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

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

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

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

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

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

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

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

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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?

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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.

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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.

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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.

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The Arizona legislature, probably with some good ol' vested interest prodding, provides a nice little mechanism to insulate tax lien investors from some of their down-side risk.  Under A.R.S. Section 42-18206, any person who redeems a tax lien after they have been personally served with a complaint seeking to foreclose their right to redeem then becomes responsible for the costs and reasonable attorney's fees that the investor instituting the action incurred.  Sometimes it is very difficult to get the owner of record or any other interested party in a given parcel, subject to a tax lien,  personally served.  Indeed, sometimes it is not possible to effect personal service in the way we normally think of people getting served - a process server handing the lawsuit to the person - because they are evading service or cannot be located despite diligent efforts.  Consequently, a person sometimes must be served by publishing a copy of the summons in a newspaper for four weeks in the county that the person is believed to live in and the property is located. 

In Richie v. Salvatore Gatto Partners, Division I of the Arizona Court of Appeals faced the legal question of whether an award of attorney's fees and costs under A.R.S. Section 42-18206 may be triggered by initiating service of process via publication or is available only after completion of the publication process under the Arizona Rules of Civil Procedure.

The appeals court ruled that the entitlement to an award under the statute requires completion of service.  The court reasoned that because the redemption occurred before the conditions to perfect service by publication were met, service of process was not actually complete.  Merely initiating service, but not completing service was not sufficient for an award of fees.   

I find it hard to believe that the trial court ruled the other way on this one.  It seems pretty clear that you need to actually complete service before you are entitled to fees. 

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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? 

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