankruptcy Laws, has since disbanded. Its members included Washington Mutual, JPMorgan, Bank of America, Citigroup, MasterCard Inc., and Morgan Stanley. Ford Motor Co., General Motors and DaimlerChrysler also were members. They won provisions in the new code that changed the way car loans are treated in bankruptcy.

Congress may soon take action to “reform the bankruptcy reform,” Zandi said. The House Judiciary Committee is working on legislation to let bankruptcy judges restructure home loans by lowering interest rates and reducing mortgage balances to reflect current market value.

Banks Oppose Change

Banks including Washington Mutual, Citigroup and Wells Fargo & Co. sent a letter to the committee opposing the change, saying such restructurings should be done privately.

Countrywide Financial Corp., the largest U.S. lender, said last month that it will modify $16 billion worth of adjustable- rate mortgages. Washington Mutual said in April that it will spend $2 billion giving discounted rates to help customers with subprime loans refinance at better terms.

So far, most lenders have been reluctant to change loan agreements. About 1 percent of mortgages that reset in January, April and July were modified, according to a Sept. 21 Moody’s Investors Service report that surveyed 16 subprime lenders that account for 80 percent of the market.

Congress probably will approve at least a limited measure to permit loan modifications, said Westbrook, the University of Texas law professor.

“They are going to have to figure out some way to address the problem,” Westbrook said. “I don’t think our economy or our consciences can handle the number of foreclosures we’ll see if they do nothing.”

As record numbers of homeowners default on their mortgages, questionable practices among lenders are coming to light in bankruptcy courts, leading some legal specialists to contend that companies instigating foreclosures may be taking advantage of imperiled borrowers, the New York Times reported recently. 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.

In an analysis of foreclosures in chapter 13, Katherine M. Porter, associate professor of law at the University of Iowa, 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 mortgage originations have faltered.

The Office of the U.S. Trustee announced plans last month to move against mortgage servicing companies that file false or inaccurate claims, assess unreasonable fees or fail to account properly for loan payments after a bankruptcy has been discharged.

In a recent front-page story, The New York Times reported that as record numbers of homeowners default on their mortgages, questionable practices among lenders are coming to light in bankruptcy courts, leading some legal specialists to contend that companies instigating foreclosures may be taking advantage of imperiled borrowers.

Because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage servicers, who collect loan payments, are profiting from foreclosures.

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.

Ms. Porter’s analysis comes as more homeowners face foreclosure. Testifying before Congress in November, Mark Zandi, the chief economist at Moody’s Economy.com, estimated that two million families would lose their homes by the end of the current mortgage crisis.

Questionable practices by loan servicers appear to be enough of a problem that the Office of the United States Trustee, a division of the Justice Department that monitors the bankruptcy system, is getting involved. In October, it announced plans to move against mortgage servicing companies that file false or inaccurate claims, assess unreasonable fees or fail to account properly for loan payments after a bankruptcy has been discharged.

On Oct. 9, the Chapter 13 trustee in Pittsburgh asked the court to sanction Countrywide, the nation’s largest loan servicer, saying that the company had lost or destroyed more than $500,000 in checks paid by homeowners in foreclosure from December 2005 to April 2007.

The Chapter 13 trustee, Ronda J. Winnecour, said in court filings that she was concerned that even as Countrywide misplaced or destroyed the checks, it levied charges on the borrowers, including late fees and legal costs.

Loan servicing is extremely lucrative. Servicers, which collect payments from borrowers and pass them on to investors who own the loans, generally receive a percentage of income from a loan, often 0.25 percent on a prime mortgage and 0.50 percent on a subprime loan. Servicers typically generate profit margins of about 20 percent.

Now that big lenders are originating fewer mortgages, servicing revenues make up a greater percentage of earnings. Because servicers typically keep late fees and certain other charges assessed on delinquent or defaulted loans, "a borrower’s default can present a servicer with an opportunity for additional profit," Ms. Porter said.

The amounts can be significant. Late fees accounted for 11.5 percent of servicing revenues in 2006 at Ocwen Financial, a big servicing company. At Countrywide, $285 million came from late fees last year, up 20 percent from 2005. Late fees accounted for 7.5 percent of Countrywide’s servicing revenue last year.

But these are not the only charges borrowers face. Others include $145 in something called "demand fees," $137 in overnight delivery fees, fax fees of $50 and payoff statement charges of $60. Property inspection fees can be levied every month or so, and fees can be imposed every two months to cover assessments of a home’s worth.

"We’re talking about millions and millions of dollars that mortgage servicers are extracting from debtors that I think are totally unlawful and illegal," said O. Max Gardner III, a lawyer in Shelby, N.C., specializing in consumer bankruptcies. "Somebody files a Chapter 13 bankruptcy, they make all their payments, get their discharge and then three months later, they get a statement from their servicer for $7,000 in fees and charges incurred in bankruptcy but that were never applied for in court and never approved."

A class-action lawsuit filed in September in Federal District Court in Delaware accused the Mortgage Electronic Registration System, a home loan registration system owned by Fannie Mae, Countrywide Financial and other large lenders, of overcharging borrowers for legal services in foreclosures.

The system, known as MERS, oversees more than 20 million mortgage loans. The complaint was filed on behalf of Jose Trevino and Lorry S. Trevino of University City, Mo., whose Washington Mutual loan went into foreclosure in 2006 after the couple became ill and fell behind on payments.

Jeffrey M. Norton, a lawyer who represents the Trevinos, said that although MERS pays a flat rate of $400 or $500 to its lawyers during a foreclosure, the legal fees that it demands from borrowers are three or four times that.

Typically, consumers who are behind on their mortgages but hoping to stay in their homes invoke Chapter 13 bankruptcy because it puts creditors on hold, giving borrowers time to put together a repayment plan.

Given that a Chapter 13 bankruptcy involves the oversight of a court, the findings in Ms. Porter’s study are especially troubling. In July, she presented her paper to the United States trustee, and on Oct. 12 she outlined her data for the National Conference of Bankruptcy Judges in Orlando, Fla.

With Tara Twomey, who is a lecturer at Stanford Law School and a consultant for the National Association of Consumer Bankruptcy Attorneys, Ms. Porter analyzed 1,733 Chapter 13 filings made in April 2006. The data were drawn from public court records and include schedules filed under penalty of perjury by borrowers listing debts, assets and income. Though bankruptcy laws require documentation that a creditor has a claim on the property, 4 out of 10 claims in Ms. Porter’s study did not attach such a promissory note. And one in six claims was not supported by the itemization of charges required by law.

Another problem identified by her study: a discrepancy between what debtors think they owe and what creditors say they are owed. In 96 percent of the claims Ms. Porter studied, the borrower and the lender disagreed on the amount of the mortgage debt. In about a quarter of the cases, borrowers thought they owed more than the creditors claimed, but in about 70 percent, the creditors asserted that the debt owed was greater than the amounts specified by borrowers.

The median difference between the amounts the creditor and the borrower submitted was $1,366; the average was $3,533, Ms. Porter said. In 30 percent of the cases in which creditors’ claims were higher, the discrepancy was greater than 5 percent of the homeowners’ figure.

Based on the study, mortgage creditors in the 1,733 cases put in claims for almost $6 million more than the loan debts listed by borrowers in the bankruptcy filings. The discrepancies are too big, Ms. Porter said, to be simple record-keeping errors.

Michael L. Jones, a homeowner going through a Chapter 13 bankruptcy in Louisiana, experienced such a discrepancy with Wells Fargo Home Mortgage. After being told that he owed $231,463.97 on his mortgage, he disputed the amount and ultimately sued Wells Fargo.

In April, Elizabeth W. Magner, a federal bankruptcy judge in Louisiana, ruled that Wells Fargo overcharged Mr. Jones by $24,450.65, or 12 percent more than what the court said he actually owed. The court attributed some of that to arithmetic errors but found that Wells Fargo had improperly added charges, including $6,741.67 in commissions to the sheriff’s office that were not owed, almost $13,000 in additional interest and fees for 16 unnecessary inspections of the borrowers’ property in the 29 months the case was pending.

In Texas, a United States trustee has asked for sanctions against Barrett Burke Wilson Castle Daffin & Frappier, a Houston law firm that sues borrowers on behalf of the lenders, for providing inaccurate information to the court about mortgage payments made by homeowners who sought refuge in Chapter 13.

Subprime lending practices in recent years have left thousands of families with mortgages they can’t afford, on houses that have lost value. The Center for Responsible Lending, a nonprofit research and policy organization, has projected that 2.2 million homeowners will lose their homes to foreclosure nationwide. As selling and refinancing both become more difficult, many people are being forced to declare bankruptcy in order to avoid foreclosure.

"The people filing today are more educated and more sophisticated," said bankruptcy attorney Robert A. Higgins of Benbrook, TX. "Money has been so loose that people have bought houses they can’t afford."

Filing bankruptcy is one way to keep a roof over one’s head. When a homeowner files a Chapter 13 bankruptcy the mortgage lender must stop any pending foreclosure, if the bankruptcy is filed before the final foreclosure deadline.

People who didn’t ask enough questions or read the fine print when they obtained their mortgages stand a better chance of getting on their feet if they approach bankruptcy better informed and better represented, according to Candy Marshall, president of Suite Solutions (www.suitesolutions.info).

"Choosing a good bankruptcy attorney is extremely important. This is one area where experience really counts," said Marshall, whose Los Alamitos, CA- based firm provides online credit reports and services to bankruptcy attorneys around the country.

"It’s not like finding a good doctor or a good decorator," she points out. "Most people who find themselves in this position are not going to be asking around at cocktail parties and kids’ soccer games for a referral. They don’t know where to look or what to look for in finding the professional guidance they really need at this point."

Bankruptcy practice has a bit of a stigma, according to attorney Higgins.

"People resort to looking in the phone book and watching late night TV commercials," he said. "People facing bankruptcy often find themselves up late at night."

From Marshall and some experienced bankruptcy practitioners, here are tips for not getting burned another time:

Don’t make assumptions. The bankruptcy reform law of 2005 has created confusion in the minds of consumers, said Jeffrey Tromberg of the Florida Debt Relief Center in Fort Lauderdale, FL. "Many people assume that they can’t file bankruptcy," he said. Some believe that they will not be able to keep their house or other possessions. Some are under the impression that if they file Chapter 13 they will have to pay all their creditors in full. And many others assume that bankruptcy is their only alternative, when they may have better options.

Do a little research. Consumer-oriented information about bankruptcy abounds on the web.

Don’t shop for the lowest price. "What matters more is finding an attorney that specializes in consumer bankruptcy law," Candy Marshall said. "Attorneys who handle high numbers of bankruptcies every year tend to be the best informed about the law, have the best advice to provide, and run the most efficient bankruptcy practices. These factors combine to give you the best value in the long run."

"If you only shop price, what you get is young and inexperienced, or else guys who hire the work out," Robert Higgins said. "When people go for the lowest price, they don’t get the results they want."

Don’t delay. If you’re finding yourself unable to make your mortgage payments, it’s time to take action. State laws vary, but in some states the lender can demand that the entire loan must be repaid if there is one missed payment.

"It’s better to get professional help before you really get in a bind," Higgins said. "An experienced bankruptcy attorney can help you protect your property and look at alternatives to bankruptcy."

Choose wisely. Once you have a short list – perhaps referrals from your family attorney, your CPA, your state’s bar association, or names you have gathered online — call for an appointment. Be prepared to give the attorney a concise picture of your financial situation. And don’t hesitate to ask questions of your own. How many bankruptcy cases does the attorney handle each year? How does the attorney keep him or herself informed about new developments in the industry and in the law? What measures does the firm take to keep costs down for clients? How will you be sure that bankruptcy really will wipe the slate clean, and give you a fresh start?"

"I’ve seen it so often, people finding out well after the bankruptcy has been discharged that there are still liens and liabilities outstanding," Marshall said. "The way they find out is when they try to buy a home or a car and their credit is checked. Then they can’t get the favorable interest rates they were counting on, or they may not be able to get the loan at all."

Marshall advises everyone who files bankruptcy to obtain their own free credit reports 60 days after the bankruptcy discharge. Consumers can obtain a free credit report once every 12 months. www.annualcreditreport.com.

The best way to be sure that all creditors are listed on the bankruptcy petition is for the debtor to authorize the bankruptcy attorney to get credit reports that include information from all three national credit bureaus – Experian, TransUnion Equifax, as well as public record information, she said.

"Credit reports are an important safety net," Tromberg said, "and getting the downloadable reports through Suite Solutions is something that allows us to keep our costs down because it eliminates the need to manually enter all that information on bankruptcy petitions."

"Prior to the law change if a debtor mistakenly left a creditor out they still had the opportunity to receive a discharge under most circumstances," Higgins said, adding that bankruptcy court judges have become much stricter since the 2005 reform law. "Now it’s very important that people run through all the traps and list all creditors. I would say that not obtaining credit reports for clients approaches malpractice."

Consider chemistry. Finally, as in engaging any professional, compatibility counts. If you feel uncomfortable with the first attorney you talk to, if the personality grates or the values expressed raise a red flag, keep looking. As Jeffrey Tromberg says, "When filing chapter 13, you’re going to be married to your attorney for up to five years."

Media Contact: Candy Marshall President of Suite Solutions 877-311-1234 candy@suitesolutions.info SOURCE Suite Solutions