There are a range of options that are available today that weren’t available a few years back. Today, we will go over a few of these options, and we will dial into more in depth solutions in the following posts.
The first thing you MUST do is SOMETHING. That may sound weird to you, but there are people who go into “foreclosure” avoidance mode and wind up losing their house when other options were available to them.
1. Sell Your House
If you have equity, and time, the best thing to do might be to go a traditional route and hire a professional real estate agent that specializes in distressed property. There is a company that specializes in helping people Sell Their House Fast
2. Short Sale Your House
If you are upside down on your mortgage, meaning you owe more than the home is worth, one avenue to explore is having a short sale on your house. A short sale is when you get the mortgage holder to accept less than the stated mortgage. To get this facilitated, reach out to a local short sale expert. In the next few weeks, we will introduce some of the top short sale experts in the country to you.
3. Apply for a Loan Modification Program
A load modification is when the mortgage holder modifies the original terms of the mortgage note. Sometimes the mortgage holder will reduce the monthly payments temporarily to help you if this is a short term trouble spot for you. The note holder might adjust your APR (annual percentage rate), this will reduce your monthly payments.
Another type of modification is when the mortgage holder takes all of the payments that you are behind and parks it on the back of the mortgage. This is a grace period and the back payments will still have to be made. Loan Modifications can come in all shapes and sizes, and we will explore these in depth as the weeks go on.
4.Offer your Bank a Deed In Lieu of Foreclosure
What this basically means is that you give the keys and all interest in the property back to the bank. This was once a popular tactic used by the banks because most homes in foreclosure a few years back had equity built in. The banks would sell the home and keep the profit. Today, less and less banks will accept a deed in lieu.
5. PICK UP THE DANG phone and call your mortgage company. Explain your situation, and ask them what special options they have for you. Banks DO NOT want to take your home via the foreclosure process. You will find a much more responsive loan officer on the phone today than you would have 3-4 years ago.
6. You can file bankruptcy
There are different types of bankruptcy and every state has different laws on the books. We will have state and national specialists post the various pros and cons of bankruptcy.
7. Strategic Default
When all else fails, and you have tried to sell your house, work with the bank, and do everything else you can, strategic default is always an option, although it is one the we would only recommend to a slight fraction of the homeowners facing foreclosure.
Our next series of posts will be on short sales, the process of short sales, and how to find a short sale expert near you.
The most common reasons we see for an inpending foreclosure are some of the following: a possible Job loss / loss of unemployment, medical emergency or illness, or a death in the family. Also, excessive debt obligations or a decrease in pay/job demotion might be the cause for your hardship.
One thing we want you to do is to be proactive with Wachovia/Wells Fargo about your situation. Don’t ignore letters, phone calls and emails from them. This will only make matters worse in the long run.
We want to help you stay in your home. Let’s work together to see if we can find a solution based on your situation and product. Here are some of the alternatives to foreclosure that our loan specialists may be able to discuss with you.
* Arrange to repay the amount that is past due over a period of time.
* Change the original rate, term, or payment of your loan.
* Sell your property so that a new buyer may be allowed to take over your loan payments.
* Sell your property and pay off your loan for less than the total amount due.
Based upon your state, product, and individual circumstances, some options may not be available to you.
Start Right Now
The sooner you call us, the more options you may have available to you. Call us today or we’ll call you and let us work with you to find ways to help you with your individual situation.
Find a Credit Counselor
Housing and Urban Development (HUD) offers lists of certified counseling agencies available to homeowners and home buyers. To find a HUD-certified housing agency in your area, please call (800) 569-4287.
If Wachovia/Wells Fargo will not work with you to prevent your foreclosure, then you have a few other options:
We also want to hear from you and your experience with Wachovia and Wells Fargo. Please comment on this page with how they have or haven’t helped your situation.
Homeowners facing foreclosure are, understandably, looking for hope. News reports of homeowners successfully asserting the “produce the note” defense to stop foreclosure have sparked that hope in many. It seems only logical that a company commencing a foreclosure action should be required to demonstrate that it is the real party in interest before that action can move forward. But simply demanding that a mortgage servicer produce the note or establish itself as the real party in interest isn’t the magic bullet it sometimes appears in the popular press.
We know mortgage documentation is rife with errors, misrepresentations and missing links. Various studies have estimated the percentage of mortgage claims containing substantial errors between 57% and 80%. Katherine Porter’s 2007 study of mortgage proofs of claim in bankruptcy cases revealed that 52.77% of proofs of claim lacked at least one clearly-required document. What those errors mean for the homeowner depends not only on the nature of the error, but also on the state and jurisdiction in which the claims are prosecuted.
Attorneys in some states have had tremendous success with the defense. In September of 2008, the First District Court of Appeals in Ohio ruled on a case in which Wells Fargo Bank had commenced a foreclosure action based on a mortgage it did not own. (Wells Fargo Bank, N.A. v. Byrd, 178 Ohio App.3d 285, 2008-Ohio-4603.)
Although Wells Fargo subsequently acquired the mortgage by assignment, the trial court ruled that this later acquisition did not cure the jurisdictional defect and dismissed with prejudice. The trial court also ordered that the law firm filing the case on behalf of Wells Fargo submit proof that its client was the real party in interest in all future foreclosure actions filed by that firm.
Publicity surrounding Wells Fargo and a handful of other similar cases produced a flurry of real party in interest defenses and optimistic news coverage. A year later, the Ohio Supreme Court declined to review a similar case in Wells Fargo Bank, N.A. v. Jordan, leaving stand an Eighth District Court of Appeals ruling that “If plaintiff has offered no evidence that it owned the note and mortgage when the complaint was filed, it would not be entitled to judgment as a matter of law.”
At the same time, Florida legal aid attorney April Charney and a handful of others began challenging claims supported by affidavits of lost notes. It seemed that in the frenzy to slice, dice, flip and securitize the high-risk loans of the 1990s and early 2000s, many lenders and mortgage servicers had dropped the ball when it came to keeping accurate records. In many cases, the paper trail was broken, non-existent, or simply didn’t conform to legal requirements. Some plaintiffs in mortgage foreclosure cases found their claims dismissed outright for lack of documentation, and some homeowners found themselves in a better position than they’d ever imagined: enormous mortgage debt simply disappeared as it became clear that no proof of ownership of the debt could be produced.
It was heartening to see mortgage servicers taken to task and forced to follow the rules, but even in the oft-cited Byrd case, the real victory was scaled back considerably by the appellate court. While the dismissal was affirmed, the appellate court ruled that it should have been without prejudice; the order that the law firm submit additional documentation in subsequent cases was reversed. Those cases in which demanding the note and dissecting the paper trail resulted in a windfall for the homeowner were few and far between.
To a layperson, common sense dictates that a plaintiff would have to own the note and mortgage in order to file a complaint based on it; the big surprise is probably not the Ohio rulings above but the fact that the question ever arose. However, that question is far from settled in many states. Consumer attorneys in some states report that their courts are simply declining to entertain defenses like the one successfully raised in Byrd. The most likely explanation for this pattern is simple economy: a case dismissed without prejudice may be re-filed as soon as the defect has been cured, so many courts are apparently reluctant to go through the motions of dismissing a claim on procedural grounds only to have it filed as a new case soon after.
But disparate treatment of this issue by the courts isn’t the only—or even the most significant—difference from state to state. More than half of U.S. states allow for some form of non-judicial foreclosure. That means that the foreclosing party doesn’t have to file a court case in order to foreclose on the property. Non-judicial foreclosure doesn’t render true ownership of the mortgage irrelevant, but it does make it more difficult for the homeowner to pursue the issue.
While the defendant in a judicial foreclosure can simply raise the issue as a defense, the homeowner in a non-judicial foreclosure will typically have to file suit himself to get the issue of mortgage ownership and documentation before the court. That means not only filing fees and service of process, but also a host of procedural hoops unfamiliar to most homeowners. Few will be able to successfully prepare and argue such a claim without an attorney. That isn’t to say that the claim won’t succeed or isn’t worth pursuing in a non-judicial foreclosure state, but the process is far more complex, time-consuming and potentially expensive than the victory stories on television and in news reports might seem to suggest.
While demanding that the claimant produce the note / arguing that the claimant isn’t the real party in interest and doesn’t have standing to pursue a foreclosure action only occasionally results in a decision that effectively forgives the mortgage debt, the challenge can be a valuable tool for homeowners facing foreclosure. If a claim is dismissed and re-filed, that may buy the homeowner valuable time in which to negotiate or assemble funds to cure the default; the added procedural complications and the possibility that the mortgage servicer or alleged note holder may not be able to establish its claim provide an incentive for the claimant to compromise. Likewise, in a non-judicial foreclosure state, initiating a suit against the claimant may only rarely put an end to a foreclosure action altogether, but may still benefit the homeowner by slowing the proceedings and creating an incentive for the mortgage holder to negotiate a workable settlement.
– Kevin Chern
Total Attorneys, Inc.
25 East Washington Street, Suite 400
Chicago, IL 60602
I also field the same type of calls from homeowners and from loan modification companies. Everyone is having the problem of Indymac not cooperating with regard to doing loan modifications. Furthermore, if I google the issue or check out loan modification forums, the same is true on the internet.
What is going on with Indymac/One West? Why aren’t they doing loan modifications? This article will try and bring together the known facts for a better understanding of the situation, and discuss what the Indymac situation means for foreclosures in general — and the government’s response to the crisis. First, to understand the situation today, one must have an understanding of the recent history of Indymac.
Indymac was a national bank in the U.S. It was insured by the FDIC. On July 11, 2008, Indymac failed and was taken over by the FDIC.
Indymac offered mortgage loans to homeowners. A large number of these loans were Option ARM mortgages using stated income programs. The loans were offered by Indymac retail, and also through Mortgage Bankers would fund the loans and then Indymac would buy them and reimburse the Mortgage Banker. Mortgage Brokers were also invited to the party to sell these loans.
During the height of the Housing Boom, Indymac gave these loans out like a homeowner gives out candy at Halloween. The loans were sold to homeowners by brokers who desired the large rebates that Indymac offered for the loans. The rebates were usually about three points. What is not commonly known is that when the Option ARM was sold to Wall Street, the lender would realize from four to six points, and the three point rebate to the broker was paid from these proceeds. So the lender “pocketed” three points themselves for each loan.
When the loans were sold to Wall Street, they were securitized through a Pooling and Servicing Agreement. This Agreement covered what could happen with the loans, and detailed how all parts of the loan process occurred.
Even though Indymac sold off most loans, they still held a large number of Option ARMs and other loans in their portfolio. As the Housing Crisis developed and deepened, the number of these loans going into default or being foreclosed upon increased dramatically. This reduced cash and reserves available to Indymac for operations.
In July, 2008, the FDIC came in and took over Indymac. The FDIC looked for someone to buy Indymac and after negotiations, sold Indymac to One West Bank.
OneWest Bank was created on Mar 19, 2009 from the assets of Indymac Bank. It was created solely for the purpose of absorbing Indymac Bank. The principle owners of OneWest Bank include Michael Dell and George Soros. (George was a major supporter of Barack Obama and is also notorious for knocking the UK out of the Euro Exchange Rate Mechanism in 1992 by shorting the Pound).
When OneWest took over Indymac, the FDIC and OneWest executed a “Shared-Loss Agreement” covering the sale. This Agreement covered the terms of what the FDIC would reimburse OneWest for any losses from foreclosure on a property. It is at this point that the details get very confusing, so I shall try toÂ simplify the terms. Some of the major details are:
How does this translate to the “Real World”? Let us take a hypothetical situation. A homeowner has just lost his home in default. OneWest sells the property. Here are the details of the transaction:
At this point, it becomes readily apparent why OneWest Bank has no intention of conducting loan modifications. Any modification means that OneWest would lose out on all this additional profit.
Note: It is not readily apparent as to whether this agreement applies to loans that IndyMac made and Securitized but still Services today. However, I believe that the Agreement does apply to Securitized loans. In that event, OneWest would make even more money through foreclosure because OneWest would keep the “excess” and not pay it to the investor!
When OneWest has been asked about why loan modifications are not being done, they are responding that their Pooling and Servicing Agreements do not allow for loan modifications. Sheila Bair, head of the FDIC has also stated the same. This sounds like a plausible explanation, since few people understand the Pooling and Servicing Agreement.Â But…
Here is the”dirty little secret” regarding Indymac and the Pooling and Servicing Agreement. The parties involved in the Agreement are:
In other words, Indymac was the only party involved in the Pooling and Servicing Agreement other than the Ratings Agency who rated these loans as `AAA’ products.
To make matters worse, Indymac wrote the Agreement in order to protect itself from liability for these garbage loans. By creatingÂ separate Indymac Corporations — which the Depositor, Sponsor, and other entities were — Indymac created a bankruptcy-remote vehicle that could not come back to them in terms of liability. However, they did not count on certain MBS securities and portfolio loans coming back to bite them and force them under.
Now, the questions become:
These are questions that I have no answer for. All I know is that at every step of the way, Indymac was involved in the process, and have taken steps to protect themselves from liability for loans that should never have been made.
As referred to earlier, the Agreement covers all aspects of the Securitization Process. With respect to Loan Modifications, the Agreement for Indymac INDA Mortgage Loan Trust 2007 – AR5, states on Page S-67:
Certain Modifications and Refinancings
The Servicer may modify any Mortgage Loan at the request of the related mortgagor, provided that the Servicer purchases the Mortgage Loan from the issuing entity immediately preceding the modification.
Page S-12 states the same “policy”:
The servicer is permitted to modify any mortgage loan in lieu of refinancing at the request of the related mortgagor, provided that the servicer purchases the mortgage loan from the issuing entity immediately preceding the modification. In addition, under limited circumstances, the servicer will repurchase certain mortgage loans that experience an early payment default (default in the first three months following origination). See “Servicing of the Mortgage Loans—Certain Modifications and Refinancings” and “Risk Factors—Risks Related To Newly Originated Mortgage Loans and Servicer’s Repurchase Obligation Related to Early Payment Default” in this prospectus supplement.
These sections would appear to suggest that the only way that OneWest could modify the loan would be as a result of buying the loan back from the Issuing Trust. However, there may be an out. Page S-12 also states:
Required Repurchases, Substitutions or Purchases of Mortgage Loans
The seller will make certain representations and warranties relating to the mortgage loans pursuant to the pooling and servicing agreement. If with respect to any mortgage loan any of the representations and warranties are breached in any material respect as of the date made, or an uncured material document defect exists, the seller will be obligated to repurchase or substitute for the mortgage loan as further described in this prospectus supplement under “Description of the Certificates—Representations and Warranties Relating to Mortgage Loans” and “—Delivery of Mortgage Loan Documents .”
The above section may be the key for litigating attorneys to fight Indymac. If fraud or other issues can be raised that will show a violation of the Representations and Warranties, then this could potentially force Indymac to modify the loan.
At this point, it becomes important to note that Indymac/OneWest signed aboard with the HAMP program in August 2009. Even though they became a part of the program, they are still refusing to do most loan modifications. Instead, they persist in foreclosing on almost all properties. And even when they say that they are attempting to do loan modifications, they are fulfilling all necessary requirements so that they can foreclose the second that they “decide” the homeowner does not meet HAMP requirements, — which, since they can make more money by foreclosing on the property, meets the HAMP requirements for doing what is in the best interests of the “investor”.
Why did Indymac even sign up for HAMP, if they have no intention of executing loan modifications?Â Clearly, just for appearances.
It now becomes incumbent upon me to ask one final question. The Shared-Loss Agreement states the following:
2.1 Shared-Loss Arrangement.
(a) Loss Mitigation and Consideration of Alternatives. For each Shared-Loss Loan in default or for which a default is reasonably foreseeable, the Purchaser shall undertake, or shall use reasonable best efforts to cause third-party servicers to undertake, reasonable and customary loss mitigation efforts in compliance with the Guidelines and Customary Servicing Procedures. The Purchaser shall document its consideration of foreclosure, loan restructuring (if available), charge-off and short-sale (if a short-sale is a viable option and is proposed to the Purchaser) alternatives and shall select the alternative that is reasonably estimated by the Purchaser to result in the least Loss. The Purchaser shall retain all analyses of the considered alternatives and servicing records and allow the Receiver to inspect them upon reasonable notice.
Such agreements are usually considered to be interpreted to the benefit of the homeowner, as with HAMP and other programs. In legalese, it is called “Intent”.
What was the “Intent” of the Shared-Loss Agreement? Was the intent to provide OneWest Bank solely with a profitable incentive to take over Indymac Bank? If so, then OneWest has been truly successful in every manner.
Or was the intent to offer to OneWest Bank a way to be compensated for losses for foreclosures, but with the primary goal to assist homeowners in trouble? If this was the intent, then OneWest has failed miserably in its actions. And if so, could OneWest be actionable by the Federal Government for fraud?
In fact the true “Intent” was to limit losses to the Treasury Department. Each and every loan modification done would save the Treasury, and the tax payer, from 80-95 cents on every dollar.
Since, technically, One West would get 5-20 cents of any savings, it should have been an incentive to use foreclosure alternatives. But the reality isÂ that the quick turnaround on foreclosure seems to give OneWest a better return. As a result, OneWest appears to simply ignore the intent and just foreclose (as far as I can tell).
So, OneWest’s failure to modify loans may actually amount to fraud on the Treasury and US taxpayers.
I have presented the story of Indymac/OneWest and what is happening today. But the story does not end with OneWest. There are over 50 different lenders and servicers who have Shared-Loss Agreements executed with the FDIC. Each Agreement offers essentially the same terms. Though other Lenders do not appear to be acting as flagrantly as OneWest, they are all still engaging in the same actions.
What is the solution for this problem?
Will this be easy? No way. After all, the lenders have the money and the ears of Congress. But if we do not draw the line here, then in 10-15 years, the Banks will devise another plan to “loot” the economy, as they do every 10-15 years.]]>
Stoking the controversy is an iStockAnalyst article which argues Wells will be OK, after it was revealed by one writer that Credit Suisse’s well-known projections for Option ARM recasts made an erroneous, blanket 5-year recast assumption. However, that writer disagrees with the iStockAnalyst conclusion that Wells is out of the woods, even though it is based on his own data!
So who is right?
Here, I will attempt to shed light on the recast portion of this argument, and hopefully clear up confusion and add to the general understanding of the subject.
The World (Savings) Option ARM differed from most other Option ARMs in the following details:
What is most important to remember is that the 5 year and 10 year recast periods are only estimates. The periods are subject to variations based upon the index value, the start rate, and the margin offered. For a complete background on this, you can refer to a previous article I have written on the Option ARM implosion at IamFacingForeclosure.com.
For a better understand of the recast, I have calculated payment schedules for a World Savings Option ARM and an Option ARM found with most typical lenders. So as to compare apples to apples, I am using a Start Rate of 1.5%, Margin of 3.45%, and the CODI Index Value of 4.3183% for the World Loan and the MTA Index Value of 4.2187% for the generic Option ARM. The Index Month is May 2006. Amortization Caps are 125% for the World Loan and 115% for the standard loan.
|World Savings||Generic Loan|
As can be seen, for the first 52 months, the minimum payment schedule would remain the same. However, at month 53, the regular Option ARM would find itself recasting to the fully amortized payment, but the World Savings Option ARM would take until the 86th month to recast, far short of the 120 months that the article stated.
There are certain factors related to the recast dates that do not appear on the above payment schedule. The primary factor is that the CODI and MTA Index adjusts monthly, so each and every adjustment will affect the month that the actual recast occurred. For example, the CODI Index is now 0.8642% and the MTA Index is now 0.5442% for Oct 2009. The lower the Index, the longer the loan takes to recast, so it is likely that the loans would now approach the recast dates of 120 or 60 months. However, if the Indexes go up, then the recasts will be on track to occur quicker.
On the face of it, the articles and the Payment Schedule would tend to support the arguments that Wells Fargo will be better off with the World Option ARMS than other lenders would. However, this is NOT simply an academic exercise, so the Real World must be factored in.
The World Savings loan was treated differently than most other Option ARMs. That is because World was a “portfolio lender” and held these loans instead of selling them to Wall Street. This had profound implications for World underwriting.
World Savings underwrote loans using a “Make Sense” decision criteria. This underwriting allowed for most loans to be stated income, and credit scores into the upper 500’s, with mortgage lates allowed. All that needed to be done was to “document” the late with a “good” letter of explanation. Do that, and the loan was approved, no matter the issues.
The reason that World was able to embark upon their “Make Sense” underwriting was their appraisal process. Whenever the World underwriter received a loan with an appraisal from a non-World appraiser, a World appraiser would review the appraisal. Usually, this resulted in the World appraiser reducing the value of the appraisal by 10%. This gave World an “added cushion” to the loan to value and loan amount, to protect their interests. In reality, this meant that World was extending the loan offer based upon the foreclosure value of the property. How this helped World Savings is shown in the following example.
It should be noted that most brokers knew the World Savings practice with regard to appraisals and if the loan to value was close to 80% and since the World procedure would likely result in the loan being declined, then the broker took the loan to another lender [Ed. note - or maybe they made sure they got a more favorable appraisal, first.].
A real problem with the Option ARM loan is in regard to the World Savings Fast Action Team. This was an underwriting program where an underwriter could usually make an approval without any upper management review. The teams were located throughout the state of California, and it was easy to simply take the original loan application and credit report to the underwriter, sit down and show the underwriter the paperwork, and the underwriter would tell you how to write up the loan, stated income or not, and other issues to address. Therefore, it was relatively easy to get even difficult loans approved.
(This was also the routine when going through the World Account Representative for the broker officer. It should be noted that the same was true of other Account Reps for different lenders. )
The reality is that most borrowers were approved for the Option ARM mortgages using Stated Income loans. The income was over-inflated, and as a result, the borrowers were never qualified for the loan. If they were lucky, they could only make the minimum payment and nothing greater. If they had been required to have impound accounts and make the impound payments as well, then they would have likely defaulted at a faster rate.
In the last two years, I have audited probably about 150 World Savings Option ARMs. These have mostly been from people in default, ready to lose their homes. The common characteristics of the borrowers reflect the following:
Based upon my observations, the 10 year recast date in not worth considering as beneficial to Wells Fargo. What will be the determining factors with regard to whether the Option ARM is going to harm Wells earlier than the recast dates will be:
A point that I should bring up regarding the Credit Suisse chart of Option ARM resets that is being discussed. I have been having discussions with Bill Matz of Master’s Touch Mortgage regarding this specific point. Bill is a licensed mortgage broker, real estate attorney, tax attorney, and financial planner. He is one of the few people I trust in the business.
It is the opinion of each of us that the chart has significant errors in it. Some of the errors relate to the issue of the 10 year recast periods. Other errors relate to how differing Index values will affect the recast times.
It is our conclusion that this chart has over-estimated the coming year’s recast numbers. A large part of this conclusion is based upon the number of Option ARMS that have recast or will recast prior to the five year term. Also, it does not factor in the number of defaults that have already occurred long before the recast period.
But whatever the final timing, Wells is surely not insulated, due to the many factors outlined above.
Disclaimer:Â Pulatie and LFI are not attorneys and do not dispense legal advice. The purpose of LFI is to assist attorneys and homeowners in their fight.]]>
I basically got into the loan audit business as a means to save my properties. As a small-fish RE investor, I was able to retire in 2005, only to wake up in 2007 and find I was possibly going to lose everything. I started the same way many of you are starting–by researching the fraud in my own two WAMU loans. My Florida nightmare had begun.
A few weeks ago, after 2 and 1/2 years of pure hell, fear, misery, frustration…. (sound familiar…?) opposing counsel and whoever purported to “own my loan” failed to show up to the hearing. The hearing was to show cause as to why the Judge’s direct order to compel discovery was not followed. That is a no-no with Judges. It shows disrespect to the Judge, the court, and to justice and fairness. And my case was dismissed… for now.
As co-founder of a Mortgage Fraud Examination firm, I have talked to many of the best auditors in the country. Here is what you should consider before you spend more money towards your legal defense of your home.
In fairness to foreclosure defense attorneys, today’s litigation defense is not as cut and dry as any of us would like to see it. Yet, case law is being made almost daily. Judges and attorneys alike are starting to see that loans made in the last ten years are a lot different than in earlier banking history. Securitization, exotic loan products, insane underwriting practices, lack of regulatory oversight, criminality, and pure greed, creates a different slant to today’s legal issues.
This is why it is crucial to hire an attorney who has been specially-trained in foreclosure defense [Editor's Note: You can find such attorneys through our site, IamFacingForeclosure.com]. This special rare breed should be an expert in contract law, real estate law, finance law and securities law, due to the overwhelmingly complex nature of this decade’s loans. Now you know WHY, in 2009, MILLIONS of (non-attorney) consumers are in foreclosure today!
By 2010, get ready for 3 more years of the exploding “Option Arms!” As lending insiders have famously stated, “Option Arms” are like neutron bombs…. kills the people but leaves the buildings standing.” Thanks guys!! See y’all in court!
So in the final analysis, hire the right attorney first–deal with the audit later!
Relax and keep the faith! I know of four foreclosure dismissals this last few weeks. The odds are tipping in your favor!
PS – I am NOT an attorney. No information that I share should be construed as legal advice. Always consult with a qualified foreclosure defense attorney regarding your foreclosure. (I am only a ticked-off, entrepreneurial homeowner who stands for property rights, free speech, due process, justice, and fairness in the USA.)]]>
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For the last year and one-half, there have been projections regarding the coming implosion of Option ARM loans. So far, it has yet to materialize on the scale that was projected. What happened to the implosion? When can it be expected? In order to answer these questions, an understanding of the mechanics of the Option ARM must first be acquired.
The Option ARM (sometimes marketed as “Pick-a-pay” or known as “neg-am” loans to industry insiders) was a very specialized mortgage loan program, designed originally to be used only under very specific circumstances. The primary beneficiaries of the Option ARM would be borrowers who had difficulties in documenting income as self-employed persons, or borrowers who had income streams that fluctuated monthly or with the seasons. Such borrowers would include contractors, sales persons, etc. The rationale for using such a loan was that when business was slow, the borrower could make the minimum payment, and when the borrower was busy with greater income streams, then the borrower would “catch up” on the loan by making principal reduction payments.
The Option Arm featured four different methods of payments. They were:
The borrower had the option of determining which payment that he would make on the loan each month. He simply wrote out the check for whatever payment he desired, and mailed out the check.
The loan had a very specific methodology for determination of the Actual Interest Rate after the first month at one percent. There were two elements necessary for determination of the rate:
The Margin would be added to the Index to determine the Actual Interest Rate of the loan. If the Margin was 3.7% and the Index was 2.2%, then the sum of the two would be 5.9%. However, most Option ARM Notes called for the rate to be rounded to the nearest .125%, so the effective rate for the month would be 5.875%.
As mentioned above, the loan officer, or broker, determined the Margin on the loan. The loan officer could provide a Margin of 2.2%, 3.00%, or whatever he wanted. One would think that the loan officer would simply give the borrower the 2.2% Margin to keep the interest rate low, but this seldom happened. That is because the higher the Margin that the broker gave a borrower, the lender would “reward” the broker with a Yield Spread Premium. On a $500,000 loan, the broker might charge a Loan Origination Fee of 1 point, or $5,000, and then receive the Yield Spread Premium of up to 4 points. For a $500,000 loan, the broker might receive a total commission of up to $25,000 per loan.
The sad fact is that most borrowers never knew this was occurring. That is because the broker seldom disclosed the Yield Spread Premium on the Good Faith Estimate. When it was revealed, and the borrower asked about this “unknown” Yield Spread Premium”, then the broker would tell the borrower, “Don’t worry about that. This is a bonus I “could” receive, once I reach a certain dollar volume with the lender, if it happens, and it seldom does. I just have to disclose the potential for it. Either way, you do not pay for it.” This was simply a lie by the broker.
Another little stunt that the broker would pull would be to charge no Loan Origination Fee and call the loan a No Point Loan. The borrower thought that the broker was being a “stand up guy”. It was never properly disclosed that the Yield Spread Premium would be paid to the broker by a higher interest rate and payment.
The end result of the broker or loan officer receiving the Yield Spread Premium would be the borrower’s payment going up considerably. On a $500,000 loan, it is common to see the payment being $500 per month or greater than what the borrower actually qualified for.
When the Option ARM mortgage was being presented to the borrower, the borrower was usually told that the Interest Rate was 1%, and the Minimum Payment would last for five years. This was a blatant misrepresentation of the terms of the loan.
The truth was that the Minimum Payment would be allowed for the first year of the loan. At the end of that year, the payment could (under typical terms) increase 7.5% of the payment amount. If the monthly payment was $1,000, the second year the Minimum Payment would be $1,075. The third year of the loan, it could go up to $1,151.52, and so forth for the first five years. Usually, at the beginning of the 6th year, the Fully Amortized Payment would be required, unless it had a 10 year period of minimum payments, as did World Savings loans and a few other special loans.
The borrower was almost always never told what the Actual Interest Rate or payment was on the loan, unless they were aware of the loan and asked.
In addition to requiring the Fully Amortizing Payment after some fixed number of years, each Option ARM loan had a “cap” on how high the loan balance could go above the initial loan amount. The cap could be from 110% of the loan balance up to 125% of the balance (for World Savings or WaMu). What this meant is that:
$100,000 loan amount X 110% = $110,000 maximum loan amount or Negative Amortization (neg-am)
When the loan would hit $110,000, then the loan would “recast,” which meant that the Fully Indexed Rate Payment would then be required. Depending upon the Index and the Margin, the loan could recast in two years or it could recast at the five year mark, or any time in between. As the Index increased in value, the quicker the recast occurred.
Note that the term “recast” is not the same as “reset”, which is often used when discussing normal ARM loans. Resets are scheduled increases in payments based on Index or Margin. Recasts are based on hitting the neg-am ceiling, or otherwise reaching the scheduled end of the non-Fully Indexed Payment phase.
On most Option ARM loans, the original projections on the Truth In Lending Disclosure would show that the loan would recast in from 3 to 4.5 years. Any increase in the Index value (assuming the borrower’s payments stayed the same) necessarily meant that recast would occur much earlier. As a result, the Truth In Lending Disclosure, though accurate, never told the full story.
I have mentioned several times about the Minimum Payment and the Fully Amortized Payment. However, for most people, the differences in each mean nothing unless it can be shown by example. So I shall take the $500,000 loan with a Start Rate of 1% as an example.
These are the numbers that the Option ARM borrower was almost always never made aware of when taking out the loan. The first Minimum Payment would add $1,973.86 to the loan balance, and each future payment would add even more due to the increasing loan balance.
Once the payment on an Option ARM does recast, as shown above, the payment can easily double. At that time, most borrowers will desire to get out of the loan because they cannot afford the payment. However, this is easier said than done since the approval guidelines for getting a loan have become much more stringent.
90% of the Option ARMS in California were stated income loans. Borrowers were never qualified using their actual income. Instead, the broker (more often than borrower) falsified the loan application income, so as to meet Debt Ratio Guidelines for approval. This leads to loan applications like the one where the room attendant/maid for a Four Seasons Hotel made $7900 per month. (Can I have that job?)
Even worse, the broker might create employment for borrowers. Most common was landscaping companies for Hispanic borrowers, and the lenders never checked. It was just a wink and a nod.
A third issue was that credit score requirements for an Option ARM mortgage fell from a minimum of 680 in 1998, down to 600 for some programs by 2004. (World Savings would loan on even lower scores, if there was enough equity in the home.) At the same time, loan to value ratios were increasing from 70%, up to 95%. Credit quality requirements for the loans were eroding fast, and anyone could qualify for the loan.
(Ultimately, the lender only cared that the borrower could make the Minimum Payment on the loan, since the loan would be sold, “without recourse” to investors, through securitization. If the borrower defaulted at a later time, it was the investor who would lose on the loan, not the lender. Without lender “risk”, there was no concern for lender liability in event of default. Even more important, the lenders sold the loans to Wall Street for 5 to 6 points. Therefore, they could afford to pay up to 4 points Yield Spread Premium for the loan.)
If a borrower wanted to refinance out of an Option ARM mortgage, he would face numerous problems which would usually prevent the refinance:
Since the borrower could not refinance, he would have one of five potential options to choose from:
Refinancing out of an Option ARM will be almost impossible for most borrowers, even if lenders were lending, because of deterioration in home values, loan-to-value (LTV), and people’s incomes.
Now, the reader has a working knowledge of the Option ARM mortgage. In fact, the reader should now know more about the loan than most loan officers ever knew! After all, loan officers only cared about the Margin and what Yield Spread Premium that they could earn. Armed with this knowledge, the reader should be able to understand why the Option ARM implosion has not yet materialized, and when to expect it.
The relevant factors related to the Option ARM implosion are:
The Margin and the Negative Amortization Cap have been set at the time of the Closing of the loan, so these factors are fixed, and cannot be changed. The higher the Margin, the quicker the loan recasts. The lower the Negative Amortization Cap, the quicker the loan recasts. Provided that the Index does not change during the life of the loan, the Margin and Cap would result in a recast date equal to what is shown on the Truth In Lending Disclosure. If the Truth In Lending Disclosure shows a recast occurring anywhere from 3-5 years, then that would be the expected time for implosions to occur.
The Index, since it can increase or decrease, is the key to the implosion to come.
The chart below shows the rise of the Index through 2007.
When the lender implosion began in Aug 07, those of us in California, Florida, Arizona and Nevada already knew what the rest of the nation would soon find out. Foreclosure activity was increasing, property values were falling, and the economy was stalling out. The Fed knew this and so did those who were buying the One Year Treasury Bonds and Notes, and as a result, the Bonds and Notes were increasing in value and dropping in rates.
By Jan 08, the Federal Reserve knew the market was in freefall. They Fed knew that the Foreclosure Crisis would only worsen. They also knew that the Sub-Prime Crisis would worsen, and then later would come the Option ARM and Alt-A Crisis. The first objective would be to attempt to deal with the Sub-Prime Crisis. Their actions drove the LIBOR Index down to .31% by the beginning of 2009. Unfortunately, that was too late for most Sub-Prime borrowers. They had originated loans from 2003 to 2006, usually fixed for two years, and by the time LIBOR rates fell to a “reasonable” level that would prevent foreclosures, it was too late. The majority of the loans had recast and people had given in to being foreclosed upon.
While the Fed was dealing with the Sub-Prime Crisis, they were also hoping that their actions would prevent the Option ARM Crisis. By lowering the MTA Index, it would postpone the recasting of the Option ARM loan to the full 5 year term. Within that time, the hope was that the “lending crisis” would end. Of course, once again, the Fed was out of touch with reality.
What the Fed failed to realize, or did not care about, was that homes were completely overvalued. As foreclosures continued to occur with the Sub-Prime Crisis, home values continued to fall. Even more short sighted, the reaction of the Servicers was not considered. The Servicers had no concern for the homeowner. Instead, they mostly wanted to foreclose (as I have detailed in previous articles).
The one action that the Fed has accomplished is to postpone the Option ARM implosion. By decreasing the MTA and other indexes, they managed to extend the period of time for when the Option ARM would recast. Now, most Option ARM loans will recast in 4-5 years. Since 2005 and 2006 saw the bulk of the Option ARM loans originated, the implosion will really occur during the next two years.
LFI (my company) is seeing increasing numbers of Option ARM loans in trouble from recasting. Most of these are the 2005 Vintage, with 2004 in second place. There have some 2006 loans, and a few from 2007. Most of the 2006 and 2007 Vintages are likely the result of financial issues related to a drop in income.
If you are behind with your Option ARM mortgage, there is hope. The good news is that many of the attorneys that LFI works with, are reporting success with getting Option ARMS modified. These modifications involve rate reductions and usually principal forbearance.
However, you must be proactive. Do not wait until you have a Notice of Trustee Sale scheduled.
If the Sale is scheduled, attorneys have limited time to work on your case, and with their current heavy workload, most will simply suggest filing a bankruptcy to stop the sale. Then they will agree to work with you.
Remember, if you have an Option ARM loan you cannot afford, in order to avoid losing your home, you must take action immediately.
Patrick Pulatie is the CEO for Loan Fraud Investigations (LFI). LFI is a Forensic/Predatory Lending Audit company in Antioch CA, and has been doing homeowner audits since Nov 07. LFI works daily with Attorneys throughout California, assisting homeowners in the fight to save their homes. He and Attorneys are constantly developing new strategies to counter foreclosure efforts by lenders.
Disclaimer: Pulatie and LFI are not attorneys and do not dispense legal advice. The purpose of LFI is to assist attorneys and homeowners in their fight.]]>
When researching loan modification companies or attorneys, one will often see a reference to the firm doing a “Forensic Loan Audit” of your documents. It is claimed that the audit will “discover violations of TILA/RESPA, find fraudulent misrepresentation, and identify the terms of your loan, fees and other “pertinent” information. Then, you should take the audit to an attorney who can use it to achieve a loan modification, or file a lawsuit.
What does this mean? Is it valid? What is the real story behind audits? This article will try and clear up the subject for better understanding.
A Forensic Loan Audit is a process that involves the examination of all of your loan documents.Â The purpose of the audit is to find violations within your loan documents that can be used to your advantage under the Truth In Lending Act or the Real Estate Settlement Procedures Act. These pieces of Federal legislation are the guidelines for lending and the disclosure of costs related to any loan. Remedies for violations are damages for up to one year, and a Three Year Extended Rescission for specific violations of required “material disclosures”.
There are variations of Audits, but essentially there are only two true types of audits:
Finally, just look at their website. If information is very general in detail, it is likely that you are speaking with someone who is only doing the low-level audit. Additionally, if the website quotes a court case and or a specific law, but offers no analysis of the underlying decision, you can certainly bet that the firm is a Low-Level Audit firm.
Most attorneys have major issues with these type of audits. In each category, they simply announce whether the applicable test was “passed or failed”. No other explanations are given. The attorney is then left to come up with the reason for the failure.
If litigation is involved, then the attorney is at a great disadvantage. To receive a Temporary Restraining Order or a Preliminary Injunction, the complaint must be argued with “specificity”. This means that the allegations must be described in detail, explaining what has occurred, and often how it occurred. With the TILA/RESPA audit, even if violations are found, the violations are not described for a “specificity” argument. Often, LFI has been contacted by attorneys using these audits for assistance in what the actual findings meant, and then for instructions on how to argue specificity. Once we have explained and given them guidance, they seek to use LFI.
By the way, it should be mentioned that the reason for most Temporary Restraining Orders to be denied is specificity of the arguments.
The second audit that you may find would be the Predatory Lending Audit. It is rare to find a firm that is competent in conducting this audit. That is because it is performed by hand, requires people who not only understand the lending process, but is well versed in not just TILA and RESPA, but is also very familiar with many other Statutes at the State and Federal level. A competent firm doing this type of audit will know Securitization inside and out, be able to obtain Pooling and Servicing Agreements, 10-K filings, FWP documents, Mortgage Loan Purchase Agreements, and then know the Foreclosure Process in detail for their state.
To effectively perform a Predatory Lending audit, the audit must be done by a professional familiar with the loan process, forms, regulations, lender practices and broker practices. To be equally effective, the auditor must also understand the laws pertaining to not just disclosure requirements, but often contract law, tort law, civil law, foreclosure law, and other pertinent statute.
Most important is that an auditor must be part detective and part mind-reader. That is because the auditor is dealing with only a portion of the loan file, the portion that has been provided to the borrower by the broker and the closing documents by the title company and lender. Missing will be all the loan documents that the lender has generated for approving the loan. This includes underwriting approval, doc order forms, rate lock requests, rates sheets, and other various documents related to the approval. Usually, the Appraisal is absent as well. As a result, the auditor must use industry knowledge, common sense and intuition to fill in the gaps as to what happened with the loan.
To develop a competent “Predatory Lending Auditor”, it takes my company 4-6 months to train an auditor to a level where he is considered competent and capable of performing audits on his own with no supervision.
Once a Predatory Lending audit is completed by the auditor, it should not be sent out to the client. Instead, it should be reviewed by the head auditor for final sign-off for accuracy
( LFI uses a “two part review” whereby after the initial review is completed, I do a final review on each and every audit to determine that the audit is completely accurate, and that nothing has been missed. Usually, I will still find violations, mostly as a result that I have done audits for so long, I pick up on violations that may occur once every 500 audits or less. Such violations cannot be taught, instead they can only be learned through experience.)
There could be nothing worse than to walk into a courtroom with inaccurate data, and when testifying, being confronted with such an error by opposing counsel. That immediately undermines the credibility of the audit, the auditor, and the legal team that the audit was performed for.
This is a list of some items that LFI will look for.Â (This list will omit some issues found in audits or go into significant detail of other items because they are in the process of preparing the arguments for major Class Action Lawsuits that are in the works.Â These issues and arguments have been developed at a great expense of time, effort and money to develop these ideas. It is the development of such ideas that sets us apart from all other companies.)
That is the real question to be asked. What can an audit do for you? It is a question that is difficult to answer, since every audit is different in results and the results will often determine a course of action that the attorney might recommend for you.
I have tried to present an objective article about the Forensic Auditing Industry. However, it is difficult since I am an active participant in the industry, and certainly have my own biases.
Currently, this industry has turned into the “Wild West” again, with the influx of un-employed loan officers buying Audit Software and conducting TILA/RESPA audits. They believe that just having the software “entitles” them to be called auditors. They are only in pursuit of the money, and nothing else. (It should be noted that most of these loan officers will never admit to culpability in the Foreclosure Crisis, but instead blame the borrower or the lender only. This is when it is readily apparent that we were all complicit.)
Even worse, these “auditors” have not studied the laws, nor have they studied the case law on the subjects at hand. As a result, they make claims about what an audit can do for you, and the claims are widely misrepresented or even completely false. As a result, homeowners again suffer from the actions of the same loan officers who harmed them by placing them into the Predatory Loans in the first place.
In final, I would be remiss to not point out the following:
I hope that this presentation has expanded your knowledge of audits, their purpose, and what can be accomplished. In the right hands, an audit, done correctly, can be a powerful tool for the attorney and the homeowner. However, an improper audit, done poorly, and in the hands of an inexperienced attorney or homeowner, makes for great starter material for the barbeque or the fireplace, on those cold winter nights when you want to keep warm, while sleeping in a tent.
Disclaimer: Pulatie and LFI are not attorneys and do not dispense legal advice. The purpose of LFI is to assist attorneys and homeowners in their fight.]]>
As a homeowner begins research into the lending and foreclosure crisis, there will be many unfamiliar terms, names and companies that come to their attention. Chief among these will be MERS.
MERS is the acronym for Mortgage Electronic Registration Systems. It is a national electronic registration and tracking system that tracks the beneficial ownership interests and servicing rights in mortgage loans. The MERS website says:
“MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans. “
In simple language, MERS is an on-line computer software program for tracking ownership.
MERS was conceived in the early 1990’s by numerous lenders and other entities. Chief among the entities were Bank of America, Countrywide, Fannie Mae, Freddie Mac, and a host of other such entities. The stated purpose was that the creation of MERS would lead to “consumers paying less” for mortgage loans. Obviously, that did not happen.
This article will attempt to explain MERS in very general detail. It will cover a few issues related to MERS and foreclosure, in order to introduce the reader to the issues of MERS. It is not meant to be a complete discussion of MERS, nor of the legal complexities regarding the arguments for and against MERS. For a more in depth reading of MERS and findings coming out of courts, it is recommended that the reader look at Hawkins, Case No. BK-S-07-13593-LBR (Bankr. Nev. 3/31/2009) (Bankr. Nev., 2009) . It gives a good reading of the issues related to MERS, at least for that particular case. Though in Nevada, it is relevant for California.
(Please note. I am not an attorney and am not giving legal advice. I am just reporting arguments being made against MERS, and also certain case law and applicable statutes in California.
Traditionally, when a loan was executed, the beneficiary of the loan on the Deed of Trust was the lender. Once the loan was funded, the Deed of Trust and the Note would be recorded with the local County Recorder’s office. The recording of the Deed and the Note created a Public Record of the transaction. All future Assignments of the Notes and Deed of Trust were expected to be recorded as ownership changes occurred. The recording of the Assignments created a “Perfected Chain of Title” of ownership of the Note and the Deed of Trust. This allowed interested or affected parties to be able to view the lien holders and if necessary, be able to contact the parties. The recording of the document also set the “priority” of the lien. The priority of the lien would be dependent upon the date that the recording took place. For example, a lien recorded on Jan 1, 2007 for $20,000 would be the first mortgage, and a lien recorded on Jan 2, 2007, for $1,500,000 would be a second mortgage, even though it was a higher amount.
Recordings of the document also determined who had the “beneficial interest” in the Note. An interested party simple looked at the Assignments, and knew who held the Note and who was the legal party of beneficial interest.
(For traditional lending prior to Securitization, the original Deed recording was usually the only recorded document in the Chain of Title. That is because banks kept the loans, and did not sell the loan, hence, only the original recording being present in the banks name.
The advent of Securitization, especially through “Private Investors” and not Fannie Mae or Freddie Mac, involved an entirely new process in mortgage lending. With Securitization, the Notes and Deeds were sold once, twice, three times or more. Using the traditional model would involve recording new Assignments of the Deed and Note as each transfer of the Note or Deed of Trust occurred. Obviously, this required time and money for each recording.
(The selling or transferring of the Note is not to be confused with the selling of Servicing Rights, which is simply the right to collect payments on the Note, and keep a small portion of the payment for Servicing Fees. Usually, when a homeowner states that their loan was sold, they are referring to Servicing Rights.)
The creation of MERS changed the process. Instead of the lender being the Beneficiary on the Deed of Trust, MERS was now named as either the “Beneficiary” or the “Nominee for the Beneficiary” on the Deed of Trust. The concept was that with MERS assuming this role, there would be no need for Assignments of the Deed of Trust, since MERS would be given the “power of sale” through the Deed of Trust.
The naming of MERS as the Beneficiary meant that certain other procedures had to change. This was a result of the Note actually being made out to the lender, and not to MERS. Before explaining this change, it would be wise to explain the Securitization process.
Securitizing a loan is the process of selling a loan to Wall Street and private investors. It is a method with many issues to be considered, especially tax issues, which is beyond the purview of this article. The methodology of securitizing a loan generally followed these steps:
As can be seen, each Securitized Loan has had the ownership of the loan transferred two to three times minimum, and without Assignments executed for each transfer.
(Note: This is a VERY simplified version of the process, but it gives the general idea. Depending upon the lender, it could change to some degree, especially if Fannie Mae bought the loans. The purpose of such a convoluted process was so that the entities selling the bonds could become a “bankruptcy remote” vehicle, protecting lenders and Wall Street from harm, and also creating a “Tax Favorable” investment entity known as an REIMC. An explanation of this process would be cumbersome at this time.)
As mentioned previously, Securitization and MERS required many changes in established practices. These practices were not and have not been codified, so they are major points of contention today. I will only cover a few important issues which are being fought out in the courts today.
One of the first issues to be addressed was how MERS might foreclose on a property. This was “solved” through an “unusual” practice.
This “solved” the issue of not having enough personnel to conduct necessary actions. It would be the Servicers, Trustees and Title Companies conducting the day-to-day operations needed for MERS to function.
As well, it was thought that this would provide MERS and their “Corporate Officers” with the “legal standing” to foreclose.
However, this brought up another issue that now needed addressing:
Once a name is placed into the endorsement of the Note, then that person has the beneficial interest in the Note. Any attempt by MERS to foreclose in the MERS name would result in a challenge to the foreclosure since the Note was owned by “ABC” and MERS was the “Beneficiary”. MERS would not have the legal standing to foreclose, since only the “person of interest” would have such authority. So, it was decided that the Note would be endorsed “in blank”, which effectively made the Note a “Bearer Bond”, and anyone holding the Note would have the “legal standing” to enforce the Note under Uniform Commercial Code. This would also suggest that Assignments would not be necessary.
MERS has recognized the Note Endorsement problem and on their website, stated that they could be the foreclosing party only if the Note was endorsed in blank. If it was endorsed to another party, then that party would be the foreclosing party.
As a result, most Notes are endorsed in blank, which purportedly allows MERS to be the foreclosing party. However, CA Civil Code 2932.5 has a completely different say in the matter. It requires that the Assignment of the Debt be executed.
As is readily apparent, the above statute would suggest that Assignment is a requirement for enforcing foreclosure.
The question now becomes as to whether a Note Endorsed in Blank and transferred to different entities as indicated previously does allow for foreclosure. If MERS is the foreclosing authority but has no entitlement to payment of the money, how could they foreclose? This is especially true if the true beneficiary is not known. Why do I raise the question of who the true beneficiary is? Again, from the MERS website……..
There, you have it. Direct from the MERS website. They admit that they name people to sign documents in the name of MERS. Often, these are Title Company employees or others that have no knowledge of the actual loan and whether it is in default or not.
There, you have it. Direct from the MERS website. They admit that they name people to sign documents in the name of MERS. Often, these are Title Company employees or others that have no knowledge of the actual loan and whether it is in default or not.
Even worse, MERS admits that they are not the true beneficiary of the loan. In fact, it is likely that MERS has no knowledge of the true beneficiary of the loan for whom they are representing in an “Agency” relationship. They admit to this when they say “Your title company or MERS officer can easily determine the true beneficiary.
To further reinforce that MERS is not the true beneficiary of the loan, one need only look at the following Nevada Bankruptcy case, Hawkins, Case No. BK-S-07-13593-LBR (Bankr.Nev. 3/31/2009) (Bankr.Nev., 2009) – “A “beneficiary” is defined as “one designated to benefit from an appointment, disposition, or assignment . . . or to receive something as a result of a legal arrangement or instrument.” BLACK’S LAW DICTIONARY 165 (8th ed. 2004). But it is obvious from the MERS’ “Terms and Conditions” that MERS is not a beneficiary as it has no rights whatsoever to any payments, to any servicing rights, or to any of the properties secured by the loans. To reverse an old adage, if it doesn’t walk like a duck, talk like a duck, and quack like a duck, then it’s not a duck.”
If one accepts the above ruling, which MERS does not agree with, MERS would not have the ability to foreclose on a property for lack of being a true Beneficiary. This leads us back to the MERS as “Nominee for the Beneficiary” and foreclosing as Agent for the Beneficiary. There may be pitfalls with this argument.
Uniform Commercial Code may address this issue, however, it can be argued in the negative:
Uniform Commercial CodeÂ§ 3-301. PERSON ENTITLED TO ENFORCE INSTRUMENT.
“Person entitled to enforce” an instrument means (i) the holder of the instrument, (ii) a non-holder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to Section 3-309 or 3-418(d). A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.
Are you confused yet? I am. Most attorneys are. And most courts are…….
There is one more issue that I will now address. That is the separation of the Note and the Deed of Trust. Again, case law is confused on this.
In the case of MERS, the Note and the Deed of Trust are held by separate entities. This can pose a unique problem dependent upon the court. There are many court rulings based upon the following:
“The Deed of Trust is a mere incident of the debt it secures and an assignment of the debt carries with it the security instrument. Therefore, a Deed Of Trust is inseparable from the debt and always abides with the debt. It has no market or ascertainable value apart from the obligation it secures.
A Deed of Trust has no assignable quality independent of the debt, it may not be assigned or transferred apart from the debt, and an attempt to assign the Deed Of Trust without a transfer of the debt is without effect. “
This very “simple” statement poses major issues. To easily understand, if the Deed of Trust and the Note are not together with the same entity, then there can be no enforcement of the Note. The Deed of Trust enforces the Note. It provides the capability for the lender to foreclose on a property. If the Deed is separate from the Note, then enforcement, i.e. foreclosure cannot occur. The following ruling summarizes this nicely.
In Saxon vs Hillery, CA, Dec 2008, Contra Costa County Superior Court, an action by Saxon to foreclose on a property by lawsuit was dismissed due to lack of legal standing. This was because the Note and the Deed of Trust were “owned” by separate entities. The Court ruled that when the Note and Deed of Trust were separated, the enforceability of the Note was negated until rejoined. ( Note: LFI did the audit for this loan.)
All Saxon could do on this loan would be to rescind the foreclosure, reunite the Deed and the Note by Assignment and then foreclose again.
Other examples of this is that in the past month, LFI has done audits whereby it was determined that Notary Fraud was present with regard to the signing of the Deed of Trust. This immediately made the Deed of Trust void, and as a result, the Note was then “Unsecured Debt”, and the property was unable to be foreclosed upon. There is even question as to if the Note is void as well.
As I have attempted to show, the whole concept of MERS is fraught with controversy and questions. Certainly, at the very least, MERS actions pose legal issues that are still being addressed each and every day. As to where these actions will ultimate lead, it is anybody’s guess. With some courts, the court sides with the lender, and others side with the homeowner. However, there does appear to be a trend developing that suggests, at least in Bankruptcy Courts, MERS is losing support.
I would like to again make note of the fact that this is simply a basic primer on MERS and the issues surrounding it. To fully cover MERS, I could easily write 100 pages, quoting statutes, case law and legal theories regarding how to defend against MERS.. However, I will save that for the attorneys, and someday, when I have time to write a book on the battles occurring daily in the courts.
As I wrote this article, a case pending on appeal in Kansas was finally decided. This case, Landmark vs Kesler, Milliennia, MERS, Sovereign Bank and others was finally decided. It offered some interesting conclusions, and reinforces what I had written about in the above article.
I must stress that this case is a guide only. It was in Kansas, and draws from case law in many different states. What is important is that with any Court, case law within the jurisdiction of the Court must be considered first in arguments. If such case law for arguments does not exist, then case law from other jurisdictions can be used to support the arguments.
What this case does do is provide guidelines for arguing in other venues. I do find the case very interesting in that it does highlight the general issues that I addressed above. It supports Haskins very nicely.
It should be noted that various articles have already been written, some of which promote the idea that it will mean free homes for millions of people. This is not likely for various reasons. However, it does offer interesting possibilities regarding certain lawsuits that I am currently assisting with. Of course, LFI has anticipated this occurring and is currently assisting attorneys in refining the argument.
This case is about a foreclosure that had occurred. The lender is trying to overturn a default judgement in favor of another lender. MERS has sided with that lender. As such, the differences in this case could weigh heavy in future rulings. I will just cite relevant portions without going into great detail, which would take a day to write. My comments follow each quote from the ruling.
“While this is a matter of first impression in Kansas, other jurisdictions have issued opinions on similar and related issues, and, while we do not consider those opinions binding in the current litigation, we find them to be useful guideposts in our analysis of the issues before us.”
This supports my contention that this is only useful in other jurisdictions to argue, but jurisdictional case law takes precedence in each area. Therefore, arguments must be made that can overturn such case law.
“Black’s Law Dictionary defines a nominee as “[a] person designated to act in place of another, usu. in a very limited way” and as “[a] party who holds bare legal title for the benefit of others or who receives and distributes funds for the benefit of others.” Black’s Law Dictionary 1076 (8th ed. 2004). This definition suggests that a nominee possesses few or no legally enforceable rights beyond those of a principal whom the nominee serves……..The legal status of a nominee, then, depends on the context of the relationship of the nominee to its principal. Various courts have interpreted the relationship of MERS and the lender as an agency relationship.”
This is the essence of the Agency Relationship that I presented above.
“LaSalle Bank Nat. Ass’n v. Lamy, 2006 WL 2251721, at *2 (N.Y. Sup. 2006) (unpublished opinion) (”A nominee of the owner of a note and mortgage may not effectively assign the note and mortgage to another for want of an ownership interest in said note and mortgage by the nominee.”)”
This case, if used and upheld in California, could portend great consequences for all homeowners.
The law generally understands that a mortgagee is not distinct from a lender: a mortgagee is “[o]ne to whom property is mortgaged: the mortgage creditor, or lender.” Black’s Law Dictionary 1034 (8th ed. 2004). By statute, assignment of the mortgage carries with it the assignment of the debt. K.S.A. 58-2323. Although MERS asserts that, under some situations, the mortgage document purports to give it the same rights as the lender, the document consistently refers only to rights of the lender, including rights to receive notice of litigation, to collect payments, and to enforce the debt obligation. The document consistently limits MERS to acting “solely” as the nominee of the lender.
Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable.
“The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. [Citation omitted.] Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. [Citation omitted.] The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.” Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. App. 2009).
“MERS never held the promissory note, thus its assignment of the deed of trust to Ocwen separate from the note had no force.” 284 S.W.3d at 624; see also In re Wilhelm, 407 B.R. 392 (Bankr. D. Idaho 2009) (standard mortgage note language does not expressly or implicitly authorize MERS to transfer the note); In re Vargas, 396 B.R. 511, 517 (Bankr. C.D. Cal. 2008) (”[I]f FHM has transferred the note, MERS is no longer an authorized agent of the holder unless it has a separate agency contract with the new undisclosed principal. MERS presents no evidence as to who owns the note, or of any authorization to act on behalf of the present owner.”); Saxon Mortgage Services, Inc. v. Hillery, 2008 WL 5170180 (N.D. Cal. 2008) (unpublished opinion) (”[F]or there to be a valid assignment, there must be more than just assignment of the deed alone; the note must also be assigned. . . . MERS purportedly assigned both the deed of trust and the promissory note. . . . However, there is no evidence of record that establishes that MERS either held the promissory note or was given the authority . . . to assign the note.”).
This identifies the real issue, as I mentioned previously. The Note and the Deed were separated, so without Assignments uniting them, there can be no foreclosure.
What stake in the outcome of an independent action for foreclosure could MERS have? It did not lend the money to Kesler or to anyone else involved in this case. Neither Kesler nor anyone else involved in the case was required by statute or contract to pay money to MERS on the mortgage. See Sheridan, ___ B.R. at ___ (”MERS is not an economic ‘beneficiary’ under the Deed of Trust. It is owed and will collect no money from Debtors under the Note, nor will it realize the value of the Property through foreclosure of the Deed of Trust in the event the Note is not paid.”). If MERS is only the mortgagee, without ownership of the mortgage instrument, it does not have an enforceable right. See Vargas, 396 B.R. 517 (”[w]hile the note is ‘essential,’ the mortgage is only ‘an incident’ to the note” [quoting Carpenter v. Longan, 16 Wall. 271, 83 U.S. 271, 275, 21 L. Ed 313 (1872)]).
This reinforces the Hawkins argument that without a “Beneficial Interest”, there is no ability to enforce the note.
This ruling in Kansas comes down to several basic issues. These are that:
This ruling, along with Hawkins, can offer the attorney a practical roadmap on how to attack MERS. It should not be taken for granted that this will apply in all states immediately, nor that this will be easy. Jurisdictional Case Law will certainly have to be fought out and overcome. Additionally, I do expect further appeals of this case, especially with other parties joining in to side with MERS because of the practical implications of this ruling.
Disclaimer: Pulatie and LFI are not attorneys and do not dispense legal advice. The purpose of LFI is to assist attorneys and homeowners in their fight.]]>
Daily, in the newspapers, radio, television and the internet, articles are written about the difficulty that borrowers face in getting loan modifications.Â These reports come not just from reporters, but from loan modification companies and also attorneys who are attempting to do the loan modifications.
At the same time, the Federal Government and the Obama Administration announce new programs to assist homeowners in getting loan modifications. These programs are going to solve the problems that homeowners have, and are going to save their homes. Yet, closer inspection of the program’s details raises eyebrows about if the new program will benefit homeowners. Then within a few months of implementing the program, reports come out that the programs are not working. Homeowners are not getting the needed help. Foreclosures are increasing.
Next, states like California decide to try and pass legislation to prevent homeowners from paying money upfront to loan modification companies and attorneys for assistance in dealing with the Lenders and Servicers. Then President Obama declares that homeowners should not pay for loan modifications and that their lenders and servicers are doing the modifications for free.
Who does a homeowner believe? What is the real truth? This article will attempt to shed some light on the issues. I will focus primarily upon loans that have been securitized. These are loans that have been sold to investors, unlike portfolio loans that are kept by banks and lenders. Portfolio loans can be easier to modify, if the lender is cooperative.
Typically, when a borrower falls behind on a mortgage, there are few programs available to help them get current. Refinances are generally out of the question, and bankruptcy is not a viable option for most people. What can homeowners then expect from the Servicer?
I must warn homeowners that any company who says that they are doing loan modifications and getting principal reductions of any significant amount, i.e. 25% or more, and then represent that they are getting these results continuously is likely a scam. I know of no companies regularly getting such reductions. When a company claims to do so, I ask for proof, and never hear from them again.
This is the question that people are asking. Occasionally, you will hear a partial answer to the question, usually like a recent New York Times article whereby the author stated that by starting foreclosure and delaying the process, the Servicer earns more fees through late payments, attorney fees and other junk fees. This is a short-sighted answer from someone who really does not understand the process. The actual reason is much more complicated.
When loans were executed, they were usually sold to investors in the process known as Securitization.Â To simplify the explanation, loans were “bundled together” by the lender and placed into trusts for IRS tax purposes and then for sale to investors. The “Issuing Entity” of the Securities “sliced and diced” the loans into “tranches”. Theses tranches were sold to securities dealers who could then sell the tranches to investors, or if they desired, they could again slice and dice the tranches again into smaller pieces and have these sold to investors.
To ensure that all parties were paid monthly, a trustee was named to oversee the payments and the correct functions of all the parts and parties to the transactions.Â The trustees often included US Bank, Citibank, Chase, Deutsche Bank, Lasalle Bank, Lehman, and others.
All factors related to the Securitization Process is governed by the “Pooling and Servicing Agreement” for each trust.Â The Agreement covers all aspects of the transaction from the origination of the loan, to the final disbursements.Â This Agreement is where the problem in negotiating loan modifications and principal reductions occur.
The Agreements all have similar language regarding loan modifications.Â Paraphrased, the Agreements authorize the Master Servicer to do loan modifications when the default of a particular loan is inevitable or likely.Â It is this phrase that “prevents” servicers from modifying a loan that the borrower is up to date on payments. Here is the wording of a New Century Agreement regarding defaults:
“The servicer will be required to act with respect to mortgage loans serviced by it that are in default, or as to which default is reasonably foreseeable, in accordance with procedures set forth in the servicing agreement. These procedures may, among other things, result in (i) foreclosing on the mortgage loan, (ii) accepting the deed to the related mortgaged property in lieu of foreclosure, (iii) granting the mortgagor under the mortgage loan a modification or forbearance, which may consist of waiving, modifying or varying any term of such mortgage loan.”
(including modifications that would change the mortgage interest rate, forgive the payment of principal or interest, or extend the final maturity date of such mortgage loan) or (iv) accepting payment from the borrower of an amount less than the principal balance of the mortgage loan in final satisfaction of the mortgage loan. These procedures are intended to maximize recoveries on a net present value basis on these mortgage loans.
Notice the portion that is underlined. The Servicer must act with regard to what actions will maximize the money returned to the investor and will minimize their losses.
Furthermore, the Servicers of these loans have no vested interest in doing loan modifications.Â They are simply acting as “collection agencies” most of the time.Â In fact, not foreclosing is in the worst interest of the Servicer. There is another section of the Agreement that must be considered:
“The servicer is required to make P&I Advances on the related Servicer Remittance Date with respect to each mortgage loan it services, subject to the servicer’s determination in its good faith business judgment that such advance would be recoverable. Such P&I Advances by the servicer are reimbursable subject to certain conditions and restrictions, and are intended to provide both sufficient funds for the payment of principal and interest to the holders of the certificates. Notwithstanding the servicer’s determination in its good faith business judgment that a P&I Advance was recoverable when made, if a P&I Advance becomes a nonrecoverable advance, the servicer will be entitled to reimbursement for that advance from any amounts in the custodial account. The Trustee, acting as successor servicer, will advance its own funds to make P&I Advances if the servicer fails to do so, subject to its own recoverability determination and as required under the trust agreement. The servicer (and the Trustee as successor servicer and any other successor servicer, if applicable) will not be obligated to make any advances of principal on any REO property. “
This is the second part of the problem. Simply stated, for each payment missed by a homeowner, the Servicer, from its own money, must “Advance” funds from its own money, to ensure that the payment stream to the Trust and Investors are kept up. They must keep advancing this money until they foreclose on the property and take back the home. At that point, they no longer need to keep the Advance on that property going, but they will still not be able to recover their own money until the property is actually sold.
To be totally blunt, it is in the best interest of the Servicer to foreclose on the property as fast as possible to stop having to make advances out of their own money. This was the true purpose of TARP, to give the servicers money so that they would have money to continue to advance funds to the Trusts, without having to trigger a gigantic foreclosure wave (this also explains why so many people are getting to live in their homes even when they are not making payments – Uncle Sam is substituting the payments for them).
At this point, another factor comes into play, “Net Present Value”.
Net Present Value is a mathematical equation. Its purpose is to determine what will earn an Investor the best return for different potential investments. The equation takes the payments to be made over a period of time for different investments in different time frames and calculates what the return would be in today’s dollars. It is a methodology that compares “apples to apples” instead of “apples and oranges”. An attempt to fully explain the equation and the process of determining Net Present Value is not in the purview of this article.
When a request for a loan modification is made, the Servicer must determine what will be of most benefit to the Investor. Which of these three options will return the most income to the Investor?
In addition to the Net Present Value Test, the Servicer will also factor into the decision as to what will get them back their “Advances” to the Trustee.
As can be seen, it is certainly in the best interest of the Servicer to foreclose on the property.
The process for determining the Net Present Value of either not modifying the loan or else foreclosing on the property is relatively straight-forward. The calculations are not that difficult. However, when considering the Net Present Value of the Loan Modification, that is where the issues arise.
To determine the Net Present Value of the Loan Modification, the Servicer must determine exactly how much the homeowner can afford to pay. Pay too much, and the homeowner will still likely default. Pay too little, and the Investor is losing money. So the Servicer must do a Debt Ratio Analysis like when the loan was approved, except that instead of it being Stated Income and having either a 45% or 50% total Debt Ratio, the income must be totally documented and the Housing Debt Ratio must usually be 31% for Fannie Mae, and can be up to 38% for private investors. In essence, the Servicer is now going to try and correct the mistake of not properly qualifying a person when he got the loan, and with default in evidence, the Servicer will do things “right”.
To submit for a loan modification, the Servicer will require that the homeowner provide verification of all income and all debts and expenses. The income must be realistic and meet underwriting standards, no non-verifiable income allowed. The expenses must be realistic as well. If the homeowner claims that food costs are $800 per month for a family of three, then receipts had better be provided showing it is realistic and steak and lobster is not being eaten twice a week. Clothing expenses and entertainment expenses will not be accepted.
At the point that all documentation has been provided, the Servicer will then determine what modifications are necessary to get the homeowner down to a 31% Debt Ratio. (Most are going to use 31%, because it makes qualifying for a loan modification much more difficult.) The Servicer will start reducing the Interest Rate incrementally until such time as the 31% is achieved. If the lowest level of Interest Rate is reached and the 31% Debt Ratio is still not present, then the Servicer will play with reducing the principal, if it is allowed. (The minimum basis Interest Rate is 2% above the 10 Year Monthly Treasury Average, the MTA Index.)
If principal reduction is not allowed, and the homeowner cannot reach the 31% Debt Ratio at the minimum Interest Rate, then the modification will not be approved. If principal reduction is allowed, it is likely that the reduction amount will be “forgiven” only until such time as the borrower can repay the loan at which time he must pay the “forgiven” amount, or when he sells the home and then must pay the amount.
Let us assume that the borrower has been able to reach the 31% Debt Ratio Guidelines. At this point, the lender will now do the Net Present Value Test for the modification. The Servicer will factor into the Test the likelihood of the borrower defaulting even after the modification, and other various events. (This gives the Servicer the ability to manipulate the data.) The results are compared to not doing a loan modification and for foreclosing. What works out best for the Investor is what the Servicer will chose, while also considering how quickly they can get their own money back.
I previously mentioned that the Net Present Value calculation for foreclosure was relatively easy. I still hold to that statement. However, there are issues with the calculation.
For one, the Servicer is the party that determines all the factors and the values used in determining the Net Present Value. And, it is the values that are assigned to particular factors that will determine the outcome. Some factors to consider:
Depending upon the values assigned to these and other factors by the Servicer, the decision to foreclose or not to foreclose could be easily manipulated.
It must also be remembered that the Servicer is likely to believe that this crisis will continue for many years. Foreclosures are going to continue. Unemployment is going to increase as the economy turns worse. Home values are going to continue to drop. And, as homeowners become further underwater in home values, the decision to simply walk away will become much easier. Under these circumstances, for the Investor, it would make sense for the Servicer to foreclose on every property that they could, when they could, and to salvage as much of the remaining value of the investment as possible, instead of waiting for the “inevitable” loss. One could easily compare it to the Stock Market, where you sell early, take what you can when you can, and limit your losses.
Now that I have presented such a gloomy picture of what to expect with foreclosure, what can be done about it with the homeowner who is in trouble and looking to save his home? After all, the Servicer is not on his side, and can work the numbers so that the Net Present Value Test will indicate that foreclosure is the best option. So what is the homeowner to do?
Having seen the games that the Servicer plays time and again, trying to discourage the homeowner to such a point that he gives up and walks away, the answer is at least simple to say:
Don’t let the Servicers beat you into submission. They created this mess with inappropriate lending. Chances are that you should probably have been declined for the loan, but since the lender did provide you the loan, then they have to answer for it. (This may be hard for many to accept that you really did not qualify for the loan, but it is likely the truth.)
In my opinion, based upon what I have seen the past two years, the best way to fight back will be to obtain an attorney, have a true forensic audit done on your loan, and then prepare to do battle because you are going to war against the lender.
If the lenders want your home, make them pay for it. Make them realize that you will take them to court and fight them every step of the way. If you lose a round, you come back even stronger on your appeal and fight harder.
But beware. Don’t set it up in your mind that you are going to go to court and have the jury award you the home free and clean, and putative damages. It will not usually happen, and mostly because the lender has more resources and money than you have, and they can afford to drag the proceedings out until you run out of money.
Instead, your goal is to get the lender “to the table” whereby reasonable and frank discussions can occur that will lead to resolving the situation. Often, this can occur with as little action as the filing of a Restraining Order temporarily stopping the auction of your home. Sometimes, it might take sterner terms. But the goal is to use the “minimum amount of legal force necessary” to bring the lender to the table.
By following this type of action, you may be able to save your home and have an excellent modification or reduction. Does it always work? No. There are no guarantees. But, it is better than simply walking away, letting the lender have your home, and then regretting the decision for the rest of your life.
The problem is that most people, including loan modification companies and attorneys do not understand what they are fighting against.Â Nor are they helped to understand the fight because of incompetent “audit” companies who do notÂ understand this either.Â LFI will attempt to shed light on this subject as we continue our series of articles.
Disclaimer:Â Pulatie and LFI are not attorneys and do not dispense legal advice. The purpose of LFI is to assist attorneys and homeowners in their fight.]]>