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Bailout Bill Gives Go Ahead to Questionable Foreclosure Fees « The Washington Independent

That change in federal law to allow bankruptcy judges to modify mortgages in foreclosure isn’t going to make it into the $700-billion bailout bill, disappointing community and housing groups that pushed for it.

On Friday, Georgetown University credit expert Adam Levitin argued on TWI that the change would be the best way to help homeowners in any rescue of the financial system. But the lending industry has long opposed it, and Congress always has taken their side. Even in a bill that spends taxpayer money to bail lenders out, they still get their way — at least as the latest version now stands.

The lending industry contends the change would only add to the costs of foreclosure and would increase mortgate rates for everyone.

But last week, Levitin told me another reason the industry might not want the change. As foreclosures have increased, the industry has come under greater scrutiny for the fees it packs on to the loans of borrowers with foreclosed homes in bankruptcy.

Apparently, while no one was looking, the industry has regularly added all sorts of unnecessary, and even illegal, fees to a bankrupt borrower’s balance — leading to claims that banks and servicers are taking advantage of people who filed Chapter 13 bankruptcies to try to save their homes.

One study found that questionable fees were added to half of all mortgage loans of borrowers in bankruptcy. In one case now under investigation, Wells Fargo added a total of $24,000 in fees to a borrower’s loan.

Levitin said that in Jefferson Parish, La., a lender charged a $250 inspection fee on one loan. The trouble was, the house was underwater. Not the loan, the actual house. Yet the lender still charged for an inspection.

Lenders might not have wanted judges modifying loans in bankruptcy not just because of the extra cost, but because of the additional scrutiny, Levitin said. Those judges might have taken a closer look at fees being charged and could have put an end to that gravy train.

But now that the measure isn’t going to make it in the bailout bill, it looks like lenders don’t have to worry about someone looking over their shoulders in bankruptcy court.

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