More Nuts and Dolts

Economist [e·con·o·mist; noun] – An expert in the production, distribution and consumption of goods and services, but is a complete idiot when it comes to making good business decisions for homeowners awash in negative equity. Q-Law.com Unabridged Dictionary

The following July 26, 2012 article appearing on a default servicing website, dsnews.com[1] caught my attention the other day: “Economists in Survey Oppose Strategic Default, Principal Forgiveness.” Herewith, are some of the gems: Continue reading “More Nuts and Dolts”

Introduction. For those Realtors® who were in the business in 2005 – 2007, multiple offers occurred fairly frequently. Today, we are seeing them again. However the circumstances are far different from before.

The term “multiple offers” refers to situations in which sellers receive two or more offers to purchase their property. The reason for multiple offers during the boom years of 2005 – 2007 was because prices were rising rapidly, and buyers wanted their offers accepted quickly in order to lock in the price. Consider this: With average prices appreciating, say 18% per year [which was not unheard of], this meant that at 1.5% a month, by the time a buyer closed in 45-60 days, he or she had already realized a sizeable amount of paper equity. On the other side of the coin, sellers who had already committed to sell were often lured by higher offers that came in while their sale was “pending” with another buyer. It is for this reason that there were so many specific performance suits and/or arbitrations filed during this time; sellers didn’t want to close with their buyer, because after they went under contract they found they could get a better price, and looked for reasons to terminate the first transaction. Continue reading “OREGON HOUSING: Multiple Offers – Then and Now”

Introduction. On February 9, 2012, the U.S. Department of Justice issued a press release announcing the “landmark” $25 billion dollar settlement with five of the largest Big Banks. On February 9, 2012 President Obama told the nation that the $25 billion settlement was: “…about standing up for the American people, holding those who broke the law accountable, restoring confidence in our housing market and our financial sector, getting things moving.”

But was it? Were those who broke the law held accountable and if so, how? The purpose of this post is not to criticize the settlement or those who fashioned it. Rather, my purpose is to examine a major financial component of the settlement, to determine if, as touted, those who “broke the law” will, in fact, be held “accountable.”

Background. In June, 2010, Jeffrey Stephan, a low level employee at Ally Financial, admitted in deposition that he routinely signed hundreds of foreclosure notices daily without reviewing the underlying facts supporting the case. This astounding practice, which was later revealed to be SOP in most Big Bank foreclosures, introduced a new verb into the American lexicon: “Robo-signing.” While banking apologists were quick to characterize these acts as “technical paperwork problems,” no amount of spinning could erase the fact that people were being foreclosed out of their homes through the widespread use of fraudulent documents.

Over the following few months, we learned that a variety of laws were routinely being broken: (a) Documents were signed by persons who had no familiarity with the facts leading up to the underlying foreclosure; (b) Affidavits were sworn to as fact, when affiants had no knowledge of what they were swearing to; (c) Forged or falsified documents were regularly submitted into court as a part of judicial foreclosures; (d) notaries routinely violated state notarization laws; and (e) official titles, such as “Assistant Vice President,” were handed out to low level employees or subcontractors, to sign legal documents, as if acting in an official capacity.

Shortly after the revelations, the attorneys general of all 50 states joined together to bring claims against five of the largest banks for their servicing[1] misdeeds: (1) Bank of America Corporation, Charlotte, North Carolina [together with BAC Home Loans Servicing, formerly Countrywide Homes Loans Servicing LP, Calabasas, California]; (2) Wells Fargo & Co., San Francisco, together with Wells Fargo Bank NA, Des Moines, Iowa; (3) JPMorgan Chase & Co., New York, along with JPMorgan Chase Bank NA, Columbus, Ohio; (4) Citigroup Inc., New York, along with CitiMortgage, O’Fallon, Missouri; and (5) Ally Financial Inc., Detroit [formerly GMAC], along with GMAC Mortgage LLC, Fort Washington, Pennsylvania, and GMAC Residential Funding Co. LLC, Minneapolis.

The complaint filed by the A.G.s included claims of unfair and deceptive loan servicing, foreclosure processing, loan origination practices, violations of the False Claims Act and Servicemembers Civil Relief Act, as well as various charges relating to the treatment of homeowners in bankruptcy. Continue reading “The National Mortgage Settlement – Will The Big Banks Pass The Buck?”

Foreclosure today is not what it used to be. In the past, banks and borrowers tried to avoid foreclosure, since it was a lose-lose proposition for both sides. Today, that is not the case. With the advent of securitization, Big Banks discovered several things: (1) That they could make loans for which they were promptly repaid in the GSE secondary market or the private label secondary market; (2) That underwriting guidelines were unimportant if Big Banks no longer kept these loans on their own books; (3) That they could make even more money servicing the loans they had already sold into the secondary market; (4) That servicing sketchy and poorly underwritten non-performing loans was far more profitable than servicing performing loans, since they could charge higher fees, pile on Draconian charges, split fees on force-placed casualty insurance, upcharge investors for the vendor costs they had advanced; (5) That through affiliated subsidiaries, they could actually create foreclosure companies to act as “successor trustees” in non-judicial foreclosure states; (6) And most significantly, Big Banks discovered that any damages resulting from their bad loans and exorbitant servicing charges, would ultimately be borne by others – either the investors who bought the private label junk they sold, or the American Taxpayer who picked up Fannie’s, Freddie’s, and FHA’s losses. So today, there is a need to level the playing field. Mandatory mediation may not be a “Silver Bullet” but it will hopefully serve as a tool to help level the playing field as homeowners try to extricate themselves from the mess the Big Banks created. Oregon’s Senate Bill 1552 is one such effort. For a more detailed discussion of SB 1552’s terminology and forms, go to my earlier blog post here. – PCQ Continue reading “Oregon’s Mandatory Mediation Law – The Timelines”

Can I sell my home (i.e. my “primary residence”) for less money than I owe to my bank? The short answer is that “it depends.” If there is only one lender and the short sale price clearly represents the current fair market value of the property, the answer – in Oregon, at least – is most likely “Yes.” If there are two lenders, the issue becomes more complicated, but in many cases, the answer is still “Yes.” Short sales have been with us for several years now. However, it hasn’t been until the last year, or so, that banks have finally come around to understanding that actually, short sales represent a far better alternative than foreclosure in almost all cases. The reasons, for bank and borrower, are the same: time and money.

While all distressed transaction will negatively impact one’s credit, short sales can be completed faster than foreclosures. This means that credit repair can begin sooner with a short sale.
Lenders are finally realizing that short sales eliminate the title risk that can occur when they take properties back via non-judicial foreclosure.
In some cases, second position lenders can retain deficiency claims after being foreclosed by the first position lender. The short sale process brings this issue to a head before closing, thus giving borrowers the ability to actually negotiate the matter. Negotiation in advance is a far preferable alternative than having the home foreclose and then waiting to hear from a collector seeing repayment at some unknown time in the future. Remember: The statute of limitations for commencing legal action on a promissory note is six years. This means that the collection company has plenty of time to wait for the borrower to get back on their feet.
Typically, if a homeowner wanted to do a deed in lieu of foreclosure, the bank will require that they first try to complete a short sale. So distressed homeowners should commence a short sale sooner rather than later, even if they believe it will be unsuccessful. The deed in lieu should be Plan B; the short sale Plan A.
Most people with significant negative equity are distressed; the short sale process is the fastest way to get past this unpleasantness, since it can be completed sooner than the other two alternatives, foreclosure and deed in lieu of foreclosure.
Many big banks have significant REO inventory. This means they are incurring millions of dollars of carrying costs that will continue until they can re-sell the home. Short sales do not increase REO inventory since they get the home off their books and into the open market sooner. This savings of time and money is even more significant if the lender is foreclosing judicially, since there is a six-month right of redemption following the sale. (The “right of redemption” is the period, provided by statute, that foreclosed borrowers have to repurchase their home after the sale. This statutory right only has value when the foreclosed borrower had equity, which is rarely the case today.) Nevertheless, this right of redemption means that the property must remain in the banks’ REO inventory even longer following a foreclosure.
Banks are starting to realize that short sales yield better prices than REOs. According to a recent Bloomberg article, short sale proceeds were 15% higher than foreclosure or REO sale proceeds. (And according to the article some lenders are actually paying delinquent borrowers to pursue non-foreclosure solutions. To read the entire article, go to this link.
Nonpayment of one’s mortgage is the only way to invite a foreclosure. But if a distressed homeowner first stopped making their loan payments in 2012, the foreclosure will not likely be completed until 2013. We don’t yet know whether the government will extend the 2007 Mortgage Forgiveness Debt Relief Act (which cancels the income tax on debt forgiveness) now set to expire on December 31, 2012. Since a short sale can usually be completed in six months, there is still plenty of time this year to close it before December 31.
For homeowners wanting to relocate for employment or other reasons, they will generally find the short sale a faster solution than a deed in lieu or a foreclosure, and frequently it can be handled even after they have moved.
Although some are faster than others, generally, most short sales, once started, actually do result in a successful closing. In other words, unlike loan modification, which can be an exercise in futility, short sales do produce results.

[Caveats: 1. The following information is solely based upon Oregon law. Residents from other states should not assume their laws will result in the same outcome. 2. This post is for informational purposes only and should not be relied upon as “legal advice” for your particular situation. In all cases, you should consult with your own attorney. There are many facts and circumstances that can change results. You need to speak with an expert who is familiar with the terms of your specific loan. – PCQ] As we enter 2012, four to five years following the real estate and credit debacles – depending on your location – we’re still in the doldrums. Drifting, and not moving in any specific direction. So, are there any words of wisdom, any encouragement, any sense that this static economic situation will improve? To those looking for predictions, this post is not for you. I have insights, but suspect they are no better than the next person’s. However, having said that, for those readers interested in a discussion about some of the Portland housing statistics, go to this link. Beyond that, for the present, I will refrain from the temptation to say what I think the future holds for Oregon’s housing inventory or its Realtor® industry. I’m saving that for another time. Rather, the purpose of this post is to provide some degree of encouragement. This is not to suggest that things will necessarily turn around this year – or at least not materially so – but that things could always be worse; that life, by definition, is a series of highs and lows, and events are rarely as good, or as bad, as they may first appear. So what do we make of this housing recession, foreclosure mess, and tight credit, all coupled with lagging employment numbers? What about those – now estimated to be nearly 30% of American homeowners – who are struggling with negative equity, meaning that their total mortgage indebtedness exceeds their home’s value? Continue reading “Distressed Housing: This Too Shall Pass”

Senior Supervisor, Bank Hardship Letter Department

Have you ever been curious about what “test” the Big Banks apply when deciding to allow short sales? I have. What follows is my analysis only. Readers are free to disagree; but remember, a couple of anecdotal stories overheard at a cocktail party, do not a trend make. There are rules and there are exceptions to those rules. I’m interested in the rules. – PCQ

First, we know that the Big Banks all base their borrower assistance programs on the concept of “deservedness.” Now, with the help of a sleeper agent working “deep cover” at the highest levels of a Big Bank, we have discovered the following purloined paperwork (including this candid staff photo taken at work), describing, in depth, the inner workings at one lender’s Hardship Letter Department:

“You get our help only if you deserve it. To be deserving, you must have a “hardship.” We get to define the meaning of “hardship.” It must relate to something unplanned or beyond your control[1]: Such as illness, death, divorce, job loss, financial inability to pay, mandatory relocation, etc. Pregnancy cannot be “unplanned” or “beyond your control” according to the Planned Parenthood folks, so it won’t get you into our “deservedness” line.

When you seek our help, we expect you to prepare and sign, under oath and penalty of perjury, a “Hardship Letter,” describing in detail, your tale of woe, beginning from early childhood and continuing through adulthood. We ask that it be hand written on cheap bond notebook paper (blue lines only – and no fancy yellow legal pad paper!), with a No. 2 pencil and shaky hand.

Before writing your Hardship Letter, we recommend watching one or more of the following sad movies to serve as your cinematic Muse and help conjure up the appropriate melancholy [in no specific order]: Titanic, Schindler’s List, Steel Magnolias, and Ordinary People. For the distressed older Baby Boomers, we suggest Love Story and Old Yeller. Continue reading “Do You Know Who Just Read Your Hardship Letter?”

The sad reality is that negative equity, short sales, and foreclosures, will likely be around for quite a while. “Negative equity”, which is the excess by which total debt encumbering the home exceeds its present fair market value, is almost becoming a fact of life. We know from the RMLS™ Market Action report that average and median prices this summer have continued to fall over the same time last year. The main reason is due to the volume of “shadow inventory”. This term refers to the amorphous number of homes – some of which we can count, such as listings and pendings–and much of which we can only estimate, such as families on the cusp of default, but current for the moment. Add to this “shadow” number, homes already 60 – 90 days delinquent, those already in some stage of foreclosure, and those post-foreclosure properties held as bank REOs, but not yet on the market, and it starts to look like a pretty big number. By some estimates, it may take nearly four years to burn through all of the shadow inventory. Digging deeper into the unknowable, we cannot forget the mobility factor, i.e. people needing or wanting to sell due to potential job relocation, changes in lifestyle, family size or retirement – many of these people, with and without equity, are still on the sidelines and difficult to estimate.

As long as we have shadow inventory, prices will remain depressed.[1] Why? Because many of the homes coming onto the market will be ones that have either been short sold due to negative equity, or those that have been recently foreclosed. In both cases, when these homes close they become a new “comp”, i.e. the reference point for pricing the next home that goes up for sale. [A good example of this was the first batch of South Waterfront condos that went to auction in 2009. The day after the auction, those sale prices became the new comps, not only for the unsold units in the building holding the auction, but also for many of the neighboring buildings. – PCQ]

All of these factors combine to destroy market equilibrium. That is, short sellers’ motivation is distorted. Homeowners with negative equity have little or no bargaining power. Pricing is driven by the “need” to sell, coupled with the lender’s decision to “bite the bullet” and let it sell. Similarly, for REO property, pricing is motivated by the banks’ need to deplete inventory to make room for more foreclosures. A primary factor limiting sales of bank REO property is the desire not to flood the market and further depress pricing. Only when market equilibrium is restored, i.e. a balance is achieved where both sellers and buyers have roughly comparable bargaining power, will we see prices start to rise. Today, that is not the case – even for sellers with equity in their homes. While equity sales are faster than short sales, pricing is dictated by buyers’ perception of value, and value is based upon the most recent short sale or REO sale.

So, the vicious circle persists. In today’s world of residential real estate, it is a fact of life. The silver lining, however, is that most Realtors® are becoming much more adept – and less intimidated – by the process. They understand these new market dynamics and are learning to deal with the nuances of short sales and REOs. This is a very good thing, since it does, indeed, appear as if this will be the “new normal” for quite a while.

[1] This discussion ignores two other additional factors, employment and confidence. We see the effect of this every day; notwithstanding record low interest rates, and record high affordability, there are many, many potential buyers still sitting on the sidelines.

Having counseled approximately two hundred Oregon homeowners drowning in negative equity, I have discovered that many, if not most, believe that somehow their lenders can literally swoop down and take not only their home, but all of their bank accounts, savings, retirement funds, and/or daily wages. In truth, the only real power most banks have over a borrower, is the ability to negatively impact their credit, and by extension, their future ability to borrow. On the other hand, one’s credit is a composite of many different data points, not simply a single “black mark” from one distressed property event. To that extent, a credit rating can be strengthened over time, and like a muscle, it builds up through consistent and prudent use over time. In today’s rental marketplace (which is populated by many former homeowners coming out of a distressed property transaction), a credit score impacted by a single distressed housing event has little or no bearing on whether a landlord will rent a home or apartment to them. In an effort to provide some peace of mind, listed below are certain “rights” that all home owners have under Oregon law. These rights cannot be taken away – they can only be voluntarily given away.

The following Bill of Rights assumes the following facts: (a) The home was used and occupied as a principal residence. A “principal residence” or “primary residence” in my vernacular, is the residence you occupy most of the time, and hold out to the city, state and federal governments (e.g. the post office, DMV, utility companies, etc.) as your “home.” A second home is not, by definition, a “primary residence.” (b) There is only one loan on the property and all of the borrowed funds were used to acquire the home. Second trust deeds can sometimes be problematic. If you have a second trust deed as well as a first, all is not lost – it just requires a little more planning, and some smart negotiations with the bank.

Caveat: This summary is not meant to be legal advice, as each person’s factual situation is different. No attorney-client relationship is sought or created by this post.– PCQ

Continue reading “Distressed Homeowners’ Bill of Rights”

The risk of ***strategic default is rising among loans that have “always performed,” according to the credit analysts at Moody’s Analytics. They say as home prices have fallen over the past year, the loan-to-value ratios (LTVs) of so-called always-performing loans – or those that have remained current – have begun to approach, and in many cases surpass, average LTVs for loans that have defaulted. This dynamic, Moody’s says, raises the likelihood of a renewed increase in strategic defaults. [DSNews.com, July 18, 2011]

I bristle every time I hear some so-called “authority” comment on the increase in “strategic defaults.” This pejorative term is a creation of the lending industry to place certain borrowers in a special “Rogues Gallery” category all their own. Depending upon the expert, a “strategic defaulter” is one who is in arrears on their mortgage for X or more months, although they ostensibly have the financial capability of making their payments. The press picks up these reports and dutifully circulates them as news.

What is remarkable is that not one of these so-called “authorities” has ever asked “Why do homeowners who might otherwise be able to pay their mortgage stop doing so?” Since no one has sought to explain this phenomenon, I will do so. What follows is not an epiphany. The answer requires no special insight. It has been in plain view for years. But the lending and credit industries have never chosen to address it – or more correctly, to admit it. Continue reading ““Strategically Default” – What Lenders Tell Borrowers To Do”