Ginn Investor News And Litigation

Lenders Pursuing Deficiency Judgments: An Interesting Georgia Case

2011-02-12T07:36:00.000-05:00

Although I don't usually follow Georgia case law, this is an interesting discussion of a recent case regarding deficiency judgments. In Florida (and elsewhere) we are already seeing some lenders simply sue on the note rather than pursue a cumbersome and more time-consuming foreclosure. This is especially the case where the property is so underwater that the lender doesn't even want it.

Should lender sue 1st, foreclose 2nd?
Atlanta Business Chronicle - by Jim Jordan
Date: Friday, February 11, 2011, 12:33pm EST

With all of the focus on foreclosures, you might have heard about the Georgia “confirmation” statute. Originating from the Great Depression, the confirmation statute provides that before a lender can hold a borrower or its guarantor liable for a “deficiency judgment” (i.e, a judgment for the difference between the amount of the loan and the sums recovered at the foreclosure sale), the lender must first have the sale “confirmed.” The policy underlying the confirmation statute is that a borrower should not be subject to a double-whammy of both losing its property and being tagged with a deficiency judgment unless the price obtained at the foreclosure sale was a fair one. Accordingly, the confirmation statute requires that the price obtained at the foreclosure sale must be the “true market value” of the property, or the lender will not be permitted to pursue a deficiency action against the borrower for the outstanding loan amount in excess of the foreclosure sale price.

The confirmation statute, which is only applicable in the case of a recourse loan, has strict language that, in theory, creates the potential for a big “cliff effect”—if the judge finds that the foreclosure sale price was even one penny below the “true market value,” then the lender loses the entire deficiency amount. The law’s language does not allow a court to prorate the deficiency, so it’s all-or-nothing.

As a result of this threat, most lenders will carefully appraise the property on which they intend to foreclose before going through with the foreclosure sale and sometimes even bid an amount slightly above the appraised value to give themselves a safety cushion. When a borrower elects to fight a confirmation, the result is typically a “battle of the appraisers” whose outcome turns on which appraisal expert (lender’s or borrower’s) the court finds more credible, and so some lenders will have the property appraised more than once to further bolster their case.

Anecdotal evidence suggests that during this current downturn, superior court judges have been less likely than in the past to grant foreclosure confirmations. To avert the risk of a confirmation denial, foreclosing lenders should consider taking advantage of existing case law that allows the lender to first sue on the promissory note, obtain a judgment for the outstanding loan balance, foreclose on the property, and then execute the judgment on the borrower for any amount remaining outstanding after application of the foreclosure bid amount against the lender’s judgment, all without getting a confirmation.

In a recent case, a borrower attacked the legality of this approach, claiming that this was effectively an end run around the policy of the confirmation statute because a lender could buy the property at a fire-sale price at foreclosure, yet still obtain the rest of the outstanding loan amount from the borrower. After losing at the trial court, the borrower appealed to the Court of Appeals, which found in favor of the lender based on existing case law (DuPree v. SunTrust Bank, 305 Ga. App. 507 (2010)). The borrower then appealed to the Georgia Supreme Court.

The Georgia Supreme Court declined to accept the appeal, but did not state why it refused to do so. It is likely that the Supreme Court believed that the existing case law is “good law” and thus there was no need to weigh in on the issue.

Based on the reported cases, the law in Georgia is that a lender has a choice when faced with a failed project that is encumbered by recourse debt: it can foreclose on the property first and then seek a confirmation as a means of obtaining a deficiency judgment, or it can sue on the note, obtain a judgment, and then execute on the judgment against the property and any other assets of the debtor (or guarantors). Which strategy the lender will choose depends on a variety of factors, including whether the borrower (or guarantors) have any assets besides the collateral property and whether the lender believes it can sell the property after foreclosure (and how quickly), and of course, whether the borrower is likely to put up a fight!

As more foreclosure cases from the Great Recession percolate their way through the court system, lenders and borrowers will each need to pay attention to this issue.

Learning To Walk: Fear, Shame And Your Underwater Mortgage

2011-02-04T12:10:00.000-05:00

HUFFINGTON POST -- Nearly one in every four homeowners across the country owe more on their home than it's worth. Once a month, those 10.8 million are faced with a question that cuts to the core of the American Dream and offers a confusing collision between a deep-seated sense of personal obligation and a cold, simple business calculation: Should I pay my mortgage?

For decades, there was only one answer for most people: Of course I should keep paying, it's the right thing to do. Besides, the argument went, a home is a great investment. Today, in the wake of the most seismic housing collapse in the nation's history, that logic has increasingly been challenged by homeowners despondent about their lack of options.

Although researchers find that some underwater borrowers who could continue paying their mortgages strategically default anyway, the vast majority continue to pay. Many homeowners, out of a combined sense of fear, shame, courage and morality, resist making what is otherwise a logical financial decision.

Walking away from a home, however, is more than the sum of a few business decisions. For many homeowners, it's either an act of civic defiance against a system they no longer buy into or the end result of being shuffled around by institutions that don't help them solve their financial problems.

While walking away is a frightening and dangerous step into the unknown, millions have beaten the path in the past few years. To find out what it's like to walk away, The Huffington Post asked readers who were considering making the move, or who had already done so, to write in and share their stories. That was in January 2010. A year later, we followed up with them to see how they reflected on the experience.

Find out how it went here...

Bet on Foreclosure Boom Turns Sour for Investors

2011-02-03T04:47:00.000-05:00

David J. Stern may be the best-known beneficiary of the foreclosure boom, having made millions in recent years from evictions processed by his law firm, the largest of its kind in Florida. But when he took part of his firm public early last year, he had plenty of help from a constellation of investors also looking to cash in on people losing their homes.

Early in 2010, the back-office processing operations of Mr. Stern’s law firm were converted into a publicly traded company called DJSP Enterprises. Mr. Stern pocketed nearly $60 million from that transaction, public filings show. Behind that big-money deal was a curious cast of characters, including some with previous run-ins with regulators. Other parties included a small Wall Street investment bank headed by a former presidential candidate, the retired Gen. Wesley K. Clark, and a little-known private equity firm based in New York.

Even before the DJSP windfall, Mr. Stern enjoyed a lifestyle that featured grand mansions, flashy sports cars and a yacht called Misunderstood. But the days of easy money are over for Mr. Stern, his law firm and DJSP investors. As the Florida attorney general’s office continues to investigate whether Mr. Stern’s law firm falsified documents in order to speed up foreclosures, the firm has lost its biggest clients, including Citibank and Fannie Mae. Many of DJSP’s executives have left the company, and it has laid off about 80 percent of its 1,200 employees.

Even More Millionaires Defaulting on Mortgages

2011-02-02T18:56:00.000-05:00

Homeowners with Loans of More Than $1 Million Default More Often than Owners with Loans Worth Less Than $1 Million

As foreclosures in 2011 are predicted to exceed the record 3.8 million reported last year, John Blackstone reports on a group of million-dollar home owners bucking the trend. One in seven homeowners with loans over $1 million are seriously delinquent compared to one in 12 with mortgages below $1 million. (CBS)

CBS News correspondent John Blackstone reports one group of mortgage defaulters seems to be bucking the trend. In wealthy communities like La Jolla, Calif., living near the ocean is a privilege that many homeowners are willing to pay millions for. For Darren Thomas that ocean view was quickly losing its value. He says, "I bought it for [$1.385 million]. It is worth less than [$800,000], maybe less."   Thomas bought his townhome in 2006 but after seeing its value drop steadily he stopped paying.

"I haven't made a payment in two years," he says. "It was business decision. It was an easy decision. I have a property worth six or 700,000 less than when I bought it. I was making payments of 10,000 a month."

Thomas has gone into strategic default. He could make payments but is refusing to put more money into a home that is worth less than his mortgage. Among luxury homeowners he is not alone.

One in seven homeowners with loans over $1 million are seriously delinquent compared to one in 12 with mortgages below $1 million.    The more you owe, it seems, the better off you may be. Darren Thomas continues to live in his home because banks are often slower to foreclose on million-dollar homes.

In Huntington Beach, Calif., realtors say banks can be slow to foreclose on luxury homes because an empty house can be bad for everyone's bottom line. "An empty $2 million home hurts the inventory around it," says realtor Rob Magnotta.

For those who have stopped paying their million-dollar mortgages it's just an investment that didn't work out.
"As negative equity took place and drove the value down it became an investment not worth holding onto," says Corelogic's Mark Flemming. "Not much different than a regular stock you would sell."   "People like myself, business people, are going it is silly to throw good money after bad," says Thomas "The loss is not mine. The loss is the banks."   When it comes to real estate, the rich are different. They can be just as ruthless as the bankers.

©MMXI, CBS Interactive Inc. All Rights Reserved.

One of the Dumbest Articles: More Foreclosures Leads to Fewer Underwater Mortgages

2010-12-15T09:43:00.000-05:00

According to a CoreLogic report released today:

There were fewer homeowners underwater on their mortgage at the end of the third quarter than the second quarter, but it's because more properties that had severe negative equity were foreclosed upon not an increase in home values.

"Negative equity is a primary factor holding back the housing market and broader economy," according to Mark Fleming, chief economist with CoreLogic. "The good news is that negative equity is slowly declining, but the bad news is that price declines are accelerating, which may put a stop to or reverse the recent improvement in negative equity."

This has to be one of the Top 10 silliest statements of the entire foreclosure debacle. These foreclosed properties are almost invariably being held in bank REO inventory. As previously pointed out in this blog, the banks are actually holding back on listing much of this inventory so as not to depress prices even further.

The idea that foreclosures are somehow reversing the price or equity decline would be like the AMA offering a statistic that people are all of a sudden healthier - only because a large portion of the sickly just died off. You absolutely cannot read any article written by the National Association of Realtors or some mortgage broker advocacy group such as CoreLogic without looking for the spin.

Fed Research Paper Concludes Loan Modifications Counterproductive and "May Increase Strategic Defaults"

2010-12-14T22:20:00.000-05:00

To all those who insist lenders are not doing enough loan modifications, a Federal Reserve Bank of Philadelphia research paper suggests that current loan modification programs may have unintended consequences for consumer behavior, specifically, "loan modifications may increase borrowers’ incentives to default on their first mortgage while remaining current on their second mortgage."

While the change in priority of defaults between mortgage and non-mortgage debt has received a good bit of attention, this paper focuses on an issue that has not received much attention: priority of default between first mortgages and second lien mortgages on the same home.

Why might households default on their first mortgage but not default on their home equity loans? One explanation for this behavior is that households do not act strategically but rather default because they are unable to make loan payments – the “inability to pay” hypothesis.

An alternative explanation suggests a more strategic approach to default. Some households that anticipate ultimately going to foreclosure may wish to stop paying their largest debt payment, which is typically their first mortgage payment. However, since foreclosure can be a slow process, these borrowers may decide that they are better off continuing to make their home equity payments to allow them to maintain some access to credit (e.g., unused HELOCs, unused credit card lines, additional credit card or card loans). This explanation would suggest that consumers with high unused HELOCs would be less likely to default on their home equity loans, even though they have defaulted on their first mortgage.

Loan modification programs may provide incentives for homeowners to default as homeowners are not likely to be approved for a modification unless they have missed their mortgage payments. In some cases, borrowers may need to be as late as 90 DPD for their accounts to be handed over to the modification department so that their loans could be renegotiated. Since most loan modifications are modifications of the first mortgage, the availability of a loan modification may provide incentives for borrowers to stop paying on their first mortgage while staying current on their second.

Our results overall suggest that people default strategically as their home value falls below the mortgage value; they exercise the put option to default on their first mortgage. However, they tend to keep their HELOCs current in order to maintain the credit line available to them, particularly for those who have already used their credit card lines. Credit quality as reflected in the types of mortgages (prime, alt-A, or subprime) does not seem to play a significant role in determining this behavior. In addition, we find that loan modifications may increase borrowers’ incentives to default on their first mortgage while remaining current on their second mortgage. Overall, our empirical findings provide a better understanding of consumer strategic default behavior and implies that current loan modification programs may have unintended consequences for consumer behavior.

Shadow Inventory Is Keeping Real Estate Prices Artificially HIGH

2010-12-09T16:32:00.000-05:00

Like everyone else in the industry, I am forever hearing the question "Will prices get lower?" While I have no crystal ball, it is fair to say that the market will get worse before it gets better. Why? The market right now is artificially high. As I have pointed out in previous blogs, the banks are not only flooded with inventory, but they are holding thousands of properties off the market - referred to as shadow inventory. This is to prevent real estate prices from a total collapse.

So, if you think that prices have hit bottom, just keep in mind that it is precisely the opposite. Real estate prices are being artificially propped up by keeping much of the supply off the market.

http://www.dailyfinance.com/story/real-estate/housing-market-outlook-2011-unsettled-underwater-unsold/19745450?a_dgi=aolshare_email

By the way, please never ever read a NAR (National Association of Realtors) article, so-called economic report or anything they distribute as anything but propoganda or advertising. Look at such articles as you would a toothpaste or deodorant advertisement.

According To Wall Street Journal, Short Sales No Better For Credit Rating Than Foreclosure

2010-12-07T08:52:00.000-05:00

Since the mortgage disaster started in 2007, I have never advocated that any owner participate in a “short sale” of their upside down property. I cannot find any legal advantage for a homeowner. The lender benefits by having the homeowner market the house and usually procuring much higher sale proceeds compared to the lender’s own fire sale. The biggest beneficiary is of course the real estate broker. (Earlier entries in this blog contained some heated attacks from realtors, who never like being exposed.) The buyer benefits by acquiring a house at a low price. But, where’s the benefit to the homeowner?? The lender usually does not release the homeowner from personal liability so the chances of a lawsuit seeking a deficiency judgment lingers after the short sale just as it does after foreclosure.

The most common reason people give me for their insistence in pursuing a short sale before letting a home go to foreclosure is “credit.” Most people tell me that a foreclosure has a worse effect on the borrower’s credit score, and they assume their credit will recover quicker if they provide the mortgage lender with a buyer in a short sale arrangement. Really?

A week ago, on Saturday, November 27, 2010, the Wall Street Journal, Nick Timiraoas wrote an article about short sales and credit. He posed the question, “Is a short sale as damaging to a borrower’s credit as foreclosure.” His answer was, “Generally speaking, yes.” He explained that in either a foreclosure or a short sale a borrower’s credit score will fall by about 100 points according to Fair Isaac Corp. So, your credit will get hit the same whether you make the effort to short sale your property or simply walk away.

A short sale may have a moral, non-legal, purpose. Many people feel a moral obligation to do every thing they can to pay back the bank. That obligation may include finding a buyer for the property to get the bank as much money toward the loan as is possible. Moral obligations are important in life, and some may find it more palatable to try to do as little financial damage as they can to their mortgage lender. (To be perfectly candid, I would not consider myself one of them. Listen to enough of our lender stories and, believe me, you will be convinced.) It is important to distinguish moral issues from the legal and credit issues in the short sale procedure. Putting it more bluntly, it is important to sift through the self serving BS and do what is in your own best interests. Tell your realtor or attorney: It's all about the deficiency.

Countrywide's Mortgage Document Errors May Doom Bank of America

2010-11-23T17:07:00.000-05:00

http://www.dailyfinance.com/story/credit/bank-of-america-mortgage-document-errors-trouble-countrywide/19728402/

Foreclosure Attorney David Stern is Struggling to Pay His Bills

2010-11-17T08:12:00.000-05:00

David Stern can't pay bills and seeks "leniency and patience" from his lenders.

The Law Offices of David J. Stern, which has helped banks seize thousands of homes from homeowners who missed mortgage payments, is now having trouble paying its own bills. One of its subsidiaries is seeking bank forbearance for defaulting loans, and the shrinking company has fallen behind on rent payments at its Plantation offices, according to a regulatory filing Monday.

Here is the story in the Sun Sentinel
http://articles.sun-sentinel.com/2010-11-15/business/fl-stern-finances-1116-20101115_1_jeffrey-tew-foreclosure-processing-david-j-stern

After A Loan Mod (Or if Your House Is Upside Down) You Are Effectively Renting The Home From The Mortgage Company

2010-11-07T08:10:00.000-05:00

Many homeowners with upside down mortgages are seeking a mortgage modification in order to lower their monthly mortgage payments. Under the government’s HAMP program, mortgage modification usually involves lowering the interest rate to 2 % intially and adding deferred interest and past-due payments to the loan principal.

Loan Mod companies are happy to take your money. But, it seems that most people do not comprehend the practical reality of a mortgage modification. If you continue to live in a currently upside down house with a modified mortgage payment you are essentially renting the property from the lender. You are renting because it is unlikely you will see any profit when the house is sold unless there is an explosive recovery in real estate value. Even if real estate values were to inflate at a 10% annual rate, starting tomorrow, very few people will break even on their modified mortgage because the deferred interest and arrearage is continuously increasing the mortgage balance. If you were upside down to begin with, it only makes matters worse.

“Renting” through a modification still makes business sense for homeowner and lender. If the homeowner did not modify the mortgage payment and could not afford to pay the mortgage the homeowner would face foreclosure, and after foreclosure the owner would have to rent an apartment or rent someone else’s home. It will take several years before the homeowner will qualify for a new home mortgage. From the lender’s standpoint, permitting the current homeowner to remain in the property in what is effectively a rental status is better than taking back the property in today’s real estate market. You are essentially renting for the benefit of the lender - or until the market turns around.

I am not criticizing mortgage modifications. If you like your home and want to live in your home then you should modify the mortgage payment to something you can afford. Just be aware the for practical purposes you are on the same position as a tenant because you it is very unlikely that you will retain any home equity.

David Stern, Florida's Largest Foreclosure "Mill," Announces Massive Layoffs

2010-11-05T07:46:00.000-04:00

Fla. foreclosure firm in probe announces layoffs

The Associated Press
A Florida law firm involved in a state investigation into questionable foreclosure practices is laying off hundreds of employees.

David J. Stern told employees in an e-mail Thursday that the firm's staff is being slashed by 70 percent. The e-mail was provided to The Associated Press by Stern's attorney.

Lenders including Fannie Mae and Freddie Mac have stopped doing business with Stern's firm amid the investigation by Florida Attorney General Bill McCollum. Stern's e-mail says business has dropped 90 percent.

The investigation into Stern's firm and three others focuses on whether false or improper affidavits were filed in thousands of foreclosures. Some employees say they were "robosigners" who signed documents without reading them.

Witness Says Stern Law Firm Gave Employees Cars and Jewelry

2010-10-19T23:30:00.000-04:00

The Florida Attorney General’s Office released some really interesting information today. This is another article from the Tampa Bay Tribune:

“The office released transcripts of two interviews it conducted for its investigation into the law offices of David J. Stern. The sworn statements were from Kelly Scott, a former employee of Stern’s and Mary R. Cordova, a former employee of G&Z, a process server used by Stern’s office. The women’s testimonies appear to back up that of former Stern’s employee Tammie Lou Kapusta, whose statement was released last week. The three statements paint a picture of a secret system designed to speed up the foreclosure process. Attorneys and staff members forged signatures, changed dates, passed around notary stamps, the women say in interviews with attorney general’s staff.

The two former Sterns employees described long tables where employees would sign as a witness and notarize documents without actually witnessing the signing. Twice a day, Scott said, the company’s chief operating officer, Cheryl Samons, would go into the office and sign 500 documents at a time – without reading them.

As a perk of Samons’ job, Stern’s office would routinely pay her personal mortgage, a car payment, her electric bills and her cell phone bill, according to Scott, who told investigators Stern also bought Samons a new BMW sport utility vehicle every year and gave her and other employees jewelry. Additionally, Stern purchased employee David Vargas a house, a car and a cell phone, Scott claims in her statement.

Scott said the office would move forward with cases, even if they knew the homeowner had not been properly notified of the lawsuit. Fannie Mae and Freddie Mac were Stern’s “babies,” Scott said, and they routinely questioned documents and came to the office to check files. Last week Freddie and Fannie said they would audit Stern’s files.

Someone inside both organizations would tip Sterns off to the visits, and Stern’s staff would then alter client codes and hide files, according to Scott’s statement. (emphasis by Christine) When Fannie and Freddie employees left, they’d bring the files back out. The other witness, Cordova, worked at G&Z for two months. The firm, which handled service for various foreclosure law firms, had special instructions for Stern, the firm’s main client, according to Cordova’s statement.

Every file was billed for at least four people to be served with the foreclosure paperwork, even if the firm knew there weren’t that many people with interest in the property. (emphasis by Christine.) These bills were sent out before the parties were served and, often, Cordova said, the company didn’t follow through with the service. These bills are paid by the lenders and, eventually, passed along to the homeowners. Kapusta, whose statement was initially released last week, said she was fired after she questioned procedures. The other two employees said they left on their own.”

Palm Beach Post: Top executives at DJSP Enterprises resign amid foreclosure flap

2010-10-19T14:15:00.000-04:00

DJSP Enterprises, Inc., which handles the non-legal side of foreclosures for the David J. Stern law firm in Plantation, announced this morning the resignations of its three top executives and appointment of a temporary chairman of the board. The interim chairman of the board replaces David J. Stern, who will continue to serve as CEO and president of the company.

The announcement comes as Stern’s firm is criticized for its handling of foreclosure documents, with sworn statements by employees alleging forgery and notary problems. Resigning is the company’s president and chief operating officer, executive vice president and chief financial officer, and vice president, genreal counsel and secretary. DJSP Enterprises, Inc. is the largest provider of prodcessing services for the mortgage and real estate industries in Florida one one of the largest in the U.S., according to its website. Its principal customer is the Law Offices of David J. Stern, P.A.

On Monday, the Florida attorney general’s office, released a second sworn statement by a Stern former employee. The employee, Kelly Scott, backed up a previous statement that signatures on foreclosure documents were regularly forged.

But, she also offers new testimony that foreclosure cases for Fannie Mae and Freddie Mac would be hidden from auditors if there were problems with the files. Scott said client codes on the documents would be changed from Fannie and Freddie to reflect a different customer and then the files would be hidden in a room. When Fannie and Freddie auditors left, the cases would be changed back. The government owned entities said last week they were no longer sending new files to Stern’s firm.

Foreclosure Fraud Parody

2010-10-14T22:23:00.000-04:00

The Banking Industry’s Stalingrad

49 STATES SIGN MORTGAGE FORECLOSURE JOINT STATEMENT

2010-10-13T13:09:00.000-04:00

(Note: I love the fact that they actually used the term "robo-signing" in the official statement)

It has recently come to light that a number of mortgage loan servicers have submitted affidavits or signed other documents in support of either a judicial or non-judicial foreclosure that appear to have procedural defects. In particular, it appears affidavits and other documents have been signed by persons who did not have personal knowledge of the facts asserted in the documents. In addition, it appears that many affidavits were signed outside of the presence of a notary public, contrary to state law. This process of signing documents without confirming their accuracy has come to be known as “robo-signing.”

We believe such a process may constitute a deceptive act and/or an unfair practice or otherwise violate state laws. In order to handle this issue in the most efficient and consistent manner possible, the states have formed a bi-partisan multistate group to address issues common to a large number of states. The group is comprised of both state Attorneys General and the state bank and mortgage regulators. Currently 49 state Attorneys General have joined this coordinated multistate effort. State bank and mortgage regulators are participating both individually and through their Multistate Mortgage Committee, which represents mortgage regulators from all 50 states. Through this process, the states will attempt to speak with one voice to the greatest extent possible. At the end of this statement is a list of the participating states.

Our multistate group has begun inquiring whether or not individual mortgage servicers have improperly submitted affidavits or other documents in support of foreclosures in our states. The facts uncovered in our review will dictate the scope of our inquiry.

The Executive Committee is comprised of the following Attorneys General Offices:
Arizona, California, Colorado, Connecticut, Florida, Illinois, Iowa, New York, North Carolina, Ohio, Texas, and Washington; and the following state banking regulators:
Maryland Office of the Commissioner of Financial Regulation, New York State Banking Department, and the Pennsylvania Department of Banking.

Participating Attorneys General:
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii Department of the Attorney General / Hawaii Office of Consumer Protection
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming

New York Times: Foreclosure Furor Rises; Many Call for a Freeze

2010-10-06T08:20:00.000-04:00

October 5, 2010
By DAVID STREITFELD and GRETCHEN MORGENSON

The uproar over bad conduct by mortgage lenders intensified Tuesday, as lawmakers in Washington requested a federal investigation and the attorney general in Texas joined a chorus of state law enforcement figures calling for freezes on all foreclosures.       Representative Nancy Pelosi, the House speaker, and 30 other Democratic representatives from California told the Justice Department, the Federal Reserve and the comptroller of the currency that “it is time that banks are held accountable for their practices.”

In a request for an investigation into questionable foreclosure practices by lenders, the lawmakers said that “the excuses we have heard from financial institutions are simply not credible."     Officials from the federal agencies declined to comment.    Texas Attorney General Greg Abbott, a Republican, sent letters to 30 lenders demanding they stop foreclosures, evictions and the sale of foreclosed properties until they could provide assurances that they were proceeding legally.

Both developments indicated that scarcely two weeks after the country’s fourth-biggest lender, GMAC Mortgage, revealed that it was suspending all foreclosures in the 23 states where the process requires judicial approval, concerns about flawed foreclosures had mushroomed into a nationwide problem.

Some of the finger-pointing was also being directed back at Congress. The Ohio secretary of state, Jennifer Brunner, suggested in a telephone interview on Tuesday that a bill passed by Congress last week about notarizations could facilitate foreclosure fraud.      Dubious notary practices used by banks to justify foreclosures have come under scrutiny in recent weeks as GMAC and other top lenders suspended homeowner evictions over possible improper procedures.     Ms. Brunner, who has recently referred possible cases of notary fraud in her state to federal authorities, worries that the legislation would allow the lowest standard for notaries to become a nationwide practice. She said she also worried that the changes were coming in the middle of a foreclosure storm where people could lose their homes improperly.    “A notary’s signature is that of a trusted, impartial third party, whose notarization bolsters the integrity of the document,” Ms. Brunner said. “To take away the safeguards of notarization means foreclosure procedures could be more susceptible to fraud.”

As banks’ foreclosure practices have come under the microscope, problems with notarizations on mortgage assignments have emerged. These documents transfer the ownership of the underlying note from one institution to another and are required for foreclosures to proceed.    In some cases, the notarizations predated the preparation of the legal documents, suggesting that signatures were not reviewed by a notary. Other notarizations took place in offices far away from where the documents were signed, indicating that the notaries might not have witnessed the signings as the law required.

Notary practices vary from state to state and the bill, sponsored by Representative Robert B. Aderholt, a Republican from Alabama, would essentially require that one state’s rules be accepted by others. If one state allows its notaries to sign off on electronic signatures, for example, documents carrying such signatures and notarized by officials in that state would have to be recognized and accepted in any state or federal court.      Ms. Brunner pointed out that some states had adopted “electronic notarization” laws that ignored the requirement of a signer’s personal appearance before a notary. “Many of these policies for electronic notarization are driven by technology rather than by principle, and they are dangerous to consumers,” she said.

Last week, JPMorgan Chase and Bank of America joined GMAC in suspending foreclosures in the states where they must be approved by a judge. The judicial states do not include California or Texas. But Mr. Abbott, the Texas attorney general, told lenders in letters dated Oct. 4 that if they used so-called robo-signers — employees who signed thousands of foreclosure affidavits a month, falsely attesting that they had reviewed the material — it would be a violation of Texas law.     As a result, he wrote, “the document and therefore the foreclosure sale would have been invalid.”

The three lenders who are at the center of the controversy, GMAC Mortgage, JPMorgan Chase and Bank of America, declined to comment. Other lenders singled out by Mr. Abbott include Wells Fargo, CitiMortgage, HSBC and National City.

Meanwhile, shares of a major foreclosure outsourcing company, Lender Processing Services of Jacksonville, Fla., fell 5 percent on Tuesday, adding to a slide that began last week.   The company’s documentation practices are stirring questions, including how the same employee can have wildly varying signatures on mortgage documents. L.P.S. blamed a midlevel manager’s decision to allow employees to sign forms in the name of an authorized employee. It says it has stopped the practice.     The United States Attorney’s Office in Tampa began investigating L.P.S. in February. An L.P.S. representative could not be reached Tuesday for comment.     Other calls for investigations came from Senators Al Franken, a Democrat from Minnesota, and Robert Menendez, a Democrat from New Jersey.

Judges revisiting foreclosure cases may aid homeowners but clog market

2010-10-05T08:00:00.000-04:00

By Ariana Eunjung Cha and Brady Dennis Washington Post Staff Writers Monday, October 4, 2010; 10:59 PM

On Florida's west coast, where the housing bust has flooded courts with foreclosure filings, the chief judge of the 6th Judicial Circuit has little sympathy for lenders who have routinely submitted flawed and possibly fraudulent foreclosure cases.    J. Thomas McGrady, whose jurisdiction includes two hard-hit counties with more than 1 million people in the Tampa area, said Monday that foreclosures based on improper paperwork should be tossed out.     Judges "are going to have to vacate that judgment and start over again," he said.

Across the country, judges facing pressure from homeowners and their attorneys are beginning to reexamine old cases and dismiss pending ones. The trend could lead to overturned evictions, and it could stall foreclosure cases for years and scare away buyers of millions of seized properties clogging the real estate market.      "We've never been inundated to this extent with this number of cases alleging fraudulent paperwork," said Peter D. Blanc, chief judge of the 15th Judicial Circuit Court, in West Palm Beach. "We're in new territory, and we're struggling to determine what the proper solution is."

Judges nationwide have broad latitude in deciding whether to accept new paperwork and whether to charge the lenders with fraud for submitting problematic documents in the first place.    Even before three of the nation's largest lenders - Bank of America, J.P. Morgan Chase and Ally Financial - announced moratoriums on foreclosures in the 23 states that require a court order to evict a borrower from a home, some judges were beginning to push back against banks with sloppy or fraudulent filings.

The lenders have acknowledged that a handful of employees signing off on hundreds of thousands of files may not have read them, but they have insisted that the problem amounts to a technical issue that can be fixed easily by replacing old documents with new ones. They say that the facts proving that borrowers missed their payments are sound and that the procedural errors might delay foreclosures but won't change the outcome.         As the situation in Florida shows, it's unlikely to wind up so simple.

Armies of consumer attorneys and homeowners are seizing on the paperwork issues to try to protect individual homes from foreclosure and bring into question the legitimacy of the millions of foreclosures undertaken since the housing crisis began in 2007.    The recent moratoriums have made life easier for people such as Michael Gaier, a Philadelphia lawyer who has taken on 130 clients hoping to fight their foreclosures.    Before, he said, judges churning through foreclosure cases tended "to roll their eyes, because they've heard every story in the book," he said. But now, "I don't have to convince them on my own. I don't have to start from scratch," he said, because the moratoriums show that the banks "know that something is wrong."           Gaier and other lawyers say they have been flooded with calls from new clients who had lost hope of keeping their homes but now see an opportunity to stay. In addition, homeowners who had been complaining of flawed or forged paperwork for years feel they are finally getting traction.

Fund Alert: Attorney's title no longer writing policies for GMAC and Chase

2010-10-04T11:42:00.000-04:00

TO: ALL FLORIDA FUND MEMBERS
FROM: Underwriting Department

Re: Ally Mortgage/GMAC and JP Morgan/Chase Foreclosures

Recently, officials at GMAC Mortgage, a division of Ally Financial, Inc., JP Morgan/Chase, and most recently Bank of America announced that they are halting evictions of foreclosed borrowers and are halting REO sales in 23 states, including Florida. In fact, several agents have reported receiving written cancellation of pending transactions involving these lenders.

Accordingly, Old Republic policies may not be issued insuring REO sales after completion of foreclosure by these two lenders. There is no prohibition on writing title insurance on short sales or following a deed-in-lieu of foreclosure involving these lenders or any prohibition against insuring titles where a mortgage foreclosure by Ally Bank/GMAC, JP Morgan Chase or Bank of America appears in the back chain of title.

We are continuing to monitor this situation and expect to be able to resume insuring REO sales by these lenders as soon as the objectionable issues have been resolved. Please direct any questions you may have to The Fund's Underwriting Department at 800-432-9594..

Attorneys' Title Fund Services, LLC

Foreclosure Errors Cloud Homeownership With ‘Blighted Titles’

2010-10-03T16:53:00.000-04:00

October 01, 2010 By: Bloomberg News

U.S. courts are clogged with a record number of foreclosures. Next, they may be jammed with suits contesting property rights as procedural mistakes in those cases cloud titles establishing ownership. Defective documentation has created millions of blighted titles that will plague the nation for the next decade,” said Richard Kessler, an attorney in Sarasota, Florida, who conducted a study that found errors in about three-fourths of court filings related to home repossessions.

Attorneys general in at least six states are investigating borrowers’ claims that some of the nation’s largest home lenders and loan servicers are making misstatements in foreclosures. JPMorgan Chase & Co. is asking judges to postpone foreclosure rulings, while Ally Financial Inc. said Sept. 21 its GMAC Mortgage unit would halt evictions. The companies said employees may have completed affidavits without confirming their accuracy.

Such mistakes may allow former owners to challenge the repossession of homes long after the properties are resold, according to Kessler. Ownership questions may not arise until a home is under contract and the potential purchaser applies for title insurance or even decades later as one deed researcher catches errors overlooked by another. A so-called defective title means the person who paid for and moved into a house may not be the legal owner.

"It's a nightmare scenario,” said John Vogel, a professor at the Tuck School of Business at Dartmouth College in Hanover, New Hampshire. “There are lots of land mines related to title issues that may come to light long after we think we’ve solved the housing problem.”    Almost one-fourth of U.S. home sales in the second quarter involved properties in some stage of mortgage distress, RealtyTrac Inc. said yesterday. In August, lenders took possession of record 95,364 homes and issued foreclosure filings to 338,836 homeowners, or one out of every 381 U.S. households, according to the Irvine, California-based data seller.

The biggest deficiency in foreclosure suits is missing or improperly handled documents, Kessler found in his study of court filings in Florida’s Sarasota County. When home loans are granted, borrowers sign a promissory note outlining payment obligations and a separate mortgage that puts an encumbrance on the property in the lender’s name. If mortgages are resold, both documents must be properly conveyed to prevent competing claims.

Mortgage Bonds
Most of the document errors involved mortgages that had been bundled into securities sold to investors, Kessler said. At the end of the U.S. real estate boom in 2005 and 2006, about 70 percent of the $6.1 trillion in mortgage lending was packaged into bonds, according to the Securities Industry and Financial Markets Association in New York.   Typically, bundling a mortgage involved three transactions: originators sold loans to companies that packaged them, those firms sold the loans to interim trusts, and then they were put into bonds, Kessler said.    “A mortgage has to follow the proper trail every step of the way, or you have title problems,” he said.

In some cases, mortgages were conveyed using the Reston, Virginia-based Mortgage Electronic Registration System, or MERS, designed to cover transfers among system members. Promissory notes also often were endorsed as payable to the bearer to avoid the need for multiple transfers. Both practices have been challenged in court.

Issue With Copies
Copies of documents aren’t enough to establish rights, just as copies of dollar bills wouldn’t be honored by a bank, said Geoff Walsh, an attorney with the National Consumer Law Center in Boston. In cases of lost or mishandled paperwork, attorneys may file affidavits and other evidence to correct omissions and establish a claim, Walsh said.    Given the volume of mortgage securitization, it was easy for paperwork to get lost, said Kathleen Engel, a financial services law professor at Suffolk University in Boston.    “Wall Street was very good at packaging loans and making sure the money flowed to the right people, but not so good at keeping track of mortgage documents,” Engel said. As a result, “we have a growing number of toxic titles,” she said.

GMAC, based in Detroit, told brokers and agents in a Sept. 17 memo there might be issues with “judicially required forms” tied to home repossessions. An employee said in a December 2009 deposition that he signed thousands of documents without verifying their accuracy.

“If I were in the title industry, or a mortgage holder, or someone who bought a foreclosed property, this is something I would be very worried about,” said Michael Carliner, a Potomac, Maryland-based economic consultant specializing in housing.     Attorneys general in Florida, Texas, Iowa, Illinois, North Carolina and Connecticut have started their own investigations into GMAC. In addition, Florida investigators have issued subpoenas to three law firms after homeowners facing eviction said the firms pursued foreclosures without following proper procedure.

“This is the most important issue of the whole mortgage mess because families are being thrown out of their homes by people who may not have the right to do that,” said Glenn Russell, a Fall River, Massachusetts, real estate attorney who won a case last year that reversed a foreclosure because of faulty paperwork.   Mark and Tammy LaRace, his clients, were able to move back into their Cape Cod-style house in Springfield, Massachusetts, more than two years after they were evicted.

Attempts to Clear Title
In February, Judge Keith Long of the Massachusetts Land Court reaffirmed his 2009 decision to return the house to the LaRaces. San Francisco-based Wells Fargo & Co., which initiated the suit in an attempt to clear the property’s title after it foreclosed on it, has appealed the decision. The case now is under consideration by the state’s Supreme Judicial Court.

The costs for title insurers to defend customers and reimburse for lost properties rose 14 percent to $480.5 million in 2010’s first half from a year earlier, according to American Land Title Association, a Washington-based industry group.   Fidelity National Financial Inc. of Jacksonville, Florida, is the largest insurer, with 38 percent of the market in the second quarter, the association said. Santa Ana, California- based First American Title Insurance Co. is No. 2, with a 27 percent share.    Title insurers use their records and public documents to verify a seller is the home’s true owner and that the property is free from liens. They collect a one-time premium and pay costs that may arise if someone challenges a new owner’s right to the property. To obtain a mortgage, buyers are required to purchase a policy to protect the lender. Many people also get a so-called owners policy to protect themselves.   “Title is everything,” said Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School in Philadelphia. “There’s no collateral without possession, and that is title.”

'Robo-signing' scandal heats up, could derail recovery

2010-10-02T17:46:00.000-04:00

After some of the largest U.S. lenders admitted to signing off on tens of thousands of foreclosures a month, both state and national law enforcement are taking a closer look at how they do business.

As mortgage defaults skyrocketed the past few years, some of the biggest lenders appear to have cut corners in their haste to process thousands of foreclosure documents.

GMAC Mortgage Co., JPMorgan Chase and now Bank of America all have suspended foreclosures in 23 states while they review whether documents were processed correctly, after employees of all three admitted signing off on tens of thousands of foreclosures a month without actually reviewing the cases, also known as "robo-signing."

And although this gives the homeowners whose foreclosures are being halted a little more time in their homes, The New York Times says it's also likely to create "paralysis and confusion" in a housing market already in turmoil, as the millions of homeowners who have lost their homes to foreclosure wonder if they were evicted by a robo-signer.

While these three lenders have admitted questionable practices, the list of culprits could go on and on, according to an article in Bloomberg BusinessWeek:
"The suspicion is that there might have been shortcuts taken by every mortgage servicer who had extraordinary numbers of foreclosure documents to go through," says Rick Sharga, senior vice president at RealtyTrac, a housing data provider in Irvine, Calif.

JPMorgan Chase alone plans to review 56,000 foreclosure documents that it suspended, and although GMAC and Bank of America haven't revealed how many foreclosures they've halted, the number could easily reach six digits.

And potentially, every one of those reviews could end up in a courtroom, which might help some homeowners get their homes back. But in the process it also could make new victims out of homebuyers who have purchased foreclosed homes.     The Times says that if former homeowners can prove their foreclosure was incorrectly processed, the new buyers of their foreclosed properties could get stuck in the middle of a legal mess that we can't even fathom at this point. One thing's for sure: We're going to be seeing a lot fewer homebuyers willing to consider buying foreclosed homes.

Sharga also told The Wall Street Journal that putting all of these foreclosures on hold also will artificially quell the wave of foreclosures that has been threatening to flood the market since banks starting taking back record numbers of homes.     Now he thinks foreclosures will peak in 2011, and homeowners know what that means: Home prices will remain depressed for longer as lower-priced foreclosures force sellers to slash their prices.
Or it could have the opposite effect. From The Times:
"Maybe this is like shock therapy," said the economist Karl E. Case. "Maybe this will actually get the lenders to the table and encourage them to work out deals that are to the benefit of everybody."    It certainly is putting more of a spotlight on the way foreclosures are processed, which means that even companies that aren't accused of rubber-stamping foreclosure documents may be more likely to look for another solution beyond foreclosure.

At least a half-dozen state attorneys generals as well as the Treasury Department are investigating this new development, but this is likely just the beginning of a brand-new mortgage mess that will do little to help the record-low new home sales and barely-better existing home sales the real-estate market is now facing.

Bank of America freezes evictions in 23 states

2010-10-02T17:33:00.000-04:00

The bank cites concerns over whether its foreclosure paperwork was handled properly.

By E. Scott Reckard
Los Angeles Times Staff Writer

Citing concerns over whether its foreclosure paperwork was handled properly, Bank of America Corp. on Friday put evictions on hold in 23 states — joining two rivals that have taken similar steps.   The freeze is taking place in states where courts have jurisdiction over foreclosures, Bank of America said. It will not apply to California and 26 other states where foreclosures usually take place without a court order, but the action could put added pressure on banks to ease back on foreclosures more broadly amid high unemployment and continued turmoil in the housing market.

Detroit-based Ally Financial Inc. halted evictions in the 23 states last month after the head of Ally's document processing team acknowledged in a deposition that he signed thousands of affidavits certifying that foreclosure paperwork was correct even though he hadn't read the documents.      JPMorgan Chase & Co., the giant New York bank, suspended its evictions this week after problems surfaced with signatures on some of its affidavits.

Charlotte, N.C.-based Bank of America — which became the largest mortgage customer-service provider when it acquired Countrywide Financial Corp. in 2008 — followed suit Friday.    "To be certain affidavits have followed the correct procedures, Bank of America will delay the process in order to amend all affidavits in foreclosure cases that have not yet gone to judgment in the 23 states where courts have jurisdiction over foreclosures," the bank said in a statement.   The affidavits are required to be filed in court when banks make motions for summary judgment to obtain foreclosure orders from judges. The bank didn't disclose how many borrowers were affected by the eviction freeze.

The banks have said they believe the information in the affidavits — such as how much is owed and when the mortgages went into default — is accurate even if the affidavit signers didn't take the time to read them thoroughly because of the glut of foreclosures.    Ally, formerly known as GMAC, includes Ally Bank and Residential Capital. It is the fourth-largest originator of mortgages and the fifth-largest mortgage servicer. Chase is third in both categories.

Wells Fargo issued a statement saying it was satisfied that "the affidavits we sign are accurate," but it stopped short of certifying that they were all properly signed.    "We audit, monitor and review our affidavits under controlled standards on a daily basis. We will stand by our affidavits and, if we find an error, we will take the appropriate corrective action," Wells said.

JPMorgan Suspending Foreclosures

2010-09-29T23:24:00.001-04:00

September 29, 2010
The New York Times
DAVID STREITFELD

In a sign that the entire foreclosure process is coming under pressure, a second major mortgage lender said that it was suspending court cases against defaulting homeowners so it could review its legal procedures.

The lender, JPMorgan Chase, said on Wednesday that it was halting 56,000 foreclosures because some of its employees might have improperly prepared the necessary documents. All of the suspensions are in the 23 states where foreclosures must be approved by a court, including New York, New Jersey, Connecticut, Florida and Illinois.

The bank, which lends through its Chase Mortgage unit, has begun to “systematically re-examine” its filings to verify that they meet legal standards, a spokesman, Tom Kelly, said.

Last week, GMAC Mortgage said it was suspending an undisclosed number of foreclosures to give it time to take a closer look at its own procedures. GMAC simultaneously began withdrawing affidavits in pending court cases, throwing their future into doubt.

Chase and GMAC, in their zeal to process hundreds of thousands of foreclosures as quickly as possible and get those properties on the market, employed people who could sign documents so quickly they popularized a new term for them: “robo-signer.”      In depositions taken by lawyers for embattled homeowners, the robo-signers said they or their team had signed 10,000 or more foreclosure affidavits a month.

Now that haste has come back to haunt them. The affidavits in foreclosures attest that the preparer personally reviewed the files, which those workers acknowledge they had no time to do.   GMAC and Chase say that their lapses were technical and will soon be remedied with new filings. But defense lawyers are seizing on these revelations and say they will now work to have their cases thrown out.

Beyond the relative handful of foreclosure cases being contested are many more in which the homeowner did not have legal counsel. Potentially, hundreds of thousands of cases could be in doubt.    GMAC’s initial disclosures prompted challenges or investigations from attorneys general in Iowa, Illinois, Colorado, California and North Carolina. The Treasury Department, which became the majority owner of GMAC after providing $17 billion in bailout money, has directed the lender to correct its procedures.

The pressure on the lender, which began as the auto financing arm of General Motors, is continuing to increase. Senator Al Franken, Democrat of Minnesota, asked Wednesday for the Treasury, the Justice Department and other regulators to collaborate on “a thorough investigation into the alleged misconduct.”

Defense lawyers have consistently complained that the lenders’ law firms were sending through cases that were at best sloppy. The Florida attorney general’s office says it is investigating four so-called foreclosure mills.   “The GMAC announcement was the mushroom cloud,” said one Florida defense lawyer, Matthew Weidner. “The fallout will burn through the entire mortgage servicing industry.”

Judges who oversee a lot of foreclosure cases increasingly agree that there is a serious problem.   “I don’t want to say that every one of these cases is wrong and a fraud on the court, but it is a big concern for us,” J. Thomas McGrady, chief judge of the Sixth Judicial Circuit in Florida, said in an interview last week after GMAC’s announcement.   Judge McGrady predicted that the foreclosure process in Florida, which the Legislature has been trying to speed up, would have to slow down.   “Everyone is going to have to look at these cases more closely,” said Judge McGrady, whose circuit includes St. Petersburg.

The foreclosure process in many states is already torpid. This benefits delinquent homeowners, who can live in their properties free for years, as well as lenders who do not have to write down the value of the original loan. But it also threatens to prolong the housing crisis for many years.

Chase said that unlike GMAC, it had not withdrawn any affidavits in pending cases. It also said that if foreclosures were completed, it was allowing its agents to proceed with the sale of the properties. GMAC has stopped its sales.   Chase followed the lead of GMAC in playing down the impact of the situation. “Affidavits were prepared by appropriate personnel with knowledge of the relevant facts based on their review of the company’s books and records,” the spokesman, Mr. Kelly, said.

But many questions are unresolved. One is whether completed foreclosures will be vulnerable to what GMAC is calling “corrective action.” If those former homeowners press their claims, they could conceivably dislodge the new buyers.   Such cases are probably not imminent. The more immediate consequences for the lenders using robo-signers will be determined by the homeowners who are fighting their cases in court.

JPMorgan Suspending Foreclosures

2010-09-29T23:24:00.000-04:00

Amid mountain of paperwork, shortcuts and forgeries mar foreclosure process

2010-09-26T17:29:00.001-04:00

The nation's overburdened foreclosure system is riddled with faked documents, forged signatures and lenders who take shortcuts reviewing borrower's files, according to court documents and interviews with attorneys, housing advocates and company officials.

The problems, which are so widespread that some judges approving the foreclosures ignore them, are coming to light after Ally Financial, the country's fourth-biggest mortgage lender, halted home evictions in 23 states this week.

During the housing boom, millions of homeowners got easy access to mortgages while providing virtually no proof of their income or background. Now, as millions of Americans are being pushed out of the homes they can no longer afford, the foreclosure process is producing far more paperwork than anyone can read and making it vulnerable to fraud.

Read the entire story here

Amid mountain of paperwork, shortcuts and forgeries mar foreclosure process

2010-09-26T17:29:00.000-04:00

Ally Financial legal issue with foreclosures may affect other mortgage companies

2010-09-26T17:14:00.001-04:00

One guy may have screwed up the entire foreclosure process in this country opening up almost every banking entity to a lawsuit by foreclosed homeowners...amazing!

http://www.washingtonpost.com/wp-dyn/content/article/2010/09/21/AR2010092105872.html

Ally Financial legal issue with foreclosures may affect other mortgage companies

2010-09-26T17:14:00.000-04:00

Democratic Representatives Ask Treasury to Rethink Strategy on Pursuing Underwater Homeowners

2010-09-26T16:52:00.002-04:00

Apparently, Democratic representatives are worried about the GSE’s plans to pursue underwater homeowners who walk away from their homes.

Representative Conyers (D-Michigan) wrote the following letter to Tim Geithner and Edward Demarco asking them to exercise their authority as conservator and “suspend the implementation of this policy until Fannie, the Administration, and the Congress, seriously consider the many problems associated with this policy and determine whether it conflicts with the Administration’s efforts to help keep homeowners in their homes.”

Here’s the text of that letter:

Democratic Representatives Ask Treasury to Rethink Strategy on Pursuing Underwater Homeowners

2010-09-26T16:52:00.001-04:00

Lawmakers are starting to see the light

2010-09-25T18:21:00.002-04:00

In the wake of the foreclosure debacle at GMAC Mortgage LLC, Florida's top court is being asked to halt around 80 percent of all foreclosures in the state. The practices at three law firms are at issue. One foreclosure defense attorney estimates "thousands and "thousands" of final judgements could be reopened.

A Florida congressman has asked the state Supreme Court to stop all foreclosures being handled by three major law firms under investigation by the Florida Attorney General over questions about slipshod paperwork practices involving thousands of cases. U.S. Rep. Alan Grayson (D-Fla.) pressed the court to halt foreclosures being handled by the law offices of David J. Stern, Marshall C. Watson, and Shapiro & Fishman.

Lawmakers are starting to see the light

2010-09-25T18:21:00.001-04:00

Ally's GMAC Mortgage Halts Home Evictions in 23 States

2010-09-23T21:54:00.002-04:00

The tide is turning as the bank screw ups become overwhelming
Bloomberg News
By Denise Pellegrini - Sep 20, 2010

Ally Financial Inc.’s GMAC Mortgage unit told brokers and agents to halt foreclosures on homeowners in 23 states including Florida, Connecticut and New York.

GMAC Mortgage may “need to take corrective action in connection with some foreclosures” in the affected states, according to a two-page memo dated Sept. 17 and obtained by Bloomberg News. Ally Financial spokesman James Olecki confirmed the contents of the memo. Brokers were told to stop evictions, cash-for-key transactions and lockouts, regardless of occupant type, with immediate effect, according to the document, addressed to GMAC preferred agents.

The company will also suspend sales of properties on which it has already foreclosed. The letter tells brokers to notify buyers that the company will extend the closing date on all sales by 30 days. Buyers will be able to cancel their agreement to purchase and get their deposit back, according to the letter.

Here is the actual memo GMAC sent out to its brokers.

Ally's GMAC Mortgage Halts Home Evictions in 23 States

2010-09-23T21:54:00.001-04:00

The Tampa Tribune: Walking away from mortgage gets easier when neighbors do it

2010-09-21T08:01:00.002-04:00

By SHANNON BEHNKEN

Some of Tampa Bay's underwater homeowners may have to wait 15 years or longer to break even on a sale. Others simply won't wait that long. They're cutting their losses now, defaulting on purpose, even though they can afford to make their mortgage payments.

And as more fed-up homeowners walk away, it becomes more likely their neighbors will too, according to a new survey from Fannie Mae, one of the nation's largest providers of mortgages. The study suggests mortgage holders are more likely to consider defaulting if they know someone who has defaulted. Of those who are already delinquent and think defaulting on purpose is OK, 40 percent said they know someone who has done the same thing.

Contrast that with mortgage holders who are current on payments and disapprove of defaulting on purpose. Just 2 percent of those respondents said they knew someone who defaulted even though they could afford their mortgage.

Fannie Mae considers states like Florida, which has a rising foreclosure rate, to be at a higher risk for so-called strategic default. That's when consumers let homes fall into foreclosure even though they can afford to make mortgage payments.

Nearly 50 percent of Tampa Bay area homeowners with a mortgage owe more than their property is worth. The number of "strategic defaults" more than doubled, to 588,000, from 2007 to 2008, according to the group's study. In the second quarter of 2009, the group said such defaults accounted for 19 percent of all mortgage delinquencies.

A separate study by college professors at the Chicago's Booth School of Business and Northwestern University's School of Business estimated 36 percent of the nation's defaults were "strategic" in December. That was up from 25 percent in March 2009.

Before the housing bust, walking away from a mortgage you could afford was unthinkable for most. But as more people realize they are stuck in houses worth tens of thousands less than they borrowed, many consider defaulting as an option. Homeowner Jim Rojas said he's known several people who let their homes slip into foreclosure, even though they could make payments. They were underwater on their mortgages, and when banks wouldn't modify their loans, they walked away. Rojas said he ordinarily wouldn't think homeowners are right to do this, but his opinion changed when lenders received government bailouts. "I think if banks are allowed to walk away from their responsibility, then why can't we," said Rojas, who recently paid off his own mortgage. "You can't have it both ways. You have to understand where these people are coming from. Homes were made artificially high."

"People are using the excuse of "everybody's doing it" to justify walking away. They're banking on the fact that the government will lower standards of credit scores. So many people are defaulting, and a foreclosure doesn't have the same stigma it used to."

Homeowners face continuing price declines as thousands of foreclosed properties followed a real estate bubble that burst three years ago. The median sales price in Hillsborough County jumped from $140,000 in 2002 to $225,000 in 2007. The median so far this year is $155,000, about what it was in 2003, according to the county property appraiser. Moody's Economy.com predicts prices in the Tampa-St. Petersburg-Clearwater metro area will fall 9 percent more until the third quarter of 2011. Prices have already fallen 42 percent since they peaked in 2006.

Those who bought at the peak will have to wait until 2024 for prices to rebound, according to Moody's.

The Tampa Tribune: Walking away from mortgage gets easier when neighbors do it

2010-09-21T08:01:00.001-04:00

New York Times: Florida’s High-Speed Answer to a Foreclosure Mess

2010-09-06T12:13:00.002-04:00

Florida’s High-Speed Answer to a Foreclosure Mess
By GRETCHEN MORGENSON and GERALDINE FABRIKANT
TEN days from now, a four-bedroom house on a cul-de-sac in Middleburg, Fla., is scheduled to be auctioned off at the Clay County courthouse, 25 miles south of Jacksonville.

A judge who recently took over their foreclosure case has ordered Rodney Waters; his fiancée, Terri Reese; and their four children to leave the home they bought in 2006. Mr. Waters, a supervisor at a local packaging company and the family’s sole breadwinner, fell behind on his mortgage two years ago after his property taxes jumped unexpectedly. He now owes $264,000 on the house; a similar home down the street sold for $138,500 in February.

The predicament of the Waters-Reese family is common in Florida today. The state routinely sets new records for foreclosures — in the second quarter, 20.13 percent of its mortgages were delinquent or in foreclosure, a national high, according to the Mortgage Bankers Association. And with housing prices still in a free fall, almost half of all borrowers in Florida owe more on their mortgages than their properties are worth, says CoreLogic, a data firm.

While the Waters-Reese case may not be unusual in Florida, the coming auction of the home is still notable: it will be a result of the Florida Legislature’s new effort to cut the number of foreclosures inching their way through the state’s courts. Earlier this year, Florida earmarked $9.6 million to set up foreclosures-only courts across the state, staffed by retired judges. The goal of the program, which began in July, is to reduce the foreclosures backlog by 62 percent within a year.

No one disputes that foreclosures dominate Florida’s dockets and that something needs to be done to streamline a complex and emotionally wrenching process. But lawyers representing troubled borrowers contend that many of the retired judges called in from the sidelines to oversee these matters are so focused on cutting the caseload that they are unfairly favoring financial institutions at the expense of homeowners.

Lawyers say judges are simply ignoring problematic or contradictory evidence and awarding the right to foreclose to institutions that have yet to prove they own the properties in question.

“Now you show up and you get whatever judge is on the schedule and they have not looked at the file — they don’t even look at the motions,” says April Charney, a lawyer who represents imperiled borrowers at Jacksonville Area Legal Aid. “You get a five-minute hearing. It’s a factory.”

But Victor Tobin, chief judge in the 17th Judicial Circuit, which includes Broward County, defended the effort. “There are more assets devoted to those three foreclosure divisions in Broward than to any other division in the building in terms of case managers and that sort of thing to help the general public,” he said. “The people who come get fully, fully heard.”

In any event, huge numbers of cases are being handled. In an article last week in The Florida Bar News, Belvin Perry Jr., chief judge for the state’s Ninth Judicial Circuit, said that during July, 1,319 cases had been closed by three senior judges in the district’s two counties, Orange and Osceola.

Florida’s foreclosure mess is made murkier by what analysts and lawyers involved in the process say are questionable practices by some law firms that are representing banks. Such tactics, these people say, have drawn out the process significantly, making it extremely lucrative for the lawyers and more draining for troubled homeowners.

Doctored or dubious records presented in court as proof of a bank’s ownership have become such a problem that Bill McCollum, the Florida attorney general, announced last month that his office was investigating the state’s three largest foreclosure law firms representing lenders.

“Thousands of final judgments of foreclosure against Florida homeowners may have been the result of the allegedly improper actions of these law firms,” said Mr. McCollum in an interview. “We’ve had so many complaints that I am confident there is a great deal of fraud here.”

To be sure, adjudicating foreclosure cases is difficult, complicated by multiple transfers of mortgages and notes when a loan is sold, bewildering paperwork submitted by loan servicers and shoddy record-keeping by the many institutions that touched the mortgages during the byzantine securitization process that fueled the housing boom.

Nevertheless, Florida law requires that before a financial institution can foreclose on a borrower, it must prove to the court that it actually has the standing to do so. In other words, it has to show that it is truly the owner. And this is done by demonstrating ownership of the note underlying the mortgage.

The Waters case offers an example of how wrong things can go in complex foreclosure cases. While AmTrust, a failed Ohio bank that is now a division of New York Community Bank, said it owned the note and could foreclose, Mr. Waters’s lawyer produced documents showing that Fannie Mae, the taxpayer-owned mortgage finance giant, was really the owner.

In spite of the conflicting evidence, Aaron Bowden, the retired judge overseeing the case, made a summary judgment on Aug. 3, ruling that the property should go back to AmTrust. Mr. Bowden did not return phone calls seeking comment.

Chip Parker, managing partner at Parker & DuFresne in Jacksonville, which represents Mr. Waters, said: “The threshold issue in any foreclosure case is who has the right to foreclose. We presented evidence to the judge that Fannie Mae owns the note and mortgage, and yet the judge ignored this crucial evidence.”

Mr. Parker is concerned that some homeowners are victimized by the system. “What we are talking about is railroading homeowners through the rocket docket,” he added.

When contacted by a reporter on Thursday, a spokeswoman for Fannie Mae confirmed that it owned the note. David Tong, the lawyer representing AmTrust in the case, declined to comment on the matter. But on Friday, he did an about-face, filing papers with the court acknowledging that Fannie Mae owns the note.

Clearing the Backlog
Florida law requires that banks argue their cases before a judge if they want to recover property from borrowers in default, and 471,000 such cases were pending in Florida at the end of July, according to the Florida State Courts administration.

Setting up discrete foreclosure courts statewide was seen as a way to help deal with the issue; consumer law experts say they aren’t aware of any other state that has set up a temporary court to work down such a backlog.

But it is paradoxical, say lawyers representing homeowners in the cases, that Florida’s attorney general acknowledges problems in the cases while retired judges, intent on reducing caseloads, seem unconcerned about those same problems — like flaws in the banks’ documentation of ownership.

“The most shocking thing of all is the A.G.’s office understands the problem and yet the court system turns a blind eye to the fact that mortgage servicers are the problem,” says Margery Golant, a lawyer in South Florida and a former executive at Ocwen, a large mortgage servicing company. “In the meantime, neighborhoods are being destroyed, homeowners’ associations are being destroyed, and the tax base is being clobbered.”

Steven P. Combs, a lawyer at Combs, Greene, McLester, who formerly was general counsel to the Fourth Judicial Circuit as well as a family law magistrate, says the entire process may be unconstitutional. The Florida Supreme Court has consistently recognized the need to hire retired judges on a temporary basis, Mr. Combs said, and has ruled that such a “temporary” use is constitutional.

But because the retired judges are being given foreclosure assignments “repeatedly and consecutively” to the point of usurping the elected judges’ jurisdiction over all residential foreclosure cases, he said, their use may not qualify as temporary and could thus violate the Florida constitution.

The fact that these judges are being paid to reduce the court’s case load creates a perception among homeowners that the judges have a financial interest in dispensing cases prematurely, Mr. Combs said, creating a potential bias against borrowers and possibly violating their right to due process.

He pointed to a recent case in Broward County in which a retired judge refused to postpone a borrower’s foreclosure sale even though the bank had agreed to it. The judge stated that she was there to “dispose of cases.”

“If you are an individual whose house is being foreclosed and you hear these judges are being paid to clean out the backlog, under a realistic appraisal of human tendencies, do you think that the average judge would be biased in favor of prematurely terminating your case to clean out the backlog?” Mr. Combs asked.

J. Thomas McGrady, chief judge in the Sixth Judicial Circuit, said in a press release announcing the program: “We have to clear these cases because of the negative impact they are having on other civil litigation. The real estate crisis has placed a tremendous burden on our judges, and people with other types of pending litigation are also entitled to their day in court.”

Who Owns the Notes?
A foreclosure crisis that has forced millions of delinquent borrowers from their homes across Florida and elsewhere has also created enormous profits for the law firms and foreclosure servicers that represent banks and financial services in these actions.

Among the busiest of these firms are the three under investigation by Florida’s attorney general: the Law Offices of Marshall C. Watson; Shapiro & Fishman; and the Law Offices of David J. Stern.

“These law firms appear to be mills,” says Mr. McCollum. “They submit false documents, fabricate the documents, or the documents actually don’t exist. They wanted to speed the process up because the faster they get the foreclosures done the better.”

But Mr. Stern said: “I can’t speak for the other firms, but I can assure you there has not been submission of fraudulent documents. We feel a lot of it is politically motivated. We have done nothing wrong and are going to cooperate fully.”

Lawyers for the other two firms also disputed the attorney general’s contentions, maintaining that they work diligently on behalf of their clients. Borrowers’ lawyers say they confront dubious practices, often involving false documentation “proving” who owns the note on a given property.

Typically, they say, this involves questionable affidavits asserting ownership of a note because the actual document has been lost or cannot be produced. Because the affidavits are often signed by bank representatives who have a stake in the outcome, they should not be allowed as evidence, borrowers’ lawyers say. Yet they routinely are introduced as evidence; the Waters case involves such an affidavit signed by an AmTrust official.

The problem of who owns the note is a result of the process of bundling home loans into securities and selling them to investors — a common practice in the housing boom. This meant that notes documenting ownership on a property were repeatedly transferred, blurring the identity of exactly who controlled the note.

Documents showing that a note has been assigned to a foreclosing bank are often dated after a foreclosure, meaning that the bank bringing the case may not have the right to foreclose.

Other questions arise involving documents with improper notary stamps and wildly different signatures on legal papers supposedly prepared by the same person, borrowers’ lawyers say.

In a case in May 2009, Thomas E. Ice, a defense lawyer at Ice Legal in Royal Palm Beach, Fla., took the deposition of Cheryl Samons, an operations manager at the David J. Stern law firm. He asked her about instances at the firm of backdating the assignment of mortgages to allow foreclosures to go forward.

Mr. Ice and his wife, Ariane, who works with him, had found problems with notary stamps on mortgage assignments. “Many assignments of mortgages were signed and notarized with a stamp that had not been issued at the time of the signing, reflecting that the assignment was backdated,” Mr. Ice says.

In her court deposition with Mr. Ice, Ms. Samons testified that she was both an executive of the entity that handles the mortgage transfers and an officer at the Stern firm. Mr. Ice says that this creates a conflict of interest because clients of the Stern firm — most of the nation’s major banks — benefit from the transfer.

The law firm helps its own clients by “creating an illusion that the signing took place before and it did not,” says Mr. Ice. Mr. Stern attributed any backdating to sloppiness on the part of paralegals and said that it had since been corrected.

As for Ms. Samons’s dual roles at the mortgage transfer registry and the law firm, he responded that, “We believe it is a solid practice.” Ms. Samons did not return phone calls seeking comment.

Another popular practice that ties up courts’ calendars occurs after a foreclosure is granted and the property is scheduled to be returned to the bank. As ownership shifts from borrower to bank, so do all the obligations associated with it, like payment of homeowners’ association dues.

But few banks want to pay these bills, so firms representing them move to delay the final step in the process by canceling the sale of a foreclosed property at the last minute, court officials say. This does not require the banks to restart the foreclosure process, but it keeps the property in the hands of the borrower, who remains responsible for maintenance and association dues.

Earlier this year, Jennifer D. Bailey, administrative judge in Miami-Dade County, said such cancellations were occurring in 55 percent of cases in her district. In July, she instituted new rules to reduce last-minute cancellations, including a requirement that a judge hear the reason.

“There was huge volume to start with and then with this extra bogus stuff going on, the courts were cross-eyed from it,” says Ms. Golant. “There is a certain amount of truth to the gridlock, but the reason for the gridlock is the foreclosure firms are practically running the courtrooms.”

One Firm, Many Cases
The lawyer most closely identified with Florida’s foreclosure morass is David J. Stern. He is something of a mystery man within the foreclosure world; it is impossible to reach him by phone since his name is not in the firm’s voice-mail directory and, until recently, there were no publicly available photographs of him.

Several prominent borrowers’ lawyers who have litigated against his firm say they have never met him. Operating out of a gleaming eight-story office building in Plantation, Fla., Mr. Stern, 50, has come a long way from the South Texas College of Law, from which he graduated in 1986. He spent his early career as a quality-control lawyer for Gerald Shapiro, a lawyer who represented mortgage lenders. He opened his own firm in 1994; Fannie Mae voted him attorney of the year in 1998.

Mr. Stern’s company, which now includes a law firm and ancillary foreclosure support businesses, employs more than 900 people. The firm filed 70,382 foreclosure cases last year. Critics say the Stern firm has been able to handle this high volume because its lawyers frequently refuse to work with borrowers and are very aggressive about pushing cases through the courts even when there are questions about the documentation.

Mr. Stern sees it differently. “I refer to us as an efficient law firm with a specialization in mortgage lending,”’ he responded. “Should I feel ashamed that I have built a successful practice?” he asked. “No one references how committed I am, how I built my firm and how I work 20 hours a day.”

But some question the thoroughness of the firm’s work. Bill Warner, a private investigator in Sarasota, said the Stern firm filed a foreclosure suit against him on behalf of Deutsche Bank Financial Trust in January 2009. But the bank did not own the property and the suit erred by including in its claims a federal tax lien on another person with the same name but a different Social Security number, Mr. Warner said.

Mr. Warner’s mortgage was actually owned by Countrywide, which had sold it to Wells Fargo. “I fought them myself for a year and a half,” he recalls. “In the meantime, we did a loan modification with Wells Fargo but Mr. Stern’s firm pursued the foreclosure on the property anyway.”

Last May, Mr. Warner filed a motion to dismiss the case, alleging submission of a fraudulent document because Deutsche Bank was not owner of the note. He filed another motion questioning the credibility of the Stern firm and the lawyer on the case, he said. On June 14, Deutsche Bank withdrew the case.

Earlier this year Mr. Stern, who has profited handsomely from the foreclosure trade, sold the part of his operation that provides support services for his firm’s foreclosure work — DJS Processing — to a public company called the Chardan 2008 China Acquisition Corporation. The processing company and affiliates generated revenue of $260 million in 2009, financial filings show.

Brian Foley, a compensation consultant in White Plains, concluded that Mr. Stern made $17.8 million in 2008, including $12.64 million in compensation and nonrecurring benefits of $4.36 million. In the deal with Chardan, Mr. Stern and his affiliates were paid $93.5 million: $58.5 million in cash and $35 million after the transaction closed, according to government filings. In addition, Mr. Stern got a promissory note for $52.49 million to be paid out over the next couple of years.

In recent years, Mr. Stern and his wife, Jeanine, have bought nearly $60 million in real estate, mostly in Florida, property records show. Their Mediterranean-style home on Harborage Isle Drive, in a gated community in Fort Lauderdale, faces water on two sides and cost almost $14 million. Not far away, in Hillsboro Beach, the Sterns bought two waterfront properties for $17 million.

Mr. Stern also spent $6.8 million last year on a 9,273-square-foot apartment at the Castillo Grand Residences in Fort Lauderdale, part of a Ritz-Carlton complex. He and his wife own two homes in Beaver Creek, Colo.; one was purchased in 2001 for $4.975 million, and another bought in 2007 for $14.2 million. His automobile collection may be worth $3 million, auto experts said; it includes a 2008 Bugatti, multiple Ferraris, Porsches and Mercedes and a Cadillac.

This being Florida, Mr. Stern also collects boats. A 108-foot Mangusta yacht, Lady J, is for sale at $5.9 million, Web postings show. It was replaced by a 130-foot yacht that cost about $20 million, according to an acquaintance who requested anonymity over concerns about Mr. Stern’s influence in the community.

In a nod to his foreclosure work, according to the acquaintance, Mr. Stern mused about possibly naming the larger yacht Su Casa Es Mi Casa — “Your House Is My House.” But his wife and others cautioned against it, according to this acquaintance, and Mr. Stern named the boat “Misunderstood.” Mr. Stern denies that he considered the “Su Casa Es Mi Casa” name.

Resigned to Moving
While Rodney Waters and Terri Reese are resigned to leaving their home and moving their family into a rental, they still face another problem. Under Florida law, a lender may pursue Mr. Waters for the difference between what it says he owes on the house and what it will fetch in a sale. Thanks to foreclosure fees and other charges, he owes almost double the $138,500 received in February by the seller of a neighboring house.

Included in the amount that Mr. Waters owes is almost $10,000 in fees generated by AmTrust’s lawyers in the case. Mr. Bowden, the retired judge overseeing the case, ordered Mr. Waters to pay the fees. His lawyer, Mr. Parker, had hoped to persuade the owner of the note to offer a new loan to his client in a smaller amount to reflect the reduced value in the property. He argued that this would be a better outcome for the lender and the borrower, since a foreclosure usually ends up costing a lender far more than does a principal write-down that leaves the borrower in the home.

But with the judge ruling in favor of the lender, such a deal is unlikely. Mr. Parker filed an appeal late last week, but Mr. Waters may have to file for bankruptcy to stop the foreclosure sale.

New York Times: Florida’s High-Speed Answer to a Foreclosure Mess

2010-09-06T12:13:00.001-04:00

"Jingle Mail": Developers Are Giving Up On Properties

2010-08-25T17:24:00.002-04:00

By KRIS HUDSON And A.D. PRUITT

Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial-property owners are defaulting on debts and surrendering buildings worth less than their loans.

Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as “jingle mail.” These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense.

“We don’t do this lightly,” said Robert Taubman, chief executive of Taubman Centers Inc. The luxury-mall owner, with upscale properties such as the Beverly Center in Los Angeles, decided earlier this year to stop covering interest payments on its $135 million mortgage on the Pier Shops at Caesars in Atlantic City, N.J.

Taubman, which estimates the mall is now worth only $52 million, gave it back to its mortgage holder. “Where it’s fairly obvious that the gap is large, as it was with the Pier Shops, individual owners are making very tough decisions,” he said.

These pragmatic decisions by companies to walk away from commercial mortgages come as a debate rages in the residential-real-estate world about “strategic defaults,” when homeowners stop making loan payments even though they can afford them. Instead, they decide to default because the house is “underwater,” meaning its value has fallen to a level less than its debt.

Banking-industry officials and others have argued that homeowners have a moral obligation to pay their debts even when it seems to make good business sense to default. Individuals who walk away from their homes also face blemishes to their credit ratings and, in some states, creditors can sue them for the losses they suffer.

But in the business world, there is less of a stigma even though lenders, including individual investors, get stuck holding a depressed property in a down market. Indeed, investors are rewarding public companies for ditching profit-draining investments. Deutsche Bank AG’s RREEF, which manages $56 billion in real-estate investments, now favors companies that jettison cash-draining properties with nonrecourse debt, loans that don’t allow banks to hold landlords personally responsible if they default. The theory is that those companies fare better by diverting money to shareholders or more lucrative projects.

"Jingle Mail": Developers Are Giving Up On Properties

2010-08-25T17:24:00.001-04:00

Florida Attorney General Press Release: Florida Law Firms Subpoenaed Over Foreclosure Filing Practices

2010-08-10T13:40:00.002-04:00

TALLAHASSEE, FL – Attorney General Bill McCollum today announced his
office has launched three new investigations into allegations of unfair
and deceptive actions by Florida law firms handling foreclosure cases. The
Attorney General’s Economic Crimes Division is investigating whether
improper documentation may have been created and filed with Florida courts
to speed up foreclosure processes, potentially without the knowledge or
consent of the homeowners involved.

The new investigations name The Law Offices of Marshall C. Watson, P.A.;
Shapiro & Fishman, LLP; and the Law Offices of David J. Stern, P.A. The
law firms were hired by loan servicers to begin foreclosure proceedings
when consumers were in arrears on their mortgages.

Because many mortgages have been bought and sold by different institutions
multiple times, key paperwork involved in the process to obtain
foreclosure judgments is often missing. On numerous occasions, allegedly
fabricated documents have been presented to the courts in foreclosure
actions to obtain final judgments against homeowners. Thousands of final
judgments of foreclosure against Florida homeowners may have been the
result of the allegedly improper actions of the law firms under
investigation.

The Attorney General’s Office is also investigating whether the law firms
have created affiliated companies outside the United States where the
allegedly false documents are being prepared and then submitted to the law
firms for use.

Subpoenas have been served on each of the law firms listed above, and the
investigations are ongoing.

Florida Attorney General Press Release: Florida Law Firms Subpoenaed Over Foreclosure Filing Practices

2010-08-10T13:40:00.001-04:00

Some Lenders Are Deciding to Sue the Homeowner On The Note Instead of Foreclosing

2010-08-10T08:17:00.002-04:00

We are seeing some mortgage lenders bypassing foreclosure and suing borrowers directly for default on the underlying mortgage note. Given the low value of some of the mortgaged properties, it seemed all to apparent to me a couple of years ago that this was inevitable. The rules have changed, These lenders don't even want the property many of the times. So why bother with a foreclosure?

When you buy a house you sign a promissory note to evidence the obligation to repay the house loan. The mortgage is a security instrument that gives the lender an interest in the house which he can foreclose if you default. Your personal obligation to the lender is based on the underlying note. A lender has the option to sue you for repayment under the note without foreclosing the mortgage. If the lender sues on the note, you, the borrower, will have a personal judgment against you for your default under the note, and the lender still retains his mortgage security in most jurisdictions. So, why would a lender chose not to foreclose a mortgage on your home and sue you directly on the note?

There are some good reasons why mortgage lender should not foreclose a home loan. Frankly, I was always surprised they did not think of this sooner:

1. The government has given homeowners more rights under the government mortgage modification program (HAMP) which regulations make foreclosures slower and more expensive for banks.

2. Recently enacted Florida laws and local court rules require mediation proceedings in all foreclosure cases which further delays foreclosure proceedings.

3. Banks who take back properties on foreclosure have to deal with delinquent HOA bills, unpaid taxes, and house repairs.

4. House values are declining again. Banks recover less money than before on repossessed property, whereas costs of maintaining the properties is not going down.

5. Legally, its much easier for a bank to get a personal judgment against the borrower through a suit on the note than it is to get a personal judgment in a deficiency claim after foreclosure.

6. Many foreclosures involve ocean front condos and houses. The BP spill’s damage to the shoreline may result in environmental damage to ocean front property. Banks do not want to foreclose and take over ownership of potential environmental liabilities.

Could it be that government programs designed to protect homeowners from foreclosure by requiring mandatory mediation and loan modifications have in fact damaged homeowners by giving banks the incentive to sue for personal liability when they mostly have not to this point pursued large scale deficiency claims? It would not be the first time that government programs have had unintended consequences. In any event, if my mortgage defense colleague is correct subsequent mortgage defaults may have more serious consequences for homeowners.

Some Lenders Are Deciding to Sue the Homeowner On The Note Instead of Foreclosing

2010-08-10T08:17:00.001-04:00

Negative Home Equity Report

2010-08-01T11:54:00.002-04:00

Here is data from a recent congressional briefing by Mark Zandi, Chief Economist of Moody's Economy.com, and Yale Professor Robert Shiller:

As of Q1 2010:

• There is almost $2.4 trillion mortgage debt for homes in negative equity.
• The total negative equity is $771 billion.
• There are 4.1 million homeowners with more than 50% negative equity (they owe 50%+ more than their homes are worth).

As prices start to fall later this year, the number of homeowners with negative equity will increase.

There are 4.1 million homeowners with more than 50% negative equity, and another 5 million homeowners with 20% to 50% negative equity.

What exactly is the end game here? The bank's plan is obvious: continue to use scare tactics to get the borrower to continue paying as long as possible, for example, the threat of pursuing a deficiency judgment for the next twenty years, attaching the debtor's other assets, garnishing wages and destroying his credit. But when will our government realize that this is counterproductive? What is to be gained by forcing a large segment of our population into filing bankruptcy?

Negative Home Equity Report

2010-08-01T11:54:00.001-04:00

Fannie Mae To Pursue Deficiency Judgments

2010-07-13T19:04:00.002-04:00

As I predicted, deficiency judgments may become the next area of litigation for unwary distressed homeowners.

Lenders, with encouragement from Fannie Mae appear to be ready to pursue deficiency judgments. This will be a major change in policy for many Lenders who have, thus far, followed the unwritten rule of not going after personal judgments following a foreclosure. The rationale was always "You can't get blood from a stone," followed by "They have never done it in the past."

How many homeowners pursued short sales with their Lenders and failed to address this issue? How many have been given the advice "don't worry about it" when they noticed that they still had a potential personal liability following the short sale?

I wonder how many Realtors who jumped on the short sale bandwagon and began negotiating short sales will be sued by the homeowner when they get hit with a deficiency judgment. Will the unauthorized practice of law be one of the claims? Worse yet, what about the lawyers who negotiated short sales? They certainly knew better when they advised the homeowner to play craps and ignore the deficiency provision in the short sale agreement they advised their client to sign.

Fannie Mae To Pursue Deficiency Judgments

2010-07-13T19:03:00.000-04:00

Should Lenders Go After Borrowers Who ‘Walk Away’?

2010-07-01T11:43:00.001-04:00

By Nick Timiraos

Fannie Mae’s announcement last week that it would seek tougher penalties against borrowers who walk away from homes when they have the capacity to pay has sparked all types of outrage.

The company said it would step up efforts to pursue deficiency judgment—seeking to recoup the difference between the loan balance and the net proceeds of the foreclosure sale—against so-called “strategic” defaulters in states where such suits are allowed. Fannie also will lengthen to seven years, from five, the amount of time borrowers who go through a foreclosure must wait before getting a new loan.

Many are asking the same question: How will Fannie determine whether borrowers default when they have the capacity to pay?

The answer can be found in this lender bulletin Fannie issued last week. Any borrower who can’t demonstrate hardship, an effort to seek a workout with a lender, or other “extenuating circumstances” that prompted the foreclosure will be subject to the longer waiting period. Those who do supply such proof will see a waiting period of as little as three years.

Fannie says it’s making the change because it wants to encourage borrowers to seek help from their lenders before reverting to foreclosure.

But there’s another message here, notes financial publisher HSH.com: if foreclosure might be in your future, keep excellent notes of your efforts to seek a workout and of your financial situation if you want to get a loan in the next seven years.

So has Fannie made the right call?

“I say it’s about time,” says SmartMoney columnist James B. Stewart, who offered his two cents in Wednesday’s column:

These relatively affluent borrowers should pay a price—even if it is a modest one—for walking away from a contract. As it is, reports have been proliferating about homeowners who simply stop paying their mortgages, stay in their comfortable homes rent-free for the 18 months to two years or more it can take for the lender to foreclose, then get another government-backed loan and buy a new house. Who is to say they won’t do it all over again?…
So I was baffled by critics who equate this new policy to things like debtor’s prison. Asking people to pay their mortgages when they can afford to is hardly locking people in a prison for the rest of their lives.
These owners chose their homes and presumably liked them. They had no guarantee that housing prices would appreciate indefinitely and never decline.

At the end of the other spectrum is Brent White, the University of Arizona law professor who says borrowers should not feel bad about walking away from underwater loans:

Fannie Mae’s plan … will, in effect, lock borrowers into a Catch-22 where they are fearful for their financial future if they default and fearful if they do not. The success of Fannie’s approach will depend on making borrowers more afraid for their financial future if they defaulted than if they stay in their deeply underwater homes….
Fannie’s new approach will just make things worse for underwater homeowners—in effect punishing the victims of the housing crisis that Fannie Mae played a large part in creating. But rather than take its lumps, Fannie seems intent on keeping as much of the burden of the housing collapse as possible on the backs of suffering homeowners.
Fannie Mae should be ashamed for punishing rather than assisting the millions of underwater homeowners who did nothing wrong but buy a house at the wrong time—and are now facing financial ruin as a result. For these homeowners, strategic default is the best bad choice to save their financial future.

Such criticism is largely not warranted, says Thomas Lawler, a former Fannie Mae economist, because the company, together with the Obama administration, has demonstrated that it will “bend over backwards to develop programs to help struggling borrowers”:

Fannie is targeting borrowers who just ain’t paying nuffin’, ain’t talking with their servicer, ain’t taking advantage of the myriad of options offered by Fannie (including not just mods but short sales, [deeds-in-lieu of foreclosure], etc), and yet have the ‘capacity’ to pay their mortgage, or at least pay sumpin’!

Readers, what do you think of Fannie’s get-tough stance towards potential walkaways?

Follow on Twitter for more housing and mortgages news: @NickTimiraos

Should Lenders Go After Borrowers Who ‘Walk Away’?

2010-07-01T11:39:00.000-04:00

By Nick Timiraos

Fannie Mae’s announcement last week that it would seek tougher penalties against borrowers who walk away from homes when they have the capacity to pay has sparked all types of outrage.

The company said it would step up efforts to pursue deficiency judgment—seeking to recoup the difference between the loan balance and the net proceeds of the foreclosure sale—against so-called “strategic” defaulters in states where such suits are allowed. Fannie also will lengthen to seven years, from five, the amount of time borrowers who go through a foreclosure must wait before getting a new loan.

Many are asking the same question: How will Fannie determine whether borrowers default when they have the capacity to pay?

The answer can be found in this lender bulletin Fannie issued last week. Any borrower who can’t demonstrate hardship, an effort to seek a workout with a lender, or other “extenuating circumstances” that prompted the foreclosure will be subject to the longer waiting period. Those who do supply such proof will see a waiting period of as little as three years.

Fannie says it’s making the change because it wants to encourage borrowers to seek help from their lenders before reverting to foreclosure.

But there’s another message here, notes financial publisher HSH.com: if foreclosure might be in your future, keep excellent notes of your efforts to seek a workout and of your financial situation if you want to get a loan in the next seven years.

So has Fannie made the right call?

“I say it’s about time,” says SmartMoney columnist James B. Stewart, who offered his two cents in Wednesday’s column:

These relatively affluent borrowers should pay a price—even if it is a modest one—for walking away from a contract. As it is, reports have been proliferating about homeowners who simply stop paying their mortgages, stay in their comfortable homes rent-free for the 18 months to two years or more it can take for the lender to foreclose, then get another government-backed loan and buy a new house. Who is to say they won’t do it all over again?…

So I was baffled by critics who equate this new policy to things like debtor’s prison. Asking people to pay their mortgages when they can afford to is hardly locking people in a prison for the rest of their lives.

These owners chose their homes and presumably liked them. They had no guarantee that housing prices would appreciate indefinitely and never decline.

At the end of the other spectrum is Brent White, the University of Arizona law professor who says borrowers should not feel bad about walking away from underwater loans:

Fannie Mae’s plan … will, in effect, lock borrowers into a Catch-22 where they are fearful for their financial future if they default and fearful if they do not. The success of Fannie’s approach will depend on making borrowers more afraid for their financial future if they defaulted than if they stay in their deeply underwater homes….

Fannie’s new approach will just make things worse for underwater homeowners—in effect punishing the victims of the housing crisis that Fannie Mae played a large part in creating. But rather than take its lumps, Fannie seems intent on keeping as much of the burden of the housing collapse as possible on the backs of suffering homeowners.

Fannie Mae should be ashamed for punishing rather than assisting the millions of underwater homeowners who did nothing wrong but buy a house at the wrong time—and are now facing financial ruin as a result. For these homeowners, strategic default is the best bad choice to save their financial future.

Such criticism is largely not warranted, says Thomas Lawler, a former Fannie Mae economist, because the company, together with the Obama administration, has demonstrated that it will “bend over backwards to develop programs to help struggling borrowers”:

Fannie is targeting borrowers who just ain’t paying nuffin’, ain’t talking with their servicer, ain’t taking advantage of the myriad of options offered by Fannie (including not just mods but short sales, [deeds-in-lieu of foreclosure], etc), and yet have the ‘capacity’ to pay their mortgage, or at least pay sumpin’!

Readers, what do you think of Fannie’s get-tough stance towards potential walkaways?

Follow on Twitter for more housing and mortgages news: @NickTimiraos

Chinese drywall problems forcing some into foreclosure

2010-06-29T15:31:00.003-04:00

For Brad and Alyse Simons of Vero Beach, the past two years have been a rough
introduction to homeownership.

Brad, 27, and Alyse, 24, moved into a new home in Vero Beach Estates. Within a year,
the air conditioning unit went out. No one could seem to fix it and the young couple ended up going without AC for between six and eight months.

After they started suffering nosebleeds and coughing up blood, they found the house
contains Chinese drywall. The wallboard is suspected of off-gassing sulfur compounds that corrode metallic
objects (like AC units) and may cause chronic health problems. One week after receiving the diagnosis on the house, Alyse learned she was pregnant. They realized they’d have to move out, however much damage that might do to their credit.

Their mortgage holder, U.S. Bank, wasn’t very sympathetic, Brad said. The bank refused to “abate” the couple’s $1,300-a-month mortgage payments, even though Brad and Alyse felt the house was hazardous to their health. The bank did offer some help in letting the couple catch up on their payments, but
refused to let them hold off on payments until the place could be remediated. If Brad
and Alyse vacated the home, they were told, the bank could do nothing for them.
Brad and Alyse did move out and, through friends, were lucky enough to find a rent-free
house.

Others aren’t so fortunate. They must try to pay both rent and the original mortgage
payments if they want to avoid foreclosure. Brad and Alyse have decided to walk away from their first home; they simply can’t afford to do anything else.

Their story is sadly familiar to Travis Walker, an attorney with the law firm of Weiss,
Handler, Angelos & Cornwell in Port St. Lucie. Walker speaks regularly on the Chinese drywall issue and is working with several dozen clients to avoid bank foreclosures on tainted homes.
Walker empathizes with Brad and Alyse. He has a 6-month-old child himself and says
he’d rather live in his car than stay in a home with Chinese drywall.

Some banks are beginning to be more sympathetic to mortgage holders with drywall
issues, Walker said. Bank of America, Chase, SunTrust, Countryside, HSBC and Wells Fargo (and soon
GMAC) all are offering to “stay” or “abate” payments for at least three months while homeowners work out what to do with their homes. Walker is aware that 90 days isn’t long enough to do more than the basics: photograph and document the visible damage, file a homeowners insurance claim, and assemble
any medical records of conditions caused by exposure to the drywall.

But at least, it’s a start he says. Lenders, homeowners and contractors all await some form of government protocol to counteract the ill effects of Chinese drywall, which is probably at least six months away, Walker said. In the meantime, he’s hoping the “more enlightened” banks will extend their grace
period for an additional 90 days. The acid test will come in August, he says, when the
first agreements expire.

Walker’s firm is also applying political pressure on state and federal legislators to get
the ball rolling. Only then can effective remediation begin.
The property damage alone caused by Chinese drywall will prove outrageously
expensive, Walker fears. Yet it’s the human costs that worry him a lot more.

Chinese drywall problems forcing some into foreclosure

2010-06-29T15:31:00.002-04:00

CHINESE DRYWALL ADDING TO BANKS’ FORECLOSURE HEADACHES

2010-06-29T15:29:00.003-04:00

The Chinese drywall crisis is looming as a potential new problem for banks and other lenders that are
already dealing with large numbers of foreclosures.

Hugh Turner, a partner in the Fort Lauderdale office of law firm Akerman Senterfitt , said that this
summer “a fair number of banks have contacted us” after finding defective drywall in homes on which
they have foreclosed.

Turner would not identify any banks, but said some have found contaminated drywall in homes they
have foreclosed on in Florida.

Turner said some banks could be among plaintiffs in lawsuits against manufacturers and suppliers of
defective drywall, and in some cases sub-contractors who worked on homes.
Homebuilders and developers likely would be lead plaintiffs in suits seeking to recover drywall-related
financial damages, he said.

Condo Vultures® research indicates that a bank that is forced to replace contaminated drywall in
a house or condominium unit could in some cases add several scores of thousands of dollars to
its foreclosure bill. That would be in addition to property taxes, homeowners association fees and
maintenance costs as it attempts to sell a foreclosure.

Akerman Senterfitt, which has offices in seven Florida cities, has a team of attorneys that is working
on drywall cases.

“I cannot comment on whether we have filed any suits yet,” Turner said.
Turner and a South Florida banker, who asked not to be identified, said they also expect that banks
might be named as defendants in some suits by homeowners whose properties are experiencing metal
corrosion, electrical mishaps and other problems due to defective drywall.

“I anticipate we will see banks more on the plaintiffs’ side,” Turner said.

The banker noted that contracts for house and condominium units usually have clauses that exempt
lenders from liability from construction problems.

But that is not preventing a growing but undetermined number of homeowners from stopping
their mortgage payments, even though they can afford to pay, when they are experiencing drywall
problems.

“We are seeing some of this,” Turner said. “We expect that banks will seek some sort of mediation
with the borrower to avoid foreclosure.”

A spokeswoman for JP Morgan Chase would not comment on whether it is seeing a large number of
homeowners not paying mortgages because of drywall issues.
“We do not track reasons why customers ask for modifications in their mortgages,” said Nancy Norris,
the spokeswoman.

If a borrower cites drywall as a problem, it is among issues where she said JP Morgan Chase
subsidiaries are always willing to “take into account the individual circumstances” when a mortgage
holder is not making payments.

In April, Norris told CondoVultures.com that Chase has expanded its programs for “getting loans cured
to avoid foreclosure.” That includes reducing interest rates and stretching the duration of some loans.
If the number of foreclosed homes with drywall starts growing rapidly, Chase Bank and affiliates likely
would be among lenders facing that problem in South Florida.

In addition to Chase Bank, JP Morgan Chase is the parent of Washington Mutual.
During the first six months of this year, JP Morgan Chase companies filed 5,967 foreclosure notices
in South Florida. That was the most for any lender/loan servicer, according to Condo Vultures®
Foreclosure Database™ .

On July 10, Miami-based homebuilder Lennar Corp. provided an indication of the potential costs of
drywall clean-up. In a filing with the Securities and Exchange Commission, Lennar said that as of May 31 it had accrued $39.8 million in warranty reserves related to what it termed “homes identified as having defective
Chinese drywall.”

Lennar said it had identified 400 homes delivered in Florida, mostly in 2006 and 2007, that it
confirmed as having defective Chinese drywall and related damages. That represented about two
percent of homes it delivered in Florida during the period.

Lennar’s reserve per home is a staggering $99,500. The company said it is “seeking reimbursement
from its subcontractors, insurers and others” for costs of investigating and repairing drywall.
Any reimbursements would reduce the costs for Lennar, and other builders in similar situations.
Banks’ drywall clean-ups likely would have fewer legal expenses than builders and would not have the
side issues with other companies.

Thus, banks’ clean-up for home should be less than Lennar’s big set-aside.
But the time and costs of even a $20,000 clean-up on a home would add to South Florida’s large and
growing problems of bank-owned foreclosures.

Basically, it would increase the number of foreclosures that are on the market for extended periods.
Turner said developers, banks and other companies that have contacted Akerman Senterfitt are
finding drywall problems primarily in homes in South Florida and on the state’s southern Gulf Coast.
He expects that banks will soon start finding more drywall-contaminated foreclosures in California and
Louisiana. Those states, like Florida, had large numbers of builders that imported Chinese drywall in
2006 and later years.

CHINESE DRYWALL ADDING TO BANKS’ FORECLOSURE HEADACHES

2010-06-29T15:29:00.002-04:00

Fannie Mae seeks to punish 'walk-away' homeowners

2010-06-25T15:20:00.003-04:00

June 23, 2010 | 11:57 am
By Tom Petruno
http://latimesblogs.latimes.com/money_co/2010/06/fannie-mae-mortgage-walkaway-strategic-default-penalty.html?source=patrick.net

"Mortgage-finance giant Fannie Mae on Wednesday took aim at homeowners who are walking away from loans they’re capable of paying.

The company, which has been under government control since September 2008, said it would refuse to back new loans for such walk-away borrowers for seven years after they abandon their homes, and would seek to go after those borrowers in court in states where laws allow such pursuit.

From the news release:

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. Borrowers who have extenuating circumstances may be eligible for a new loan in a shorter time frame.

“We're taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, executive vice president for credit portfolio management. “Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.”

Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.

Fannie and its sister company, Freddie Mac, are the main sources of U.S. mortgage financing. They buy loans from lenders, guarantee them and resell them to investors via mortgage-backed securities.

One key issue, of course, will be how Fannie and its loan servicers decide whether someone had the ability to pay their loan but decided not to.

Freddie Mac hasn’t announced a similar program targeting walk-aways, but given that both companies are under government control, it would seem odd if Freddie didn’t follow suit.
A Freddie Mac spokesman had no immediate comment.

[Updated at 4:30 p.m.: A Freddie Mac spokesman said the company currently bans walk-aways from getting new Freddie Mac-backed loans for five years. He said the company was "studying the latest change from Fannie and will consider additional changes to our policies as needed to responsibly manage risk in the current market."]"

Fannie Mae seeks to punish 'walk-away' homeowners

2010-06-25T15:20:00.002-04:00

Lenders go after money lost in foreclosures

2010-06-24T23:56:00.003-04:00

By Dina ElBoghdady
Washington Post Staff Writer
Wednesday, June 16, 2010
http://www.washingtonpost.com/wp-dyn/content/article/2010/06/15/AR2010061505428.html

"After the bank foreclosed on Fernando Palacios's Gainesville home in March, he thought he was done with what he described as the most stressful financial situation of his life.

The bank sold the home for far less than Palacios owed on it, as often happens with foreclosures. What Palacios did not see coming was the letter from his lender demanding that he pay the shortfall: $148,064.02. "I really thought I was through with this house," said Palacios, who fell behind on payments when the economy soured and his cleaning business stumbled.

Over the past year, lenders have become much more aggressive in trying to recoup money lost in foreclosures and other distressed sales, creating more grief for people who thought their real estate headaches were far behind.

In many localities -- including Virginia, Maryland and the District -- lenders have the right to pursue borrowers whose homes have sold at a loss to collect the difference between what the property sold for and what the borrower owed on it, also called a deficiency.

Before the housing bust, when the volume of foreclosures was relatively low, lenders seldom bothered to chase after deficiencies because borrowers had few remaining assets to claim and doing so involved hassles and costs. But with foreclosures soaring, lenders are more determined to get their money back, especially if they suspect borrowers are skipping out on loan they could afford, an increasingly common practice in areas where home values have tanked.

Palacios said he was committed to staying in his house, which he bought in 2005. He sunk $20,000 into improving it and hoped to raise his children there. But his lender refused to modify his loan, he said. To avoid personal liability for the deficiency, Palacios is filing for bankruptcy protection, as many people do who are in similar situations, said Nancy Ryan, his bankruptcy attorney.

"I am definitely seeing more people come through my door who walked away from houses a year or two ago and thought they were as free as the dead," Ryan said. "They're stunned when they realize they're not."

Several lenders contacted for this story declined to say how often they pursue deficiencies. But many said they try to collect the debt if they conclude the borrower can repay all or part of it.

"Lenders are not going after people who face a hardship," said John Mechem, a spokesman for the Mortgage Bankers Association. "If they can't pay their mortgage because they have a loss of income, there is no point in going after them."

Those who had a second mortgage, such as a home-equity line of credit, in addition to their primary mortgage may find themselves particularly vulnerable, especially if they tapped into the equity line for cash.

Second lenders are last in line to get paid when a distressed property is sold. There's usually little or no money left over for them, making it more likely that they will pursue large deficiencies, several attorneys said.

Gretchen Somers said she and her husband understood the risks last year when they completed a "short sale," a transaction that allowed them to sell their Manassas home for about $150,000 less than they owed on it. But they felt they had no other options.

Somers said her family hung onto the house as long as possible. They tried but failed to sell it when her husband was transferred to Arizona for his job in early 2006, just as home prices were softening. They moved back into the house then tried to sell it again in 2008, after their adjustable-rate mortgage reset and their monthly mortgage payment nearly doubled. But home prices had plunged further by then, making it even tougher to sell.

Last year, their first lender and their home-equity line lender granted permission for the short sale. But the second lender reserved the right to come after the couple. Six months later, a collection agency called demanding $85,000 for related losses.

In hindsight, Somers said she and her husband should have just walked away from the house. "We took care of the house because we wanted it to sell," Somers said. "If they were going to come after us anyway, we shouldn't have done them the favor of making sure it looked good and cutting the grass even after we moved out, We should have mailed them the key and said: 'Here you go.' "

Carlos Cortez and his wife managed to escape that fate after their second lender came after them for $70,000 when their short sale was completed on his Manassas Park townhouse in 2008.

Cortez knew that was a possibility, but he went through with the sale because his real estate agent said the lender was engaging in scare tactics.

James Scruggs, an attorney at Legal Services of Northern Virginia, said the lender appears to have backed off after Cortez argued that that the loan officer falsely qualified him and his wife for a home-equity line by fabricating key details about their finances.

A handful of states do not allow lenders to pursue deficiencies, nor does a federal program that took effect April 10. Lenders participating in that initiative are paid for approving short sales and as a condition, they cannot go after outstanding debt.

In many states, lenders can go after deficiencies, though laws vary widely, said John Rao, an attorney at the National Consumer Law Center. Some states limit how long the banks have to file a claim or collect the debt. Others may calculate deficiencies based on the fair-market value of the house, Rao said. For instance, if a home sells for $200,000 yet its fair market value is $250,000, "the borrower who owes $240,000 on the mortgage would not have a deficiency," he said.

Borrowers should get a waiver in writing from their lenders to protect themselves, said Diane Cipollone, an attorney at the nonprofit Civil Justice. "Nobody should assume the deficiency is forgiven," she said."

Lenders go after money lost in foreclosures

2010-06-24T23:56:00.002-04:00

"Exactly Why Am I Bothering With This Short Sale?"

2010-06-14T17:36:00.003-04:00

I am constantly reading articles about the merits of short sales over foreclosures.   The short sale myth is usually perpetrated by realtors and it usually involves some speculation about a credit score advantage which no one seems to really know is true or not.   I recently read a new spin. The author stated that while the housing crisis affects most of Florida, the wealthier neighborhoods fare better because the homeowners have money to maintain payments while negotiating short sales with the lenders, whereas in less affluent neighborhoods the homeowners are forced to abandon properties and suffer foreclosure. Naturally, the author went on to state that a foreclosure is worse than a short sale for the homeowner because a foreclosure has a more damaging and longer lasting effect on the homeowner’s credit rating.

Two problems:   First, how frequently do owners negotiate short sales while keeping their payments current?   Based upon what I have seen, the lender almost always refuses to negotiate with an owner who is current. Second, exactly what is to be gained by pursuing a short sale (unless your goal is to be aggravated by bank clerks and make money for your realtor)?

I have never spoken to an attorney who recommended that their clients pursue short sales. Not one. Excuse me, there is one exception: an attorney who does short sales for a living.   I rarely see an advantage to a short sale when it comes to credit rating. Most owners are of the belief that a short sale arrangement includes a release of liability; the lender accepts less than the full mortgage balance and releases the mortgage and the underlying promissory note. Not true.  A homeowner is in for a rude awakening when he ultimately finds out that he is still liable for the balance of the promissory note after months of negotiating a short sale and endlessly furnishing financial information to the lender (It's usually lost at least a couple of times by the bank). This almost invariably leads to the same result:   a fight breaks out between the realtor and his client.

Alternatively, if a homeowner refuses a short sale and subjects his home to a foreclosure suit the homeowner can, by defending the foreclosure suit, position himself to negotiate with the lender. Defending a foreclosure suit deprives the mortgage lender of what it wants most of all- possession and control of the property. Attorneys are usually able, at some point during the foreclosure defense, to negotiate a release of liability in exchange for the homeowner dropping the foreclosure defense.

Although lenders and real estate salespeople have a different opinion, I cannot help but think that the only people who benefit from short sales without a full release are the lenders who liquidate the property, the sales agent who makes a commission, and the buyer who gets a good deal on a home. The seller goes through lots of work to negotiate with the buyer and lender and in the end he may still be liable for the full mortgage amount.

Its nice to have that 800 credit score, but that won't put your kids through college or fund your retirement. Unless a lender will release you from liability in a short sale, I think most often the homeowner can negotiate a better deal in the foreclosure process.

"Exactly Why Am I Bothering With This Short Sale?"

2010-06-14T17:36:00.002-04:00

Strategic Default: Now Everyone Has An Opinion

2010-06-10T10:21:00.003-04:00

There is finally a heated debate in local and national media about strategic mortgage defaults. The definition of a strategic default is essentially where a homeowner decides to walk away from an upside down mortgage although he has the income or ability to pay the mortgage payments. The homeowner makes a decision that it is not in his best financial interest to continue to pay a mortgage on a home with no equity (in most cases, substantial negative equity).

Many pundits, including attorneys, have pointed out that to date most banks have not pursued personal deficiency liability on first mortgage foreclosures.  Some claim that lenders will increasingly pursue or assign deficiency claims in the future. I have heard some attorneys and other so-called experts forecast that deficiency actions will become the norm in future years as either banks have more time as foreclosures decrease or as borrowers recover financially as the economy improves.

Let's add some reality to the theory.

First, we all agree that some lenders are pursuing deficiencies and some are not. So what?   Are you really going to suggest to a client with assets that he play Russian roulette with his life savings? Obviously any rersponsible advisor must deal with and plan for the possibility of a lender pursuing the deficiency which, as we all know by now, is a judgment good for as much as twenty years.

Second, I personally know someone in the business that buys deficiencies (along with other bad debt) from banks at pennies on the dollar. He collects what he can. I can go into detail of exactly how this is done and which law firm and collection agency he chooses to get which, etc., etc. The important thing is that the risk cannot be minimized.

The national media has recently run segments on strategic defaults, such as the piece in 60 Minutes. Most of these reports emphasize the risk of rich people walking away from mortgages they can easily afford.   This makes for good news copy but in the real world there is a great deal of middle ground between the homeowner who is stuggling, or perhaps just lost his job, and the wealthy investor who is thumbing his nose at the bank while driving around in his Ferrarri. Most folks are in between. Maybe they are investors. So? It's time to stop treating investors and second home owners like they are some sort of criminals, maintaining that we should only have empathy for the struggling primary homeowner.

The examples are endless. I know of two doctors, husband and wife, that purchased several investment properties (no need to be ashamed - investing is not against the law last time I looked), all of which were substantially underwater. When I say "substantially" I mean that the value has decreased by some 80 to 90%.   Now, this is obviously not the norm.   These properties were in several of the now infamous Ginn golf resort developments (which, unfortunately, I personally know only too well). This crash in value is only partly attributable to the overheated Florida real estate market. There is substantial evidence of appraisal fraud and all sorts of hanky-panky which are now the subject of several class action law suits and a criminal investigation.

We know the banking apologists will say they feel no sorrow for this Trump wannabe investor who should have known better, yadda, yadda. But that misses the point. These people have depleted their savings trying to pay the monthly bills and they are both working 16 hour days. The banks still refuse to make a deal. We have outlawed debtors prisons, last I checked. You may not feel sorrow for this couple, but the simple fact is that the banks have left them no alternative but to strategically default and stop the bleeding (no pun intended for the doctors). Should they deal with the possibility of a deficiency judgment? Of course they should. This is where a good foreclosure defense lawyer and asset protection attorney comes in.

I believe a strategic default is better than spending your retirement savings on a hopelessly upside down house. If you deplete your retirement money and savings funding a seriously upside down mortgage you will find yourself with no house and no retirement savings. After all your money is gone, and you need money to retire or for a financial emergency, I guarantee your mortgage lender will not be there to help you. Homeowners need to protect themselves first. We can leave it up to our government to protect their mortgage lender.

Strategic Default: Now Everyone Has An Opinion

2010-06-10T10:21:00.002-04:00

The New York Times: Owners Stop Paying Mortgages, And Stop Fretting

2010-06-03T16:30:00.004-04:00

The New York Times
Tuesday, 1 Jun 2010
By: David Streitfeld

For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of.   Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.   “Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”

A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.

This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.

“I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”

Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.   While there are no firm figures on how many households are following the Pemberton-Reboyras path of passive resistance, real estate agents and other experts say the number of overextended borrowers taking the “free rent” approach is on the rise.

There is no question, though, that for some borrowers in default, foreclosure is only a theoretical threat for a long time.   More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier.

In some states, including California and Texas, lenders can pursue foreclosures outside of the courts. With the lender in control, the pace can be brisk. But in Florida, New York and 19 other states, judicial foreclosure is the rule, which slows the process substantially.

Mr. Pemberton and Ms. Reboyras decided to stop paying because their business, which restores attics that have been invaded by pests, was on the verge of failing. Scrambling to get by, their credit already shot, they had little to lose.      “We could pay the mortgage company way more than the house is worth and starve to death,” said Mr. Pemberton, 43. “Or we could pay ourselves so our business could sustain us and people who work for us over a long period of time. It may sound very horrible, but it comes down to a self-preservation thing.”    They used the $1,837 a month that they were not paying their lender to publicize A Plus Restorations, first with print ads, then local television. Word apparently got around, because the business is recovering.

The couple owe $280,000 on the house, where they live with Ms. Reboyras’s two daughters, their two dogs and a very round pet raccoon named Roxanne. The house is worth less than half that amount — which they say would be their starting point in future negotiations with their lender.   “If they took the house from us, that’s all they would end up getting for it anyway,” said Ms. Reboyras, 46.

It was a stupid move by their lender, according to Mr. Pemberton. “They went outside their own guidelines on debt to income,” he said. “And when they did, they put themselves in jeopardy.”   His mother, Wendy Pemberton, who has been cutting hair at the same barber shop for 30 years, has been in default since spring 2008. Mrs. Pemberton, 68, refinanced several times during the boom but says she benefited only once, when she got enough money for a new roof. The other times, she said, unscrupulous salesmen promised her lower rates but simply charged her high fees.

“The longer I’m in foreclosure, the better,” she said.   In Florida, the average property spends 518 days in foreclosure, second only to New York’s 561 days. Defense attorneys stress they can keep this number high. Many mortgages were sold by the original lender, a circumstance that homeowners’ lawyers try to exploit by asking them to prove they own the loan. In Mrs. Pemberton’s case, Mr. Stopa filed a motion to dismiss on March 17, 2009, and the case has not moved since then. He filed a similar motion in her son’s case last December.

From the lenders’ standpoint, people who stay in their homes without paying the mortgage or actively trying to work out some other solution, like selling it, are “milking the process,” said Kyle Lundstedt, managing director of Lender Processing Service’s analytics group. LPS provides technology, services and data to the mortgage industry.

These “free riders” are “the unintended and unfortunate consequence” of lenders struggling to work out a solution, Mr. Lundstedt said. “These people are playing a dangerous game. There are processes in many states to go after folks who have substantial assets postforeclosure.”

But for borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future.   I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. “I told the lady at the bank, ‘I can’t afford $2,500. I can only afford $1,300.’ ”

Mr. Tsiogas, who lives on the coast south of St. Petersburg, blames his lenders for being unwilling to help when the crash began and his properties needed shoring up.   Their attitude seems to have changed since he went into foreclosure. Now their letters say things like “we’re willing to work with you.” But Mr. Tsiogas feels little urge to respond.   “I need another year,” he said, “and I’m going to be pretty comfortable.”

The New York Times: Owners Stop Paying Mortgages, And Stop Fretting

2010-06-03T16:30:00.003-04:00

Thoughts on Walking Away From Your Home Loan

2010-05-27T14:32:00.004-04:00

I have been asked about the impact of a short sale and foreclosure on obtaining credit in the future. Here's a timely repost of an article that ran in the New York Times last March.

If you’re among the millions of people who will not qualify for the Obama administration’s program to help troubled homeowners, you’re probably wondering what you’re supposed to do now.

Perhaps you no longer have enough income to pay your loans. Or you can afford the payments but don’t qualify for refinancing under the new plan because the value of your home is too far below the balance of the loan. If you’re far enough underwater, you’re probably questioning the wisdom of writing a monthly check on a place that may take 10 or 15 years to get back to the value it had two or three years ago. It isn’t easy to come up with the answer, and if you have moral misgivings about not making good on your mortgage, a religious officiant may offer as much useful guidance as a financial planner.

In an economic environment like this one, however, the consequences of giving up on your mortgage may not be as painful as they were a few years ago. Yes, it’s almost always preferable to negotiate a better deal on your existing mortgage than to walk away. But if you can’t work things out with your lender, you probably won’t be sued. You shouldn’t receive a major tax bill either. And the damage to your credit will not be permanent or insurmountable.

Let’s look at these last three in order.

YOUR LENDER First off, let’s define what we mean by “giving up” on your current mortgage. It may mean trying for a short sale, where the lender allows you to sell your home for less than the mortgage amount. You may also hand over the deed to the home in exchange for the lender agreeing not to start foreclosure proceedings (a “deed in lieu” in industry terms). Then, there’s foreclosure itself, and the possibility that bankruptcy judges may soon have the power to adjust the terms of primary mortgages.

That said, just because you’re ineligible under the Obama plan doesn’t mean that your lender or servicer won’t ultimately adjust your mortgage anyhow. Collectively, there are enough people in trouble or under water on their loans that they have plenty of leverage if they’re willing to play chicken with their lender and threaten to stop paying.

The problem is, the lender can play chicken, too, by threatening to come after you for the balance of any money you owe — whether it’s the difference between what you sell the property for yourself and the remaining mortgage, or the loan amount left over after the lender sells your property in foreclosure.

The lender may not follow through, though. “What our membership is telling us is that it can be cost-prohibitive to chase down a borrower who is already in financial distress,” said John Mechem, a spokesman for the Mortgage Bankers Association. “You can’t squeeze blood from a stone.” They may, however, still come after people with high incomes who walk away from jumbo loans that are way under water or loans on investment properties.

In fact, if you want to be sure your lender (or a collection agency that it may sell your loan to) won’t chase you down, it’s a good idea to have a lawyer involved with any short sale, deed in lieu or foreclosure itself. “You must get the bank to agree in writing that any deficiency is waived,” said Chip Parker, a lawyer specializing in foreclosure with Parker & DuFresne in Jacksonville, Fla.

The biggest challenge here may simply be finding someone at the bank to help. Having a second mortgage will also complicate matters.

YOUR TAXES You also need to consider the taxman. Often, forgiven debts are taxable as income. Recent legislative changes, however, eliminate the federal tax burden through 2012 on most primary residence debt that a lender has reduced through loan restructuring or forgiven during foreclosure.

Mark Luscombe, principal analyst for CCH, a tax information service, said that people who sell their home through a short sale or give up the deed in lieu of foreclosure can also qualify for tax relief if they use a special tax form, 1099-C, that reflects the amount of debt that the lender has forgiven.

YOUR CREDIT A short sale, deed in lieu or foreclosure itself will almost certainly damage your credit report and score, and the black mark will last for up to seven years. But the amount of damage it does will depend on how much other credit trouble you’ve gotten yourself into with other lenders.

If you’re giving up the home you own, you’ll probably need to rent soon afterward. Will landlords turn you away once they check your credit and discover your troubled mortgage? “If it’s the only thing marring their credit, it’s probably not a big issue,” said Clay Powell, the director of the Rental Property Owners Association of Michigan, who added that good tenants could be scarce in economic environments like this one.

In fact, Todd J. Zywicki, a law professor at George Mason University, predicted that FICO may have to adjust its credit scores to lessen the impact of a foreclosure or similar incident. “It just seems obvious that a foreclosure in 2008 or 2009 doesn’t have as much information value as a foreclosure five years ago,” he said. “To the extent that foreclosure doesn’t predict future behavior as much as it did in the past, you’d expect that the FICO algorithm would change to adjust for that.”

Craig Watts, a spokesman for FICO, said that was an interesting idea. “We try not to get involved too much in psychobabble around what is and isn’t predictive,” he said. “If the numbers show that foreclosure is less predictive, then we’ll take it into account in future redevelopments of the formula.” That would take a minimum of two to three years, though.

Some lenders aren’t waiting that long to initiate their own foreclosure destigmatization programs. The Golden 1, one of the nation’s largest credit unions, now has a mortgage repair loan for people who have lost a home to foreclosure but want to buy a new one.

It’s hard to imagine that there won’t be a parade of insurance companies, credit card issuers and mortgage lenders in Golden 1’s wake, even though Fannie Mae and Freddie Mac may be unwilling to guarantee the mortgages of such borrowers for several years. In fact, Aaron Bresko, the vice president of lending for BECU, another large credit union based in Washington State, is putting together a panel called “How to Lend to the Newly Credit Impaired” for a conference later this year.

“Good people have bad things happen to them, so how do you find those people and reach out to them?” he said. “As the year progresses, it’s going to be an emerging market.”

Thoughts on Walking Away From Your Home Loan

2010-05-27T14:32:00.003-04:00

Florida Judge Wipes Away Mortgage Debt

2010-05-27T11:11:00.004-04:00

Miami Dade Judge Bailey cancelled a mortgage for the bank's failure to comply with an order to post a bond.   The judge was so angry with the bank that she wiped away the mortgage debt and ordered them to convey the property back to the homeowners within thirty days.

DAILY BUSINESS REVIEW      All Orlando Eslava wanted from his lender was a loan modification to make his payments affordable. Instead, he got his $207,000 mortgage wiped out — and a crash course in the confusing way foreclosures are unfolding in a court system chock-a-blocked with cases.   The teacher was Miami-Dade Circuit Court Judge Jennifer Bailey, who cancelled Eslava’s debt after lender HSBC Bank USA ignored her previous order to post a $414,000 bond.

Bailey said the actions of William Huffman, HSBC’s lawyer from Tampa-based Florida Default Law Group, were “contemptuous,” according to a court hearing transcript.

HSBC’s run-in with Bailey began in December 2009 when she granted the lender’s motion for the foreclosure sale of Eslava’s one-bedroom unit at El Dorado Tower in Aventura. But HSBC lost the note on Eslava’s property. So the judge ordered the lender to post a $414,000 bond to indemnify Eslava in case another lender filed a claim against the unit.

According to court records, HSBC and Florida Default did not post the bond and proceeded with an April 9 foreclosure sale that gave the lender title to the condo.    Eslava and his lawyer, Sheleen Khan, sought to overturn the sale, claiming the lender violated Bailey’s court order. At a May 6 hearing, Bailey dismissed the foreclosure case with prejudice, which prevents the lender from suing Eslava again. The judge also canceled the mortgage and ordered HSBC to return title of the condo to Eslava.

“None of us is above the law,” Khan said. “This is a landmark ruling.”   In addition to canceling the mortgage, Bailey chastised Huffman, according to a transcript of the hearing obtained by The Daily Business Review.   “When the order is simply ignored … at the end of the day, you’re the lawyer, you’re responsible,” she said.    Bailey did not sanction Huffman but said he should consider her order a “wake-up call.”

“Some day, this foreclosure crisis is going to be over, and you need to decide what kind of lawyer you are going to be,” Bailey told him. “Because at the end of the day, you are responsible for your client’s compliance with court orders.”    Huffman apologized. He said his client failed to post bond because he had misunderstood the order, according to the transcript.    “I don’t want apologies,” Bailey replied. “I want performance. I want responsible attorneys who meet the basic standards of knowing what … is going on in their files.”

Bailey’s frustration with the lender and Florida Default weren’t limited to Eslava’s case. She complained about the general “chaos and disorganization” of lenders and their lawyers.   Suzanne Hill, who represented Huffman and his firm at the hearing, said Florida Default was weighing its options, which include appealing Judge Bailey’s ruling or seeking a rehearing.

An attempt to buy time
Eslava, 53, a residential agent with Carden Realty & Investment in Sunny Isles Beach, says he fell behind on his $1,800 monthly mortgage payments when home sales plummeted in 2008 and commissions became scarce.   He retained Sheleen Kahn two months before the foreclosure auction and says he never sought to get his mortgage canceled. He just wanted more time to negotiate with the lender.   “I wanted to lower the payments because I want to keep my home … this is my home,” said Eslava. He said he spent thousands of dollars to repair the unit after it was damaged by Hurricane Wilma in 2005.

Last Nov. 6, months before the foreclosure auction, HSBC had placed Eslava into the Obama administration’s Home Affordable Modification Program (HAMP). The lender reduced Eslava’s monthly payments from $1,800 to $620 and put him in a three-month trial. Under such a trial, the reduction is temporary and the bank uses the time to decide whether the borrower can afford to make the reduced payment over the long term.

Eslava said he never heard back from the lender after the trial period expired. But he says he continued to send payments to HSBC of $620 a month. Despite making those payments, the bank sold his condo.

His isn’t an isolated case, according to those who work with distressed homeowners.   “It is not infrequent,” said Arden Shank, executive director and president of Neighborhood Housing Services of South Florida in Miami. “We worked with families who had that happen to them.”

The agency recently helped another family obtain a loan modification in Miami-Dade County, but the lender did not cancel the foreclosure sale. Four months ago, the family lost the house in an auction. They got the title back after Neighborhood Housing hired a lawyer who convinced a judge to overturn the sale.   Shank said actions like that can undermine national efforts of programs like HAMP to keep homeowners in their homes.

That was the case of Eslava. “If lenders are implementing the HAMP program and then their two different departments don’t communicate and don’t know what each other is doing, then that is kind of problem in implementing HAMP,” Shank said.   Initially, Judge Bailey sided with Florida Default’s request to proceed with the sale but ordered HSBC to post the bond by April 2.

On April 9, the bank sold the condo without posting the court-ordered bond. Kahn. Eslava’s lawyer, filed an objection to the sale. At the May 6 hearing, Judge Bailey expressed disbelief that HSBC had opposed canceling the sale when Eslava was still in the middle of a loan modification trial. She called the bank’s opposition “idiotic,” according to the transcript.

“You are filing pleadings in court every day and you don’t even know what’s going on with the case,” she told Huffman, the HSBC lawyer. “In no other species or kind of law would that be remotely acceptable, or frankly, anything short of malpractice. But somehow in Foreclosure World everybody thinks that is just fine, that you can know absolutely nothing about your files and walk in here and ask judges for things left and right without even knowing what’s going on.”

Fort Lauderdale attorney Jed Frankel, who witnessed the exchange while awaiting a hearing in his own case, said he was stunned by the judge’s decision to cancel the mortgage, but not by the bank’s actions.   “It is very unusual to see this type of sanction entered,” said Frankel, who frequently represents condo associations on foreclosure-related matters. “That’s a very severe sanction. But it was a very well thought out ruling.”   Frankel said he had a similar experience recently, when Deutsche Bank was sanctioned for not complying with a court order related to the foreclosure of a unit at King Cole Condominium in Miami Beach.

Frankel said Miami-Dade Circuit Court Judge William Thomas ordered the lender to pay the condo association more than $4,000 for ignoring the judge’s court order to proceed with a foreclosure sale of a condo or pay $1,221 in condo dues.    “Judges are looking at these cases a little bit differently than they would have four, five years ago,” said Frankel, who represents King Cole. “They are more aware of what is going on in the foreclosure cases.

Florida Judge Wipes Away Mortgage Debt

2010-05-27T11:11:00.003-04:00

Sun Sentinel: 4 in 10 homeowners would consider walking away from ‘underwater’ mortgage

2010-05-26T13:21:00.004-04:00

MIAMI – May 21, 2010 – More than 40 percent of homeowners with a mortgage say they would consider abandoning an “underwater” property, according to a national online survey released Thursday.   The study conducted this month by Harris Interactive for real estate firms Trulia and RealtyTrac touched on a topic that affects many South Floridians.

More than 371,000 homes in Palm Beach, Broward and Miami-Dade counties were worth less than the mortgage amount at the end of the first quarter, Zillow.com said recently.   Pete Flint, chief executive of Trulia, said on a conference call with reporters he “absolutely expects” more homeowners to walk away in the coming years as the stigma of foreclosure fades.    This is the fifth such survey of consumer attitudes since 2008, but the first time questions about underwater mortgages were included, Flint said.

Because South Florida home prices have fallen by more than 40 percent since the peak of the housing boom in 2005, underwater borrowers here may have to stay put for a decade or more until they can break even in a sale, housing experts say.    Some of these homeowners say they’re unwilling or unable to wait that long.

RealtyTrac executive Rick Sharga said many borrowers are disgusted with their lenders, feeling as though the banks are “stonewalling” their attempts to seek mortgage modifications and stay in the homes.     There’s a lot of visceral anger at the banks right now,” Sharga said, adding that there may be fewer people walking away from homes if they felt lenders were negotiating in good faith.

Lenders insist they are, pointing to the mortgage modification offices they’ve set up across the country to help borrowers who can demonstrate actual need.    “With people who can afford their payments but their home is worth less than what they owe, that is not considered a hardship,” said Nancy Norris, a spokeswoman for banking giant Chase.

Jay Brinkmann, chief economist for the trade group, said in a statement that Florida is getting worse when it comes to delinquencies and foreclosures.    Meanwhile, Sharga and Flint said lenders are doing a good job of managing inventories of foreclosed homes.    RealtyTrac has as many as 800,000 bank-owned homes in its database, but less than 30 percent are for sale. Gradually putting those on the market helps prevent major price declines, Sharga said.

(NOTE:   This huge inventory of properties owned by the banks that are not even on the market is commonly referred to as "shadow inventory."  Most of the reports you see from the government and real estate cheerleaders such as realtors do not even indicate the existence of this enormous inventory, which is only growing. The flip side of Mr. Sharga's comment above is that the prices we are seeing now are artificially high!)

Copyright © 2010 Sun Sentinel, Fort Lauderdale, Fla., Paul Owers. Distributed by McClatchy-Tribune Information Services.

Sun Sentinel: 4 in 10 homeowners would consider walking away from ‘underwater’ mortgage

2010-05-26T13:21:00.003-04:00

Bank: Take This Underwater House and Shove It!

2010-05-25T17:53:00.001-04:00

Anger at the root of mortgage default problem, study finds

By Kenneth R. Harney The Washington Post
Saturday, May 22, 2010

Memo to the bank: Take this money-sucking, underwater house and shove it! Go ahead and wreck my credit for years to come. I’m walking away, no matter what.

Why?
That’s the question posed by Brent T. White, a University of Arizona law professor whose academic paper last year on the fast-spreading “strategic default” phenomenon drew sharp criticism from lenders and Wall Street, who viewed him as the Pied Piper of the walk-away movement.

Now White has published a paper based on the personal accounts of 356 strategic defaulters and homeowners on the verge of doing the same. His finding: People who intentionally default on their loans are not as economically rational or calculating in their decision-making as widely thought.

In fact, he said, their decisions to pull the plug “may not turn out to be economically rational.” But they walk anyway, in large part because they are at the end of their emotional rope. They have transitioned from feelings of anxiety and hopelessness to outright anger at their lenders, the government and a financial system they consider unfair.

White published his latest paper in Arizona Legal Studies, the university law school’s journal. After a study he did last year, which argued that far larger numbers of underwater borrowers should stick it to their lenders, White says he was inundated with e-mails and calls from homeowners saddled with negative equity. Many provided him with extensive details of their financial situations and difficulties dealing with their lenders.

According to CoreLogic, a real estate analytics firm, negative equity continues to be a massive and corrosive problem. During the first quarter, 11.2 million homeowners across the country owed more on their mortgages than the market value of their properties.

In Las Vegas, 75 percent of mortgaged homes and condos are underwater. In Phoenix, 550,000 homeowners have negative equity — 58 percent of houses with loans. Florida’s rate of negative equity is 48 percent, followed by Michigan at 39 percent and California at 34 percent. Nationwide, nearly one out of four mortgaged houses is in a negative equity position, according to CoreLogic.

White and other academic researchers say that severe negative equity is the essential spark that prompts owners to consider walking away — even those who think it’s morally wrong to default.

Based on the personal accounts shared by strategic defaulters, White said, they often have high credit scores, sterling payment histories and solid incomes. As one underwater homeowner said in an e-mail to White, “There isn’t a lender out there who wouldn’t give us a loan,” based on credit performance.

But staring at hundreds of thousands of dollars of negative equity, owners become anxious, then pessimistic, about their financial futures. Older owners with severe negative equity worry about their ability to stay afloat in their retirement years if they keep paying their mortgage.

Lenders and loan servicers often play crucial — if inadvertent — roles in motivating owners to walk away, White said. Of the 356 homeowners’ situations he analyzed, 100 percent reported contacting their lenders to work out a solution before they defaulted.

Many say they were rebuffed by servicers who refused to discuss modifications with anyone current on loan payments. White quoted one deeply underwater homeowner: “So many times I have called my mortgage company to say that I have been a good-paying customer, who despite the difficult economic times, [has] continued to pay on time. I am told over and over again that they cannot do anything for me.”

Other owners told White that they tried to qualify for one of the Obama administration’s foreclosure-prevention programs but either got snagged by rigid income-to-payment rules or non-responsive servicers, or were told they were too deeply underwater to obtain assistance of any sort.

In the end, anger pushes even the most reluctant defaulters over the line.

Some of the anger is directed at the federal government. One couple told White: “Frankly we are tired of getting the short end of the stick, while the government seems to rescue everyone but us.”

White says there can be no effective answer to the walk-away trend as long as lenders and the government fail to intervene early and address underwater borrowers’ needs and emotions.

One possibility: much deeper principal-reduction efforts for owners who have severe negative equity and see no way out. Another option offered by White: Create a “rent-based loan program” that would allow underwater owners the option of refinancing their balances to an interest rate that would bring their monthly payments in line with the rental cost for a comparable house.

Bank: Take This Underwater House and Shove It!

2010-05-25T17:53:00.000-04:00

Strategic Default on 60 Minutes

2010-05-13T10:37:00.004-04:00

Finally, finally the media is realizing that the problem of severely underwater property is what is significant - more than the ability to pay one's loan.   What is the point of getting a loan modification (assuming you can get it after jumping through the bank's hoops for months and resending the financial package numerous times because they keep "losing" it) if your property is worthless?

Simply put, the Obama plan - getting the banks to agree to more loan modifications by showering them with taxpayer's money - wouldn't be the answer even if it did work.   A successful loan modification on an upside down property only keeps that owner as a slave to the house. He is nothing more than a renter. He has no equity. It's worse. he has substantial negative equity. So even if the market does recover, he will have years to go before he even gets to zero.

Not surprisingly, David Stevens, Commissioner of the FHA, blatantly sided with the banks. The banks' misconduct in orchestrating this disaster is only half of the issue.  This assigning blame is not even the point. As Prof. White so correctly points out in his paper (previously discussed in this blog), the homeowner is constantly being fed nonsense to just keep him paying. Take notice of even the subtle misstatements, for example, Stevens conceding that the properties being strategically defaulted on are almost worthless. No sir.    They are far less than worthless! This owner will never have equity in his home!

You may watch the entire episode here.   Look at the comments. I am still floored at the backlash towards homeowners who are defaulting on their loans. I appreciate the emotion. But just because you have made a decision to stay on the Titanic, doesn't mean you should be angry with those that bailed.

Understand this clearly:   The value of the property is not that old purchase price, which is being artificially propped up by the banks and government by their campaign of harassment and guilt. The value is what it is now. You can face the facts or chose to ignore them and get angry at those that default.

There is so much to say and I can only stay on the soapbox for so long at a time. Tomorrow, I will discuss the "you walk away" concept. Good or bad?   Then we need to take a look at the alternatives available for the owner of seriously underwater property.

Strategic Default on 60 Minutes

2010-05-13T10:37:00.003-04:00

CBS 60 Minutes on Strategic Defaults: Walking Away From Your Mortgage

2010-05-11T10:23:00.004-04:00

I was given advanced notice and have been waiting months for this episode of 60 Minutes to air. I haven't seen it yet, but will do so this evening and then offer my insights. I am told that Morley Safer acted with his predictably sanctimonious attitude, of course not being in this predicament himself.

60 Minutes: A Million Have Walked Away; Trend Could Undermine the Fragile Economic Recovery

One more thing: Remember that you cannot simply walk away in many states, such as Florida and New York (among others), without running the risk of being pursued personally by the lender with a deficiency judgment. This is crucial. Unless you want to live under the radar for years to come, do not simply walk away! But that does not mean you should keep making payments on your upside down property and it does not mean that you should even consider taking money from your retirement fund or kid's college fund just to pay what is tantamount to extortion money to the bank because they refuse to give you a release. Read my blog. More on this later.

URL: http://www.cbsnews.com/stories/2010/05/06/60minutes/main6466484.shtml

CBS 60 Minutes on Strategic Defaults: Walking Away From Your Mortgage

2010-05-11T10:23:00.003-04:00

Attorney general investigating Tampa foreclosure firm

2010-05-01T20:30:00.004-04:00

Florida Default Law Group, a huge foreclosure law firm has angered judges with its practices.

By MICHAELÂ SASSO
The Tampa Tribune
Published: April 30, 2010

TAMPA - The Florida Attorney General's Office is investigating a Tampa-based foreclosure law firm that has become one of the state's largest foreclosure mills.

On the agency's Web site, the attorney general showed it has an "active public consumer-related investigation" into Florida Default Law Group. The agency notes that it is a civil investigation, rather than a criminal one, and the fact that is has an investigation isn't proof of any violation of law.

Without going into much detail, the attorney general's Web site says Florida Default Law Group, "Appears to be fabricating and/or presenting false and misleading documents in foreclosure cases. These documents have been presented in court before judges as actual assignments of mortgages and have later been shown to be legally inadequate and/or insufficient. Presenting faulty bank paperwork due to the mortgage crisis and thousands of foreclosures per month."

According to the Tribune's review of 1,994 circuit court records, the firm filed initial legal documents for 323 foreclosure lawsuits in October. That was second only to the Law Offices of David J. Stern, a Broward County-based foreclosure firm that filed 352 foreclosure cases in October.

Attorney general investigating Tampa foreclosure firm

2010-05-01T20:30:00.003-04:00

Buyers have no moral duty to lenders

2010-04-28T12:41:00.004-04:00

By Brent T. White

As a result of the housing collapse, many homeowners have seen their homes lose half of their value. Many owe several hundred thousand dollars more than their homes are worth and are unlikely to dig out of their
negative equity hole for decades.    For these homeowners, the American dream as become a nightmare - and their financial future is dim.

To compound the stress and anxiety, when they've called their lender to work out a solution, they've discovered that their lender won't even talk to them about a loan modification or a short sale as long as they
are current on their mortgage. With no help in sight, some of these underwater homeowners have decided that they would be better off letting go of their homes and have stopped making their mortgage payments. Many have done so with the hope that defaulting will finally bring their lender to the table, but they are also resigned to the fact that they will likely lose their homes.

It has been suggested that such homeowners are immoral or, at least, irresponsible. I disagree. Before explaining why, it is important to emphasize that the decision to strategically default on a mortgage involves many complex, localized and individualized factors. No one should decide to strategically default on their mortgage without sitting down first with a knowledgeable professional.

But let's say that you've actually sat down with a professional to do the calculations and have concluded that defaulting on your mortgage is the only way out of your financial nightmare. Would it be immoral or irresponsible for you to do so?

The arguments against homeowners intentionally defaulting on their mortgages generally center on the same three basic points.    First, underwater homeowners "promised" to pay their mortgages when they signed the
mortgage contract. Second, foreclosures lead to depreciation of neighborhoods, so underwater homeowners should hang on in order to help preserve their neighbors' property values. And, third, if all underwater
homeowners defaulted, the housing market might crash. Homeowners thus have a social obligation to pay their underwater mortgage in order to save the economy.

While all three of these arguments might hold some initial appeal, none holds water.
First, a mortgage contract, like all other contracts, is purely a legal document - not a sacred promise. The lender has contemplated in advance that the mortgagor might be unable or unwilling to continue making
payments on his mortgage at some point and has decided in advance what fair compensation to the lender would be. Specifically, the lender included clauses in the contract providing that the lender can foreclose on the property and keep any payments that have been made. The lender had the property appraised and made the decision that the value gave it adequate collateral to make the loan. That's the agreement. No one forced the lender to make the loan or sign the contract. Indeed, the lender wrote it. And, to be sure, the lender wouldn't hesitate to exercise his right to take a person's house if it was in his financial interest to do so. Concerns of morality or socially responsibility wouldn't be part of the equation.

But what about the argument that mortgage default hurts neighborhoods and the economy? Well, first, in a capitalist society, we don't generally expect individuals to make personal economic decisions for the collective good. Aside from this fact, however, it's unfair, in my opinion, to ask underwater homeowners to prop up neighborhood property values, or the housing market, on their backs - especially if means sacrificing their ability to send their children to college or save adequately for their own retirement.

Why take homeowners, and not lenders, to task for putting their own financial interest ahead of the common good? Indeed, if lenders were less intransigent and more willing to negotiate, underwater homeowners wouldn't have to walk away from their homes in order to save themselves from financial ruin. And we wouldn't have to worry about the fragile housing market crashing again.

Why it is that we speak of morality and social responsibility only when talking about the little guy, who must take his lumps for the common good, while financial institutions are free to protect their bottom line? It just can't be the case that it's morally acceptable for banks to look out for their financial best interest, but it's not OK for the average American do to exactly the same thing.

Brent T. White is an associate professor of law at the James E. Rogers College of Law at the University of Arizona.   He is the author of the paper "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

Copyright © 2009, azcentral.com.

Buyers have no moral duty to lenders

2010-04-28T12:41:00.003-04:00

Cape Coral, Florida: A generation of wealth lost

2010-04-24T16:43:00.004-04:00

In Florida, one city bet its future on growth. On its Web site, the city of Cape Coral boasts that the town has more miles of canals than Venice, Italy, dubbing it a "waterfront wonderland." For its motto, it adopted "City of Superlatives."   The city's motto rings true but in a rather ignominious manner. Instead of climbing the ranks of popular tourist destinations, the Cape Coral-Fort Myers, Fla., MSA, has found itself near the top of lists enumerating America's most battered housing markets.

How often have you heard the old maxim "You can't go wrong being on the water"?  or "The coast: They're not making any more of it."   A fundamental contributor to the exponential price appreciation seen throughout much of South Florida was the idea that land was finite, and fevered demand for property near the coast was especially desirable, creating an investment bonanza among homebuyers.

But, unlike much of coastal South Florida, land was abundant in Cape Coral. The city bet on residential housing from the get-go, with much of the city's land dedicated to single-family, pre-platted land plots.
In essence, Cape Coral received the price-pushing investment mentality that permeated Florida while also having cheap land in spades. Rather than acting as a check on prices like plentiful land has done in places such as Atlanta and Indianapolis, Cape Coral's overflow of lots created a self-reinforcing cycle by allowing developers to toss up houses quickly and cheaply while a growing investment community bid prices ever higher.

The crazy money that was coming through this area enabled all the smaller, mom-and-pop investors to go to those builders that would normally only produce maybe five homes a year — instead, they would produce 100,   The guy cutting your hair was buying five homes at $1,000 down and when he was only earning $35,000 a year. A blue collar worker could act like a Donald Trump. Before the boom, lot prices in the city stood at roughly $3,000. By the time the housing bubble reached its peak in 2006, lots were selling for nearly $90,000. Now, land prices have tumbled back down to $3,000. Home prices performed similarly, shooting up 136.2% from the 2001 first quarter through the 2006 first quarter and then crashing, according to the Federal Housing Finance Agency.

Builders, lenders and mortgage brokers all cooperated. Price appreciation was so rapid and attractive that buyers would put $1,000 down to get a home built and resell it for $30,000 or more in profit without ever actually acquiring title to the property.   The notable difference between this and other speculative areas was that the down payment was nominal. But there was nothing behind the curtain of growth. I can remember driving up the west coast of Florida and thinking "Where are all these people going to work?" Living on the east coast, I assumed the answer was Fort Myers, and that Cape Coral was is bedroom community . . . that is until I saw Fort Myers.

Unsurprisingly, with construction jobs falling off a cliff, Cape Coral-Fort Myers has posted a towering unemployment rate, hitting 13.9% in February vs. the national average of 10.4% for the same month. Whatever housing market metric one picks, Cape Coral-Fort Myers is near the top — in a bad way. The metro area has seen prices fall 49.5% from the 2006 first quarter through the 2009 fourth quarter, larger than the 42.0% drop posted by California's infamous Inland Empire and the 49.3% decline seen in Nevada's eviscerated Las Vegas-Paradise MSA. With unemployment shooting up and prices tumbling, it comes as little surprise that Cape Coral-Fort Myers is also one of the nation's most foreclosure-prone neighborhoods. The metro posted the second-highest foreclosure rate of any metro area in the nation during 2009, according to RealtyTrac.

The Rocket Docket
Cape Coral is ground zero for foreclosures. Lee County is No. 1 in the worst unemployment rate and No. 1 in foreclosures. Being a judicial foreclosure state, the foreclosure process has to go through the courts. Cape Coral created such a backlog in the judicial system that the courts adopted what some disparagingly refer to as the "Rocket Docket" - a system in which foreclosures are disposed of within seconds. Lawyers representing banks (with the acquiescence of judges) have been known to rip through 120 foreclosures in one day. Unfortunately, the backlog of the court system invariably leads to a deprivation of constitutional rights on the part of many homeowners losing their homes.

Despite all the carnage, real estate agents are singing a tune of hope and optimism. The nearly 50% drop in prices has put the price of homes virtually minutes from the water under $100,000. That has attracted a flood of interest from foreigners and out-of-towners looking for a second home.

The spike in sales goes beyond out-of-towners searching for a sunny second home. Flipping has become more common, although most flippers need all cash. One of my friends recently purchased a property for $29,000 from the bank, put roughly $10,000 into repairs and quickly resold the home for $71,000. The real good deals are offered in bulk from lenders. The question is what do I do with a hundred or so single family homes acquired in one shot.   There simply isn't the demand to flip some and even rent out the balance.

There are more than 11,000 single-family homes for sale. The multifamily picture is even worse, with 6,500 units for sale, which is more than the full year's worth of sales in 2009, according to data compiled by Denny Grimes & Co. Inc. And with foreclosures failing to keep pace with delinquencies, the much-talked-about shadow inventory casts a dark cloud over the Cape Coral-Fort Myers housing market.

Cape Coral, Florida: A generation of wealth lost

2010-04-24T16:43:00.003-04:00

PBS: 'Strategic Defaulters' Skip Mortgage Payments as Home Values Tumble

2010-04-22T16:15:00.004-04:00

I was interviewed for this story which recently aired on PBS.   Since I am fortunate enough to own three properties in the now virtually blighted former boom town of Cape Coral, on Florida's west coast, I was asked to appear for the interview. I opted to remain in New York with my kids and watch it on TV. You can see the newscast here or read the salient points below.

As part of his continuing series of reports making sense of economic news, Paul Solman tells the story of some homeowners who have stopped paying their mortgages even though they can still afford them.

PAUL SOLMAN: Meet 28-year-old Josh Bartlett, West Virginia native, now a restaurant manager in Fort Myers, Florida. He lives in a condo he bought in 2005 for $210,000, with a mortgage of $190,000.
And what's this place worth today?

JOSH BARTLETT, homeowner: Forty-five thousand. I can go across the street, pay cash, and never have to worry ever again about a mortgage payment.

PAUL SOLMAN: Across the street, around the corner, with a 60 percent vacancy rate, Bartlett could buy at least four units in this development for what his place cost. But, as for never worrying about a mortgage payment again, well, it's not as if he's sweating over his current obligations.

JOSH BARTLETT: In December of 2007, I made my last payment, which every previous payment was on time. And I told them that, if they didn't adjust any kind of rates, any kind of principal, that they would not see another dollar from me.

PAUL SOLMAN: So, you could afford the payments that you're not making?

JOSH BARTLETT: Yes, I could afford that. But, when it's only worth $45,000, I would much rather flush my money down the toilet.

PAUL SOLMAN: Bartlett is a part of a growing breed in the post-boom bust, strategic defaulters, those who can afford to make their mortgage payments, but refuse. With their home values way below what they owe, they figure, why throw good money after bad?

JASON WELSH, Golf professional: At some point in time, you have to cut your losses.

PAUL SOLMAN: Golf pro Jason Welsh figures he can rent for less, and save money for his kids' college education.

JASON WELSH: It's the smart business decision. It's not about whether I can afford the place or not. It's more about taking care of my family.

PAUL SOLMAN: But what about the seven years of bad credit scores that punish all defaulters?

JASON WELSH: I just feel that I can rebuild my credit score faster than I'm going to get $100,000 equity back in my house.

PAUL SOLMAN: And with lenders overwhelmed by so many foreclosures like Jason Welsh's and legal complexities galore, they're not going after his other assets, even though, in Florida, they could.

According to economist Luigi Zingales, strategic defaults now account for a third of all foreclosures in the U.S., a significant increase from just a year ago.
LUIGI ZINGALES, economist, University of Chicago Booth School of Business: People who know other people who walk away are more willing to walk away, so this points in the direction of a contagion.

LUIGI ZINGALES: But, if most of the people who are underwater walk away, then house prices will drop even more, and then that will induce more people to walk away. So, we can have sort of vicious circles in a lot of real estate markets, local real estate markets, that are going to be very dangerous.

PAUL SOLMAN: In Florida, where nearly half the mortgages are underwater, walking away is becoming, if not yet commonplace, at least nothing to be ashamed of.

PAUL SOLMAN: Besides, says Bartlett, businesses do it all the time. In December, Morgan Stanley stopped making payments on five San Francisco office buildings worth half what they cost in 2007.
In January, developer Tishman Speyer gave two Manhattan apartment complexes on which it had borrowed $4.4 billion back to its creditors, including the California Teachers Pension Fund -- current market value, $1.8 billion.    And, in February, the Mortgage Bankers Association sold its Washington headquarters, on which it owed $75 million, for $41 million. Continued ownership, said the MBA, would be economically imprudent.

JOSH BARTLETT: Yes, I'm defaulting. Yes, I'm walking away. But I'm not going to keep running a business that is losing money as the days go on.

PAUL SOLMAN: So, a lot of folks aren't bothered by walking away, any more than they're embarrassed by having bought during the boom, the latest one, or, for that matter, the one that created this corner of Florida in the late '50s, when the Rosen brothers, a couple of salesmen from Baltimore, thought to develop Cape Coral.

GARY MORMINO, historian: They bulldozed everything over. They brought in an aggressive commissioned sales force. They brought tourists to Cape Coral by airplane. If you forgot your checkbook to make your down payment, they had blank checks from every bank in America. And Cape Coral was one of the great success stories.

NARRATOR: Cape Coral, with more miles of waterways than Venice, Italy, has become a legendary way of life on Florida's Gulf Coast.

PAUL SOLMAN: In 2006, Jarrett bought this home for nearly three-quarters-of-a-million dollars. But his dream of living on the water soon had him drowning in a nightmarish sea of debt.

KEVIN JARRETT: Soon after I bought the home, everything started crashing, and I didn't have the cash to pay it off like I expected to. So, I started paying the minimum, and then the below-minimum, which just kept putting -- adding on to the back end of the house.

PAUL SOLMAN: While his mortgage amount rose, the value of the house plunged, ultimately, by more 50 percent.

KEVIN JARRETT: I tried to keep everything going as long as I could, waiting for something to change, because everybody said that this market crash was going to last six months. Well, obviously not.
PAUL SOLMAN: Jarrett didn't walk so much as stumble away, broke. The bank moved to foreclose.

KEVIN JARRETT: During that process, I also lost my family. My -- I went through a divorce. My wife and my daughter now live up north.   I mean, I have literally lost everything. But, right now, I'm just trying to -- I'm just trying to do what's right, you know. And I'm in a bad spot, in a bad situation, but it has nothing to do with a business decision, where, you know, I'm walking away because my house is upside-down.

PAUL SOLMAN: Jarrett's foreclosure, in other words, was no strategic default. But had he had the option, he says, he wouldn't have gone that route.
BILL VALENTI, president & CEO, Florida Gulf Bank: When the value of the house was going up, you know, no one ever came to the bank and said to me, Bill, I have just sold my home, made $100,000. Here's $10,000 for the bank. Thanks for helping me, you know?    But yet, when the value of the home is going down, notwithstanding the fact that the borrower can repay the loan, they expect the bank to take the loss, or the person that bought that mortgage in the secondary market. In my opinion, it's just simply not fair.

PAUL SOLMAN: But most mortgages aren't owned by banks anymore, right? They're owned by investors, who own shares of pools of mortgages, and those investors are all over the world.

BILL VALENTI: And you and I may be investors in those pools by virtue of the fact that we have invested in a mutual fund or -- or some other investment vehicle.   So, some other human being, not an institution, is going to lose money as a result of their decision simply not to honor an obligation. And where does it end? How can a bank make a loan in the future if it runs the risk of knowing that the value of that property, if it goes down, the borrower has the right to leave it?

PAUL SOLMAN: So, what are you doing here at this point?
JOSH BARTLETT: Well, some people would call it squatting. But they could still have me, you know, to make payments, to refinance, to lower my principal. There's a million things that they could do, but are not willing to.

PBS: 'Strategic Defaulters' Skip Mortgage Payments as Home Values Tumble

2010-04-22T16:15:00.003-04:00

Upside Down Owners Receive Totally Irrational Treatment From Lenders

2010-04-13T08:31:00.004-04:00

Compare two situations I have seen recently:

The first is an owner of underwater property who wanted to take the responsible approach and offered the bank a check for $150,000, in addition to the property. The bank turned him down. Although he was shocked, we weren't. I have spoken to officers at the major lenders who insist that they will make no deals other than payment in full. Realizing that all too frequently these banks are simply unwilling to negotiate in good faith (thus far, anyway), the owner became a client. In the interest of full disclosure, the lender was willing to accept the $150,000 cash, provided the owner agreed to remain liable for the balance. He didn't need our advice on how to respond to that offer.

During the same week, a foreclosure of a client's upside down property ended with the bank agreeing to take back the property and giving a full release of liability. Moreover, the bank paid the client $3000 cash for vacating promptly and leaving the property in good condition. This is referred to as "cash for keys" - which is not exactly a novel concept. Many landlords will give a tenant cash to move out quickly. It obviates the need for an eviction and makes sure that the homeowner does not vandalize or damage the home or think about removing appliances or fixtures.

About a year ago I blogged that lenders typically offer cash for keys to avoid a foreclosure as well. With filing fees at $1900 and courts totally jammed, it makes sense for the lender to offer cash for a deed in lieu of foreclosure. A lender friend of mine offers $10,000 for the deed, to avoid having to foreclose. The lender gets immediate title to the property and can avoid vandalism and physical deterioration. The lender can more quickly put the house back on the market and save an average of an estimated $50,000 in foreclosure expenses.

So let's get back to the owner that offered the bank $150,000 for the privilege of giving it a deed in lieu and saving the bank perhaps a year or more in time and an estimated $50,000 in costs. How can this be justified? If you're thinking the bank is making a conscious business decision to pursue the deficiency judgment after foreclosure at some point in the future, instead of accepting the "bird in hand", all I can say is that I wouldn't want to be one of its shareholders.

Upside Down Owners Receive Totally Irrational Treatment From Lenders

2010-04-13T08:31:00.003-04:00

South Florida Sun-Sentinel.com: Foreclosure plan targets underwater homeowners

2010-03-27T08:47:00.004-04:00

The Obama administration is starting to appreciate that principal reduction, rather than loan modifications, is what's important. It makes no sense to simply lower your monthly payments when you are grossly upside down.   Without equity in his home, the underwater owner is nothing more than a renter. And the bank is the landlord. Rather than building equity, he is losing it and, in effect, renting from the bank to help subsidize its ultimate recognition of the loss in value.

It is only a matter of time before the underwater owner wakes up to the reality. Granted, it may take more time for him to take action.

The market can never reach its bottom without reducing principal to fair market value.  The alternative is to wait until each homeowner reaches his breaking point and does what is in his financial interest by walking away.   The policy of "fear and shame" can only keep the upside down owner paying what he cannot afford - or does not make financial sense - for so long.
South Florida Sun-Sentinel.com
Foreclosure plan targets underwater homeowners

The Obama administration on Friday took another stab at addressing the foreclosure crisis by unveiling a plan that helps unemployed and ‘underwater’ homeowners

By Paul Owers, Sun Sentinel

The Obama administration, blasted for a largely ineffective plan to curtail foreclosures, responded Friday with help for unemployed and "underwater" homeowners.   Administration officials said the program will reduce mortgage payments to affordable levels for three to six months while homeowners look for work. In addition, lenders will get incentives to cut mortgage balances when residents owe more than their properties are worth.

The problem is especially severe in South Florida. Roughly half of all mortgage holders in Broward and Palm Beach counties are underwater, according to First American CoreLogic. The typical underwater borrower in the United States will remain that way until at least 2015, the California research firm said this week. (Actually, most studies suggest closer to 2020.) Friday's announcement follows one made Wednesday by Bank of America, which said it will forgive up to 30 percent of mortgage debt for 45,000 of its customers.   (on a voluntary basis. see my previous post.)

Banks have opposed slashing loan balances, saying it would encourage borrowers to default and penalize people who didn't get in over their heads. But housing analysts and other industry observers insist it's the most effective solution to the housing debacle because it limits foreclosures and stabilizes prices.   Lenders and the government "are finally listening," said Mike Larson, a housing analyst with Weiss Research in Jupiter. "Better late than never. I think this is one of the more significant steps we've seen to date."

Risky mortgages taken out during the housing boom caused an avalanche of foreclosures in 2007 and 2008. During those two years alone, roughly 103,000 homeowners in Broward and Palm Beach counties were in some stage of default, according to RealtyTrac Inc.    More recently, though, soaring unemployment is the main reason people are losing their homes. Florida's unemployment rate is 12.2 percent, the highest level since 1970.

Since the government announced a $75 billion foreclosure prevention plan last spring, only about 170,000 homeowners nationwide have received permanent loan modifications. Administration officials conceded Friday that lenders were slow to implement the so-called Home Affordable Modification Program but said the new changes, to be rolled out over six months, will help.

Under the plan for unemployed homeowners, lenders must reduce monthly payments to, at most, 31 percent of a borrower's income. Homeowners who still don't have jobs after the three- to six-month forbearance period will be considered for a modification or another alternative to foreclosure, such as a short sale.

To qualify, the homes must be owner-occupied and the loan balances below $729,000. Borrowers must submit proof that they are receiving unemployment benefits and request temporary assistance during the first 90 days of delinquency.

Lenders must consider principal reductions for borrowers who owe more than 115 percent of the values of their homes. Loan balances will be reduced in steps over three years if borrowers continue to make payments on time. The lenders or investors will contact eligible homeowners.

Also, the Federal Housing Administration will help underwater borrowers restructure loans by giving lenders financial incentives to reduce loan balances on first mortgages. The home must be a primary residence, and all homes will be appraised. Also, the loan-to-value ratio of the new FHA loan must not be greater than 97.75 percent of the appraised value of the home.

The government stressed that lenders are not required to reduce principal amounts. But lenders will be given greater incentives to do so and expects banks to offer that solution to their customers in many cases.

Ward Kellogg, chairman of Boca Raton-based Paradise Bank, said he favors lowering monthly payments but not forgiving mortgage balances.   "To tell a lender to reduce principal is unreasonable," he said. "And I feel sorry for the neighbor who owns his home free and clear." (That neighbor will feel far worse when the homeowner walks away from the property leaving it with an overgrown lawn, in disrepair, and vandalized.
Doesn't it make more sense to help the existing homeowner remain in his home?)

While reaction to the plan generally was positive, some said the relief for unemployed homeowners is only temporary and insisted the president has yet to unveil a long-term strategy for fixing the nation's housing market.

South Florida Sun-Sentinel.com: Foreclosure plan targets underwater homeowners

2010-03-27T08:47:00.003-04:00

Bank of America Announces It Will Offer Principal Reductions

2010-03-24T23:17:00.004-04:00

Yes, you read that correctlly.   Take a look at this article from MSNBC.com for the whole story. But before you get too excited, these principal reductions stem from a settlement with states over the predatory loans Countrywide made.   It has limited applicability and is not to be taken as an indication that lenders are now willing to write down the principal balance of their mortgages to the fair market value of the underlying property.

The article points out that while the principal reductions are being offered to solve its legal problems, it may create a precedent for offering principal reductions.   In other words, other banks may feel some pressure to do the same thing now that B of A has made this announcement. I sincerely hope so because, as I have continuously maintained in this blog, there is presently no incentive for most homeowners to remain in homes that are seriously upside down.

The article says that B of A estimates that 45,000 borrowers will likely qualify, and you’d also need to qualify under the HAMP program guidelines as well.   Go here for the guidelines under HAMP.   At a minimum, the property must be the borrower's primary residence.

Although the numbers of people who qualify are a paltry 45,000, and only around 180,000 people have obtained permanent modifications, it is certainly a step in the right direction. Hopefully lenders, as well as our government, will finally realize that a policy of reasonable principal reductions, rather than fear and shame, is the only way to finally get to the bottom of the real estate debacle.

Bank of America Announces It Will Offer Principal Reductions

2010-03-24T23:17:00.003-04:00

Watch Out For That Short Sale

2010-03-10T17:42:00.004-05:00

        I've been a big fan of agents requiring their short sale clients to obtain attorney representation. A big reason for this position is that I keep seeing and hearing horror stories of transactions involving realtors or short sale processors where they gave really bad advice (to put it mildly).   Simply put, a seller contemplating a short sale must consult an attorney, and not rely on their agent or the short sale processor for legal advice.

        I've seen many instances where an owner was told by their agent that there would not be a deficiency if the sale went through.   The contract from the bank included the following provision: "[Lender] and/or its investors may pursue a deficiency judgment for the difference in the payment received and the total balance due, unless agreed otherwise or prohibited by law, if the short sale closes on the loan referenced above.   In addition, if this loan is covered by mortgage insurance, the mortgage insurance company may reserve the right to pursue the seller for the deficiency . . .."

        It's pretty damn clear that this lender is reserving the right to pursue the balance of the loan. They further note that a mortgage insurer might be able to pursue the balance. So what made this realtor believe that the lender wouldn't be able to pursue the balance? Supposedly, it was another paragraph that provided: "Seller is to contribute $0.00 to assist in the closing of this transaction.  This contribution will be in the form of a promissory note."

        It seems obvious that a seller should consult an attorney about whether or not the lender could pursue a deficiency.   But, what about all those attorneys doing short sales that advise their clients not to worry about the language? "It's OK to sign it. They never go after the shortage."  As I've said in earlier posts, most of these deals seem to benefit everyone but the borrower.