Foreclosure Legal Fees

January 30th, 2007

Hidden legal fees push some into foreclosure
Lenders often hire lawyers to handle overdue mortgages

Threatened with foreclosure, Sharon Pettway discovered that her overdue mortgage bill was rising so quickly that each time she cobbled together money to pay it, the debt had grown larger.

The reason: Fast-mounting attorney fees charged by the law firm hired by her mortgage company to handle the foreclosure. At one point, the charges by the Harmon Law Offices in Newton increased 80 percent in three weeks, leaping from $2,237 to $4,020. But when Pettway called the firm to pay her bill, she said, she was told it would take several days to tally the final balance, a delay that resulted in more charges.

"If they had taken what I owed right then and there I would have been able to pay it off, but they kept adding on fees," said Pettway, 43, who bought her single-family home near Codman Square in 1993. "It wasn't right. Here I was trying to pay my debt, and they're adding on fees I can't afford."

With foreclosures surging in Massachusetts, runaway mortgage debt is a growing problem for thousands who have fallen behind on their house payments. In November alone, lenders foreclosed on 2,100 properties in the state, up nearly 300 percent from the same month the previous year, marking the second-biggest increase in the country. And while many cash-strapped homeowners fighting foreclosure struggle to make up missed payments, they are unaware that thousands of dollars in legal fees can accumulate in the interim.

Those charges -- for sheriff services, auctioneers, and other expenses incurred by law firms and lenders -- turn the debt into a moving target many homeowners can never catch. Mortgage companies and foreclosure law firms say the fees are legitimate and often required by law, and say they sometimes bill for estimated future expenses to compensate for costs that continue climbing until payoffs are received.

To address the problem, which consumer advocates say contributes to mortgage defaults and the avoidable loss of homes, legislation was filed last week to create a "breathing period" for homeowners facing foreclosure. Backed by the Massachusetts Affordable Housing Alliance, the bill would require mortgage companies to wait 30 days after initiating a foreclosure before hiring a debt-chasing law firm. Senator Jarrett T. Barrios, a Cambridge Democrat who is a lead sponsor of the bill, called the proposed waiting period "modest" and said he is optimistic it will become law.

"The hole keeps getting deeper, and how quickly it gets deeper is really shocking to people," said Boston lawyer Gary Klein, who reached an $800,000 class-action settlement with Harmon last year after suing the firm for allegedly charging for estimated costs and services it didn't provide. Pettway was a lead plaintiff in the case and is entitled to a $5,000 settlement.

And, Klein added, "It's almost impossible for homeowners to get information about how much of what they owe is fees and costs, and how or why they were incurred."

"The mortgage industry has been given a license to steal from homeowners with this out-of-control system in which law firms tack on fees and costs," said Christopher M. Lefebvre, a Pawtucket, R.I., lawyer who filed a class-action suit against Harmon for allegedly violating federal law when collecting delinquent mortgages in Massachusetts and Rhode Island. He called the problem "a national epidemic."

Harmon settled that suit, in which it was accused of illegally requiring homeowners to notify the firm in writing if they disputed their debt, for $16,000 in 2003.

Foreclosure-related fees typically include costs for certified mail, property inspections, and auction advertisements required by law. Foreclosure lawyers also charge for filing court documents, calculating delinquent bills, and sending default letters -- work Lefebvre describes as "highly automated" and "consummated by paralegals but billed at prominent Wall Street firm rates."

Pettway's charges, for example, included a $350 appraisal, nearly $400 for title searches, and $1,100 in unitemized "legal fees." With help from family, she survived her foreclosure ordeal four years ago and saved her house.

Attorneys Mark P. Harmon and Andrew S. Harmon of Harmon Law Offices, which handles more foreclosures than any other New England firm, did not return calls for comment.

But their practices were defended by Alberta E. Hultman, executive director of the United States Foreclosure Network, a Tustin, Calif., nonprofit association for law firms and other businesses that specialize in foreclosure.

Hultman described Harmon's method of calculating foreclosure fees, in which the firm routinely billed for projected costs before it had incurred them, as "pretty much industry standard."

"They're not fooling anyone, and law firms are compelled to forecast fees by the way the foreclosure action proceeds," she said. "If [a homeowner facing foreclosure] calls me today and says, 'What's my payoff?', unless you're standing there with a cash payoff today, that amount will not necessarily be the same tomorrow."

To compensate for fees that can accrue between the time a balance is quoted and the time a payoff is made, firms often bill for services not yet provided or interest not yet accrued. Firms often say they will refund those fees if necessary.

"A class-action lawyer may want to characterize that as duping someone or not charging proper fees," Hultman added, "but it's not."

Hultman said law firms that pursue delinquent mortgages are bound by debt-collection laws, as well as by rules that govern the practice of law. "Many, many times those things may conflict," she said, "so it's almost like if you can get through without doing anything wrong, you're a genius. And that's a very, very frustrating situation for many of my members who are outstanding law firms."

Pettway's slide into foreclosure was caused by a litany of personal and financial woes, including a divorce and an ex-husband who stopped paying child support. When she fell behind on house payments, she tried to negotiate with her mortgage company, but eventually it hired Harmon to collect her debt.

As of November 15, 2002, according to a letter from Harmon, Pettway owed legal fees and charges totaling $2,237. By November 22, the amount had jumped to $3,645. By December 9, it was $4,020.

"I really think there should be a standard amount law firms charge . . . but there is no standard," she said.

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