California foreclosure blog

Yesterday, I posted information about the bankruptcy reform proposals under consideration in the Congress. This morning, on the front page of Yahoo!, there's a story entitled "How Banks are Worsening the Foreclosure Crisis."

It's interesting reading, to say the least.

The banking industry thought that the housing market would turn around, and the foreclosure mess would work itself out. Under normal economic circumstances, this could have happened. Of course, had the banking industry pulled its head out of the sand to look at what was propping up the economy, they would have realized that the housing bubble had burst and their assumptions were invalid.

So, what are lenders doing to take on the growing problem?

They're denying that it exists.

Mortgage lenders claim that they've "modified" uhndreds of thousands of loans...I'm surprised they can keep a straight face while making such absurd statements. They also claim that there is no real problem - in their world, "irresponsible borrowers" are solely to blame for the current, but nonexistent, unpleasantness in the housing market. And yet, this same industry asks for handouts in the hundreds of billions, at taxpayer expense.

The lending industry is also going to Washington this week to lobby Congress to kill, or at least seriously curtail, the proposed bankruptcy reforms I posted about yesterday.

Here's the thing: if there's no problem, what are these guys afraid of? Having their loans treated the same as a yacht loan?

The bottom line is this: for whatever reason, there appear to be many people within the lending industry who are out of touch with objective reality. Even their own lobbyists acknowledge that lenders should have addressed the foreclosure crisis two years ago by making meaningful adjustments to bad home loans.

Now, instead of addressing the problem, banks are trying to buy their way out of a remedy that will give some real leverage and relief to regular people. If the prospect of this upsets you, I urge you to contact your Congressional Representative, and your Senators, and let them know what you think about caving in to the lending industry. Hopefully, the politicians will side with the people over the well-heeled special interests.

So it's been quite awhile since I've posted anything. I've had my hands full trying to bring lenders to the table to work with my clients. We have had some successes and some disappointments, but mostly it's waiting around for lenders to get back to us.

One exciting development is the prospect of a change to the Bankruptcy Code that will allow judges to treat home loans like any other secured debt. Under current law, if your car, boat, farm, or vacation home is worth less than the loan(s) secured by it, the judge can reduce the principal balance to reflect the lender's actual secured value, and adjust the payment terms accordingly. In bankruptcy circles, this is referred to as a  "cramdown." For the past several years, home loans, especially first position loans, have been off limits to this sort of treatment.

Senator Richard Durbin has been trying to change that. He first introduced legislation to fix this issue back in 2007, and again in 2008, but the Bush Administration made it clear that any such measure would receive a veto. Now that we have an Obama Administration (President Obama has long expressed support for this type of reform), many people believe that the present form of the bill could be approved in the coming weeks. The proposal is being called the "Helping Families Save Their Homes in Bankruptcy Act of 2009."

Senator Durbin, along with Representative John Conyers, Jr. in the House, have worked on getting the measures through their respective chambers in Congress. The House version has already been amended and approved by the House Judiciary Committee, and floor hearings started earlier this week. The Senate version is still in the Judiciary Committee. The Senate bill is SB 61, and the House version is HR 200.

For obvious reasons, the lending industry is fighting against the proposal tooth and nail. Banking trade groups are using scare tactics by claiming that the cost of home loans will go up as much as $297 per month - of course, no evidence is offered in support of such a wild claim.

In fact, Professor Adam Levitin with the Georgetown University Law Center did a statistical analysis of actual loan rates the last time bankruptcy judges had this power. From 1981 to 1993, some parts of the country allowed judges to cramdown home loans, while other parts of the country did not allow it. As a result, we had a two tiered bankruptcy system, and the ability to compare home loan rates in cramdown areas to rates in non-cramdown areas. The result? Rates were not higher in the cramdown areas.

If passed, the changes proposed will give homeowners leverage to get lenders to make reasonable, sustainable changes to their loans. This is because most lenders will want to avoid bankruptcy like the plague - especially on homes with severely under water values.

One last benefit of the current proposal ties back to TILA. If a homeowner can show that the lender violated TILA in such a way as to give the owner a right to rescind, the judge would have the power to invalidate the debt entirely. This is a huge risk for lenders, especially on loans made during the bubble, because so many signings were done with mobile notaries and little to no follow up or oversight. While some may see this as a heavy penalty, take a look at the Bankruptcy Code sometime - it's full of heavy penalties that are intended to punish a debtor or creditor who fails to play by the rules.

Now that the election results have begun to sink in, and economists have decreed that our economy is officially in recession (actually, the recession started a year ago), lenders are starting to see the writing on the wall. If lenders don't do more to work with homeowners to fix bad loans, then the new Congress and incoming Obama Administration will likely pass legislation that will force lenders to do things that the lenders will not like.

As a result, lenders have been announcing new and improved loan modification programs at a blistering pace. The problem is, there are too many new programs for the average homeowner to keep track of, and many programs have conflicting eligibility requirements.

The most publicized program is that of the FDIC, which has set a great example of how to work out bad loans through its mandated modification program for IndyMac borrowers. As the FDIC takes over more and more troubled lenders, its program may well become the standard that other lenders look to. Even so, the IndyMac plan is far from perfect: IndyMac's implementation of the plan has been slow because of the need to hire and train enough people to do the work, the FDIC may have scrapped IndyMac's traditional workout guidelines in favor of its new approach, and an IndyMac representative told me flat out that the FDIC workout options will not be discussed with any borrower representative, even a lawyer.

Then we have the Fannie Mae and Freddie Mac workout plans. I would love to tell you more about how these plans work, but I can't because I haven't spoken to anyone who's done one or is even in the process of doing one. The main reason for this is that these plans have what I believe is a major flaw: borrowers must be at least 90 days late on their loan payments to qualify for these plans. Many homeowners who are that late on loan payments really cannot afford to keep their homes. I think the folks who came up with these plans understand that. As a result, nearly no one will qualify for these workouts. It's a case of Fannie and Freddie refusing to take objective reality on the ground for what it is. That happens to be the very reason the government had to take over the ailing companies in the first place.

Then we have the hodgepodge of private, voluntary programs offered by lenders, which range from laughably unrealistic to very good long term solutions. While there are too many to comment on individually, I can say that my own experience has made me realize that two rules generally apply: it's a tightrope walk even under the best of circumstances, and borrowers will do better if the lender stands to take a huge loss in a foreclosure.

The continuing wave of bank takeovers and forced buybacks of loans present challenges to homeowners seeking help with their loans - your loan may be with one bank today, and with another bank or the government next week. If you are a homeowner struggling with a bad loan, you should consider getting qualified professional help to deal with your lender.

Remember how, after the September 11 attacks, Congress moved swiftly to eliminate law enforcement "turf wars" over sharing information and cooperating to catch evildoers? In light of recent events in the financial world, it's time for bank regulators to work together for the common good and stop the current practice of pissing contests and flat out refusal to hold bad lenders accountable. There's a great article on the issue from The Seattle Post-Intelligencer.

Here's what's been going on to date: literally dozens of state Attorneys General have attempted to take large, nationally chartered lenders like Washington Mutual and National City Bank to task for predatory lending practices and violations of state consumer protection laws. Their efforts always end up hitting a brick wall.

The culprits: the federal Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS), the two agencies that oversee federally chartered banks. Actually, under the Bush Administration, these agencies have consistently refused to oversee lenders.

Often, the OTS and OCC would come to the aid of the banks, ordering state investigators to back off because the federal agencies claim exclusive regulatory authority.The agencies have gone so far as to obtain court orders barring state regulators from even visiting the offices of the banks in question.

Normally, this would not be a problem, except that neither the OTS nor the OCC has any authority to enforce state laws.

So the banks got a free pass. In effect, these banks are currently above the law, because states are nearly barred from going after them, and the federal agencies who are supposed to be regulating them have done a laughable job in making them play by the rules.

It is precisely this sort of perversion of a regulatory system that's supposed to protect the public that cries out for reform. The OTS and OCC have abdicated their responsibilities to the American people, and have caused grave harm to countless American homeowners by shielding bad lenders from having to answer for their actions.

There is a very easy solution to this miscarriage of justice. We need a financial equivalent to the Patriot Act, at least as to the law enforcement cooperation and information sharing aspects. Congress could very easily require the OTS and OCC to step aside in matters of state enforcement of state consumer protection laws, or require that banks under federal charters abide by all general consumer protection laws in the states where they do business, and empower state agencies to enforce those laws.

At any rate, Congress should do something right now, because allowing federal agencies to thwart legitimate state investigations simply rewards bad behavior and encourages lenders to get federal charters for the sole purpose of being shielded from often tougher state consumer protections.

It's 4:42 AM.

I've been up since 4:00, scouring Google News for the latest headlines on the bank bailout bill.

Here's the latest:

• Everyone hates investment bank executives, so executive pay will get clipped in some way under the plan.
  
• Mr. Paulson, the Treasury Secretary, will not get the blank check he asked for over the weekend. Rather, he will have to answer to Congress on how he spends taxpayer money.
  
• The government will take debt and equity positions in banks it bails out. This means that Mr. Paulson will buy mortgage backed bonds, as well as stock and "warrants" (special equity positions with repayment protections built in). The rationale is that taxpayers stand a better chance of recovering most or all of the money put in if the banks' stock value rises after the bailout.
  
• The government will require help for homeowners in junk loans.
  

We should know more later today, as Congress, Treasury and the Administration continue negotiations.

Here's what's still unclear:

• How homeowners will be helped under the plan,
  
• Whether the final plan will include Bankruptcy Code changes to allow the court to modify a home loan (something taken away as part of the 2005 Bankruptcy Act in a 1993 Supreme Court case), and
  
• Whether the government will pay hedge-fund prices (20 cents on the dollar) or 1980s government contract prices (12,800 cents on the dollar - remember the $640 toilet seat?) or something in between for distressed bank debt and assets.
  

Stay tuned, folks. This should get even more interesting as the day progresses.

Awhile back, I wrote a post warning about the impact that junk debt buyers could have on the housing crisis. The business model is as simple as it is brutal: buy delinquent loans for as little as 20 cents on the dollar, foreclose on the homeowners, sell the properties at 50 cents on the dollar, and double your money after costs. Never mind that the activity wrecks home values and destabilizes communities - this is business, after all.

Don't you love how it's "business" when common people get screwed, but it magically becomes "a confidence crisis" once the fat cats start losing money?

In a move that has the potential of making a bad situation worse for millions of Americans, the Bush Administration is trying to scare the Congress into approving a $700 BILLION blank check for Treasury Secretary Paulson to make US taxpayers the biggest junk debt buyers in history.

Members of Congress are wary, and many are calling for additional help for regular people, like tougher mortgage workout requirements for lenders and additional jobless benefits for the increasing number of people unable to find work.

The questions that the Administration must be required to answer before any plan is approved are these:

How will the government behave as a note holder? Will Uncle Sam be required to provide workouts for the homeowners suffering under the junk loans that Wall Street seeks to dump?

As hard as it is dealing with a lender's Loss Mitigation Department, that experience will likely pale in comparison to dealing with the government, unless the Congress puts in place clear ground rules that favor turning these junk loans into affordable, stable loans.

I would think that, if the Congress has the courage to require this as part of any bailout, the value of junk loan portfolios could actually be enhanced by converting them to stable, low risk loans. Over the long run, taxpayers would see three net positives: investment banks would stop dying off in droves, the retail lending market would start working again, and most importantly, the foreclosure crisis could be put in check.

Sadly, political reality is such that these protective measures probably won't end up in the final version of the law, even though they would be in the best interests of the taxpayers being asked to foot the bill.

I'm not holding my breath, but I will hope for a miracle.

In the midst of this week's market turmoil, Congress was taking testimony about the new FHA refinance program set to start on October 1. The testimony was a study in contrasts.

On the one hand, representatives from major lenders were grumbling about the prospect of mandatory principal writedowns under the FHA program. Most banks stated that they prefer to try their own approaches to loan modifications before resorting to the FHA plan.

On the other hand, the Attorney General of Massachusetts, Martha Coakley, pulled the curtain back to shine some light on what lenders have really been doing - NOTHING.

In her testimony, Coakley detailed how major lenders including Bank of America, Citigroup and Wells Fargo reneged on an agreement to form a loan modification system for Massachusetts homeowners. Her story is sadly typical: banks love to say nice things to get good PR, but refuse to take any meaningful action.

Coakley also testified about reality on the ground: lenders are not voluntarily making meaningful changes that will help homeowners avoid foreclosure.

"Regrettably, this approach has not been successful. Indeed, the voluntary approach to loan modification has failed."

Coakley went on to testify that lenders are approving far too few workouts, and most so-called modifications that lenders currently approve fail to decrease debt or promote affordability for homeowners. The result is that many homeowners who have received bad loan mods will still end up losing their homes.

I can tell everyone from personal experience that, even when you have dirt on a lender (like a TILA violation that allows the borrower to cancel a loan), lenders are extremely difficult to deal with, and it is a long battle to get a lender to act reasonably and fairly.

Just this week, a major lender contacted my client (rather than me) to attempt to trick the client into waiving a TILA rescission. Their method: a purported "Loan Modification" that was really a repayment plan that offered my client no real relief.

If  lenders are willing to flaunt the rules for homeowners with representation, then homeowners going it alone have ZERO CHANCE of getting a fair shake. Lenders, through their arrogant actions, have drawn a line in the sand. For homeowners, the only thing that will force lenders to act fairly is government action. If you are a homeowner who's getting nowhere with your bank, call your Representative in Congress, and your Senators.

I found this news item about two Bay Area foreclosure scammers recently sentenced to prison for their crimes.

The two women were running a scam where they have homeowners deed an interest to a shell company so the scammers could stall a foreclosure by filing a phony bankruptcy in the name of the shell company. Usually, the scammer will tell the homeowner that the deeded interest is required because then the scammer can negotiate with the bank as an owner on title. Lenders usually get out of the phony bankruptcy and proceed to foreclose on the property.

The two convicted scammers were charging homeowners from $1500 to $2500 a month while running the scam. The scammers made other false promises to homeowners, including claims that they could repair homeowners' credit. They found their victims through direct mail campaigns, getting addresses from Notice of Default records.

The two saddest facts from this story:

1) these scammers were taking in over $170,000 a month when they were charged back in March, and

2) through a plea bargain, the scammers have to make restitution to their victims, but they will only serve a maximum of 16 months in prison.

I think they got off too lightly, given the fact that these two are likely responsible for hundreds of people needlessly losing their homes.

For homeowners, here's the moral of the story: if you are in foreclosure, get proper help. Most scammers will send you direct mail, call you, or even knock on your door. In contrast, legitimate help usually requires you to do the legwork, so beware of people contacting you. Also, remember what you learned as a kid: if it sounds too good to be true, it probably is.

There are legitimate solutions available to homeowners, from legitimate sources, that are usually much less expensive than these scams. As an example, my flat fees for services to homeowners in trouble are usually less than the first monthly fees that the two scammers above were charging, so shop around.

I just read yet another account of a common foreclosure scam. The article is a transcript from a story broadcast on the radio program Marketplace.

The moral of the story is twofold. First, if it sounds too good to br true, it probably is. Second, homeowners in distress are easy to take advantage of because of the real psychological despair that comes with serious financial problems.

If you are a homeowner in trouble, or if you know a homeowner in trouble, there are real options available other than falling for some scam. And if you think you are the victim of the scam, contact your District Attorney as soon as possible. Most DAs in California have task forces to deal with this type of crime. Yes, the situatuin is so bad that DAs have to have task forces to deal with it.

If you are a real estate professional, warn your clients, friends and colleagues about avoiding scam artists. And do the profession a favor: take a few minutes to report people if you think they could be scam artists. It's all too common for real estate professionals to be contacted with offers for "big referral fees" from people with dubious backgrounds. All the real estate pro has to do is hand the henhouse to the fox. If you do it, you're no better than the scam artists.

And if you happen to be a scam artist who somehow stumbled across this post, I have a warning. Many states, including California, have ways of dealing with your type. You are the most despicable sort of scumbag - those who prey on the vulnerable through deceit, who have no problem stealing families' equity and homes. If I happen to find out about you, I will go out of my way to make sure the law comes down on you like the wrath of a very angry God. Just be glad we don't execute people for the kind of misery you visit upon others through your scams.

Now it's official: the Mortgage Bankers Association, a major banking industry interest group, has released a report that confirms what many (myself included) have feared for the past several months.

Four million American homeowners with a mortgage were either delinquent on their payments or in some stage of foreclosure for the quarter ending June 30, 2008. That's nine percent of all homeowners with a mortgage.

What's worse, it's not just subprime loans that are going belly-up. An increasing number of homeowners are being caught short by a combination of resetting loan rates and declining home values. Many people with good credit are suffering because of exotic loan products like option ARMs with negative amortization. In many parts of the country, homeowners cannot sell or refinance, because their loan balances exceed the value of their properties.

This situation will get worse before it gets better: something like 2 million ARMs are going to reset to higher rates in the next 12 months...unless lenders heed their own trade group and step up to the plate.