UNDERSTANDING LOAN MODIFICATION OPTIONS – as a start point, it is important that you understand that a loan is a contract between the borrower and the lender in which the lender gives you money which you promise to pay back.  If you breach that contract, the lender generally has the right to take your property by foreclosure and put you out.  In some cases, they can even get a deficiency judgment against you for the unpaid balance. Since the recession started in 2007, many government and private programs have come into being to push lenders to “modify” the loan contracts to make them more affordable and enable borrowers to keep their homes.  The best known of these programs is the Home Affordable Modification Program, commonly called HAMP, which deals with loans owned by FNMA and Freddie Mac.  Many other “proprietary” modification programs exist with lenders to deal with non-HAMP loans.  Virtually all of them are based upon a qualifying criteria that a borrower’s first loan payment should not be more than 31% of their gross monthly income. If you qualify, then the following modification options may be offered to you:

1st: Interest Rate Reduction – will reducing your loan’s interest rate reduce your monthly payment to 31%?  If so, this may be all you are offered.  This is the most common modification.

2nd: Lengthen the Loan Term – will reducing interest plus also extending the term from a 30 year payback to 40 years reduce your monthly payment to 31%?  If so, these two may be all you are offered.

3rd: Forbearance – the lender may offer to take a portion of your loan balance and move it to a “silent second” position.  Now you only make payments on the remaining first loan. The second sits there, doesn’t accrue interest and doesn’t require monthly payment.  But it never goes away.  If you later want to sell or refinance the property, this second loan must also be paid in full.  This option is less common but does occur, particularly with Bank of America modifications.

4th: Principal Reduction – the last option for modification and the least desirable option for lenders is Principal Reduction where they actually forgive, ie: extinguish, a portion of the principal balance. Unlike forbearance, with Principal Reduction the forgiven amount never is repaid, it’s is gone.

UNDERSTANDING PRINCIPAL REDUCTION – Principal Reduction asks lenders (and their investors) to lose money they loaned so that an upside-down borrower can keep their home. Understandably, lenders’ response to such requests has been: “why should we lose, we didn’t breach the contract?” While many may disagree that lenders have no responsibility for the loss of property value, by and large the Federal and State governments have been unwilling to pass any law compelling lenders to do principal reduction.  Arguably, governments have no legal right to do so even if they had the political will. So generally, principal reduction has been a “last-resort” option that is rarely offered.  The result is that – even for those few borrowers that get payment reducing modifications – a high percentage of over-encumbered properties end up in short sale or foreclosure as borrowers conclude that it may be a better “business decision” to let the property go, take the hit to their credit, and get back into the market in 2-5 years which may be far less than the 10-20 years it might take to break even on paying for an over-encumbered property.  For almost all owners, this business decision is coupled with a “moral dilemma” of how they feel emotionally in doing something that violates how they were raised and violates their contract obligations.

So, if it takes a principal reduction to keep your home and lenders have been unwilling to do so and the Legislatures are unwilling or unable to push them, is there anything that can help?  The answer, surprisingly, has been lawsuits… not the “we’ll sue the rascals” lawsuits promoted by law firms on the web (many of which are scams) but instead legal actions by Federal and State agencies against lenders for their wrongful acts.  Here are the most important ones which may actually compel principal reductions:

1.  ROBO-SIGNER SCANDAL – You may recall the scandal back in 2010 wherein many lenders were caught using fraudulent documents to foreclose properties, ie: the “Robo-Signer” scandal.  As a result, the Attorney Generals of all 50 states sued the big 5 lenders: BofA, Wells Fargo, Chase, Citicorp, and ALLY (formerly GMAC). In February, 2012, a settlement was reached which is now known as the National Mortgage Settlement. You can get details on this at my earlier Blog Article: What You Need to Know about the National Mortgage Settlement.  The important part is that of the $25 Billion settlement amount, almost all will be satisfied through the 5 lenders receiving “credits” for principal reduction to enable people to keep their homes. The downside is that it does not apply to loans owned by FNMA and Freddie Mac. In short, the Settlement effectively compels lenders to do principal reduction as punishment for their wrongful foreclosures using robo-signers.  Details of this are just starting to emerge but if you are seeking modification from one of these 5 lenders, be sure to ask if you qualify for Principal Reduction under the Settlement.

2.  FED REGULATORS FINING LENDERS – having watched the results of the litigation and National Mortgage Settlement, government Regulators are considering fines against 8 other lenders for the same kind of robo-signer abuses. These include HSBC, SunTrust, MetLife, US Bancorp, PNC, One West, Everbank, and Goldman Sachs.  In part this is intended to put a stop to the robo-signer abuses which may still be continuing. But also a clear objective is to push these lenders into some kind of Settlement involving principal reduction.  This will be important to watch especially concerning OneWest which has loss protection guarantees from FDIC for when they took over from IndyMac.  Details of this are just starting to emerge but if you are seeking modification from one of these 8 lenders, be sure to ask if you qualify for Principal Reduction.

3.  FNMA AND FREDDIE MAC – these two massive government sponsored enterprises (GSE’s) are now under government control. They hold 60% of all residential loans with approximately 700,000 being over-encumbered.  Any principal reduction of these loans is most likely to come through a tax-payer bailout.  So far, the GSE’s have refused to offer any reduction arguing in part that offering to “bailout” upside-down borrowers presents a “moral hazard” that might encourage other borrowers to default to get the reduction benefits.  While this is a legitimate concern, there are many ways that this can be handled without promoting greater default than already exists. So far, statistical data indicates that principal reduction prevents foreclosure even if the reduction is not to current market value.  If you have a Fannie or Freddi loan, watch the news and my Blog for updates.

Overall, Loan Modification and principal reduction remain and likely will remain a divisive topic in the months and years to come, especially as we head into a Presidential Election.  Lender processing continues to present foreclosure risks to borrowers seeking modification despite many legal protections.  Lack of clarity and understanding creates even more problems. Nevertheless, for those who are struggling to keep their homes, Loan Modification is the only reasonable solution that is available today.

Meanwhile, if you or someone you know is struggling with an upside-down property in California and don’t know what to do, our $200 flat fee Consultation Program can offer knowledge of what to expect and form strategies to either keep the property or move on with as little financial risk as possible. To schedule a Consultation, please contact our office at (916) 966-2260.

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, especially if you’re facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.

I grew up in the 1950′s in a home in Boston filled with music from records. And like most kids of that era, I was glued to American Bandstand.  At 11 years old, I started drumming with a drum & bugle corps, St. Kevins Emerald Gems, feeder corps to the CYO Champion Emerald Knights. 

Band Emblem

At 14, my family moved to the suburbs of Rosllindale west of Boston and I joined Sacred Heart Band and started one of the most important and formative times of my life making friends, learning to read music, and falling in love with classical orchestral work. I was pretty intense as a drummer and we built a great drumline which was unheard of for a marching band. In fact, in 1966 we competed against drum corps members in the National Championships and came in high in the rankings.  During this time, I picked up accoustic guitar for relaxation and started plinking on a piano when I got near one. By 1967, our Band was undefeated CYO Champions.  We’re planning a Reunion of this group next October.  Members can find more by clicking these links:  sacred-heart-band-concert-program-march-1966;  sacred-heart-band-concert-program-march-1967; sacred-heart-band-members-march-1966.

After our victories with the Band, the lure of drum corps got greater and in 1967 I left the Band and joined the 27th Lancers Drum & Bugle Corps from Revere, MA. This was an incredible experience as we grew from a bunch of hot shot musicians from all over and were transformed by George Bonfiglio into one of the most storied, famous, and successful Drum and Bugle Corps in history along the way garnishing CYO Nationals, World Open, and DCI victories.  Our next 27th Lancers Reunion is set for October 19-21, 2012. Check it out or sign up to attend at http://27thlancers.net/index.htm or catch up with Alumni and Friends on our Facebook Page at http://www.facebook.com/groups/27thlancers/. If you’re not a member, sign-up.

During these high school and early college years, I was alo teaching drumming, playing with the Boston Youth Symphony, and having fun.  But I never connected with any kind of rock band.  Jump forward 30 years. My son, Alex, wants to learn to play drums in high school so I bought him a drum set. His interest waned but mine didn’t and soon I upgraded and joined Skip’s Music’s Weekend Warrior Program http://www.skipsmusic.com/ww.html an increadible opportunity to come together. Soon I was playing drums in Warriors Bands.  Then, about 5 years ago there were too many drummers.  Not being one to sit on the sidelines, I picked up a bass guitar, learned to play, and soon I was playing either bass or drums in Warriors bands.

From 2010-2011, I had the honor of playing bass guitar for one of Sacramento’s premier dance bands, Unlicensed Therapy.  But work and travel and wanting more weekends away with my wonderful wife of 34 years, Ann, led me to drop out. Today, I still enjoy musical fun on accoustic and electric guitar, bass, drums, leyboard and piano. 

Music will always be a part of my life.

Between them, Fannie Mae and Freddie Mac own more than 200,000 foreclosed homes. The Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie Mac, expects it will receive a considerable number of bids in April for the initial round of 2,500 Fannie-owned homes in cities like Atlanta, Chicago, Los Angeles and Phoenix. They’ve already received expressions of intent from 4,000 investor groups and other organizations.

And the banks are watching. The nations banks own more than 600,000 single family homes according to Realty Trac and they too would like to get rid of their inventory quickly. Bank of America has announced its own plans to sell its REO properties in bulk to investors. These properties will not be available to individual investors or possible home owners. Selling in bulk will allow Bank of America’s REO department to avoid paying commissions, brokerage fees, escrow fees, and much of the various costs involved in a typical home sale. 

Critics, meanwhile, contend that such sales will cause at least two major social problems:

1.  Bulk Sales destroy social benefits of home ownership - governments have long recognized that home ownership brings stability to communities, particularly inner cities. Programs such as the Community Reinvestment Act of the 1970′s and similar later programs fostered greater ownership amongst those who would otherwise be shut-out of the home ownership market. While deregulation let this process run out of control leading to the current recession, the underlying concept remains vital to the growth and stability of our nation. Bulk Sales will transfer increasing numbers of these properties to big fund investors potentially turning us into a nation of renters instead of a nation of owners.

2.  Bulk Sales damage the Real Estate Industry – the real estate profession exists in our Country to provide professional, dedicated, and organized expertise in the sale of real property as a third party intermediary. They bring together buyers and sellers and make certain that required inspections and disclosures occur thus creating transparency and credibility in the real estate market. In an industry already ravaged by dramatic reductions in earnings and inventory for sale, bulk sales will put many brokerages out of business and force more professionals to abandon their careers. Of even greater worry is that bulk sales may lead to lenders moving back into direct selling competition with agents and thus trigger another conflict of interest mess as we saw in the 1980′s.

We’ll keep you informed in future E-News updates as this issue evolves. Meanwhile, if you or someone you know is struggling with an upside-down property in California and don’t know what to do, our $200 flat fee Consultation Program can offer knowledge of what to expect and form strategies to either keep the property or move on with as little financial risk as possible. To schedule a Consultation, please contact our office at (916) 966-2260.

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, especially if you’re facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.

1.  The Lenders – the Settlement ends lawsuits by the Federal Government and State Attorney Generals against: Bank of America, Wells Fargo, JP Morgan Chase, Citigroup, and GMAC/Ally.

2.  The Settlement – requires the 5 Lenders to collectively provide up to $25 Billion in relief to distressed borrowers and payments to government agencies.  This will be provided through a combination of direct cash payments and credits for debt reduction and other loan adjustments.  The individual lender shares are:   BofA: $11.82 Billion; Wells Fargo: $5.35 Billion; Chase: $5.29 Billion; Citigroup: $2.21 Billion; and Ally:  $610 Million.

3.  The Allocations - The Settlement requires the Lenders to provide the relief through three broad categories:

             (1) Foreclosure Assistance Payments – paid to State and Federal Govenerment agencies;

             (2) Consumer Relief Programs – credits for principal reduction of 1st and 2nd loans;

             (3) Loan Refinancing – provides interest rate and principal reduction

4.  The Side Deals – The Settlement is very complex and the devil will be in the details since each lender can map out exactly how it plans to satisfy its allocations.  See my recent Blog on the Wells Fargo roadmap.  However, already participating lenders are cutting “side-deals” to obtain a better result by offering even better settlement options:

          a.  Bank of America – announced deeper principal reductions for about 200,000 homeowners, up to $100,000 each.  In exchange, they will avoid up to $850 Million in penalties.  BofA has also announced that it is temporarily halting foreclosures while it identifies and solicits the potential beneficiaries of these reductions.

          b.  Ally – announced possible principal reductions to current market value.  Further, some borrowers in extreme financial distress may get reductions to 85% of their home’s value.

5.  What to Do Now – Although the Settlement terms must still be approved by a Federal Judge, if you are in financial distress and in danger of losing your home, contact your State Attorney General’s office for information and contact links with the specific lenders.  The California AG’s website for the National Settlement is at http://oag.ca.gov/nationalmortgagesettlement and has internet and/or phone contacts for each of the participating lenders.  Don’t expect immediate relief.  The Settlement is a process that still requires Court approval, will take several months to get organized, and will take up to three years to fully provide benefits.  But, it does promise substantial relief for those who qualify and diligently pursue the available benefits.

Meanwhile, if you or someone you know is struggling with an upside-down property in California and don’t know what to do, our $200 flat fee Consultation Program can offer knowledge of what to expect and form strategies to either keep the property or move on with as little financial risk as possible. To schedule a Consultation, please contact our office at (916) 966-2260.

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, especially if you’re facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.

Bank of America is responsible for the largest chunk of the $25 billion settlement with obligations to pay $3.24 billion in cash to federal and state governments, along with $8.58 billion of principal write-downs, refinancings and other assistance, for a total of $11.8 billion. Under the side-deal only applying to BofA, the lender can avoid up to $850 million in penalties by giving qualifying borrowers a chance to cut their mortgage balances to their home’s current market value. Other banks are required under the national settlement to cut principal to no more than 120% of the home’s value.

Borrowers who qualify are expected to receive principal reductions averaging more than $100,000, a Bank of America spokesman said. The pact’s total value will depend on how many borrowers take up the offer. An Obama administration official said that principal reductions will be done only when there is a benefit to investors, meaning that the cost of the principal reduction will be less over time than taking the loan through foreclosure, and the principal reduction is done in accordance with investor contracts.

Details related to the settlement are likely to emerge in the next few days when the final agreement is filed in court.  It isn’t clear the extent to which other banks (Wells Fargo, Chase, GMAC/Ally, and Citigroup) will write down balances on investor-owned loans as part of the settlement. Ally has stated that it “will be pursuing opportunities on our owned portfolio at this point”; and Wells Fargo revealed a plan that includes extensive write-downs.  Chase and Citigroup are “considering” their options.

However this all turns out, for some fortunate homeowners, the National Mortgage Settlement will enable them to keep their homes at a payment and a principal balance that makes avoids foreclosure and moves us closer to resolving this portion of our real estate woes.

The Wells Fargo Settlement obligation is $5.3 Billion. Their plan to meet this was contained in their 2011 Annual Report filed last week with the Securities and Exchange Commission (Pg 74 of the 233 page Report).  What it does is identify three broad categories of payment:

1.  $1 Billion for Foreclosure Assistance Payments – These funds will be paid directly to Federal and State government agencies to use as they see fit for their own foreclosure assistance programs, including reimbursement of monies that such agencies may have already paid out.

2.  $3.4 Billion for Consumer Relief Programs – These funds are not actually “out-of-pocket” payments.  Rather, Wells Fargo will receive “credits” against this obligation in exchange for principal reductions on existing loans.  These will be made in two different categories:  

          (a)  1st Lien Principal Forgiveness – they will receive $1 of credit for each $1 of debt forgiveness on loans with a loan to value (LTV) ratio of 175% or less.  This must be a minimum of 30% of their credits.  If the LTV ratio is greater than 175%, they only get a 50% credit.  This would suggest that they will offer credits to keep loans in place when the property is more “affordable”.  When it is not, ie: LTV over 175%, they probably will push these to foreclosure or short sale.

         (b)  2nd Lien Principal Forgiveness – they will receive a sliding scale of credits based upon how delinquent the borrower is:  Less than 90 days late = 90% credit; 91 to 179 days late = 50% credit; and 180+ days late = 10% credit.  We can reasonably expect that the bulk of these credits will go to those who are in default but not seriously in default.  Those who are not in default at all will presumably get no assistance.

3.   $900 Million for Loan Refinancing – These funds will be used to assist debtors in refinancing their existing loans.  There is a complex formula to follow that matches first the old interest rate against the new interest rate then multiplies that by a factor based upon the unpaid principal balance.  So, each loan can bring a different result.

The bottom-line in the above is this: Wells Fargo has a new incentive to offer principal reductions on loan modifications and refinances.  But these will most likely be used on loans where the credits will likely save the property from foreclosure.  Conversely, those that do not fit within this framework may be more likely targeted for foreclosure which will push the urgency of short sale to minimize the risk of judgment, tax, credit, and career damage.

Meanwhile, if you or someone you know is struggling with an upside-down property in California and don’t know what to do, our $200 flat fee Consultation Program can offer knowledge of what to expect and form strategies to either keep the property or move on with as little financial risk as possible. To schedule a Consultation, please contact our office at (916) 966-2260.

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, especially if you’re facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.

As reported in DSNews.com, a Massachusetts real estate company, McGeough LaMachia Realtors, conducted a nationwide study  which indicated that short sales bring a 24% greater return to lenders than foreclosures. This study by compared sale prices of short sales vs REOs in multiple states including California.?The average difference was $43,000!  And that likely did not take into consideration the cost of foreclosure including many months more of non-payment plus carrying costs as an REO.  It therefore is no surprise that some lenders have actively sought to promote short sales by offering incentives to upside down owners to not just walk away.  Chase has been offering incentives of up to $35,000; BofA: up to $25,000; and Wells Fargo: up to $20,000; and Citibank: up to $12,000.  With many more foreclosures likely coming in 2012, these programs may very well expand especially in states like Florida where foreclosures require a legal action in the courts.  According to a Chase spokesman: “When a modification is not possible, a short sale produces a better and faster result for the homeowner, the investor and the community than a foreclosure.”

According to market analyst Realty Trac, a mountain of pending repossessions is holding back a recovery in the housing market, where prices have fallen for six straight years, and damping economic growth. Owners of more than 14 million homes are in foreclosure, behind on their mortgages or owe more than their properties are worth. Short sales represented only 9% of all residential transactions last year with many owners holding out for a Loan Modification or otherwise staying in their property payment free for over a year while their home moves to foreclosure. Lenders are realizing that they can dramatically cut their losses by paying owners to sell the property now. 

Unfortunately, the government agencies which hold at least 60% of the delinquent loans have not gotten the message. FHA offers only $1,500 in incentives. Fannie Mae and Freddie Mac offer incentives up to $3,000 but only through the HAFA program.  Perhaps this government resistance to economic logic explains why lenders are returning to profitability while the government languishes in a Budget mess. 

For some commentators however, any such payment is viewed as a reward for defaulting on obligations and sets a precident which might encourage others to also default. While indeed there is a “moral hazard” involved in any perceived bailout – whether it be government helping the banks or anyone helping the homeowners – the reality is that our economic recovery requires that we resolve the housing crisis as soon as possible regardless of whom is to blame. 

From my vantage point, having now advised over 4,000 upside down property owners over the past 3 years, this is not about deadbeat borrowers trying to avoid their debts. Many people still fail to appreciate the impact that this housing crisis has had on upside-down owners. For most, it is not a choice whether to pay or lose their home. Job losses and escalating loan costs have made many loans unaffordable for the average person. Almost all Loan Modification programs including the government’s HAMP program start with a threshhold that people should not be paying more than 31% of their income on their loan. However, a recent study by the Center for Housing Policy  indicates that nearly 1/4 of all homeowners are paying over 50% of their income for housing costs. The Report indicates a similar payment ratio for renters.

With high unemployment and increasing costs for everything from gas to groceries, it is likely that more and more struggling homeowners will lose the battle to keep their homes leaving short sale or foreclosure as their only alternatives.  Look for even more Lenders to offer incentives to move these properties faster and reduce their losses.  Whether the government agencies will get on board will remain questionable especially in an election year when the granting of any payment to a defaulted borrower will be considered by some to be a waste of taxpayer dollars.

Meanwhile, if you or someone you know is struggling with an upside-down property in California and don’t know what to do, our $200 flat fee Consultation Program can offer knowledge of what to expect and form strategies to either keep the property or move on with as little financial risk as possible. To schedule a Consultation, please contact our office at 916 966-2260.

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, especially if youre facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.

Lenders Settle with Government in Foreclosure Abuse Investigation

Nearly two years ago the State’s Attorneys General across the country along with Federal Officials collectively began to investigate the largest lenders regarding the foreclosure practices of the banks. As you may recall, this investigation got a huge boost in late 2010 when it was discovered that many lenders were just ramming foreclosures through process with no oversight to insure that the process was being carried out in conformance with the law. This led to among other things – the robo-signing scandal – where lenders had processors continually signing various foreclosure documents with falsified and fraudulent verifications that was being attested to was indeed correct. This scandal led to short suspension of foreclosures in late 2010 but by early 2011 the lenders foreclosure mills were up and running again at full speed with not much change in the process or oversight.

In response, the Attorneys General of many States filed lawsuits against the largest banks and, since then, have been negotiating a Settlement.  Many of these abuses continue today with no real help coming from the lenders. Yet this potential settlement between the Government and the largest lenders is billed as a watershed moment for homeowners. The details of the agreement are still coming out but here is what we know so far.

It appears based on the information that has been released to the public that the total settlement package is valued at about $25 billion. Based on the information the plan appears to earmark at least $10 billion dollars for modifications and principal reductions for about 1 million homeowners.  $450 million of this is being given to California.  With 2 million upside down owners, that equals about $213 per homeowner. Others estimate the potential savings per homeowner at $20,000, but with the average being $50,000 upside-down, this won’t make a huge dent.  Another, $3 billion is earmarked for refinancing of mortgages, some which may be underwater mortgages. And another $1.5 billion will pay up to $2,000 to about 750,000 homeowners that were improperly foreclosed upon. The remaining money – $10.5 billion – will be distributed to the States and Federal Governments to compensate the participating governmental entities for loss of public funds as it relates to the servicer misconduct. At this point, only Oklahoma has opted out.

While this has initially been heralded as a good deal for the homeowner, the reality is that it is not at all likely to make any signficant difference. $2,000 will not reasonably compensate the people who have wrongfully lost their homes; a $20,000 principal reduction will not enable most upside-down owners to afford their loans.  Nearly 50% of the settlement monies are headed directly to the government coffers bot to affected homeowners.  We have seen this happen before. In December of 2008, after 11 states filed a class action against Countrywide for violations of lending practices, the government settled the matter, directed Countrywide to modify the subprime loans that they had sold during the bubble, but built an escape clause based on the net present value (NPV) of the loan.  By including such a component, the programs were essentially designed to fail… and there was no enforcement ability when they did fail.

This settlement may be much more of a gift to lenders.  Five banks will share liability for $25 billion.  Yet the banks had income of $317 billion last year alone.  The banks have 3 years to perform, and notification of the Program to affected homeowners may not occur for up to 9 months.  Worst of all, this Settlement will have no affect on FNMA and Freddie Mac loans which account for 80% of the subprime loans out there.  Finally, by the Settlement, lenders will gain immunity from any further Attorney General suits concerning the robo-signer scam.  This sounds very much more like a lender win than any real hope for homeowners.

Questions remain as to what the specifics of the settlement are and what will actually be required by the lender and how effective are the penalties to deter the banks future intransigence in processing and working with borrowers on loan modifications and principal reductions.  The reality is homeowners do not need assistance in 3 years, they need it now.

While it remains to be seen as to what the actual settlement will say and what it will require – one thing is for sure, if the settlement agreement limits enforcement rights to only the participating governmental entities and does not contain a right of private enforcement, ie. if the homeowners are not allowed to use the settlement as a basis for litigating and protecting their rights in a Court of Law, the settlement will more than likely be as impotent and ineffective as the Countrywide settlement, HAMP, HAFA, TARP, Hope for Homeowners and every other mortgage relief program that has been put in place in the last four years to help.

Nature of Real Estate Secured Debt

A real property loan has two parts: 1) The Promissory Note which establishes your personal liability to repay the debt; and 2) the Security Instrument (Deed of Trust or Mortgage) which gives the lender a security interest in the real property. If the borrower defaults in payment under the Note, the Security agreement gives the lender a power to foreclose and sell the property. In most States, including California, this foreclosure action must be taken before a lender could seek to get a money judgment against the borrower.

The Role of Bankruptcy

Sometimes a person may be so in debt that they cannot pay everything. A Bankruptcy is a legal proceeding designed to give the debtor a “fresh start” either by extinguishing personal liability for their debts (Chapter 7) or creating a reorganization plan to pay some and extinguish the rest (Chapter 13). While Bankruptcy can eliminate liability, it does not transfer real estate that may be securing those debts. In a Chapter 7 Bankruptcy Petition, Exhibit B-8 is the Debtor’s Statement of Intention wherein they state what they intend to do with the property. One of those choices is to Reaffirm the Debt. If the borrower elects “Reaffirm”, the debt is not discharged in the Bankruptcy and the personal liability remains. However, concerning real estate secured debt, this usually is not advised.

When the loan is not reaffirmed, the Bankruptcy discharge extinguishes the personal liability under the Note. However, the Bankruptcy does not extinguish the lender’s Security against the property. Thus, after discharge the borrower could keep on paying the loan and keep the property even though they have no personal liability. If they later default in payment, the only thing the lender could do is foreclose on the Security but they cannot get a deficiency judgment against the borrower. …. unless the borrower has somehow later “reaffirmed” the debt. And that is the worry about post-Bankruptcy loan modification.

Impact of Post-Bankruptcy Loan Modification

Since the Bankruptcy discharge eliminated the borrowers “obligations” under the Note, there is no obligation left to modify. If, however, the borrower and lender enter a Modification Agreement, the terms would likely express either a reaffirmation of the debt or, alternatively, a new promise to pay. On paper at least, this post-Bankruptcy agreement would create a new enforceable “obligation” and thus impose personal liability against the borrower for the modified debt. In short, the Modification could arguably reaffirm the previously discharged debt. Whether this would be actually enforceable is another issue.

Post-Bankruptcy Loan Modification Might Not Be Enforceable

Bankruptcy Courts are very reluctant to allow Reaffirmation Agreements within a Bankruptcy since that eliminates the “fresh start” that the Bankruptcy was intended to provide. In essence, such agreements are the antithesis of the purpose of bankruptcy; a reaffirmation gives up the very thing the debtor sought by the filing. Accordingly, judges go out of their way to find reaffirmation agreements improper. Unless reaffirmed, not only is the loan liability extinguished, but any further action to collect upon the discharged debt is prohibited. So, after the Chapter 7 discharge, the focus changes from entering into improper reaffirmation agreements to acts in violation of this discharge injunction. The discharge order makes clear that lenders cannot take any action to collect a debt as a personal obligation of the borrower. However, they can run afoul of this prohibition in a variety of ways.

All loss mitigation efforts (e.g., loan modifications, forbearance and repayment plans, short sales, etc) involve communications with the debtor which could reasonably be construed as debt collection actions even if the lenders include language that states that they are only acting against the property. That may not be enough. If the loan is secured by real property where the value of the property is less than the amount owed on the loan, any requirement that payments be made essentially could be construed as a requirement that the borrower remain personally liable.  Accordingly, a payment plan, loan modification or short sale where there is no equity in the property could be found to be a violation of the discharge injunction.

Courts are concerned about the attempt of creditors to avoid the Chapter 7 discharge and are increasingly likely to find that attempted reaffirmations are invalid. In addition, courts are increasingly likely to find that any action that might be construed as a threat of personal liability against the debtor is violative of the discharge injunction. Finally, courts are very willing to assess significant damages against lenders who violate the discharge injunction including allowing recoveries in class action law suits.  Section 524 of the Bankruptcy Code provides that an order discharging a debt in a bankruptcy case “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor . . . .” 11 U.S.C. § 524(a)(2). The discharge injunction is broad and prohibits any act taken to collect a discharged debt as a personal liability of the debtor.

If any party knowingly violates the discharge injunction, the court may properly hold that party in civil contempt. For example, in a recent case out of Texas, Bank of America had hired collection agencies to pursue debtors even though they knew that the debt had been fully discharged in Bankruptcy. In that case, the Court awarded the debtors: 1) $2,500 in actual damages; 2) $79,839 in attorneys fees; and 3) imposed sanctions against BofA and its collection agency totaling $150,000. (McClure v. Bank of America, Adv. No. 08-4000 (Bankr. N.D. Tex. 11/23/09).

Summary

Based upon the foregoing, these conclusions appear accurate:

1. A borrower and a lender can enter into a post-Bankruptcy Loan Modification Agreement. This may be desirable if the borrower is trying to keep the property;

2. The Loan Modification Agreement may create a reaffirmation of the debt that had been extinguished by the Bankruptcy making the borrower once again personally liable for the debt; and,

3. Any such Loan Modification Agreement may be deemed by the Bankruptcy Court as an illegal violation of the Bankruptcy discharge which could result in voiding the Modification and raising damage claims against the lenders.?

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If your real estate is upside-down and if you are negotiating a Loan Modification – especially if you have filed and been discharged in Bankruptcy – get competent legal advice in your State immediately so that you can determine your best options.

As we’ve often seen in the market, Fannie Mae and Freddie Mac remain obstacles to both loan modifications and short sales by refusing principal reduction in loan modifications and restricting short sale contrbutions to junior lenders.  Since these two GSE’s own or guarantee up to 80% of all residential loans, they have a significant effect on market recovery.

To encourage investors to agree to principal reduction modifications, Treasury is tripling the incentives for such restructurings, paying from 18 to 63 cents on the dollar, depending on the degree of change in the loan-to-value (LTV) ratio. The Federal Housing Finance Agency (FHFA) has prohibited Fannie Mae and Freddie Mac from employing HAMP’s principal reducing option for their borrowers. Treasury has notified FHFA that it will pay these same principal reduction incentives to Fannie and Freddie if they allow servicers to forgive principal in conjunction with a HAMP modification. FHFA issued a statement in response noting that it recently released analysis concluding principal forgiveness does not offer any greater benefits than principal forbearance as a loss mitigation tool. But the agency says it will reassess the investor incentives now being offered, taking into consideration the number of eligible loans, operational costs to implement such changes, and the potential effects of incentivizing borrowers to remain current.

Among the other changes announced, borrowers who are struggling because of debt beyond their mortgages, such as second liens and medical bills, will be eligible for an alternative program evaluation with more flexible debt-to-income criteria. In addition, Treasury will expand eligibility to include investor properties that are currently occupied by a tenant as well as vacant properties slated for rental use. Tim Massad, Treasury’s assistant secretary for financial stability says single-family homes serve an important function as affordable rental housing, and foreclosure of investor-owned homes has disproportionate negative effects on low- and moderate-income renters, as well as communities.

The deadline for HAMP will be extended for an additional year through December 31, 2013.

Meanwhile, if you or someone you know is struggling with an upside-down property in California and don’t know what to do, our Consultation Program can offer knowledge of what to expect and form strategies to either keep the property or move on with as little financial risk as possible.  To schedule a Consultation, please contact our office at 916 966-2260. 

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 advice in your State immediately so that you can determine your best options.