by Tanta on 4/29/2008 02:52:00 PM

As our wise commenter Markel observed the other day, the great thing about stories from the RE front is that, the more you poke at them, the more it becomes clear that everyone involved is the bad guy. It is not inspiring or uplifting reading.

Of course “bad guy” is ironic here, at least for those of us who do not trade in simplistic concepts of heroes and villains, white hats and black hats. Everyone is implicated; every story has another side that complicates our understanding of what is going on. Getting at the complicated truth of the matter, it seems to me, is an important undertaking. Not because it “defends” or “convicts” any party to the tale, but because if the truth of these things is in fact quite complicated and uneasy, we need to know that. No one can suggest a possible “fix” for a problem he or she does not understand fully—to do so is to leave the land of unintended consequences, to which any policy solution is susceptible, and arrive at barking up the wrong tree.

By and large, the press does not share this view, if we may judge by what they actually write, as opposed to whatever it is they tell themselves about what they write. Some days I cannot decide whether the media requires a simple, black and white morality tale, and therefore wittingly or unwittingly filters and distorts the details of events in order to present this a priori narrative, or if they are, indeed, such incompetent and uninformed reporters that they really do accept only half a tale to begin with, duly typing it up as presented by an unhappy borrower without any attempt to verify facts or arrive at the other side. That would, given a borrower’s frequent need to self-justify, rather inevitably produce a tale of an innocent victim preyed on by an unscrupulous lender. (Of course the opposite case would be equally a problem; it's just that these days we're not pushing the lender's need to self-justify.)

I really want to make it clear why I am going through this exercise of examining in detail a recent “villain” story. I have no particular desire to heap blame on the borrowers or defend the lender (or its attorneys). As far as I can tell, everyone involved—including, I think, the bankruptcy court and the U.S. Trustee reporting on this case—dropped the ball at least once. It is simply that there has been too much rhetoric expended, in my view, on this business of “unnecessary foreclosures” and servicers profiting from foreclosure fees. We might as well let Gretchen be our poster child, since she regularly volunteers for the task:

As the mortgage crisis has spread, an army of law firms, loan servicers and foreclosure management companies has developed a highly profitable business by assessing legal fees and other charges on imperiled borrowers, calculating what they owe and drawing up the documents required to remove them from their homes.

For years, consumer lawyers say, bankruptcy courts routinely approved the claims and fees. But a number of bankruptcy judges and officials representing the United States Trustee, a unit of the Justice Department that oversees the bankruptcy system, have grown increasingly concerned that lenders and their representatives are running roughshod over borrowers.

Among their concerns are excessive fees imposed on homeowners and actions taken to seize the homes of borrowers who are not delinquent on loans. Most foreclosures are uncontested by homeowners, who typically rely on what the lender or its representative says is owed, including fees assessed during the process.

In late February, for example, the United States Trustee for the Atlanta region sued Countrywide Home Loans, a unit of Countrywide Financial, as a result of actions the company took against John and Robin Atchley, borrowers in Waleska, Ga. Twice in 2006, the Atchleys were almost forced from their home when Countrywide and its law firm claimed erroneously to the court that the borrowers were delinquent on their mortgage.

Citing a pattern of questionable practices, the trustee asked the bankruptcy judge overseeing the case to enjoin Countrywide “from engaging in bad faith and abusive practices.” [Emphasis added]

Forget the fact that we need more than one example to back up “an army.” Forget the fact that no particular evidence that any of this is “highly profitable” has been tendered (here or in any other Morgenson article I’ve read on this subject). We are not here today to demand a distinction between revenue and profits, although we will at least note that if Countrywide is currently running “a highly profitable business,” they’re disguising it well.

What we are going to do is look at the claim that Countrywide “claimed erroneously to the court that the borrowers were delinquent on their mortgage.” Does this not sound to you all, my experienced readers of idiomatic English, as if it means that the borrowers were not, in fact, delinquent, while Countrywide said they were? That’s what it sounded like to me, and I was certainly interested: if there ever is such a thing as an “unnecessary foreclosure,” it would be one filed against a non-delinquent borrower. So I did some digging on Mr. Internet. Pieced together from an article in the Atlanta Journal-Constitution, the U.S. Trustee’s Complaint, and the Cherokee County public deed records, I have the following incomplete story. There is information still missing; in some cases we can only speculate in the absence of further documents. What information we do have suggests that Morgenson’s characterization of the case is willfully misleading. I call that journalistic bad faith.

It is, actually, true, per the BK trustee, that at least once Countrywide did file a motion to lift stay that was inaccurate about the borrower’s delinquency status. (I am not as convinced as the trustee is that it happened twice, but we’ll get to that.) But there appears to be no question at all the Atchleys were, in fact, delinquent at the time; the question was how many post-petition payments were behind. But let’s start from the beginning.

Per the Journal-Constitution:

Robin and her husband, John, a utility lineman, put $22,000 down in 2004 when they moved out of their single-wide mobile home and bought the brand-new house in Waleska, about 50 miles from downtown Atlanta.

The next year, they refinanced with American Freedom Mortgage to pull out enough money to put up a fence and finish the basement. The project allowed their two daughters and two sons — today ages 14, 12, 11 and 5 — to each have their own rooms.

When the first payment book arrived, it had Countrywide's logo on the front.

The family kept up with its payments until a personal tragedy hit. Robin's sister died unexpectedly, prompting Robin to take a few weeks of unplanned leave from her job. They got behind with their bills.

To buy time to catch up, the Atchleys filed for bankruptcy in October 2005 under a Chapter 13 reorganization plan. . . .

The family had no significant debt other than their mortgage and auto loans. When their bankruptcy plan was filed, they were three months behind on the mortgage, which amounted to about $5,000. The Atchleys immediately started making payments after their plan was filed.

In February and then again in May of 2006, Countrywide's attorney, McCalla Raymer, came to court seeking permission to foreclose, saying the family had not been making its required payments.

But payment receipts proved Countrywide's action was improper.

Fighting off the foreclosure actions, however, didn't solve all the problems. Countrywide planned to up the family's monthly payment to cover "escrow" charges, even though the family covered its own homeowners insurance policy and property tax payments.

"I made four payments in two months, and they were still telling me I owed them an outrageous amount of money on late payments and stuff," Robin Atchley said. . . .

The Atchleys couldn't keep up. Their budget was so tight, their sons offered to pay for gas using money they had earned doing odd jobs working for relatives.

They decided they didn't have the resources for a lengthy fight against Countrywide. They also didn't have the money to pay a mortgage balance that continued to climb.

When they entered bankruptcy, Countrywide said the Atchleys owed just under $185,000. When it came time to pay off the loan, Countrywide said their pay-off total would be $199,000. The Atchleys still do not understand how Countrywide came up with such a high mortgage balance, given their payment history. The sale price of the house was about $2,000 short of what the family needed to pay commissions and Countrywide.

"We had to pay to get out of the home after we had put everything we had in it," Robin said.

According to county public records, the Atchleys bought the home in March of 2004. (The sales price is not on the deed.) They took out a $161,910 mortgage from Indy Mac, a 2/28 ARM with an initial interest rate of 7.75% and a monthly payment of $1,159.94 by my calculation. In March of 2005, they refinanced the loan (which was apparently immediately sold to Countrywide) for $180,200, in a 3/27 ARM with a start rate of 10.10% and a monthly payment of $1,594.72. I have no idea why the Atchleys increased their monthly payment by over $400 in order to borrow less than $20,000 in new money. Perhaps they did not qualify for a HELOC. In any case, it appears that the payment on the second loan did not originally include a tax and insurance escrow.

The Atchleys filed for banktruptcy on October 3, 2005. If, as the Journal-Constitution reports, they were 90 days delinquent at the time, the latest possible last paid installment would have been due July 1, 2005. Their first payment date on the loan in question was May 1, 2005. I do not doubt Mrs. Atchley’s account of the reason for the delinquency; I simply note that “a few weeks of unplanned leave” from her job, “no significant debt” other than auto and mortgage loans, and a brand-new cash-out refinance that increased the monthly housing cost by over one-third, resulting in a 90-day delinquency within six months of loan origination, strongly implies to me that we have borrowers who cannot afford their house payment. We are not informed what the Atchleys’ household income was when the loan was made or thereafter, or if it was ever verified. We are not informed whether any attempt was made on either side to work out a repayment plan prior to the bankruptcy filing. We do not know what the likely sales price of the home would have been at the time the bankruptcy was declared.

We do know that on February 21, 2006, Countrywide filed a First Motion to lift the BK stay (and proceed with foreclosure) on the grounds that the borrowers were delinquent in post-petition payments by two months. There would have been four post-petition payments falling in that period (November 1 through February 1). According to the Trustee’s Complaint:

The Atchleys disputed Countrywide’s contention that they were two months delinquent on their postpetition payment obligations. On February 23, 2006, the Atchleys’ attorney transmitted documents to Countrywide’s local counsel by facsimile that purported to demonstrate that they were not two months delinquent. . . . . These documents purported to demonstrate that when Countrywide filed the First Motion, the Atchleys allegedly had made postpetition payments to Countrywide totaling $6,295. These documents included Western Union Quick Collect receipts and U.S. postal money orders dated November 21, 2005, January 18, 2006, and February 20, 2006, all before the filing of the First Motion. Based on the figures set forth in the Proof of Claim, the total amount of postpetition payments that had become due to Countrywide as of its filing of the First Motion was $6,380. The documents transmitted to Countrywide’s attorney on February 23, 2006 also included a payment history prepared by Countrywide. This payment history is dated February 22, 2006, which is the day after Countrywide filed the First Motion. The payment history demonstrates that on the day after Countrywide filed the First Motion, it was holding an “unapplied” balance of $1,581.66 with respect to the Atchleys’ account.

We are not given the amounts of these three payments; it does however appear that the December 1 payment was not made until January 18. I confess to being a bit surprised that the BK Trustee is quite as hard on Countrywide about this First Motion as it is; the Motion was filed only the day after the date of the borrower’s payment receipt (which presumably shows the date sent, not the date received, which may be different). It is perfectly possible that Countrywide sent instructions to file the motion to its attorneys on or before February 20; indeed, it would be quick turnaround to have the Motion filed the day after the servicer sent the information to the attorneys. Such payments-crossing-filings do occur, and in this case I’d be inclined to give Countrywide the benefit of the doubt. Nor is it shocking, it seems to me, that there was an unapplied balance on February 22; the trustee’s report makes clear that the amounts sent by the Atchleys, per their receipts, fell short of four full payments. Servicers do indeed have the legal right to hold partial payments in an “unapplied” status until the borrower remits the full amount due. In any event, a payment history dated February 22 doesn’t tell us what the payment history showed on the date Countrywide instructed its attorneys to file the motion.

That, in any case, was the “first” episode of an “erroneous” Motion of Countrywide’s. Note that these motions concern themselves solely with “post petition” payments. The “pre petition” past due amount, presumably, is being paid a few hundred dollars a month out of the monthly installments of the Chapter 13 repayment plan. There is no question that the Atchleys were still delinquent on these dates; the specific question was whether they were at least 60 days past due on the post-petition payments alone. That First Motion was withdrawn; the Second Motion was not filed until May 24, 2006.

In its Second Motion, Countrywide alleged that the “Debtors have defaulted in making payments which have come due since this case was filed. Through the month of May 2006, two (2) payments have been missed.” . . . Countrywide also alleged that the debtors had a “clear inability to make all required payments.” . . . The Atchleys again contested Countrywide’s allegations that they were two months delinquent on their postpetition payment obligations. On June 6, 2006, the Atchleys’ attorney transmitted additional documents to Countrywide’s counsel. . . . These documents included a Western Union Quick Collect receipt dated May 20, 2006 in the amount of $1,600. This receipt demonstrates that, four days before Countrywide filed the Second Motion, the Atchleys were one month delinquent, rather than two months delinquent, as represented in the Second Motion. These documents also included a Western Union Quick Collect receipt dated June 2, 2006, less than two weeks after the previous payment, in the amount of $1,748.92.

I note for the record that May 20, 2006 was a Saturday. It seems only reasonable to assume that Countrywide would have processed that payment to the Atchley’s account no earlier than May 22; it might have been after that, depending on what kind of "Quick Collect" transaction the Atchleys used. Did that give Countrywide reasonable time to cancel that Motion before the attorneys filed it on the 24th? Yes, I think you could say that it did. But to be fair, only just.

I see a pattern forming here of borrowers who have made post-petition payments late since the very first one and who tend to remit payments at the last possible moment. Any servicer is in a bind with borrowers like this: if they are making post-petition payments and repayment plan payments, nobody particularly wants to foreclose, especially if the borrowers have little to no equity. On the other hand, without the repeated threat of foreclosure, it’s hard to assume with any confidence that those payments would have kept coming in, late as they were.

The picture is also muddled by the absence of any clear documentation on the escrow issue (this lack, it seems, is Countrywide’s error in failing to amend its Proof of Claim properly). While there may have been no escrow account on the loan when it was originated, it seems clear that at some point after that Countrywide demanded that the borrowers begin paying into a tax and insurance escrow. The Atchleys indicate that they do not understand the escrow amounts charged, but then again they don’t actually explicitly claim they were keeping up with their tax and insurance payments during this period, either. I note only that the public records show a lien filed against them by their homeowners’ association for past-due assessments in November of 2006. Any servicer with evidence of unpaid taxes, insurance, or assessments has the right under the mortgage to require escrow payments, even if that requirement was waived when the loan was originated. I also note that while the Trustee’s Complaint notes that Countrywide did not amend its Proof of Claim properly in order to reflect the addition of escrow payments to the amount owed, it does not proffer any evidence that such charges were improper.

The Atchleys asked for court approval to sell their home in March of 2007 and received the payoff statement from Countrywide in May. The Trustee’s concern is that the payoff statement includes $2,793 in aggregated fees. Whatever those fees were for—legitimate or illegitimate charges—there would have been a problem, since it appears that Countrywide never amended its Proof of Claim since the original one filed in January of 2006. On that original Proof of Claim, only $242.50 in fees had been indicated. It is not demonstrated by the Trustee that the additional fees would have been determined to be improper by the court if the Proof of Claim had been amended properly; there is no way to know if the fees were proper or not since Countrywide erred Big Time in not submitting the required proof to the court.

I note that we are given no information at all about when the Atchleys made their last post-petition payment to Countrywide. Without knowing how much past-due interest, taxes, insurance, and assessments there were, we have no way of measuring whether that $199,000 payoff was really a surprising number or not. We have the Atchleys’ claim that they did not understand it. I will hereby opine that servicers who provide payoff statements that do not clearly itemize all fees and charges are asking for borrowers who do not understand them, and that if the servicers had a lick of sense they’d quit doing that. But I’m afraid there’s no reason not to assume that this case legitimately racked up a couple thousand in legal fees and escrow shortages between January of 2005 and May of 2007.

Could those fees be padded or incorrect? Sure they could. This is Countrywide we're talking about. Did those fees themselves drive the Atchleys into BK and threaten them with foreclosure? Are we kidding? They weren't even assessed, it appears, until two years or so after the first delinquency on this loan.

Countrywide continued to screw up even after the sale of the property—it seems that they never withdrew their Proof of Claim after the payoff in full, and so they continued to accept payments from the court (out of the repayment plan funds) for several months. I observe that the court didn’t notice the problem either, but the Trustee’s Complaint solely faults Countrywide (and/or its attorneys) for this problem. In any case, Countrywide did return the improper payments to the court. It remains to be seen whether the court will determine that any of the fees collected in the payoff of the loan were improperly charged and must be returned to the Atchleys.

To sum up, then: there is evidence here of gross incompetence on Countrywide’s or its attorneys’ part in failing to amend its Proof of Claim (probably on several instances). Its behavior in not refunding improper payments from the court until the debtors filed motion is indefensible. They should collectively get their butts kicked for that, and it appears that they will.

Given the facts presented, I do not find the two motions for lifting of stay grossly improper. It seems to me that the fact that the borrowers’ (late) payments so closely preceded the filings is insufficient evidence that the servicer was acting in bad faith. I suspect that Countrywide’s law firm—the infamous McCalla Raymer—probably does not have a good process for re-verifying updated payment histories just prior to filing motions, and perhaps the court should admonish them for that. I probably would.

It is also possible that the legal fees charged to the borrowers in the final payoff will be considered improperly charged because those two motions were deemed erroneously filed. If that is the case, I think that’s probably slightly unfair. The borrowers were either unable or unwilling to make their post-petition payments until literally the eleventh hour before a 60-day delinquency, which pretty much automatically results in a motion to lift stay. Nothing that I can see (remember, I do not have the exhibits to the Complaint) suggests unambiguously to me that Countrywide acted in bad faith when it believed that the borrower was two months past due and that, crucially, the borrower was unable to continue to make payments on an on-going basis. On that last part, events seem to have born that out.

I’m sorry that the Atchleys lost their home. However, unless they owed money on a lot of very expensive cars—we aren’t given any information about that—it seems clear to me that the mortgage payment was in fact the root of their financial problems. They were budgeted so tightly that a few weeks of the loss of one borrower’s income put them 90 days down; they struggled throughout the bankruptcy to stay current on post-petition payments and appear to have made most of them late; they were unable to keep up with their HOA assessment; they were lucky, it seems to me, to eke out enough sale proceeds to nearly cover the mortgage debt and broker commission. (If Countrywide ends up returning $2,000 or so to them in “improper” legal fees, that would bring them to break-even.) Neither the 10.10% loan they ran out of steam on or the 7.75% loan they started with (that was a pretty high ARM interest rate in 2004) implies that their credit records were stellar before the home was originally purchased. With hindsight, they’d have been much better off to have sold rather than declaring bankruptcy back in late 2005. These folks are an object lesson in why struggling to hold onto your home can be the worst thing you can do to yourself.

In fact, the Atchleys sound to me like classic subprime borrowers—which phrase I insist on using as a matter of fact description, not an insult. Many, many of those borrowers don’t make it. That is why subprime lending—and borrowing—is so risky. That is why the big boom in subprime lending in the period in which the Atchleys got their loans was such a disaster. But they are not, as far as I can tell, evidence that servicers are foreclosing on non-delinquent borrowers, and if anybody involved made all that much of a “profit” on them except the lender who originated their loan and the builder who sold them the house, I’ll be shocked. Indeed, the fact that servicers are racking up so much operational expense in foreclosures and bankruptcies right now is, well, part of the subprime disaster. Pretending that it's a way for these Bad Guy lenders to practically print money is a very bad joke.