MERS Exodus

The Mortgage Electronic Registration System (MERS) was created by the mortgage industry to fast-track the loan assignment process and helped bypass the burden of having to record every assignment.  MERS was a perfect solution during the mortgage securitization frenzy. 

When the housing bubble imploded and foreclosure activity went through the roof, MERS found itself the target of many lawsuits.  Homeowner after homeowner challenged MERS' legal authority to foreclose, as it was supposed to simply serve as an electronic registry, though it was often the named beneficiary under deeds of trust, though a "nominal" beneficiary.  MERS made it through the foreclosure crisis pretty well, all things considered.  Most legal challenges failed, as the courts likely couldn't open up that kind of systemic Pandora's box.  

Well, according to Bloomberg, MERS' chief legal officers, its national litigation coordinator, its corporate counsel, and its chief internal auditor have all now left the company.  Hard to say why the exodus, but it may signal another closed chapter in the foreclosure crisis.  Job done, time to move on. 

National Mortgage Settlement - Done?

Joseph Smith, the monitor of the National Mortgage Settlement has reported that the five major banks have officially fulfilled the consumer relief obligations of the National Mortgage Settlement.  He further reported that the banks have provided more than $50 billion of gross relief, which allegedly equates to more than $20 billion in credited relief. 

Smith filed final crediting reports with the U.S. District Court for the District of Columbia tfor Bank of America, JP Morgan Chase, Citi, and Wells Fargo, which detailed how these servicers gave consumer relief.

Smith's office found that more than 600,000 families received some form of relief, which was broken into 17% refinancing assistance, 37% first lien principal forgiveness, 15% second lien principal forgiveness and 31% other relief.

In total, Bank of America, Chase, Citi, Wells Fargo and ResCap provided $8.6 billion, $4.2 billion, $1.8 billion, $4.3 billion and $200 million, respectively, in total relief obligations.

Smith said that they will continue to monitor the servicers and are only about halfway through the settlement process. The office will continue to test the servicers’ compliance with the settlement’s servicing rules. 

The banks had major incentives to provide relief early, which they have complied with.  It remains to be seen whether the banks will be able to meet the stringent servicing requirements, which plagued them during the financial crisis. 

National Mortgage Settlement & Bounced Government Checks

The New York Times recently reported that when homeowners went to cash checks coming from the National Mortgage Settlement, the checks bounced - yes bounced. 

Ronnie Edward, whose home was sold in a foreclosure auction, apparently waited three years for his $3,000 check. When it arrived, he went to his local bank in Tennessee, only to learn that the funds “were not available.”  Mr. Edward was taken aback. “Is this for real?” he asked.

The Times further reports that "it is unclear how many of the 1.4 million homeowners who were mailed the first round of payments covered under the foreclosure settlement have had problems with their checks. But housing advocates from California to New York and even regulators say that in recent days frustrated homeowners have bombarded them with complaints and questions." 

"The first round of the settlement checks was mailed last week. In recent days, problems arose at Rust Consulting, a firm chosen to distribute the checks, people briefed on the matter said. After collecting the $3.6 billion from the banks, these people said, Rust failed to move the money into a central account at Huntington National Bank in Ohio, the bank that issued the checks to homeowners."

"Banking regulators, frustrated with missteps at Rust, urged the consulting firm to shore up the account Tuesday. Now, regulators say the problems are resolved, and are urging homeowners to try again. Officials worry that homeowners, weary from a process that has stretched on for years, will give up."

“We apologize to anyone who experienced problems trying to cash their checks,” a senior vice president at Rust, James Parks, said in a statement. “We are working hard and communicating with the banking regulators, the servicers, and other banks to ensure those issues are not repeated.”

This obviously will not engender much hope or trust in a system that has been mired in controversy since the housing crash that started to implode in late 2007.

Will They Extend It?

So, the election is over and the "fiscal cliff" is awaiting.  Will The Mortgage Forgiveness Debt Relief Act of 2007 (the "Act") be extended?  Given its bi-partisan support in the past, I would venture to say that it likely will be extended another year. 

The extension of the Act is a concern for many given that the housing market is nowhere near out of the woods.  The real issue is that if the Act is not extended, borrowers in most states will have to pay income tax on the amount of any debt forgiven in a short sale, deed in lieu of foreclosure, or foreclosure.

However, for some property owners in Arizona, the expiration of the Act may not have any appreciable impact because of Arizona's broad anti-deficiency protections for borrowers.  Assuming your property is located on under 2 1/2 acres and utilized as a single or two-family home, the property is deemed a qualifying property for anti-deficiency protection.  Additionally, assuming your loan (and even a second loan) was used for the purchase of the home, it is deemed a non-recourse loan and and any deficiency will not be considered income because it is non-recourse debt.  See I.R.S. Publication 4681.  This IRS Publication states that "if you are not personally liable for the debt, you do not have ordinary income from the cancellation of the debt..." Therefore, in Arizona, even if the Act is not extended, you may not have any tax liability in the event of a short sale or foreclosure if your property is protected by Arizona's anti-deficiency statutes. 

Extension of The Mortgage Forgiveness Debt Relief Act

For many people considering short sales or allowing their property to go to foreclosure, one of the crucial issues lately is whether Congress intends to extend The Mortgage Forgiveness Debt Relief Act, which is set to expire at the end of 2012. 

Here is a link to an article by Kenneth Harney from The Real Deal, which talks about where Congress is at with extending relief to homeowners.  Election year politics will certainly be at play here.

Another Affirmation of Arizona's Anti-Deficiency Protections

The Arizona Court of Appeals in Phoenix recently ruled in Independent Mortgage Company v. Alaburda, that Arizona's anti-deficiency law (A.R.S. Section 33-814(G)) protects a borrower who has a fractional interest in a vacation home. 

The Alaburdas purchased a 1/10th fractional interest in a single-family residential condo in the exclusive Villas at Seven Canyons in Sedona.  Independent Mortgage financed the Alaburda's purchase and took a note for $321,750, secured by a deed of trust on the 1/10th interest in the property.  The Alaburdas were only allowed to use the property for 28 days each year for vacation purposes. 

Well, the Alaburdas defaulted on the note and a trustee's sale was held on their 1/10th interest and Independent Mortgage took back the interest on a credit bid of $285,000.  It then filed a deficiency action against the Alaburdas, alleging a deficiency of $57,884.  The Alaburdas filed a motion for summary judgment arguing that they were protected by A.R.S. Section 33-814(G) - Arizona's anti-deficiency law for deeds of trust, against any deficiency claim.

Independent filed a cross-motion for summary judgment arguing that partial ownership in a vacation home cannot be characterized as a single family dwelling; therefore, no anti-deficiency protection existed for the Alaburdas.

The Court of Appeals upheld the trial court's granting of summary judgment in favor of the Alaburdas, finding they were not liable for any deficiency.  The Court of Appeals, relying on past Arizona decisions in this realm (Pinetop Properties and Mid Kansas), held that the Alaburdas used the property as a single family vacation home; and thus, met the broad requirement under the anti-deficiency laws that the property "is limited to and utilized for either a single one-family or a single two-family dwelling."  The Court rejected Independent's narrow definition of "dwelling," finding that the Alaburda's sporadic use of the property did not limit the application of the anti-deficiency protections. 

The Court also rejected Independent's argument that because the Alaburdas did not own the property as tenants in common and they were not entitled to continuous and total use of the property.  The Court ruled that the definition of "trust property" includes any interest in real property.  Further, the Court ruled that A.R.S. Section 33-814(G) does not limit its protection to only those that own all of the trust property described in the deed of trust.  To rule otherwise would have cast doubt on the protections afforded condominium owners (as in the Pinetop decision).  The Court was not going to go that direction.

This is another in the long string of factually distinguishable cases that are testing Arizona's broad application of the anti-deficiency statutes.  It is clear that many more cases are on their way up the legal chain. 

Cash Out Refinance - No More Anti-Deficiency Protections in Arizona

The Arizona Court of Appeals (Division 1 in Maricopa County) just issued an opinion entitled Helvetica v. Pasquan, which addresses the scope of Arizona's anti-deficiency protections in the judicial foreclosure (non-trustee's sale) context. 

The first issue the Court addressed is whether refinancing a purchase money loan forfeits a borrowers' anti-deficiency protection, to the extent that the proceeds from the refinancing transaction were used to satisfy the underlying purchase money obligation.  The Court held that refinancing alone does not destroy the purchase money status and the borrower does not lose the protections of Arizona's remedial anti-deficiency protections.

The Court next addressed the open question of whether a loan that funds construction of a statutorily qualifying residence (as defined in A.R.S. Section 33-729(A)) is a purchase money obligation.  The Court held that a construction loan qualifies as a purchase money obligation if: (1) the deed of trust securing the loan covers the land and the dwelling constructed on the land and the loan proceeds were in fact used to construct a residence that meets the size and use requirements set forth in A.R.S. Section 33-729(A).

Finally, the Court addressed an issue that has been hanging in the balance since 1997, when the same Court decided Bank One, Arizona v. Beauvais, which held that regardless of whether the subject workout note was an extension, renewal, or new obligation, it was a purchase money obligation and the borrower was protected by the anti-deficiency laws.  However, Bank One did not address the propriety of segregating non-purchase money portions of the loan, as Bank One abandoned that argument in that case.

On this issue, the Court of Appeals held that loan proceeds used to construct a qualifying residence (as set forth in A.R.S. Section 33-729(A)) merit anti-deficiency protection under certain circumstances, but those sums disbursed in a loan transaction for non-purchase money purposes may be traced, segregated, and recovered in a deficiency action.

This decision now opens the door for lenders to pursue borrowers who took out money in a refinance and used it for purposes other than the purchase (or construction of a property on vacant land) of a home.  While this decision is limited to judicial foreclosures, as opposed to the trustee's sale context (which accounts for almost all foreclosure sales in Arizona), the logic would seem to apply to the trustee's sale context, but it remains to be seen whether the courts will extend this ruling to the deed of trust statutes.  Stay tuned as always.

Arizona Joins the Mortgage Servicer Settlement

Arizona will receive $1.6 billion of the purported $25 billion joint federal-state settlement with the nation's five largest mortgage servicers for their role in wide-spread servicer and foreclosure abuses.  Arizona Attorney General Tom Horne's decision to join the broad settlement also means that his office has reached an agreement with Bank of America over allegations that it has violated an earlier consent agreement that was reached with Countrywide and allegations that Bank of America has systematically violated Arizona's Consumer Fraud Act. 

The agreement requires Bank of America to pay $10 million to the Arizona Attorney General to be used to: (1) avoid preventable foreclosure; (2) mitigate the effects of the mortgage and foreclosure crisis in Arizona; and (3) enhance law enforcement efforts to prevent and prosecute financial fraud or unfair or deceptive acts or practices, and/or provide compensation for harm resulting from conduct alleged in the lawsuit. The agreement also requires Bank of America to pay the Attorney General’s costs and attorneys’ fees incurred in the lawsuit.

Bank of America has also agreed to the following Arizona-specific provisions, which are not included in the broad federal-state settlement: (1) retain an unaffiliated third party to maximize the response rate for loss mitigation programs; (2) confirms that even borrowers who were previously denied for or defaulted on loss mitigation will not be prevented from applying again solely because of the previous denial or default; and (3) requires Bank of Ame to report Arizona-specific information about modifications and other assistance provided to Arizona borrowers.

Arizona’s estimated $1.6 billion share of the global settlement is broken down as follows: 

  • $1.3 billion principally for principal reduction, but also including a menu of other relief to homeowners (how this will actually be implemented obviously remains to be seen).
  • Arizona’s borrowers who lost their home to foreclosure from January 1, 2008 through December 31, 2011 and suffered servicing abuse will be eligible for an estimated $110.4 million in cash payments to borrowers, estimated at approximately$2,000 per borrower.
  • The value of refinancing loans to Arizona’s current, underwater borrowers will be an estimated $85.8 million.
  • The state will receive a direct payment of approximately $102.5 million (yet no mention of what this $102.5 million will be used for).

While the global settlement does not grant any immunity from criminal offenses and will not affect criminal prosecutions, as far as allegations of servicer abuse, including robo-sigining and dual-tracking go, the five largest banks have the green light to push through many of the foreclosures that have been stalled while this agreement was hammered out.  The agreement also does not prevent homeowners or investors from pursuing individual, institutional, or class action civil cases against the five servicers. The pact also enables state attorneys general and federal agencies to investigate and pursue other aspects of the mortgage crisis, including securities cases, which may be the next big fish to land.

The final agreement will be filed in the form of a consent judgment in U.S. District Court in Washington, D.C. and will have the authority of a court order. The consent judgment will require that Arizona’s share of the state’s direct payment be used by the Attorney General to carry out the purposes of the settlement, including to avoid preventable foreclosures, to remedy the effects of the mortgage and foreclosure crisis, and to enhance law enforcement efforts to prevent and prosecute financial fraud and unfair or deceptive acts or practices.

The Perpetually Imminent AG Settlement Has Arrived

A long-vaunted settlement arising from the sixteen-month 50-state investigation into faulty bank foreclosure practices, which has perpetually been imminent, has finally concluded.  The deal was struck between federal banking officials, 49 states Attorneys General, and the five largest mortgage servicers - Bank of America Corp., JPMorgan Chase Co., Wells Fargo Co., Citigroup Inc., and Ally Financial Inc, which will release these servicers from liability for robo-signing and other forms of servicer abuse in exchange for a host of financial "penalties."  In addition, nine other unnamed loan servicers may join the settlement later, which will notably increase the overall settlement value.  Loans owned or backed by Fannie Mae and Freddie Mac will not be part of the deal.

Roughly $5 billion of the funds will be used as potential $1,800 - $2,000 payouts to hundreds of thousands of borrowers affected by the abuses and were foreclosed on between the beginning of 2008 and the end of 2011 (sorry we foreclosed, but here's a little check for your troubles).  A portion of this $5 billion will also go to the states, which can use them for legal aid services, foreclosure mitigation programs, and ongoing fraud investigations in other areas

Another $17 billion will be used as "credits" toward writing down principal on roughly one million loans mainly held in by the banks as part of their own portfolios, as opposed to loans there were originated, sold, and securitized.  Officials have said that some of the principal reductions will go toward mortgages held in private-label securities, which means that investors will take some of the hit, even though they would likely take a hit if any of the subject loans went to foreclosure.

Roughly $10 billion of the $17 billion held for principal reduction "credits" will go to borrowers who are delinquent on their mortgages. 

The banks will not get dollar-for-dollar credit for every write-down; reductions on loans bundled in private-label mortgage-backed securities, for example, will be under 50 cents on the dollar, and write-downs for second liens (mostly home equity lines of credit) will be more like 10 cents on the dollare.  Housing and Urban Development Secretary Shaun Donovan has stated that HUD will be able to get between $35-$40 billion in principal reduction in real dollars out of this settlement.  Good luck trying to figure out who exactly is most deserving of the write-downs.  No wonder Oklahoma's AG bowed out of this deal.  The real issue - short changing the foreclosure process has not really been addressed. 

Another $3 billion will be spent on refinancing borrowers who owe more on their mortgage than their home is worth.

As part of the deal, Bank of America will send $1 billion cash to the Federal Housing Administration.  It also appears that Nevada’s and Arizona’s suits against Countrywide and Bank of America for violating its past consent decree on mortgage servicing has been “folded into” the settlement.

California will get $18 billion of the agreement.  New York will receive $648 million in assistance from foreclosure settlement, including $495 million for principal reductions.

New York AG Eric Schneiderman will co-chair a task force with the Justice Department and HUD, reversed his previous decision to not sign onto the foreclosure deal. He was removed from the central negotiation committee last year when he tried to expand the scope of the investigation into securitization and other issues. His task force, along with California AG Kamala Harris and several other AGs, will look into secondary market and other fraud outside of the robo-signing probe.

Also as part of the deal, Schneiderman will not have to drop his suit against the banks for their use of the Mortgage Electronic Registration Systems or "MERS." 

The servicers will send plans to a federal monitor, North Carolina banking commissioner Joseph Smith, who will have oversight responsibilities over the settlement. However, the monitoring process begins with a self-assessment from the banks through quarterly reports, which Smith and a committee can then review. This enforcement process is likely to take months to actually properly assess the settlement.

While this settlement sounds pretty large ($35-$40 billion), which, as David Dayen of Firedoglake points out, is at best, "a guess since the direction of the principal reduction is mostly at the discretion of the banks, pales in comparison to the negative equity in the country, which sits at $700 billion. And the banks have three years to implement the principal reductions, drawing out the loss on their books."  In the end, this is a pretty minor slap on the wrist.  “It’s not new money. It’s all soft dollars to the banks,” said Paul Miller, a bank analyst at FBR Capital Markets. 

Indeed, of the purported $26 billion, the five largest banks only have to pony up $5 billion in cash, which they already had reserves for.  No wonder bank stocks were all up on the news of the settlement.  Some commentators have said that this settlement "is a a stealth bailout that strengthens bank balance sheets at the expense of the broader public."  So the banking oligarchy wins again - shocker.

Principal Reduction - Who's Willing to Take the Haircut?

Democrats on the House oversight committee have apparently been pushing to subpoena the Federal Housing Finance Agency ("FHFA") to obtain an analysis looking at what effects principal reductions would have on Fannie Mae and Freddie Mac. 

As HousingWire has reported, FHFA Acting Director Edward DeMarco has long defended the agency's policy of keeping Fannie and Freddie mortgage servicers from writing down principal.  "We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer."  It turns out that Mr. DeMarco's agency has yet to produce an analysis, which was requested last year by Democrats.

Several Democrats have cited a recent White Paper from the Fed allegedly acknowledging the need for principal reduction to coerce borrowers into staying in their home and provide a boost to the overall economy.  However, Fed researchers "admitted the potential benefits would be hard to quantify." 

Given that Fannie Mae and Freddie Mac already owe the Treasury roughly $151 billion in bailouts, it should come as no surprise that many are rightfully concerned about principal reductions, even if the pain of such reductions would be spread across the American populace.  DeMarco believes instead, Congressional action is required to force him to write down principal on loans held by Fannie Mae and Freddie Mac.  Between the two government sponsored agencies, the total of underwater mortgages is currently about $303 Billion.  The estimated loss to both agencies for principal reductions would amount to $101.7 Billion.  The scope of such a principal write down would cause great havoc for Fannie Mae and Freddie Mac's accounting, which would require immediate accounting losses. 

Interesting though, in the third quarter of 2011, servicers cut principal on 10,722 modifications, roughly 7.8% of all workouts during the period, according to the Office of the Comptroller of the Currency.  That is not an insignificant number, given the general reluctance of any servicer to consider a principal reduction.  While this number is interesting, it does not say exactly who is doing the principal reductions.  Either way, Fannie Mae, Freddie Mac, and many, many banks continue to face the specter of continued downward pressure on home prices, which will create additional underwater owners, which creates greater incentive to walk away (especially in non-recourse states).  We are no where close to getting out of the thicket on this one.   

Election Year Bravado

A new federal federal task force, dubbed the "Residential Mortgage-Backed Securities Working Group" led by New York Attorney General Eric Schneiderman has sent subpoenas to the 11 largest financial institutions in the past few days as part of its investigation into possible residential mortgage-backed securities fraud. 

Attorney General Eric Schneiderman who was cast off the central negotiation committee of Attorneys General trying to crack down on several securitization issues related to the major banks, seems to be gaining a foothold in his attempt to forge his own settlement with the major banks outside the realm of the federal regulators and AG Tom Miller's crew. 

Schneiderman will be joined by Delaware AG Beau Biden, Massachusetts AG Martha Coakley, Nevada AG Catherine Cortez Masto, California AG Kamala Harris and Illinois AG Lisa Madigan, several of whom refused to bow to continued pressure to try and settle legacy issues surrounding the robo-signing scandal and other securitization issues.

It is very interesting that President Obama allegedly formed this task group, which he announced during his State of the Union address Tuesday.  President Obama has come under increasing pressure to do something substantive about the ongoing foreclosure crisis, which has not been curtailed in the slightest by the introduction of yet another acronym. 

U.S. Attorney General Eric Holder said 15 lawyers and investigators are working with the group. The FBI will add 10 agents, and another 30 lawyers and staff will join the group, along with the

The SEC will also participate. SEC Director of Enforcement Robert Khuzami said there "would be no stone unturned, no dark corner unexposed to the light."

Schneiderman, in a clear shot across the bow to the major banks commented: "We have jurisdiction to go after every aspect of the mortgage bubble and the crash of the financial market . . . We have jurisdiction over every MBS issued over the last decade with Delaware and New York joining the group."

Secretary of the Department of Housing and Urban Development, Shaun Donovan, has also made clear the investigation and ongoing settlement negotiation between other state AGs and mortgage servicers over foreclosure problems would be separate and any charges would not release the banks from liability in the robo-signing scandal.

"It became clear very quickly that Eric [Schneiderman] and I shared a vision that it would be a grave injustice to hold these institutions accountable and potentially have hundreds of billions be paid to private investors and pension funds but not make sure homeowners who hold those loans who depend on being able to get those loans fixed to be able stay in those homes," Donovan said.

Iowa Attorney General Tom Miller, who has been heading up the mortgage servicer investigation, has said the resulting settlement would not release the banks from securitization or lending liabilities.

This is going to produce a very interesting political sideshow as AG Tom Miller tries to keep his band of AG's together, while Schneiderman forges ahead with the new found support of the Obama administration, which it seems only recently, was looking to help the major banks and servicers find a quick settlement to documented abuses that have been alleged by the AG's for some time now. 

The task force represents the Obama administration’s attempt to address complaints from the "Occupy" part of his constituency that it has simply failed to address the housing crisis or bring banks to account for causing it through subprime home loans that were repackaged and securitzed and sold to investors. Critics correctly point out that the Obama administration's attempts to solve the problem through government-sponsored refinancing programs and gentle begging to the banks, have been ineffective.  This is going to be a campaign issue and if the Obama administration is not going to try to spin, the Republicans certainly will.  It has been over three years since the credit crunch in earnest and the housing market had started its full-force downward spiral, and little has changed.  Not surprising to see yet another attempt by the administration to try and appease another part of the base. 

"Independent Foreclosure Review" - Oh, Sorry About That....

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.

Hunting Season Has Opened on MERS

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 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. 

The Dirty Dozen Feeling the Heat from the Feds?

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.

Another Sputtering Government Program - FHA Short Refi Program

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.

The Death of Dual-Tracking?

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.

Short Sale vs. Foreclosure - What's the Difference

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.

Turf Battles: the Feds vs. the Attorneys General

The "robo-signing" scandal unearthed substantial regulatory meddling into the practices of the mortgage servicing industry, which has only further exasperated any hope of a recovery in the housing industry.  In October 2009, the 50 Attorneys General allegedly joined forces with the Justice Department, the Federal Trade Commission, the Treasury Department, and the Department of Housing and Urban Development to investigate whether home-loan servicers violated state laws against deceptive practices by submitting affidavits and foreclosure documents without confirming the paperwork's accuracy.  The investigation also looked into loss mitigation practices by the servicers.

It was not long before the coalitioin of attorneys general began to fracture and word of a separate federal investigation involving the Federal Reserve and the Office of the Comptroller of the Currency began to take shape. 

The AGs prepared a 27-page "Term Paper" that reads like a wish list of changes to the servicing industry, many of which do not take into account the inherent restrictions that servicers face in their relationship with the mortgage pool trusts they serve and their own vested financial interests.

Federal regulators have just announced a consent agreement with 14 of the largest servicers.  The consent agreements require these companies in part to comply with state law (imagine that!) and retool their loss mitigation processes to give homeowners a chance at modification before foreclosure. While the federal regulators made room for monetary sanctions, they have yet to release an exact amount.  Early talk by the FDIC and the AGs of a $20 Billion sanction seems to have been undercut by this consent agreement. 

Iowa Attorney General, Tom Miller, who has been leading the investigation and settlement on behalf of the 50 AGs commented that the federal consent agreements "will not impact our investigation of the nation’s largest servicers and pursuit of a joint settlement."

In apparent frustration of how the federal regulators have undercut the AGs settlement, Housing Wire reports that Rep. Elijah Cummings (D-Md.) introduced a bill in the House of Representatives pushing for more requirements such as modifications and disclosures before servicers can file a foreclosure case.  The bill, H.R. 1477, is a companion to S.489 introduced by Sen. Jack Reed (D-R.I.). Both bills would apply to loans not only covered by the U.S. government, but to all mortgages falling under the supervision of the Consumer Financial Protection Bureau. 

The mortgage service industry is under severe scrutiny right now (and rightfully so), and it will be very interesting to see how the AG's collective efforts, the federal consent agreement, potential federal legislation, class actions, and individual borrower lawsuits will will reshape how securitization of mortgages and the attendant servicing rights evolve.  The turf battles will have their own story line, but it is clear that changes to how servicers approach loan modification is long overdue.   



Bank of America - Doing What it Seems to Do Best

I took three different calls this past week from homeowners who have sought the assistance of Bank of America's servicing subsidiary, BAC Home Loans Solutions, for a loan modification.  What most unsuspecting homeowners do not realize is that BAC simply has no vested interest in actually making good on the false promises it continues to peddle to these homeowners.  Is it any wonder that the Arizona Attorney General has intervened.  In summing up the over 400 complaints it has received about Bank of America and its servicer BAC's handling of loan modifications, the A.G. states the following in its Complaint against these entities: 

"Defendants have continued to engage in widespread consumer fraud by misrepresenting to Arizona consumers whether they were eligible for modifications of their mortgage loans, when Bank of America would make a decision on their loan modification requests, whether Bank of America had approved their modification requests, why Bank of America declined their modification requests, and whether and when Bank of America would foreclose upon their homes."

BAC, like many other servicers, systematically lulls homeowners into believing that a loan modification is something other than a pipe dream.  However, and as noted in the A.G.'s Complaint, BAC, again, like many other servicers, has been "dual tracking" delinquent loans.  While BAC promises that it is working on a homeowner's loan modification, it is at the same time, in a different department, pushing forward with a foreclosure action.  Indeed, servicers habitually allow howeowners to make lower "trial modification" payments and then send the homeowner a Notice of Intent to Accelerate.  So the servicers accept the lower payment and then use the fact that the homeowner is paying less each month to create lump sum delinquencies that most homeowners cannot pay. 

Indeed, in one case I reviewed this past week, the homeowner had never missed a payment, but sought a loan modification to try and ease their struggle.  They sent in the requisite paperwork, then sent it in again, then sent it in again.  They were promised a lower trial modification payment, which they dutifully made each month for several months, and then they received word a Notice to Accelerate.  While BAC was happy to take the new trial modification payments each month and cash those checks, it was at the same time reporting to credit agencies that the homeowners were delinquent each month (due to the difference between the old payment and the lower trial modification payment).  BAC was again dual tracking this loan towards foreclosure.

We would have been far better off if the banks had just said to homeowners, "Sorry, we are not offering any loan modifications.  Make your payment or lose your house."  Instead, in no small part due to the federal HAMP program, howeowners are instead lulled into the very mistaken belief that they are going to receive a loan modification.  Well, guess what, BAC, like most other laon servicers, get paid whether they string you along or foreclose.  Indeed, it is best to "dual track" by stringing people along and then foreclosing on them.  That way, the servicer makes the most money - even if it is contrary to the best interest of the actual investor holding the mortgage.  Perverse times we live in, eh?

Bank of America in the Cross Hairs

Arizona Attorney General Terry Goddard announced that on December 17, 2010, his Office filed a lawsuit against Bank of America and its affiliated companies  alleging violations of the Arizona Consumer Fraud Act and violations of the consent judgment entered in March 2009 between Arizona and the Countrywide companies owned by Bank of America.

The lawsuit, filed in Maricopa County Superior Court, was triggered by hundreds of consumer complaints and follows a year-long investigation into Bank of America’s residential mortgage servicing practices, particularly its loan modification and foreclosure practices.

Goddard stated that Bank of America, the nation’s largest residential mortgage loan servicer, should be leading the way out of the country’s foreclosure crisis. Instead, he said, “Bank of America has been the slowest of all the servicers to ramp up loss mitigation efforts in response to the housing crisis. It has shown callous disregard for the devastating effects its servicing practices have had on individual borrowers and on the economy as a whole.”

The complaint asks the court to hold the defendants in contempt for violating the consent judgment and to order them to pay restitution to eligible consumers and civil penalties, attorneys’ fees, and costs of investigation to the State. It further asks the court to order the defendants to pay up to $25,000 for each violation of the consent judgment and up to $10,000 for each violation of the Arizona Consumer Fraud Act.

Goddard noted that Arizona has been particularly hard hit by the foreclosure crisis, as evidenced by recent reports ranking the state second behind Nevada in foreclosures. Nevada plans to file a similar lawsuit against Bank of America today.

The consent judgment was entered into on March 13, 2009 to resolve the Attorney General’s allegations that Countrywide had engaged in widespread consumer fraud in originating and marketing mortgage loans. In the judgment, Countrywide agreed to develop and implement a loan modification program for certain former Countrywide borrowers in Arizona. Bank of America acquired Countrywide on July 1, 2008 and has assumed responsibility for Countrywide’s compliance with the consent judgment.

The complaint filed today alleges that, since the consent judgment was entered, Bank of America has repeatedly violated the judgment’s provisions related to loan modifications. Instead of providing the relief to which eligible homeowners were entitled, Bank of America has failed to make timely decisions on modification requests and proceeded with foreclosures while modification requests were pending in violation of the agreement.

The complaint also alleges that Bank of America has violated the Consumer Fraud Act by misleading Arizona consumers about its loss mitigation process and programs, including matters such as:
• Whether homeowners must be delinquent on their mortgage payments to be considered for a loan modification.
• How much time it would take to receive a decision from Bank of America on a modification request or a short sale request.
• Whether foreclosure would proceed while a modification or short sale request was pending, or while a homeowner was making trial payments.
• Whether the homeowner had been approved for a loan modification.
• Failure to provide valid reasons why the homeowner was declined for a modification.
• Whether the homeowner would be approved for a permanent modification if the consumer successfully made all trial modification payments.

As a result of Bank of America’s deceptive practices, many homeowners who were already contending with other financial hardships have been led to unnecessarily deplete their dwindling savings in futile attempts to obtain the promised relief and save their homes. Many homeowners who tried to obtain a modification from Bank of America ended up owing more principal on their loans or having less equity (becoming more “underwater”) in their homes. Others gave up their chances to pursue other financial options, such as short sales, while trying to modify their loans with Bank of America. These consumers endured months of frustrating delays, not knowing whether or when they would lose their homes. They called Bank of America and resubmitted their paperwork over and over again in futile efforts to get the help they were promised.

“I am filing this lawsuit today because, after years of delay and broken promises, Arizonans should not have to wait any longer to seek redress,” Goddard stated. “Our homeowners and communities need and deserve relief. Bank of America must be held accountable for its deceptive conduct and failed commitments.”

For anyone in the front lines of the foreclosure debacle, this should come as little surprise.  The Attorney's General's lawsuit joins many across the country seeking class-action status, alleging that Bank of America regularly falsely informs borrowers that it did not receive requested information and demands that documents be re-sent.  Bank of America is not exactly alone here.  The entire loan modification "extend and pretend" system is flawed and implicitly intended to allow servicers of loans the opportunity to make more money while stringing people along with the false hope that they will receive a permanant loan modification.

Breathing Underwater

A great article by Don Lee - Tribune Washington Bureau - highlights how underwater mortgages are a serious contributor to the dismal performance of the national economy.  It is estimated that there are 15 million homeowners who are undewater on their mortgages, many of whom can and continue to pay on their mortgage, but have no means to refinance and are stuck paying on homes in which the value may not return for 10-15 years.  In other words, they are stuck.  Lenders are not likely to offer any modifications so long as they are current on their loans.  So for many, it is continue to pay and hope for a quick (though unlikely) recovery in home prices, walk away and suffer the attendant consequences, or hope that lenders become more proactive in offering modification or refinance options.  If the economy continues to drag, which by all accounts it will (even with new quantitative easing by the Federal Reserve), the threat of more strategic walkaways in non-recourse states is likely to become a more serious problem.  

Careful When You Close The Door Behind You

A San Diego police officer and his wife recently pleaded not guilty to accusations that they trashed their foreclosed home in Riverside County, taking $44,000 in appliances and fixtures with them when they moved out.  Both have been charged with one felony count of damaging or carrying away items from a foreclosed property.  Damage was estimated at over $165,000.

If convicted, they could face up to four years in prison.  As reported in the Press-Enterprise and the Signon Sand Diego, the damage included stones smashed off the facade, dye poured on carpets, wiring pulled out of walls, spray-painted the walls, cut and chopped-down shrubs tossed in the backyard swimming pool, and pulled out electrical wires and cut them.

Supervising Deputy District Attorney Arthur Chang said the damage was "indicative of a great deal of maliciousness and bitterness."  Robert Acosta's attorney, Albert Arena, raised questions about the ownership of the property and the conduct of the Acostas' lender. He said it was "a stretch" to charge the couple with a crime

Robert Acosta is a 12-year veteran of the San Diego Police Department and served eight years in the U.S. Marine Corps.  San Diego police officials said Acosta is on administrative leave.

Riverside County authorities said this is the only case they can recall in which a former homeowner has been charged with a crime for damage to a foreclosure.

A witness saw the Acostas June 12 removing items from the home, court records state. Later, investigators recovered $7,920 in stolen property, including appliances, chandeliers, shutters, iron gates and exterior lights in the Acostas' storage units in San Diego County.

While a likely majority of homeowners in Arizona will be protected by the anti-deficiency statutes in the event of a foreclosure, if a homeowner causes "waste," the lender can seek recourse against those borrowers.  It will be interesting to see whether criminal charges become more prevalent as the foreclosure crisis continues.     

Here Come the Feds

On October 20, 2010, the White House issued the following Fact Sheet: 

FACT SHEET: Federal Government Efforts to Support Accountability, Stability and Clarity in the Housing Market

Today the Department of Housing and Urban Development, the Department of the Treasury, the Department of Justice, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Trade Commission, the Securities and Exchange Commission, the Federal Housing Finance Agency and the Office of Thrift Supervision met to discuss ongoing interagency action to support accountability, stability, and clarity in the housing market and residential mortgage backed securities markets. 

We are working together to review practices that do not comply with state foreclosure law or applicable federal laws, including taking the following actions:

• The Federal Housing Administration (FHA) has been reviewing servicers for compliance with loss
mitigation requirements.  These reviews are being broadened to include a larger range of processes,
focusing in particular on servicer procedures during the final stages of the foreclosure process.  These
reviews are expected to be complete within nine weeks. 

• The Financial Fraud Enforcement Task Force, led by the Department of Justice, has brought together more than 20 federal agencies, 94 US Attorney’s Offices and dozens of state and local partners to share information about foreclosure and servicing practices.  The Task Force’s collaborative efforts are ensuring that the full resources of the federal and state regulatory and enforcement authorities are being brought to bear in addressing this issue.  

• The Financial Fraud Enforcement Task Force has also been coordinating with State Attorneys General in their joint review of “robo-signing” practices in foreclosure cases.  

• The Department of Justice, including through the Executive Office for U.S. Trustees, is also working
with regulators to investigate and, where appropriate, litigate against servicers, their law firms, and
third-party providers regarding their foreclosure and bankruptcy processes.  

• The Federal Housing Finance Agency (FHFA) directed Fannie Mae and Freddie Mac to remind
servicers of their contractual and legal responsibilities in foreclosure processing.  On October 13, FHFA directed Fannie Mae and Freddie Mac to implement a policy framework for dealing with possible foreclosure process deficiencies that requires servicers to review their foreclosure processes and fix any processing problems they identify.  The FHFA policy framework includes specific steps servicers should take to remedy mistakes in foreclosure affidavits so that the information contained in the affidavits is correct and that the affidavits are completed in compliance with applicable law. 

• The Office of the Comptroller of the Currency (OCC) directed all large national bank servicers on
September 29 to review their foreclosure management processes, including file review, affidavit
processing and signatures, to ensure that the processes are fully compliant with all applicable state

• The Office of the Comptroller of the Currency and the Federal Reserve System are jointly examining
foreclosure and securitization practices at the nation's largest servicers.  The examinations will include intensive review of the firms’ policies, procedures, and internal controls related to loan modifications, foreclosures and securitizations, seeking to determine whether systematic weaknesses are leading to improper foreclosures.  The reviews will also evaluate controls over the selection and management of third-party service providers.  

• In coordination with the work of the other agencies, the Office of Thrift Supervision (OTS) is reviewing the mortgage related policies, foreclosure processes and staffing levels of the largest servicers it supervises.   The OTS has gathered preliminary information through its regional offices about the servicer practices across the country.  It also issued correspondence on October 8 to all savings associations involved in servicing residential mortgages requiring the immediate review of their actual practices associated with the execution of documents related to the foreclosure process.  

• The Federal Deposit Insurance Corporation is participating in the reviews by the OCC, the Federal
Reserve System, and the OTS of the foreclosure and securitization practices of the largest mortgage
servicers in its role as back-up supervisor.  The FDIC also is verifying that the servicers it supervises do not exhibit the problems that others have identified as well as reviewing the processes used by
servicers of loans subject to loss share agreements and other loans from receiverships of failed banks. The regulators are also evaluating foreclosure and securitization practices in electronic registration systems.

• The Federal Trade Commission (FTC) is monitoring servicers under existing public orders to confirm
proper servicing and foreclosure processes, is conducting reviews in line with past servicing abuses
and monitoring the market closely for any fraud or foreclosure scams.

• The US Treasury has implemented a strong compliance framework for the Home Affordable
Modification Program (HAMP) servicers. On October 6, Treasury issued a notice to HAMP servicers
reminding them of their requirement to comply with all applicable state and federal laws, as well as a
reminder that prior to foreclosure sale, servicers must certify to the foreclosure attorney or trustee that
all loss mitigation options have been considered and exhausted.   Treasury also recently instructed its
HAMP compliance agent to review internal policies, procedures, and processes for completing the pre- foreclosure certifications at the ten largest servicers.

• In addition to its role enforcing the federal securities laws, the Securities and Exchange Commission
(SEC) has issued proposed rules that would provide greater transparency and disclosures in the
securitization market and provide investors with additional tools to evaluate actions in the securitization market. 

I do not wish to come across as too jaded and skeptical, but this trumped up effort by the full panoply of the Federal government seems to be a well-timed effort to say that the administration is doing something about the foreclosure disaster.  With the mid-term elections right around the corner, it is only appropriate that it appear that the government watchdogs are doing something, albeit reactionary to scrutinize lenders' foreclosure efforts. 

While it seems a nice gesture, I am much more concerned with why we have thrown so much money at the flailing HAMP program (See Jon Prior's article on why TARP has failed) and why we ever allowed Fannie Mae and Freddie Mac to get into the mortgage-backed securities market in the first place.  We the taxpayers are the ones mopping this up now. 

MERS: The Risk of Efficiency

MERS or the Mortgage Electronic Registration Systems, little known before the foreclosure tsunami struck, was developed in the early 1990's by a number of financial entities, including Bank of America, Countrywide, Fannie Mae, and Freddie Mac, allegedly to allow consumers to pay less for mortgage loans, streamline the mortgage process through electronic commerce, and eliminate the need to prepare and record assignments when trading residential and commercial mortgage loans.  MERS describes itself as "innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked."  Sounds nice, right? 

Well, as detailed by Floyd Norris of the New York Times in his article "Some Sand in the Gears of Securitizing," and elsewhere, MERS has been under attack for its part in the massive securitization of the American housing market. 

Indeed, as alleged in a Nevada class action called Lopez vs. Executive Trustee Services, et al., MERS was a very serious contributor to the financial crisis: "Before MERS, it would not have been possible for mortgages with no market value . . . to be sold at a profit or collateralized and sold as mortgage-backed securities. Before MERS, it would not have been possible for the Defendant banks and AIG to conceal from government regulators the extent of risk of financial losses those entities faced from the predatory origination of residential loans and the fraudulent re-sale and securitization of those otherwise non-marketable loans." 

In other words, without MERS, transparency would have ruled the day, counties would have been paid their recording fees, consumers, attorneys, and title companies could easily track chain of title, and foreclosures would have been processed much more effeciently.  Instead, we have servicers with their own vested interests pitted against investors who cannot readily make decisions about their pooled notes; thus, the entire foreclosure process grinds away glacially, subject to legal attack at every turn.





Clamping Down on the "Foreclosure Consultants"

In an effort to curb the predatory practices of certain "loan modification" companies, claiming to offer loan modification services for an upfront fee, the Arizona Legislature recently passed several laws with some good sized teeth - codified at A.R.S. Sections 44-1378-1378.08.

A.R.S. Section 44-1378.02, for example, prevents a "foreclosure consultant," as defined in A.R.S. Section 44-1378, from doing the following: 

 1. Claim, demand, charge, collect or receive any compensation until after the foreclosure consultant has fully performed each covered service that the foreclosure consultant contracted to perform or represented that the foreclosure consultant would perform.

2. Claim, demand, charge, collect or receive any fee, interest or other compensation for any reason that is not fully disclosed to the homeowner.

3. Take any wage assignment, lien on real or personal property, assignment of a homeowner's equity or other interest in a residence in foreclosure or other security for the payment of compensation.

4. Receive any consideration from any third party in connection with a covered service provided to a homeowner unless the consideration is first fully disclosed to the homeowner.

5. Acquire, directly or indirectly, any interest in the residence in foreclosure of a homeowner with whom the foreclosure consultant has contracted to perform a covered service.

6. Accept a power of attorney from a homeowner for any purpose, other than to inspect documents as provided by law.

A.R.S. Section 44-1378.05 is where the teeth are, because it contains some serious financial downside to continuing the practices prohibited above: 

A homeowner who is injured as a result of a foreclosure consultant's violation of this article may bring an action against the foreclosure consultant to recover damages caused by the violation, together with reasonable attorney fees and costs.

B. If the homeowner prevails in the action, the court may award punitive damages as determined by a jury or by a court sitting without a jury, but the punitive damages shall be at least one and one-half times the amount awarded to the homeowner as actual damages.

The Arizona Attorney General is also given powers to proceed under these new laws.  Even before these laws took effect in July 2010, the Attorney General filed suit against Scottsdale-based Guardian Group, LLC, a "loan reduction" service company.

According to a press release from the Attorney General, the company, which markets nationally, made claims it would negotiate with lenders to purchase a consumer’s note for less than face value and sell the note in an investment package to a third-party investor.  Guardian Group then told the consumer that it would modify the rates and terms of the consumer’s mortgage loans and reduce the principal owed to 90 percent of current market value.  

The lawsuit, filed in Maricopa County Superior Court, alleges the Guardian Group fraudulently represented itself as providing loan reduction services to homeowners struggling to make their mortgage payments. The company charged consumers an average advance fee of $1,595 for mortgage loan refinancing services, which it rarely provided.  It collected fees from more than 2,500 consumers for enrollment in its Principal Reduction Program since August 2009. 

The Guardian Group is without question not the only company out there doing the same thing.  As the Attorney General commented on The Guardian Group, "this company has exploited the financial struggles of hundreds of homeowners by promising them mortgage relief it couldn’t deliver."  

First it was the greed of the loan originators and general American public, then it was the greed of the Wall Street firms that securitized all these loans, then it was the greed of the Wall Street bond firms that repackaged these loans into collateralized debt obligations, then it was the greed of the ratings agencies who had no clue of what they were rating, then it was the greed of the investors who didn't know what they were buying, be it collateralized debt obligations or credit default swaps -  all of which led to the meltdown in 2008. 

Now it is the greed of the mortgage loan servicers intent on stringing home owners along so they can make more fees and the "loan modification" scammers that are intent on getting money upfront and then do little to nothing to earn it.  Glad to see a good law in place with some real teeth.  Problem is, any recourse against these likely "fly-by-night" companies is going to be tough and expensive at the front end.  Always more difficult to chase the money after the fact.

Clamping Down on the "Foreclosure Consultants"

In an effort to curb the predatory practices of certain "loan modification" companies, claiming to offer loan modification services for an upfront fee, the Arizona Legislature recently passed several laws with some good sized teeth - codified at A.R.S. Sections 44-1378-1378.08.

A.R.S. Section 44-1378.02, for example, prevents a "foreclosure consultant," as defined in A.R.S. Section 44-1378, from doing the following: 

 1. Claim, demand, charge, collect or receive any compensation until after the foreclosure consultant has fully performed each covered service that the foreclosure consultant contracted to perform or represented that the foreclosure consultant would perform.

2. Claim, demand, charge, collect or receive any fee, interest or other compensation for any reason that is not fully disclosed to the homeowner.

3. Take any wage assignment, lien on real or personal property, assignment of a homeowner's equity or other interest in a residence in foreclosure or other security for the payment of compensation.

4. Receive any consideration from any third party in connection with a covered service provided to a homeowner unless the consideration is first fully disclosed to the homeowner.

5. Acquire, directly or indirectly, any interest in the residence in foreclosure of a homeowner with whom the foreclosure consultant has contracted to perform a covered service.

6. Accept a power of attorney from a homeowner for any purpose, other than to inspect documents as provided by law.

A.R.S. Section 44-1378.05 is where the teeth are, because it contains some serious financial downside to continuing the practices prohibited above: 

A homeowner who is injured as a result of a foreclosure consultant's violation of this article may bring an action against the foreclosure consultant to recover damages caused by the violation, together with reasonable attorney fees and costs.

B. If the homeowner prevails in the action, the court may award punitive damages as determined by a jury or by a court sitting without a jury, but the punitive damages shall be at least one and one-half times the amount awarded to the homeowner as actual damages.

The Arizona Attorney General is also given powers to proceed under these new laws.  Even before these laws took effect in July 2010, the Attorney General filed suit against Scottsdale-based Guardian Group, LLC, a "loan reduction" service company.

According to a press release from the Attorney General, the company, which markets nationally, made claims it would negotiate with lenders to purchase a consumer’s note for less than face value and sell the note in an investment package to a third-party investor.  Guardian Group then told the consumer that it would modify the rates and terms of the consumer’s mortgage loans and reduce the principal owed to 90 percent of current market value.  

The lawsuit, filed in Maricopa County Superior Court, alleges the Guardian Group fraudulently represented itself as providing loan reduction services to homeowners struggling to make their mortgage payments. The company charged consumers an average advance fee of $1,595 for mortgage loan refinancing services, which it rarely provided.  It collected fees from more than 2,500 consumers for enrollment in its Principal Reduction Program since August 2009. 

The Guardian Group is without question not the only company out there doing the same thing.  As the Attorney General commented on The Guardian Group, "this company has exploited the financial struggles of hundreds of homeowners by promising them mortgage relief it couldn’t deliver."  

First it was the greed of the loan originators and general American public, then it was the greed of the Wall Street firms that securitized all these loans, then it was the greed of the Wall Street bond firms that repackaged these loans into collateralized debt obligations, then it was the greed of the ratings agencies who had no clue of what they were rating, then it was the greed of the investors who didn't know what they were buying, be it collateralized debt obligations or credit default swaps -  all of which led to the meltdown in 2008. 

Now it is the greed of the mortgage loan servicers intent on stringing home owners along so they can make more fees and the "loan modification" scammers that are intent on getting money upfront and then do little to nothing to earn it.  Glad to see a good law in place with some real teeth.  Problem is, any recourse against these likely "fly-by-night" companies is going to be tough and expensive at the front end.  Always more difficult to chase the money after the fact.

Loan Modification Scam

Let's start out with this - I'm incensed today.  The newest cottage industry to crop up in the wake of the foreclosure tsunami are the loan modifiers.  Many of the most notorious loan modification companies were headed by the same individuals that were all to happy to originate loans that never should have been considered in the go-go days of the real estate bubble bath.  Now, there may be some legit people out there really trying to help out with loan modifications, including some attorneys perhaps, but most do not require money upfront and promise things they can't deliver on.

I met with someone today who just came from the courthouse steps after learning that his home had been sold at a trustee's sale.  He showed up at the sale with all the money necessary (so he thought at least) to reinstate his loan.  No can do.  The problem for him is that under Arizona's lender-friendly statutory scheme for trustee's sales, he was required to come forward with payment by 5pm the day before the trustee's sale.  He didn't know that because the average person on the street would have no reason to know that - that is what we attorneys are apparently for. 

The reason I am incensed is that many in the loan modification industry (and many lawyers for that matter), don't understand the law or the dynamics of how servicers are processing loan modifications.  It is well established that the servicers of loans have their own financial interest at heart when it comes to loan modifications and they are not too terribly interested in saving people from foreclosure.  Indeed, the loan servicers, who often have competing interests to the very investors that own the loans, don't much care whether they foreclose or not, as they get paid.  In the end, loan modifications are expensive, time consuming and do not pad the servicers' bottom line, and the servicers run a parallel track of claiming to consider a loan modification and moving along the foreclosure at the same time.  See Diane Thompson's very well researched and explained article on why servicers foreclose rather than modify loans.  It is a relative expose on the lending industry. 

Had the loan modification company that was supposedly trying to help this individual understood the law and the dynamics of how servicers lull borrowers into the trap of believing that a modification is forthcoming, while processing the foreclosure at the same time, this company would have known that this guy needed to come due with the money the day before the sale or attempt to stop the sale if he had a defense.  This company falsely believed that the modfication was coming too - a big mistake.  This guy paid $1,500 and lost his house.  A quick trip to an attorney could have saved this fiasco.  We need more education out there - that is for certain.  Sad day - yet another preventable foreclosure.

Stemming the Tide of Foreclosures: Principal Reduction

Bank of America, which bought Countrywide Financial for $4 billion in stock in early 2008, has come under pressure from the Massachusetts Attorney General, as a result of Countrywide's notorious lending practices.  Bank of America's move is part of an agreement to settle claims over certain high-risk loans made by Countrywide.  See link to Wall Street Journal article.

Bank of America's program is limited to Countrywide borrowers whose loan balance is at least 120% of the estimated home value, who are at least 60 days overdue, and who can show that financial hardship makes them unable to meet current payments. The bank estimated that 45,000 customers will qualify for principal reductions averaging more than $60,000.  In the end, only the riskiest loans will be eligible. They include sub-prime loans; "option adjustable-rate" mortgages entailing minimal payments now but big increases later; and certain loans that have a fixed rate for two years and then adjust annually.

Any thought that principal reduction is the path the lenders are heading in should consider the limited scope of the agreement between Bank of America and the Massachusetts Attorney General.  Nonetheless, the action by Bank of America is notable because it is the largest mortgage servicer, collecting loan payments on one of every five home loans in the U.S. At the end of last year, 14.76% of them were at least 30 days past due or in foreclosure, versus an industry average of 12.31%, according to Inside Mortgage Finance. 

Principal reduction is clearly the direction that the large majority of underwater borrowers clearly are hoping the major banks are leaning towards.  Given that lenders must incur substantial costs in foreclosing, only to take a wash when they sell the foreclose property as a Real Estate Owned property, it only seems practical to try and keep people in their homes by reducing the principal.  I have seen many properties where the bank ended up selling a foreclosed property for substantially less than they would have made had they just worked with the homeowner.  No one claims that reason is driving this ship. 

The Walk Away

University of Arizona College of Law Professor Brent T. White has stirred quite a bit of controversy over his recent article in the Arizona Legal Studies entitled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."  

His basic thesis is that despite the increasing number of homeowners walking away from their underwater mortgages, most homeowners continue to try and hold on to their homes even when it does not make economic sense to do so.  He suggests that homeowners choose to try and hold on to their homes to avoid the shame and guilt of foreclosure and because of the  "exaggerated anxiety" over the perceived consequences of a foreclosure created by "social control agents."  In short, he believes that underwater homeowners (in Arizona and California) are not knowingly making bad choices, they just can not "cognitively grasp" that they would be better off financially by simply walking away.  At the end of the day, argues White, many more underwater homeowners should be walking away from their mortgage obligations. 

As a justification for his thesis, White suggests that the "norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse."  

White argues that there are costs associated with walking away, but they are not outweighed by the financial benefits of a "strategic default."  While White's thesis is controversial, as it applies to Arizona borrowers, he is correct.  Arizona's anti-deficiency laws are incredibly broad and protect the large majority of borrowers who are now trying to keep pace with a subdivision home that is severely underwater.  Arizona's anti-deficiency statute (A.R.S. Section 33-814(G)) prevents lenders from pursuing a deficiency (the difference between the amount owed by the borrower and the price bid at a trustee's sale) against the borrower.  While a borrower's credit rating will undoubtedly take a severe beating from a foreclosure and the borrower may have to wait several years to obtain a federally guaranteed loan, for many underwater borrowers, the calculus leads to the undeniable conclusion that walking away makes the most financial sense. 

As for the moral aspect of walking away, White reasons that the overriding message to borrowers is that they have a moral responsibility to pay off their obligation.  White counters this message by pointing out that lenders are operating amorally according to market norms and could have acted to protect themselves by following prudent underwriting practices.  White's final point is that  "it is time to take morals out of the picture and search for an equitable solution to the negative equity problem."  While White is correct in many respects, had lenders and borrowers employed a stronger sense of morals when it came to underwriting and borrowing, we might not have experienced such a severe market bubble and attendant bust. 

The Jumbo Wave

It seems that the small glimmer of hope that everyone is hoping for in the housing market is not likely to come anytime soon.  Mathew Padilla has posted an excellent blog article discussing that the discussion of another wave of foreclosure implies that the current wave has already receded.  Sam Khater, a senior economist with First American CoreLogic has stated: “To say there is a second wave implies the (current) wave has receded . . . I don’t see that the wave has receded.”

Call it what you will, the next foreclosure wave to hit will largely involve Pay Option ARMs.  Pay Option ARMs are adjustable rate mortgages on which the interest rate adjusts monthly and the payment adjusts annually, with borrowers offered options on how large a payment they will make. The options include interest-only, and a "minimum" payment that is usually less than the interest-only payment. The minimum payment option results in a growing loan balance, termed "negative amortization."  As Long and Foster's Ron Sitrin recently commented: because these loans "had negative amortization for so long, they can't refinance out of them and they cannot sell them because the loans are worth more than the properties themselves."

For the most part the expensive gated communities have avoided the impact of the current foreclosure wave, but its job loss consequences are coming home to roost in the upper income brackets.  This graph puts the Pay Option ARM problem in stark terms: 

As a recent post on Dr. Housing Bubble stated: "The Pay Option ARM is one of the most poorly construed mortgage product ever to face this planet. It was a pathetic attempt to allow a larger majority of Americans to have a piece of the great American credit ponzi scheme."  How's that for upbeat? 

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Protecting Tenants at Foreclosure Act of 2009

On May 20, 2009, President Obama signed into law Senate Bill 896, also known as the "Helping Families Save Their Homes Act of 2009."  Section 702 of that Act - the "Protecting Tenants at Foreclosure Act" is very broad in scope and affects the ability of the new owner of certain foreclosure property (including Section 8 properties) to take immediate possession of that property. 

The new Act has effectively mandated a tenant-friendly "non-disturbance clause", common in commercial leases, into the residential landlord-tenant world.  The Act now requires landlords to provide tenants residing in foreclosed residential properties to be provided 90 days advance notice to vacate the property.  However, except where the purchaser intends to occupy a given property as the primary residence, the terms of any bona fide lease remains in effect.

A lease or tenancy must meet the following requirements to be a bona fide lease: (1) The tenant cannot be the mortgagor or the child, spouse, or parent of the mortgagor; (2) The lease or tenancy must be the result of an arms-length transaction, and; (3) The rent required under the lease cannot be substantially less than fair market rent for the property or the rent is subsidized by a Federal, State or local subsidy. 

This is a watershed change in the law and now provides residential tenants protections that, though common in commercial leases, rarely have been seen in the residential context.  It also brings the law a small step closer to the long-past English feudal system of attornment, whereby a a new landlord had to obtain the consent of the tenant before becoming the new landlord.  Such a system was abolished in 1705, but it is clear that the pendulum is swinging towards tenant protections.  In light of the massive foreclosure wave that has swept this country, it is not surprising to see such a change.  A lot of unsuspecting tenants were left holding the bag after their landlord lost the property to foreclosure.  For what it is worth though, such a change is temporary.  The Act sunsets at the end of 2012. 



Looks Like No Bankruptcy Foie Gras Power For Judges

When I hear the term "cram down" authority in the bankruptcy context, I keep picturing some poor mortgage lender warily stepping into a bankruptcy judge's chambers only to have a long metal pipe shoved down his throat until the lender is willing to give in on a loan modification.  Only a month ago it appeared that bankruptcy judges were on their way to wielding such foie gras power. 

While a "cram down" bill made it through the House of Representatives in March, Senate Bill 61 met fierce resistance and failed to muster the necessary votes to pass.  Brett Weiss, a bankruptcy attorney in Maryland, provides some excellent insight in his article as to why Senate Bill 61 bill could not pass despite President Obama's apparent 100-day mandate clout and a Democratically controlled Congress.  One is left to wonder why President Obama, who supported such "cram down" authority was unwilling to use some of his political capital to see this one through.

Senate Republican Leader Mitch McConnell of Kentucky seemed to echo the standard line being floated by the likes of J.P. Morgan Chase & Co., Bank of America Corp., and Wells Fargo & Co, namely that the vote was "a bipartisan rejection of an interest-rate hike, which is exactly the wrong solution for jobs, homeowners and the economy." 

However, as Brett Weiss notes in his article, mortgage insurance was the real issue.  Mortgage insurance gives lenders a very strong incentive not to write down principal, and gives them more money if they foreclose, even where the property is sold at a significant loss, than to work to make the loan performing.  In the end it seems that saving the likes of the stronger financial institutions was more practical than forcing the likely failure of MGIC, RMIC and Genworth, mortgage insurers already on the ropes.





We're Not Leaving!!!

As the foreclosure wave has grown into a tsunami-like crisis, advocacy groups such as the Association of Community Organizations for Reform Now (ACORN) have taken to the streets in campaigns to lobby legislators about implementing new regulations that will help stem the foreclosure crisis and curtail predatory lending.  When I left the Pima County courthouse yesterday, there was an ACORN protest taking place at the same time that a Trustee's Sale was going on.  An interesting contrast between ACORN's bullhorn calls to action and the trustee calling out bids. 

Unquestionably, the foreclosure epidemic has resulted in some very impassioned debate as to whether and how the government should act.  Rick Santelli's recent rant highlights just how impassioned this debate has become.  While Santelli's rant has garnered much of the media hype, Stuart Varney's recent interview with ACORN's Bertha Lewis demonstrates just how zealous some people have become at the prospect of the government aiding struggling homeowners, who many view as irresponsible.  Varney was incredulous at ACORN's suggestion that people on the verge of foreclosure should stay in their homes.

As always, the foreclosure epidemic is far more nuanced than many of the talking heads are willing to discuss.  Predatory lending certainly was in force and many people were not informed of what they were getting into.  Likewise, many, many people bought far more home than they could ever afford.  Only time will tell whether massive government intervention or the force of the market will prevail. 


Cramdown Authority

It is clear that that lending industry has been slow to confront the ever-widening foreclosure crisis that began to pick up steam in 2007.  Indeed, Sandor E. Samuels, the former chief legal officer of Countrywide Financial was quoted as saying "We are going to keep making these loans [subprime teaser loans] until the last second they are legal."  Samuels' comments seem to reflect some of the general industry denial about the problem.  Despite such denial, many have been advocating changes that will help address the crisis. 

Last month, Arizona Attorney General Terry Goddard, along with twenty one other Attorneys General sent a letter to the U.S. House and Senate leadership urging an amendment to the bankruptcy code that would permit federal bankruptcy courts to order loan modifications, also known as "cramdown authority" in Chapter 13 bankruptcies.  The Attorneys General are advocating broader authority in the bankruptcy courts to stem the foreclosure tide. 

However, the lending industry has been actively lobbying against granting such cramdown authority, which they argue would reward irresponsible borrowers and result in higher borrowing costs.  The general intransigence is perhaps better explained by the accounting nuances involved in allowing wide-scale modifications.  Aubrey Cohen has a good blog post that describes how the securitization of loans has complicated the process. 

Nonetheless, Citi recently dropped its opposition to cramdown authority, but has stood alone among the lending industry.  One is left to wonder whether Citi was pressured into such a stance given that it has come to the Treasury trough twice in recent months for bailout funds.  Meanwhile, the Mortgage Bankers Association recently launched a "Stop the Bankruptcy Cram Down Resource Center" to try and ward off any further attempts to empower the bankruptcy courts to force modifications.  Time will tell whether the banks are able to ward off continued congressional pressure to force modifications.  No small task. 

Arizona Foreclosure Rates

RealtyTrac just released its 2008 U.S. Foreclosure Market Report, which reported that there were a total of 3,157,806 foreclosure filings (default notices, auction sale notices, and bank repossessions) on 2,330,483 properties during 2008.  That was an 81 percent increase over 2007 and a 225 percent increase over 2006.  To get a feel for the breadth and scope of just how serious the foreclosure Juggernaut is, take a look at this map to see just how hard hit certain parts of the country were in 2008.

Arizona reported the third highest foreclosure rate of all states in 2008.  4.49 percent of all housing units in Arizona received at least one foreclosure filing during the year.  Indeed, 116,911 properties in Arizona received a foreclosure filing, which also put Arizona third for total foreclosure filings.  Amazingly, foreclosure activity in Arizona during 2008 increased 203 percent from 2007 and 665 percent from 2006.  That last percentage far surpasses the two top foreclosure activity states - California (412 percent increase since 2006) and Florida (412 percent increase since 2006).  

Not surprisingly, Pinal and Maricopa County were particularly hard hit.  The Phoenix metropolitan area reported 97,684 foreclosure filings in 2008, an increase of 220.77 percent from 2007.  That put the Phoenix metropolitan area fifth on the top 100 metropolitan areas, which is fairly consistent with its metropolitan population ranking.  The Tucson metropolitan area reported 9,043 foreclosure filings in 2008, an increase of 113.33 percent.  The Tucson metropolitan area ranked 37th on the top 100 metropolitan areas, which is again fairly close to the Tucson metropolitan population ranking. 

The burn-off of the Arizona housing bubble seems to be gaining momentum faster than the meteoric rise in real estate prices.  For example, take a look at the graph of median home prices in Phoenix between 1989 and 2009.  Look at the incredible bell curve between about 2005 and 2008.  The scary thing that some commentators are noting, is that while the bell curve has basically been erased and median prices are near 2004 levels, the current inventory of homes is far greater than 2004 levels, not to mention, it is much more difficult to qualify now.  Looks like we may not hit a bottom for a while yet.  The bubbly hangover may be more painful than the euphoria of the upswing, eh? 

Foreclosure and The Right of Reinstatement

So a borrower defaults under a promissory note and the deed of trust.  Normally, the lender in that circumstance will exercise the power of sale clause in the deed of trust and begin the foreclosure process by noticing a trustee's sale.  However, the lender may also choose to call the note due and accelerate the entire amount and proceed with a judicial foreclosure.  Most lenders choose to go the trustee's sale route because it is faster and cheaper than a judicial foreclosure. 

What I recently discovered, is that many attorneys do not know about a borrower's statutory right of reinstatement and how that right applies in the context of both a trustee's sale and a judicial foreclosure.  Under Arizona Revised Statute Section 33-813(A), the trustor under a deed of trust (borrower) may reinstate (or cure the default under the promissory note) by paying the lender "the entire amount then due . . ., other than the portion of the principal as would not then be due had no default occurred . . ."  In other words, the borrower only needs to come up with the amount he or she is in default, not the entire amount due under the promissory note.  Nonetheless, many lenders' attorneys seem to believe that if the lender calls the promissory note due and exercises its right to accelerate the promissory note, the borrower must immediately pay the entire amount owed under the promissory note in order to cure the default, not just the defaulted amount. 

However, in Chapparral Development v. RMED Intern, 170 Ariz. 309, 823 P.2d 1317 (App. 1991), the Arizona Court of Appeals ruled that under A.R.S. Section 33-813(A), a trustor has an absolute right to reinstatement whether a lender chooses to foreclose by means of trustee's sale or a judicial foreclosure.  The difference being, if a lender chooses to pursue judicial foreclosure, a borrower's statutory right of reinstatement is cut off once the lender files the judicial foreclosure action and the borrower will have to pay the entire amount owed on the promissory note.  On the other hand, in the context of a trustee's sale, the borrower can reinstate up until 5:00 p.m. the day before the date of the trustee's sale.  But once the trustee's sale has been held, that right of reinstatement is extinguished.

The American Ninja

What do the traditional Japanese Ninja and the the American Ninja have in common? Both destablize and cause social chaos. While traditional Ninjas allegedly intended to destabilize and cause social chaos in enemy territory or against opposing rules, the American Ninja never intended to do anything but make money.

The American Ninja is actually an acronym, which stands for (N)o (I)ncome, (N)o (J)ob, no (A)ssets. Apparently, HCL Finance, who dubs itself "Home of the No Doc Loan," coined the term during the go-go days of the real estate bubble. Indeed, this "innovative product," like so many others, was a driving force in the boom.

So, combine Salomon Brothers' Lewis Ranieri's idea of buying mortgages, bundling them, and issuing bonds with the bundles as collateral and the Ninja loan, and we have the perfect recipe for disaster. The US housing market is far from bottom and the effects of ridiculous lending practices will continue to be felt for some time to come.

Staving Off The Foreclosure Juggernaut

RealtyTrac estimates that 1 in every 171 United States households were in the process of losing their home - up 121% on last year. To give some perspective on that number, RealtyTrac estimates that almost 740,000 United States homes entered the foreclosure process in the second quarter of 2008. That number includes receiving a default or bank repossession notice or warning of an impending auction. That is an incredible number for three months.

Not surprisingly, the worst hit areas were Nevada, California, Florida and Arizona, which had seen the biggest house price rises during the boom years, and the largest volume of sub-prime lending. Indeed, California had the most filings - 202,599 - which was up 198% from the same period a year ago.


In response to the worsening foreclosure crisis and credit crunch, both the House and the Senante approved a housing bill - The American Housing Rescue and Foreclosure Prevention Act of 2008 - that will provide mortgage relief for 400,000 struggling homeowners. The housing plan is aimed in large part at calming the financial markets, which have been riding a roller coaster of late, due in no small part to concerns over the financial stability of Freddie Mac, Fannie Mae, and the banking industry as a whole.


Despite an early veto threat, President Bush said he will sign the bill promptly. President Bush opposed the bill because he claimed that $3.9 billion in proposed neighborhood grants did nothing to help homeowners. President Bush had objected to the neighborhood grants, which would be for buying and fixing up foreclosed properties, saying that they were aimed at helping bankers and lenders, not homeowners who are in trouble.


The bill headed for the President's signature aims to spare an estimated 400,000 debt-strapped homeowners from foreclosure by allowing them to get more affordable mortgages backed by the Federal Housing Authority ("FHA"). The FHA could insure $300 billion in such mortgages. However, banks would first have to agree to take a large loss on the existing loans in exchange for avoiding costly foreclosures.

The bill also seeks to overhaul FHA by requiring lenders to show how high a borrower's payment could get under the terms of his mortgage. The bill also provides $180 million in pre-foreclosure counseling for struggling homeowners.


The bill also is designed to relieve a broader credit crunch that has taken hold because of rising defaults and falling home values. To free up safer and more affordable mortgage credit, the bill permanently would increase to $625,000 the size of home loans that Fannie Mae and Freddie Mac can buy and the FHA can insure. They also could buy and back mortgages 15 percent higher than the median home price in certain areas.

The Treasury Department will also gain unlimited power, until the end of 2009, to lend money to Fannie Mae and Freddie Mac or buy their stock should they need it. The Federal Reserve will also more actively oversee the two mortgage giants.


The bill also includes $15 billion in tax cuts, including a significant expansion of the low-income housing tax credit and a credit of up to $7,500 for first-time home buyers for houses purchased between April 9, 2008, and July 1, 2009. The bill also allows people who don't itemize their taxes to claim a $500-$1,000 deduction on their 2008 property taxes. That chiefly benefits homeowners who have paid off their homes and can't claim a deduction for mortgage interest.

Democratic leaders also tacked on an $800 billion increase, to $10.6 trillion, in the statutory limit on the national debt, which clearly irked many conservative Republicans. Those same Republicans were vehemently opposed to the bill, particularly the help for Fannie Mae and Freddie Mac. Many argue that the companies enjoy lavish profits in good times and wield their outsized political clout to resist regulation while depending on the government to bail them out should they falter.

The Congressional Budget Office ("CBO") announced that the bailout plan could cost the government $25 billion over two years. Hard to argue that US taxpayers are not once again on the hook for a significant bailout. The difficult part in all this is to identify what the alternative is. All this "propping up" lenders and "calming" the markets gives one the feel that this is all a delicate house of cards just waiting to fall. We shall see.

Mr. Foreclosure and the Copper Thieves

A recent Reader's Digest article highlighted Clint Medford, referred to by some as "Mr. Foreclosure." While the foreclosure epidemic certainly has hit many homeowners and would-be investors hard, it has created a host of interesting opportunities for savvy investors and thieves alike.

Often a foreclosed home will sit empty for a time, which has invited a brand of looters who strip a home of its valuable materials. Indeed, as copper prices have sky-rocketed in recent years, desperate looters are stealing copper wires and pipes from foreclosed homes. Indeed, it has been reported that some owners of very expensive homes have stripped their own homes before foreclosure. This phenomenon is happening most prevalently in the Rust Belt states. Some estimate that the average home has over $1,000 in copper in it. Despite some recent legislative attempts to control the scrap metal market, thieves have successfully been able to find buyers for the stolen metal.

In those instances where a lender is sitting on a home that has sat for several months and no longer is inhabitable because of the destruction to the home, Medford steps in. He has created a network of banks that look to him to unload their rising stock of these uninhabitable homes. Medford has picked up houses for as little as a few thousand dollars. Rather than touch the hyper-inflated California markets, Medford focuses his purchases in the tough hit areas in the Rust Belt and places like Detroit, that has been especially hard hit.

Medford puts a little money into the house and turns around and sells it to investors looking for rental properties. Medford has a list of about 600 to 700 investors ready to purchase the homes he has picked up on the cheap from the banks. While selling to investors proved to be good business, Mr. Foreclosure has stepped into a completely new realm - mortgage lender.

For many in the foreclosure belt, many people may be able to afford some of the houses now for sale, but they can not get a mortgage. That is where Medford is stepping in. Rather than make the mistakes that many lenders were making during the rah-rah days of the hysterical real estate boom, Medford works with people by doing something unheard of - verifying their income. Hard to believe there was a time when people could get loans with NO income, just a credit score. The same buyers that obtained sub-prime loans and later faced foreclosure are the same people coming back to buy some of the homes that Medford has to offer. In other words, Medford is stepping in where the banks are all afraid to go right now.

Many question whether someone like Medford is a "foreclosure vulture" or someone willing to stop the forthcoming blight of neighborhoods hard hit by the foreclosure crisis. Sure Medford is charging 11 percent for a mortgage on a house he may have bought for a couple thousand dollars, but he is providing people an opportunity to get back into a house for less than they would be paying in rent in many places. That is a whole lot less shady than the other vultures who swoop in before a foreclosure only to grab someone's title and equity because they can think of no other options. It sure is interesting out there though.

What's With the Short Sale?

Simply speaking, a short sale is when a bank or mortgage lender agrees to allow a homeowner to sell their home for less than the outstanding balance on the home. Lenders often only consider this option if it makes if the cost of a foreclosure is greater than the loss it will suffer as a result of the short sale. Typically, lenders do not accept short sale offers or requests for short sales until a Notice of Default has been issued or recorded with the locality where the property is located. In other words, the lender wants to be assured that the homeowner truly is suffering financial hardship at the time the homeowner requests short sale relief.

As the foreclosure epidemic continues unabated, more and more people are considering the option of a short sale on their home to avoid foreclosure. While many real estate agents are touting this option as a way to avoid the impact on the homeowner's credit, there are other consequences that any potential homeowner must consider as well.

First, in some states like Texas, even if the lender agrees to the short sale, it may be still come after the homeowner for the difference between the amount owed and the amount of the sale, even it approved the short sale. This is known as seeking a deficiency judgment. Indeed, some lenders may not tell a homeowner this until well down the line when the homeowner is less likely to back out. The key issue to consider is whether the loan is a "recourse" or "non-recourse" debt. If the debt is recourse, the lender can come back after the borrower, even if the short sale has been approved. If the debt is non-recourse, the lender's only collateral is the property itself.

Fortunately for borrowers, Arizona has anti-deficiency statutes to protect against a lender going after a borrower for any deficiency.

The other major consideration in a short sale is the potential tax hit to the seller. As if they pressures of a potential foreclosure are not enough, the IRS may hit you for any forgiven debt. In other words, if the bank agrees to a short sale, any amount between what was owed on the mortgage and what the property sells for may be viewed as income by the IRS.

Mortgage Forgiveness Debt Relief Act of 2007

As the foreclosure crisis mounted, Congress and President Bush took action. The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007. Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage or foreclosure on a homeowner's principal residence.

Usually, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. The Mortgage Forgiveness Debt Relief Act of 2007 allows an owner to exclude certain cancelled debt on his or her's principal residence from income.

The Act applies only to forgiven or canceled debt used to buy, build or substantially improve the owner's principal residence, or to refinance debt incurred for those purposes. Rules for debt forgiveness:

  1. The debt must have been discharged by the lender in 2007, 2008, or 2009.
  2. The amount of debt that can be excluded is limited to $2 million.
  3. The exclusion can be used only if the loan was taken out to acquire, build or substantially improve a principal residence. Forgiveness of debt on vacation homes, second homes and investment property doesn't qualify. This is a huge exception given the number of speculative investment purchases that have helped fuel the foreclosure crisis.
  4. Debt forgiven on a cash-out refinance or home equity loan must be apportioned between the amounts used for home acquisition, construction or improvement and amounts used for other purposes such as tuition, travel or repayment of other debts. Only the allowable portion qualifies for the tax break, says John W. Roth, a senior tax analyst at CCH, a provider of tax services, software and information in Riverwoods, Illinois.

So, if a lender accepts a short sale, and the borrower does not meet the exceptions above, again, the IRS normally views the discounted loan amount as income. For the real estate investor, the taxable income may be used to offset other income, but that is an issue best handled by a tax adviser.

In the end, while the short sale seems like a good option on first blush, any sale is discretionary the part of the lender and it will take a significant amount of time to consummate any transaction. Finally, a short sale can have tremendous tax implications to a seller. This is an issue I am not sure that real estate agents are in a good position to advise their clients of. Sellers need to understand there are several issues at play in a short sale, and jumping in without adequate advice can only add more trouble to an already difficult situation.

Not Your Typical Foreclosure....

Clearly, the foreclosure crisis is real and is affecting a broad spectrum of people. In other words, the epidemic is not just hitting homeowners with subprime mortgages with adjusting rates. Indeed, it seems those at the upper echelons are being hit as well. Indeed, Ed McMahon's six-bedroom, five-bathroom, 7,000-square-foot house is on the verge of foreclosure.

While predatory lending certainly is component in the foreclosure epidemic, the example of Ed McMahon exemplifies the current problem - living beyond your means. Ed McMahon stated "If you spend more money than you make, you know what happens. . . " Indeed, this seems to be what is happening to many people in general. When lending was loose, people were qualifying for homes they likely had no business purchasing in the first place. Once the go-go days of the real estate boom ended, equity dried up and many are now upside down in their houses. It seems that no one expected for prices to turn so quickly and drop so hard.

I am not sure there is a silver lining in all of this, but I think with a foundering economy, high gas prices, and the steep downturn in the housing market, people are beginning to reassess their lifestyles, and perhaps question whether the immediate gratification mindset is sustainable any longer.

Foreclosure Woes

I will be focusing many of my future posts on the foreclosure crisis. Here is a good article talking about the record number of foreclosures in the United States.

NEW YORK ( -- More than one million homes are now in foreclosure, the highest rate ever recorded, according to a trade group which warned Thursday that number will continue to climb. The Mortgage Bankers Association's first quarter report showed that a record 2.5% of all loans being serviced by its members are now in foreclosure, which works out to about 1.1 million homes. That's up from the 2% of loans, or about 938,000 homes, that were in foreclosure at the end of 2007.


The report also showed that 448,000 homes, or about 1% of loans being serviced, began the foreclosure process during the first quarter. That's up from about 382,000 homes, or 0.83%, that entered foreclosure in the last three months of 2007. The seasonally-adjusted rate of homeowners behind on their mortgage payments also hit a record high. Nearly 3 million home loans, or 6.4%, have missed at least one payment, while about 737,000 are at least three months past due, but not yet in foreclosure.

Grim numbers

"The figures aren't surprising, but they're pretty ugly nonetheless," said Michael Larson, real estate analyst with Weiss Research. "We're talking higher delinquencies and foreclosures pretty much across the board." And he doubts that there's much reason to expect the foreclosure crisis to abate until next year at the earliest, adding that it could be a couple of years or more before foreclosure rates retreat to more normal historical averages. "It's the same story we've been seeing for a while now - we had too much reckless lending, and buyers who got over-extended," he said. "We've had an unprecedented decline in home prices on a nationwide basis, which is public enemy number one for mortgage loans. And now you've got an overall economy that has slowed adding to this toxic stew."

Good credit, bad credit

Much of the problem lies with subprime loans given to borrowers with weaker credit records, especially those loans that had adjustable rates. Nearly four out of ten subprime ARM loans are a month or more late, or in foreclosure. And subprime ARMs account for 39% of the loans that fell into foreclosure during the quarter. Prime fixed-rate loans, which are considered very low risk, have also seen sharp increases in their delinquency and foreclosure rates, although they are performing far better than the riskier loans on the market. There are 431,000 prime loans in foreclosure, a seasonally adjusted rate of 1.2% that is more than double the 0.5% rate a year ago. The report showed about 1.2 million prime mortgages are now a month or more past due, a seasonably adjusted rate of 3.7% of those loans. That's up from a rate of 2.6% a year ago. According to Jay Brinkman, MBA's vice president for research and economics, the prime loan segment was hurt by so-called Alt-A loans, which didn't require income verification for buyers with good credit. Prime loans are also getting into trouble in places such as Florida and California, which have seen sharp home price declines. "You still have people with prime fixed rate loans who lose their jobs, who get a divorce or have an illness come up, and can no longer afford a house," Brinkman said. "In areas where there's been home price appreciation, you can get out of that with the sale of a home or some other negotiation."

This marks the sixth straight quarter in which a record percentage of loans went into foreclosure.

The trend has led to a widespread decline in home prices, as well as huge losses for banks and other financial firms that issued or invested in the loans.

Nearly half of the homes in foreclosure are concentrated in six states. But those states are undergoing two very different types of housing meltdowns.

California, Florida, Arizona and Nevada have been hit by a hangover after a home building boom in the middle of the decade, which was fueled by rising home prices and investors snatching up real estate using risky mortgages. Those four states have nearly 400,000 homes in foreclosure, or a third of the nationwide total. Roughly 3.6% of all of the loans in these states are now in foreclosure.

"Clearly things in California and Florida are going to get worse before they get better," said Brinkman.

The other two states that are ground zero for the crisis - Michigan and Ohio - have been hit by the more traditional economic woes stemming from rising job losses, particularly in the automotive sector.

Ohio has about 61,000 homes in foreclosure, while Michigan has about 54,000. The foreclosure rate in those two states is 3.9%.

There is a glimmer of good news. The rate of homes going into foreclosure in Ohio and Michigan was narrowly lower than it was in the fourth quarter, and 18 other states also saw a decline in that rate.

Brinkman said he hoped that means the crisis is at or near a bottom in much of the country, and that foreclosure prevention efforts have started to have an effect. But he added that a slight improvement in one quarter doesn't necessarily mean the end is near.

Indeed, the rate of homes going into foreclosure continued to climb sharply higher in California and Florida, as has the rate of loans in those states that are 90 days or more past due but not yet in foreclosure. Brinkman said that in markets like these, where home prices have fallen so far from the market's peak, finding solutions to keep a home out of foreclosure are more difficult.

He also added that, given the large impact California and Florida are having on the national foreclosure numbers, and the fact that historically foreclosures peak about three years into the loan's life, he expects the number of foreclosures will continue to rise.