Archive for the ‘Foreclosure’ Category

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Pay Your HOA Fees Post-Bankruptcy . . . or Else!

Friday, October 28th, 2011

Of the many exceptions to discharge found in 11 U.S.C. Sec. 523, subsection (a)(16) is perhaps the oddest. That section limits the dischargeability of property or home owners association (“HOA”) assessments, but only for assessments that are incurred post-petition. So, anything incurred pre-petition is discharged. The section states that the bankruptcy discharge does not discharge an individual from a debt

for a fee or assessment that becomes due and
payable after the order for relief to a membership association with
respect to the debtor’s interest in a unit that has condominium
ownership, in a share of a cooperative corporation, or a lot in a
homeowners association, for as long as the debtor or the trustee has a
legal, equitable, or possessory ownership interest in such unit, such
corporation, or such lot, but nothing in this paragraph shall except
from discharge the debt of a debtor for a membership association fee or
assessment for a period arising before entry of the order for relief in
a pending or subsequent bankruptcy case;

This often creates huges problems for debtors in bankruptcy. Often debtors want to surrender an overencumbered home to the bank,* but the debtor has to keep making payments on the HOA assessments until the deed is formally recorded transferring title to the new owner. And as I have noted anecdotally in my practice and as others have noted, banks seem to take a lot longer to foreclose when an HOA is involved. This makes some sense on the bank’s part, because once the foreclosure takes place, the bank is now liable for ongoing HOA assessments. But before the foreclosure takes place, the HOA assessments are subordinate to the bank’s lien. In some clients’ situations, the bank has taken almost 3 years to foreclose on a lien where an HOA was involved.

For debtors filing bankruptcy, it is important that they remember to make all of their post-filing assessments and to make them timely. Some HOA creditors are relatively lenient, while others can be quite agressive in attempting to collect these. For debtors who face agressive HOA collection tactics, it is imperative that they keep good records that they paid all of their post-petition HOA fees and paid them timely.

*Note: I use the term “bank” loosely to refer to the entity holding the mortgage and the entity enforcing that mortgage. Most mortgages are held in trusts and are serviced by mortgage servicers that don’t actually own the paper and those servicers are not banks. The days are far gone when your local bank owned your mortgage.

Posted in Bankruptcy, Chapter 7, Discharge, Foreclosure, Fresno Bankruptcy, Mortgage Servicing | Comments Off

A Bankruptcy Doesn’t Get Rid of Your House

Monday, February 28th, 2011

I frequently talk with people who think that by filing a bankruptcy, they can rid themselves of a house they don’t want anymore. Unfortunately, this is not the case.

In the modern housing crisis, there are many people who do not want to keep an over-encumbered house. They may have lost a job and know they will never be able to pay for it, or their efforts to obtain a loan modification may have been frustrating and ineffectual, and they are just tired of fighting to keep the house. So, the logical next question is, how can I give my house back to the bank? The short answer is, you can’t . . . unless the bank agrees.

(Note: I am using the term bank here loosely. Yes, I know that almost all residential loans are handled by a servicer, not by the holder of the note.)

Often, these people need to file a bankruptcy anyway and they think that the bankruptcy can help them deal with the house they want to dump. Here comes the confusing part: they are partly right and partly wrong. The bankruptcy discharges the personal liability on the debt, i.e., the bank could not sue you and get a money judgment against you personally. However, the bankruptcy does not cause the property to be transferred from you to the bank. And this can be a big problem for several reasons.

As long as the property is in your name, you are responsible for everything that happens on the property. So, you have to keep the insurance and property taxes current, and you have to make sure that the property complies with all codes and ordinances, e.g., making sure the grass is watered. Also, if your home has a property owners’ association, you are liable for any post-petition fees or assessments. This may be why it seems like banks are slower to foreclose on houses with property owners’ associations.

So, what has to happen to have the property transferred out of your name? There are several ways that could happen when the property is “under water”:

1. Deed in lieu of foreclosure. Sometimes, the bank is willing to take a deed in lieu of foreclosure. Essentially, the borrower signs a deed to the bank. Unfortunately, the bank usually requires a laundry list of guarantees to do this, and even then, few banks will actually approve these. Banks want to get the property sold and quickly out of the bank’s name, not keep it around in the bank’s name.

2. Short sale. A short sale means selling your property for less than the bank is owed. To do that, the bank has to agree. Getting bank approval can take a long time and they may not agree to it. There are also issues with potential tax consequences from doing a short sale. Once escrow closes, the property is no longer in the borrower’s name.

3. Trustee’s Sale a.k.a. Foreclosure. The foreclosure process takes a minimum of 110 days, but usually longer. First, the bank records and sends out a Notice of Default, giving the borrower 90 days to bring the loan current. If the loan is not brought current, the bank can then give 20 days notice of a trustee’s sale. At the trustee’s sale, the property is equitably transferred to the new owner, but it is not finalized until a trustee’s deed is recorded. Usually, the trustee’s sale deed is recorded within 15 days of the trustee’s sale. It is probably not safe to consider the property to have left the borrowers name until the trustee’s deed is recorded.

In bankruptcy, we might say that the “debtor intends to surrender the house.” But all that means is that the debtor will not be contesting a foreclosure. The bank still has to complete the foreclosure for the property to be transferred out of the debtor’s name. And sometimes, it takes a long time.

I have had many clients who have told me that the bank took over 2 years to foreclose on a home. Consequently, I usually suggest that clients not move out of a home until they know the lender will foreclose. That way, the client can make sure the property is kept up and taken care of while waiting for the lender to foreclose. Of course, the client won’t have to pay any rent during that time period and can save up for moving costs.

Posted in Bankruptcy, Chapter 13, Chapter 7, Credit Issues, Foreclosure, Fresno Bankruptcy, Loan Modification, Mortgage Servicing | Comments Off

MERS: Should Counties Sue Them to Collect Unpaid Recording Fees?

Tuesday, October 19th, 2010

Whenever a document is recorded with a county recorder, the recording party must pay a recording fee. This includes the initial filing of a mortgage or deed of trust (they are essentially identical in California), as well as any assignment of the mortgage or deed of trust. When mortgage lenders began the process of securitizing mortgage debt, they realized that a significant amount of money would have to be paid in fees to county recorders, because each securitization will result in about 4-6 “sales” of the note, and consequently, assignment of the mortgage. For this reason, these mortgage lenders created  the Mortgage Electronic Registration Systems (MERS).

The purpose of MERS is to essentially act as a shell entity on the title records for whoever really holds the note and mortgage. The problem with this is that this is not really contemplated by property law in any of the states. Real property law provides that the owner of the mortgage is listed on the mortgage. In a fascinating article, Prof. Christopher Peterson delves into the legal no man’s land created by MERS. One of the things he discusses is whether counties should be entitled to recover the recording fees that were avoided through the use of false statements associated with the MERS system. The essence of the argument is that MERS being a “nominee” of the mortgagee and, often, the mortgagee at the same time is a fraudulent attempt to avoid paying recording fees. Thus, the real owners of the mortgage (if they can be found) should have to pay the recording fees.

Professor Peterson describes the reasons for the formation of MERS:

In the mid-1990s mortgage bankers decided they did not want to pay recording fees for assigning mortgages anymore. This decision was driven by securitization—a process of pooling many mortgages into a trust and selling income from the trust to investors on Wall Street. Securitization, also sometimes called structured finance, usually required several successive mortgage assignments to different companies. To avoid paying county recording fees, mortgage bankers formed a plan to create one shell company that would pretend to own all the mortgages in the country—that way, the mortgage bankers would never have to record assignments since the same company would always “own” all the mortgages. They incorporated the shell company in Delaware and called it Mortgage Electronic Registration Systems, Inc.

Even though not a single state legislature or appellate court had authorized this change in the real property recording, investors interested in subprime and exotic mortgage backed securities were still willing to buy mortgages recorded through this new proxy system. Because the new system cut out payment of county recording fees it was significantly cheaper for intermediary mortgage companies and the investment banks that packaged mortgage securities. Acting on the impulse to maximize profits by avoiding payment of fees to county governments much of the national residential mortgage market shifted to the new proxy recording system in only a few years. Now about 60% of the nation’s residential mortgages are recorded in the name of MERS, Inc. rather than the bank, trust, or company that actually has a meaningful economic interest in the repayment of the debt. For the first time in the nation’s history, there is no longer an authoritative, public record of who owns land in each county.

Essentially, what the MERS system has done is create a private system of recordation of mortgage ownership. The article then analyzes some of the arguments MERS advances as to why it exists:

MERS describes itself as “an innovative process that . . . eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.” The phrase, which the company uses both in legal briefs and public relations material, hints that recording assignments was merely some useless, archaic formality. It is far from clear that state appellate courts will agree that MERS does eliminate the need to record assignments. But even if MERS does eliminate the need to record, it most certainly does not eliminate the need for records. The policy justifications behind recording statutes are as germane today as they were hundreds of years ago when the first American colonies began adopting the statutes. Society needs an authoritative, transparent source of information on who owns land in order to protect property rights, encourage commerce, expose fraud, and avoid disputes.

Unfortunately, as Professor Peterson points out, MERS does not provide such an authoritative and transparent source of information:

After seeing loan after loan in her court room with incomplete documentation and incoherent transactional records, Judge Jennifer Bailey, a Circuit Court Judge in Miami recently stated:

[T]here are 60,000 foreclosures filed last year. Every single one of them— . . . almost every single one of them—represents a situation where the bank’s position is constantly shifting and changing because they don’t know what the Sam Hill is going on in their files.

That MERS maintains a database of servicing rights simply does not provide a commercially reliable, authoritative source of lien information because servicers, who are in business to make profit through providing financial services, do not have an incentive to maintain permanent, transparent, publically available records of mortgage ownership.

MERS also does not systematically track beneficial ownership rights of the mortgages registered on its system. Recall that MERS only maintains a database which its members can enter information upon if they want to. When the beneficial ownership interest in a loan changes hands, such as through negotiation of a promissory note and a written assignment of the mortgage, the parties to that transaction can send an electronic message to MERS updating a field of information in the database. MERS calls this process an “electronic handshake.” But, unlike most county real property recorders, MERS does not keep digital or hard copies of documents that embody the agreement—making it much more difficult to track fraud and errors through the record keeping system. Even more troubling, MERS members are not legally bound to update this information on the database. In the words of the MERS’ CEO, the system “is capable of being used to track [beneficial ownership interests] if the members utilize it for that reason.” But, if the MERS members choose not to use the database to reveal themselves, MERS does not investigate further or otherwise insist that members actually use this feature of the database. Instead, MERS leaves this to the “business model” of the financial institution. When asked whether MERS expects financial institutions to update the MERS database regarding changes in loan ownership, the company’s CEO replied, “not so much. . . .”

Posted in Foreclosure, Mortgage Servicing, Securitization | Comments Off

Morality of Strategically Defaulting on a Mortgage

Thursday, May 6th, 2010

This is a very interesting paper on the morality of strategically defaulting on mortgage payments. The paper examines some of the common concerns expressed by borrowers as to the morality of deciding not to pay the mortgage and letting the house go to foreclosure. Concerns include (1) the fact that homeowners “promised” to pay the mortgage, (2) a feeling that homeowners should hang on to help preserve the neighborhood value, and (3) the concern that if everyone defaulted the market would collapse. The author addresses each of these concerns in turn, eventually finding that there is no moral basis to criticize homeowners who decide to let go of their homes.

I am often asked about the morality of letting a house go to foreclosure or of filing bankruptcy, for that matter. I think the author of this post has some good points. I also direct clients to the Bible. In our culture, the Bible is still considered THE primary source for foundational moral authority and it has many things to say about the debtor/creditor relationship. While there are general themes about responsibility, which by implication would require a debtor to pay his debts, the vast majority of passages on this subject are warnings to lenders not to take advantage of debtors. Following are a few examples:

Exodus 22:25 – lenders were not allowed to charge interest.
Exodus 22:26 – lender had to return security to the borrower if it was needed by the borrower.
Deuteronomy 15 – Debts were to be released every seven years.
Nehemiah 5 – Nehemiah severely rebuked the lenders because they had taken advantage of the poor.

Posted in Bankruptcy, Credit Issues, Foreclosure, Fresno Bankruptcy | 1 Comment »

Citi decides not to play Scrooge for the holidays, but in January all bets are off

Thursday, December 17th, 2009

Trying to repair an image that is pretty bad right now, Citi has decided not to pursue foreclosures for the Christmas holidays. But, because life does go on, they will start back up again in January. Citi estimates this will benefit about 2,000 homeowners, albeit temporarily. What if Citi got some real Christmas cheer and looked seriously at some of the 100,000 loan modification requests they have received? That would be something. Unfortunately, Citi has only modified 270 of those loans. Think about that–a 2.7% loan modification rate. That is pretty bad and brings us back to the point discussed on this blog many times: the only way lenders will make serious changes to their loan modification process is if Congress allows mortgages to be modified in Chapter 13 bankruptcy. Will it happen? Only time will tell.

Posted in Foreclosure, Loan Modification | Comments Off

Are Foreclosures in Lenders’ Best Interest?

Wednesday, July 29th, 2009

Foreclosures Are Often In Lenders’ Best Interest says a story from the Washington Post. But are they really?

But a study released last month by the Federal Reserve Bank of Boston was downbeat on the prospects for widespread modifications. The analysis, which looked at the performance of loans in 2007 and 2008, found that lenders lowered the monthly payments of only 3 percent of delinquent borrowers, those who had missed at least two payments. Lenders tried to avoid modifying the loans of borrowers who could ’self-cure,’ or catch up on their payments without help, and those who would fall behind again even after receiving help, the study found.

The article goes on to quote industry insiders saying, essentially, “ergo, loan modifications don’t make sense for lenders.” That conclusion doesn’t make a whole lot of sense itself. The reason that not a lot of loan modifications are being done is that not a lot of loan modifications offered by mortgage servicers make sense for borrowers. Most of the modifications don’t actually decrease the cost of the loan very much and even in those that do, the total amount of debt on the property is still often $100,000 to $150,000 more than the property is worth, with no hope in sight (or 10 to 15 years, at least) for the property values to eclipse the loan amount.

The question I am asking myself constantly is “why aren’t servicers doing more reasonable loan modifications?” I think there may be several reasons:

1. The old problem of who is really in charge with all of the mortgage backed securities and the conflicting interests of trustees, servicers, and bondholders in the trust. Servicers are the one’s really calling the shots and it doesn’t make a whole lot of financial sense for them to invest a lot in doing voluntary loan modifications, because they don’t make a ton that way and open themselves to possible litigation if they do too many modifications.

2. I think that the financial services may be leery of doing too many modifications because it might encourage people who can actually pay the mortgage to ask for a modification. And they want those who can actually pay to keep paying the mortgage. If servicers had to rewrite everyone’s loan that was underwater, half the mortgages in the country would probably have to be rewritten. I think they may want to keep these to a minimum, with no one getting a decent modification so that they don’t go tell their friends what a great deal they got.

3. Probably most important–they don’t have to. Because the prospect of modifying home mortgages in bankruptcy is now dead (at least for the time being), mortgage servicers can do whatever they want.

All of these problems create a real frustration for those watching homeowners who could afford a reasonable payment get washed out in the foreclosure deluge. I had a homeowner talk to me the other day who had worked out a loan modification with one of the larger mortgage servicers. Shortly thereafter, however, the loan was sold to another entity (of dubious distinction) that is insisting they will take nothing other than payment in full or they will foreclose and that they will not honor the servicers commitment to modify the mortgage. And there is little this person can do about it. The mortgage servicers hold all the cards.

Posted in Foreclosure, Mortgage Servicing | Comments Off

Foreclosure rates up in Fresno

Wednesday, July 8th, 2009

The Business Journal is reporting that foreclosure rates in Fresno are up from 2.1% of all single family residences in foreclosure last year at this time to 3.5% this year. That is an increase of 67% over last year’s historically high foreclosures.

The interesting thing about this statistic is that a lot of mortgage companies are actually delaying foreclosures in some cases because they don’t have the capacity to liquidate all of the properties and they don’t want the liability of dealing with a lot of property on their hands. Consequently, I often have clients who want to surrender a property to the creditor where it will take 6 or even 12 months before the mortgage company will start the foreclosure process. Then, it takes another 6 months or so to complete the process. These numbers could be a lot higher.

Posted in Foreclosure, Mortgage Servicing | Comments Off

1 out of 8 U.S. Homeowners in foreclosure or late on mortgage payments

Thursday, May 28th, 2009

Reuters is reporting that 1 out of every 8 homeowners (approximately 12% of homeowners) in the United States is late on mortgage payments or in the foreclosure process. That is a staggering statistic. In California, the problem is worse than the nation as a whole, so the number is probably even higher for California. I think we are close to where the bottom for home prices should be (based mostly on income ratios), but due to all of these foreclosures, I think home prices are going to continue to drop to a number lower than what prices should be. For people with cash (and maybe first-time home buyers who can get a loan), that will be an opportune time to buy. Everyone else is in for a difficult ride.

Posted in Foreclosure, Mortgage Servicing | Comments Off

California 90-day Foreclosure Moratorium

Wednesday, February 25th, 2009

On February 20, 2009, the Governor signed Senate Bill SBX2 7, which puts an additional 90-day hold on foreclosures to allow for loan modifications. In cases where the lender is not willing to do a modification, this will not force them to do so. They just have to wait another 90 days. However, it will provide a little breathing space for some people.

The bill is not in effect yet and does not go into effect until 14-days after certain regulations have been drafted. And even after it goes into effect, mortgage companies can apply for an exemption upon a showing that they have an acceptable loan modification program. My personal feeling is that this will do little to stem the flood of foreclosures.

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Credit Suise Study: Bankruptcy Mortgage Modification Bill will cut foreclosures 20 percent

Wednesday, January 28th, 2009

Credit Suisse came out with a new study finding that if the mortgage modification in bankruptcy bill passes, it would cut foreclosures by 20%.

WASHINGTON (Reuters) – A plan to let bankruptcy judges erase some mortgage debt will help lower foreclosures by 20 percent and stabilize the troubled housing market, a Credit Suisse report concluded on Monday.

The possibility that judges could lower, or ‘cram down,’ a loan amount will give mortgage companies an incentive to modify more failing loans on their own, the investment bank’s researchers said.

“We expect the new bankruptcy reform will increase loan mods, particularly principal reduction mods, as it is likely to both pressure and also give justification to servicers to more actively pursue principal reduction mods,” the report from Credit Suisse Fixed Income Research stated.

A two-year-old housing downturn has pushed foreclosures to record levels as more families struggle to make payments on properties that are slipping in value.

Many of those sour loans were bundled by Wall Street into complex securities that are difficult to modify.

Advocates for mortgage “cram-down” argue that bankruptcy judges are uniquely able to cut through mortgage contracts and rewrite loan terms.

Late last week, Democratic leaders who control the White House and Capitol Hill agreed to push a cram-down bill early this year.

“A large percentage of delinquent borrowers could benefit from cram downs,” the report states. “We expect the bankruptcy plan will provide about a 20 percent reduction in foreclosures.”

A separate report on Monday warned that redrafting bankruptcy rules could scare more lenders away from the housing market and damage banks that specialize in mortgage second-liens.

“(Cram-downs) will create long-term problems for the housing market through higher mortgage rates and reduced affordability, which will likely further destabilize home values and wreak havoc on second-lien and consumer lenders,” the report from Friedman, Billings, Ramsey & Co said.

Second-lien holders would likely be wiped out by a bankruptcy judge, the report concludes, and lenders that specialized in those loans will be hurt.

Many troubled consumers will be enticed by the possibility of getting relief through the courts, and increased bankruptcy filings will mean more write-offs across the sector, the investment bank stated.

“A spike in bankruptcy filings would also cause a surge in credit card losses, as lenders are required to charge off the account upon receipt of the bankruptcy notice,” the report states.

(Reporting by Patrick Rucker; Editing by Kenneth Barry)

Posted in Bankruptcy Legislation, Chapter 13 Mortgage Modification, Foreclosure, Mortgage Servicing | 2 Comments »

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