Miraculous Transfer of Wealth from Banks to Borrowers

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



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

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

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

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

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.

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

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

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

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

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


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

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

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

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

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

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 jail...it really should be the client.  Wink, wink, nudge, nudge.

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.

If this were only a hand slap...Banks lose in court and stock market

Today, the Massachusetts Supreme Judicial Court issued an opinion on a case involving mortgage backed securities, trust funds, foreclosure, lying, fraud, coercion, and all around baddy-bad-bad badness.

Two banks, US Bank and Wells Fargo, were the banks that purportedly held the mortgages on two homes belonging to the Ibanez family and the LaRace family.  The problem on the Ibanez home, which is the headliner property in the opinion that can be found as a slip opinion here, U.S. BANK NATIONAL ASSOCIATION, trustee  vs. Antonio IBANEZ, is that US Bank didn't finish most of its documentation of owning the home until after the foreclosure process had occurred.  In fact, if it hadn't been for Mr. Ibanez being a service member, this case may have never even happened because Massachusetts is a nonjudicial foreclosure state like Washington.

Because Mr. Ibanez was a service member, the foreclosure had to proceed through the courts, and a challenge was issued against US Bank as to its ownership.  See, the note had passed from an originator to Option One Morgtgage Corp, a record holder, to Lehman Brothers Bank, FSB (now defunct) to Lehman Brothers Holdings Inc. who sold it to structured Asset Securiteis Corporation which deposited the note with US Bank National Association as the trustee for a MBS trust.  If you lost count, that was 8 different entities holding the note, supposedly.  The note was usually passed
"in blank" which means that the new holder's information wasn't filled out.  Crazy!

US Bank bought the Ibanez property for well below market value and also well below par value of the loan and asked the court to quiet title.  The court ruled against the Bank and held that the foreclosure sale was invalid because the mortgage had not been properly assigned. A motion to vacate the judgment was denied and the decision was appealed.

The bank had the authority to exercise the power of sale contained in the Ibanez and LaRace mortgages only if they were the assignees of the mortgages at the time of the notice of sale and the subsequent foreclosure sale. However, mortgage loans that are pooled together in a trust and converted into mortgage-backed securities, the underlying promissory notes serve as financial instruments generating a potential income stream for investors, but the mortgages securing these notes are still legal title to someone's home or farm and had to be treated as such.
U.S. Bank argued that it was assigned the mortgage under the trust agreement described in the PPM, but it did not submit a copy of this trust agreement to the judge. The PPM, however, described the trust agreement as an agreement to be executed in the future, so it only furnished evidence of an intent to assign mortgages to U.S. Bank, not proof of their actual assignment. Even if there were an executed trust agreement with language of present assignment, U.S. Bank did not produce the schedule of loans and mortgages that was an exhibit to that agreement, so it failed to show that the Ibanez mortgage was among the mortgages to be assigned by that agreement.

The court concluded that  the banks were not holders of the mortgages at the time of foreclosure and thus did not obtain title at the foreclosure sale.  What does this mean for the homeowners.  Well, a person that gives a mortgage is called a mortgagor and holds superior title to everyone except the mortgagee (the person receiving the mortgage and usually the one lending money), so the houses must revert to the Mortgagor, the homeowner.

There is no question that the homeowner defaulted.  The issue really was whether the banks had the right to do what they did.  In a concurring opinion, Judge Cordy stated "what is surprising about these cases is not the statement of principles... but rather the utter carelessness with with the plaintiff banks documented the titles to their assets."  This carelessness is where homeowners can forestall the process because the banks have to prove that their title is superior and they have the right to foreclose.  The unfortunate issue though, is that the only way to do that is to get into a legal battle in nonjudicial foreclosure states like Washington.

My offices are preparing a number of complaints against MBS  trust held mortgages as an effort to restrain a nonjudicial foreclosure.  Certainly there is risk in this activity, but at the same time, the ability to hold title to your property and live in it until the bank can establish its superior title is very powerful.

What does this mean for the overall economy?  Well, this could be catastrophic.  In a Reuter's article that I read, the ticker down the side showed the major banks shedding percentage points today on the news. The banks are going to the cleaners over this, the only way to prevent this type of opinion from destroying our title system is to have a legislative forgiveness passed on the MBS community.  The only way for that to come about though is for some chaotic repentance in the courts first.

Its a bird, its a plane,...its a flying horse with some help?

Growing up, I enjoyed Greek mythology.  The monsters, the gods, the heros, it was all very exciting and when it came to pegasus, who didn't want a horse that could fly so you could get away from the nightmare we all called puberty?  Well, Pegasus may be making a new landing soon for lenders and carrying them away from the nightmare life of robosigning.  I said this blog would be of practical use, and this time I am including this as a practical use item for the lenders and their attorneys that will be reading this because I am suing them.  Happy Holidays.

In a recent post from Housing Wire, Pegasystems has launched a new product that will help banks not screw up the foreclosure process.  The biggest problem with foreclosure, is that it is a law, and most people like it when you follow the law.  I know its like a total bummer.  The banks have been doing 75 mph down the freeway and its time they realized its a 20mph school zone.

The software is supposedly designed to help the lender through the pre-default stages in identifying defaulting loans and ensure the process is as efficient and trouble free for the bank as possible (read the preceding as cheap and fast).  The principal for the company was quoted as saying, "Pega’s new pre-foreclosure solution vastly improves the visibility, certainty and efficiency of the overall process and provides unmatched quality controls and integrity.  Servicers can sleep better at night knowing that their documentation is error-free."(emphasis added).

That better night sleep is so important, especially when you have attorneys sitting at the edges of your banker dreams with Jason masks and machetes.  I have to say, with the number of mistakes that have walked through my door, and the foreclosures that I have started over because of errors, this process is a nightmare for the bankers.

Last week, one of my clients, who had a Notice of Default that had significant errors in it, received a new Notice of Default after a letter I sent to the bank and trustee caused the trustee to revise and reissue.  The first NOD had Trustee's fees of just over $1000, the new NOD included over $4000 in fees, mostly due to my letter.  If every mistake were to only cost the banks $3000, the losses would be astronomical.  The funny thing is, the newly issued NOD still isn't 100% accurate.  Maybe I will sign the new letter Jason.

So, if the banks would like to escape some of these nightmares, I would recommend them spending some cash  and flying away on Pegasystems if it will help them conform to state law.  Because if they don't get Pegasus to help them, I am more than willing to help them find out what the law says and how they screwed it up!

Why are you distressed and why will you be taxed?

This blog is being offered partially as a public service, hopefully some of my readers will find the information useful to them as they buckle down for what is to come, and partially as a way for me to express my ideas on the mounting troubles caused by failed policy, greed, and blind decision making by the general public.

My primary audience will  be those that are upside down in their houses, those that owe more than the house is worth, those that want to save the house from foreclosure, those that want to give the house back, and those that are in the process of giving the house back.  Though that description seems to be directed at a bunch of different people, it is not.  Its directed at homeowners who have purchased or refinanced in the last 10 years.  Let's fact it, most of you are underwater. 

There are legal tools that can help people out of this crisis.  There are also practical tools as well.  I hope that this blog will provide a good mix of practicality and if you are really bored, you can read some of my legal rants.

Why are you distressed?  Well, the technical definition of a distressed property is that property is in danger of foreclosure.  Well, this is a narrow definition that Washington State and some other jurisdictions are using to set up enforcement actions against certain vultures.  I use vultures in the sense that there are companies and individuals that are waiting for the first Notice of Default to be recorded in your county and then they swoop down to get your money before you die a financial death.  I believe that distressed property is really any property that has more debt against it than it is worth.

The reason why I think that definition is important is that there are a lot of good people that are trying to pay what they agreed to pay back in say 2006 when the housing market here in Western Washington was strong.  Whether it is from a moral conviction or just not knowing that there are other ways, the person still pays the monthly obligation.  Well, the property, even if you can afford it now, is still distressed because the proverbial straw that broke the camel's back is only an uninsured sickness away.  So the simple fact that you owe more on your house than its worth means that it is stressing you out and thus you are distressed.

So, now we have a baseline for why you are distressed, why will you be taxed?  This is one that many of us don't even consider because lets face it, you have bigger problems to worry about...now.  The person that is living in an underwater house is likely facing reduced income, increased stress, unhappy spouse, nervous children, cranky bosses, and unhappy customers.  It is easy to say, "I have enough on my plate."  The problem is that when the time comes that we part ways with our home, whether it is by the overt act of a person in control of their life or by the fact that the head in the sand, ostrich approach failed, you the homeowner will have some potentially adverse tax consequences.

I know it seems impossible, the home that you paid so much for, is now worth a lot less, so you feel like you had a loss.  The problem is that our tax code does not recognized losses on personal consumption property.  If the property was not purchased to enable you to make more money like an investment property or a commercial property, then the loss you suffer isn't recognized from a tax perspective.  There is no, "I'm sorry you lost your house" box on the 1040 you will file next year.

To add insult to injury, the money you got from the bank, that you really didn't get because it went to an escrow agent and then to the seller is considered income to you after the bank subtracts however much the bank got from the foreclosure, short sale, or deed in lieu.  Oh, did your real estate agent fail to mention that to you?  Sorry, I thought you were working with an ethical agent.  They probably didn't tell you that the short sale they are pushing also is going to cost you an excise tax due on sale of 1.28%.  I know, details, details.

What I am driving at is that distressed properties have hidden "gotcha" traps all through them.  Whether it is information that the banks are not sharing with you about the foreclosure process, or the hidden taxes that will show up afterward, doesn't really matter.  That process of being distressed leads to being taxed, mentally, physically, emotionally, spiritually, and when you get the 1099-C, financially.