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

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

Photographer: David Paul Morris/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.

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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.

Ditech's Growing Portfolio

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.

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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.

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