Wednesday, February 23, 2011

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 StewartMon - Thurs 11p / 10c
Mortgage Bankers Association Strategic Default
Daily Show Full EpisodesPolitical Humor & Satire BlogThe Daily Show on Facebook

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.

Monday, February 21, 2011

Update on Foreclosure Mediation-Its Now a Paper Tiger

Legislators like to beat their chests and show they are doing good for the public, but when they compromise, their boasts about the tiger they are unleashing on behalf of their constituents end up being a tiger made out of paper mache.  This is just a quick note on some updates for foreclosure mediation bills, HB 1362 and SB 5275.  Both bills were referred to their respective Ways & Means committees.  The real issue is that what was submitted to the Ways & Means committees were substitute bills (SB 5272 Substitute Bill) and not the bills that I went to Olympia to fight for last month.  Certain provisions have been gutted and substituted, one important item that got the axe was the in person negotiator.  HB 1362 under new subsection (f) says "a person who is authorized to modify the loan obligation or reach an alternative resolution to foreclosure on behalf of the beneficiary may participate by telephone or video conference, so long as a representative of the beneficiary is at the meeting in person." (SB 5275 subsection (e)). During the hearings last month, the banking industry, represented by one of the big downtown law firms, made the argument several times that the person most suited for making the modification doesn't exist within the state boundaries and it would be too much trouble to put that person in front of an underwater homeowner.  I hate that argument, I hate the compromise.

In one of my posts last year, Hi Ebb, I'm Flow, I discussed the dehumanization of the banking experience being one of the factors that has lead to this crisis in our collective history.  The banks wanted nothing more than analytics in determining the risk of a loan, when one of the most important factors of determining risk is the ability of the local banker to work with people that he knew in his community.  The banks moved from that model almost completely and substituted computer programs that were easily fooled by inflated numbers and defeated by crummy underwriting standards.  The foreclosure mediation bills explicitly put decision makers in the room with the homeowner, correcting a dishonorable banking practice of the last decade.  The banks have done their best to keep that decision maker out of that room and now you have a Skype call to get answers with some lackey sitting in the corner listening to the conversation.  If my court can drag your butt into the court room because you have sufficient contacts with my state, why can't my legislators do the same thing to save a home.  The person is coming here on the bank's dime, not the taxpayer's.

The other gutless act of our state legislators was the removal of a provision which would make it an act of bad faith on the part of the bank to not offer a modification if the net present value of the modification was greater than what the bank could anticipate receiving in foreclosure.  Simply put, was the price tag on the modification bigger than the foreclosure?  If it is, do the mod, if not, then do the foreclosure.  That was an aspect of subsection 11(f) of the original bill, but new section 11 completely removed that obligation.  The Washington State Real Property Bar had issued a letter (and no, I didn't get a copy either) stating that the provision, in the committee's opinion violated the constitution by interfering with private contract.  I think that is an overblown argument because a majority of DOTs explicitly make themselves subject to the changes in the Deed of Trust Act in the state and from an economic position, the only way that not making that deal makes sense is if there are other payments coming to the bank which are not being made public knowledge.  Sorry for the conspiracy theory, but the banks are getting its back scratched somewhere which is altering the economics of these transactions.  I wish I had more information but the FOIA requests are turning up squat.

There is a scheduled Senate Hearing on the 24th at 1:30 pm in the Senate Committee on Ways&Means which I am trying to see if I can attend.  Hopefully, I can get some more answers for you.  The new bill is pretty much a paper tiger at this time but there are likely a couple of footfalls there for the banks which can be beneficial to my clients.

Thursday, February 17, 2011

Lawyer Goes to Jail Because he was not Strategic-Just Stupid

When I was at the University of Florida, one of the preeminent professors there was often heard to say, "If someone has to go to jail, make sure its the client."  I guess those sage words of advice never graced the ears of California lawyer, Michael J. Pines.  In a Housingwire article which details Mr. Pines contempt charges for helping his clients break back into a foreclosed home, the lawyer is made out to look like a bit of a Thoreau or Ghandi type figure for his civil disobedience.  My take, is that the lawyer in question is just stupid because he wasn't strategic.

I don't make that claim lightly, because I have great respect for anyone that can endure three brutal years of law school and then pass a bar, especially a difficult bar like California's.  The problem that I read in the article came from the following paragraph:"In January 2010, Canejo Capital Partners, an investment firm based in California, purchased the home through a foreclosure auction court documents show, but the Earls remained in the property and delayed eviction through bankruptcy filings."

To the average person, there doesn't seem to be any issue with this, but from my Washington perspective there are huge issues.  Mr. Pines was trying to create a forum where he could air his client's grievances with robo-signing, produce the note, and I am sure, a whole smattering of other claims that could discredit the bank's legal right to foreclose the home.  The huge issue that first comes to mind is that nonjudicial foreclosure is designed to ensure continuity of title, thus once the sale takes place, you have very little legal standing to challenge the sale.  Here in Washington, we saw the Albice case back at the end of the third quarter of last year where the Court of Appeals did overturn a sale, but that is incredibly rare. So strike one is that Mr. Pines didn't challenge the legality of foreclosure prior to the sale, he was too late to implement a valid strategy.

The second big issue that I saw was that Mr. Pines didn't strategically place his bankruptcy.  Bankruptcy is a tool, and in my opinion, shouldn't even be the mainstay of any attorney's practice.  Bankruptcy mills in my opinion are a disservice to the client because the attorney has a conflict of interest with his client.  He only gets paid for doing bankruptcy and if he lets his client walk out the door without a bankruptcy he doesn't get paid.  As my MBA professor would say, bankruptcy attorneys, when they open their tool box, have a big shiny hammer and the whole world looks like a nail.  The bankruptcy should have been placed prior to the sale, which would have had the same effect of keeping the client in the home for a longer period of time and then would have provided a proper venue to challenge the foreclosure.

See, the bank, upon receiving notice of the bankruptcy would be subjected to the automatic stay.  The automatic stay is the provision that is so powerful in bankruptcy because it stops all collection activities, including foreclosure.  The bank would have been forced to either wait for the bankruptcy proceedings to conclude or request relief from the stay.  In requesting relief, a well informed attorney would have the proper venue to challenge the legality of the foreclosure in the first place.  Mr. Pines instead waited too long and then had essentially no legal standing for the challenge.

The third issue is that the lawyer made the case about him, instead of about his client.  Self agrandizment during your client's proceedings is in bad taste.  Mr. Pines had spent too many nights reading Civil Disobedience and dreaming of changing the world through sit-ins instead of looking out for the best interests of his clients.  He helped his client's break into the house, after the foreclosure, and then spouted off to the court saying, "Well then I think you should hold a contempt hearing, and I welcome that..."  He was proud that he would bring attention to the plight of his client's case by getting sent to jail.  Idiot.

If you want to bring attention to the plight of your client, win the case.  Have a better argument!  Implement a strategy!  Don't get sent to the jail because you're too stupid to come up with a better plan.  The only thing that he can hope for now is that his complexion won't clash with his orange jumpsuit.

When strategically defaulting and forcing a foreclosure, sometimes it becomes obvious the bank is not following the rules, or maybe doesn't have legal rights to do what it claims to be doing.  At that point in time, you have to have a plan, a strategy, and if you are the attorney, it better not end with you going to really should be the client.  Wink, wink, nudge, nudge.

Wednesday, February 16, 2011

Strategy and Speed - Default and Bankrupcty - Will you be left behind?

Last week I wrote a post on why strategically defaulting on your home loan may be an economically sound choice, not just for the homeowner but for the overall economy.  Homeowners can deleverage underwater properties through a strategic default and nonjudicial foreclosure and in some cases erase second mortgage debt through a bankruptcy.  Sometimes, the default is enough to create hardship so that an otherwise errant short sale can be pushed through which may also eliminate debt from the second mortgage.

In today's Seattle Times, and really, it was kyped from the AP, a story discussed Borders filing chapter 11 bankruptcy because it couldn't keep up with its market.  One of the quotes really caught my eye, "Less nimble than rival Barnes & Noble, Borders now begins what analysts expect will be a quickly resolved struggle for the survival of its remaining stores."

The lead up to that quote came in the form of Borders missing the fact that its customer base was moving on to other providers for its goods.  Internet retailers, downloads, other big box stores that have driven down prices, and the such.  Really, customers that had evaluated the opportunity costs of staying with a financially bad model or moving onto a better model.   It made me think about some of my clients and really, my potential clients.  Are you going to let the wave of foreclosures wash over you, drive your house value farther into the floor, and leave you struggling to float for the survival of your remaining financial stores?

Many of us don't want to have this conversation, we bury our heads in the sand, hope Obama will wave a magic wand and our housing problems will go away.  If you are among those that are thinking that way I want to shatter that pair of rosy glasses on the bridge of your nose.  Obama can't fix it, it wasn't his fault, and it is unlikely that we will see the necessary tools provided by congress in the near term.  So, as a pragmatist, I suggest we look at the tools we have and strategically plan for the deleveraging of these toxic assets.

Strategic Default gives you as an individual leverage.  Bet you never thought that a deadbeat would have leverage, but many times we don't see the relationship between the layman and the bank in the context of the bank being without money.  The truth is, that if everyone would go to the bank tomorrow, withdraw every penny they have, and then not pay a cent on their loans, the banking industry would be gone in a month.  The banks would all file bankruptcy and disappear.  I am not advocating that, but from one of my favorite childhood movies, remember "It's A Wonderful Life" with Jimmy Stewart, that it was set against the backdrop of Jimmy running a bank in which the customers made a run on the bank and if it weren't for his honeymoon savings, the bank would have been sunk.  The moral of the cautionary tale of the runs on the banks from times past is that the customers have the power because they actually have the money.

The more people that go into default, the more likely that congress is going to finally come together and make decisions that will help stem the tide.  The problem is that many times the corporate donations mean that the legislators fall on the side of favors rather than the consumer and the rules are not likely to fall in the defaulter's favor.  So in the vein of our Borders example above, failure to adapt early to the changing economy is to risk the possibility that the market will pass you by and leave you struggling to float for the survival of your remaining financial stores.

The moral of this is not so profound as the common man holding power over the mighty banks.  It is simply don't procrastinate.  You need to make all speed in understanding this changing housing market and deleverage that toxic, underwater asset before it sinks you in the wave.

Thursday, February 10, 2011

Foreclosures up 93% Over Last Year...Would You Like to Ride the Wave?

The wave is a comin', are you going to ride it, or get crushed by it?  I posed that question at the end of my previous post in regard to strategic defaults.  Since January of 2010, the number of foreclosures in King County were up 93% according to Realty Trac as reported by the Seattle Times.  Nevada, Arizona, California, and Idaho are some of the markets that run the highest rates of foreclosure and have been so for the last couple of years.  However, as we look at those states, they share common characteristics of large numbers of retirement and vacation homes, as well as speculation properties.  Washington was 12th, and though it has a fair number of vacation homes as well, the driving forces of the foreclosures is changing from the removal of investment and speculation properties to properties subject to subprime and even prime lending.

The wave that enveloped those markets is rising through many of the surrounding markets, and Washington isn't being spared.  Losses in manufacturing, tech, and governmental positions in the state are finally taking their toll. 

At the beginning of this housing crash, we as consumers felt trapped by our moral imperative to fulfill our obligation to our lenders.  However, that feeling of obligation has been lessened as we have watched the ultra-rich and even those that have preyed on our moral inclinations return their underwater assets to their lenders.  A popular video from the Daily Show reveal the hypocrisy of the moral imperative.

As the wave rises, and as the moral imperative recedes, the conversation of strategic default will move from hushed tones to water cooler talk.  But an issue that we as Washingtonians must face is that while our legislature inadvertently protected the consumer from the banks taking our homes and charging us with the deficiencies, the legislature did not protect us from banks that would crush our legal rights of due process under the boot of efficiency.

The Deed of Trust Act does give those that are subject to nonjudicial foreclosure the right not to be subject to a deficiency, however, it does not provide us with an automatic forum to fight the problems that inundated judicial foreclosure states like Florida.  James Saccacio, CEO of Realty Trac, was quoted as saying in regard to the national decline in foreclosures that "Unfortunately, this is less a sign of a robust housing recovery and more a sign that lenders have become bogged down in reviewing procedures, resubmitting paperwork and formulating legal arguments related to accusations of improper foreclosure processing."

Nonjudicial foreclosure, which is the product of a successful Strategic Default, should not mean that we do not have right to fight lenders who don't respect our rights.  Part of the reason that foreclosures are up is due to stress on the average homeowner's financial situation, but in addition, banks are moving to shorten the process of getting homeowners out of non-performing assets and not necessarily following the rules because there is no judge to keep them in check.

Under the Deed of Trust Act, the homeowner can create a forum to challenge the nonjudicial foreclosure (I bet you didn't know that)  However, there is the cost of hiring an attorney, placing a month's mortgage payment with the court, and then filing the complaint.  Many that are going through foreclosure in Washington will never take this route because of the cost or simply by not knowing about it. In judicial foreclosure states, even without the homeowner keeping a vigilant eye, a judge was reviewing the cases.

Both houses of the Washington legislature have proposed new laws (HB 1362 and SB 5275) which would provide an almost automatic forum, see this post.  However, even without the proposed new laws going into effect.  There are ways to combat abusive lender behavior.  One important aspect of the Deed of Trust Act which seems to have been overlooked by some practitioners is the role of the Trustee in the nonjudicial foreclosure process.

Trustees do not have a fiduciary duty to the homeowner in the process.  However, they do have a duty to provide accurate information and to follow the statute.  The trustees thus are the weak link in a chain of players trying to foreclose on the property because they can't just ignore the rules.  My office has had enormous success in stopping the foreclosure process by forcing the trustee to comply with the statute.

 So, as the wave is peaking here in Washington, those that are not prepared for the wave are going to be crushed, while those that take a strategic approach will ride right through the barrel...standing up out the other side.

Wednesday, February 9, 2011

Strategic Default...Why its good for the economy?

Our nation tends to be a conglomeration of misshapen lemmings.  We don't all look the same, some are white, some are black, some are tall some are short, skinny and fat, rich and poor, but when something is cool, we like to follow it, like a lemming.  California hit its declines in housing values and its sharp upswing in "negative equity" in 2009.  Well, like the waves I have talked about in previous posts, we see the wave washing over Seattle metro, following California like a great northwestern lemming (which is not as close to extinction as you might expect.)

In the Seattle Times today, the report discussed the rise in "negative equity" going from 23% of all households in teh Greater Seattle area to 34.3% at the end of 2010.  Now, my group and the companies that I have been working with for the last 8 months have been saying that this is the trend for ages now.  We have been talking about how homeowners have seen the greatest decrease in wealth in recent history and now our major news outlet decided to chime in, thank you.

The article quotes's chief economist Stan Humphries as saying, "[the increase in negative equity] increases the likelihood that owners will default - even if they still can manage the payment."  The article then goes on by quoting Glenn Crellin, the director of real estate research at WSU and  states that "strategic default" ..."damages owner's ability to obtain credit for other purchases, further curtailing economic activity."

This article states some generalities but misses the essence of the strategic default.  By definition, it is strategic, meaning there is a plan in place.  Crelin is only half right in his assessment, because what he fails to capture in his analysis or at least in the sound bite  provided by the Times is that by defaulting, the homeowner frees up cash flows of at least the mortgage payment.

Under the Deed of Trust Act for Washington, a defaulting homeowner can expect, at a minimum, seven months of mortgage payments being freed up for use in other economic pursuits.  The cash can be used to get rid of other debt, build bankruptcy proof asset pools, or even on a turn of whimsy pay for that amazing trip that the homeowner and spouse have been dreaming about but never had the cash to afford.

That cash flow is creating economic activity, just not for the banking establishment.  Homeowners are using that cash flow also to maintain lifestyles that have been severly hampered by the down turn in the economy.

The article did note that homeowners that decide to hold onto their mortgage, probably out of an uninformed sense of morality, harm the economy as well.  Those homeowners do not expend money on home improvements, basic maintenance, and are unwilling or unable to move even for better job opportunities.  That means that the utility of the cash being flowed from those homeowners to the banking institutions are actually less effective than that of the strategic defaulter.

Bottom line, it is better to default while you are in control of your financial self, than be forced to default when you have no other options.  Men were created to act, not to be acted upon.