December 30, 2008

FHA Short Sale Mortgagee Letter 2008-43

Filed under: FHA Loan,Short Sale

Forget everything you knew about FHA short sales.  There’s a new Mortgagee Letter describing the FHA pre-foreclosure sale (a/k/a short sale) guidelines which states:

“This ML supersedes in its entirety ML 1994-45, “HUD’s Nationwide Pre-Foreclosure Sale (PFS) Procedure”.  It also supersedes the section (pages 29-35) of ML 2000-05, “Loss Mitigation Program-Comprehensive Clarification of Policy and Notice of Procedural Changes” that describes Pre-Foreclosure Sale requirements.”

FHA Pre-Foreclosure Sale Procedures

Bankruptcy Repo

Filed under: Auto Loan,Bankruptcy,Repo

My husband and I filed a bankruptcy that finalized June 4, 08. My car was repossed in August 08.  We were given no warning.  They said that we hadn’t paid in three months.  They worked with us before with late payments.  In May we were up half a payment that month and made the other half payment that month.  With my husband out of a job it was hard to make a full payment.  So the next two months we only made a half payment.  Which put us behind 1 full payment by July. 

We told them that we would be able to make July’s and August’s payment all at once, by the end of August, from the economic stimulus payment we would recieve.  Our payments were $365. So we would owe them $730. Well right before the end of August two men came to repossess our car. 

We called them and they said it hadn’t been paid in three months.  We called Truepay, which removes money from our bank account and places it with the car loan bank account.  They had went out of business!  We had no idea where our payments went.  They sent our account to Speedpay, another middle man.  But they had no idea about the payments either. We told our bank that we would not make payments until it was settled. 

They then told us that our car was repossessed because my husband had told them we weren’t going to make July and August’s payment, when we said we were going to pay in full.  They even said we were late every month because we made our payments on the 5th and 20th and they didn’t accept half payments and even though they said payments were do by the 27th, they told us that the date varied every month!

The guys took our car and it was sold about a month and a half later.  It was sold for half of what we had left on the loan!  Now we can’t get ahold of the bank to make payment arrangements.  Though we can’t afford them since we had to get another vehicle and pay a high interest.  Its not even as good as vehicle as what we had.  We went from 2006 Hundyaii Sonata to a 2003 Chevy Cavalier.

Even though we agreed that payments would stop until the car was sold, the bank still made the new middle man take out the next two payments.  They said we verbally agreed on them taking them out.  We did get those two payments returned and had a stop placed on the bank and on Speedpay.

Can we do anything about the middle man taking out money?  And what about those half payments that were never posted to their bank?  Was the bank with the loan in the wrong? 

I have two children and one on the way.  My husband is getting deployed soon and we need the money. I am afriad that they will garnish his wages.  Or even take our tax return which i need to pay my student loan that has to be paid.  It feels like we were trapped!

Kimberly (more…)

December 29, 2008

Buy and Bail

Filed under: FHA Loan,Short Sale

I have a condo right now and i want to short sale it. While the condo is for sale can i apply for an FHA loan even if i have the other loan. THe loan on my condo is not an FHA loan.

Vicente (more…)

Credit Report Repair via Lexington Law

Repair your credit today with Lexington Law

December 27, 2008

Can Florida Attorneys Be Considered Foreclosure Rescue Consultants?

I was talking to an attorney recently about newly enacted FS 501.1377 and its application to lawyers in Florida.  The initial version/s of the statute contained a specific attorney exemption which was subsequently altogether removed in the version of the Act that has since become Florida law.

The Broken Credit Blog covered this problem six months ago on June 11, 2008 where we wondered if homeowners would be left in the lurch when desiring attorney legal assistance in filing bankruptcy, or in defending a foreclosure action.  Thankfully, on July 11, 2008 we reported that Attorney General Bill McCollum provided a limited attorney exemption which states (in part) that the FL AG “approves for exclusion from the definition in this provision of a foreclosure rescue consultant, a person licensed to practice law in this state, when such person provides legal representation to a client with respect to a foreclosure” (emphasis added).

To put the Florida AG letter in perspective, he was responding to an inquiry made on behalf of bankruptcy attorneys (who no doubt were in upheaval with 501.1377 because they became the unenviable subject to provisions of BAPCPA in ’05).  And in answering their concern he most assuredly also wanted to aver foreclosure defense attorneys that they were not hindered in any way “when such person provides legal representation to a client with respect to a foreclosure”.

Contrast all of this with the California version of the Foreclosure Consultant Act which exempts attorneys in CA Civil Code 2945.1(b)(1) with the following text: “A person licensed to practice law in this state when the person renders service in the course of his or her practice as an attorney at law.”

The California version of the statute was enacted in 1979 (and amended in 1980 and 2004), whereas the Florida statute is brand new, literally only a few months old. In California, lawyers essentially run loss mitigation companies collecting legal fees for loan modifications, short sales, etc. and I have no problem with that.  The problem and liability arise, in my opinion, when an attorney in Florida offers to assist a homeowner with a loan modification, short sale, or other workout, exclusive of the client engaging him or her in response to the filing of a foreclosure of which the pendency of such “foreclosure proceedings (is) recorded pursuant to s. 48.23” [501.1377(2)(g)].

The serious question remains and undoubtedly case law will develop accordingly to determine what was the legislative intent behind removing the attorney exemption in FS 501.1377?

This author is not an attorney and this information should not be considered legal advice.  Please consult an attorney for legal advice.

December 26, 2008

Forbearance & Loan Modification Waivers Unenforceable

It seems to be standard operating procedure for lenders to force borrowers to sign away their rights in the form of a (sneaky) waiver when entering into a workout to retain the home (i.e. forbearance agreement, loan modification, etc).  Well, it appears these waivers are not enforceable – or at least with regards to federal laws that affect the “public interest” such as the TILA.  In Vermurlen v. Ameriquest Mortgage Company, No. 1:06-cv-828, 2007 the borrower entered into a forbearance agreement and Ameriquest included the following waiver:

“Effective upon the execution hereof, and notwithstanding any failure of Borrowers to satisfy any of the conditions precedent set forth above, Borrowers hereby agree that, without any further act, Lender is fully and forever released and discharged from any and all claims for damages or losses to Borrower’s property or person (whether these damages or losses are known or unknown, foreseen or unforeseen, or patent or latent) including, without limitation, tort claims, demands, actions and causes of action of any nature, whatsoever arising under or relating to the Loan Documents or any of the transactions related thereto, prior to the date hereof, …”

The court noted that “[i]n Brooklyn Savings Bank v. O’Neil, 324 U.S. 697 (1945), the Supreme Court addressed the question of waiver under the Fair Labor Standards Act. The Court held that “a statutory right conferred on a private party, but affecting the public interest, may not be waived or released if such waiver or release contravenes the statutory policy”…“The public benefits from enforcement of TILA because it creates a system of disclosure that improves the bargaining posture of all borrowers.”  Therefore, such a waiver is unenforceable with regards to the TILA.

While the TILA rescission claim was dismissed for other reasons in Vermurlen; nevertheless, this is helpful case law for others who no doubt will find themselves once again battling against their lender after a completed loan modification down the road when a similar waiver was included.

This author is not an attorney and this information should not be considered legal advice.  Please consult an attorney for legal advice.

Judy’s Eight Short Sales

Filed under: Mortgage,Short Sale

I have 8 homes needing to be short sold. How do you have time to help? You must be over loaded. I need real help. I need lots of advice. H E L P!!!

Judy (more…)

Did You Receive Your ‘UCC Compliant’ Repo Notice?

Filed under: Auto Loan,Repo

1984 Movie, Repo ManAppellant’s car was repossessed and sold, and she filed this class action against the lender, alleging that it failed to comply with the notice requirements of the UCC. The trial court granted the lender’s motion for summary judgment, but we reverse because of the insufficiency of the notice. We also find a settlement offer for the full amount plaintiff sought did not make the class action moot.

The notice provided by the lender failed to include a number of requirements found in section 679.614(1)(a) and section 679.613(1), such as whether the sale was public or private, or where or when the sale would be held. The lender argues that if the notice was not in compliance with the UCC, plaintiff had received actual notice of the sale through conversations between her and the director of collections for the lender. The case relied on by the lender to support its argument that the oral notice would remedy any deficiencies in the written notice, Bondurant v. Beard Equipment Co., 345 So. 2d 806 (Fla. 1977), was decided before the legislature enacted the current statutes requiring written notice, and is no longer good law. The court accordingly erred in entering a summary judgment in favor of the lender.

Nor do we agree with the lender’s argument that its unaccepted settlement offer for the full amount of plaintiff’s claim, a practice which is known as “picking off” a class representative, made this case moot. Neither Florida nor the federal courts sanction that practice. Allstate Indem. Co. v. De La Rosa, 800 So. 2d 245 (Fla. 3d DCA 2001); Weiss v. Regal Collections, 385 F.3d 337 (3d Cir. 2004). Reversed.

Jackson v. Southern Auto Finance Company [4D07-3284, Fla 4th DCA, August 20,2008]

December 24, 2008

Litton Reduced Principal Loan Modification

Filed under: Loan Modification

My sister just received a loan modification from Litton.  To make a long story short…she quit paying on her mortgage about a year ago when Litton quit responding to her attempts at a loan mod.  Then she just received an off from Litton where they are willing to eat approx $150,000 in principal, interest and fee’s. 

My question, can the lender send the difference to the IRS as an income for my sister? 

I told her not to sign until we received clarification.  She called Litton and they told her to talk to an attorney.


Securitization Trusts & Loan Modifications At Odds

A major factor complicating private, voluntary loan modification efforts is securitization. The vast majority, somewhere upwards of 80%, of residential mortgages are securitized. Understanding securitization is key to understanding why private, voluntary efforts at mortgage modification will inevitably fail and why bankruptcy modification presents the only sure method of preventing preventable foreclosures.

Securitization transactions are technical, complex deals, but the core of the transaction is fairly simple. A financial institution owns a pool of mortgage loans, which it either made itself or purchased. Rather than hold these mortgage loans (and the credit risk) on its own books, it sells them to a specially created entity, typically a trust (SPY). The trust pays for the mortgage loans by issuing bonds. The bonds are collateralized (backed) by the loans now owned by the trust. These bonds are so-called mortgage¬backed securities (MBS).

Because the trust is just a shell to hold the loans and put them beyond the reach of the financial institution’s creditors, a third-party must be brought in to manage the loans. This third-party is called a servicer. The servicer is supposed to manage the loans for the benefit of the MBS holders. The servicer performs the day-to-day tasks related to the mortgages owned by the SPY, such as collecting payments, handling paperwork, foreclosing, and selling foreclosed properties. These servicers are the entities that actually consider loan modification requests. Confusingly, the servicer is often, but not always, a corporate affiliate of originator; most of the major servicers are subsidiaries of bank holding companies: Countrywide Home Loans (Bank of America); CitiMortgage and CitiFinancial (Citigroup); Select Portfolio Servicing (Credit Suisse); Litton Loan Servicing LP (Goldman Sachs); Chase Home Finance and EMC Mortgage (JPMorgan Chase); Wilshire Credit (Merrill Lynch); Wells Fargo Home Mortgage and Homeq Servicing (Wells Fargo).

Securitization creates numerous obstacles to voluntary loan modifications, but they may be reduced to three broad categories: contractual, practical, and economic.

Securitization Creates Contractual Limitations on Private Mortgage Modification

Securitization creates contractual limitations on private mortgage modification.

These limitations cannot be bypassed except through bankruptcy modification or a taking ofMBS holders’ property rights.

Servicers carry out their duties according to what is specified in their contract with the SPY. This contract is known as a “pooling and servicing agreement” or PSA. Although the decision to modify mortgages held by an Spy rests with the servicer, and servicers are instructed to manage loans as if for their own account, PSAs often place restrictions on servicers’ ability to modify mortgages. Almost all PSAs restrict modifications to loans that are in default or where default is imminent or reasonably foreseeable in order to protect the SPY’s pass-thru REMIC tax and off-balance sheet accounting status.

PSAs often further restrict modifications: sometimes the modification is forbidden outright, sometimes only certain types of modifications are permitted, and sometimes the total number of loans that can be modified is capped (typically at 5% of the pool). Additionally, servicers are frequently required to purchase any loans they modify at the face value outstanding (or even with a premium). This functions as an anti¬modification provision.

No one has a firm sense of the frequency of contractual limitations to modification for residential MBS (RMBS). A small and unrepresentative sampling by Credit Suisse indicates that almost 40% of RMBS PSAs have limitations on loan modification beyond a near universal requirement that the a loan be in default or imminently defaulting before it may be modified.33 The Credit Suisse study, however, did not track all types of modification restrictions, such as face-value repurchase provisions, so the true number of restrictive PSAs is likely higher. Nonetheless, there are still a large number of homeowners whose mortgages are held by securitization trusts with restrictive PSAs. This includes both private-label securitizations and GSE securitizations; some Fannie Mae securitizations, for example, prohibit any reductions in either principal or interest rates.

It is virtually impossible to change the terms of a restrictive PSA in order to allow the servicer greater freedom to engage in modifications. The PSA is part of the indenture under which the MBS are issued. Under the Trust Indenture Act of 1939,35 the consent of 100% of the MBS holders is needed in order to alter the PSA in a manner that would affects the MBS’ cashflow, as any change to the PSA’s modification rules would.

Practically speaking, it is impossible to gather up 100% of any MBS issue. There can be thousands of MBS certificates from a single pool and these certificate holders might be dispersed world-wide. The problem is exacerbated by collateralized mortgage obligations (CMOs), second mortgages, and mortgage insurance. MBS issued by an Spy are typically tranched-divided into different payment priority tiers, each of which will have a different dividend rate and a different credit rating. Because the riskier tranches are not investment grade, they cannot be sold to entities like pension plans and mutual funds. Therefore, they are often resecuritized into what are known as CMOs. A CMO is a securitization in which the assets backing the securities are themselves mortgage¬backed securities rather than the underlying mortgages. CMOs are themselves then tranched, and the senior tranches can receive investment grade ratings, making it possible to sell them to major institutional investors. The non-investment grade components of CMOs can themselves be resecuritized once again into what are known as CM02s. This process can be repeated, of course, an endless number of times.

The upshot of this financial alchemy is that to control 100% of an MBS issuance in order to alter a PSA, one would also have to own 100% of multiple CMOs to alter the
CMOs’ PSAs and of multiple CM02s to alter the CM02s’ PSAs. .

The impossibility of modifying PSAs to permit modification on a wide scale is further complicated because many homeowners have more than one mortgage. Even if the mortgages are from the same lender, they are often securitized separately. If a homeowner is in default on two or three mortgages it is not enough to reassemble the MBS pieces to permit a modification of one of the mortgages. Modification of the senior mortgage alone only helps the junior mortgage holders, not the homeowner. In order for a loan modification to be effective for the first mortgage, it is necessary to also modify the junior mortgages, which means going through the same process. This process is complicated because senior lenders frequently do not know about the existence of the junior lien on the property.

A further complication comes from insurance. An SPV’s income can exceed the coupons it must pay certificate holders. The residual value of the SPY after the certificate holders are paid is called the Net Interest Margin (NIM). The NIM is typically resecuritized separately into an NIM security (NIMS), and the NIMS is insured by a financial institution. This NIMS insurer holds a position similar to an equity holder for the SPY. The NIMS insurer’s consent is thus typically required both for modifications to PSAs and modifications to the underlying mortgages beyond limited thresholds. NIMS insurers’ financial positions are very similar to out-of-the-money junior mortgagees¬they are unlikely to cooperate absent a payout because they have nothing to lose.

Thus, the contractual structure of securitization creates insurmountable obstacles to voluntary, private modifications of distressed and defaulted mortgages, even if that would be the most efficient outcome.

Testimony of Adam J. Levitin, Professor Georgetown University Law Center
“Helping Families Save Their Homes: The Role of Bankruptcy Law”
Senate Judiciary Committee, November 19, 2008

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