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  4.  » Justice Department Joins Bankruptcy Trustees in Foreclosure Probe

A unit of the Justice Department, the U.S. Trustee Program, is now using its role as a watchdog to pressure lender-side foreclosure law firms and mortgage processing companies to make sure foreclosure proceedings are handled properly. Chapter 13 bankruptcy trustees have already intervened in two bankruptcy cases involving bungled foreclosures.

As we reported in our October 20 post, one of the companies being probed is Florida-based Lender Processing Services Inc. (LPS), a mortgage technology and information provider. U.S. Chapter 13 bankruptcy trustees are investigating the firm along with mortgage lenders’ law firms in cases in Mississippi and Louisiana.

This week, the bankruptcy trustee in the Louisiana case announced that it has installed a two-year monitoring program on how the Boles Law Firm of Monroe, Louisiana, handles bankruptcy cases. The law firm and LPS allegedly failed to credit the now-bankrupt homeowner’s mortgage payments and thereby misled the bankruptcy court about the debtor’s debt level.

‘Foreclosure-Gate’ Now Spilling Over Into Bankruptcy Cases

U.S. bankruptcy trustees are responsible for ensuring the integrity of the bankruptcy system. Typically lawyers or accountants, their job is to account for the bankruptcy debtor’s assets and debts and handle the distribution of any assets liquidated in Chapter 7 or approve Chapter 13 payment plans. They also monitor bankruptcy cases and make sure creditors and debtors follow the rules.

The widespread problems created by the securitization of mortgages during the housing bubble and by the pervasive legal issues in the foreclosure process are impacting all parts of the economy, and the bankruptcy system is no exception.

Mortgage securitization and “robo-signing” have created a mortgage and foreclosure system where missing and incomplete paperwork is rampant.

“The paper trail is not taken care of properly,” said Michael Joseph, president of the National Association of Chapter 13 Trustees. “I often think of the movie, ‘It’s a Wonderful Life,'” where community bank owner George Bailey knew everybody he lent to. “You don’t have that anymore.”

In the flood of bankruptcy cases following the foreclosure crisis, the U.S. Trustee Program is using its authority to pursue mortgage services for improper filings, said Clifford White III, director of the program.

“We aim to hold mortgage servicers to the same standard of completeness and accuracy in their filings that we do the debtors who owe them money,” White said.

Source: The Wall Street Journal, “Trustees Probing Mortgage Handlers,” Carrick Mollenkamp and Dionne Searcey, October 29, 2010