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.