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

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.   

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

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

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

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

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

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

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

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

The list of participating servicers includes:

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

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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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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. 

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Once an investor has owned a tax lien certificate of purchase for at least three years since it was first offered for sale by the given county, the investor may seek to foreclose the right of the property owner to redeem the tax lien. Arizona's statutes (A.R.S. Section 42-18201, et seq.) govern the foreclosure process.

Specifically, Arizona Revised Statute Section 42-18201 requires that at least thirty days before filing an action to foreclose the right to redeem, the tax lien holder must send a notice of intent to file a foreclosure to the property owner. Section 42-18201 specifies exactly how that is to be done.

The recent Arizona Court of Appeals case of Roberts v. Robert, 158 P.3d 899 (App. 2007), has added to the due diligence necessary to successfully foreclose the right of a property owner to redeem a tax lien. In Roberts, the Roberts purchased two tax liens for property located in Mohave County, Arizona. The Roberts later sued the owner of record, Phyllis V. Johnson, the Mohave County Treasurer, various fictitious parties, and the "unknown heirs of any of" them "if they be deceased" to foreclose their right to redeem the tax liens.

After attempting personal service on Johnson, the Roberts discovered that Johnson had died. A son of Johnson, was served on Johnson's behalf and subsequently entered into an arrangement with the Roberts whereby they would obtain a default judgment without any subsequent assessment of fees or costs against Johnson or the son. The Roberts later obtained a default judgment barring Johnson or any person claiming title "under" her from asserting any right, title, or interest in an tot he property subject to the tax lien.

A year later, Tim Roberts appeared, claimed to be the son of and heir of Johnson, and argued that as an heir, he had a right to redeem the tax liens. He then moved for a new trial and asked the trial court to set aside the default judgment, arguing that the default judgment was void because he had not been personally served or served by publication.

The issue presented to the Court of Appeals was whether Johnson's heir had a right to redeem a tax lien. The Court of Appeals ruled that because Tim Roberts was Johnson's rightful heir, he a right to redeem. The Court also ruled that only those parties who are joined in a foreclosure action may have their rights to redeem foreclosed. Thus, ruled the Court, the Roberts need to join Tim Roberts as a defendant in their foreclosure action and obtain a judgment against him to foreclose his right to redeem.

The Court also set the standard for what level of due diligence and due process will be required in a tax lien foreclosure action in Arizona. Depending on the circumstances, the Court ruled that a tax lien holder may need to examine public records, or may need to ask relatives, friends, or the neighbors of the deceased property owner about the existence of heirs. In the end, the Court stated that whether service by publication is constitutionally sufficient will turn on the facts of the particular case, and it would not attempt to set forth a rule that will fit each circumstance.

This case clearly sets a due diligence and due process standard, but leaves it up to the circumstances of each case to dictate what efforts will justify service by publication. Indeed, the Court rejected the Roberts' contention that they did serve Tim Roberts as an "unknown heir." The Court stated that the record contained no evidence of what steps, if any, the Roberts took to identify and locate Johnson's heirs before attempting service by publication.

The message is clear - if the property owner has died, some efforts must be made to locate the heirs of the deceased property owner before service by publication will be deemed appropriate under the circumstances. This decision clearly will place a heightened burden on tax lien investors and will undoubtedly increase the cost of successfully foreclosing the right to redeem. It will be interesting to see if future court decisions spell out in greater detail what level of due diligence and due process will be required. Until then, investors beware - do your due diligence.

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