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.

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.

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.

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.

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.

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.

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.