The latest uproar about mortgage servicing in bankruptcy is an admission by Countrywide that it "recreated" documents related to the servicing of a consumer’s home loan. The short story is that Countrywide says a debtor’s monthly mortgage payment changed during the Chapter 13 plan and that the debtor didn’t make the increased payments. The problem is that the debtor, her attorney, and the trustee say that they were never told about the increase in payments, which is purportedly due to changing escrow requirements. Countrywide gave the debtor letters showing that the amounts changed; those letters were dated 2003, 2004, and 2007. The problem is that those letters were not copies of actual letters from 2003, 2004, and 2007. As Countrywide admitted, it "recreated" these letters as "evidence" of the change in the monthly payment. The judge had a few questions about that practice:

From the transcript, In re Hill, Dec. 20, 2007:

11 THE COURT: Well, why wouldn’t you just show that by

12 an in-house document generated by Countrywide? Why would you

13 go to the steps of creating a letter that never was sent, which

14 appears — which could be used by a loan processor or somebody

15 at Countrywide when a debtor calls up on their own to find out

16 the background of a loan, and these letters were forwarded on

17 without the benefit of counsel or you and Mr. Steidl talking

18 about post-discharge injunction violations? Why would that

19 type of document ever even be part of this system?

20 MS. PUIDA: Your Honor, I can’t speak as to that. I

21 don’t know the answer.

The judge’s question goes right to the heart of the matter. What is going on in this system? Why can’t one of the nation’s largest banks look in its records and produce evidence that it did what it says it did? And why can’t Countrywide’s lawyer explain its servicing practices? Countrywide’s servicing technology reputedly retains images of every document that it produces for five years; these letters should be there. (And I note, it’s possible that they are, but somebody decided it would be easier/faster/better to "recreate" the evidence.) As the judge’s comments suggest, how was a consumer supposed to know these were recreations? The "recreation" only came to light in this case because one of the receipients of the letters did not move to the given address until months after the letter was sent. A letter really written at that date couldn’t have been sent there–the recipient didn’t even know they were going to relocate at that point in time. But for this quirk, the debtor could have been forced to pay more than $4,000 to Countrywide, even though that money may not be owed.

The procedural posture of the case is critically important. The consumer, Ms. Hill, filed Chapter 13 bankruptcy to save her home and, to the best of the knowledge of her counsel, her trustee, and herself made every required payment during the her repayment plan. She received a bankruptcy discharge; a court order that she had done everything necessary under bankruptcy law during that 5 year period. What happened at the moment of this "fresh start?" Countrywide refused to accept her mortgage payments and asserted that her mortgage was in default because she was behind on her payments. Ms. Hill was very, very fortunate. Her bankruptcy attorney continued to represent her and alleged that Countrywide was violating the discharge injunction. The Chapter 13 trustee in this area, the Western District of Pennsylvania, is already embroiled in a dispute with Countrywide, alleging that it lost or destroyed $500,000 in checks from bankrupt homeowners. These factors helped get Ms. Hill’s situation in front of a judge, a benefit that many homeowners facing foreclosure will never get.