Act fast if behind on mortgage, or it will cost you
Legal fees mount once foreclosure begins, so try first to work out a payment plan
By Jonathan D. Epstein NEWS BUSINESS REPORTER
Updated: 10/21/07 8:24 AM
It’s tough enough on borrowers when they can’t afford to keep up with their mortgages, and wind up in foreclosure. It’s even worse if the only reason they lose their home is because they can’t pay thousands of dollars to the bank’s lawyers before the lender will help.
That’s what nearly happened to Anthony Williams. The 40-year-old former Delphi Corp. laborer defaulted on his $48,000 loan from M&T Bank after losing his $58,000 job — the family’s primary source of income.
But when he went to his lender to modify the loan after getting a new job, he first had to come up with $7,200 in legal fees and court costs.
And given his struggles, he had no chance of paying that bill — not until a member of his church generously donated the money to save his house.
“I was pretty frustrated. Sometimes you feel like you can never catch up once you fall behind,” Williams said. He was feeling that “somebody’s getting something here, and I’m still stuck.”
As mortgage defaults and foreclosures have spiked to record levels nationwide, industry leaders, lawmakers and regulators are desperately searching for ways to control the problem.
Federal and state officials are working with consumer advocates to develop rescue programs to aid customers without bailing out the industry or investors. Lenders urge borrowers to call as soon as they get into trouble, rather than waiting until it’s too late. And regulators want lenders to be lenient.
But consumers, advocates and even lawyers say Williams’ story is all too common in New York state, and puts a crimp on efforts to help struggling homeowners avoid foreclosure.
Just as consumers think they can work with their lender to restructure their loan, they learn they must first pay the piper — in this case, the lawyer.
“Legal fees can be the straw that breaks a borrower’s back,” said Legal Aid Bureau of Buffalo attorney Athena McCrory.
The problem stems from the long legal process that foreclosure requires in New York, and the skyrocketing fees that can quickly result once those procedures begin. That’s why consumer advocates and lenders urge borrowers to get help and work something out before their loan is sent to lawyers.
“Don’t wait to get a summons or complaint. Call us immediately,” said Carol Brent, a staff attorney at Legal Services for the Elderly, Disabled and Disadvantaged of Western New York, which works with Legal Aid on foreclosure prevention.
The issue is exacerbated when lenders either can’t or won’t roll those fees into a modified loan with the past-due debt.
In some cases, the investors who own or insure the loans require them to be out of foreclosure before modification, so the fees have to be paid. That’s the case with loans insured by the Federal Housing Administration, and to some degree for loans sold to mortgage giants Fannie Mae or Freddie Mac.
Or the borrower can’t afford or qualify for a modification unless the fees are paid separately. The bank also may not want to roll those costs into the loan.
“I’ve got a philosophical problem with having people pay interest on those costs and fees,” said Joseph M. Morrison, real estate collections and recovery manager at M&T.
Some lenders balk
And lenders are legally entitled under the original mortgage to demand payment from the borrower before changing the loan.
“Many lenders are not willing to simply work out a payment arrangement for the fees and costs,” said Peter Muth, attorney at Hodgson Russ LLP. “In order to cease the foreclosure, the borrowers often must pay the fees and costs very quickly — if not immediately.”
But in many cases, the fees and court costs amount to as much or more than what is overdue from the loan. That means several thousand dollars or more that must be paid in a hurry by someone who struggles just to eke out several hundred dollars.
“When you have fees like this, most people can’t afford to pay,” said Brent, who reviewed Williams’ case for The Buffalo News.
Williams quickly fell behind on his mortgage after he lost his laborer job at auto parts supplier Delphi in March 2006.
His wife Annetta, a 35-yearold stay-at-home mother, wasn’t working, and with four children, the Williams couldn’t afford the $600 monthly mortgage payments. Even when she took a $24,000 job as a Medicare specialist at Independent Health and he took odd jobs, it wasn’t enough. By February, they were six months late, and their lender started to foreclose.
Williams was familiar with the mortgage process from working at M&T Mortgage before Delphi, so he contacted the bank to find out about modifying the loan. He was told he owed about $6,000 in late payments and other charges to the bank, and another $4,185 to the law firm of Steven J. Baum.
The bank debt could be rolled back into the loan, which could be extended out to keep the payments affordable. But his loan was insured by FHA, so the legal debt had to be paid first.
He refused initially, challenging it as excessive and filing a response in court. But he was told by government officials the fees were acceptable. So he sought help from housing counselors at Belmont Shelter Corp., who negotiated the fees down in April. He still couldn’t pay, and by August, they were up again.
The attorneys’ fees for past work totaled $2,620, including $1,170 to foreclose and $1,450 for litigation because of his challenge. There was also another $3,193 in past court costs. And then $1,390 in additional fees that were expected for the final month of proceedings.
“Those are very high. That sounds fairly odd to me,” said Alan Kopit, legal editor for Lawyers. com. “I would like to get behind those numbers.”
M&T and Baum declined to comment on a specific case. But Morrison said M&T follows strict FHA rules, and is highly rated for working with clients.
Court costs add up
New York is one of only 17 states that still requires “judicial,” not administrative, foreclosures, and its laws date back at least to the Depression. In other states, the process is fast and inexpensive, taking just two to three months with no court costs or filing fees. But here, the procedures take seven to nine months, as the case winds through a county or state Supreme Court, collecting costs. Such costs include:
• $210 to file the complaint and get a court index number.
• $45 to file a notice of pendency, and 50 cents a page per loan.
• $40 to $100 per defendant to serve the summons and complaint, depending on location.
• $95 to request a judge.
• $45 for having the judge sign the order appointing the “referee to compute,” and another $50 for the computation.
• $45 to execute the judgment.
• Several hundred dollars to publish the foreclosure sale.
• $500 for the referee to attend the auction and sell the home.
Just to file the complaint and serve the summons could cost the lender $1,400, Muth said.
“Borrowers will find a big difference between the amount they owe the lender immediately before the file is sent to the foreclosure attorney, and the moment after the foreclosure action has been filed,” he said.
There’s also a $250 to $500 fee for a foreclosure title search or certificate, and $45 fees for almost every other document submitted to the court, as well as other court administration, search and service fees that may crop up, he added. There’s even an overnight mail charge.
Are lawyers’ fees fair?
In all, court costs amount to two-thirds of the total legal expenses. The rest consists of the separate attorneys’ fees for foreclosure, and for any litigation.
Adding to the controversy is a perception the fees and vague charges don’t resemble the real work performed, critics say. The court costs and basic attorneys’ charges are flat fees for the type of work, regardless of the time required, the size of the loan, or whether the work was done by a firm partner or a paralegal.
“Most of the firms who handle these actions use boilerplate pleadings that require little more than plugging in information they receive,” McCrory said. “The true time it takes to put together these pleadings is far less than what the homeowner is billed for.”
However, court costs are set by law, so they’re fixed. Attorneys’ fees are less regulated, and critics say they aren’t consistent from case to case.
There are some limits on such fees but they are not universal. Fannie Mae and Freddie Mac, which buy mortgages from lenders and then sell pieces of them to investors as securities, restricts attorneys’ fees on their loans by state and region.
In Buffalo and the rest of upstate New York, Fannie Mae caps fees at $1,250, while Freddie Mac limits them to $900. But that only applies if Fannie or Freddie purchase the loan. Reimbursement for additional costs can be negotiated.
Similarly, the FHA caps attorneys’ fees on the loans it insures, since it guarantees banks will be paid. The agency sets the limit at $1,300 here.
In all three cases, attorneys get a percentage of the cap based on the stage of the process.
But none of those limits applies when litigation starts and the court approves added fees. And they don’t govern court costs themselves. “Those are set by the state,” said Freddie Mac spokesman Brad German. “It would be up to the state Legislature to address that issue.”
Critics say the system is flawed and needs to be reined in. But they don’t agree how. Both sides say it’s unclear how to set limits that would be fair for consumers and lawyers.
Even the lenders see the problem. “The banks are beginning to reach out to us and say we want to stop collecting the attorneys’ fees,” Brent said. “They’re waking up.”
But that doesn’t help Williams. He’s working again, as a voltage tester for Davey Resource Group, earning just half of his Delphi salary. After his fellow parishioner came through, he got the loan modified.
But he’s out $7,200. “I always felt it was wrong,“ Williams said. “The lenders know how to twist the rules, and there’s nobody here in Buffalo to watch them. If there was someone watching them, they wouldn’t do it.”