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.

The wave of possible lender lawsuits against borrowers has started, primarily by junior lenders whose seconds (often HELOCS) were wiped out when a senior lender foreclosed.  We presently are representing borrowers in a number of these lawsuits and have already settled several. The most important points to remember if you are served with a lawsuit are: 1) don’t panic and ignore it. Get competent legal counsel in your State to advise you how and when to respond; and 2) almost all such lawsuits will resolve without going to trial.

There are several defenses that can be raised in defense to any lender lawsuit that may reduce or even eliminate their claim. These include:

1. Lender does not own the loan - In order to file a lawsuit against you, the lender must actually “own” the loan, that is they own and have possession of the Promissory Note.  Loans change ownership all the time and it is possible that the lawsuit has been brought by a loan “servicer” or collection company, not the actual owner. If they cannot prove ownership, they do not have “legal standing” to file the lawsuit and they should lose.

2. Loan was predatory - One of the key reasons why we had this market collapse was that from 2000 through 2006, lenders made loans to borrowers who in reality could not afford the loan.  Sometime this was done by misstating income on “stated income” or “no document” loans and often this misstatement was done by the lender, not the borrower. Other times the loan was unrealistic, such as a 1% interest rate on which the borrower qualified for the loan but which jumped up much higher after the first month.  So the buyer only qualified on month one but would never qualify on month two.  Failure was inevitable unless the buyer could quickly flip the property.  If the lender should never have made the loan, they likely will not recover against the borrower in court.

3. Loan was result of fraud - Similar to predatory loans, many borrowers obtained loans through actual fraud where the loan agent altered information supplied by the borrower or made false representations to the borrower such as:  “take this adjustable rate now and we’ll convert it to a fixed rate within a year”. For most borrowers, that loan agent was never to be found within the year, the fixed rate was not obtainable, and the increasing adjustable rate forced the borrower into default.   If the lender’s loan agent defrauded the borrower into getting the loan, they likely will not recover against the borrower in court.

4. Lender failed to do diligence - One of the biggest causes of the market collapse was that the lenders failed to exercise any diligence in checking to make sure the information on the loan application was true, such as checking tax returns and confirming the borrowers employment and income.  The banking deregulation in the late 1990’s created a flood of money in the market for new loans to be made and lenders accepted virtually any application without checking whether the loan was good. The result was billions of dollars of bad loans secured with property that was not worth the debt.   If the lender should never have made the loan, they likely will not recover against the borrower in court.

5. Lender knew the market was inflated in a bubble - The combination of banking deregulation and easy money created a huge increase in demand by possible homeowners and investors which drove up the prices on available properties, often increasing by $10,000 or more in a single month.  Developers rushed in with new subdivisions everywhere trying to fill the demand as competition for homes kept driving prices upwards.  This inflationary bubble was almost entirely fueled by high-risk loans, speculative appraisals, and the lack of real underwriting and diligence by the lenders. It was completely foreseeable to lenders that this bubble would burst but they made the loans anyway because they earned commissions and could sell the loans in the secondary mortgage market.  It was no real surprise to lenders when the borrowers started defaulting in 2005 on the increasingly expensive loans which led to the collapse starting in 2006.  If the lender should never have made the loan, they likely will not recover against the borrower in court.

6. Lender has insurance for the loss - Many of the loans made were 100% of purchase price and even more. Generally, if the loan was for more than 80% of the property value, mortgage insurance (PMI) was required. Although paid for by the borrower, this insurance paid the lender for any loss on a default. The lawsuit may be an attempt by the lender to collect on a loss that they have already recovered on through the insurance. If the lender has already been compensated for any loss, they likely will not recover against the borrower in court.

7.  Lender has been bailed out by the taxpayers - Between 2008 and 2009, Federal bailout monies paid by taxpayers (including the borrower) provided protection for lenders damaged because of loan losses.  Our government guaranteed billions of dollars in lender bad debt, guarantees that we and our children will be paying for years to come. Many consider these bailouts to be a reward for bad business practices instead of the punishment that might be deserved. If the lender has already been compensated for any loss, they likely will not recover against the borrower in court.

How Should You Prepare? - In California, the deadline for a lender to bring a claim against a borrower is four years from the date the borrower defaulted. With hundreds of thousands of borrowers just now in default, these lawsuits will be a constant threat for many years to come.  These may be joined by deficiency lawsuits following short sales to which the same defenses can be raised in addition to several other defenses unique to short sales which I’ll cover in subsequent Blogs.

Before you make any decision concerning your upside-down home or investment property, be certain to get tax and legal advice from qualified professionals in your State who can look at your specific situation and advise you on how these rules apply to you, particularly on how to identify and minimize the risks of a lender lawsuit.  This Article is solely intended to give you an introduction to key legal concerns affecting borrowers today but you should not rely on it to apply to your financial circumstances.

If you have specific questions about your liability, short sales, foreclosure, or any legal issues, feel free to contact me 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. Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/.

With the stroke of a pen, Gov. Schwarzenegger signed Senate Bill 94 and put an end to loan modifiers who charge up front fees.  As reported in the Sacramento Bee today, the action comes following massive complaints to the Dept. of Real Estate comcerning loan modifiers who took borrower’s money - up to $4,000 - and then abandoned them. While not condemning all modifiers, the new law applies to every such company that collects up-front fees. 

Earlier this year, State and Federal crackdowns on loan modifiers limited such services to real estate licensees and mandated DRE approved contracts for any up-front fees. However, many simply ignored the restrictions. More significantly, the earlier law excluded attorneys. As a result, law firms quickly filled the gap by collecting up-front fees and then partnering with loan modifiers to do the actual work. The new law puts an end to this.

While protecting the victims of these scams, the intent of the law is to stop abuse of borrowers in trouble. Legitimate loan modifiers can still operate but they cannot get paid until they have performed all of the services promised in their contract with the borrower.  This does not require that payment only be made if the modification is successful.  Borrowers must pay the loan modification firm for the services they provided, even if the firm cannot get the loan modified. 

Furthermore, the modification firms must tell potential clients that they may be able to get the same services for free from government-approved nonprofit mortgage counsellors. You can find these by Googling under such names as “nonprofit mortgage counsellors” or “debt management consultants”. I would expect that with this latest crackdown, getting access to this free help will become much more competitive so don’t wait. Act now and be persistent.

The new law will expire on January 1, 2013 which coincidentally is the expiration date for the Federal Debt Forgiveness Relief Act.  Apparently the concensus in Washington D.C. and in California is that this real estate mess will be cleared up by the end of 2012 so loan modification protection will no longer be an issue.  We’ll hope that they are right.

If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com or call us at (916) 966-2260 for a phone or personal appointment.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/. 

WHERE WILL THE MONEY COME FROM…

Breaking News for all people facing foreclosure sale.

President Obama will be rolling out a plan to attack the mortgage crisis next week. His target, we’re told will be slowing rising delinquencies and foreclosures by using $50 billion of the bailout monies. In anticipation, several financial institutions  have said that they will stop foreclosures on owner-occupied properties until they see what’s in the Plan. These Lenders include Fannie Mae and Freddie Mac plus Bank of America, J.P. Morgan, Chase, and Citigroup. Since many of these lenders control other lenders, the scope should be very wide. Since BofA has bought Countrywide, we would expect the stoppage to extend to Countrywide loans as well. Although the Plan will be unvieled next, discussion and shaping will last considerably longer. Accordingly, this hold should last at least until mid-March and in many cases continues a hold started last September. This gives some breathing room and hope to many on the edge of a foreclosure sale.