California foreclosure blog

The Associated Press is reporting that a federal takeover of Fannie Mae and Freddie Mac may happen as early as this weekend, quoting a source "briefed on the matter," who spoke on condition of anonymity.

What a difference a month makes.

Fannie, Freddie, and Treasury officials declined comment.

Get set for another wild ride, folks.

In my law practice, I get more calls than I should from desparate homeowners in foreclosure who paid a lot of money - often many times (like 10 to 20 times) what I charge for actual legal services from a real live lawyer - to some company who sent them direct mail or cold called them.

The story goes like this: homeowner in default gets an unsolicited contact, is told what they want to hear: their house can be saved, etc., homeowner forks over thousands of dollars up front, which they have because the lender stopped taking their payments when they fell behind, and now, three months later, homeowner learns that their house will be auctioned in a couple of weeks. Meanwhile, the foreclosure consultant (and the homeowner's money) is nowhere to be found.

Minnesota's Attorney General just filed suit against two such outfits, in their home states of Florida and New Jersey. Overall, the Minnesota A.G. has filed ten such suits in the past year. While this is great news for some, the sad truth is that it's just a drop in the bucket, as there are probably thousands of scam artists preying on growing homeowner desparation.

California has several laws designed to protect vulnerable homeowners from scam artists who prey on the desparation of people at risk of losing their homes. There are two types of activity that are covered under the law: "foreclosure consulting," which is any activity outside a bona fide attorney-client relationship where a consultant purports to offer assistance or advice to a homeowner in default regarding their foreclosure, and "equity purchasing," which is any type of investment activity between an investor and an owner in default, other than a traditional bona fide financing transaction.

Foreclosure consultants and equity purchasers are required to give specific disclosures, and a three day right to cancel form, to homeowners. Homeowner rights under these laws cannot be waived, and any waiver provision in a contract is void and could be deemed a violation of the law. The consultant or equity purchaser cannot require the homeowner to pay an up front fee - payment is not due until after the consultant or equity purchaser does everything they promised to do. In an equity purchase, the homeowner cannot be required to sign any transfer document like a Deed or Option Agreement until after the equity purchaser has fully performed.

For homeowners caught in a bad deal with a consultant or equity purchaser, call your District Attorney. Most California DAs have task forces to deal with this type of consumer fraud. But remember, time is your enemy, so make the call right away.

Recent data from DataQuick bear out the negative impact foreclosures are having on home values.

In July 2008, REOs accounted for one third of all sales in the San Francisco Bay Area, compared to just 4.2% of sales in July 2007. In some areas, like Solano County (where I happen to live), as much as two thirds of all sales were foreclosures. The median sale price in the Bay Area is down nearly 30%, pushing home values back to what they were 53 months ago.

Some people see a silver lining: sales were up 2.2% compared to July 2007. In Solano County, sales were up 56% compared to a year ago. It appears that the only people buying right now are investors and first time buyers who can meet the underwriting requirements to get a loan.

Some people in the real estate community claim that foreclosures are "skewing" home value data downward, and are quick to point to "core Bay Area communities" where prices have not declined as drastically...yet. But I disagree: no one ever claims that values are skewed when the trend is upward.

The current value declines are very real, and are bound to spread because of the large number of people stuck in junk loans that are about to explode. I'd be willing to wager that a fair number of those loans will affect those "core" Bay Area communities just as they have already wreaked havoc on communities like mine. For anyone in doubt, call an owner who just put their house on the market because their rate is about to reset or their option ARM was recast early, and their lender won't work with them.

July 2008 may be looked upon as a study in contrasts. On the one hand, it was the month that Congress and the White House put aside their differences to enact sweeping legislation aimed at stemming off foreclosures and propping up Fannie Mae and Freddie Mac.

And then there's the bloodletting on the ground.

In July, the rate of foreclosures in California was estimated at a staggering 1,300 per business day. That's triple the estimate from a year ago. California's foreclosure rate was up 22.5% from June 2008.

The most depressing news: Notices of Trustee's Sale are recording at a rate of 97% of Notices of Default. Under normal circumstances, this figure would be at or below 50%. This means that nearly all homeowners who go into default will end up losing their home at auction.

Speaking of auctions, lenders are taking back over 96% of properties put up for auction, despite opening bids that cut up to 40% off a property's current value.

In a move to clear its backlog of REOs, Fannie Mae is opening offices in California and Florida and considering bulk sales to distressed asset investors.

So these contrasting events beg the question: when are lenders going to start working with homeowners to turn these junk loans into more stable, performing loans?

With the new rules enacted last month, a loan servicer can modify a loan without risking an investor lawsuit, as long as the net present value of the modified loan exceeds the value of the loan as a foreclosure.

Fannie Mae has announced new loan servicer incentives, designed encourage loan workouts instead of foreclosures.

Here's a link to a PDF of the announcement.

Some highlights:

• A "HomeSaver Advance" loan program, to provide unsecured loans to homeowners as part of a workout
• Increased payments for loan workouts ($700), the unsecured loans described above (up to $700), repayment plans ($400), short sale approvals (from $1000 to $1500), and deeds in lieu of foreclosure ($1000)

The incentives are limited to loans that Fannie Mae has to cover the risk of investor losses for nonperformance.

This is certainly welcome news for struggling owners. The Fannie Mae incentives, along with similar Freddie Mac incentives announced in July, apply to a significant number of home loans. Hopefully, we'll see some improvement in meaningful loan workouts going forward.

In a move that could be another big step in the right direction for struggling homeowners, the FDIC has announced a moratorium on foreclosures for IndyMac Bank loans. The FDIC took over the struggling bank a few weeks ago.

As part of the move, the FDIC has announced that loans will be modified to keep homeowners in their homes. IndyMac has a $15 billion loan portfolio.

Kudos to the FDIC.

Sheila Bair, the Chariperson of the FDIC, has stated that a modified loan is worth more than a foreclosure. When one combines this statement with the recent safe harbor added to TILA for loan servicers to modify loans, we may be moving towards real solutions for struggling homeowners: principal writedowns and rate reductions.

Freddie Mac has announced changes to its loan servicer compensation policies that should help some struggling homeowners avoid foreclosure.

Under the previous guidelines, servicers were compensated for bringing delinquent loans to foreclosure as quickly as possible. In a normal housing market where values are stable or appreciating, foreclosing as soon as possible generally makes business sense. For obvious reasons, the current market does not support such incentives. As a result, Freddie Mac has eliminated compensation based on how quickly a servicer can get a loan through foreclosure.

Some other changes will help even more.

First, Freddie Mac has actually increased its foreclosure timeline for 21 states, including California, to 300 days from a borrower's last payment, and 150 days from the initiation of foreclosure proceedings.

Second, Freddie is doubling the amount of money it will pay to loan servicers for workouts. Under the new guidelines, a servicer will be paid $800 for a loan modification, $2,200 for a short sale or full payoff sale, and $500 for a repayment plan. The amount paid for a deed in liue of foreclosure remains at $250.

Finally, Freddie will now allow previously modified loans to be modified again. This is particularly important for homeowners who were put into loan modifications that increased their payments - these are really repayment plans that were mislabeled.

These changes may help keep people out of foreclosure - what remains to be seen is whether, and how faithfully, the loan servicers participate.

It's been a busy morning for news related to the housing market.

President Bush signed the much-anticipated housing bill this morning. Most of the bill's provisions take effect on October 1, but some of the emergency measures take effect immediately. If you just have to know all the details, or if you're looking for a cure for your insomnia, you can get the full text of the law (all 700 pages of it) through the Library of Congress website.

Standard & Poor's also released its Case/Schiller housing price report for May 2008. As largely expected, housing prices continue their slide in many areas: of the top twenty metro areas, all twenty tracked year-over-year declines, and ten of the twenty had double-digit value declines. Most of the hardest hit areas are in California, Nevada, Arizona, and Florida.

With all the buzz surrounding the housing bill, I haven't had time to write about a recent tragic story that should help us all realize what's really at stake in the current housing crisis.

Last week, in Taunton, Massachusetts, near Boston, a woman shot herself about 90 minutes before her home went up for auction. She sent her lender a note stating that by the time the lender foreclosed, she would be dead.

She left behind a husband and son.

Because the woman handled the family's finances, her husband did not know about the foreclosure. The woman was carrying the burden, stress, and shame of her family's money problems on her own.

She tried to save her home by filing for bankruptcy under Chapter 13 three separate times, but her petitions were dismissed.

This tragedy is a metaphor for what's happening to our nation, and our communities, as a result of the current housing slump. Across the country, communities are dying, and once active neighborhoods and cities are becoming ghost towns. As home values continue to decline, and homeowner interest rates continue to rise, there's a real and palpable feeling of despair setting in. Any banker, politician, or pundit out there who can't feel this is out of touch with the American public. Ignoring the public is fraught with peril: after all, regular people living their daily lives is what drives 70% of our economy.

So what do we do now? There are only a few ways that a problem this large gets fixed: 1) incomes rise enough so that the average unit of housing becomes a lower multiple of the average household annual income - this will take years to happen, even with falling home prices, because real income has been flat or falling for the past decade; 2) something big happens in the economy to make regular people feel wealthier, like the dot com bubble of the late 90s, or the housing bubble - well, I think we can agree that we should steer clear of another bubble market as a fix; or 3) all the players agree to take some of the sting of the current mess, roll up their sleeves, and work together for a long-term fix that minimizes foreclosure risk for homeowners.

The third option is commonplace in commercial real estate loans - there are even lawyers who specialize in commercial loan workouts for commercial property owners and developers who get caught short by a turn in the real estate cycle. Unfortunately, despite banking industry lip service in the media, the workout option is far too uncommon in residential loans. The reason is simple: a single commercial loan commonly ties up millions of lender dollars in reserve (money set aside that the lender cannot reinvest) for a long time, because of how long it takes to resell a large commercial property. But a single residential loan gone bad does not put a big dent in the lender's capacity to do business.

Until now.

Lenders are taking back so many properties that their reserves should be getting to the point that residential workouts make business sense. The real question is whether the lenders are willing to roll up their sleeves and work with homeowners the way they already work with commercial property owners.

Let's hope so.

Here's a snapshot of reality on the ground in too many communities:

Home values have tanked. Homeowners are struggling to keep up with escalating loan payments, and many are falling behind. Beleagured lenders do what they've always done: start the foreclosure process.

But we're not living in a market where doing what one has always done will work.

The proof is threefold:

• banks have a growing glut of REOs (Fannie Mae and Freddie Mac have a combined $6.9 billion REO portfolio as of March 31) in a declining market;
  
• "opportunistic investors" (read: vultures) are buying distressed notes directly from lenders at severe discounts (20 to 50 cents on the dollar), only to foreclose on homeowners themselves or "restructure" the homeowner's debt at a 100% plus profit; and
• lenders are facing increased court challenges regarding foreclosures: a lender must be able to prove it owns the note it is attempting to foreclose on, and many note owners are being barred from foreclosing because, as a result of sloppy paperwork, they can't prove ownership of the note.

So here's a thought: what if lenders took the vultures out of the equation, and instead worked with homeowners to keep their homes off the auction block? In most markets, many borrowers would be able to keep their homes with lender cooperation, and the lender would make more money than it would by selling the note to a vulture, since most writedowns wouldn't require the drastic discounts demanded by the vultures, and the lender would continue to receive interest income. The lender would also avoid the prospect of yet another REO on its books, and the associated expenses: insurance, maintenance, property taxes, costs of sale, and the opportunity cost of the money it cannot invest because of reserve requirements for another failed loan.

And what of the investors who actually own the notes, what if they won't work with homeowners? Well, the homeowner can always call a lawyer to tie up the foreclosure in court and make the investor prove they have standing to foreclose. Oh yeah, I should mention that these cases usually take years to go through the judicial process, and cost tens or hundreds of thousands of dollars for the lenders. Even if they win, they lose, as their options upon winning in court are to foreclose at a loss, or sell to a distressed debt investor at a loss.

Working with a homeowner avoids these losing outcomes, and keeps another empty home off the already overloaded housing market. This seems like a no-brainer. But then, I didn't go to business school, so maybe I don't know something that the geniuses who helped create this mess, and the oil speculation mess, and the Enron mess, and the S&L mess, and the junk bond mess, and the - I could go on, but you get the picture.

Let's hope the lenders have some simpletons among them who think like I do.