I have actually set up a payment agreement with my mortgage company and when I fist set it up I sent in my monthly payments like I was scheduled to. Then in Feb. *3 months later* they contacted me stating they didn't have all the signature papers and they sent the money back well so I faxed the paper work numerous of times and in the process of faxing the paper work the company kept telling me to resend the money costing me to send the money. They finally got it and I spoke to them and they said they would apply it to my account. Today I find out they sent the payment back again. Can they do this by law??

Ok, if you had an agreement for catching up your payments and it was accepted and signed by them ( and you have proof) no they can not do that. And you can merely mail ( not send another way) the payments with a letter showing that you have this agreement and they are obligated to follow it. But you have to keep sending you your payments,
If you are even one day late making those agreed payments they don't have to accept the agreement.
Next stop talking to them on the phone, do't send the money western union, do everything in writing, if they don't write it down, it is like it was never done.