Sacramento Bankruptcy Lawyer Blog

The federal government is applying pressure on banks to help borrowers burdened with second mortgages. Representative Barney Frank, chairman of the House Financial Services Committee, wrote an angry letter to major U.S. banks demanding that they write-down second mortgages. By failing to do so, Frank claims that borrowers are unable to receive loan modifications on their first mortgages, and as a result are letting their homes go into foreclosure.

Until now, the Obama Administration has focused its Home Affordable Motification Program (HAMP) on modifying first mortgages. However, many modifications fall through because an agreement fails to be reached with the holder of the second mortgage. So, the focus is now shifting to coming up with solutions for the second mortgage.

Many second mortgages these days are completely unsecured because property values have dropped below the balance of the first mortgage. Due to complicated accounting rules, banks prefer not to take losses on their second mortgages because doing so would cause a big hit to their balance sheets. Also, even if a borrower goes into foreclosure, the bank can pursue the borrower for the balance owed on the second mortgage. Those two factors are dissuading banks from writing down second mortgages. A homeowner cannot complete a short sale without agreement from the bank holding the second mortgage. And thus, many short sales have fallen through.

A short sale occurs when mortgage company holding the first mortgage agrees to allow the borrower to sell the home for less than the balance of the loan, and the borrower can walk away from the difference. In avoiding a foreclosure, the bank saves money and the borrower does not take a hard hit to his credit.

In a few weeks, borrowers who receive reduced payments on their first mortgage through HAMP will also receive a break on their second mortgages. Bank of America has signed up for this program and other large banks are likely to as well. The Obama administration will also be encouraging those who cannot qualify for a loan modification to pursue a short sale or deed-in-lieu of foreclosure. Holders of second mortgages may receive 3% of the unpaid loan balance, up to a maximum of $3,000, for writing down second motgages in the event of a short sale.

Refinances, loan modifications, and short sales receive most of the attention when alternatives to foreclosure are discussed. However, another option may begin to gain popularity. One of the nation's largest mortgage lenders, CitiMortgage, will soon start a program for borrowers to execute "deeds in lieu of foreclosure."

A deed in lieu of foreclosure is fairly straightforward. A struggling borrower and his or her lender agree that the borrower will turn over the deed to the home in exchange for the bank not foreclosing on the home. The borrower may remain in the home for a number of months and does not suffer as much damage to his or her credit rating as would occur with a foreclosure. The bank releases the borrower from all legal obligations to repay the loan. A deed in lieu involves less legal costs for a bank than foreclosure and also incentivizes borrowers to keep the homes in better condition.

CitiMortgage is planning a pilot program for deeds in lieu in a number of eastern and midwestern states. Qualified homeowners would receive six months to live in the home and $1000 in relocation assistance as long as they maintain the property in good condition. To qualify, a homeowner must be 90 days late on their mortgage and not have a second lien. Citi expects only about 1,000 borrowers to take advantage of the offer because of how many of its customers have second mortgages.

Other lenders consider deeds in lieu on an ad hoc basis. If you are interested in pursuing a deed in lieu or any alternative to foreclosure, contact a specialist who has helped many borrowers find a better option to foreclosure.

The Sacramento mortgage industry will be convening at the Sacramento Convention Center on Friday, February 26. Lenders hope to attract Sacramento-area borrowers who want to explore their options for a more affordable repayment plan. The event offers an eight-hour foreclosure prevention workshop that will hope to inform borrowers of their options, including Making Home Affordable, a federal program that helps borrowers work out modifications or refinance their mortgages.

The event will attempt to improve upon a similar session held in December 2008 that attracted 1,000 borrowers and 19 lenders. At that event, many borrowers received help on the spot, but others received promises of help that never came to fruition. At the end of 2008, the country was paralyzed by recession and lenders were slow to respond to the housing crisis. More than a year later, lenders have a better understanding of how to work with borrowers and rewrite loan terms so that the borrower is set up for success.

The latest numbers from the Treasury Department provide reason for borrowers to attend Friday's event with optimism. California leads the nation in securing permanent loan modifications through Making Home Affordable. And, 20,000 more California homes received trial modifications in January than in December. Lenders such as Bank of America and Wells Fargo approved thousands more permanent modifications in January than December, likely reflecting the pressure the federal government has applied to banks.

Still, not all borrowers will find a permanent solution. Unemployment remains high in the Sacramento area and a modification requires monthly income. And many who receive trial modifications, do not receive an offer for a permanent modification even if they successfully complete the trial period without missing a payment.

Friday's free workshop will be from 1 p.m. to 9 p.m. at 1400 J St. Mortgage lenders and nonprofit home loan counselors will be available for borrowers to speak with. If you would like to discuss your options after the session, you may contact a specialist who has worked with many borrowers to achieve lower mortgage payments.

Nearly a year into the program, California is leading the nation in HAMP mortgage modifications. HAMP stands for Home Affordable Modification Program. The Obama Administration championed HAMP as a way to ensure that banks would work with millions of homeowners who are at risk of losing their homes to foreclosure. So far, the results have been mixed.

Through January, HAMP had initiated over 800,000 trial modifications natoinwide. Borrowers must enroll into a Trial Period Plan before receiving a permanent modification. Only about 116,000 homes have been converted to permanent modifications. California led all states by a wide margin with over 191,000 permanent and active trial modifications. Florida came in second with 116,000 and Illinois third at 49,000.

All HAMP modifications include reductions in the borrower's interest rate so that the monthly payment does not exceed 31% of the gross monthly income. If a rate reduction alone cannot drop the payment to 31% of income, then the loan servicer may extend the loan term to up to 40 years, defer a portion of the principal amount until after the loan matures, or forgive a portion of the principal.

HAMP is set to expire on June 10 of this year so the data in the coming months may see a spike as servicers scramble to qualify borrowers for a modification. With housing prices yet to rebound, there will be no shortage of borrowers in need of assistance. If you are interested in seeing if HAMP is a good program for you, contact a specialist in foreclosure prevention who can discuss HAMP and any other options you may have.

The figures from 2009 have been calculated, and as expected foreclosures in California were high in 2009, especially in the Central Valley. However, the real bad news is that a number of factors are conspiring to keep foreclosures high into 2010.

Of all U.S. cities, Merced had the third highest foreclosure rate in 2009 with 10.1 percent of households receiving a filing. Stockton came in fifth at 8.62 percent and Modesto sixth at 8.53 percent. The highest rate in the country was Las Vegas, which saw 12 percent of its homes receive a notice of default, auction, or repossession in 2009.

Unfortunately, projections for 2010 do not include optimism for a decline in these figures. Economists predict that the jobless rate will remain around 10 percent for the new year and that joblessness and underemployment will drive many to be unable to afford their mortgages. The Federal Reserve's $1.25 trillion program to buy mortgage-backed securities is done on March 31. The program helped to suppress borrowing costs, as the rate on 30-year fixed mortgages dropped to 4.71 percent in early December, the lowest level since 1972. When the program expires, there will be less buyers, and homes will linger on the market for longer, leaving vulnerable homeowners more susceptible to foreclosure.

If you worry that you may not be able to maintain payments on your home, you may benefit from speaking to an attorney who has helped many find alternatives to foreclosure.

According to the Washington Post, data from the Federal Housing Administration (FHA) foreshadows a wave of foreclosures that have yet to hit the housing market. The FHA's default rate, which measures the percentage of FHA borrowers who have missed at least three payments, jumped to 9.1 percent in December. The rate in December 2008 was a third less, 6.5%.

The high rate of defaults reflects loans made in 2007 and 2008 that are just now beginning to go south. Many of these were subprime loans with adjustable interest rates that are now resetting to higher rates and minimum payments. The FHA projects that it will have to pay out claims to lenders on one out of every four loans made in 2007 and 2008.

The FHA did not issue these loans, but insures the lenders against losses. The agency collects fees for the loans that it insures, but it may find that its short-term losses exceed its reserves. If that is the case, the federal government will have to use taxpayer money to cover the losses, something that the FHA has never done in 75 years.

The FHA is scrambling to try to stabilize itself. It ended a program that enabled sellers to cover the down payments of buyers. The program is projected to cost the FHA $10.5 billion in losses. In 2009, the loans it backed went to borrowers with substantially better credit scores - the average score now is 690, up from 630 two years ago. The agency is rapidly banning and suspending suspect lenders from making FHA loans. It is proposing a rule to raise the amount of capital that banks must hold to pay the FHA for losses due to fraud from $250,000 to $2.5 million. And, it has developed much tougher rules for borrowers - higher upfront fees, higher required down payments for those with weak credit scores, and restrictions on the amount of money that sellers can pay toward closing costs.

Still, the FHA has dug itself a deep hole. Its reserves as of September 30 were $3.6 billion, down from nearly $13 billion a year before. That latest figure is only 0.53 percent of the value of all FHA single-family-home loans. Congress requires that the rate be no lower than 2 percent. The data only reflects the payouts that the FHA has made and does not project future losses, which may be great considering the high default rate that continues to rise.

Because the FHA plays such a huge role in the housing market, its continued struggles may signal that recovery is still well into the future.

There are pluses and minuses to loan modifications. "Loan modification" means any modification to an existing loan, whether or not the loan is in default. Modifications range from loan extensions to restructurings. "Loan workout" means any resolution to a loan default consented to by the lender, borrower. The following lender options when dealing with a loan default:

• extension of loan's due date;
• forbearing interest in exchange for additional collateral to the lender;
• reduce loan payment rate;
• reduce loan interest rate;
• exchange debt for equity;
• filing bankruptcy against the borrower.

Negotiation begins with a pre-negotiation letter, where the bank attempts to have borrower waive duty to negotiate in good faith. In closing, the lender will want to maintain loan priority through the mortgage modification and title insurance policy endorsement.

Most borrowers want to keep their property. Modification is a solution for those whose current financial situation would cause default through foreclosure or short sale. The income tax consequences of a foreclosure may realize taxable income even if the owner receives no cash, leading to insolvency. In a short sale, the sale proceeds fall short of the balance owed on the property's loan. If the borrower had a second lien on the property, such as a line of equity, the borrower would not have funds from the sale to pay any mortgages after the primary. The second lien holder would face unsecured debt once the property is sold, similar to the priority of a borrower's credit card companies in the event of a bankruptcy.

Modification allows the lender to avoid litigation expenses. The lender is poorly equipped to manage the mortgaged property if the lender takes over management as a "mortgagee in possession," or acquires it at a foreclosure sale. The lender will be exposed to tort claims such as personal injury occurring as a result of a sidewalk. In litigation, for borrower might defend as to unfairness in the loan agreement, but if the borrower loses, the lender is able to obtain a judgment and place a lien on the borrower's other property or wages, plus post-judgment interest at 10% in California.

If the lender refuses a loan modification, the borrower may file bankruptcy to maintain control of the property. The borrower can propose a reorganization plan that will leave the borrower in control of the property following confirmation of the bankruptcy. A reorganization plan imposed on a lender, over its objection, is a cramdown plan. In a cramdown plan, the lender may be entitled only to payments with a present value not exceeding the fair market value of its collateral, even if the value of the collateral is substantially less than the unpaid balance of the loan.

Continue reading "Loan Modification and Loan Workout" »

Four Pennsylvanians and one person from New Jersey were indicted earlier this month for a $14.5 million mortgage fraud scheme that operated from 2004 to 2007. The FBI headed a joint federal-state investigation that led to the indictments.

The scheme promised 35 struggling homeowners that they could save their homes if they allowed a straw purchaser to buy the homes and obtain new mortgages. The homeowners could stay in their homes, make partial mortgage payments, and would receive their homes back in a year.

Instead, the schemers set up phony bankruptcies and mortgages and funneled home equity through shell corporations into their own bank accounts. They targeted homeowners in desperate need of assistance and took full and knowing advantage of that desperation. Among the five indicted are a real-estate lawyer, a bankruptcy attorney, two mortgage brokers, and the wife of one of the mortgage brokers. If convicted, they face millions of dollars in fines and maximum prison sentences that would be the equivalent of multiple life sentences.

This story is another warning to homeowners to be careful before pursuing offers that are too good to be true. Make sure that the professional you work with has a strong reputation and consult with H.U.D. (877-HUD-1515) before proceeding.

Distressed properties continue to flood the market and depress housing prices. This, along with a rush to take advantage of an $8,000 federal tax credit that was originally set to expire on November 30, caused home sales to spike in November. Sales were 7.4% higher than in October and were a whopping 44.1% higher than in November 2008.

The median sales price for existing homes dropped by 4.3% from a year ago, to $172,600. In the Western United States, the drop was 4.1% to $231,000. The price drop indicates that greater supply had more to do with the higher sales than did increased demand. In fact, 33 percent of November sales were distressed properties.

Sacramento was one of three areas, along with San Diego and Riverside, that had lower sales, likely because there were inventory shortages for lower-priced homes.

Unless lenders more aggressively seek loan modifications and other arrangements with homeowners, the supply of distressed homes will not taper off anytime soon. Economists foresee 1.7 million homes heading for sale due to foreclosure or delinquency. Because Congress ended up extending the tax credit through April 2010, there will likely be another surge in buying then.

Lenders and the federal government will greatly influence the direction of the housing market. If lenders flood the market with foreclosed properties and short sales, then prices will drop further. But, if the Obama administration's program to assist homeowners with working out loan modifications rebounds from its initially sluggish start, then the housing market may have a steadier recovery. Banks too should see it as in their best interests to more steadily introduce homes onto the market and maintain the value of their housing stock.

There is a growing consensus that the federal Home Affordable Modification Program (HAMP) championed by the Obama Administration is a failure. Borrowers blame the banks for not being responsive and banks lay that same accusation at borrowers along with claiming that they are not properly submitting paperwork. Through November 30, only 31,382 permanent loan modifications had been completed under HAMP. With predictions for 1.7 million foreclosures in 2010, HAMP is barely a drop in the bucket.

A major problem is that HAMP requires income, and many borrowers face foreclosure because they have none. Also, the approval process is frustratingly bureaucratic, with confusing paperwork flying back and forth often discouraging borrowers.

There are a number of suggestions on how to improve HAMP. Provide direct loans to unemployed homeowners. Compel banks to write-down mortgage principal on mortgages that exceed home values, which is the case for more than a quarter of homeowners. Force banks to rent foreclosed properties to former homeowners. Apply more government pressure to ensure that loan servicers are properly handling loan modifications. Organize the mortgage industry to provide more help for borrowers to navigate the process. Finally, there are even those that advocate for nothing to be done because those that got themselves into trouble should suffer the consequences, and the economy would recover quickest if foreclosures sank housing prices.

It is true that HAMP has been unsuccessful for most distressed borrowers. Still, HAMP does provide relief to borrowers that patiently work the system. Homeowners may benefit from speaking with an attorney who has successfully negotiated loan modifications to avoid foreclosure.

California housing market may be stabilizing, but Cynthia Kroll, a senior regional economist for the Fisher Center for Real Estate and Urban Economics, at UC Berkeley, reports prices are unlikely to fully recover in 2010. Read her research report titled "California Housing in the Subprime/Credit Crisis -- Overview and a Forward Look at Recovery." This may drive more homes into foreclosure.

The article does a study on median home prices, and provides statistical analysis on California trends as compared to US home prices. The extended recovery will affect everyone with real estate interests (lenders, investors, borrowers) in California.

With commercial property, Brady W. Dunnigan at Dinsmore & Shohl LLP reports in his article "Why is a "financeable lease" crucial to your loan?", that lenders are focusing on financeable leases to ensure consistent cash flow and terms that protect them from liability in the event of property foreclosure.

In analyzing whether a lease is financeable, the lender will review the creditworthiness of the tenant. Security deposits and personal guarantees of the tenant's obligations are important.
The lender may require each tenant to sign a subordination, non-disturbance, and attornment agreement (SNDA), to ensure stable occupancy and rental payments if there is a loan default and subsequent foreclosure of the loan by the lender. In the SNDA the lender and tenant agree that:

• the lease is subordinate to the lender's mortgage;
• as long as the tenant is not in default of the lease, it will not be affected by the owner's loan default and subsequent foreclosure; and
• if the lender or a new owner takes over from the original owner, the tenant will acknowledge the new owner as its landlord under the lease.

Continue reading "Real Estate Recovery Unlikely in 2010" »

ReputationDefender, launched in 2006 to defend people's good name on the Internet, discusses on its blog on November 17, 2009 and November 16, 2009, about its attendance at the National Association of REALTORS (NAR) Conference in San Diego, CA. People looking for professional assistance in loan modifications and foreclosures might look online for information on realtors, lenders, and other professionals prior to engaging them. Social media has become the connection between buyers and sellers in this job market.

Many professionals are building web properties with blogs to relate the news, professional networks like LinkedIn to connect with customers, and messaging services like Twitter to share insights. Can a professional who publicizes inappropriate photographs and poor online communications do well in representing someone in something as serious as negotiating a short sale? Do not check just the professional, but any friends and family members linked to the professional on social networks. For instance, can an attorney who purchases alcohol for an under 21 son who posts photos of him and his friends drinking on FaceBook really obey all laws in a representation? Poor judgment on a personal level may lead to poor judgment on a career level.

ReputationDefender suggests that professionals monitor their name online like setting up a Google News Alert or signing up for MyReputation. ReputationDefender advises to separate work and play and be careful of oversharing. Anything published on the web may be considered public even if locked only to approved friends. Friends may become enemies, spouses may get separated, and photos are easily emailed to non-friends and future employers.

It's best to search all avenues of content on someone to get a full picture of the professional. For example, David Thompson is the General Counsel and Chief Privacy Officer at ReputationDefender. Though his bio details deep experience in Internet technology and the law, his LinkedIn profile shows him as graduating from Stanford Law School in 2007. Of course, some people can rise to the top quick. Thompson founded his first Internet business in 1996 before entering college at Yale University. Highlights of his legal experience include clerking for Chief Judge Alex Kozinski of the Ninth Circuit and clerking for Justice Antonin Scalia of the Supreme Court of the United States. His personal web site at www.davidcthompson.com shows him as having prior interests in bankruptcy laws:

• "Note: A Critique of 'Deepening Insolvency,' a New Bankruptcy Tort Theory," 12 Stan. J. L. Bus. & Fin. __ (2007) (describing a bankruptcy theory of liability).
• The Johns-Manville Bankruptcy in Bankruptcy Stories (Foundation Press 2007).

Continue reading "ReputationDefender" »

Bloomberg reports that country-wide foreclosure filings are projected to hit 3.9 million for 2009, the second consecutive record-setting year. In 2008, there were 3.2 million filings. Through November this year, there have been 3.6 million filings. On the positive side, filings fell 15 percent from their July peak and 8 percent from October.

But, the data still does not leave much room for optimism. University of California, Berkeley economics professor John Quigley believes that the housing market will not improve until unemployment does. National unemployment continues to hover around ten percent, and projections do not forecast job growth until well into 2010. And when there is job growth, it will take some time to recover from the 7.2 million jobs that have been lost during the two years since the recession began.

November was the ninth straight month that foreclosure filings topped 300,000. The federal government had hoped that defaults would taper off after it implemented its foreclosure prevention plan, the Home Affordable Modification Program. However, only 31,000 homes have received permanent modifications, and many of the trial modifications have not succeeded as the homeowner has subsequently defaulted.

California led the country with 73,995 November filings. Three of its cities had the top three rates of foreclosure among metropolitan areas of over 200,000 people: Merced, Stockton, and Modesto. It is clear that the national housing figures will not recover in large part until California's housing market improves.

Despite mortgage interest rates lower than they have been in sixty years, many homeowners have been unable to refinance their existing loans. The New York Times reports that six of ten homeowners have mortgages with terms that exceed the 4.8 percent fixed rate currently available on 30-year mortgages. Many of these existing loans have variable interest rates that may skyrocket into the double digits if and when the Federal Reserve raises interest rates.

Nevertheless, credit remains tight and banks are unwilling to approve homeowners' applications for refinancing. With rates so low, refinancing would save many homeowners hundreds of dollars in payments per month. But, banks cite the pressure they are under to lend more cautiously on the heels of their aggressive lending that pushed the country into the recession. Banks were burned by many of the risky subprime mortgages they handed out and are hesitant to approve anything but the safest loans. Thus, homeowners with second mortgages or with negative equity are almost invariably turned down. And these are the homeowners who are in most need of help.

President Obama is trying to put pressure on the banking industry to more freely lend to consumers. If banks refinance more loans, then more homeowners will be able to afford to stay in their homes and avoid foreclosure. Also, those homeowners will have more disposable income to spend, save, or pay down other debts.

Obama must act with some urgency because fixed loan rates likely will remain below five percent only through March, when a Federal Reserve program that drives down interest rates expires. Many experts believe that rates will jump to as high as six percent in the spring.

The Center for Responsible Lending is advocating a change to bankruptcy laws that would allow bankruptcy judges the ability to rewrite mortgage terms. The Center's position appears even more necessary in light of loan servicers' inability to permanently modify mortgages under the federal Home Affordable Modification Program.

Rewriting bankruptcy law to provide bankruptcy judges discretion to unilaterally impose revised mortgage terms is not a revolutionary idea. Bankruptcy judges can rewrite debtors' terms on many secured loans, most notably car loans. Due to lenders' powerful lobbying efforts, when Congress enacted the Bankruptcy Code in 1978, an exception was inserted into 11 U.S.C. section 1322(b)(2) that prevented bankruptcy judges from modifying first mortgages. Thus, even if a home is worth significantly less than the mortgage amount, the bankruptcy judge cannot revise the principle to the fair market value. The judge cannot affect the monthly payment either.

Ideally, providing bankruptcy judges the power to revise mortgage principal and montly payments would be unnecessary. The Home Affordable Modification Program was supposed to make it substantially easier for borrowers to work out loan modifications with lenders. However, while the Program has spurred 650,000 trial modifications, few have been converted into new permanent mortgages.

Extending bankruptcy judges' powers would provide borrowers a last, but potentially very effective, resort to stay in their homes if their lenders and servicers are unresponsive. Unless the Home Affordable Modification Program is more successful, Congress should take a look at following the Center for Responsible Lending's recommendation.