Tucson Land Use Law Blog : Tucson Land Use Lawyer & Attorney : Fleishman Law Firm : Tax Liens, Foreclosures, Zoning

Anyone who has been involved in dealing with banks in the realm of loan modification have come to accept (at least at some level) that banks move with glacial speed.  Well, for those with a high credit score who actually just want to close a loan - this may be the way to go.....

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Fourteen U.S. mortgage servicers and their affiliates are making available a free, "impartial" Independent Foreclosure Review process (website - Independent Foreclosure Review) to certain of their borrowers, as part of certain consent orders entered into with federal bank regulators, the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the Board of Governors of the Federal Reserve System.

The review process was put into place by the regulators to determine how many borrowers were harmed by faulty procedures including: robo-signing, dual-track foreclosures, and a shortage of qualified staff to work with delinquent borrowers.  The process has been set up to identify customers who were part of a foreclosure action on their primary residence during the period of January 1, 2009 to December 31, 2010. The reviews will span nearly 4.5 million loan files and could take up to a year to complete, according to Acting Comptroller of the Currency John Walsh.

If eligible borrowers believe that they were financially injured as a result of servicer errors, misrepresentations or other deficiencies in the foreclosure process on their primary residence, they can request a review of their foreclosure file to verify that their foreclosure process was handled properly.

An estimated 4.5 million borrowers will be notified by a letter explaining the review process and a Request for Review Form. The mailings will be staggered to better manage volumes in stages beginning Nov. 1, 2011, with an ad campaign to follow. A 1-800 number has been established as well.  A review administrator will allegedly send a confirmation one week after the borrower sends in a five-page request form.

Joe Evers, deputy comptroller for large banks at the OCC, said a remediation plan is still under development to determine how borrowers will be paid. He added that it could take months to figure out how to do that and it was difficult to estimate when a borrower would receive a check.  "It will be a lengthy process," Evers said.

The OCC said it would release the names of the independent consultants soon. The consent orders did leave room for a fine, but Evers said the fine will be determined after the reviews are completed.

So, another government led program aimed at addressing the fallout from the financial crisis brought on by the ramp up of securitization of home mortgages.  It appears that the Independent Foreclosure Review will be a time-consuming procedural morass that has no pre-defined mechansim for determining what remedies will be made available to eligilble homeowners.  Let's hope the various attorneys general are able to reach a substantive settlement with lenders and servicers that has some meat to it.

The list of participating servicers includes:

• America’s Servicing Co.
• Aurora Loan Services
• Bank of America
• Beneficial
• Chase
• Citibank
• CitiFinancial
• CitiMortgage
• Countrywide
• EMC
• EverBank/EverHome Mortgage Company
• GMAC Mortgage
• HFC
• HSBC
• IndyMac Mortgage Services
• MetLife Bank
• National City Mortgage
• PNC Mortgage
• Sovereign Bank
• SunTrust Mortgage
• U.S. Bank
• Wachovia Mortgage
• Washington Mutual (WaMu)
• Wells Fargo Bank, N.A.

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The Mortgage Electronic Registration System ("MERS") is increasingly under attack from multiple angles.  MERS describes itself as "an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked."  Created by the real estate finance industry, including many of the largest lenders and Fannie Mae, MERS allegedly "eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans."  This bypassing mechanism is what has garnered the attention of recording offices throughout the country.

Geauga County in Ohio just filed suit against MERS alleging that it bypassed the recording of mortgage assignments in local registry offices (as MERS was intentionally designed to do), thereby depriving numerous Ohio counties on revenue from filing fees.

The lawsuit comes only weeks after the Dallas County District Attorney sued MERS and its parent company, Merscorp. Inc., alleging the system acts as a shadow recording system that allows lenders to avoid local mortgage registration fees - this according to HousingWire.com.

HousingWire reports that the suit was filed by David Joyce, prosecuting attorney for Geauga County.

"The MERS business model and practices comply with the recording statutes and regulations of Ohio," a MERS statement of response reads. "This position has been upheld in numerous cases in Ohio courts and countless cases across the country on the state and Federal level. We are confident that MERS’ business practices will be upheld in court as complying with Ohio law."

The complaint also names various financial institutions as defendants – including Bank of American, Chase Home Mortgage, Citi, HSBC Bank, and others, all of whom used MERS to bypass the need to record transfers of the beneficial interest under deeds of trust on properties. 

In the suit, Geauga County claims "the defendants systematically broke chains of land title throughout Ohio counties' public land records by creating gaps due to missing mortgage assignments they failed to record, or by recording patently false or misleading mortgage assignments." The county claims MERS' failure to pay filing fees is a violation of Ohio state laws.

These suits may signal the opening of the floodgates by counties seeking to recoup lost revenue; though one must question the level of damages suffered, as each county also did not have to do the work necessary to receive the money they charge.  Makes me wonder how much it costs to record versus how much they charge for each recording. 

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When it rains, it pours.  The fallout from the artificially generated housing bubble and the attendant financial crisis is really starting to take hold against the various major players in the banking industry.  It seems everyone with any stake in the mortgage meltdown, from individual home owners to purchasers of mortgage-backed securities, are seeking their pound of flesh from the likes of Bank of America, JP Morgan Chase, CitiBank, Ally Financial, Wells Fargo, UBS, Goldman Sachs, Deutsche Bank, and others.

The New York Times broke the story yesterday that the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, the failed government agencies relegated to taxpayer-backed conservatorship three years ago, is set to file lawsuits against twelve of the major banks.  The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under the nation's securities laws and missed evidence that borrowers' incomes were inflated or falsified.

The FHFA issued sixty-four subpoenas last year to issuers and servicers of mortgage-backed securities - one of the largest investigations to date of alleged securities fraud stemming from the housing bust.  The FHFA, with subpoena power, has a huge advantage over private investors, which have had a harder time gaining access to the loan files, critical to filing lawsuits against the banksters.  The suits are likely to be filed now because regulators are concerned that it will be much harder to make claims after a three-year statute of limitations soon expires.

In the heyday of loan originations and sales into the secondary market, Fannie and Freddie couldn't purchase those loans directly, but they were allowed to invest in slices of "private-label securities" that were backed by subprime and other risky loans, but were rated as safe AAA investments by the ratings agencies.  Indeed, Fannie and Freddie were among the largest investors in those securities.  Freddie and Fannie began increasing their purchases of private-label securities early last decade in order to boost profits while satisfying government mandates to support affordable housing.  By law, Fannie and Freddie were required to back loans to low-to-moderate income borrowers, and the private-label securities were counted toward those goals. In 2005 alone, Freddie Mac purchased $180 billion in private-label securities, up from $24 billion four years earlier.

In the the lead up to the financial crisis, “the market was so frothy then it was hard to find good quality loans to securitize and hold in your portfolio,” said David Felt, a lawyer who served as deputy general counsel for FHFA until January 2010. Moreover, the private-label securities carried higher yields at a time when the two mortgage giants could buy them using money borrowed at rock-bottom rates, thanks to the implicit federal guarantee they enjoyed.  According to Felt, “Fannie and Freddie thought they were taking AAA tranches, and like so many investors, they were surprised when they didn’t turn out to be such quality investments."  This despite the fact that Freddie was warned by regulators in 2006 that its purchases of subprime securities had outpaced its risk management abilities, but the company continued to load up on debt that ultimately soured.

Fannie and Freddie still hold billions of dollars in mortgage securities backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A loans.  Sadly for the American taxpayer, these securities have been among the poorest performing mortgages.  The U.S. government has spent $141 billion to keep Fannie and Freddie afloat. Freddie Mac allegedly estimates its total gross losses stand at roughly $19 billion, while Fannie Mae allegedly estimates its losses at nearly $14 billion.

While the FHFA has been making noise about pursuing the banks for some time, as Naked Capitalism has reported, "the overarching story remains the same: the more rocks you turn over in mortgage land, the more creepy-crawlies emerge."  In Arizona, when you turn over rocks in the desert, you often find scorpions.  They creep and crawl and they pack a mean sting.  It remains to be seen just how many stingers the Too Big To Fail camp have.

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On July 29, 2011, J.P. Morgan Chase & Co. announced that the firm would begin exiting the tax lien business.  Plymouth Park was a New Jersey-based unit of Bear Stearns Cos. Inc., but was doing business as XSPAND and headed by a former New Jersey governor.  Plymouth Park was a major purchaser of tax liens throughout the country and one of the largest purchasers of tax liens at the Pima County tax lien sale over the past several years.  According to a Bloomberg article, J.P. Morgan claims that the unit is "not central to its operations." 

While most of the media outlets were quick to report that J.P. Morgan was shedding its tax lien unit, few have given any analysis as to why.  However, according to Bloomberg, Plymouth Park "was among companies that received grand-jury subpoenas in 2009 as part of a U.S. Justice Department antitrust probe of bidding at municipal tax-lien auctions in New Jersey according to an August 2009 prospectus for New York City tax-lien bonds that were serviced by the firm.  The Bloomberg article goes on to say: "Antitrust officials investigated whether investors colluded to limit competition on sales to win a higher return, said Vincent Belluscio, executive director of the Tax Collectors & Treasurers Association of New Jersey." 

Why exactly J.P. Morgan is exiting the tax lien market may remain unknown to the general public, but others entities have quickly filled J.P. Morgan's void.  Indeed, at the 2011 tax lien sale in Pima County, the same representative that used to bid for J.P. Morgan was believed to be bidding on behalf of Fortress, a large hedge fund. 

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It seems the federal government is never short on ideas on how to head off the foreclosure crisis.  Launched less than a year ago, the Federal Housing Administration's "Short Refinance Program" is an alleged effort to help "responsible homeowners," who owe more on their mortgage than the value of their property, to refinance their loans. 

The Federal Housing Administration will offer certain underwater non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.  

To be eligible for a new loan, the homeowner must owe more on their mortgage than their home is worth and be current on their existing mortgage. The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500. The property must be the homeowner's primary residence. And the borrower's existing first lien holder must agree to write off at least 10% of their unpaid principal balance, bringing that borrower's combined loan-to-value ratio to no greater than 115%.

In addition, the existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent.  One catch in all this is that servicers must have executed a Servicer Participation Agreement (SPA) with Fannie Mae, in its capacity as financial agent for the United States, on or before October 3, 2010.

This program, like many the federal government has already put in place, is long on hope and short on efficacy.  After spending $50 Million (of the $8 Billion slated for the prorgram), a pathetic 246 borrowers have made it through the program.  Do the math - that's $203,252 per borrower.  The program was supposed to have helped 500,000 to 1.5 Million borrowers.  Well, that obviously is not going to happen. 

One of the major hurdles to the program's success is that Fannie Mae and Freddie Mac are not participants.  Ironically, participating servicers must execute the SPA with Fannie Mae.  It is as though the government doesn't understand the often conflicting interests of investors and servicers.  Follow the money.  Without a realistic incentive structure in place, why would servicers or investors sign on?  Well, not surprisingly, only about 24 servicers have signed on.  So long as borrowers are current on their loans, most servicers and investors are not going to bother with a program like this.

It should not come as any surprise that our legislative leaders have been quick to put this one on the chopping block.  Representative Robert Dold (R-Ill.) sponsored legislation to kill the program, but the bill is unlikely to reach the Senate floor.  Rep. Dold said the program was well-intentioned but predictably doomed.  He further noted, "It’s time for Washington to learn the same lesson instead of focusing only on prolifically inventing new programs and stubbornly persisting with them at all costs."  

President Obama recently commented: "We are going back to the drawing board to put more pressure on banks to see if we can help more homeowners through modification and see where reducing principal is possible"  Good luck with that.  Well, fortunately, the debt ceiling will be raised here soon to help finance another knee-jerk program that no rightful lender, investor, or servicer would want to get wrapped up in.

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The Arizona Supreme Court just weighed in on the issue of attorney's fees in tax lien foreclosure cases.  Under Arizona Revised Statutes section 42-18206 (2010), a tax lien purchaser is entitled to a judgment for costs and reasonable attorney fees if the delinquent taxpayer redeems the lien after the purchaser commences a foreclosure action.  After years of litigation, the Arizona Supreme Court held that a tax lien purchaser is only entitled to reasonable attorney fees incurred before the tax lien is redeemed and a certificate of redemption issues.

The court of appeals noted that this statute neither places a "temporal limit" on recoverable fees nor limits eligibility for fees "to certain matters and not others."  The Arizona Supreme Court noted though although the legislature did not expressly place temporal and subject matter restrictions in the text of A.R.S. § 42-18206, such restrictions are apparent from the context of the statutes governing tax lien redemption.

The Court went on to say that A.R.S. § 42-18206 protects against a loss to the purchaser from pre-redemption litigation, but it does not ensure a profit. Nor should it subsidize unlimited litigation to contest redemption in pursuit of that profit.

In its most foreceful reasoning, the Court stated: "Thus, interpreting § 42-18206 to allow post-redemption fees and costs skews the statute to subsidize unsuccessful litigation. Such a reading creates an incentive for protracted and potentially meritless litigation. It allows tax lien purchasers to coerce landowners otherwise able to redeem to forfeit their property by the threat of continued litigation conducted at the landowners' expense. We discern neither a legislative intent nor any sound policy reason to award fees for a losing argument, especially when doing so encourages protracted litigation, discourages redemption, and interferes with litigants' and the courts' interests in finality."

Though this decision does not undercut the basic protections afforded tax lien purchasers in the statutory scheme, unfortunately, this decision does leave tax lien purchasers slightly exposed to the costs associated with having to file for a judgment after a property owner redeems and refuses or is unable to pay the costs and fees incurred by the tax lien purchaser.  A strict reading of this opinion seems to indicate that seeking a tax lien holder seeking a judgment after a redemption, for failure to pay the pre-redemption costs and fees incurred, will not be recoverable.  

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Housing Wire recently reported that the Federal Housing Finance Agency (FHFA) has directed the two government sponsored agencies, Fannie Mae and Freddie Mac to align their guidelines for servicing delinquent mortgages.

Previously, they maintained different requirements for how their mortgage servicers would treat loan backed by Freddie and Fannie.  This new push for alignment may be the death knell for the practice of "dual tracking."  Dual tracking has been a common practice by servicers of working on a loan modification at the same time as it is purshing a loan towards foreclosure.  The new FHFA forced allignment will push servicers into engaging the borrower as soon as they become delinquent and will prevent the initiation of the foreclosure process if the borrower and servicer are working toward solving the delinquency in a good-faith effort.

Housing Wire furtehr reports that "under the new requirements, servicers must engage in a single track for considering foreclosure alternatives up to the 120th day of delinquency" and "must also perform a formal review of the case to confirm the borrower was considered before starting foreclosure. Even then, servicers are required to continue work with the homeowner on other alternatives." 

Servicers for both Fannie and Freddie will also apprewarded and penalized the same under the new guidelines.

"FHFA's directive to align Enterprise policies for servicing delinquent mortgages should result in earlier servicer engagement to identify the best solution available for homeowners, given their individual circumstances," said FHFA Acting Director Edward DeMarco.

Freddie Mac CEO Ed Haldeman said: "Alignment of key servicing practices between our two companies will help servicers . . . to streamline their operations and more effectively target resources to distressed borrowers . . . For example, it will simplify the process for seeking help by giving borrowers one application to fill out and servicers one application to review for all Freddie Mac loan modifications and foreclosure alternatives."

This allignment, if actually followed by Fannie and Freddie-backed servicers will have a huge impact for borrowers seeking to modify the terms of their loans.  Indeed, the dual-track process is precisely what has led to many unsuspecting homeowners losing their homes, as they never understood that dual tracking was the policy.  Perhaps the common lament of "how could they sell my home, I was in the middle of a loan modification" may be a thing of the past.  I won't be holding my breath on that one.

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It seems that real estate agents will no longer be able to rely on the credit score rationale for pushing short sales.  The old mantra has been that shorts sales have less impact on your credit rating.  Unless you have a bank that is proactive enough to approve a short sale before you have actually defaulted on your loan, it appears that the difference between a short sale and a foreclosure is no longer appreciable.

According to Fair Issac Corporation, the company that brought us the FICO score, homeowners with short-sales and foreclosures on their records ended up with similar credit scores, assuming their scores were similar as distressed homeowners.

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