Analysis of Foreclosure Fairness Act: Homeowner's Guide

On Friday, 4/8/2011, the State legislature delivered a bill to the Governor for signature on 04/14/2011 which will significantly change the process of foreclosure in the State of Washington.  The major change is that the legislature has delivered to the homeowners, a statutory right to sit down and talk turkey about modifying the loan that has become the bane of homeowners everywhere.  In 2007, the median net worth of a family in Washington was around $150,000.  Since that time, we have seen the stock market crash and the housing bubble burst, unemployment rise, real wages drop, and interest rates on mortgages climb.  On average, the American Household lost $125,000 by 2009.  When you compare the statistics, we should be plus side, $25,000.  The problem is, that the mortgage that secured the average home, didn’t go anywhere, and the though the median and the averages were in the $150,000 realm of net worth, those buying homes and refinancing in 2007 and earlier, were doing it on 100% loan to value terms and it is unlikely they were near the median in net worth.  Thus the average losses that impacted the portfolio didn’t turn into a mere $25,000 remainder, but left them insolvent and starring at bankruptcy. It is likely, that of the 33% of homeowners that have a mortgage that is underwater in the Puget Sound, your financial situation is sinking but this bill may provide a much needed life saver.

The Foreclosure Fairness Act will provide the homeowner the opportunity to force its banker to the table to discuss the realities of modifying the loan.  Prior to this, homeowners have fussed with lost documentation, forbearance agreements and the actions of a banking industry that border on the criminally negligent. In addition, the bill requires the bank to provide specific information in making a determination of what the best outcome will be based on present values of modification, foreclosure, short sale, deed in lieu, and whatever workouts may otherwise be arranged.  The problem will be getting through the hoops to make that banker sit there and look you in the eye with a mediator looking on and provide you this information.

Previously, the process of nonjudicial foreclosure in Washington was that the owner of your mortgage, the bank, would stop receiving the monthly payment.  In turn, the bank would declare the loan to be in default, and contact a trustee to initiate the nonjudicial foreclosure.  The trustee would send a Notice of Default out no earlier than seventy (70) days after the first missed payment and the home would be auctioned off about 120 days later.  The homeowner would then be forced to move by the twentieth day after the sale.  Thus the whole process would take about seven months or 210 days.

With the changes, the statute imposes on the bank a requirement that it send out a notice a full thirty 30 days before recording the Notice of Default that details your rights in sitting down with the bank.  If you don’t answer that letter, don’t worry, the bank will call you three times by telephone, and then send a certified letter.  Failure to meet that requirement means the bank cannot foreclose. 

If you do respond to the letter.... TO ACCESS THE REMAINDER OF THIS ARTICLE, and trust me you want to get the detailed analysis of this statute, PLEASE REGISTER FOR A FREE SEMINAR HERE. Just click on the green "register now" button for either a live event or the webinar, and the article will be emailed to you shortly.


My good friends at the Financial Revival Group liked my analysis last week that they bought the rights and are incorporating it into their workshops.  Must be good if someone is willing to buy it.

Foreclosure Mediation is Here...but its not a Knockout!

Last night at 10pm the Seattle Times posted that Governor Gregoire had indeed signed the bill that the legislature laid at her feet some 7 days prior.  The Bill, now called the Foreclosure Fairness Act as proposed in HB 1362 has some great new features for homeowners but the way Times describes it, its a knockout for homeowners, and it is not.

The Seattle Times took the effort to document some of those features but its glaze leaves more than a little to be desired.  The article talks in definitive terms of what it does for homeowners when in reality they are just jabs.  The bill for one, does not automatically extend an additional 60 days for homeowners that respond to the request for mediation.  Neither does it automatically stop the foreclosure if the lender is in bad faith unless the homeowner has properly engaged counsel and been referred to mediation.

I want to be clear, there are tremendous advantages created by this bill, but there is a lot of work to be done.  If you want those provisions to benefit you, it is highly recommended that you sit down with someone, preferrably an attorney because of the attorney's ability to land a knockout blow.  The bill does extend a new fee of $250 for housing counselors, which there is no requirement that a housing counselor have any specific license.  They are not attorneys.  And while we're on the subject, I feel inclined to point out that from the article, "Without Prompting, the Washington Bankers Association offer to pay a $250 fee for every default notice filed [not true, only the first notice], with the stipulation that 80 percent of the money pay for housing counselors."  (emphasis added.) 

The Banks are paying for the housing counselors, and I am sure it is out of the kindness and goodness of their ever expansive corporate heart.  Wait...corporations don't have hearts?  Are you sure?  Yep, they don't breath or have blood...sounds like a vampire.  The corporations have alternative motivations for pushing homeowners off on housing counselors.  One, if you know who butters your bread, you take care of them right?  Two, housing counselors cannot sue you if the note was assigned by Linda Green.  (If you don't get that reference, please check this blog posting out, 60 Minutes Story - The next housing shock (crash).

It is no surprise that banks want homeowners to go to someone they pay.  Prior to the housing counselors provided by HUD, the banks were asking you to call them.  TARP assets were being set aside to pay for HAMP and HAFA, yet the banks did very little, a national average of 3.5% success rate in actually modifying mortgages despite billions of dollars being thrown at the problem.  The counselors were then invented, paid for by banking money, as a substitute for bank employees who would counsel with homeowners on budgets designed to free up cash to pay for the mortgage. 

There are alternatives to freeing up your liquid cash to pay on a property that acts like a shredding machine instead of like an ATM.  The problem for housing counselors is that they cannot talk about those alternatives in a comprehensive way, they simply don't have the tools.  So, if you are looking for some relief under the Foreclosure Fairness Act, and would like a sit down mediation with your bank, remember its not as easy as one call that's all! There are hoops to jump through and arguments to be won.  Do you want a bank sponsored housing counselor in your corner or a real fighter, I mean attorney?  I'll let you decide.

AG Settlement's Falls Short

Tomorrow, the AGs of the 50 states are supposed to reveal the great settlement that is going to impose upon the largest lenders some burden for the short cuts that helped deepen this recession.  The problem that some have found with this is that the AG's solution may actually lengthen the time that underwater properties plague our economy.  Some have gone so far as to find their own economists to attack the settlement because it may cause higher costs than what the lenders are actually going to give up ($25 billion in mortgage principal writedowns). Whether you think its good or not, or if you just don't agree with the banking industry, you will find supporters aplenty (counter argument-if you can call it that)

In some respects, I can understand the hand wringing because I too don't see the AG's settlement as a positive move.  I remember in 2008, when GM was on the verge of financial collapse and the government stepped in to save it, Mitt Romney wrote an op-ed for the New York times.  In that piece, he explained that the GM should be allowed to go into bankruptcy.  It was likely the fastest way of curbing the executory contracts with its labor force and salvaging its beneficial intellectual, real, and personal properties so that they could be put to the best effect.  I agreed with Romney at the time he wrote that piece, and hindsight shows that the government intervention did little to alter the outcome, only delaying the inevitable restructuring of a failed enterprise. 

The difference though, in that Governmental-hand-of-god save of GM as compared to what the AGs are trying to with home owners, is that there isn't really any save.  In a blog post a couple of weeks back, I looked at the number of homes to be repossed this year alone, 1.2 million, and if all the principal writedowns were to go to those homeowners alone, it would only amount to $20,833 per home.  Considering that in our present market, homes have lost nearly 1/3 value since 2007 for an average of over $100,000, that write down doesn't even scratch the surface.  When applied to the nearly 5 million homes in default, that number dwindles away to become inconsequential.  Consider this, last month, I negotiated a second mortgage of nearly $100,000 for a payoff of $10,000 and still failed to bring the home flush, its close, but still not flush.

The economists hired to look at this deal though, have made some gross assumptions that lack reason when comparing write downs to loan modifications.   In my opinion, it shows either a lack of understanding in what is actually being offered by the banks, or blatant disregard for factual circumstances.  Your choice, I either call you ignorant or a liar.  Home loan modifications, as described by the FDIC guidelines and those developed in GSEs, basically say that the bank has to be as well off as if it got its original deal.  The banks are not bending over backwards to write off billions of dollars in mortgages, especially when people are still paying.  Many of the modifications simply add the amount of arrears on to the end of the mortgage, extend the time from a 30 year fixed to a 40 year fixed, and alter the interest rate.  This amounts to no change, no principal write down.  What the AG's are requiring is actual write down.  We take the terms as they stand, and then the lender lops off some portion of the principal.  The problem is that it doesn't go far enough. 

The authors of the ecnomics paper argue taht the changes are going increase strategic default, but it isn't as if there is need for additional incentive.  A home being $100,000 upside down is incentive enough.  The write downs may actually incentivize homeowners to stay and pay.  Which brings me to my reasoning for not linking the settlement.  I am affraid it will limit private action against the banks, and it doesn't go far enough to incentivize homeowners to stay in their homes. If you are going to do it, do it right, make it effective, and by all means, go after every penny of revenue that the banks have stolen from local governments in the forms of excise taxes.  Then, provide a broader forum for individual homeowners to obtain compensation, and by all means, allow them to lop off most if not all of their underwater mortgage.

If homeowners are a little bit underwater, the emotional attachment to the home will allow them to pay the extra money that they will to hold on to the memories of birthdays, anniversaries, births, marriages, and simple day to day glimpses of the past.  But if homeowners are stuck with putting their monthly mortgage payment through a shredder each and every month that their property loses value, strategic default, and simple missed payments will continue.  I personally am happy to help anyone down the path of strategic default and extract the cash from the lenders in anyway possible, but if you can modify and stay, then more power to you but don't count on the AG's Settlement, it simply falls short of real relief.

Foreclosure Mediation: Poking the Bear

Have you ever heard the phrase, "don't poke the bear?"  Of course you have, unless you are 7 years old and never read anything in your life.  Even by context, it seems like a bad idea.  Well, after some 30,000 foreclosures last year, the bear has had enough, and I mean the voters.  If you have been following me while I tracked SB 5275 and HB 1362, you know that I was of the belief that the banks had won.  In the first substitute of the bill I went to Olympia to fight for, the legislators had gutted the bill.  See Paper Tiger. 

Much to my wonderment and excitement, the second substitute put almost every tooth back in, and those dentures are sharp.  You can read the text of the new bill here, but only if you are a glutton for monotonous punishment.  The bill is about 28 pages and it has twists and turns, new definitions, rules, traps, and in the end, I believe a tool that will allow homeowners to hold banks responsible. 

The bill has not yet been signed.  I didn't want to get scooped here, so I am posting this before Gregoire puts pen to paper.  She got the bill on Friday and it has not been scheduled when she will sign the bill.  Some of the highlights are mediation, of course, bad faith, and attorney opinion letters to HUD.  I always like new business.  there are some traps as well, the provisions are not automatic, they are not free, and in many ways, they will be ineffective, but that doesn't mean you ignore them.

I will write more on this later this week.   So stay positioned, the great bear of the northwest has been poked out of its cave for long enough, and some bankers better be wary.

Trustee Where Art Thou?

If you own property in Washington, you more than likely signed a deed of trust.  It was one of the thicker documents in that stack of paperwork that you didn't read but it can be summed up like this.  You gave some third party the right to sell your house if you don't pay.  The trustee is chosen by the beneficiary (read that as bank) and is oft time paid for by the beneficiary, usually only when the home is going into foreclosure because it us underwater.  However, that doesn't mean that he works for the beneficiary as we would traditionally look at an employee.  Its more like a professional, that is why attorneys often work as trustees.

Just because a Trustee is appointed by the banks, it still has a duty to the Borrower or homeowner.  By statute, the Trustee owes the borrower a duty of good faith.  According to case law decided prior to the language in the statute being added, the duty was that of a fiduciary.  Other than in an esoteric, legal debate do those two standards have much space between them.  Both are high standards and the Trustee must meet that standard in its dealing with the borrower.

So you can imagine my surprise this afternoon when I am making a phone call on behalf of a borrower.  The Trustee screwed up the paperwork on the Notice of Default.  Some people think I am being nit picky when I complain about the trustee not being able to do math, and that was the case here also.  However, in addition to not being able to do simple addition, the trustee's printer had cut off the last few digits of some of the numbers so that they were unreadable.  You may wonder how I could do math with missing numbers, but I can do multiplication as well, and the inputs for the missing numbers were available. 

So over a month ago, a letter was sent informing the trustee that it had screwed up, a phone call was returned saying, hey, we're reissuing the notice of default.  Today, in checking on the sale, it was still on, so new letters were sent, and phone calls were made.

In my phone conversation with the woman working for the Trustee, presumably the trustee, as the Trustee is a corporation, she said that I had to talk to the beneficiary about reissuing the Notice of Default.  Well, I said the trustee is the one responsible for issuing the NOD and so I need to talk to the trustee.  Trustee says to me on the phone, "We don't make decisions, we do what the lender tells us to do." My response, stunned silence.

Due to the duty of good faith, there must be more responsibility with the trustee.  It cannot simply say we do as the bank tells us.  That would be like the trustee of a child's trust saying, I do whatever the kid wants me to do.   So if the kid wants a million dollars of chewing gum, he gets it?  I don't think so.

The opposite of Good Faith, is Bad Faith.  Bad Faith is something that can be pursued in a civil action much like any other tort.  The other nice thing about bad faith, is it lends itself to consumer protection actions.  Trustees need to be wary, because responses like that make me wonder where the real trustee is, and if he agrees with the asinine things his employees say.

Taxes Are for Chumps! Underwater Investment Properties Don't Have to Get Soaked!

Last week there were grand articles decrying the fact that not only did GE, maybe one of the largest businesses in the world, not pay any US tax, it got a refund.  So, GE, according to the articles soaked the US government and tax payers alike. I studied U.S. International taxation at the University of Florida to learn how to do and assist companies like GE in accomplishing exactly that outcome.  No U.S. tax.  Is it right?, the rules make it okay.  Is it ethical?  Now that is a debate for philosophers and charlatans.  Suffice it to say, that the Tax Code written by your duly elected congressmen is rife with loop holes that would allow a behemoth like GE to walk through and even some that a small real estate investor can squeeze through too, if he, or she, knows where to look.  Its tight fit, but it acts like a squeegee so you don't get soaked.

I do some digging on AVVO.com an attorney locating website that allows attorneys to answer questions and bump up their rankings.  There was a question presented by a woman, who prior to marrying her husband, had purchased a home to use as a rental income property.  She had the home up for short sale, which implies that it was underwater or upside down, and thus it was also possible it was in danger of foreclosure.  Right up my alley, right?  Her question was, "Is there something other than "insolvency" that I can claim so I don't have to pay "COD" income on the forgiven debt?"

First, let's define a few things.  COD or cancellation of debt, or discharge of indebtedness, income arises under Internal Revenue Code Section 61(a)(12) and is basically the theory that when you take out a loan, you have cash (even though you probably never saw the cash) and that when the loan is forgiven without paying for it, the cash you supposedly had is now income.  Next, insolvency is not bankruptcy insolvency, because the IRS doesn't allow for exemptions like a homestead.  Insolvency is basically you total up all your assets and subtract all your liablities, and if you come out with a negative number, you are insolvent.

The issue the woman was struggling with is that her other assets probably are fairing better than her rental property but she doesn't want to liquidate performing assets to pay the government for what she likely has as a loss on her rental property. Essentially, she isn't insolvent, does she still have to pay the tax.

The first poster to this woman's question went on and on about mortgage forgiveness act of 2007 and was really far off, because he never once looked at IRC section 108(a)(1)(D) which allows for the exclusion of qualified real property business indebtedness income, a fancy way of saying a mortgage on a rental property that is forgiven.

That section, for real estate investor who haven't put their property inside a C-Corporation, and anyone that puts real property in a corporation should shoot their adviser (can I say that in light of Arizona?), is like gold.  Its not perfect, because there are some things to be aware of, but essentially, the investor can exclude from gross income, the amount of COD income that is attributed to the house being underwater.  The investor must subtract that amount from the basis of depreciable property, so the investor will defer the tax, but as Professor Lokken used to say, and probably still says even though he is in Miami, deferment, if done long enough is like a credit. 

So, the doom sayers and charlatans that say your rental property is going to leave you with enormous debts to the IRS probably haven't read through the entire section on excluding COD income.  Remember, to read to the end of the page, otherwise you might get soaked.  Insolvency and Bankruptcy are not the only ways of avoiding this kind of taxable income and even a well healed investor with a bad property can side step paying taxes on COD income if they find the right adviser to keep them dry.


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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?