Merry Christmas... Mr. Grinch!

This marks the 12 month anniversary of Distressed and Taxed.  This blog has had over 12,000 page views this year including some of one of my first posts about Christmas and Freddie Mac, Well, its Christmas time again and the elves at Freddie and Fannie, who can't seem to foreclose that solo cup, have decided not foreclose on your home this Holiday Season.  What must be remembered though, is that just because the house isn't selling in foreclosure, does not mean that mechanical minds of our lending institutions are not working to seize your house.

One of my favorite Christmas movies is How the Grinch Stole Christmas with Jim Carrey.  My wife doesn't like it, but we have decided we don't have like the same things and its okay.  In the show, Grinch burns the Who's Christmas tree and then retires to his home in Mt. Crumpit while the Who's continue to celebrate.  He starts to concoct a devious plan to steal Christmas.  Well, the banks are Grinching away at your home and have started their way back down the mountain.

Though actual foreclosure sales were down in November as compared to last year, the number of filings for nonjudicial foreclosures was 56% over last year in Washington state. See this article in Yahoo!  Considering that last year was a record year for foreclosures and the postings for foreclosures starting in January are up more than half, means that 2012 will be a quite the ride for both the housing market and the homeowner's trapped in their underwater homes.

Unlike the Grinch, I would not expect the many bank institutions to have a change of heart and grow from two sizes too small.  The simple fact is that banks are heartless, anaerobic, constructs which neither feel nor care about your plight.  The only question that can be asked is the questions asked by the shareholders, which is, "did you make me any money today?"  Not foreclosing does not make money.  Grinch!

If you would like to see some heartwarming trends, the Foreclosure Fairness Act and the mediations it is producing are providing some surprising results.  Not as consistent as I would like, but surprising none the less.  So to avoid being grinched by the increased foreclosure activity hit us up at NicFisherLaw.com.

Foreclosures: Drugs, Sex, and dead bodies?

When Jim Morrison was singing about taking it higher, his followers were toking out in woods and buses, but today's stoners have a new venue for getting high, your foreclosed home.  In a very interesting link from Progress Illinois, there are claims, by the coalition that is trying to take back chicago, although I am not exactly sure from whom they are taking, that foreclosed homes are havens for crime.  I don't think it is far fetched that a vacant home makes for a good hide out.  I remember as a kid, my buddies and I planned a night where we were all staying at each other's house, like mom would never find out.  A storm came up and an abandoned house became our refuge until the police escorted us home.

With the significant deleveraging that is occurring in the housing markets and has occurred for the last three years, there is a dearth of vacant homes.  Many cities have passed ordinances that require homeowners to mow the lawn, take out the trash, and maintain the property, mine included.  Some though, have stepped up the regulation to specify foreclosed homes that must meet this standard or else.  Banks like Bank of America, CITI, Chase, and even smaller lenders like Aurora FSB, fka Aurora Loan Services, LLC and Nationstar have properties that are blighting our communities by having over grown lawns and such.

The homes have become places for drug dealers and users to congregate.  The homes have become places where teenagers gather to drink and commit debauchery.  There have even been those that have committed crimes such as rape and murder that find these foreclosed homes to be safe havens because the banks aren't maintaining the properties.

It makes sense to this blogger that the banks should be required to do more than simply foreclose and sit on the immense shadow inventory of homes that it has.  If you are unfamiliar with shadow inventory, it is the supply of homes held by banks but not being marketed for resale, check this article out for more information.  This shadow inventory is not creating any wealth, it has no utility, no value, and in fact it is dragging down home values and promoting crime.  Cities should pass ordinances requiring maintenance, and if the maintenance does not occur, fines should be issued.  If Bank of America didn't like losing 50% of its value over the last 10 months, it would hate this even more because it won't be taken any higher. 

Foreclosure Mediation being Hijacked by Law Firm

A law firm with offices in Bellevue has seen fit to hijack the foreclosure mediation process for about 75% of clients being funneled through the Volunteers of America and other mediation centers based on the advice that it will not sign a mediation agreement. Amazing, since the mediation is predicated by a law and is the right of the homeowner and not the right of the bank. I will refrain from naming the law firm, Routh Crabtree and Olsen, at this time because of what appears to be a defenseless and cowardly move. It would be unfair to give the description of the "mill" like company that continues to pump out bilge in its documents and arguments.

Suffice it to say, that if the unmentioned law firm, RCO, is representing your banking institution, it may be a while before you get the benefit granted to you under the law known as Foreclosure Fairness.

Restraint of Sale and Foreclosure Fairness

So I am not the best blogger in the world. I will admit that, but in spite of that fact, I have an excuse. In fact I have a good excuse, I have been at war with the banks. So please forgive me while I was in the trenches, but I am back with some real world information, some that you want to hear, some that you don't, but here it goes.
First Point: The banks have been prematurely sent out their notices of default. Here is what is happening, my clients are receiving the notice of default, I will assume the Pre-Foreclosure Options letter prior to the appointment of the Trustee that is sending out the letter. This is problematic because the Trustee is not authorized to do anything until such time as it is appointed. Small problem with the statute and deed of trust that the banks and trustees seem to have with figuring out what "vesting" means.
Second Point: The banks must produce the note. The question is when. The lawyers for the banks have vehemently denied that there is any authority for the production of a note, but the judges, even the very conservative judges in Snohomish County, have been willing to require the banks to produce the notes. This is something that will not happen with a simple letter of request from the borrower to the bank or whatever entity is holding your note. However, if you are in litigation, and you have the right complaint, then the judge can require production of the actual note for inspection. I recommend that you hire a forensic auditor to look it over with you. Have him bring his microscope and split some hairs.
Third Point: You have to have more than a contracts claim to win in court. If you are upset with your HAMP modification (or lack thereof), then you will still need to find a better reason to sue the bank than that. The TPP agreements, if not made permanent, then it has no teeth and will not get you through the door. I recommend some fraud mixed with some misrepresentation, and a dash of conspiracy for good measure.
Fourth Point: The foreclosure Fairness act and its Foreclosure Mediation is here. My offices are doing the letters for $150 and a full representation, including being at the mediation for $900. This process will produce positive results for you if the home is your primary residence. Don’t hesitate, you need to put your request in within 30 days of receipt of your Pre-Foreclosure Options letter.
Last Point: Keep fighting. I had a good friend who was a third degree black belt in judo and a state wresting champ out of Spokane tell me that most of his opponents weren’t willing to push for more than 8 seconds and if he pushed a little longer he would win the fight. That is true in this arena. The opponent is big, and has resources to push for a long time, but its lackadaisical in its approach and lets up at times. That is when you have to push hard and put it on its back.

Miraculous Transfer of Wealth from Banks to Borrowers

Here is a well presented reason why the economics of foreclosure are beneficial to the overall economy.  Jim Cramer goes into some incredible comparisons between Bank of America and Capital One in regard to defaulters.  There is also interesting information on the economic buying power of defaulting homeowners.



My Law offices have been discussing the benefits of this strategy for a while and you can look back here on Why Strategic Default is Good for the Economy!

Cramer made the comment that strategic default creates a "miraculous transfer of wealth from banks to borrowers."  Credit card companies like Capital One and retailers like Costco are seeing the benefit of homeowners eliminating the largest single payment in their monthly budget and re-purposing that money to service other debts and make smart purchases.

The use of this freed up cash allows the homeowners to make economic choices that have more utility than being simply forced to feed the big banks.  This is why the banking sector as a whole is down 5% in trading but you see certain lenders like Capital One, which facilitates purchases with credit cards rather than mortgages has done well.  Homeowners want to be economic players, they like choice, the down turn seemed to take that choice away.  But now, the miraculous transfer is putting choice back in the homeowner's favor.

At the end of the piece, Cramer went on to put it simply, "You got to be nuts to pay your mortgage if its underwater, you got the government on your side."  I don't know that I agree the government is on your side, but we do see more politicians working on the homeowner's side as evidenced by the Foreclosure Fairness Act. The choice seems and if you clear away the emotional baggage, really is simple.  The transfer of that monthly mortgage payment, for whatever period of time you stay in your home is hard to overlook.

Homeowners will get "Experienced" Mediators

Foreclosure Fairness is about to come to Washington and yesterday, an email from the Washington State Bar Association outlined some of the minimum requirements to be considered a mediator.  A mediator is simply a neutral third party that helps negotiate conflicts between two parties.  In the instant case, it will be the frustrated homeowner who has sought HAMP and conventional modifications from an unmotivated banking institution.  The mediators must have had a minmum of 200 hours of mediation experience, or 60 hours of mediation experience and 40 hours of mediation training with a minimum of 10 completed mediations. 

All in all, the qualifications are not really problematic.  It is good to have mediators that have experience dealing with two individuals working out thier problems.  Where I find issue with the qualifications is that there is no requirement that the individual have any experience in finance and real estate law.

Foreclosure mediation is going to be its own beast.  This is not a divorce or custody dispute, it is not an employee who feels wronged by a manager, nor is it two homeowners fighting over boundaries.  This is an intense struggle between a homeowner and a highly sophisticated, financial entity which has access to economists, finance experts, and lawyers.  Who do you think has leverage going into this mediation?

Additional issues come into play that stem from the new Foreclosure Fairness Act itself.  The act has handcuffed the mediators because there is no requirement that the banks disclose all of the factors going into the net present value (NPV) tests of a loan modification.  An NPV analysis can be quite simple, it is a function of the number of payments, interest rate, starting and ending values.  However, this simple function that can be run on a HP 10bII calculator can become incredibly complex though, when the interest rate and end values are gerrymandered with payoffs from third party insurance products and volatile derivative markets.

Since those inputs into the NPV analysis do not have to be disclosed, it makes it difficult for the average homeowner to understand why a modification is being offered when the modification has a NPV that is clearly higher than the NPV of a foreclosure in the simple set.  This fact alone is one of the reasons why a homeowner should choose legal representation over a simple housing counselor when approaching the mediation process.  You must meet sophistication with sophistication, even if the argument, boiled down to its essential elements, is quite simple.

The representative of the homeowner must have the ability to understand and dissect the bank's complex jumble of information, essentially cutting through the crap, and deliver the actual terms.  Since the mediators are not required to be able to do this on their own, nor will they have the resources at $400 per mediation, it falls to the homeowner to deliver a break down of the bank's proposal and a solid counter proposal which is more reasonable.  Good luck getting that done with a free housing counselor being funded by the banking institutions.

I have harped on the way the new legislation force feeds housing counselors on the public and this is why.  When it comes to complex negotiations, it is unlikely that the homeowner will get adequate representation in the foreclosure mediation because there are too many cases, limited resources, and a suspect source of funding to legitimately expect excellence.  Homeowners that can afford nothing else will likely be better off than with no help, but remember the adage that "you get what you pay for."

The Housing Double Dip Fudge

In December, I posted a note about how I like chocolate ice cream.  I like it in a cone, double dip and I eat it with spoon.  Well, really, the post was about the economy and housing in particular.  I had friends that were bullish on the stock market, jobs, the economy, housing, you name it, they said buy it.  A lot of that braggadocio in regard to economy came from individual's fear of things going sideways.  It certainly didn't help that trusted sources like the Wall Street Journal were salivating over futures makets and Ben Bernanke was imputed with indicating that he didn't expect a double dip recession. 

Information from the Federal Reserve and the futures markets seemed to indicate that the recovery was going to happen in 2011, 2012 at the latest (see the video on the WSJ link.)  This morning, CNBC, not my most common source of news because it tends to push a rosy view of the economy, came out and said this morning that a "Double-Dip" in housing prices is even worse than expected. It would seem, that Mr. Bernanke likes a little fudge on his double-dip. In all fairness, I couldn't find a single quote from Bernanke saying there was not going to be a double dip, but he did make indications that there wouldn't be, with caveats. He should have been a lawyer.

So what is the driver in this "unexpected" double dip in the housing market.  Well, first of all, it isn't or shouldn't have been unexpected.  The amount of foreclosed/ bank owned properties on the market or yet to be available in the market is enormous.  The US housing market on average will sell about 4 million units.  The banks are holding nearly 8 million units and foreclosures are ramping up.  Though the data is not yet in for April/May 2011 in Washington, I expect Realty Trac to make an announcement of nearly a quarter to half increase over the previous quarter in new foreclosures for the state.

This has partly to do with the new Foreclosure Fairness Law, okay, scratch that.  It has almost everything to do with the new Foreclosure Fairness act.  So, if your house was worth X in February, the number of new foreclosures happening will likely place downward pressure on your price, no later than August meaning your house will be worth X-Y.  Additionally, Washington is already on pace to see more nonjudicial foreclosures this year than last year according to the congressional fact finding for the Foreclosure Fairness Act.

The article in CNBC said that the US average drop this year has been 3.5% which is more than what I had reported as being 1% per month and there are a lot of foreclosures to come.  State specific data on Washington showed a loss of 4.15% since December, well ahead of the US average.  Surprisingly, Seattle remained even from February to March, one of only two cities on the S&P/Case Shiller index to do so.

This double dip leaves this question to be asked:  What do I do about it?  If you purchased/refinanced your home between 2003 and now so you locked into the height of the housing market, how long will it take you to recover your house value?

This is a serious discussion that you have to have with your self and your financial advisers.  The average family has lost over $125,000 of value since 2008 and the greatest asset of most families is the home.  Can you afford to loose more over the course of the next two years? 

It is time that you sat down with a lawyer trained in foreclosure law and find out what your rights are in regard to your home.  I am not saying that your house is a stock and that it should be dumped, but when analogized, it can help make better economic decisions.  Let's head down to the local ice cream shop, get a real double dip, and see what you can do about avoiding the economic double-dip finally being reported by the media.  I like mine with some cinnamon bears on it and your paying.

Pre-Foreclosure Options Letter - Foreclosure Fairness Act

So this morning, I got this wonderful call on my new HTC Evo.  I love my new phone.  Anyway, the meeting was with Rick Torrance and Valerie Grigg Devis from the Public Safety Unit of the Department of Commerce.  I know, your saying, "who?!? why?!?, what the..."  Well, the new law signed by Governor Gregoire that implements HB 1362 on July 22, 2011 is being administered, at least in part by the Department of Commerce.  The Department of Commerce, or COM as they like to call it has the unenviable duty of manufacturing a number of notices which will be used by attorneys and housing counselors to access the new provisions which will be codified in RCW 61.24.

The first notice, and this is the one the banks have been asking for specifically, is the newly minted Pre-Foreclosure Options Letter.  We have to thank Mr. Bruce Neas for the snazzy title and really, he should be thanked for much of the product that is the Foreclosure Fairness Act.  This is the first notice included under section 16 of the new act and it specifically requires that notice be given in English and Spanish from the lender notifying the homeowner of its options, including mediation.

This letter is being developed with model language and should be approved by the AG's office next week when it will be sent out for translation into Spanish.  You must note, that the banks were unwilling to foot the cost in translating this item.  They would rather that the tax payers eat the cost of translation.  I guess they will still need make sure they have a Spanish speaking attorney available to verify that COM got it right.  So, here is to job creation!

This notice will be sent to homeowners and will contain most of what we find in section 5(c) of the law which will amend RCW 61.24.031.  The Notice will say you have 30 days to contact the beneficiary (bank) and request mediation, I mean options.  You will note, in Section 8, the bill allows you to request mediation on or after July 22 as long as you have received a notice of default.  So you won't be left out.


Though this Pre-Foreclosure Notice is the top priority for COM, it is not the one of the most interest to me.  COM has until June 22nd to post and provide the Notice for Referral which will detail what must happen prior to an attorney making a referral to mediation.  This notice is also detailed in section 16 and refers to new section 7 which states in part, "[An] attorney referring a borrower to mediation shal send a notice to the borrower and the department, statement that mediation is appropriate."  The only thing that I did not get out my conversation this morning is what the heck does "appropriate" mean?

This form is also in production and I was told it will be posted early next month but as of this time, the forms are still unavailable for public perusal.  There are four additional notices which are produced either by COM or the mediator which the homeowner has little or no control over.  Those will also be available but of much less interest.

There does seem to be a rush by the banks to get NODs out before July 22nd.  However, that rush really is to avoid the recording costs, not to avoid the law, well maybe it is to avoid the law, but section 8 puts them squarely in it.  The issue is going to be this, if you have a sale date set for July 22nd (which ironically is a Friday and the day the law goes into effect) and my office faxes a referral to mediation to COM before the sale, does the Trustee have to push off the sale and the bank set up the mediation?  I believe the answer to this question is YES, YES, and YES!!! if you didn't hear me.

So, I am going to be holding a Midnight party at my offices on July 21st to send off mediation referrals for anyone that would like one.  Once 12:01am hits, the fax will be a humming.  I am kidding...or am I.  I guess maybe you should give me a call on my new EVO before Thursday, July21st. 425-314-6737.

Analysis of Foreclosure Fairness Act: Homeowner's Guide

On Friday, 4/8/2011, the State legislature delivered a bill to the Governor for signature on 04/14/2011 which will significantly change the process of foreclosure in the State of Washington.  The major change is that the legislature has delivered to the homeowners, a statutory right to sit down and talk turkey about modifying the loan that has become the bane of homeowners everywhere.  In 2007, the median net worth of a family in Washington was around $150,000.  Since that time, we have seen the stock market crash and the housing bubble burst, unemployment rise, real wages drop, and interest rates on mortgages climb.  On average, the American Household lost $125,000 by 2009.  When you compare the statistics, we should be plus side, $25,000.  The problem is, that the mortgage that secured the average home, didn’t go anywhere, and the though the median and the averages were in the $150,000 realm of net worth, those buying homes and refinancing in 2007 and earlier, were doing it on 100% loan to value terms and it is unlikely they were near the median in net worth.  Thus the average losses that impacted the portfolio didn’t turn into a mere $25,000 remainder, but left them insolvent and starring at bankruptcy. It is likely, that of the 33% of homeowners that have a mortgage that is underwater in the Puget Sound, your financial situation is sinking but this bill may provide a much needed life saver.

The Foreclosure Fairness Act will provide the homeowner the opportunity to force its banker to the table to discuss the realities of modifying the loan.  Prior to this, homeowners have fussed with lost documentation, forbearance agreements and the actions of a banking industry that border on the criminally negligent. In addition, the bill requires the bank to provide specific information in making a determination of what the best outcome will be based on present values of modification, foreclosure, short sale, deed in lieu, and whatever workouts may otherwise be arranged.  The problem will be getting through the hoops to make that banker sit there and look you in the eye with a mediator looking on and provide you this information.

Previously, the process of nonjudicial foreclosure in Washington was that the owner of your mortgage, the bank, would stop receiving the monthly payment.  In turn, the bank would declare the loan to be in default, and contact a trustee to initiate the nonjudicial foreclosure.  The trustee would send a Notice of Default out no earlier than seventy (70) days after the first missed payment and the home would be auctioned off about 120 days later.  The homeowner would then be forced to move by the twentieth day after the sale.  Thus the whole process would take about seven months or 210 days.

With the changes, the statute imposes on the bank a requirement that it send out a notice a full thirty 30 days before recording the Notice of Default that details your rights in sitting down with the bank.  If you don’t answer that letter, don’t worry, the bank will call you three times by telephone, and then send a certified letter.  Failure to meet that requirement means the bank cannot foreclose. 

If you do respond to the letter.... TO ACCESS THE REMAINDER OF THIS ARTICLE, and trust me you want to get the detailed analysis of this statute, PLEASE REGISTER FOR A FREE SEMINAR HERE. Just click on the green "register now" button for either a live event or the webinar, and the article will be emailed to you shortly.


My good friends at the Financial Revival Group liked my analysis last week that they bought the rights and are incorporating it into their workshops.  Must be good if someone is willing to buy it.

Foreclosure Mediation is Here...but its not a Knockout!

Last night at 10pm the Seattle Times posted that Governor Gregoire had indeed signed the bill that the legislature laid at her feet some 7 days prior.  The Bill, now called the Foreclosure Fairness Act as proposed in HB 1362 has some great new features for homeowners but the way Times describes it, its a knockout for homeowners, and it is not.

The Seattle Times took the effort to document some of those features but its glaze leaves more than a little to be desired.  The article talks in definitive terms of what it does for homeowners when in reality they are just jabs.  The bill for one, does not automatically extend an additional 60 days for homeowners that respond to the request for mediation.  Neither does it automatically stop the foreclosure if the lender is in bad faith unless the homeowner has properly engaged counsel and been referred to mediation.

I want to be clear, there are tremendous advantages created by this bill, but there is a lot of work to be done.  If you want those provisions to benefit you, it is highly recommended that you sit down with someone, preferrably an attorney because of the attorney's ability to land a knockout blow.  The bill does extend a new fee of $250 for housing counselors, which there is no requirement that a housing counselor have any specific license.  They are not attorneys.  And while we're on the subject, I feel inclined to point out that from the article, "Without Prompting, the Washington Bankers Association offer to pay a $250 fee for every default notice filed [not true, only the first notice], with the stipulation that 80 percent of the money pay for housing counselors."  (emphasis added.) 

The Banks are paying for the housing counselors, and I am sure it is out of the kindness and goodness of their ever expansive corporate heart.  Wait...corporations don't have hearts?  Are you sure?  Yep, they don't breath or have blood...sounds like a vampire.  The corporations have alternative motivations for pushing homeowners off on housing counselors.  One, if you know who butters your bread, you take care of them right?  Two, housing counselors cannot sue you if the note was assigned by Linda Green.  (If you don't get that reference, please check this blog posting out, 60 Minutes Story - The next housing shock (crash).

It is no surprise that banks want homeowners to go to someone they pay.  Prior to the housing counselors provided by HUD, the banks were asking you to call them.  TARP assets were being set aside to pay for HAMP and HAFA, yet the banks did very little, a national average of 3.5% success rate in actually modifying mortgages despite billions of dollars being thrown at the problem.  The counselors were then invented, paid for by banking money, as a substitute for bank employees who would counsel with homeowners on budgets designed to free up cash to pay for the mortgage. 

There are alternatives to freeing up your liquid cash to pay on a property that acts like a shredding machine instead of like an ATM.  The problem for housing counselors is that they cannot talk about those alternatives in a comprehensive way, they simply don't have the tools.  So, if you are looking for some relief under the Foreclosure Fairness Act, and would like a sit down mediation with your bank, remember its not as easy as one call that's all! There are hoops to jump through and arguments to be won.  Do you want a bank sponsored housing counselor in your corner or a real fighter, I mean attorney?  I'll let you decide.

AG Settlement's Falls Short

Tomorrow, the AGs of the 50 states are supposed to reveal the great settlement that is going to impose upon the largest lenders some burden for the short cuts that helped deepen this recession.  The problem that some have found with this is that the AG's solution may actually lengthen the time that underwater properties plague our economy.  Some have gone so far as to find their own economists to attack the settlement because it may cause higher costs than what the lenders are actually going to give up ($25 billion in mortgage principal writedowns). Whether you think its good or not, or if you just don't agree with the banking industry, you will find supporters aplenty (counter argument-if you can call it that)

In some respects, I can understand the hand wringing because I too don't see the AG's settlement as a positive move.  I remember in 2008, when GM was on the verge of financial collapse and the government stepped in to save it, Mitt Romney wrote an op-ed for the New York times.  In that piece, he explained that the GM should be allowed to go into bankruptcy.  It was likely the fastest way of curbing the executory contracts with its labor force and salvaging its beneficial intellectual, real, and personal properties so that they could be put to the best effect.  I agreed with Romney at the time he wrote that piece, and hindsight shows that the government intervention did little to alter the outcome, only delaying the inevitable restructuring of a failed enterprise. 

The difference though, in that Governmental-hand-of-god save of GM as compared to what the AGs are trying to with home owners, is that there isn't really any save.  In a blog post a couple of weeks back, I looked at the number of homes to be repossed this year alone, 1.2 million, and if all the principal writedowns were to go to those homeowners alone, it would only amount to $20,833 per home.  Considering that in our present market, homes have lost nearly 1/3 value since 2007 for an average of over $100,000, that write down doesn't even scratch the surface.  When applied to the nearly 5 million homes in default, that number dwindles away to become inconsequential.  Consider this, last month, I negotiated a second mortgage of nearly $100,000 for a payoff of $10,000 and still failed to bring the home flush, its close, but still not flush.

The economists hired to look at this deal though, have made some gross assumptions that lack reason when comparing write downs to loan modifications.   In my opinion, it shows either a lack of understanding in what is actually being offered by the banks, or blatant disregard for factual circumstances.  Your choice, I either call you ignorant or a liar.  Home loan modifications, as described by the FDIC guidelines and those developed in GSEs, basically say that the bank has to be as well off as if it got its original deal.  The banks are not bending over backwards to write off billions of dollars in mortgages, especially when people are still paying.  Many of the modifications simply add the amount of arrears on to the end of the mortgage, extend the time from a 30 year fixed to a 40 year fixed, and alter the interest rate.  This amounts to no change, no principal write down.  What the AG's are requiring is actual write down.  We take the terms as they stand, and then the lender lops off some portion of the principal.  The problem is that it doesn't go far enough. 

The authors of the ecnomics paper argue taht the changes are going increase strategic default, but it isn't as if there is need for additional incentive.  A home being $100,000 upside down is incentive enough.  The write downs may actually incentivize homeowners to stay and pay.  Which brings me to my reasoning for not linking the settlement.  I am affraid it will limit private action against the banks, and it doesn't go far enough to incentivize homeowners to stay in their homes. If you are going to do it, do it right, make it effective, and by all means, go after every penny of revenue that the banks have stolen from local governments in the forms of excise taxes.  Then, provide a broader forum for individual homeowners to obtain compensation, and by all means, allow them to lop off most if not all of their underwater mortgage.

If homeowners are a little bit underwater, the emotional attachment to the home will allow them to pay the extra money that they will to hold on to the memories of birthdays, anniversaries, births, marriages, and simple day to day glimpses of the past.  But if homeowners are stuck with putting their monthly mortgage payment through a shredder each and every month that their property loses value, strategic default, and simple missed payments will continue.  I personally am happy to help anyone down the path of strategic default and extract the cash from the lenders in anyway possible, but if you can modify and stay, then more power to you but don't count on the AG's Settlement, it simply falls short of real relief.

Foreclosure Mediation: Poking the Bear

Have you ever heard the phrase, "don't poke the bear?"  Of course you have, unless you are 7 years old and never read anything in your life.  Even by context, it seems like a bad idea.  Well, after some 30,000 foreclosures last year, the bear has had enough, and I mean the voters.  If you have been following me while I tracked SB 5275 and HB 1362, you know that I was of the belief that the banks had won.  In the first substitute of the bill I went to Olympia to fight for, the legislators had gutted the bill.  See Paper Tiger. 

Much to my wonderment and excitement, the second substitute put almost every tooth back in, and those dentures are sharp.  You can read the text of the new bill here, but only if you are a glutton for monotonous punishment.  The bill is about 28 pages and it has twists and turns, new definitions, rules, traps, and in the end, I believe a tool that will allow homeowners to hold banks responsible. 

The bill has not yet been signed.  I didn't want to get scooped here, so I am posting this before Gregoire puts pen to paper.  She got the bill on Friday and it has not been scheduled when she will sign the bill.  Some of the highlights are mediation, of course, bad faith, and attorney opinion letters to HUD.  I always like new business.  there are some traps as well, the provisions are not automatic, they are not free, and in many ways, they will be ineffective, but that doesn't mean you ignore them.

I will write more on this later this week.   So stay positioned, the great bear of the northwest has been poked out of its cave for long enough, and some bankers better be wary.

Trustee Where Art Thou?

If you own property in Washington, you more than likely signed a deed of trust.  It was one of the thicker documents in that stack of paperwork that you didn't read but it can be summed up like this.  You gave some third party the right to sell your house if you don't pay.  The trustee is chosen by the beneficiary (read that as bank) and is oft time paid for by the beneficiary, usually only when the home is going into foreclosure because it us underwater.  However, that doesn't mean that he works for the beneficiary as we would traditionally look at an employee.  Its more like a professional, that is why attorneys often work as trustees.

Just because a Trustee is appointed by the banks, it still has a duty to the Borrower or homeowner.  By statute, the Trustee owes the borrower a duty of good faith.  According to case law decided prior to the language in the statute being added, the duty was that of a fiduciary.  Other than in an esoteric, legal debate do those two standards have much space between them.  Both are high standards and the Trustee must meet that standard in its dealing with the borrower.

So you can imagine my surprise this afternoon when I am making a phone call on behalf of a borrower.  The Trustee screwed up the paperwork on the Notice of Default.  Some people think I am being nit picky when I complain about the trustee not being able to do math, and that was the case here also.  However, in addition to not being able to do simple addition, the trustee's printer had cut off the last few digits of some of the numbers so that they were unreadable.  You may wonder how I could do math with missing numbers, but I can do multiplication as well, and the inputs for the missing numbers were available. 

So over a month ago, a letter was sent informing the trustee that it had screwed up, a phone call was returned saying, hey, we're reissuing the notice of default.  Today, in checking on the sale, it was still on, so new letters were sent, and phone calls were made.

In my phone conversation with the woman working for the Trustee, presumably the trustee, as the Trustee is a corporation, she said that I had to talk to the beneficiary about reissuing the Notice of Default.  Well, I said the trustee is the one responsible for issuing the NOD and so I need to talk to the trustee.  Trustee says to me on the phone, "We don't make decisions, we do what the lender tells us to do." My response, stunned silence.

Due to the duty of good faith, there must be more responsibility with the trustee.  It cannot simply say we do as the bank tells us.  That would be like the trustee of a child's trust saying, I do whatever the kid wants me to do.   So if the kid wants a million dollars of chewing gum, he gets it?  I don't think so.

The opposite of Good Faith, is Bad Faith.  Bad Faith is something that can be pursued in a civil action much like any other tort.  The other nice thing about bad faith, is it lends itself to consumer protection actions.  Trustees need to be wary, because responses like that make me wonder where the real trustee is, and if he agrees with the asinine things his employees say.

Taxes Are for Chumps! Underwater Investment Properties Don't Have to Get Soaked!

Last week there were grand articles decrying the fact that not only did GE, maybe one of the largest businesses in the world, not pay any US tax, it got a refund.  So, GE, according to the articles soaked the US government and tax payers alike. I studied U.S. International taxation at the University of Florida to learn how to do and assist companies like GE in accomplishing exactly that outcome.  No U.S. tax.  Is it right?, the rules make it okay.  Is it ethical?  Now that is a debate for philosophers and charlatans.  Suffice it to say, that the Tax Code written by your duly elected congressmen is rife with loop holes that would allow a behemoth like GE to walk through and even some that a small real estate investor can squeeze through too, if he, or she, knows where to look.  Its tight fit, but it acts like a squeegee so you don't get soaked.

I do some digging on AVVO.com an attorney locating website that allows attorneys to answer questions and bump up their rankings.  There was a question presented by a woman, who prior to marrying her husband, had purchased a home to use as a rental income property.  She had the home up for short sale, which implies that it was underwater or upside down, and thus it was also possible it was in danger of foreclosure.  Right up my alley, right?  Her question was, "Is there something other than "insolvency" that I can claim so I don't have to pay "COD" income on the forgiven debt?"

First, let's define a few things.  COD or cancellation of debt, or discharge of indebtedness, income arises under Internal Revenue Code Section 61(a)(12) and is basically the theory that when you take out a loan, you have cash (even though you probably never saw the cash) and that when the loan is forgiven without paying for it, the cash you supposedly had is now income.  Next, insolvency is not bankruptcy insolvency, because the IRS doesn't allow for exemptions like a homestead.  Insolvency is basically you total up all your assets and subtract all your liablities, and if you come out with a negative number, you are insolvent.

The issue the woman was struggling with is that her other assets probably are fairing better than her rental property but she doesn't want to liquidate performing assets to pay the government for what she likely has as a loss on her rental property. Essentially, she isn't insolvent, does she still have to pay the tax.

The first poster to this woman's question went on and on about mortgage forgiveness act of 2007 and was really far off, because he never once looked at IRC section 108(a)(1)(D) which allows for the exclusion of qualified real property business indebtedness income, a fancy way of saying a mortgage on a rental property that is forgiven.

That section, for real estate investor who haven't put their property inside a C-Corporation, and anyone that puts real property in a corporation should shoot their adviser (can I say that in light of Arizona?), is like gold.  Its not perfect, because there are some things to be aware of, but essentially, the investor can exclude from gross income, the amount of COD income that is attributed to the house being underwater.  The investor must subtract that amount from the basis of depreciable property, so the investor will defer the tax, but as Professor Lokken used to say, and probably still says even though he is in Miami, deferment, if done long enough is like a credit. 

So, the doom sayers and charlatans that say your rental property is going to leave you with enormous debts to the IRS probably haven't read through the entire section on excluding COD income.  Remember, to read to the end of the page, otherwise you might get soaked.  Insolvency and Bankruptcy are not the only ways of avoiding this kind of taxable income and even a well healed investor with a bad property can side step paying taxes on COD income if they find the right adviser to keep them dry.


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AG Foreclosure Settlement: Regulation Run Amok

Politicians are not going to fix the problems that we are in, not at least when there is money to be made in squabbling.  The Obama administration is backing the AG settlement offer.   Mr. Obama's lap dog, Timmy "the Taxcheat" Geithner (People wander why I didn't work for the IRS), put in his two cents saying this settlement was a necessary step forward, and  Elizabeth Warren, the architect of the Bureau of Consumer Finanical Protection, which was part of the Dodd-Frank Act of 2010 said "I still worry, a lot," about changes in the mortgage finance market.

The Republican response, led by Alabama's Senator Rich Shelby immediately attacked the proposal as an enormous overreach by a yet to be defined Bureau of Consumer Financial Protection (CFPB).  Mr. Shelby as well as a whole host of Republican congressmen despise the Dodd-Frank Act for its amorphous creation of additional regulatory agencies designed to create additional regulation of the financial sector.   House Republicans sent a letter to Mr. Geithner requesting proof of the legal authority granted to federal and state regulators to do what was proposed.   I truly don't have an opinion as to whether additional regulation is necessary or not, I do have an opinion on the creation of redundant regulatory arms.  Supposedly, the new CFPB will encompass and phase out the redundant aspects but my experience tells me that government isn't good at shrinking, like my waist line.


Now that we know that both sides are essentially fighting over the bone that is the CFPB, we can now look at the settlement in a new light.  The CFPB, as Ms. Warren has said, will "Demonstrate how we're going to deal with financial institutions who take on too much risk." Essentially, she is looking at the issue of the consolidation of the banking industry into giants like Chase, BofA, and Wells that forging themselves into the "too big to fail" model that precipitated the mess that we all find our selves in today.  Thus, the Democrats, through the creation of this new Regulatory Arm want credit for saving the American people from "too big to fail," and the Republicans, obviously not having the regulatory high ground, want a Legislative response that makes them out to be the White Knights of America's underwater homeowner.

A wise professor once pulled me aside when I was studying business at Valparaiso, and said, "Nic, when you are in government, where you are negotiating deals, make sure you trade apples for apples, and not for oranges."  What he was getting at, not that I have political aspirations, is that politicians tend to trade one thing for another when the fact is that they don't understand the value the items being traded. As long as the perception is that they got a good deal, it doesn't matter.  The problem is that sometimes it takes years to find out if the politician got a good deal.  Thus, if you are dealing in apples, you had better get the equivalent of an apple in return, otherwise you have done your constituents great harm.

The tools that are being put into the settlement agreement are fine.  As I said yesterday, they aren't really anything new, just consolidated to one place.  The $5 to $30 Billion settlement of cash in my opinion is a drop in the bucket when we are considering 1.2 million homes are being repossessed this year with an additional 5 million that are at least 60 days behind on their payments.  So, what is it that is being accomplished, other than a sound bite and picture in the paper?

AG Foreclosure Settlement: Parts to like, but at what cost?

Yesterday I posted on the AG Foreclosure Settlement, today I was finally able to read the 27 page draft that was allegedly sent to the biggest banks in America.  There are certain aspects of the proposal that have merit.  It contains tools such as closing the option of Dual Track Foreclosure which we discussed last week.  There are also requirements of providing documentation in Nonjudicial foreclosure states like Washington which are not otherwise required.  The proposal also includes the forced use of NPV analysis on determining the value of modifications and short sales as opposed to foreclosure, principal loan modifications, single point of contact with the servicers, and increased use of short sales.

These tools are really not all that different than many of the tools that we already have at our finger tips as attorneys.  Certainly, the tools are more spread out.  We have to weave together items of Consumer Protection, Real Estate, Tort law, agency, bankruptcy, and contract law to come up with some of our answers, but that doesn't mean the answers are not already available.  The AGs are packaging it into a nice little kit if you will. 

The problem that I have with the kit is going to be the expense.  If you look on page 26 of 27, you will find item VI Monetary Relief and there is a little phrase there that reads, "settle claims owed the government and/or to fund programs..."  This is where I find this proposal suspect as reported yesterday.  What is it going to cost to get the protections listed in the other twenty five pages, plus the money?  I believe that the banks are going to be asking for immunity from suit on the bad acts from private parties.  I believe that the tools already in place will be made ineffective by the AG's settlement and the only way to be allowed to use them is to fight with the AG who is supposed to be helping consumers beat harmful business practices.  Who is going to protect us from a duped AG?

It is too early to tell what the actual ramifications of this proposal will be, but considering that most AGs are political in nature, ie Rob McKenna from Washington using the AG office as a stepping stone to run for Governor, it is not surprising to find short sighted fixes.  Especially when we are dealing with all 50 states AGs and the banking industry and a handful of federal bureaucracies.  Stay informed, put in your two cents, because if we stand idly by, our government may give away our rights in the name of protecting the society.

AG Foreclosure Settlement and the Little Red Hen

I am fond of the children's story, The Little Red Hen.  To me, it has always stood for self reliance and capitalism.  When individuals share in the work, they share in the rewards, but when an individual cannot be bothered to lift a hand in the cause of industry, they are left to what they put their hands.  The Little Red Hen offered to include everyone, everyone declined, until she had produced her bread and then everyone wanted a slice.

Last Thursday, the individual states Attorneys General gathered in Washington, DC to discuss a settlement with the biggest banks over the improprieties in handling foreclosures throughout the United States.  The number that was reached, at least as reported in some places is $20 billion.

To you and me, that sounds really big.  $20 Billion with "b."  But, as you start to delve into the number, I have a flash back to Austin Powers and Dr. Evil putting his pinky to his teeth when he says a "million dollars" as if that were some astronomical amount of cash which would shock the civilized world.  Instead, we pat our mouths as the yawn emerges.

Imagine that in the US, where we have a population of nearly 300 million people and of that vast number of individuals, there were 1 million households that were affected by the housing crash.  No imagine, that these people that have lost anywhere from 15 to 50% of their house value in the course of 3 to 4 years, would offering them $20 billion even seem like it would act like a bandaid for the financial scar on their lives?  The amount being sought, is $20,000 per household.  That doesn't even cover the down payment most of these people put on their now underwater homes.

These families have searched the internet, sought out housing counselors, short sale specialists, and the smart ones have found attorneys that understand the significance of the battle that is being fought and have put up a good fight.  These little red hens, if you will, have gathered the wheat, ground it, made their dough, and baked it.  As they sit down to eat, it would appear that every farm animal that was too busy to be bothered has enlisted the AG's to broker a deal to get them a slice.

To be clear, I am not for the settlement, I think the consumer is being sold down the river.  The banks are going to walk with a slap on the wrist while the little red hens are told they can't eat their bread because the AG's made a bad deal, with bad people, all in the name of taking care of everyone.  The fact is, if you want protection (bread) get your own.  I work with a handful of good attorneys in the Puget Sound that have secured settlements and negotiated deals that make $20k look like pennies on the dollar.  The AGs can keep their settlement if it means that I can't do for my clients what I have been doing.

Dual Track Foreclosures and Forbearance Agreements

Tools are good, tools help us save time, save money, and sometimes even save lives.  The term, forbearance is defined as refraining from something.  In the context of underwater homes and homeowners attempting to salvage their upside down property, forbearance sounds like a god send, the relief from the storm, a life-saver, a good tool.  When forbearance is coupled with "dual track foreclosure," forbearance shouldn't sound anything like a life-saver but more like a mill stone hanged about the neck of the homeowner.

Legislators in California are trying to implement a law that would make the activities of some home loan servicing firms illegal, the act of offering a forbearance agreement while simultaneously moving down the foreclosure path.  That would be the definition of a dual track foreclosure.  Senator Mark Leno (D-San Francisco) (no relation to Jay Leno) said "Banks should not foreclose on a  family's home until they inform the owner whether the loan can be modified to an affordable level...homeowners who qualify for modifications should get them - not a foreclosure notice."

The turn of phrase used in the news article, "modified to an affordable level," caught my eye and reminded me of a class action lawsuit I had read about.  The sign up for the case is found here, and is being brought against Aurora Loan Services LLC of Littleton, CO by Hagens Berman, a national law firm with offices here in Seattle.  The interesting thing about this case is that it is taking a judicial tack at what the legislatures are trying to make illegal.

THe complaint is being handled in U.S. District Court in California and can be read here, but the gist is as follows:  The homeowner goes into default by missing payments and seeks modification help to save the home from foreclosure.  Aurora Loan Services LLC continues the foreclosure process but finally comes to the homeowner and offers them a "forbearance agreement."  The agreement requires the homeowner to make a sizable up front payment followed by 4 to 6 monthly installments.  The amounts paid will not bring the mortgage current, so the homeowner continues to be in default.  The servicer is "checking to see if the homeowner qualifies for modification," and then when the homeowner magically doesn't qualify at the end of month six, the home is foreclosed, no additional notices are provided.

This is plausible scenario even here in Washington under the Deed of Trust Act.  The act requires direct notices to the homeowner in the form of the Notice of Default and the Notice of Trustee's sale which come a minimum of 120 and 90 days before the sale, but the sale can be unilaterally pushed back by the Trustee for up to 120 days.  Thus a forbearance agreement could be signed after an original date of sale is issued, the agreement would not interfere with the propriety of a sale as long as it occurred within 7 months of issuing the original Notice of Trustee's sale.  Do you see where this going?

The trustee issues the Notice of Trustee's Sale and almost simultaneously the Servicer issues a forbearance agreement which uses the possibility of a loan modification as inducement for signing.  The agreement asks for roughly two months worth of payments up front and then four additional installments to paid on a recurring day each month, like the 20th.  The agreement states that if the homeowner will provide required documentation, the Servicer will determine if the homeowner qualifies for a modification.  This is music to the desperate homeowner's ears, but its a sham.

The success rate of modifications under HAMP or otherwise is between 3.5% and 12%, depending on which governmental metric you want to follow.  The modification program is routinely used by the banks to keep loans that would otherwise seek refinance at another institution.  Thus the number of modifications for those that are desperate is probably even lower. Consequently, most of the forbearance agreements are not really promising to do anything for the homeowner.

The real problem with these forbearance agreements is the payment.  Under the Deed of Trust act, the homeowner can walk away from the underwater home and make no payments during the time of the foreclosure process.  So, each payment received under the forbearance agreement is essentially free money to the servicer who would not normally see any money during the process.

To add insult to injury, the Servicer receives higher fees when the loan is in default than it does when the payments are current.  The investors in the Mortgage Back Securities are thus not seeing a very high percentage of the money flowing from the homeowner, rather it is being siphoned off at the servicer and Trustee level.  I am sure you wouldn't be surprised to learn that the servicers and trustees are generally subsidiaries of large mortgage banks.

Bottom line, the forbearance agreement is most likely a tool to take money out of your pocket and not a tool to save your home.  Don't be a tool, tell the bank to shove the forbearance agreement and short circuit the dual track foreclosure before it gets started.

Zombie walk down Foreclosure Lane

To continue my B-Movie monster work, I though we would start in with Zombies, the walking dead. Doomed to roam the earth with no place to stop and call their own wit a deep seeded hunger for...jobs? Wait, we're not talking about zombies, we're talking about the 18+% of people not employed or under-employed. Does that sound high to you? If it does, clean out the wax because this is a brave new world where that shouldn't surprise you. What should surprise you is the media touting a dip to 9.1% unemployment.

In today's Seattle Times, the news actually caught the "catch" in the good numbers released today.  Supposedly, on a seasonally adjusted basis, joblesness in our corner of the country dropped from 9.3% in January to 9.1%.  The state economy added 11,000 jobs in January and everyone should be ecstatic...right?  Well, except if you don't seasonally adjust the numbers we actually had 47,100 jobs disappear.  Poof.

The next number to look at are underemployed and those that have quit looking for work, talk about walking dead.  That number is 18.4%.  That is nearly 2 percentage points higher than the national average of 16.7%.  Since 2009, the state has added only 20,200 jobs and we have an estimated 338,905 (pretty specific number for a government number) that are jobless.  If that is what we have to look at as success, it would take over 15 years to eat up our jobless rate.

In January I lambasted jobs and I believe that is very relevant now.  We still haven't seen the full force of layoffs at the state and local levels. Boeing will add new jobs with the Tanker contract, why that took so damn long I will never understand or at least never accept as being valid.  But those additions are not likely enough to offset the public sector contractions.

The problem that we are seeing here in WA is a stress on the hourly wage and the income of the average family.  That downward stress continues to pull on the housing market.  If you have $15 to $20 an hour workers, it will always be hard to afford $300,000 plus homes.  The loans will always be subprime and we will have a continued depression in housing prices.

Last week, the Oracle of Omaha, Warren Buffet, was quoted as forecasting housing recovery within a year.  I had great respect for that man up until about three years ago, but he has lost his Midas touch and I think that forecast is a self-serving statement.  One of those, I think therefore I am issues.  The indicator are not there for housing recovery as long as it is linked with jobs.  The walking dead will continue to shuffle down foreclosure lane.  Sorry for the downer, but truth isn't always pretty.

So, for an upbeat ending, what can be done?  Well, those that can find work, maybe not in this state, shouldn't be held back by a bad bank loan.  Your economic opportunity shouldn't be put on hold due to a underwater home consisting of WA property.  We have laws in this state that can allow for a worker to walk away from the home with money in his pocket and still get a good night sleep as he prepares for that new job. 

I had a client last month who had tried to work with her bank as her husband left town to find employment.  She came to my office in a fit, the bank, under a deed-in-lieu was going to hold her liable for the whole deficiency.  Not after we got done with them. The bank will be singing nonjudicial foreclosure under the deed of trust and the deficiency goes poof. She now has a clear plan, she will join her husband in his new place, her son will finish school here, and she will sleep like a log for the next couple of months.

The difference for her is a plan... some knowledge... and a pep talk.  We are not walking dead, just asleep because we are afraid to get out of the dreams.  The reality isn't so bad, for those that will go at with their eyes wide open, looking for opportunity, and taking it where they can find it.

Get the Pitchforks...The Evil Homeowners are ...

Let me set the stage for this classic B-Movie scene.  Its Grapevine, Texas, a quiet little village populated with poor bankers from around the world.  Up on the hill is an ominous castle with a mad scientist that has figured out that the by combining a bad economy, depressed housing prices, and delinquent mortgage payments; and then exposing it to lightning, that an ominous beast, capable of enormous destruction can be unleashed on the village below: the Strategic Defaulter!  Da, Da, Dum!!!!!!

The Horror!  The Depravity!  The...stupidity.

Like all B-movies, the villain is nothing more than a man in a suit painted by another man.  Well, the suit we are looking at was painted by the Banking industry and not just anyone in the banking industry but a Panel hosted by the Mortgage Bankers Association (MBA) at their annual servicing conference in Texas.  The panel was discussing whether banks should pursue a deficiency judgment against strategic defaulters.

One panelist, Jim Davis, Executive VP of American Home Mortgage,  was caught ranting about the beastly strategic defaulters, "Servicers should push back and hold those borrowers accountable.  I think it is time for us to do that.  There seems to be this entitlement by borrowers [to default because of a bad economy]."  Mr. Davis was paraphrased as disagreeing with the right to default because the homeowner made the decision to buy the property and the lender shouldn't be expected to bear the brunt of the loss.


I want to switch gears a little bit and have you watch the following video:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Mortgage Bankers Association Strategic Default
www.thedailyshow.com
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You will note in this satirical news reporting that a vast truth was just unleashed, the MBA, which is hosting the panel on the beastly Strategic Defaulter, defaulted on a $79 million dollar loan.  I juxtapose these two stories for a couple of reasons: One, its funny; two, the banking industry is filled with hypocrites; and three, the banks don't really know who a strategic defaulter is over someone who simply can't pay.

In 2004, only 4% of defaults were strategic, a professor from the University of Chicago, using both survey and data based methods estimates the number of defaults in the current year between 25% and 35%.  I hope that I in some small part have helped increase that number this year.

The MBA would like nothing less than to be able to attach a deficiency to every loan that goes bad when the borrower had the wherewithal to pay for the note.  The problem that I have with that, is that the rules, i.e. the Deed of Trust Act in Washington, were written by bankers for bankers and now that the rules don't fit their reality the banks are out to make the homeowners into Frankenstein's monster. 

You will note in some previous posts that I believe in the existence of the heavy influence of the banking lobby.  It has impacted good legislation that would help out homeowners for the worse.  We have to be better educated about the process and realize that the bankers are speaking out of both sides of their face.  Now if something that can grab a pitchfork, influence legislation, and speak out of two sides of its head isn't a B-Movie monster,  then I don't know what is.