Snidely Whiplash, Arch Villain, Rocky & Bullwinkle Cartoon
This post follows on the heels of my discussion of Oregon’s Foreclosure problems, here. At this time, we know two things: (a) The lenders and servicers cannot change our trust deed foreclosure law to accommodate their foreclosure practice; and (b) In fact, they likely don’t have the necessary paperwork to record even if they wanted to comply.
Here are their choices:
- Continue to ignore ORS 86.735(1), the successive recording law they sought to repeal, and record only one assignment [which usually issues from a sham corporate officer on behalf of MERS or the originating lender – PCQ]. But even if you’re a Big Bank, it’s pretty hard to ignore two federal judges who have already said that the resulting foreclosure would be invalid. Moreover, as pointed out in my earlier post on the marketability issue, the title companies are now balking at insuring title for the banks’ REO sales if the underlying foreclosure failed to comply with Oregon’s law.
- But let’s look at what would happen today if lenders actually continued doing their foreclosures illegally in Oregon? Probably what is going on right now, i.e. a fear that the deeds out from the lenders to good faith buyers who pay fair consideration without knowledge of the problem. [These people are known as “Bona Fide Purchasers” or ”BFPs.” Normally the law gives them great protection. However, it questionable whether BFP protection can trump a void sale. – PCQ] So how will the banks deal with the risk that a couple of years down the road, a former foreclosed borrower might come back and assert ownership to the property due to an invalid foreclosure? Here are some suggestions for the Big Banks to consider:
- Why not start giving BFPs a deed that warranted the quality of title from the foreclosure? That should help.
- Why not give the title companies an indemnification if title is attacked because the bank didn’t follow the foreclosure statutes? It is my belief this is already going on now, since the McCoy case.
- Why not get their favorite politician to beef up the foreclosure statute so there would be some presumptions of validity where the Trustee’s Deed went to a BFP? [Note: To a degree this already exists – but likely can’t trump an invalid sale. There would need to be some strong anti-fraud protections for borrowers here. – PCQ]
- Why not get their favorite politician to offer a bill shortening the statute of limitations to one year for foreclosed borrowers (and their successors in interest) to attack title arising out of a foreclosure? This would reduce the risk to banks and title companies, which would be easier to manage.
[I submit these more measured and reasonable legislative solutions would have received more support and less criticism than the Dash-7 Amendment that was roundly criticized both for its content and the way it was presented. Hitting singles is easier than home runs, and in politics, sometimes smarter. – PCQ]
- Why not take a Deed-in Lieu of Foreclosure from the borrower rather than going all the way to a foreclosure sale, which requires the issuance of a Trustee’s Deed? A deed from the borrower will convey marketable title, whereas the Trustee’s Deed may not. [Note: This will be discussed in further detail below. – PCQ]
- Start filing judicial foreclosures, which, as I mentioned in my previous post, is not a viable option, since it will invite the Florida style defense of “Show me the Note.” [However, lest anyone think this is nothing more than a hyper-technical stalling tactic, I beg to differ. Whenever a plaintiff seeks relief through the court system, they have to establish their “standing,” i.e. that they are the proper party entitled to the relief sought. Since holding the promissory note – or not holding it, but having the right to enforce it – is essential to foreclose a trust deed. – PCQ]
- The last bank alternative, “Plan C” or “Plan D” – I forget – is unknown to me, although I’d sure like to be that fly on the banks’ boardroom wall.
The Non-Foreclosure Solution. By now I suspect the Big Banks and their foreclosure mill attorneys are starting to realize that the sloppy paperwork and record keeping during the rampant “private label” securitizations of 2005 – 2007 has come home to roost. Here’s what we saw in 2010:
- Banks tried the DocX approach of manufacturing entirely fake documents, but that hasn’t worked.
- They tried the LPS approach of robo-signing and surrogate signing, but that created a firestorm both in and out of the courtroom.
- Then they tried obfuscation in court, but that just resulted in sanctions from the outraged judge.
Q. What’s a foreclosure mill attorney to do these days just to make an honest buck?!
A. Let me suggest looking at the source of the problem, and then avoiding that problem. The problem is trying to foreclose trust deeds in Oregon without properly recorded documentation. So rather than figuring ways to game the system, why not consider some lawful ways to avoid the foreclose process entirely and still get the property into the marketplace?
Here’s what the Mortgage Bankers Association said as early as 2008 in a Policy Paper entitled “Lenders’ Cost of Foreclosure”:
“Foreclosure is a costly, complex, and time consuming process. For all the parties involved — the homeowner, the community, or the mortgage industry participants — foreclosures are a losing economic proposition. As this paper points out, foreclosure imposes significant costs on servicers, lenders, and investors. These costs not only impact their profitability, but also their ability to lend funds for new mortgages and continue to help finance homes for new borrowers.”
Here are some “non-foreclosure” alternatives that Big Banks should consider:
- Short Sale Transactions (without contentious second liens). [It is true that short sale success is often tied to the cooperation of the second lien holder. The greater the negative equity, the more likely the second lender will demand some money since the short sale cannot close without their consent. I will deal with these situations in the following section. – PCQ] Banks should develop a fast track short sale approval protocol. Equity sales – those transactions where the sellers are not selling short – normally take 45-60 days to close. Due mostly to delays in obtaining lender consent, short sale listings are stigmatized. Many buyers simply avoid them, regardless of the quality and location of the home. If lenders streamlined the short sale consent process to be on a par with equity sales, buyers would no longer avoid them. Market absorption of short sale properties would increase dramatically. Once buyer demand increases, distressed sellers (and their lenders) would have more bargaining power with buyers and there would be less price discounting. The sellers get out from under overwhelming negative equity, and their lenders recover more back on the sale. If the lender is forced to foreclose to get the property back, everyone loses. [I understand that many lenders and servicers are fearful of being taken advantage of by flippers and scammers. But remember, this is Oregon, not the “sand states” where this conduct is far more widespread. I would suggest that if the banks are seriously concerned about this risk in Oregon, they simply insist upon a recorded restrictive covenant at closing that would prohibit transfer for six months or more. How difficult is that? – PCQ]
- But wait! There’s more! As an added bonus for doing a fast track short sale, let’s throw in a clean marketable title! Yes, that’s right! Since there was no unsightly or embarrassing foreclosure, there is no need for the bank to engage in the “single assignment” ruse, which – though illegal – has become so popular today. The recorded chain of title would run from the borrower/seller directly to the short sale buyer. No Big Bank fingerprints on this deed! We know the seller won’t use a “robo-signer” or “surrogate signer” to execute the paperwork. And the notaries will actually witness the buyer signing the documents, and will duly record the event in their record books, just as the law requires!
Imagine how easy things become when the Big Banks and their affiliated servicers agree to follow the law?!
- Short Sale Transactions (with second liens). Not all second lien holders are contentious – especially when they both are the same lender. Under Oregon’s 2010 House Bill 3656, there is a likelihood that if the first and second lenders are the same – e.g. Countrywide – that a foreclosure would wipe out any deficiency risk on both of them at the time of sale. This fact has a sobering effect on second lien holders when they realize it, since it means they cannot improve their financial position if the first lender forecloses. This reality, if fully understood by the second lien holder, may bring them to the table sooner.
Which brings me to my second point about short sales, especially those with contentious second liens. The current bank protocol of waiting until the latest possible time before closing to have a discussion with the borrower about the deficiency, offends everyone, including the new buyer. We know that generally the first lender will cooperate, since they know the non-judicial sale will just get them the property back but no claim for a deficiency against the borrower. It is the second lender that can be the spoiler. While I do question whether blood or ice water runs through their veins, I cannot expect them to make poor economic decisions. But why not deal with these issues at the start of the short sale transaction, rather than letting everyone sit on pins and needles until the 11th hour? By getting the negotiating out of the way at the outset of the short sale transaction, the parties and the first lender know where they stand. There is absolutely no use for everyone to go through the motions of trying to list and sell a short sale if the second lender has no intention of cooperating, or wants an exorbitant amount of money to do so.
I have another bone to pick with the lenders – this time the first lien holders. If the buyer wants to pay some money for the second lender’s consent, what’s wrong with that? Even if the first lender hasn’t been made whole…especially if the first lender hasn’t been made whole!
Here’s the scenario: The first consents to the short sale, but is $50,000 shy of being made whole. The second will get nothing. It is in the first lender’s interest to see this transaction close, since their only other alternative is foreclosure, which does not get the property out into the marketplace. While the first might offer $3,000 to the second for their consent, these are table scraps, and probably insulting to the second lender. Remember, the first lender needs the second lender’s consent for this whole thing to work. Say the short sale buyer wants to pay $20,000 of their own money to the second lender for their consent, and the second lender agrees to give its consent to the short sale. Uniformly, the first lender says “NO!” This is an example of the first lender standing on principle (“that $20,000 should go to us first – we have priority!”), rather than good sense. So the sale fails, the first lender forecloses, and ends up carrying the property in their REO for another eight months until the next selling season, and sells the property for even less than what they could have netted on the original short sale. Huh?
- Deeds-in-lieu-of-Foreclosure (“DIL”). If a short sale is not viable, would the borrower sign a Deed in Lieu of Foreclosure? This is not a complicated transaction, especially if there is no second lien. But even if there is a second, it doesn’t mean failure. Remember, the second lien is subordinate to the first. In certain instances (e.g. HB 3656), they would get nothing even if the first lien did foreclose. If they don’t know this, they need to be educated. If the second lender wants some compensation or a promissory note from the borrower, that should be negotiated up front, just the same as a short sale as described above. No use wasting time discussing the DIL if the lenders can’t or won’t agree.
- Cash for Keys. I know, I know. Big Banks are going to play the “Moral Hazard” card. That if they pay a borrower a few dollars for them to leave, it will encourage other borrowers, perhaps in less dire straits, to default and get cash to leave. My response: ”Pot, meet Kettle.” The “To Big to Fail” concept created Moral Hazard for the Big Banks. TARP created Moral Hazard for the Big Banks. Credit Default Swaps created Moral Hazard for the Big Banks. “Originate to Sell” created Moral Hazard for the Big Banks. Securitization created Moral Hazard for the Big Banks. Need I go on? I suspect there are very legitimate financial parameters (that do not involve intangible issues of borrower “deservedness” and “hardship letters”) that can be placed on such a program. When HAMP first came out, it was made clear that modification decisions would be based upon the NPV Test. OK, let’s build an algorithm that does the same thing for a Cash-For-Keys program: For example, take the net present value of the property after foreclosing over twelve months or more, add to that the thousands of dollars in carrying costs, taxes, commissions, insurance premiums, and possibly having to clear an unmarketable title, versus the net present value of getting the property back now and paying a few Dinero to the borrower for relocation costs. This should not be complicated – and I think I already know the answer. Maybe the government could take a few of billion dollars from Fannie and Freddie’s monthly allowance, to fund a Cash For Keys program.
Whatever the pre-foreclosure solution, Big Banks and servicers should focus on every homeowner as they queue up in the foreclosure line. They should not simply let the legal process grind on. Personnel should make contact before the foreclosure is ever filed, using a competent, trained, empathetic, non-outsourced, employee who can work with them one-on-one, to evaluate if there is any possibility of the homeowner saving the home. In all likelihood, by now they have either tried modification and failed, or did not qualify for modification in the first place. In most instances, this should be a fairly perfunctory exercise, since much of the information has already been made available to the lender. Once it is determined that the default is irremediable [say, by the application of existing statistical information, which I suspect would say 90+ days of delinquency – PCQ], it is time to consider the non-foreclosure alternatives for getting the distressed property back into the marketplace. The home’s condition would be evaluated as well as the homeowner’s finances and needs. Admittedly, none of this is easy. But on May 31, 2011, we learned from the Case-Schiller press release, that housing has experienced a double-dip. [For a simpler non-economic explanation of a double-dip, go to this link. – PCQ] In other words, prices haven’t hit bottom yet. Do the Big Banks want to wait another year to get these properties back? Are they just going to let their REO department bulk up on homes with toxic titles?
Conclusion. Admittedly, the above suggestions do not deal with the banks’ recognition of loss, which would be accelerated sooner since there is no drawn out foreclosure. This runs counter to their current slow motion business model. But given their lobbying of the FASB to soften the market-to-market rules in 2009, I suspect something can be worked out. As for the banks’ concern about flooding the residential marketplace with lower priced homes, I have two thoughts: First, HAMP, the first time buyer tax incentive programs, and the rest of the government’s other political steroids used to artificially pump up the housing market, were world class flops. They may have been well intentioned, but being a cynic when it comes to our leaders, I suspect that as smart as Henry Paulson, Tim Geithner, Alan Greenspan and Ben Bernanke are, they knew at the outset these were merely cosmetic efforts to buy time and allay American fears of an imminent housing collapse. In short, these efforts did nothing in the long run. Now we’re in the fourth year of the housing crisis, with nothing to show for it, except increasing skepticism, frustration and fear.
It may be time to endure a little pain now, in order to be pain-free in the future. This idea of taking the foreclosure Band-Aid off ever so s-l-o-w-l-y, is not working. It has merely prolonged the misery. Clearly, it is time to try something new.
