Homeowners emerging from bankruptcies face threat of foreclosures.
WILMINGTON, Del. — Amid mounting allegations of abuse by big lenders, a federal judge has indicated he is leaning toward reining in mortgage companies that have been foreclosing on consumers who brought their home-loan payments up to date while in bankruptcy.
Such a move — outlined Wednesday by Judge Brendan Shannon of the U.S. Bankruptcy Court in Wilmington, Del. — could have national implications because Delaware courts play a big role in interpreting laws that govern financial institutions. Those courts so far have generally been friendly toward credit-card companies and banks.
On Wednesday, several big mortgage lenders — including Countrywide Financial and Wells Fargo — told Shannon he didn’t have the power to decide whether late fees and other costs imposed by mortgage companies on bankrupt homeowners are appropriate.
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Shannon rejected that argument, saying it that were the case, he would be on a “complete fool’s errand.”
In the recent housing crisis, homeowners that have emerged from bankruptcy proceedings have been hit with what Shannon called “surprise” fees — late fees, inspection fees and other costs that were not previously disclosed to them.
Unpaid, the new assessments can lead to foreclosure against people who went through five-year bankruptcy proceedings in an effort to hold onto their homes.
Courts in Ohio, Pittsburgh, Idaho, Texas and elsewhere have imposed penalties or are weighing penalties against lenders like Countrywide for alleged wrongs ranging from document forgery to ignoring court determinations that homeowners have brought their home-loan payments up to date.
The lenders also have been accused of refusing to cash checks sent to them by court officials on behalf of homeowners.
“I’m dealing with it”
“Courts around the country are dealing with this and I’m dealing with it now,” Shannon said.
Mortgage companies have acknowledged some mistakes but insist they’re entitled to assess many extra charges under home-loan deals agreed to by consumers. Bankruptcy courts, they say, have no power to modify their rights as secured creditors.
Adam Hiller, an attorney for several mortgage lenders, including Countrywide and Wells Fargo, said Wednesday that Congress recognized a “clear bright line” in the bankruptcy law, one that keeps judges from interfering with mortgage companies.
Fees create problems
“It’s good to be you,” Shannon replied. Shannon said the “surprise” charges make problems for the bankruptcy system, because homeowners who have just emerged from bankruptcy can be forced back into bankruptcy to fend off foreclosure attempts.
“Doesn’t that frustrate what I’m doing here?” Shannon asked Hiller.
William Jaworski, the Delaware lawyer who raised the issue before Shannon, has more than a dozen clients ready to exit Chapter 13 bankruptcy with their mortgages paid up and their credit on the way to being restored.
But he said he’s afraid that, days or weeks after his clients emerge from bankruptcy, they will be hit with late fees and costs and, if they don’t pay up, threats of foreclosure from mortgage lenders.
In all of his cases, Jaworski wants Shannon to put in place procedures that require mortgage companies to give notice to homeowners and the court before assessing fees and costs. He also wants those companies to demonstrate why those fees are reasonable.