Doesn’t it seem that a foreclosure is a losing proposition for homeowner’s as well as mortgage companies? Then why are there so many foreclosures lately? Turns out there are other players in the foreclosure game that ARE making money off of foreclosures. Gretchen Morgenson and Jonathan D. Glater published an article entitled the Foreclosure Machine for the New York Times On March 30, 2008. Morgenson and Glater describe a little known phenomenon in the foreclosure universe: The law firms which represent mortgage companies are able to make large profits whenever a consumer’s home enters foreclosure. This seems counterintuitive at first. The consumer loses money and often seeks bankruptcy protection. The note holder (AKA, the mortgage company) is not receiving its monthly mortgage payments from the consumer, so how are these law firms making such large profits?

According to the Morgenson and Glater article, bankruptcy judges explain that many of these law firms are paid by the number of motions filed in foreclosure cases. As a result, law firms which represent mortgage companies in foreclosure are encouraged to file as many claims as possible—hence the title of the article: The Foreclosure Machine. “Court documents say that some of the largest firms in the industry have repeatedly submitted erroneous affidavits when moving to seize homes and levied improper fees that make it harder for homeowners to get back on track with payments.” Associate Professor of Law at the University of Iowa, Katherine M. Porter, found that a recent analysis of 1,733 foreclosures across the country showed that “questionable fees were added to borrowers’ bills in almost half the loans.”

The article tells the story of a couple, the Atchleys, who had a home loan with Countrywide and entered Bankruptcy to protect their home from foreclosure. The Atchleys almost lost their home again when Countrywide falsely told the court that the Atchleys were 60 days behind in their Chapter 13 payments two times over four months. As we know, a Bankruptcy Debtor is required to continue making his mortgage payments while he makes his payments to the Bankruptcy Trustee. If Countrywide had been successful in their claim, the Atchleys home would have entered foreclosure again.

“After the Atchleys supplied proof that they had made their payments on both occasions, Countrywide withdrew its motions to begin foreclosure. But the company also levied $2,793 in fees on the Atchleys’ loan that it did not explain, court documents said.”

Sadly, the Atchleys’ case is not uncommon. Homeowners come to my office on a regular basis and state that they have completed their Chapter 13 bankruptcy, made all payments due to the mortgage company during the bankruptcy but get a bill for fees and expenses that the mortgage company charged during the bankruptcy without their knowledge or Court permission. Mortgage company’s attorneys increase their profits by filing more motions, and Chapter 13 bankruptcy debtors are paying the price. On top of this, the mortgage company’s attorneys charge fees without receiving court permission, and for which they are unable to account.

However, bankruptcy judges are beginning to punish mortgage company’s attorneys and mortgage companies for their behavior. A Texas judge sanctioned a Texas firm, Barrett, Burke, Wilson, Castle, Daffin, & Frappier $75,000; the firm Shapiro and Diaz was sanctioned $125,000; and a bankruptcy judge awarded a debtor $250,000 in emotional distress damages and $500,000 in punitive damages against Ameriquest.

Too often Mortgage Company’s and their attorneys are not punished for their behavior and the homeowner suffers. This is true even when the homeowner has sought bankruptcy protection. By charging additional fees without court permission and filing false motions, the mortgage company’s and their attorneys are abusing the bankruptcy system. This is unfair to the bankruptcy debtors, and it is illegal.

The first step to alleviating this problem is awareness, and the next is action. Mortgage Company’s and their attorneys will continue to employ The Foreclosure Machine as long as it is profitable to them. The best way to stop them is to file suit every time they have violated the law, and for judges to implement uniform punishment.