We awake this November 3rd to a changed political climate nationwide as well as here in California.  Will this bring meaninful change to ease the housing crisis? That is not likely.  What is likely is that this election signals a return to the housing expectations we held before the real estate bubble arose. Hopefully this time either common sense or regualtory control will stop the Wall Street excesses that fueled that bubble. First a little history lesson.

The roots of the housing crisis actually started back in the 1970′s with the evolution of real estate investment gurus such as Robert Allen who’s book Nothing Down started a frenzy for buying real estate that continued to grow. The only constraint was qualifying for loans.  By the 1990′s, a push was on to open the “American Dream” of home ownership to everyone. But, if they couldn’t qualify for a loan, how were they going to buy a home? That was answered in the late 1990′s by Federal deregulation of the financial markets, opening up Fannie Mae and Freddie Mac to buy the loans, and the creation of supposed insurance programs called “credit default swaps”.  Banks now were happy to lend because they could get the high-risk, “subprime loans” off their books and they had a ready supply of money through Wall Street investment firms which packaged these loans as securities and passed them off as safe investments. The problem was hat they were never safe. But, as long as there was a buyer, no-one cared.  So we ended up with the perversity of lenders offering nothing down, no payment required loans, to unemployed people who were destined to fail.  But the loans drove the demand higher and the prices higher and the sales and loan commissions higher, inflating the bubble.  Then came the crash.

By late 2006, loan defaults were increasing as original “teaser” interest rates reset to full payments that buyers could not afford. The bubble was cracking. By 2007, as defaults and foreclosures started skyrocketing, the housing bubble began cracking but this was still lost on Wall Street which did not realize (or had ignored) that these sub-prime loans now made up the majority of their investments. By 2008 however, Wall Street was in a panic as they realized that hundreds of billions of dollars of investments they had sold the American public was backed by worthless loans.  They had no money to operate and no more money to loan to banks to make more loans. The market collapsed and the entire economy was threatened.  In came the U.S. Treasury in 2008 with a series of bailouts and buy-ups to stop the damage. When the dust cleared, many Wall Street investment firms were gone, banks went under, and the American taxpayers were on the hook for 80% of the sub-prime loans which by now were held by Fannie Mae and Freddie Mac.  The only thing left was to clear out the bad loans and that led to the housing and foreclosure mess that we’re still going through today.

So what should we expect going forward?  Here’s my thoughts on this:

1.   Don’t expect help from the Government - preserving bad loans is not on anyone’s agenda and with the increased Republican control nationwide, the push will be to strengthen the economy and provide incentives to create more jobs.

2.  Expect the pace of loan resolutions to increase – While loan modification success has been dismal, Government financial incentives for principal reduction kicked in October 1st and may improve these numbers. But again, preserving bad loans is not on the agenda.  I do expect short sale success to improve as lenders finally seem to be getting it that a sale yeilds a better return for their investors than a foreclosure.  But all those HELOC second loans may get in the way as they demand full recourse or substantial payoffs.  The most likely scenario is that foreclosures will increase as lenders seek to get what they can and move on.  We’re already seeing a faster recording of Default Notices, even by BofA.  Expect this to continue.

3.  Prices are not likely to rise soon - According to the US Census Bureau, in 1900 les than half of people owned their homes. By the start of the housing bubble in 1999, that number had increased to 66.9% and, at it’s bubble peak, the rate reached 69.2% nationwide and much higher in some States.  Today, that ownership number has returned to pre-bubble levels.  Over 18 million homes stand vacant or are in default.  This supply, plus harder-to-get loans, will keep a lid on any upward price pressure for many years. 

4.  Being a Tenant will no longer be a negative – For many of us, our adult lives have been directly influenced by housing promoters and cheap money that made us feel somehow inferior if we rented rather than owned. That is now changing.  As reported by Carrie Bay of DSNews.com,  The housing market is over-subsidized. Homeownership isn’t for everyone…. For decades, America has been “over-housed” and “over-consumed.” Not only is renting gaining ground as the most practical means of housing for a larger number of consumers, but some say it could also be the answer to keeping millions of struggling borrowers in their homes and stabilizing foreclosure-ridden communities.  Stephane Fitch of Forbes claims that the fading American Dream of home ownership is cause to rejoice: “Fact is, when you look at how much it costs to rent versus how much it costs to own housing in big cities across the U.S., you discover that the cost of renting is likely to be lower. Throw in the fact that rental leases only last a year and that in most places they can be broken if the the tenants move to another city in search for a job, and I see a very good case that America is stronger if more of us decline to own homes.”  So as we look forward, perhaps a re-defining of what the American Dream really means will be in order.

We still will have problems to deal with over the next several years as this housing crisis continues. So, if you or your clients are upside down on a loan and facing foreclosure, this is a time to act to seek that modification or complete that short sale.  If you are facing a lender lawsuit, get representation and put up a challenge.

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 facing a lender lawsuit, 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.

Be Sociable, Share!

• 

For many months, we’ve been hearing of Courts throwing out lender lawsuits for judicial foreclosure based upon falsified declarations.  Now many States are jumping in and suspending certain foreclosures.  Here’s the background in what is going on and what to expect in the future.

Each State has its own laws for handling defaulted home loans. For example, California allows both Judicial foreclosures (lawsuit in the courts) and non-judicial foreclosures (non-court Trustee Sale).  Each method has its pros and cons for lenders, but because of the speed and lower cost of Trustee Sales, that is generally used for home foreclosures. However, in California if a lender does do a Trustee Sale, they give up any right to recover a deficiency judgment on the unpaid balance.  It’s different in other States.  23 States only allow Judicial Foreclosure so their foreclosures are always Court supervised. The remaining States allow a choice of either method but only a few bar deficiency judgments after Trustee Sale.  So there are two issues arising in a foreclosure: 1) loss of home; and 2) deficiency judgment risk.

The problem for lenders first arose in the judicial foreclosure States.  As part of their legal filing, the lenders were required to provide a sworn statement as to the truth of the facts claimed in their lawsuit such as that they owned the loan and that the procedures for foreclosure were properly followed.  However, it was discovered that attorneys for the lenders were falsifying the sworn statements and in many cases simply having someone sign the form without any actual knowledge of the facts, so called “robo-signers”.  Presumably the lenders and their attorneys filing thousands of such lawsuits believed that no one would pick up on this and they hoped they could get quick results. They were wrong.  Attorneys for some defendants challenged the lawsuits and the false statements and the Courts have responded by throwing out the lawsuits.

While lawsuits get challenged all the time and typically are corrected, the extent of these falsified Complaints indicated a systemic policy of lenders committing this fraud.  Faced with potentially damning publicity and possible legal sanctions, lenders stated damage control. Last month, GMAC admitted that their employees had falsified foreclosure documents.  Recently, Chase and BofA admitted the same.  Each has stated that they are suspending foreclosures until the problem is fixed. Meanwhile, the States have started to act. on Friday, Connecticut suspended all foreclosures for 60 days.  California’s attorney general has ordered Chase to stop foreclosures or prove the validity of its process.  More are expected to follow as further evidence comes out showing the corruption in the foreclosure process.  However, other lenders such as Wells Fargo have not made any suspension and have recently indicated its intent to increase the pace of foeclosures. This is surprising given indications that Wells Fargo has also filed lawsuits against borrowers without legal merit.

These foreclosure suspensions will give affected upside-down owners some more time but they will not result in loan foregiveness.  The lenders will fix the problem and defaulted loans will eventually be foreclosed unless an alternate resolution is reached.  This means that impacted lenders will likely be much more receptive to a loan modification or short sale without deficiency recourse.  The one step that we do not expect to see is Congress or State legislatures coming to the rescue of homeowners.  They have shown no willingness to date to do anything other than bailout lenders without recourse for the terrible lending practices that drove us into this Recession.

So, if you or your clients are upside down on a loan and facing foreclosure, this is a time to act to seek that modification or complete that short sale.  If you are facing a lender lawsuit, get representation and put up a challenge. The lenders’ hope with these fraudulent lawsuits was that they would win without challenge. I’s up to you to stop them and the Courts may be willing to help.

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 facing a lender lawsuit, 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.

Be Sociable, Share!

• 

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.

Be Sociable, Share!

• 

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.

Be Sociable, Share!

• 

This economic recession has brought little hope for homeowners. Despite numerous government sponsored programs such as HAMP and HAFA, very few borrowers get loan modifications and thus upside-down owners are left facing either short-sale or foreclosure.  But there may be a more effective approach… fighting back.

Part of what created this economic collapse was the willingness of lenders to make loans virtually to anyone without any real checking to see if they could really afford the loan. But with this drop of standards also came a drop in diligence in handling the loan paperwork properly. The reality is that millions of loans are legally defective and, in some cases, may not be collectible.  This has given rise to a new wave of scams by so called “forensic auditors” who, for a large up-front fee,  promise to search the loan documents for defects but more often would take the money and run.  As readers of my Blog know, I’ve opposed such approaches because, even if they found defects in the loan, the legal remedy for Truth in Lending (TILA) violations was rescission: the lender gives you back what you paid but you have to give back the loan proceeds.  This simply didn’t work.  But now, there may be new strategies available through this process that can potentially stop foreclosure, stop judgments, and maybe even force a loan modification.

I recently attended a seminar put on by a Florida company called AmStar which is in the forefront nationally of assisting lawyers in challenging lenders.  The critical issue is not TILA but rather the underlying changes in ownership of the loan and security: 1) Who really owns the loan?  2) Who really can foreclose (it’s not MERS); 3) Do the Loan Agreements conflict with HAMP and HAFA and specific State laws requiring good faith efforts to resolve loan disputes?  Courts throughout the Country are starting to rule that lenders cannot foreclose if their loan documents or handling are defective.  If the lender can’t foreclose, they’ll want to settle and that could mean a principal reduction modification enabling the borrower to keep their home.

Determining whether a borrower’s loan is defective requires several steps: 

First, a Qualified Written Request (QWR) should be sent to the loan servicer to obtain their loan documents and payment and handling history. Recent law changes require a lender to acknowledge receipt of the Request in 5 days and actually send the responsive documents within 30 days (15 day extension possible). 

Second, have the loan documents reviewed by a qualified and certified auditor to determine if defects exist and whether they are minor or fatal to enforcement of the loan.  Beware of “auditors” charging upwards of $5,000 for this service. A good residential home audit will cost approximately $2,000.

Third, if the loan documents and audit results indicate that the loan is not enforceable, then you may have good cause to get a legal injunction to stop a pending foreclosure and possibly even beat the lenders in Court. Of course, most homeowners can’t afford the legal cost of a protracted litigation. But most lenders also don’t want a Court to dig in to the validity of their loan practices. The result is a greatly increased interest in settlement which can be a win-win for everyone, especially for the homeowner that gets to keep their home at an affordable payment rate.

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 upside-down on your loan(s), 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.

Be Sociable, Share!

• 

One of the most common complaints we hear from upside-down owners is that lenders are non-responsive to their requests for loan modification or short sale. Documents are getting lost, or the lender says they have not been received, or the negotiator has changed, or many other excuses.  All of this has led many frustrated upside-down borrowers to believe that lenders have no intention of helping them despite all of the hype about government programs such as HAMP (Modifications) and HAFA (Short Sales and Deeds in Lieu). While I believe that most lenders are trying but are overwhelmed, there is a very real question of whether OneWest Bank is pushing for foreclosures.  The evidence suggests that it is.

First a little history.  A great many banks are insured by the FDIC, the national program designed to protect depositors’ assets. During the height of the real estate bubble, lenders were giving out loans without really any care for whether the borrower really could pay them back.  When the market crashed starting in 2006, foreclosures skyrocketed, banks lost their source of income and capacity to operate, ie: they “failed”. When a bank fails, FDIC steps in and takes control. This is what happened in 2008 with the collapse of Indymac. But FDIC does not want to run the bank. First they took control then found a buyer: OneWest Bank.  OneWest was created by a handful of very wealthy investors solely to take over Indymac from the FDIC.  What made this an attractive investment was the unique “Shared Loss Agreement” between Indymac and OneWest wherein OneWest purchased Indymac’s loans for between 58-70% of the balance owed but if there was a foreclosure, FDIC would pay 80-95% of the losses on the original balance. It is not rocket science to figure out that under this deal, OneWest could make far more money from a foreclosure than they could from a modification or short sale.  To learn more about this history, read Patrick Pulatie’s blog: http://iamfacingforeclosure.com/blog/2009/12/01/anatomy-of-a-government-abetteded-fraud-why-indymaconewest-always-forecloses/

So what does this all mean to you, the upside-down property owner: If you’re dealing with OneWest Bank or Indymac, don’t expect help because it may not be there.  Note also that FDIC has entered these Shared Loss Agreements with over 50 different lenders and servicers, although apparently none are as uncooperative as OneWest. Is there anything you can do to force them?  Possibly. First – write your Congressman for help. It is certainly unlikely that our legislature intended this perverse result when they approved the FDIC operations. This may put on pressure.  Second - use the Courts to get relief. Many States, such as California, require that a lender negotiate in good faith to attempt a resolution before commencing a foreclosure. Paragraph 2.1(a) of the FDIC-OneWest Shared Loss Agreement requires OneWest to “undertake, reasonable and customary loss mitigation efforts”.  A judge or jury can decide if OneWest has met their responsibilities. Remember, the squeaky wheel gets the grease. Faced with a legal challenge or Congressional pressure or both, OneWest may fix your problem to make you go away even if they are unwilling to change their policies.

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.

Be Sociable, Share!

• 

Everyday we’re meeting with property owners who can’t get a loan modification and are deciding whether to attempt a short sale or just let the property go to foreclosure.  For more than 90%, a short sale is the best solution because it causes less credit damage, provides negotiation of recourse liability (especially important with multiple lenders), and avoids the potential future career damage of having a “foreclosure” on your record. Indeed, having at least attempted a short sale demonstrates a cooperation that may speed up the willingness of future creditors to provide a new loan.  But short sale is not always for everyone.

For the past three years, most people struggling with upside-down loans were those who bought their homes in the early to mid-2000′s with teaser loans such as negative adjustable, or pay-option ARMS which allowed them to qualify for the loans based upon “stated income” and a starting interest rate that virtually guaranteed a loan.  But then, as the teaser rates ended and interest adjusted, borrowers could no longer afford the payments.  For most of these borrowers, short sales work well because they don’t have any substantial assets and, unless they refinanced, they may have no deficiency liability (at least in CA). 

But now the profile of the upside-down owner is changing.  Today’s troubled owner is more likely to have a decent loan but they’ve lost their job or otherwise been impacted by the recession.  These owners may have lots of other assets but they can’t afford to keep paying for the negative cash-flow on the over-encumbered second home or rental property.  In California, these loans generally have deficiency recourse and, if a lender pursued a deficiency judgment, they could reasonably collect some or all of the deficiency from the borrower.  If the borrower attempted a short sale, they would have to disclose their assets as a part of the hardship package and, in doing so, they would be letting the lender know: 1) they have assets to contribute to payoff a short sale deficiency; and 2) if the short sale fails, they would be a good candidate for a “judicial foreclosure” which would allow a lender to get a deficiency judgment.  Even though that process could take over 2 years, the collectability could make it worthwhile for the lender to pursue.

Faced with this reality, it can be better for an otherwise solvent borrower to let the property go to foreclosure and, by not disclosing assets, have a better chance of avoiding the liability. In California, most lenders will foreclose through “non-judicial foreclosure” (also called Trustee Sale) because it is both cheap and fast but they give up any right to deficiency judgment.  Without knowledge that a borrower has other assets, the lender is most likely to take this path instead of the long, expensive, and generally non-productive judicial foreclosure route.  So, strategically, for the solvent but upside-down borrower, it may be better to walk away than short sale.

Of course, everyone’s situation is unique and there is no single best solution. The information presented in this Article is not to be taken as legal advice. Determining what to do involves consideration of judgment risk, tax factors, and credit and career impacts as well as the type of property and number of loans involved.  If you are considering default on your loans, 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.

Be Sociable, Share!

• 

As the recession has deepened and lengthened, many people who are fully able to afford the payments on their real estate loans on over-encumbered property have decided to walk-away and let the property go to foreclosure. For these people, the long time it would take to reach break-even simply doesn’t make financial sense. This practice has come to be called “Strategic Default”.   While the rights of the affected lenders will still be solely governed by the loan documents, as expected the lending industry is pushing for stronger penalties to curtail Strategic Defaults.

As reported widely on the web, Fannie Mae (“FNMA”), the government-sponsored enterprise that creates the “secondary market” by buying up mortgages, has stated that: “Defaulting borrowers who walk away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure”.  We had previously reported that both FHA and FNMA were talking 5 years for this practice so we are not surprised at this announcement.

More worrisome is the FHA Reform Act (HR 5072) which was passed by the House of Representatives with nearly unanimous consent and is now being debated in the Senate. The proposed Act contains a provision that would bar strategic defaulters from getting an FHA loan any time in the future!  This Bill was supported of course by the lending lobby, but also by the National Association of Realtors and even by that  champion of the common man, Barney Frank.  Will it pass through the Senate? Almost certainly although it’s final form remains to be seen. While the overall objective of the Act is to save the financially-damaged FHA through raising the costs of mortgage insurance, this provision is obviously targeted at stopping the practice of strategic default. 

What remains unclear despite all the hype is how to define who exactly is a Strategic Defaulter.  While obviously a person with plenty of assets and financial capacity who defaults as a business decision would seem to fit the description, that may be more the exception than the norm. More common is the person, as reported in the Washington Independent http://washingtonindependent.com/88445/strategic-default-penalties-threaten-struggling-homeowners, that suddenly realizes that they have been sinking steadily and if they don’t stop now they’ll lose everything.  Should that person be barred forever?  Of course not. What will most likely come out of this is a recommended process that upside down owners should always follow: First seek modification; then seek short sale; and only last let it go to foreclosure. For the borrower with financial capacity, the outcome may be the same but the process may infuence future borrowing ability.  Of course, if there is actual deficiency liability on the loan, the financially solvent borrower may not want to disclose their assets to the lender through a modification or short sale since this would certainly invite a demand for contribution or even for a judicial foreclosure (in California).

Lastly, there is the very real question of whether targeting strategic defaulters is fair and equitable. The loan being defaulted is a contract between the borrower and the lender that already provides remedies that the lender can take if a borrower defaults.  Both borrower and lender take on the known risks of what will happen on default. Why should government intervene in this contract to give the lenders even more remedies by effectively increasing the borrower’s risks?  Certainly the government has refused to effectively intervene to protect borrowers from the extraordinary risks in the sub-prime loans promoted by the lenders through 2007.  Meanwhile, the HAMP modification program hyped to help homeowners limps along with only 4.5% getting permanent modifications and virtually no-one getting principal reductions. 

Millions have lost their homes with no realistic assistance from the government and now this Act will not only further hurt future borrowers but will once again send a very clear message that as far as Congress is concerned, what’s good for the lenders is good for the country.  If you believe that this provision of the proposed Act should be dropped or changed, be sure to write your State Senator and make your concerns known.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are considering default on your loans, 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.

Be Sociable, Share!

• 

There’s been a lot of cheering lately for the news that on June 3rd, the California Senate passed SB 1178 that would extend deficiency judgment protection to include refinances. Under existing California law, a homeowner generally has no liability to repay the lender for any deficiency between the value of a foreclosed property and the amount owed to the lender. This “anti-deficiency” law only applies to owner-occupant loans obtained to purchase a 1-4 unit property.  SB 1178 extends this anti-deficiency protection to any refinance of the original purchase money debt.  Whether this protection will include “cash-out refinances” is questionable although I understand that the Bill’s proponent, California Association of Realtors, is seeking that result.

What has gotten lost in all the cheering is the reality that SB 1178 will not go into effect until June 11, 2011. It is intended to stop lenders from bringing deficiency lawsuits against borrowers after that date. Nothing stops lenders from bringing deficiency actions before that date where they would have such a right under current law. In most circumstances, these would be lawsuits brought by “junior” lenders whose security gets wiped out by a senior lender’s foreclosure.  A lot of these are being filed right now.

A lot could change before the final form of this measure gets through the Legislature and is signed by the Governor. Presently the Bill is in House committees and the next hearing will be late this month.  Various challenges and clarifications are being discussed and there is no certainty at this point when or if this Bill will get passed or what a final form will look like.  We’ll keep you informed as it progresses.

Meanwhile, if you are facing a lender lawsuit or if you have specific questions about your liability, 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.

Be Sociable, Share!

• 

The rights and responsibilities of lenders in dealing with upside-down loans are governed by State as well as Federal law.  In all cases, lenders must act “in good faith and with fair dealing” and comply with the law. However, in at least two recent actions in California, Wells Fargo appears to indicate that they consider themselves above the law and can do whatever they choose:

1)  A Buyer and Seller entered a Short Sale Agreement to which Wells Fargo consented as long as they completed the sale by May 31st.  Everything went well and the Buyer obtained his financing by mid-May and was ready to close escrow. However, on May 11th, Wells Fargo breached their own short sale consent and foreclosed.  They admitted this was a mistake and, even though a fix was easy because they ended up with the property, they have refused. Their only suggestion was that the Buyer could attempt to buy it when Wells Fargo puts it back on the market.  It apparently doesn’t matter to Wells Fargo that the Buyer loses the money he spent pursuing the purchase; the Agent loses the sale commission they earned; and the Seller suffers greater credit damage with a foreclosure on their record. And of course, Wells Fargo’s own investors will likely lose more in an REO re-sale. The Buyer, Seller, and Agent have now filed suit against Wells Fargo to force them to rescind the foreclosure and honor the Short Sale Agreement and the title to the property has been clouded with a Notice of Pending Action (“Lis Pendens”) stopping any re-sale.  We’ll keep you informed as this progresses.

2.   In another more incredible action, Wells Fargo has actually filed a lawsuit against a Borrower without even foreclosing!  In California (and most States), a lender who makes a loan which is secured by a lien against the real estate must foreclose first before they have any right to pursue any claim against a borrower for a deficiency. This is called the “Security First Rule”. In this case, Wells Fargo made a home equity loan to a property owner which was secured with a Deed of Trust against the property. The owner subsequently defaulted on the loan. But, instead of foreclosing, Wells Fargo filed a lawsuit against the borrower, failed to identify in the suit that the loan was secured with the real estate, and instead have treated this like an unsecured personal loan. When confronted with this breach of California’s real estate laws, Wells Fargo (through their attorney) has refused to dismiss the lawsuit and comply with the law.  While this reaction demonstrates a very troubling arrogance, it is equally troubling that their attorneys would knowingly violate California law.  Sadly, in this case, the property owner cannot afford to challenge Wells Fargo’s actions in Court.

There is no question that these are tough times for lenders as well as borrowers. The lenders created a house of cards by making loans that should never have been made to borrowers who could never have afforded them if they were priced according to economic reality. It could only have worked if real estate prices continued to climb forever. But the real estate economy never works that way. Booms are always followed by busts usually every 6-10 years. The lenders knew this even if the gullible borrowers did not. 

This reality doesn’t excuse borrowers from defaulting even if it was foreseeable. The laws on breach of contract are clear… don’t pay and you’ll be foreclosed. But the borrowers distress certainly doesn’t give the lenders such as Wells Fargo any legal right to disregard the law simply because they think the borrower can’t afford to stop them.  It is exactly this arrogance that has caused Americans to attack Wall Street for its greed and lack of concern for the damage caused to its investors.  In the lending industry, Countrywide paved the way for the economy’s collapse by promoting subprime loans.  Wells Fargo in contrast acted responsibly and maintained their reputation for sound lending. Now however, Wells Fargo’s apparent lack of concern for the law may undermine not only its reputation and further damage its borrowers, but may also promote a broader distrust of the lending industry at a time when trust and credibility are needed most. 

We’ll keep you posted as these and other similar cases move forward. Meanwhile, if you’ve been challenged with a wrongful foreclosure or if you have specific questions about your liability, 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.

Be Sociable, Share!

•