Want to Fight Foreclosure? Good Luck After Ditech’s Bankruptcy

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(Bloomberg) -- More than 4,000 homeowners have complained to federal agencies in the past year about Ditech Financial LLC, including allegations that the bankrupt mortgage servicer failed to properly credit payments and wrongly foreclosed on their homes.

A federal judge on Wednesday is slated to decide whether Ditech can sell its mortgage servicing business “free and clear” of these consumer claims as part of $1 billion deal in its bankruptcy plan. Consumer advocates say if U.S. bankruptcy judge James L. Garrity Jr. blesses the deal, it would be difficult or impossible for homeowners to correct what they say are errors related to their loans.

People would even be permanently stripped of claims or defenses that would help them save their homes from wrongful foreclosures, the New York Attorney General’s office wrote in its objection to the sales. The New York AG contends that some homeowners are facing foreclosure because of potential errors by Ditech, in which the firm misapplied or refused to record payments that they made, misrepresented the amounts they owed or failed to acknowledge tax payment plans that would bring their accounts up to date.

Homeowners alleging they were wronged by the company include a Staten Island man who says Ditech refused to apply a 2017 mortgage payment and an elderly woman in Long Island who claims the company began foreclosure proceedings for failure to pay property taxes even though it knew she had a repayment plan with her town to catch up, according to the New York AG.

There’s also the case of Hazel Duncan Childs, a 62-year-old retired school bus driver who says that the outstanding principal on the mobile home she owns in Greenwood, South Carolina has somehow risen, not fallen, over the past two decades.

“It’s like we been living here and we never made a payment!” Childs said in a telephone interview.

A representative from Fort Washington, Pennsylvania-based Ditech declined to comment.

Want to Fight Foreclosure? Good Luck After Ditech’s Bankruptcy

Ditech filed for bankruptcy in February, a setback for chief executive Tom Marano, who headed the mortgage- and asset-backed securities business at Bear Stearns Cos. before its 2008 collapse. Ditech made plans for a bankruptcy sale that would transfer its mortgage servicing and origination business to a company controlled by Fortress Investment Group LLC for about $1 billion and its reverse mortgage business to an affiliate of New York-based investment company Waterfall Asset Management LLC.

Including the homeowner liabilities would have killed both deals, Ditech lawyer Sunny Singh said during a two-day trial in New York this month.

Homeowners still can try to fix mistakes associated with their mortgages, but only if the solutions don’t involve the new owners paying any money, Singh said during the hearing.

For example, New Residential Investment Corp., which would own Ditech’s servicing business if the sale proceeds, would use “commercially reasonable” efforts to investigate and fix any error in a homeowner’s loan, but not if the correction requires New Residential to pay damages or refund money, according to the bankruptcy plan. Ditech lawyers also said it would create a $5 million fund for borrower recoveries, which comes out to about $1,200 per complaint when divided by the number of complaints made in the past year.

Singh, of law firm Weil Gotshal & Manges LLP, didn’t respond to an email seeking comment.

State Opposition

The U.S. Trustee, the division of the U.S. Department of Justice that oversees bankruptcies, and attorneys general from about a dozen states across the U.S. have joined a consumer creditor committee in objecting to Ditech’s free and clear plan. Ditech argued against the creation of the committee representing the interests of homeowners, but was overruled.

“The debtors now appear to assert not only that they can cleanse their assets of all consumer borrower claims through the sale and plan, but that they can also preclude consumer creditors from asserting their fundamental rights to seek to correct overstated accounts, defend themselves against wrongful foreclosures, and/or exercise recoupment and setoff rights,” consumer creditor attorney Victor Noskov of Quinn Emanuel Urquhart & Sullivan LLP wrote in the committee’s objection to Ditech’s plan.

The U.S. bankruptcy code allows for some assets to be sold free and clear of claims because it increases their value and the pool of money available to creditors. Amendments to the code in 2005, however, protect consumers in bankruptcy sales when the assets involve certain credit transactions, according to the code and the National Consumer Law Center.

Consumer Protections

“Congress has made an effort to protect consumer borrowers from having their claims discharged without the ability to sue somebody who buys the assets,” said Laura Bartell, a law professor at Wayne State University in Detroit, Michigan. “In this case, the debtor has found a way to try to circumvent that protection. That’s unique.”

Bartell said Ditech lawyers categorized the sale under a section of the bankruptcy code that doesn’t include the amendment that preserves consumer claims on credit transactions.

Mortgage servicing typically involves billing and collection of home loans on behalf of banks or owners of mortgage-backed bonds, as well as handling foreclosures. Ditech specialized in “high-touch” or troubled mortgages.

Some homeowners have petitioned Judge Garrity for help.

Childs, the mobile home owner in Greenwood is one of them. She and her daughter bought their place back in 1997 for $64,500, according to letter filed with the court. When Ditech filed for bankruptcy and she tried to refinance the loan, her local credit union told her that Ditech records showed she still owed more than $70,000.

When she asked Ditech why her loan principal was higher than her initial mortgage, the company told her she had incurred an “advance deferral fee” of over $32,000 along with escrow and late fees of about $3,000, according to the letter.

Childs said that she modified her loan in 2015 when she was out of work and missed multiple mortgage payments, but doesn’t understand why she was charged such high fees and has tried to contact Ditech multiple times without an answer.

“It’s just not right,” Childs says. “Ditech should not be able to get away from this.”

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