Sacramento Bankruptcy Lawyer Blog

In April 2010, Governor Arnold Schwarzenegger signed California Senate Bill 401. With the signing, mortgage debt forgiveness for the California taxpayer is more aligned with the Federal relief act. According to a press release from the Office of the Governor, the bill extends the law providing mortgage debt forgiveness to homeowners who lost their homes due to declining home prices and could not afford to pay taxes because the mortgage company forgave the remainder of the loan.

Californians who sold their homes as short sales are allowed to exclude from taxable income the amount owed to and forgiven by the mortgage company. The legislation increases the amount of mortgage debt forgiveness, and applies to homeowners who made loan modifications in 2009.

California Senate Bill 401 also assists renewable energy companies establishing financing to build projects in California. Federal economic stimulus grants received through the American Recovery and Reinvestment Act for renewable energy projects are not treated as income for tax purposes.

SB 401 is welcome news to homeowners who are continuing to lose their homes in a market where property values are going south. In July 2010, SFGate.com reported in "Contra Costa still heading south" that average assessed property values are decreasing throughout Contra Costa county from industrial Richmond to high class Danville.

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Many borrowers are defaulting on private money loans. Borrowers who want to keep their homes will file bankruptcy to seek the protection of the automatic stay to stop creditors from foreclosing.

The automatic stay stops a creditor from collection actions until or unless the bankruptcy court grants the creditor relief from the automatic stay.

In a loan secured by real estate, the creditor can seek relief from the automatic stay by claiming the creditor is not adequately protected by equity or the debtor does not need the property as part of the reorganization according to Bankruptcy Code Section 362. When making a motion for relief from automatic stay, the creditor might need to do an appraisal of the real property to evaluate what the equity is.

The borrower who files bankruptcy might still need to pay the lender when the borrower is trying to reorganize debt and the loan is part of the bankruptcy plan. In a Chapter 13 bankruptcy filing, the borrower who files bankruptcy is obligated to make post-petition payments.

Another way for creditors to terminate the automatic stay is for them to seek adequate protection payments. Bankruptcy Code Section 361 provides the following examples adequate protection of a party's interest in property: 1) a cash payment or periodic cash payments to the extent that the party's interest declines in value as a result of the debtor's actions; 2) additional or replacement lien to the extent the party's interest declines in value as a result of the debtor's actions; or 3) other relief, as will result in the realization of the "indubitable equivalent" of an entity's interest in property. The purpose of adequate protection is to maintain the status quo.

If a private money loan is underwater, the lender might be subject o cramdown or lienstripping. Cramdown is the involuntary court imposition of a reorganization plan over the objection of creditors. Lienstripping means liens being stripped off of the debtor's assets in a Chapter 11 or Chapter 13 bankruptcy filing, when there is not enough equity in the asset, after deducting senior liens from the property's current market value, to secure the unsecured, when the lien exceeds the value of the debtor's property. According to Bankruptcy Code Section 506, a lien is a secured claim to the extent there is value in the asset it attaches. To the extent the claim exceeds the collateral value, that portion of the claim is unsecured.

Continue reading "Private Money Loan Defaults - Sacramento" »

Commercial mortgage defaults result in an increase in loan workout and foreclosure activity. Foreclosure is often a last resort for lenders. Before going to foreclosure, the loan workout is the preferred route for borrowers and lenders in a defaulted loan.

Before borrowers and lenders discuss work-out or loan modification, the parties might sign a Pre-Negotiation Agreement (PNA). A PNA confirms: (i) rights and obligations of lender and borrower as to any loan modification or work-out; (ii) guidelines governing discussions and proposals relating to a modification or work-out; (iii) discussions won't change the existing loan terms until they agree to formal loan work-out/modification documentation; (iv) evidence of conduct and communications during the negotiations are inadmissible in litigation; and (v) neither party waives rights and remedies in agreeing to workout/ modification discussions.

Once signed, a PNA assists in before modification of the loan terms is reduced to a written agreement. The parties will not unknowingly waive rights contained in the existing loan. A PNA prevents lender-liability lawsuits brought by borrowers claiming the loan officer promised loan extensions or modifications. The lawsuits delayed foreclosures.

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Lenders have been reluctant to foreclose on delinquent residential properties subject to a condominium or homeowners association (HOA) because they do not want to step into the shoes of the delinquent borrower and be liable for condominium and HOA assessments.

Lenders file the foreclosure action on delinquent properties to preserve their foreclosure rights. Once filed, the lender completes the process and takes title to the property when it finds a buyer. Lenders often delay taking back title to a property for several years because of backlog in the court systems, avoiding assuming financial liability for maintenance costs and assessments. Every month of delay means bad debt write-off for an association, which becomes an expense paid by the rest of the unit or home owners.

In HSBC Bank USA, et al. vs. Keys Gate Community Association, Inc., A Florida Non Profit Corporation, et al., the homeowners' association filed and foreclosed its own claim of lien on the delinquent property and acquired title to the property through its own foreclosure sale in April 2007, but could not sell the property because of the lender's senior priority mortgage. In June 2007, the lender filed its foreclosure against the delinquent property, but had not completed the foreclosure process two and a half years later. The homeowners' association filed a summary judgment motion against itself, to immediately grant the lender's request to take title to the unit as stated in the lender's foreclosure complaint, waiving its rights to the property and a public sale. The court granted the homeowners' association's motion, and directed the Clerk of Court to issue a certificate of title immediately transferring ownership of the property to the lender, triggering the lender's requirement to pay its share of past due assessments for 8 months, legal fees, court costs and all assessments going forward.

Continue reading "Residential Property Foreclosures" »

The Truth in Lending Act requires a borrower who wants to cancel a loan to return the loan's unpaid principal to the lender. When a loan is rescinded, the parties are returned to their original position, as if the loan was never made. The borrower has rescission rights during the three day cancellation period immediately after a transaction closes, and if there is a deficiency in the loan's legally mandated disclosures, the availability of the rescission remedy is extended to three years. Rescission means a right to void a loan. The lender loses its security interest and must return to the borrower fees and interest. Once the lender has released its security and returned fees and interest, the borrower must return the unpaid principal of the loan. If the borrowers rescind after several months or years, the borrowers might not be able to return loan proceeds because the loan money has been used to either refinance a home or for a home equity loan has been drawn down and spent.

Some courts require a borrower to be ready, willing and able to tender the loan to the bank to state a rescission claim. If he cannot, his case will be dismissed. Other courts do not require a borrower to make such a claim. A borrower can make the lender bear the expense of discovery and defense, gaining leverage in negotiating a workout of his loan. This is based on the statute placing the consumer in a much stronger bargaining position than he enjoys under the traditional rules of rescission to ensure creditor compliance with TILA's disclosure requirements.

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The First District Appellate Court decision in Calumet Transfer LLC v. Property Tax Appeal Board on how to assess property tax opens the door to data on foreclosure, bankruptcy and other distressed sales appearing with greater frequency as evidence of value in assessment appeals.

In this Illinois case, the Illinois Property Tax Code defines fair cash value as "the amount for which a property can be sold in the due course of business and trade, not under duress, between a willing buyer and a willing seller." The Uniform Standards of Professional Appraisal Practice defines market value as, "the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus."

There are constitutional guarantees of uniformity of assessment and that numerous factors may artificially inflate or deflate sales prices. Sales can be rebutted with arm's-length transactions of comparable properties sold not under duress but meeting the definition of fair cash value. For instance, a property sold as part of bankruptcy auction or foreclosure proceeding is likely sold under duress, without adequate market exposure.

In Calumet Transfer, the Intervenor submitted an appraisal that included evidence of sales of comparable properties sold conventionally, and not through bankruptcy or foreclosure. Because the Intervenor's evidence demonstrated that comparable properties were selling for higher prices when those sales did not occur through the bankruptcy process, the Property Tax Appeal Board found the taxpayer's evidence to be insufficient to support an assessment reduction.

Continue reading "Calumet Transfer LLC v. Property Tax Appeal Board" »

On April 30, 2010, Fannie Mae announced new standards for the purchase and securitization of adjustable-rate mortgage (ARM) products and a change to the qualification criteria for interest-only loan products.

Fannie Mae changed eligibility criteria to protect consumers from payment increases and assist borrowers who hold these types of mortgages to sustain them beyond the initial interest rate period.
If you have any questions with regard to bankruptcy or foreclosures, please contact our office at 1-800-303-2964. Rinne Legal is located at 1990 North California Blvd., Walnut Creek, California 94596, with additional offices in Fairfield, Oakland, and Sacramento. Rinne Legal offers free initial consultations.

The press release said that for ARMs with initial periods of 5 years or less, Fannie Mae requires borrowers be qualified at the greater of the note rate plus 2 percent or the fully indexed rate (index plus margin).

According to the announcement from Fannie Mae, for an interest-only loan product, the maximum loan-to-value ratio cannot exceed 70 percent, the borrower's credit score must be 720 or higher and the borrower must have a minimum of 24 months of liquid asset reserves remaining after loan closing. Balloon mortgages, which are mortgages with small periodic payments until the completion of the term, at which time the balance is due as a single lump-sum payment, will no longer be eligible, except with special approval.

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Freddie Mac, a government-sponsored enterprise (GSE) chartered by Congress to stabilize the residential mortgage markets and expand homeownership and affordable rental housing, announced its financial results for the quarter ended March 31, 2010.

Traded on the NYSE, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors on the open market. In late May 2010, it reported a net loss of $6.7 billion for the first quarter of 2010, compared to a net loss of $6.5 billion for the fourth quarter of 2009.

In September 2008, Federal Housing Finance Agency put Fannie Mae and Freddie Mac under the conservatorship of the FHFA. The United States Department of the Treasury contracted to acquire $1 billion in Freddie Mac senior preferred stock, paying 10 percent per year. Even with the takeover, Freddie Mac's finances does not see improvement. It reported in May 2010, a net loss attributable to common stockholders of $8.0 billion, or $2.45 per diluted common share, for the first quarter.

In the first quarter, there was continued weakness in the housing market. Freddie Mac ended the first quarter with a net worth deficit of $10.5 billion, compared to positive net worth of $4.4 billion at December 31, 2009. There was a decrease in total equity of $11.7 billion due to the adverse impact of changes in accounting methods, and a $1.3 billion dividend payment to Treasury. The FHFA planned to submit a request on the company's behalf to the United States Department of the Treasury for a draw of $10.6 billion under a Senior Preferred Stock Purchase Agreement with Treasury. If granted, this request will bring the company's cumulative draw to $61.3 billion.

In the first quarter, Freddie Mac financed more than 390,000 single-family homes and 50,000 units of rental housing, refinanced $68 billion of single-family loans, and provided foreclosure alternatives for over 71,000 families. Freddie Mac's primary method of generating money is from charging a guarantee fee on loans that it purchases and securitizes into mortgage-backed security bonds. Freddie Mac keeps this fee in exchange for assuming the credit risk, meaning Freddie Mac guarantees the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays.

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Beginning April 5, 2010, the Home Affordable Foreclosure Alternatives (HAFA) program, will offer foreclosure alternatives servicers and borrowers incentives to pursue short sales and deeds in lieu of foreclosure.

HAFA is available to a borrower who meets eligibility requirements for MHAP modification but does not qualify for a modification or unable to complete the modification process, such as not making the required payments during the trial or modification period.

Under HAFA, servicers must determine whether the borrower qualifies for a short sale. A short sale is a sale of the property for less than the amount owed to the lender on the mortgage. Factors the servicer will consider: property's value, expected marketing time for the property, condition of title, and whether net sales proceeds will exceed what would be recovered in a foreclosure.

To encourage a short sale, HAFA offers these incentives:

• Payment to servicers of up to $1,000.
• Payment of up to $1,500 to borrowers for relocation expenses.
• Reimbursement to investors of up to $1,000 for payments made to junior lien holders to release claims.

To determine property value and the minimum acceptable net return for an investor, the servicer must obtain an appraisal performed under the Uniform Standards of Professional Appraisal Practice. The servicer must approve an offer to purchase if net sales proceeds for payment to the servicer are equal to or exceed the minimum acceptable net return determined by the servicer.

HAFA requires servicers to use standardized short sale documents published by HAFA, which give borrowers at least 120 days, but not more than a year, to market and sell the property. If the borrower does not sell the property, the servicer may accept a deed in lieu of foreclosure.

Continue reading "Foreclosure Alternatives" »

Governor Schwarzenegger has been busy trying to pump up the housing market this week. Yesterday, he signed a bill that extends an up to $10,000 state tax credit for first-time homebuyers. Also yesterday, he vetoed a bill that would have given people who complete short-sales or deeds-in-lieu of foreclosure a tax break.

The tax credit program begins on May 1 and continues until the end of 2010. The Governor hopes that the program will rehabilitate the housing market by injecting new buyers to snatch up the thousands of unsold new and existing homes that are clogging the housing market. More liquidity in the housing market will allow distressed homeowners to sell their homes rather than go into foreclosure.

Even though Schwarzenegger vetoed the tax break bill, he maintains that he is for the measure. Schwarzenegger cited a measure in the bill that would have increased tax penalties for the very rich (single filers with more than $10 million in income or joint filers with more than $20 million in income) as the reason for the veto. He said he hopes to pass the tax break in the coming weeks once the Legislature passes a bill without the tax penalty provision.

It is encouraging that Schwarzenegger continues to address California's woeful housing market. Housing prices in the state, especially in the Sacramento area, have dropped as much as anywhere in the country. Increasing demand for housing is a crucial element for stemming the flood of foreclosures continuing to hit the market.

After finally passing health care reform earlier this week, the Obama Administration has turned to upping its aid of distressed homeowners. The New York Times reports that tomorrow the administration will announce an initiative that will apply pressure on banks to rewrite the mortgages for borrowers underwater in their homes.

If banks rewrite mortgages, it will be a major concession that will help millions make their homes more affordable. Until now, lenders have only been willing to lower interest rates. The mortgage balances on many homes are tens and even hundreds of thousands of dollars more than their present values. If that excess is forgiven, it could reduce monthly payments by hundreds and even thousands of dollars.

Another element of the Obama plan is to have the Federal Housing Administration refinance loans. Investors who own the loans would take a loss. But, because the FHA insures the loan the investors would likely collect much more money long-term than if the home went into foreclosure. A third element of the plan would require lenders to offer unemployed borrowers a reduction in their payments for a minimum of three months.

The plan is sure to spark controversy. Taxpayers will assume a significant risk of loss if housing prices drop further. And homeowners who have diligently paid their mortgages will argue that it is unfair that those who made bad investments are being bailed out.

Both contentions have merit, and it will be interesting to see how Obama addresses these concerns. Still, it is painfully clear that the housing market is far from healthy. Foreclosures and distressed homeowners are a major factor inhibiting economic growth. The current federal program and options that lenders have offered have not gone far enough to provide homeowners with effective relief.

The Los Angeles Times published a story yesterday about an alarming trend. Increasingly, homeowners are deciding to walk away from their homes despite the wherewithal to continue making payments. A number of factors are conspiring to cause them to decide that allowing their home to go into foreclosure is a better option than staying and continuing to pay.

Foremost among the causes is that many homeowners are significantly underwater. Median home prices in Southern California rose to $275,000 in February, almost half the median value in July 2007 of $505,000. Studies show that once a home falls to 25% below the loan amount, homeowners are much more likely to decide to walk away.

And that decision has become easier from a societal perspective. Before, the stigma and shame of abandoning one's obligation inhibited many people from even considering the option. But, foreclosures have become widespread over the last few years. People are much more open to walking away from their homes if they know someone else who has gone through foreclosure.

Homeowners are also deciding that sacrificing their credit is worth removing the burden of sustaining a failed investment. They see the lenders receiving bailouts for the banks' failed investments, but no bailouts for themselves and decide that not paying their loan can be a form of revenge.

Before walking away, homeowners should really think deeply about their options. The article makes an important point about the worth of a credit score - it affects a person's ability to borrow money, rent an apartment, or even qualify for a job for many years.

There are alternatives out there, though none maybe as simple as walking away. The federal Home Affordable Modification Program has had growing success working out loan modifications for borrowers. A borrower can also negotiate with the lender to pursue a short sale (an agreement with the lender to sell the home for less than the mortgage) or a deed-in-lieu of foreclosure (hand the deed to the bank and walk away from the obligation).

Before walking away, contact someone who is knowledgeable about the options and can help you make a decision best for you.

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.