Many people struggling to pay the mortgages are motivated to consider a short sale. I am often told that it is considered because of their concern that if a short sale is not done, and the property is allowed to foreclosure, they will never be able to own a home again. Today, I want to tackle the perception of that…and present a bit of reality, from my point of view.
Posts Tagged ‘Mortgages and Foreclosures’
Saving the Home: Thinking Beyond “Delay and Pray”
Saturday, January 30th, 2010
The foreclosure numbers don’t lie. According to ForeclosuresMass.com, a total of 478 new foreclosures were filed this week (ending January 29, 2010). Approximately 56 homes slipped into foreclosure every day for the last 60 days. The economy is far from a turn around.
HAMP is not really working – at least in not any meaningful way. Homeowners can expect a “delay and pray” modification or an “extend and pretend.” Taking arrears and putting on the tail end of the note, “delay” (which is a nice way of saying a “balloon” payment), means that for it to be paid off, the value of the property will have to increase (hence, the term “pray”). What seems more accurate is “extend and pretend.” You can extend the terms, such as turning a 30 year note into a 40 year note. Of course, the “pretend” comes into play when you want to “pretend” you want to live in the property, “pretend” that the economy and the housing market will turn around so that you still won’t have to come to the closing table with a checkbook in hand.
HAMP is not the only option available to homeowners trying to avoid foreclosure. There’s HARP, there are short sales and there is the possibility of keeping the home under bankruptcy court protection (either in chapter 13 or 11). While bankruptcy should be one of the last options, I am always surprised at people who quickly dismiss it altogether – especially when it’s the best option available.
Consider this scenario:
‘Extend and Pretend’ Doth Not A Modification Make
Tuesday, July 28th, 2009
Today’s editorial in USA Today chides lenders for playing the “extend and pretend” game with mortgage modifications. The piece is one of the first of what I hope is a larger chorus of supporters of amending the Bankruptcy Code to permit modifications on residences.
There’s just one problem with this game of “extend and pretend.” It’s bad for everyone concerned, including the banks. As the number of houses in foreclosure grows, it damages neighborhoods and pushes down home values.
The best thing Congress could do to aid hard-pressed homeowners is to alter bankruptcy law to allow judges to modify troubled mortgages, as they do with virtually all other debts. This common-sense change would give lenders more incentive to make modifications themselves, rather than lose control to a bankruptcy judge.
It’s time to start pressuring Washington about this again. And this time, we need to be sure that Washington hears from everyone. Start talking.
‘20 Months Too Late’: Let’s Start Rethinking Mortgage Modifications in Chapter 13
Wednesday, June 24th, 2009
I’ve been thinking about yesterday’s blog entry. When I first read the First Circuit decision, I wondered why the case was brought. Here was a homeowner arguing that a mere technical violation of TILA would enable him to rescind a mortgage that he signed 20 months prior. Based on the facts cited by the Court, it seemed a bit disingenuous. But then, as I was thinking about it more, it occurred to me that what did not sit well with me was not what I knew from the court decision. It was what I didn’t know. I knew nothing about the homeowner.
I don’t know if the homeowner knew exactly what he was doing when he was at the closing. I don’t know if the homeowner was honest when he was applying for the loan, but knew that he could not afford the mortgage unless he was able to refinance. I don’t know if he was banking on rates going down, his property value going up, or both.
I don’t know if the mortgage broker lied, if the notary was drunk, or the closing agent fled to Columbia after the closing. I don’t know if the homeowner was warned every step of the way, but heard and saw only what they wanted to.
I don’t know if the homeowner simply misgauged what the future might hold. I don’t know if he was motivated by greed. I don’t know if he was motivated by someone else’s greed, like family member’s, fueled further by his reluctance or his refusal to urge restraint.
I don’t know if his inability to afford the payments is based on what they could have controlled, but for whatever reason, did not. I don’t know if he had the ability, the choice or the wherewithal to do everything he could to avoid heading into the financial minefield he now finds himself in.
I don’t know if it was a father trying to refinance their home because of a child – a new child to be born, an older child to be schooled or a sick child to be healed. I don’t know what was going through his mind. I don’t know what was going through his heart.
I also don’t know if the homeowner himself or his spouse was ill. Assuming they were, I don’t know if he was ill because of something he couldn’t control, or if his quart-of-gin-and-two-pack-a-day lifestyle was finally catching up with him.
I don’t know if the homeowner was employed, was under employed or was unemployed. I don’t know if the homeowner one day went to work only to find the office doors locked or if he came home to find his spouse gone.
I don’t know if the homeowner refinanced to pay for a new roof, new wiring or a new septic system. I don’t know if it was for a man-cave for him or an addition for his ailing mother.
Nor do I know if the homeowner was a scoundrel. I don’t know if he overestimated his income to such a degree that it reflected a hope for a better, brighter and richer future than any rational person would think possible. I don’t know if this is just one more thing he had already assumed he was going to get away with.
Regardless of the one or the combination of any of the above things that I do not know, I do know that the homeowner cannot go to bankruptcy court to modify the loan secured by the mortgage on their principal residence. If you simple replace the words “I don’t know” with “What if you knew that…?” in each of the above situations or with a combination of any, and was able to consider what you did know, it would not change anything because the homeowner still could not modify the loan secured by the mortgage on their principal residence in bankruptcy. But more simply stated: for the homeowner before the First Circuit Court of Appeals seeking to change the terms of a promise he made 20 months prior, I don’t know the reasons why.
Section 1322(b)(2) of the Bankruptcy Code of the United States won’t allow any homeowner in chapter 13 to seek modification of a loan secured by their principal residence regardless of the reason. Congress has determined that the reason for the requested modification is irrelevant. They have determined that no one, no judge, and indeed, not even me or my readers need ask why the modification is needed in chapter 13. From the perspective of Congress (and frankly that of the Mortgage Bankers Association and their ilk), “why” is irrelevant. (Actually, I’m not entirely correct on that point. Lenders can choose to voluntarily modify the mortgages on a debtor’s principal residence. They alone can consider the reasons “why.”)
Our country is embroiled in an economic crisis of historic proportions. It’s bad out there, and for many may get worse. If I’m eventually (i.e., within several months) proven wrong then you can all paint me crazy and I’ll find myself my own “Plan B.” Until then, let’s all help each other find answers to the questions that start with “What if you did know…?” And let’s start a meaningful discussion that may result with an amended Section 1322(b)(2) that will let homeowners prove in our forum of last resort (the Bankruptcy Court) the desperate financial situations they find themselves in, and will let judges consider and weigh the reasons why they should get a second chance to keep their family home. If for no other reason because it defies logic that the same standards be applied to someone who has been dealt a bad hand versus someone who is gaming the system.
20 Months Too Late
Tuesday, June 23rd, 2009
When a homeowner refinances their mortgage, the lender must give certain notices under the federal Truth in Lending Act, also referred to as TILA. For a number of good reasons, homeowners must be given a notice that informs them of their rights to rescind their mortgage. But what happens if the notice does not strictly comply with what TILA’s requirements? Does any flaw in the notice permit a homeowner to rescind a mortgage? On June 11, the First Circuit Court of Appeals had an opportunity to answer that question.
The case involved a borrower who had been given a copy of a rescission notice at closing. The notice stated:
You are entering into a transaction that will result in a mortgage/lien/security interest on our home. You have a legal right under federal law to cancel this transaction, without cost, within THREE BUSINESS DAYS from whichever of the following events occurs LAST:
(1) The date of the transaction, which is ______; or
(2) The date you receive your Truth in Lending disclosures; or
(3) The date you received this notice of your right to cancel.
The homeowner also received information on how to cancel the transaction (i.e., how and when notices must be sent).
Under the Federal Reserve Board’s regulations, specifically, Regulation Z, when a homeowner rescinds the mortgage, the homeowner is “not …liable for any amount, including any finance charge” and the lender “shall return any money or property that has been given to anyone in connection with the transaction.” Now if the notices the homeowner receives do not comply with TILA, or if the homeowner never received any notices, the homeowner has up to three years to rescind the mortgage, rather than just the three days. Three years versus three days: that can be particularly advantageous to a homeowner seeking to refinance when interest rates are lower, or if a loan that seemed like a good idea at the time has now revealed that it’s really not a good idea at all.
This homeowner argued that he was able to rescind the loan 20 months after closing because the “date of transaction” line in the notice was left blank. However, the date of the transaction was stamped on the upper right hand corner of the notice (although not precisely in the blank line). But that was not the only issue that worked against this homeowner.
The homeowner attended the closing and admitted receiving the notices at the closing. The only possible issue was that the closing occurred on a Saturday, and it might be difficult to determine exactly when the three days expired (i.e., the following Tuesday, Wednesday or Thursday). But the argument here was not over a few days, it was over a few months. This homeowner was effectively arguing a mere technical violation of the notice that the Court found would impose a penalty on the lender while at the same time allow a windfall on the homeowner. For those reasons, the Court found that there was no way the blanks misled the homeowner as to when his rescission rights expired, and his request to rescind was untimely.
What options does this homeowner have? It’s tough to say. The decision does not discuss the homeowner’s income and expenses or whether there is a possibility that the homeowner can benefit from a bankruptcy filing. But remember, if the home is the principal residence, modifying the loan in a bankruptcy will not be possible.
The Sunday News
Sunday, June 14th, 2009
A fellow bankruptcy attorney shared this article that appeared in last month’s New York Times Magazine. I see in it some of the same difficulties I see in clients. It also makes me question how “half-empty” the glass really is. Although in the interest of full disclosure, the writer has a book coming out. In other news…
ONE FLAG! Six Flags Amusement Parks files for Chapter 11 protection.
Nashua NH Telegraph: Welcome to the New Consumer Economy.
Boston Herald: Consumer spending may never be the same as it was.
South Coast: Home values could take years to recover. We also could be hitting bottom (I’m not being sarcastic, it says the market “could be a reading a valley”). I could also be a ledge (ok, that was sarcastic).
Nantucket foreclosures. I wonder if these homeowners claim their loan was predatory? I also have to question whether it was.
A bad apple is removed from the barrel: Brockton lawyer settles fraud suit with the Massachusetts Attorney General’s office.
The Handwriting on the Wall
Saturday, June 13th, 2009
Over the last two years or so, I’ve seen a particularly troubling trend with homeowners seeking bankruptcy protection. It is making bankruptcies unnecessarily complicated and expensive. It also puts them at a greater risk of failing – at least once (which at the very least, makes it more expensive). It’s the trend for them to wait until the very last minute to actually consider bankruptcy as an option. This is a bad, bad idea.
Years ago, I would hear from callers who had oppressive credit card debt, medical bills and had experienced some sort of major life event: job loss, medical crisis, death in the family, or divorce. That debt was getting out of control, but their real estate was usually current….or perhaps was approaching default but not in foreclosure. They could see the handwriting on the wall; they could see the storm clouds on the horizon. They needed to prepare for what they thought was inevitable. Nowadays, it’s usually quite different.
Now I typically hear from callers who are facing foreclosure within 2-3 weeks, and if they (and I) are lucky, they have more than a month before the scheduled auction. The reasons are essentially the same: many are losing jobs, wages and overtime is getting frozen or eliminated, mortgage payments and other debts have creeped up. There is also the occasional debtor with a health care issue or some other extraordinary set of circumstances. The bankruptcy filing can delay the sale, and give the debtor an opportunity to reorganize finances or even secure a loan modification. But think about this – if you Google “GM Bankruptcy” you will see that pundits were talking about GM’s bankruptcy last fall (look under archives). I am willing to bet GM was at least thinking about it was well. I’m also willing to venture that GM was preparing for the possibility of having to file bankruptcy. For homeowners, there’s no good excuse to be waiting until the auction has been scheduled and the notice has been published to be at least considering and planning a bankruptcy filing. Think of it as Plan B.
Unfortunately, to homeowners who are attempting to secure a modification of their loan, I have some bad news. Lenders are not all that organized themselves: it’s not altogether uncommon for the foreclosure department who is handling the auction not to be speaking to the loss mitigation department who is handling the modification and vice-versa. Perhaps this is what happens when we let companies get too big to fail. I realize that this lack of communication protocol may seem strange if not completely asinine, but this has been my experience, and my colleagues who represent lenders have shared their frustrations with me on this issue as well. Thus, your request for modification will not necessarily stall a foreclosure.
Of course, filing a properly prepared chapter 13 bankruptcy petition takes quite a bit of work. And documents. And information. And good counsel. Tax returns need to be filed. Pay stubs or payment advices need to be gathered. Property needs to be valued. The Bankruptcy Code requires that documents be filed within a certain period of time after the case is filed. A typical bankruptcy petition – along with a chapter 13 plan – can exceed well over 45 pages. And chapter 13 plans require some thought, strategy and expertise.
If a debtor seeks bankruptcy protection but does not have this information properly prepared when the case needs to be filed, an Order to Update will enter. The Bankruptcy Court will order that the debtor file all documents by a date certain: anywhere from 3-14 days. Need an extension? You might get one. You also might not.
I am increasingly finding that debtors simply do not have the information needed within the 3-14 day period. Sometimes I can get an extension. Sometimes I cannot. Sometimes the pro se debtor cannot get one and that is the first time they pick up the phone and speak to a bankruptcy attorney. The delay, the motions, and frankly, the hunt for this information under the pressure of a strict time deadline only adds to the expense and increases the risk for error. It also does nothing to quell the anxiety of what is undeniably a stressful situation. Sadly, this is all fueled by debtors who are considering bankruptcy only within weeks, days or in worse case scenarios hours before a foreclosure auction is scheduled to move forward. And in many cases, their delays prove costly, and may also lead to their case imploding.
If you are a homeowner who is serious about saving their home and attempting to keep what you have worked hard for, then you must consider bankruptcy as an option at the earliest opportunity. This way, you can start gathering information and be ready to go if the mortgage modification doesn’t come through.
Of course, there are others out there who I know are telling folks not to think about bankruptcy. There are others who mislead with claims that bankruptcy protection is harder to get now. If you rule it out the bankruptcy option without getting the facts, speaking with a bankruptcy attorney, and understanding process and what will be expected of you in that process, I promise you this: you will regret it.
Anyone that tells you differently is selling you something.
The Cramdown Bill is Dead
Thursday, April 30th, 2009
From MSNBC:
A dozen Democrats joined Republicans in the 45-51 vote to scuttle the bill, which Obama had said was important to saving the economy and promised to push through Congress. But facing stiff opposition from banks, Obama did little to pressure lawmakers who worried it would encourage bankruptcy filings and spike interest rates.
I remind everyone that next year, 2010, is an election year. If you want to know who to blame, here’s the roll call vote.
Mortgage Modification/Cramdown Bill Update
Tuesday, April 28th, 2009
From Today’s Washington Post:
Days before an expected vote, Senate leaders yesterday touted their version of a proposal to allow bankruptcy judges to modify mortgages, but have yet to secure the support of the financial services industry and face fierce opposition that could derail the proposal again.
The characterization of the opposition being “fierce” is unfortunate, but it appears to be accurate:
“I hope we can muster the courage and find the votes, although I know it will be hard,” (Senate Majority Whip) Durbin (D-Ill) said on the Senate floor yesterday. Durbin has been pushing the measure for more than two years. “It’s hard to imagine that today the mortgage bankers would have clout in this chamber, but they do.”
For more on the President’s Foreclosure Prevention Plan, click here.
Does the Cramdown Bill Have a Chance of Passing?
Wednesday, April 22nd, 2009
A report from Housing Wire suggests that the answer may be ‘no’.
“[Senator Richard] Durbin [D-Ill] had a hell of a time coming up with a bill that’d pass the Senate,” said Burt Ely, a banking expert and principal of Ely & Co. “He’s watered it down so much that his proposal now limits the accessibility or intention of the bill. Even if he got it passed, the gulf is so big it wouldn’t even get out of [the House] conference committee to be enacted into law.”
Not surprisingly, consumer advocates are seeing red.
“With Durbin, Dodd and Reid doing the bidding for the banks, this current state of the cramdown bill will have virtually no impact for at-risk borrowers,” says Bruce Marks, CEO of Neighborhood Assistance Corp. of America, a mortgage broker and consumer activist. “The Senate Democrats have made no measurable actions this year to help the housing crisis.”
