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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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

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

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

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

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

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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?

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

The Federal Housing Finance Agency, which has served as the conservator of Fannie Mae and Freddie Mac since 2008, is looking to recoup on serious losses that the government sponsored entities have suffered as a result of their heavy purchases of mortgage-backed securities during the hey days of the real estate bubble.  The FHFA has hired Quinn Emanuel Urquhart & Sullivan LLP, a large law firm out of L.A. and has issued sixty-five subpoenas to various banks.  The probe is focused on private-label securities that were originated by mortgage companies, packaged by Wall Street firms, and then sold to investors.  This has the potential to throw open the floodgates of litigation against originators of loans who securitized these loans and sold them to investors like Fannie Mae and Freddie Mac. 

With the financial backing of the US government and a large LA law firm set to push forward, the stage is set for a serious inquiry into the originating and securitization practices of many institutions.  Quoting Joshua Rosner of Graham Fischer & Co, the Wall Street Journal recently reported if the FHFA is successful in proving that loan files didn't meet underwriting standards or that their ownership chain wasn't properly transferred during the securitization process, that could pave the way for other investors to make similar challenges. 

Fannie and Freddie were two of the largest investors in mortgage backed securities during the height of the real estate bubble.  "Those securities were often backed by subprime loans and mortgages that required little or no documentation of borrower incomes, which deteriorated sharply once home prices fell."  Indeed, Fannie and Freddie purchased $227 billion of bonds backed by subprime and other risky loans in 2006 and 2007. 

In the end, they paid the price for trying to keep pace with the returns that investment banks and retail banks were making, all of which led to the financial crisis in 2008.  Once again, the US taxpayer is on the hook for those losses, which the FHFA is now trying to recoup.  However, some analysts are saying that FHFA is going to have a hard time proving that Fannie and Freddie, which "touted their unparalleled mortgage-market expertise," didn't know what they were buying.  Either way, the new associates at Quinn Emanuel are going to have plenty to do in meeting their 2000+ hour billable requirement and the US taxpayer paying dearly for those new associates.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In one of my prior blog posts (April 6, 2010 - "Tax Lien Foreclosure: Ready, Willing, and Able to Redeem"), I wrote about an unpublished Memorandum Decision from the Arizona Court of Appeals, Division 2 - Leveraged Land, Montgomery, v. Hodges, 2 CA-CV 2009-0057.  In that Decision, the Court overturned a default judgment that a tax lien investor had obtained through service by publication in a newspaper, which restored the owner of record's ability to pay off the delinquent property taxes.  Service by publication is often the only way to notify someone about a pending lawsuit, because in many cases all efforts to personally serve someone prove unsuccessful.  Because service by publication is not the preferred manner of serving defendants, the courts allow a default judgment that is obtained through serving a defendant by publication to be challenged for up to a year after the judgment is obtained. 

In the Leveraged Land case, even though service by publication was warranted, the Court, based on prior precedent, ruled that the owner of record, because he was ready, willing, and able to pay off the tax lien, should be entitled to do so.  Additionally, the Court ruled that the tax lien investor must understand that any default judgment obtained through service by publication is open to attack for up to a year, and the fact that the tax lien investor later decided to sell the property to a third-party before that time period had run was their own fault.

The Arizona Court of Appeals recently issued a written Opinion stemming from the same litigation.  In this set of appeals, the Court was faced with two primary issues on appeal: (1) were Appellants Raven II Holdings, LLC ("Raven"), Hanna 120 Holdings, LLC ("Hanna"), and Bingham Arizona Land, LLC ("Bingham"), the subsequent purchaser of the property from Leveraged Land, LLC,  "bona fide purchasers" of the property that was the subject of the tax lien foreclosure case? and (2) was Leveraged Land entitled to recover all of its attorneys' fees under A.R.S. Section 42-18206. 

A "bona fide purchaser" is used to refer to one who purchases property for value with notice.  Regarding the issue of whether Raven, Hanna, and Bingham were "bona fide purchasers," the Court held that because Leveraged Land properly recorded the Treasurer's Deed and the Default Judgment was attached to it, all subsequent purchasers were given "constructive notice" that the Default Judgment was subject to legal challenge, and "the risk of disruptions to any subsequent conveyances of the foreclose property fell squarely on" Leveraged Land and its successors.

Leveraged Land appealed the trial court's award to it of attorney's fees in the amount of $1,500.00. The trial court ruled that the amount of attorney's fees that Leveraged Land requested was "unreasonable," though it provided no basis for such a determination.  Leveraged Land argued on appeal that such an award was arbitrary and had no reasonable basis, especially when it had already been determined by the Court of Appeals that service was done correctly, thus entitling Leveraged Land to recovery of its fees if the owner of record later redeemed, which is what Hodges did in this case.  Hodges, who was permitted to redeem the tax lien, argued that Leveraged Land was not entitled to attorney's fees it incurred in opposing his redemption.  The Court ruled that, over a dissenting opinion, a plain reading of A.R.S. 42-18206 leads to the conclusion that Leveraged Land is entitled to recover its attorney's fees even if it was eventually unsuccessful in its appeal on the issue of whether Hodges was entitled to redeem the tax lien.  The Court of Appeals, ruling that the trial court had abused its discretion, has remanded the case back to the trial court for a determination of the amount of attorney's fees that Leveraged Land is entitled to.

One has to wonder just how much the subject property was worth in order to justify the level of expenditures in the underlying case, which resulted in three different appeals.  In the end, the Court of Appeals made it clear that A.R.S. Section 42-18206 is unambiguous and permits a party to recover its attorney's fees if the owner of record redeems a tax lien after proper service of process, and will leave it to the trial courts to determine what fees are "reasonable."  

• Email This
• Print
• Comments
• Trackbacks
• Share Link

It never ceases to amaze me how astute and opportunistic people can be when it comes to making money.  In the Arizona tax lien foreclosure realm, there exists a group of opportunistic investors that derisively have been called "bottom feeders" or "title raiders."  What these people do is comb public records to find pending tax lien foreclosure cases.  The easiest way to find a pending tax lien foreclosure case is to search for a recorded Lis Pendens, which is a recorded public document that gives notice that a particular real property is subject to pending litigation.  A Lis Pendens is used in real property cases where title is at issue. 

Once these "bottom feeders" find the recorded Lis Pendens and the associated tax lien foreclosure lawsuit, they quickly write to or physically approach the owner of record and attempt to purchase the property on the cheap, because both the owner of record and the "bottom feeder" recognize that the owner of record is likely to lose the property anyway, as the owner is unable to pay off the delinquent property taxes.  If the owner of record is willing to sell the property on the cheap, then the "bottom feeder" purchases the property and the owner conveys the property.  Under the prior A.R.S. Section 42-18206, which was recently amended, if the owner of record redeems the tax lien after having been served personally or by publication in the action, judgment shall be entered in favor of the plaintiff against the person for the costs incurred by the plaintiff, including reasonable attorney's fees to be determined by the court.  The reason these individuals have been derisively referred to as "bottom feeders" is that by obtaining the subject property prior to the owner of record being served, the prior owner and the current owner (the "bottom feeder") avoid having to pay the tax lien investor's attorney's fees and costs, which are not insignificant. 

Well, this all changed on July 29, 2010, when changes to A.R.S. Section 42-18206 became effective.  A.R.S. Section 42-18206 now states (with changes highlighted): Any person who is entitled to redeem under article 4 of this chapter may redeem at any time before judgment is entered, notwithstanding that an action to foreclose has been commenced, but if the person who redeems has been served personally or by publication in the action, or if the person became an owner after the action began and redeems after a notice is recorded pursuant to section 12-1191, judgment shall be entered in favor of the plaintiff against the person for the costs incurred by the plaintiff, including reasonable attorney fees to be determined by the court.

This new law will severely hamper the ability for the "bottom feeders" to obtain properties from owners prior to those owners being served with notice of the lawsuit.  What this new law does not do away with is the continuing risk to tax lien investors who must still get owners served before they pay off the tax lien.  If the owner of record pays off the tax lien prior to being served, the tax lien investor must eat the costs and attorney's fees he or she has incurred.  Nonetheless, this change in the law will unquestionably limit some of the downside risk of tax lien investing, as the "bottom feeders" will face the very real risk that they will be responsible for the tax lien investor's fees and costs incurred. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In the tax lien foreclosure world, appropriate service of process is absolutely crucial.  Consider what is at stake in a tax lien foreclosure case - the potential forfeiture of the right of the owner of a property to pay off their delinquent property taxes, which practically speaking means the likely loss of their property.  If you are going to foreclose on someone's property, for their failure to pay property taxes for five consecutive years, you better give them adequate notice of the pending case against them.  

A recent memorandum decision from Division 2 of the Arizona Court of Appeals, Leveraged Land, Montgomery, v. Hodges, 2 CA-CV 2009-0057, deals with the issue of what happens in a tax lien foreclosure case where the owner of record has only been served by publication in a newspaper.   Memorandum decisions, while instructive for lawyers to consider how the courts may rule in a future case, unfortunately cannot be cited by as legal authority.  

In Hodges, the tax lien investor filed a complaint to foreclose the owner's (Hodges) right to redeem the tax lien.  The tax lien investor apparently was unable to serve Hodges personally and served Hodges by publication.  A default judgment was eventually entered against Hodges and the tax lien investor obtained a Treasurer's Deed and then sold the property.  Hodges later filed a motion to set aside the default judgment, arguing in part that the judgment was void because he had "good cause" entitling him to a new trial.  The trial court denied his motion and Hodges appealed. 

Hodges argued in his appeal that he was "ready, willing, and able to redeem the property" and that entilted him to a new trial.  Under Rule 59(j)(1) of the Arizona Rules of Civil Procedure, when a judgment has been entered on service by publication, and the defendant has not appeared, a new trial may be granted upon application of the defendant for good cause shown by affidavit, made within one year after the judgment has been entered.  Relying on a 1942 case that was very similar in facts, the appeals court held that because Hodges was "ready, willing and able to redeem the property," the trial court erred in not granting the new trial.  The court remanded the case back to the trial court stating that the trial court should give Hodges a new trial. 

After sending the case back to the trial court, Hodges paid off the property taxes after working with some third-party investor who took a partial legal interest in the property.  The tax lien investor appealed the new judgment of the trial court arguing that Hodges did not have the ability at the time of the original case to pay off the tax lien, which Hodges admitted he did not.  The appeals court went on to rule that "the end result of a successful Rule 59(j) challenge is the restoration of a defendant's right to redeem."  The appeals court, applying equitable principles, stated that "purchasing tax liens entails risk and the onus is on the purchaser to protect its own interests."  The Court also stated that the tax lien investor must understand that any default judgment obtained through service by publication is open to attack for a year, and the fact that the tax lien investor decided to sell the property before that time had run was their own fault. 

Warning tax lien investors: if you are going to get into the tax lien investment world; beware, as there are pitfalls that come up that late night infomercials do not tell you that. 

Warning attorneys: do your due diligence upfront and get people served personally. 

Additional warning attorneys: it seems pretty clear that the court does not look too favorably on tax lien investing. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link