The late Waylon Jennings had a hit song years ago called “Sick and Tired of Getting Up Sick and Tired.”  The song related to the chronic consumption of alcohol but the analogy to the need for a mandatory rule for mortgage payments through the Chapter 13 Trustee is not that far-fetched.  As a debtor’s attorney who has learned through torture, pain and error how to read the Da Vinci Code produced by mortgage servicers, and as a lawyer who has spent countless hours reviewing postal receipts, personal check registers and Western Union money orders, I have decided to join Waylon and sober up.  As a result, I have discarded my prior predisposition for direct mortgage payments by Chapter 13 debtors and have opted-out to a mandatory conduit model. 

I had previously been a proponent of direct debtor payments because of the Trustee’s commission on making the payments through the plan.  I have concluded, however, that the price for making the mortgage payments through the Trustee is extremely low when compared to the normal post-discharge bills from the mortgage servicers.  I, for one, consider the Trustee’s commission on these payments to constitute the best insurance a debtor can buy.  And, in many cases, the monthly Trustee’s commission for the mortgage payments will be less than the traditional “legacy late charges” imposed by servicers.

My thirst for sobriety also arises out of having filed over three thousand adversary proceedings against servicers for improper proofs of claim, for the misapplication of direct and arrearage payments, for the imposition of ghost charges and fees, for adding unlawful legal fees and rolling late charges to the mortgage accounts, for taking monthly pictures of the debtor’s residence (and occasionally someone else’s home), and for other assorted and sundry (?) forms of misconduct.  Notwithstanding all of this litigation, I am sad to report that the conduct of the servicers has not improved but, believe it or not, is worse today than it has ever been.  So, I need the help of the Chapter 13 Trustee and the United States Trustee (or Bankruptcy Administrator) in dealing with the servicers.  I am not calling “uncle” but I am calling for help with these problems.

I have reached this reincarnation on the question of mortgage payments for a number of reasons.  The following list constitutes my Top Ten Reasons for Conduit Mortgage Payments.  Please note that the list is not in any particular order of priority.  All ten reasons stand alone as an independent justification for conduit plans. 

First, the Trustee will ALWAYS have admissible evidentiary business records online as to how much has been paid under the plan, when each payment was posted and when each payment was disbursed to the servicers.  Specifically, Trustees will also have the date each disbursement check was presented and paid by their banks.  As a result, I can forget about hunting for payments in the dreaded “Servicer’s Suspense Accounts” and about hounding debtors for checks and money orders that have been “lost” or “misplaced.”  One can certainly make the case that Trustee records are generally better than the records of the debtors.

Second, I will always have an “independent” witness who can produce exact business records as to when payments were made or when they were not made.   The so-called affidavits of default prepared in Dakota County, Minnesota, and used by many servicers are virtually worthless, not to mention being hearsay three-times removed.  And, in many cases, the debtors will have lost their records of the mortgage payment made in November of 2006.  The “Conduit System” will also eliminate the need for thousands of motions for relief from stay once servicers realize that the easy, no cost remedy is to let the Trustees file a simple motion to dismiss for non-payment.

Third, if the servicers continue with their old misconduct then they will be “messing with the Trustee’s money” and not with “the debtor’s money.”  I can tell you that after 34 years in this practice, the identity of the source of the money does make a difference.

Fourth, whether we are talking about a Section 1306 or Section 1327 conduit mortgage plan the disbursements by the Trustees to the servicers will  always involve “property of the estate.”  I am a firm believer in 1306 plans but for those who have not yet been converted this is a way to “protect” Section 1327 debtors from the servicers.  And, they need such protection.

Fifth, the Trustee voucher checks or check stubs will provide servicers with all of the detailed information servicers need to properly “apply the payments” to the correct account (pre-petition arrears, post-petition payments, legal fees, etc.).  Without disparaging my own clients, let’s just say that many such details are generally lacking in direct-pay plans.

Sixth, servicers will have to notify the Trustee of any changes in the monthly mortgage payments.  We all know about the escrow problems, but with more ARMS scheduled for the first reset in the next five months than in the past five years, such increases are going to be a nightmare under the direct-pay plans.  This will also mean that the attorney can eliminate countless hours dealing with debtors who may or may not have received such notices in direct-pay plans.  This will also assist the bankruptcy system in the elimination of the so-called re-created documents because in a conduit plan either the Trustee received the notice or he or she did not receive it.  Like it or not, the Court certainly gives more weight to the non-receipt testimony of the Trustee than to such testimony by the debtor.

Seventh, servicers will have an obligation to review the Chapter 13 Trustee website or the National Data Center’s Website for any payment discrepancies within their own “accounting systems” prior to the filing of a motion for relief from stay.  And, if the so-called PACT tracking system has any real chance of success, then we must have conduit mortgage payments.  If the attorney for a servicer failed to conduct a Trustee or NDC or PACT review before filing the motion for relief from stay, then surely such conduct would be grounds for the entry of a 9011 order by the Court on its own motion.  Such a review would surely constitute minimum due diligence for any servicer attorney.

Eighth, Chapter 13 Trustees should have more success in communicating with servicers than is the case for debtor’s attorneys.  Whether or not they are required to provide a designated Chapter 13 contact person in each case, the Court tends to consider the lack of communication with the Trustee as a more serious matter than the lack of communication with the debtor’s attorney.

Ninth, the Trustees records will provide the debtor’s attorney and the Court with a better way to track the application of the pre-petition arrears and the post-petition payments.  Currently, servicers tend to apply payments in no particular order of priority and such practices lead to unnecessary defaults, misapplications, and inaccurate balances.

Tenth, the conduit system will provide the debtor with substantially more ammunition in dealing with the undisclosed “protective advances” and “corporate advances.”  Under a conduit system, servicers will be required to provide timely notice of any such advances or their right to a recovery will be lost.  More importantly, the notice requirement will at least give the debtors the opportunity to object to the charges before they are faced with a post-discharge foreclosure.  This system will give the debtor more fire-power to enforce a Section 524(i) claim if the debtor receives one of those mega post-discharge bills!

The servicers have advised the Courts and Congress that many of the so-called mortgage servicing problems are rare and isolated events.  But for those of us down here in the Tranches, we know it ain’t so.  The fact of the matter is that as origination income declines and as servicing expenses rise, the current level of “mortgage servicing errors” is at an all time high.  And, just like the price of gas, these fees seem to be only going up.  Some might say the current problem is at epidemic levels, but that would be an understatement.  It is time to fix the problems of false and fabricated fees.  It is time to make Chapter 13 work for debtors who are trying to save their homes from foreclosure.  It is past time to make servicers comply with fundamental due process and the right to notice.

I do not for one minute believe that conduit mortgage payments will eliminate all of these abuses.  But, at they very least, they will provide the system with an honest keeper of the money records.