2-track system under attack

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It’s a common complaint of struggling homeowners that mortgage loan servicers sometimes initiate a foreclosure while they are trying to get a loan modification.

Lenders defend this two-track system as a necessary way to begin the long foreclosures process in case a loan modification isn’t appropriate or viable for that homeowner. Consumer groups and consumer law attorneys, meanwhile, bemoan the practice in which foreclosures and loan modifications seem to be carried out simultaneously. The latter is, of course, moot once the former runs its course.

The National Association of Consumer Advocates, or NACA, a group that represents attorneys, and the National Consumer Law Center, or NCLC, a nonprofit that focuses on consumer credit issues, have released a new survey of attorneys that found substantial percentages had represented homeowners whose loans had been involved in foreclosure and loan modification at the same time. Altogether, the surveyed attorneys reported that more than 2,500 clients said they’d faced this scenario.

The survey also asked the attorneys about “shoddy, abusive and illegal practices” in the mortgage servicing industry, such as wrongful force-placement of homeowner’s insurance, misapplication of loan payments and inflated or improper fees, leading to foreclosure. The surveyed attorneys reported that more than 1,800 of their clients said they’d had their loan put into foreclosure, even though they were current on their payment or were making payments as agreed.

In a statement, the NACA and NCLC demanded the elimination of the two-track system and called on the Obama administration, Congress, banking regulators and federal and state law enforcement officials to take “immediate action” to “rein in” loan servicers.

“Homeowners should be properly evaluated for a loan modification before a foreclosure is initiated, and that evaluation should be completed before any foreclosure fees are incurred. Servicers must not be allowed to profit from improper fees and unnecessary foreclosure initiation,” the groups said.

Lenders and loan services may well take exception to the groups’ definitions of what is or isn’t “proper” or “necessary” and argue that their practices are lawful and appropriate action against borrowers who are behind on their payments.

Borrowers, what’s your view?