Thursday, December 16, 2010

Napoleon Rises Again - Short Sales and the Foreclosure Waterloo

Okay, I am not a history buff and to be honest, I'm not sure we have a good historical analog to the economic issues that we are facing today.  The amount of leveraging we have seen in the last 10 years is unprecedented and the decrease in real property values, though not undocumented, even under speculation (see housing markets in the 1870s)causing everything to come together in a unique 21st century conundrum. That said, we do have a Waterloo of sorts for foreclosures due to rising costs, and the most famous "short" in history, has to be Mr. Napoleon.

So why would Napoleon rise again in this world of nonjudicial foreclosure?  Well, according to a recent post on higher loss severity rates, investors in Mortgage Backed Securities are seeing incredible declines in their investments.  The measure being used is "loss severity."

If you are unfamiliar with loss severity, don't worry, I had to look it up too.  In a rather dry technical explanation from Moody's, the following definition was given: The loss severity rate (LSR), or loss given default (LGD), is the amount of losses, including both missed interest and principal write-downs, incurred by a defaulted security, as a share of its principal balance. The recovery rate is one minus the loss severity rate.

If you still feel lost, again don't worry, that previous sentence wasn't written for Joe Six-pack, or even for someone that is well versed in investing.  It is specialized to the mortgage backed securities which have spawned thier own language, issues, and neophytes.  The simple explanation is that loss severity is the measure of how much of the investment will never be paid back.  The recovery rate is how much will actually be paid back.

A quick illustration:  You invested $100,000 into a mortgage backed security(MBS) and it has a loss severity of 45%, you will lose $45,000.  Your recovery rate will be $65,000.

Well, the story is that foreclosures are causing these MBS investments to loose more money.  Foreclosure has been estimated to cost upwards of $75,000 though I haven't seen how that number is calculated.  It would seem odd to me that such number includes only direct costs such as attorney's fees, court costs, and the such.  It also likely includes some diminution in value of the loan or collateral in which that number may be low.  Many people that have mortgages now, don't have that mortgage with the company that originated it.  Rather, it is owned by a trust, and that trust has a duty to its investors to make the trust assets perform or at least stop losing value.

In order to accomplish this task of stopping the tide lost value, the trustees are looking past the simple aspect of holding essentially REO property through foreclosure.  In Washington, the number of houses actually sold at Trustee's sale is between 7.5 and 12%.  There is a push to get homeowners to short sale the properties rather than go into foreclosure.

Short sale has benefits to both the homeowner and the holder of the note.  The homeowner gets to be done with the process.  Okay, that is not much of a benefit and to be honest with you,  beyond the benefits certainty and a possibility of avoiding a foreclosure on your credit score, there is little value to a homeowner  in a short sale.  However, the benefits to the note holder are numerous:  Instant cash flow, no cost in holding or marketing the property, no real estate excise taxes, limited losses during falling housing prices and freed up cash for alternative investments. 

The home owner that goes through a short sale has essentially handled the administrative aspects of selling the property for the bank for no compensation.  On top of it, during a falling housing market, the homeowner obtains a better price for the note holder because it did not have to wait until after the foreclosure sale to market the property.  And, I would say the kicker to all of this, is that a short sale limits the possibility of litigation, either from the note holder in a judicial foreclosure, or a restraint of sale action on the part of the homeowner, further limiting the note holder's exposure to mishandled origination and chain of title issues.

So, when the MBS trust that holds the note to your property comes to you and suggests that maybe it would approve a short sale for you, don't be like Napoleon and surrender.  Because, the bottom line is that short sale push is a self interested move on the part of the note holders and not a benevolent change in policy.  Remember, we're Americans, we don't give up.  Live Free or Die.

Wednesday, December 15, 2010

Merry Christmas Mr. Moneybags...The Bush Tax Cuts are Extended...almost

In this season of giving, there has been a number of brightly packaged deals with bright, satiny bows delivered under the trees of our top 2% of earners in the U.S.  Merry Christmas!

In an article from msnbc, the Senate cleared the "Tax Deal" for passage and now we wait for tomorrow for the House to rubber stamp this legislation.  There are a bunch of people that are really pissed about this deal.  Not the least of which is Mr. McDermott from our little state of Washington.   The opposition to the deal is based somewhat on class warfare in what Mr. McDermott termed "trust fund babies" that were benefiting from this legislation extension.

This deal clearly favors those of our country that have the most wealth but it is completely two faced of Mr. McDermott to classify this legislation as only about the "trust fund babies."

This last week, I had the chance to be the instructor at two CPA continuing education classes in which we discussed the "expiring" Bush tax cuts and the numerous provisions that have controlled the majority of my working lifetime.  In this legislation, Congress created a new 10% tax bracket, lowered the tax brackets of nearly every American, cut our capital gains rates to encourage the transfer of stagnant assets from those that could no longer efficiently use them to those that could squeeze some more beneficial life from them.  In addition to these issues, there were sweeping expansions of refundable credits, including the Earned Income Tax Credit, and the Child Tax Credit, both of which have provided those in the lowest tax brackets not only relief from tax liability, but have made it so they were actually recipients of other's taxable wealth.

I believe it is about time that the Democratic congressional leaders get off this track of thinking everything that was done during the Bush administration was only to benefit the rich and that it is flawed.  The flawed thinking is really in that anyone could possibly think that we can tax ourselves out of this problem.

The old adage, that it takes money to make money is not a trite statement.  If our government is taking money out of the public, when the economy has struggled so mightily in the past, how is the public going to have the funds necessary to rebuild?  Yes, there are greater benefits to those that already have wealth, but my fledgling little business really cannot afford to give Uncle Sam another 5% of my income this next year.  I'm cut thin and this extension means I may have the little wiggle room that I need to start climbing out of this mess.

Tuesday, December 14, 2010

Hi Ebb, I'm Flow

Waves rise and fall and with each lunar appearance and there is a certain amount of excitement in seeing the ocean lap the shorelines.  Waves can be so peaceful, and constant, that we sometimes forget the tremendous power that is being released with each breaking explosion of sea foam.  Though the sea is in constant flux and change, it seems to always find its way back to where it was.

In September, Washington saw some record foreclosure rates; just over 2000 homes were auctioned off to the highest bidder.  Yet this month, the reports are in and what had seemed like a tidal wave of foreclosures hasn't even created a white-cap.  From what had been a 20% increase from month to month in September, showed a 55% decline in October and November.

There are a number of factors for this, one that many will point to is the robo-signing  debacle that caused the likes of Bank of America to suspend its foreclosure processes.  Certainly, there was a ripple effect as many other lenders had to look at the issues that they are facing with accuracy of reporting and reliability of identifying participating versus nonparticipating loans, but I don't believe that to be the complete story.  Bad practices have been rampant in the entire process from the first orignation of these loans to the foreclosure.  The real issue that I think the lenders are facing is that technology wasn't capable of doing what the lenders thought it could do.

I remember my first banker.  My dad took me down to the local bank and got me a savings account when I got my first lawn mowing job.  The president of the bank is the one that opened my account for me.  That bank and president got a lot of business from my family over the years.  There was a personal touch.  However, with the advent of MERS and its ability to track mortgages electronically starting in 1995, the lending industry pushed for faster, less expensive (read that as less human capital intensive) means of delivering its products to the consuming public.  Essentially, a dehumanizing of the banking world.  There was a shift, an ebb if you will from human to computer.

Today, though it may not seem any different as we see commercials for check cashing via I-phone and online banking being required or there will be a fee, there is a new flow to human contact.  You may not notice it at the teller line or in the text message notices of your account balance, but I promise there is a human factor that is coming.  These flows in the foreclosure, though they ebbed the last two months in Washington, will be flowing again soon.  My post from last week in regard to Moody's downgrade of MBS is what I believe to be a harbinger of future calamity in our housing markets.

Part of that calamity is going to be in the form of new and innovative lawsuits and the human element of the banking world will be manifest because banking officials will be making very personal appearances in a court room near you.  Failing to take the time to get to know your clients when you had the chance at originating the loan will soon mean getting to know the client and his attorney in a deposition.  The reliance on technology to dehumanize the transactions when that human element may have been the most important aspect of underwriting the risk of loans is coming back to wash over the banks with tidal fury.

In a case from the bankruptcy courts, Kemp v. Countrywide Home Loans, there was a very Davidian blow sent to the banking industry as the issue with MBS trusts that were not properly populated with assets and the backlash from investors started to mount.  Important people, at least in their own spheres were being called to answer uncomfortable questions.  Additionally, it is noted that the AG from IOWA is talking about sending some of these bankers to jail for their roles in the violation of due process in the foreclosure scandals.

Waves, they ebb and flow, constantly changing but staying the same.  Banking was personal, it got impersonal, robotic, and pretty soon, if this attorney has anything to say about it, will be personal again.

Saturday, December 11, 2010

Its a bird, its a plane,...its a flying horse with some help?

Growing up, I enjoyed Greek mythology.  The monsters, the gods, the heros, it was all very exciting and when it came to pegasus, who didn't want a horse that could fly so you could get away from the nightmare we all called puberty?  Well, Pegasus may be making a new landing soon for lenders and carrying them away from the nightmare life of robosigning.  I said this blog would be of practical use, and this time I am including this as a practical use item for the lenders and their attorneys that will be reading this because I am suing them.  Happy Holidays.

In a recent post from Housing Wire, Pegasystems has launched a new product that will help banks not screw up the foreclosure process.  The biggest problem with foreclosure, is that it is a law, and most people like it when you follow the law.  I know its like a total bummer.  The banks have been doing 75 mph down the freeway and its time they realized its a 20mph school zone.

The software is supposedly designed to help the lender through the pre-default stages in identifying defaulting loans and ensure the process is as efficient and trouble free for the bank as possible (read the preceding as cheap and fast).  The principal for the company was quoted as saying, "Pega’s new pre-foreclosure solution vastly improves the visibility, certainty and efficiency of the overall process and provides unmatched quality controls and integrity.  Servicers can sleep better at night knowing that their documentation is error-free."(emphasis added).

That better night sleep is so important, especially when you have attorneys sitting at the edges of your banker dreams with Jason masks and machetes.  I have to say, with the number of mistakes that have walked through my door, and the foreclosures that I have started over because of errors, this process is a nightmare for the bankers.

Last week, one of my clients, who had a Notice of Default that had significant errors in it, received a new Notice of Default after a letter I sent to the bank and trustee caused the trustee to revise and reissue.  The first NOD had Trustee's fees of just over $1000, the new NOD included over $4000 in fees, mostly due to my letter.  If every mistake were to only cost the banks $3000, the losses would be astronomical.  The funny thing is, the newly issued NOD still isn't 100% accurate.  Maybe I will sign the new letter Jason.

So, if the banks would like to escape some of these nightmares, I would recommend them spending some cash  and flying away on Pegasystems if it will help them conform to state law.  Because if they don't get Pegasus to help them, I am more than willing to help them find out what the law says and how they screwed it up!

Wednesday, December 8, 2010

The only double-dip I like, is chocolate ice cream...

There is chocolate and then there is "chocolate."  I like mine down at the local ice cream parlor, double dip, and give me a spoon because I can't handle it any other way.  However, there is some movement just this last Monday on another double dip and I think it will take more than a spoon to get through.  Maybe a shovel, or a backhoe.

There are recessions and then there are "recessions."  In the article posted at, the journalist reports that Moody's, one of the largest credit agencies in the world that measures the credit worthiness of insurance companies and countries, has down graded a number of mortgage backed securities.  This tells me that the double-dip recession is more of an eventuality than the competing theory being spread by the Fed.  The party line, that is still being toed and also the reports coming from Bernanke and the Fed are that some time in 2011, housing prices are going to bottom out and at most there will be only a further loss of 5% in home values.If that were truly the case, why would you need to down grade these tranches of mortgaged back securities again?

Moody's has had this 5% line for months now and most of these securities have been down graded ages ago.  My guess, is that the rosy picture of a bottom is not an accurate picture of what is to come.  Certainty does not exist, but when the guys that have money in the game are putting money down on the bear, then the bull may not be as strong as some have been telling us.

The bear side of this recession is putting a line at 20% and that could take 2 or 3 more years to hit bottom.  2014 is a long time to wait for your house to bottom out, or your paycheck to bottom out, or a lot of things to bottom out.  If you want to believe Bernanke and his Bull about the economy recovering and your housing values rising, then by all means, start buying homes again and investing.  As for me and my money, I am betting on the house and its bears.  Speaking of bears, I love cinnamon bears in my chocolate ice cream.

Tuesday, December 7, 2010

Home for the Holidays...Protect your Tenants in Foreclosure

Yesterday, Fannie Mae suspended its foreclosure and eviction of homeowners and tenants from foreclosed homes from December 20 to January 6th.  In this spirit of Christmas charity, I thought my readers might like to know how they could protect their tenants from getting evicted from a distressed property.

Under the Deed of Trust Act in Washington, once a Trustee's sale has taken place, the person occupying the property has 20 days to leave.  If the person does not leave, he can be sued for rent and be evicted in a process called unlawful detainer.  This is a process that isn't fun for anyone involved but it can be the only way to get a defaulting homeowner or renter out of a property.

The state legislature noted the housing decline was leading to lots of foreclosures, especially on property that had been purchased on speculation, highly leveraged, and primarily used as investment property with tenants.   These tenants believed that they were safe because they were paying their rent, but with the Trustee's sale, they had to leave.  Washington amended the Deed of Trust Act under SB 5810 to extend new rights to tenants requiring notice of 90 days and replaced the 20 days in the rental property with a new 60 day window after the trustees sale.

Not to be outdone by the individual states, Federal law passed in 2009 called Protecting Tenants at Foreclosure Act.  This Act required the purchaser at the trustee's or sherriff's sale to honor unexpired leases.  So, instead of being able to keep your tenants in the home for just 60 days, they could stay until the end of the lease term.

Now, this is not automatic.  If you have a Trustee's sale scheduled at the end of this week, you cannot go in and sign a lease with your tenant and expect it to be honored.  That said, I would still sign the new lease, because I believe the burden of proof that the lease isn't to be honored rests on the new owner, not the person renting the property.  However, if you can, you should sign a new lease, with market rate rent and terms, prior to getting the Notice of Trustee's sale.  The trigger point in doing this should be the Notice of Default.  Once you receive that document, re-write your lease.

Even if you fail to re-write, the tenant gets an added benefit of being able to stay for 90 days after the sale and really its 90 days after he receives notice from the new buyer which may be even longer than 90 days.  But, if you re-write the lease, and we have been doing these for the bottom rate on the market for 2 year terms.  If the buyer at the trustee's sale is not going to live in the property, he has to honor the lease.  You just gave a very good Christmas gift to your tenant by reducing his monthly rent, and stabalizing his family through the season.

The added bonus is that you got to drop a lump of coal in the bank's stocking.  So Merry Christmas to you too!

Friday, December 3, 2010

Beating Banks with the Statute, like it was a stick!

Do you remember, when we were kids, and there were still wooden bats?  I remember "The Natural" with Robert Redford, and he made his bat out of the tree that was struck by lightning.  If I had a bat like that, I would burn the name "RCW 61.24 et. seq." into it and step into the batter's box.

A couple of months ago, a case came out of Division 2 Court of Appeals referred to as Albice.  In that case, as in many others, the court iterated that banks (beneficiaries) and the trustees had a duty to follow to the letter, the Deed of Trust Act.  In that case, the court used the statute like a stick and beat the trustee like a curve ball with no curve for not providing factual details in the conveyance instruments. The court took the unprecedented position of overturning a completed trustee's sale.  This seems to be one of those ground swell cases where the courts are holding the banks and their trustees to a higher standard than before.

In that same vein, last month I started sending letters to banks, servicing companies, and trustees or trustee's agents taking them to task on discrepencies between the statute's requirements and what it was stating in the Notice of Default.  Today, I received my first, rather contrite letter back, admitting to defects in the notice of default and that the Trustee would issue a new notice of default and start the nonjudicial foreclosure process over from the start.

This is no small victory.  My clients were able, due to a back and forth of only two letters and at most a couple of hours of research and writing, get nearly 45 days more in their home.  On an average mortgage, on an average house, in Snohomish County, of roughly $300,000, that is a a savings of over $3,000.  For two hours of work at $200 per hour, the rate of return is incredible.

So, as I promised, practical solutions to some of your problems.  If you are in receipt of a Notice of Default (a letter posted on your home and likely sent to you by regular and certified mail with the title "Notice of Default" at the top) you need to read three sections.  Section (d) which tells you how much you are behind on your payments; Section (e) which tells you how much the bank has spent trying to get you to pay since you quit paying (trustee's fees, attorney's fees, filing fees, etc.); and section (f) which should be a total of (d) and (e).  If those two sections, when added together, do not equal what is shown in (f), you can make the trustee start over.  Talk to your attorney and have them draft a letter, if you need to, have your attorney contact me to draft the letter.  Whatever you need to do, but you need to hold the bank responsible for the letter of the law.  If we don't all play by the same rules, then somebody is going to get beat with a stick, make sure you do the beating.  Grip it an rip it.

Why are you distressed and why will you be taxed?

This blog is being offered partially as a public service, hopefully some of my readers will find the information useful to them as they buckle down for what is to come, and partially as a way for me to express my ideas on the mounting troubles caused by failed policy, greed, and blind decision making by the general public.

My primary audience will  be those that are upside down in their houses, those that owe more than the house is worth, those that want to save the house from foreclosure, those that want to give the house back, and those that are in the process of giving the house back.  Though that description seems to be directed at a bunch of different people, it is not.  Its directed at homeowners who have purchased or refinanced in the last 10 years.  Let's fact it, most of you are underwater. 

There are legal tools that can help people out of this crisis.  There are also practical tools as well.  I hope that this blog will provide a good mix of practicality and if you are really bored, you can read some of my legal rants.

Why are you distressed?  Well, the technical definition of a distressed property is that property is in danger of foreclosure.  Well, this is a narrow definition that Washington State and some other jurisdictions are using to set up enforcement actions against certain vultures.  I use vultures in the sense that there are companies and individuals that are waiting for the first Notice of Default to be recorded in your county and then they swoop down to get your money before you die a financial death.  I believe that distressed property is really any property that has more debt against it than it is worth.

The reason why I think that definition is important is that there are a lot of good people that are trying to pay what they agreed to pay back in say 2006 when the housing market here in Western Washington was strong.  Whether it is from a moral conviction or just not knowing that there are other ways, the person still pays the monthly obligation.  Well, the property, even if you can afford it now, is still distressed because the proverbial straw that broke the camel's back is only an uninsured sickness away.  So the simple fact that you owe more on your house than its worth means that it is stressing you out and thus you are distressed.

So, now we have a baseline for why you are distressed, why will you be taxed?  This is one that many of us don't even consider because lets face it, you have bigger problems to worry  The person that is living in an underwater house is likely facing reduced income, increased stress, unhappy spouse, nervous children, cranky bosses, and unhappy customers.  It is easy to say, "I have enough on my plate."  The problem is that when the time comes that we part ways with our home, whether it is by the overt act of a person in control of their life or by the fact that the head in the sand, ostrich approach failed, you the homeowner will have some potentially adverse tax consequences.

I know it seems impossible, the home that you paid so much for, is now worth a lot less, so you feel like you had a loss.  The problem is that our tax code does not recognized losses on personal consumption property.  If the property was not purchased to enable you to make more money like an investment property or a commercial property, then the loss you suffer isn't recognized from a tax perspective.  There is no, "I'm sorry you lost your house" box on the 1040 you will file next year.

To add insult to injury, the money you got from the bank, that you really didn't get because it went to an escrow agent and then to the seller is considered income to you after the bank subtracts however much the bank got from the foreclosure, short sale, or deed in lieu.  Oh, did your real estate agent fail to mention that to you?  Sorry, I thought you were working with an ethical agent.  They probably didn't tell you that the short sale they are pushing also is going to cost you an excise tax due on sale of 1.28%.  I know, details, details.

What I am driving at is that distressed properties have hidden "gotcha" traps all through them.  Whether it is information that the banks are not sharing with you about the foreclosure process, or the hidden taxes that will show up afterward, doesn't really matter.  That process of being distressed leads to being taxed, mentally, physically, emotionally, spiritually, and when you get the 1099-C, financially.