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.

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
Daily Show Full Episodes Political Humor & Satire Blog The 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.

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.

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 Zillow.com'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.

Update on the HB 1362 Hearing this morning...

I wanted to capture some of the information and my observations from today’s House Judiciary Committee Meeting on HB 1362. A committee staff person took the first few minutes to flesh out the bill and I would like to recap a lot of what was stated, of course with my own added commentary.

First, the bill is designed to strengthen the “meet and confer” provisions that already exist in the bill.  As it stands now, RCW 61.24.031, which expires December 31, 2012 and only applies to Deeds of Trust that were signed between 2003 and 2007, requires the lender to contact the homeowner by phone and mail and have an initial conversation with the homeowner owning the right to a subsequent meeting with the lender to discuss the homeowner’s financial ability to repay the debt.  The problem with this section is that there is a compliance section that allows the lender to send a letter and document three phone calls, whether the homeowner answers or not is of no consequence, and then the lender has “acted in good faith in complying with the law.

From what I have seen, there is a log recorded on the Notice of Default which lists the day the letter was sent and the days and times the lender tried to make the required phone call.  The problem is that it is impossible to distinguish the calls simply seeking payment and the calls that are actually trying to comply with the statute.  The lender will say its one in the same.   Just to be sure, it is not one in the same.

This bill would extend the provision to all owner occupied properties, regardless of the date of the DOT, remove the sunset date at the end of 2012, and would also disallow the meeting to occur by phone, but would require an in person meeting  The bill proposes to change the language from may to must in many instances giving more teeth to the legislation.

The second and maybe the most significant and certainly the most controversial aspect of the bill is the issue of Mediation.  The bill would require that a homeowner that requests a mediation after the NOD has posted and before the NOT is posted, be given a chance to have a third party mediator sit down with the homeowner and a decision maker from the bank.

The mediation requirements have some teeth to them and that is why it is so controversial.  The bill would require the bank to act in good faith and negotiate as such.  The legislation goes to illustrate good faith by including the beneficiary to provide accurate statements of loan balances, copies of original loan documents, proof that the entity claiming to be the beneficiary is the owner of the promissory note, and itemized lists of arrears and fees, an affordable loan modification calculation, and net present values of the modification versus proceeds from an anticipated foreclosure.

The Washington Bankers Association and United Trustees Association and some lawyers from Davis Wright and Tremain presented over 25 minutes of counters to these requirements.  The representative from WBA presented a three part defense.  First, the WBA has already agreed to strengthen “Meet and Confer” without further legislation; second, WBA has pledged to fund additional Housing Counselors; and Third, provide an alternative legislation based off the Colorado model.

The lawyer from Davis Wright Tremain, a respected law firm in Seattle, and let’s be honest and call the firm (and not its attorneys) what they are, corporate whores, called the mediation not mediation, but mandatory arbitration.  This is because of the Consumer Protection Act which I will detail later, would add teeth to failures to negotiate in good faith.  The incentive in other wards is more of a stick than a carrot which the banks object to being prodded with during foreclosure.

Additionally, and DWT is not alone, the issue of governmental interference with a private contract, which is unconstitutional, was brought up as a potential problem.  The Executive Committee of the Real Property and Probate Section of the Washington State Bar addressed the same issue and supposedly sent out an email to that effect yesterday, I still haven’t seen it.  My reading of the bill shows that there is tremendous wiggle room here for the banks and that this is a bit of hyperbole because let’s face it, some people, no matter how much you cut the payments down, cannot afford the houses they are living in now.  Modification must be discussed, but not all will qualify.  However, if the Net Present Value (NPV) of the payments under modification will gross more than a foreclosure sale, to turn down that option when you are comparing on a dollar to dollar basis seems like bad faith.  That was the point of one gentleman who claimed that due to the governmental deals through the FDIC, foreclosure and a guarantee of losses makes foreclosure too profitable. I cannot speak directly to that theory, but there is evidence to suggest that such deals were made and exist.

Finally, the Consumer Protection Act (CPA) would be applied to the mediation component.  The CPA would allow the State Attorney General to step in and regulate some of the bad actors that we have come to loathe over the last few years, and yes Aurora Loan Services, I include you in that group.  What is of note here, is that Mr. Jim Sugarman of the AG’s office came out and stated that his office “was in favor of the CPA being applicable to the entire Deed of Trust Act.”  That is significant, because that would mean that it wouldn’t be so damn hard for me to attach it to violations by banks.  I support Rob McKenna in making that a reality.

 So what does this mean for us.  Nothing.  This is proposed legislation, it isn’t worth the paper it is written on until it is enacted.  So what can you do, call you state senator and legislative representatives.  Tell them you support this bill.  The banks have basically given a finger to “meet and confer” for the last three years and there isn’t any way in hell that I believe they will voluntarily act on the proclamation that they will strengthen this.

Additionally, we don’t need more housing counselors.  The ones we have don’t have the tools necessary to do anything.  This legislation would give housing counselors, private parties, and their attorneys real weapons to help homeowners out.  Call your legislators and tell them you support the bill.  Let’s get this one passed.