Sunday, July 27, 2008

If This Is Victory

by Tanta on 7/27/2008 12:21:00 PM

Then I don't want to know what defeat would be. Even I am getting tired of writing about Gretchen Morgenson columns, but this one cries out for demystification. Anyone who wants to claim that any homeowner who stops foreclosure and keeps her home has necessarily "won" anything or received any particular financial benefit needs to read this post. This is a profoundly important issue: the whole "stop foreclosure" movement is based on the assumption that stopping a foreclosure is always and everywhere a "win" for homeowners. Morgenson appears to buy this idea so much that her reporting crosses the line from its typical tendentiousness to outright distortion in order to sustain the myth. I suggest that no actually useful and successful response to the "foreclosure crisis" will ever come about as long as this kind of distortion goes unchallenged.

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Here's Morgenson:

MAMIE RUTH PALMER isn’t a celebrity. People magazine doesn’t chronicle her every move. The paparazzi don’t wait for a photo op outside of the modest Atlanta home where she has lived since 1987.

But in some mortgage circles, Ms. Palmer, a 74-year-old former housekeeper, has earned her moment of fame. After enduring six years in foreclosure hell, almost losing her home twice, Ms. Palmer has escaped intact.

Last month she received a settlement from the Bank of New York, the trustee for a vast pool of mortgages that included hers. Under the terms of the deal, the bank reduced Ms. Palmer’s loan balance to $59,000 from about $100,000 and has agreed to accept the proceeds of a reverse mortgage in full satisfaction of her obligation.

The settlement also eliminated about $12,000 in foreclosure fees added to her debt and called for the installation of central air-conditioning in Ms. Palmer’s home.

Roughly $10,000 in legal fees billed over five years by Ms. Palmer’s lawyer, Howard D. Rothbloom, will be covered by payments she has made toward her mortgage while she was battling foreclosure.

“I feel good,” Ms. Palmer said last week. “It’s been a long time coming.” To celebrate, she said, she is going to Florida to fish with her nephew.

Ms. Palmer’s case is hardly unique. It’s just one of a swelling number that revolve around the thorny issue of who owns the note on a home when it’s forced into foreclosure proceedings.
This case is not "about" who owns a note. It just isn't. Certainly, among the tens of thousands of dollars worth of objections and motions made by Palmer's attorneys over the course of six years, there was some question about the standing of the mortgage servicer. It appears that the servicer produced some pretty sloppy paperwork for the court. It appears that the Debtor's attorney also filed some pretty sloppy paperwork with the court, too, which dragged out the challenge to the servicer's standing for months. (If you want to read a first-rate judicial slapdown and you have a PACER account, don't miss Judge Massey's "Order Directing Debtor's Counsel to Withdraw Objection to Claim of HomeEq Servicing Corporation or To Litigate The Objection Properly," In re Palmer, Case No. 02-81333, docketed 3-31-03, US Bankruptcy Court, Northern District of Georgia.)

At the end of it, the mortgage servicer withdrew its proof of claim and the trustee of the security owning this loan (Bank of New York) entered the case directly. I do not see from my review of the documents on PACER that there was ever any question that Bank of New York as trustee for the MBS had standing in bankruptcy or was owed money.

The final complaint that resulted in a settlement of this case alleged that Bank of New York charged inappropriate fees. There was no challenge at all to BNY as the creditor.

At no time, it seems, was there ever any question about the fact that Palmer had a mortgage loan and did not make payments either pre- or post-petition. Documents in this case indicate that the mortgage loan in question was originated in October of 1996, and that Palmer began making late payments by June of 1997. Palmer failed to pay taxes and insurance on the property. She filed prior bankruptcies in 1999, 2000, and 2002, each of which was dismissed. When this $52,000 loan was first originated on what was then a $78,000 property, the monthly payment exclusive of taxes and insurance was $554.97, and it became clear within a year that Palmer could not afford that.

By November of 2005, Palmer owed (according to her servicer) $50,611.70 in principal, $10,104.98 in escrow advances, $19,802.60 in accrued but unpaid interest, and $11,379.90 in legal fees, late charges, etc. During most of this period she does not appear to have made any mortgage payments, or any payments for taxes and insurance.

The final complaint made by Palmer's attorneys alleged that some fees were inappropriate. By this time there was no question that Bank of New York had a proof of claim; the argument was about how much the debtor owed. I have no idea whether the $10,000 Morgenson reports as being the cost of Palmer's own attorney's efforts is "appropriate" or not. It appears that BNY just got seriously tired of all of this and did, indeed, decide to settle. But Morgenson's description of that settlement leaves a lot to be desired. I quote from Judge James E. Massey's Interim Consent Order of May 5, 2008:
The parties have reached a settlement of any and all claims that were or could have been raised in this case.

Plaintiff has been approved by Financial Freedom, a subsidiary of Indymac Bank, for a reverse mortgage to be secured by her residence. Plaintiff will receive approximately $79,530.00 in a principal limit. The lender will deduct approximately $6,436.00 for the cost of closing the loan and approximately $5,946.98 for servicing the loan. Approximately $7,300.00 must be set aside for repairs to be made as a condition of the loan. After all deductions, Plaintiff will receive approximately $59,847.02.

From the proceeds of the reverse mortgage, Plaintiff will pay the sum of $57,800.00 to Defendants and Defendants shall accept the sum of $57,800.00 in settlement and as full and final satisfaction of the entire debt owed by Plaintiff to Defendants. Upon receipt of these funds, Defendants shall cause the deed to secure debt on Plaintiff’s residence to be released and will withdraw the proof of claim filed by them in this case.

The Trustee shall not disburse any additional funds whatsoever to Defendants for ongoing mortgage payments or for any proof of claim filed by Defendants in the case.

The parties shall bear their own respective costs incurred in this adversary proceeding.
So this is how Mamie Palmer came out "intact": she began her case owing $51,000 in principal and around $76,500 in total, including interest, escrow, and legal fees. She now owes $79,530. She will also have to pay $10,000 to her attorney out of payments she made to the bankruptcy trustee. She gets $7300 worth of repairs to her home. Although her new mortgage, being a reverse mortgage, will not require her to make monthly payments, she will still have to pay taxes, insurance, and maintentance out of pocket, since the initial disbursement for this loan was equal to its full principal limit. If she does not make those payments, she can face foreclosure from IndyMac. Or, well, the FDIC. If the FDIC is willing ever to foreclose on any IndyMac loans.

I guess that punishes the investors in Palmer's mortgage loans and her mortgage servicer for having made an error on a mortgage assignment: they'll be writing off most of their accrued interest and all their legal expenses.

I suppose it's just more of the crashing irony of this story that Palmer's new loan now belongs to us taxpayers, unless the FDIC can find a buyer for IndyMac. That and the fact that a homeowner left the bankruptcy system owing more, not less, than she did when she started. One of our regular commenters likes to tell me this is called "rough justice," and I should "get used to it."

I'm not sure I'd call this "rough justice." I certainly will not call this a "victory" for a homeowner in "foreclosure hell." Whatever Morgenson is smoking, she needs to give it up.
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