Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Nye Lavalle
PAGE ONE
More Debtors
Use Bankruptcy
To Keep Homes
Chapter 13 Filings Gain
In Popularity Because
They Halt Foreclosures
By AMY MERRICK
October 23, 2007; Page A1
With loan defaults rising along with many mortgage payments, fast-growing numbers of homeowners are gambling on bankruptcy filings to try to stay in their homes.

Last month, as the nation's housing slump continued, consumer bankruptcy filings increased almost 23% from a year earlier -- representing nearly 69,000 people -- according to the American Bankruptcy Institute, a nonprofit research group whose members include bankruptcy attorneys, judges and lenders. Overall, consumer bankruptcy filings were up 44.76% during the first nine months of this year.


In some areas where the real-estate boom was especially heated, the increase in filings has been even sharper -- especially for a type of bankruptcy that allows homeowners to halt foreclosures on their homes.

The surge in filings hasn't caught up with the flood of bankruptcy cases consumers launched in 2005, as they raced to beat a change in federal law that made it harder for individuals to declare bankruptcy. Even so, it shows the rising sense of insecurity many Americans feel as housing values fall, lending standards get tighter and hundreds of thousands of mortgages with low introductory interest rates "reset" to higher rates, boosting the homeowner's monthly payments.

Most consumers filing for bankruptcy continue to do so under Chapter 7 of the federal Bankruptcy Code. Under that provision, a person must forfeit certain assets -- including, in some cases, a portion of home equity. Those assets are sold to pay off debts.

While Chapter 7 filings stop foreclosure proceedings, the break is usually only temporary. As a practical matter, many homeowners who file under Chapter 7 lose their homes.

In recent months, however, an increasing number of homeowners have filed for bankruptcy under Chapter 13, which staves off foreclosure proceedings while the homeowner works out a plan to pay off mortgage debt and other obligations over time -- usually three to five years. To qualify, debtors must have a regular income and must stay current on their new bills. About four in 10 filers today are filing under Chapter 13 -- up from three in 10 two years ago. The 2005 change in bankruptcy laws was designed in part to shift more filers to Chapter 13, which forgives less debt than Chapter 7.

In California, one of the nation's hottest markets during the recent real-estate boom, the number of nonbusiness Chapter 13 petitions in the second quarter of the year more than doubled from a year earlier, according to records compiled by the Administrative Office of the U.S. Courts in Washington. Over the same period, such filings increased nearly 40% in the northern district of Illinois, which includes Chicago, and 70% in Massachusetts.

"It's a mess," says William McLeod, a Boston bankruptcy attorney who says he is receiving twice as many calls from debtors as he did a year ago. "This is fed right now by real estate, and what's been this mortgage frenzy in the last several years."

Some bankruptcy attorneys are promoting Chapter 13 bankruptcy in press releases and commercials, and are contacting borrowers whose homes are already in the foreclosure process. But it isn't a strategy that works for everyone. Consumer advocates say the homeowners who are most likely to benefit from Chapter 13 are those facing foreclosure because of a temporary financial setback, but who expect to be able to cover their mortgage payments in the future.

Early this year, 47-year-old Briant Titus saw sales start to lag at his family's vacuum-cleaner sales business. He missed several payments on the two-story Cape Cod home in Potterville, Mich., that he purchased 15 years ago for $139,000. When he called his lender to find out why two recent checks hadn't been cashed, a manager told him that foreclosure proceedings had begun.

"I was freaking out," says Mr. Titus. "All I was thinking about were my two little kids," who are 9 and 6 years old.

Mr. Titus saw a TV commercial for a local bankruptcy attorney, Gene Turnwald. Encouraged by the suggestion that he could save his home, Mr. Titus hired Mr. Turnwald and filed a Chapter 13 petition about six months ago. Since then, he has paid his regular monthly mortgage bill of $950 as well as $2,000 under his debt-repayment plan, half of which is applied to his past-due mortgage payments and the other half to business creditors. Vacuum sales are still sluggish, but he says he can make his payments by budgeting carefully.

"I think if people knew they had the Chapter 13 option, a lot of people would save their house," Mr. Titus says. He says he can't recall what he paid in legal fees but says he thinks he spent a total of about $1,200 to file his case.

Of course, there are pitfalls. A Chapter 13 filing stays on a person's credit file for a decade, wreaking havoc on his or her ability to get financing. And the repayment plans leave borrowers with little room for maneuver. Indeed, many Chapter 13 plans fail because of unforeseen problems such as an illness, job loss or expenses for an emergency home repair.

Moreover, for thousands of debtors caught up in the sagging housing market, a Chapter 13 plan can be unrealistic. Mr. Titus benefited from having a fixed-rate mortgage, but many homeowners are facing adjustable-rate mortgages that are resetting to much higher monthly rates. Some can't even afford their new mortgage payments, let alone repay mortgage arrears, overdue credit-card bills or other debts.

Donna Randles of Chicago sought a Chapter 13 filing last year after her brother lost his job and she was unable to keep up with the monthly mortgage payments they had shared: $775 on a house and $1,900 on a two-unit apartment building. She also had about $3,500 in credit-card debt.

The bankruptcy-court petition gave her some breathing room, Ms. Randles says. She has started a day-care business to supplement her salary as a service worker for a utility company.

But her mortgage payments have increased more than 25% in the past nine months. With a monthly income of about $5,000, she is paying $864 a month on the house and $2,500 on the apartment building, along with $1,800 on her Chapter 13 repayment plan. Her brother remains unemployed.

"As things progress, I'm learning that my income doesn't increase, but my mortgage does," says Ms. Randles, who is 46 years old. "It's still a struggle to try to move money around."

With Congress scrambling to stem foreclosures, a bipartisan group of lawmakers has suggested altering the Bankruptcy Code. The code currently prevents mortgage lenders from changing loan terms on a filer's primary residence, but not on vacation homes, investment properties, family farms and businesses.

Members of the House and Senate have introduced competing bills that would, to varying degrees, allow bankruptcy courts to modify mortgage terms and extend the time frame for repayment.

"All the other markets with debt that can be modified in bankruptcy function fine. It's entirely consistent to have a functioning market and to have the ability of bankruptcy judges to modify loans when necessary," says Eric Stein, senior vice president of the Center for Responsible Lending, a nonprofit consumer-advocacy group based in Durham, N.C. He testified recently before Congress in support of the proposed changes, estimating that the moves could save 600,000 homes from foreclosure.

Bankruptcy attorneys are divided on the proposals. Some believe the changes would indeed ward off foreclosures. Others are more concerned that lenders would become even more reluctant to give mortgages to low-income borrowers. Lenders also worry about ripple effects on the loan portfolios they have turned into securities and sold off to investors. If the terms of the loans in those packages change, it could change their value to investors.

Steve Bartlett, president and chief executive of the Financial Services Roundtable, which represents financial-services companies, told a congressional subcommittee that if the law allows debtors to wipe out a portion of their mortgage debt in bankruptcy court, lenders will increase interest rates on future borrowers. "This will dry up credit for many Americans who may not be able to afford these higher rates," he said.

Finance Panel's Chairman Seeks
Overhaul of Mortgage Regulations
By DAMIAN PALETTA
October 23, 2007; Page A16
WASHINGTON -- The chairman of the House Financial Services Committee is pushing for broad, industrywide overhaul of the way mortgages are offered, securitized and supervised.

Rep. Barney Frank (D., Mass.) introduced legislation that would, among other things, prohibit mortgage brokers, bankers and others from steering borrowers toward more-expensive loans in order to receive greater compensation. It would prohibit prepayment penalties on subprime loans and limit prepayment penalties on prime loans.

Mr. Frank said the bill's goal is to "diminish predatory lending while continuing to support a rigorous mortgage market. It creates a national standard for giving mortgages, originating mortgages, which will cover every mortgage originator," he said in a conference call with reporters.

Some banking-industry officials fear, however, that the proposal wouldn't create a uniform standard. It would set the floor for what underwriting standards should be, but states could pass more-aggressive rules. "Without a uniform national standard, this legislation could only serve to foster more confusion in the marketplace," said Kurt Pfotenhauer at the Mortgage Bankers Association.

The bill would extend some liability to certain parts of the secondary market, an issue known as assignee liability. Mr. Frank said this would ensure that investment banks and other securitizers monitor the quality and underwriting standards of the loans they fund. The bill would create safe harbors, though, shielding secondary-market investors from liability if they follow certain due-diligence and other practices.

The issue of assignee liability will likely be one of the more controversial aspects of the legislation. Federal Reserve Chairman Ben Bernanke has said limited and clearly defined assignee liability could prove beneficial, but Treasury Secretary Henry Paulson has said assignee liability could scare away investors.


Lenders Curb New Mortgages In Weaker Areas
Move May Put Added Pressure
On Prices in Hard-Hit States;
Submarket Collateral Damage
By RUTH SIMON
October 23, 2007; Page D1
Some lenders are now making it tougher for borrowers in softening housing markets to get a mortgage.

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The policy is designed to keep lenders from holding the bag if home prices in those markets continue to fall -- and highly leveraged borrowers find themselves owing more than their home is worth. But the tighter standards, by discouraging home buyers, could add to downward pressure on home values in already weak markets.

Lenders such as J.P. Morgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. are cutting the maximum amount some borrowers can finance in counties or states where home prices are declining. Mortgage companies are also taking a tougher look at appraisals in housing markets with falling prices. Among the areas being hit by the tougher standards are parts of California, Florida and Michigan.

Lenders in the past have come under criticism for their failure to make loans in minority neighborhoods, a practice known as "redlining." The latest round of tightening, by contrast, is broader, and aimed at markets where home prices are falling.

The sharper focus on soft housing markets comes after mortgage lenders have tightened their standards for all borrowers amid a slowing housing market, a widespread credit crunch and rising delinquencies. New national data from Equifax Inc. and Moody's Economy.com show that the mortgage delinquency rate jumped to 3.3% in the third quarter from 2.3% a year earlier.

Because lenders' policies vary, borrowers can often get around the tighter restrictions by taking their business elsewhere. Ritch Workman, a mortgage broker in Melbourne, Fla., says he recently asked Wells Fargo to approve a loan for a borrower with good credit who was buying a new $1.1 million home in Brevard County and wanted to put 10% down. "Wells came back and said they would only [finance] 85%" of the home's value, says Mr. Workman. The borrower ultimately got the 90% financing he was seeking from another lender, according to Mr. Workman.

The impact of such restrictions could grow if these tighter standards become more widespread. It "could significantly impact the ability of even borrowers with good credit scores to buy a home if they don't have a significant down payment," says David Stevens, who runs the mortgage operation at Long & Foster Real Estate, based in Fairfax, Va. Last year, more than one-third of Long & Foster's customers put less than 10% down, Mr. Stevens says.

With house prices falling, lenders are looking to control their risk, says Doug Duncan, chief economist of the Mortgage Bankers Association. But "there's a little bit of a self-fulfilling prophecy," he adds. "If you tighten standards, fewer people can qualify [for a mortgage]. Effective demand is going to be lower, resulting in lower house prices."

The tighter standards are already creating challenges for some borrowers. James DeGeronimo Jr., a mortgage broker in Cleveland, says that Charter One, a unit of Citizens Financial Group Inc., turned down one of his clients who was seeking to refinance a $108,000 mortgage. The lender didn't feel that it could get an accurate valuation of the property, given the high number of foreclosure sales in the neighborhood, he says. Mr. DeGeronimo says his firm was able to find another lender willing to refinance the mortgage.

A spokeswoman for Charter One says the company "has taken a prudent approach to serving the borrowing needs of homeowners" and has an additional appraisal-review process in areas with declining values. "We continue to lend in Cuyahoga County and it continues to be an important market for us," she adds.

Thornburg Mortgage Inc. in Santa Fe, N.M., which specializes in larger loans, has begun looking at median home prices in specific markets when it assesses a particular loan. "If we're making a $2 million loan in Manhattan, we're a lot more comfortable with it than a $2 million loan in Dearborn, Michigan," where prices tend to be much lower, says Thornburg President Larry Goldstone.

RAISING THE BAR ON BORROWERS

Some of the lenders are reducing the maximum combined loan-to-value ratio, a measure of how much of a home's value a borrower can finance using a mortgage and a home-equity loan. In August, J.P. Morgan Chase's home-equity division cut the maximum amount borrowers in Nevada can finance to 85% of the home's value. The unit won't let borrowers finance more than 90% of their home's value in seven other states -- Arizona, California, Colorado, Florida, Michigan, New Jersey and New York. That compares to a maximum combined loan-to-value of 100% of a home's value in Texas and Washington and 95% in other states. Chase made the move to reduce the chance that the loans it makes will wind up under water, a company spokesman says.

Citigroup this month cut the maximum amount certain borrowers in "depreciating" markets can finance through a mortgage and home-equity loan. The change applies to borrowers in seven states -- including Arizona, California and Florida -- who are buying a home or pulling cash out when they refinance. In most of these markets, Citi is reducing maximum financing to 85% of the home's value. Citi is also reducing by five percentage points the maximum loan-to-value ratio in more than 80 counties in 14 states and the District of Columbia.

"We routinely review our criteria and make adjustments as appropriate according to market conditions," a Citi spokesman says.

Wells Fargo, meanwhile, has expanded a program begun earlier this year that tightened standards in certain "declining" markets. Wells has reduced the maximum amount it will finance by 10 percentage points in markets the company has identified as "distressed." The list includes more than 50 counties in seven states, including parts of California, Florida and Michigan. It also cut by five points maximum financing in more than 125 other counties in a total of 22 states and the District of Columbia. A spokesman says the company is monitoring credit conditions on a "day to day" basis.

In other cases, lenders are giving appraisals closer scrutiny. Bank of America Corp. says it is asking for more detailed appraisals in markets with falling prices. In many cases, appraisers are being told to drive by the property to get a better estimate of its value instead of just running information about the home through a computer model.

In October, SunTrust Banks Inc. published a list of roughly 50 metro areas in 16 states and the District of Columbia that it designated as "declining markets." The declining markets list "was issued to make sure that appraisers in those markets are taking that into account and explaining how it figures into their valuation," a SunTrust spokesman says.

In markets where home prices are declining, IndyMac Bancorp Inc. is telling appraisers to base its assessment of a property's value on comparable sales that are less than 90 days old. It's also telling them to take into account the asking price for at least one comparable home that's currently on the market.

"The lenders are being way more conservative than they were a year or two ago," says John Rooney, an appraiser in Phoenix. In some cases it can be tough to find enough comparable properties that meet lenders' criteria, particularly for higher-end homes, he says.

Write to Ruth Simon at ruth.simon@wsj.com

Dumped Mortgage Files
Invite Identity Theft
By MICHAEL HUDSON
October 23, 2007; Page B1
Last month, Waldell Thomas, a maintenance worker at Montego Apartments in Atlanta, made a discovery inside the complex's Dumpster: a cache of 40 boxes of loan files containing Social Security numbers, credit reports and other data on customers of Ameriquest Mortgage Co.

"I said: 'God, this is people's personal information,' " Mr. Thomas recalls. "What if that had been my information and somebody had come along and got it?"

Privacy experts say this sort of mishap -- which leaves borrowers vulnerable to identity theft -- is a growing concern in the mortgage industry. The mortgage process has become more complex, with consumer information flowing through the hands of a menagerie of independent brokers, itinerant loan officers, investors and financial middlemen. With the housing downturn forcing many of these firms to sack workers and shut branches, some mortgage files are getting lost in the shuffle, turning up in places like Dumpsters that are easily accessed by scam artists.

"In times of organizational change or chaos, we're much more likely to see those kinds of leaks -- what I call inadvertent disclosures," Dartmouth College management professor Eric Johnson says.

Experts say that putting numbers on how frequently confidential mortgage data is leaked is difficult, because many breaches go unnoticed. In July, however, Bob Segall, a reporter at WTHR-TV in Indianapolis, tried to get a sense of how bad the problem was around central Indiana. Over three days, he peered into 40 Dumpsters behind loan branches and title companies that handle mortgage documents. In nearly half -- 18 -- he discovered sensitive information about borrowers.

"You could see their complete financial lives on paper, dating back 20, 30, 40 years," he said. Among the finds inside the mortgage files: a letter from one borrower's counselor saying he was doing well in alcohol rehab.

Several borrowers went on camera to express their outrage after Mr. Segall informed them their documents had been tossed in the trash. Among them were Russ Biegel and Harold Webb, who had just bought a house together outside Indianapolis.

"I don't frequently get telephone calls from investigative reporters," Mr. Biegel, 54 years old, recalls. "When he told me, I was very shocked. I trusted people I shouldn't have trusted. You just think that these things are going to be automatically protected and they're not."

R.J. Schlecht, a security expert at the Mortgage Bankers Association, says industry players are constantly working to improve safeguards. And while small and midsize players can be vulnerable to security problems, he says, the big lenders that amass most of the consumer data "have the resources and knowledge to be able to provide a lot of controls and mechanisms" to protect borrowers' privacy.

State and federal authorities have written rules aimed at discouraging breaches that can benefit Dumpster-diving scam artists. Under such rules, lenders and other firms that handle mortgage documents are generally required to hold onto these papers for lengthy periods, and to shred or burn them when they finally discard them.

The Federal Trade Commission and other regulators have begun taking enforcement action. In February, North Carolina's attorney general fined two mortgage firms in Charlotte for dumping loan files into the trash.

In July, authorities in Hawaii fined a defunct mortgage-escrow firm $10,000 for improperly disposing of mortgage documents. That case arose in March when Jim Kelly, editor of Honolulu's Pacific Business News, stumbled upon 39 boxes of mortgage documents as he was dropping newspapers at a recycling center.

Mr. Kelly says he almost walked away, but he recalled being a victim of identity theft years ago. He hauled away the boxes and stored them in his garage, making four trips in his wife's SUV.

Then he tracked down the firm's former owner, who told Mr. Kelly he had paid a handyman $150 to remove the documents from his basement, where they had been stored in the six years since he had shuttered the company. The state took possession of the documents from Mr. Kelly and shredded them.

In the case of the Ameriquest loan files, DeKalb County, Ga., police have stored the boxes in their evidence room. Deputy Chief Mike Burrows says initial inspection has turned up loans made to buyers in Georgia and Florida dating between the late 1990s and 2005. At this point, he says, no evidence of a crime has emerged, although whoever is responsible could face a civil fine from state bank regulators.

In recent months Ameriquest's parent, ACC Capital Holdings, has shut down Ameriquest's loan offices, but it continues to fight a civil case in federal court in Chicago that accuses the company of defrauding borrowers. The lead attorney in the civil action, Jill Bowman, is seeking to subpoena the Georgia documents.

Ameriquest said, "We take the security of our records very seriously." It said the documents may have been stolen and it's working with police to determine who took them.

The dangers of identity theft in the mortgage business go beyond Dumpsters. Private information can also leak out via the Internet or when computer disks are taken off premises by employees.

On Sept. 21, Dow Jones Newswires reported that files containing Social Security numbers and other information on 5,208 customers of a Citigroup Inc. unit had been inadvertently downloaded onto an Internet "peer-to-peer" file-sharing network.

Dow Jones Newswires, a unit of Dow Jones & Co., publisher of The Wall Streeet Journal, determined the breach came after a former business analyst for Citigroup's ABN Amro Mortgage Group joined a file-sharing network where people can share music and video downloads. Old work-related information that she had downloaded onto her personal computer apparently was inadvertently exposed to the network.

After looking into the matter, Citigroup offered one year of free credit monitoring to affected customers. The company said it is "fully committed to physical, electronic and procedural safeguards to protect personal information."

--Jaime Levy Pessin contributed to this article.


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