Archive for September, 2010

One month ago, I wrote about the incredible deal that One West appeared to get when it took over IndyMac from FDIC. http://stevebeede.com/2010/08/are-modifications-or-short-sales-possible-with-onewest-bank/. Most readers agreed that this sweetheart deal seemed improper and led to more foreclosures. Others said that merely because OneWest could possibly make more money by foreclosing rather than by modifying, did not prove they actually did it. Evidence may now be here and OneWest justifies the practice.

One of our clients has been seeking a loan modification on her IndyMac loan (now owned by OneWest). She sought this through the Home Affordable Modification Program (HAMP) set-up by our government to help people keep their homes. She appeared to meet all HAMP requirements: her debt to income was well over 31% (actually 46%) and she had stayed current on her loan.  Yet, she was rejected on the grounds that the “Net Present Value” (NPV) of the deal didn’t warrant modification. When she called IndyMac to challenge the rejection, she was told “The NPV test is an economic loss test that basically is seeing if the modification is better for the investor than foreclosure”.  Further, in her rejection letter she was told that she could request the values which IndyMac used in its NPV calculation. When she requested these values, she was told “There is not anything that can be sent to you”.

A review of the HAMP guidelines on https://www.hmpadmin.com/portal/programs/hamp.html indicates that our client met the criteria.  However, the NPV instructions available on the site appear to leave discretion to the investor whether to participate or not or how to create its NPV values. Thus, while the HAMP guidelines have made for good political soundbites making it sound like modifications were available, the underlying NPV structure gives lenders an out.  OneWest/IndyMac certainly appears to be going through the motions only but without any real intent of modifying.  Given the better results from foreclosure under their FDIC deal, this is understandable but I very much doubt that this is what our government really expected in promoting the HAMP modification program.

So where does HAMP stand now? We have reported that only 4.5% of HAMP applicants get a modification. Other say that the ultimate number may be more like 2-3%.  With most HAMP modifications not including any principal reduction, failure rates are running at 50%.  Meanwhile, there appears to be no pressure on banks to do anything more. As recently reported by Alyssa Katz of Housing Watch: “The illusion that HAMP is helping most troubled borrowers while preventing big losses among banks and investors in mortgage-backed securities is part of what’s stopping Treasury from taking the kind of aggressive action it needs to – namely, reducing principal owed”.  http://www.housingwatch.com/2010/08/03/hamp-program-success-rate-much-lower-than-first-reported/

The bottom line for upside-down borrowers is that a home saving loan modification will remain unlikely. While it is still worth the attempt, owners should be prepared to face the reality of moving on either through a short sale or foreclosure. Although many of these same issues plague short sales (particularly mortgage insurance), most are successful in helping owners avoid foreclosure and potential deficiency liability.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re having problems communicating with OneWest or Indymac, get competent legal advise in your State immediately so that you can determine your best options. 

If you have specific questions about your liability in California or about short sales, foreclosure, or any legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.

On September 7, 2010, a new Program went into effect which promised to enable many borrowers to obtain a principle reduction on their loan and thereby keep their homes. FHA calls this a lifeline for responsible borrowers. While any assistance will always be welcomed, for most upside down borrowers this Program is more hype than help and certainly will not be a sufficient lifeline to help them keep their homes. Under the Program, FHA will refinance an existing non-FHA loan with an FHA loan if the following conditions are met:

1. The homeowner must be in a negative equity position;
2. The homeowner must be current on the existing mortgage to be refinanced;
3. The homeowner must occupy the subject property (1-4 units) as their primary residence;
4. The homeowner must qualify for the new loan under standard FHA underwriting
requirements and possess a”FICO based” decision credit score greater than or equal to 500;
5. The existing loan to be refinanced must not be a FHA-insured loan;
6. The existing first lien holder must write off at least 10 percent of the unpaid principal balance
7. The refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent;
8. Non-extinguished existing subordinate mortgages must be re-subordinated and the new loan may not have a combined loan-to-value ratio greater than 115 percent;
9. For loans that receive a “refer” risk classification from TOTAL Mortgage Scorecard (TOTAL) and/or are manually underwritten, the homeowner’s total monthly mortgage payment, including the first and any subordinate mortgage(s), cannot be greater than 31 percent of gross monthly income and total debt, including all recurring debts, cannot be greater than 50 percent of gross monthly income;
10. FHA mortgagees are not permitted to use premium pricing to pay off existing debt obligations to qualify the borrower for the new loan;
11. FHA mortgagees are not permitted to make mortgage payments on behalf of the borrowers or otherwise bring the existing loan current to make it eligible for FHA insurance; and
12. The existing loan to be refinanced may not have been brought current by the existing first lien holder, except through an acceptable permanent loan modification.

The real question from this is will it bring any wide-spread relief to upside-down owners. Not likely For most upside-down owners, the key to any lasting relief is the principal reduction. Lenders have shown very little willingness to do any principal reduction so far and this Program is completely voluntary for lenders. The Program requires at least a 10% principal reduction and that the resulting debt to value ratio not exceed 97.75% (115% if more than 1 loan). With so many properties now being 40-50% over-encumbered, it would take a much greater cut to make this work. Also, many borrowers are upside-down because of reset payment schedules that greatly increased their monthly payments to unaffordable levels. These borrowers are very often already in default without any capacity to bring the loan current. Since the loan proceeds cannot be used to bring them current, this entire group of the most-needy borrowers will be excluded.

For certain, a few borrowers will qualify and be helped. FHA says 500,000 to 1.5 million borrowers could be helped. This seems very, very optimistic since it realistically requires lenders to take a principal hit that they have so far been unwilling to do. More likely this will be just another government program that makes it sound like help is coming but will not really do much. Further, since this is a refinance program, those California borrowers whose existing loans are non-recourse (purchase money) will be changing into a recourse loan for which they could be held personally liable if there is a future default.

If you believe this FHA Refinance Program can help you, contact a local lender and determine if you qualify. Certainly some property owners will be helped by this and it could be you. So check it out. But don’t be surprised if your lender doesn’t play along.

If you have specific questions about your liability in California or about short sales, foreclosure, or any legal issues, feel free to contact us at sjbeede@bpelaw.com

We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.

Over the past several years, we’ve assisted thousands of property owners in coping with upside down loans. Although very few have gotten actual modifications that made their homes affordable (the lenders and our government won’t go that far), most have used short sales to avoid judgments against their credit that would follow them for years.  Even most people who have gone through foreclosure have avoided the lenders’ deficiency recourse.  But now, many are shocked to discover that, although the lender has no judgment against them, the debt still appears on their credit reports as an unpaid debt. This can block future credit and could possibly used by a collection agency to force a payment that is no longer owed.

When a property is sold in a short sale, agreements are generally made with the lenders in which the unpaid balance is forgiven, ie: there is no deficiency recourse.  Similarly, in California at least, most foreclosures are done through a Trustee Sale process through which the foreclosing lender has no recourse against the debtor for any unpaid balance.  These unpaid amounts are considered “forgiven debt” and the debtor may be taxed on this amount unless they have an exemption such as the 2007 Federal Debt Forgiveness Relief Act, or their accountant determines that they are otherwise exempt: purchase money debt, insolvency, etc.  When this occurs, the debtor’s credit report should show the loan as “settled”; or “paid less than full” or some similar reference… not that anything further is due.  So what do you do if this happens.

First, get your records together to show that the loan deficiency was actually resolved.  This may be the short sale closing documents, particularly the lenders’ short sale consent letters addressing the deficiency (or removing any deficiency language). For a foreclosure, the type of foreclosure used will provide guidenance. In either case, the debtor should receive a 1099 form from each lender. A 1099C indicates that the debt is forgiven but sometimes the lenders use the wrong one.

Second, send a dispute letter to each of the credit bureaus - Experian, TransUnion, and Equifax - and challenge the debt reference. Send this my Certified Mail Return Receipt and keep all your records.  Once the credit reporting agency has received your dispute letter, they are obligated to investigate. According to the Fair Credit Reporting Act, the credit bureaus must take the following steps:

  • The credit reporting agencies must resolve consumers’ disputes within 30 days limit, unless you have used the services of annualcreditreport.com, then the bureaus can take up to 45 days.
  • In response to consumers’ complaints that documentation in support of their disputes was disregarded, the credit bureaus have to consider and transmit to the furnisher all relevant evidence submitted by the consumer the first time.
  • Consumers will receive written notice of the results of the investigation within five days of its completion, including a copy of the amended credit file if it changed based on the dispute.
  • Once information is deleted from a credit file, the credit bureaus can not reinsert it unless the entity supplying the information certifies that the item is complete and accurate and the credit bureau notifies the consumer within five days.

All of the big-three agencies are working on making sure that all disputes are handled within 30 days. See http://www.creditinfocenter.com/repair/Repair.shtml#4 for more specific details.

If a lender fails to respond to the credit bureau’s investigation, they may delete the refeence themselves. If not, or if the lender actually refuses to remove the derogatory credit reference, then you may need to initiate legal action against the lender. Reporting a false debt on the debt reporting system is slander and you could have a legal claim against the lender and the reporting credit bureau to both remove the reference and recover damages.

Are these strategies for you?  Every person’s situation is different. The information presented in this Article is not to be taken as legal advice.  If you are facing false credit reports which claim you still owe a forgiven debt, get competent legal advise in your State immediately so that you can determine your best options. 

If you have specific questions about your liability in California or about cleaning your credit report, short sales, foreclosure, or any legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.