Can my Lender sue me for not Making my Mortgage Payments?

The wave of possible lender lawsuits against borrowers has started, primarily by junior lenders whose seconds (often HELOCS) were wiped out when a senior lender foreclosed. We presently know of borrowers being represented in a number of these lawsuits and have already settled several. The most important points to remember if you are served with a lawsuit are: 1) don't panic and ignore it. Get competent legal counsel in your State to advise you how and when to respond; and 2) almost all such lawsuits will resolve without going to trial.
There are several defenses that can be raised in defense to any lender lawsuit that may reduce or even eliminate their claim. These include:

1. Lender does not own the loan - In order to file a lawsuit against you, the lender must actually "own" the loan, that is they own and have possession of the Promissory Note. Loans change ownership all the time and it is possible that the lawsuit has been brought by a loan "servicer" or collection company, not the actual owner. If they cannot prove ownership, they do not have "legal standing" to file the lawsuit and they would potentially lose.

2. Loan was predatory - One of the key reasons why we had this market collapse was that from 2000 through 2006, lenders made loans to borrowers who in reality could not afford the loan. Sometime this was done by misstating income on "stated income" or "no document" loans and often this misstatement was done by the lender, not the borrower. Other times the loan was unrealistic, such as a 1% interest rate on which the borrower qualified for the loan but which jumped up much higher after the first month. So the buyer only qualified on month one but would never qualify on month two. Failure was inevitable unless the buyer could quickly flip the property. If the lender should never have made the loan, they likely will not recover against the borrower in court. For the agents that have the FACS certification we call these loans NINJA Loans (No Income No Job or Assets)

3. Loan was result of fraud - Similar to predatory loans, many borrowers obtained loans through actual fraud where the loan agent altered information supplied by the borrower or made false representations to the borrower such as: "take this adjustable rate now and we'll convert it to a fixed rate within a year". For most borrowers, that loan agent was never to be found within the year, the fixed rate was not obtainable, and the increasing adjustable rate forced the borrower into default. If the lender's loan agent defrauded the borrower into getting the loan, they likely will not recover against the borrower in court.

4. Lender failed to do diligence - One of the biggest causes of the market collapse was that the lenders failed to exercise any diligence in checking to make sure the information on the loan application was true, such as checking tax returns and confirming the borrower’s employment and income. The banking deregulation in the late 1990's created a flood of money in the market for new loans to be made and lenders accepted virtually any application without checking whether the loan was good. The result was billions of dollars of bad loans secured with property that was not worth the debt. If the lender should never have made the loan, they likely will not recover against the borrower in court. If the lender is trying to give you a commissionectamy when negotiating a commission, remind that lender of exactly the above point and additionally you did not tell them how many points to charge when they originated the loan.

5. Lender knew the market was inflated in a bubble - The combination of banking deregulation and easy money created a huge increase in demand by possible homeowners and investors which drove up the prices on available properties, often increasing by $10,000 or more in a single month. Developers rushed in with new subdivisions everywhere trying to fill the demand as competition for homes kept driving prices upwards. This inflationary bubble was almost entirely fueled by high-risk loans, speculative appraisals, and the lack of real underwriting and diligence by the lenders. It was completely foreseeable to lenders that this bubble would burst but they made the loans anyway because they earned commissions and could sell the loans in the secondary mortgage market. It was no real surprise to lenders when the borrowers started defaulting in 2005 on the increasingly expensive loans which led to the collapse starting in 2006. If the lender should never have made the loan, they likely will not recover against the borrower in court.

6. Lender has insurance for the loss - Many of the loans made were 100% of purchase price and even more. Generally, if the loan was for more than 80% of the property value, mortgage insurance (PMI) was required. Although paid for by the borrower, this insurance paid the lender for any loss on a default. The lawsuit may be an attempt by the lender to collect on a loss that they have already recovered on through the insurance. If the lender has already been compensated for any loss, they likely will not recover against the borrower in court.

7. Lender has been bailed out by the taxpayers - Between 2008 and 2009, Federal bailout monies paid by taxpayers (including the borrower) provided protection for lenders damaged because of loan losses. Our government guaranteed billions of dollars in lender bad debt, guarantees that we and our children will be paying for years to come. Many consider these bailouts to be a reward for bad business practices instead of the punishment that might be deserved. If the lender has already been compensated for any loss, they likely will not recover against the borrower in court.

8. How Should You Prepare? - In many states, the deadline for a lender to bring a claim against a borrower is four years other states are six years while I have heard as high as seven years in other states. Don’t forget that most states the owners of the debt are able to get an extension for up to ten years and in some states you can get that extension of ten years twice. Meaning for the next twenty six years the homeowner is going to be on the hook for the debt. That’s generally from the date the borrower defaulted, not to be confused with the actual foreclosure date. With hundreds of thousands of borrowers just now in default, these lawsuits will be a constant threat for many years to come. These may be joined by deficiency lawsuits following short sales to which the same defenses can be raised in addition to several other defenses unique to short sales which I'll cover in subsequent Blogs assuming I have the time!

Before anybody makes any kind of decision concerning your upside-down home or investment property, be certain to get tax and legal advice from qualified professionals in your State who can look at your specific situation and advise you on how these rules apply to you, particularly on how to identify and minimize the risks of a lender lawsuit. Thank you to Attorney Mr. Steve Bedde from the Sacramento California area in helping us to recognize these steps. www.stevebeede.com

This article in no way is serving as a function of legal advice. You must talk to an attorney in the state your property is located in order to make an intelligent decision in diagnosing the recourse of your debt.

-Christopher Rockey

Jimmy HAFA

Please excuse the delayed post. I have been travelling the world in 60 days. I am having a lot of agents tell me HAFA is going to change the world. That's great!!

Tell me what you see missing...

The first gives up rights of recourse, great many states are a single action state anyway (Sorry Florida) How about the second?

HAFA is designed for homeowners who have applied to HAMP for assistance but have had no success with their loan modification program. To participate in HAFA, homeowners must still meet HAMP’s eligibility criteria (principal residence, first-lien mortgage, serious delinquency, unpaid balance under $729,750, and a mortgage payment over 31 percent of gross income).

Homeowners must be considered for HAFA within 30 days if they cannot meet HAMP’s requirements or if they specifically request consideration for HAFA. However, the homeowner only has 14 days to respond to a written notice that HAFA may be available to them, giving the lender time to meet their 30-day deadline.

As with other short sales and deeds-in-lieu, the lender or loan servicer of the primary mortgage must approve of the transaction and conduct their own independent appraisal. Under HAFA, however, they must also agree to accept the proceeds from the sale of the house as payment in full, waiving their right to collect the balance of the loan from the homeowner.

It is up to the lender or servicer of the first-lien mortgage whether they or the homeowner negotiate with any subordinate lienholders. Lenders of HELOCs and other subordinate liens may be allowed to keep a limited portion of the proceeds (up to $3,000 each) of a short sale, with the first-lien lender’s approval. These funds are part of an incentive program for subordinate lienholders to waive their right to collect the balance due on their loans. The original lender may not be held responsible if any subordinate lienholders decline to participate and decide to sue the borrower for the amount of their unpaid debt.

HAFA’s Short Sale Agreement (SSA) has certain stipulations for all parties involved. Their SSA requires that the deadline for the homeowner to find a buyer and complete the transaction be not less than 120 calendar days from the date the SSA is mailed to the homeowner. The lender has the option of extending this deadline another 245 calendar days, for a total term of 12 months. The SSA also mandates that a HAFA transaction must be ‘arms-length’, and that the end buyer must agree to hold the property for at least 90 days after closing. Finally, the SSA gives the listing real estate agent the right to an undiscounted 6 percent commission at closing.

A short sale is any sale of property, usually during the foreclosure process, in which the lender(s) agrees to accept less than the balance due on the mortgage(s) or lien(s) in order to avoid the cost of foreclosure. Depending on HAFA requirements and state law, the lender(s) may or may not pursue the homeowner for the remainder of the debt. The vacancy date is determined by the terms of the closing.

Unlike a short sale, a deed-in-lieu simply allows the homeowner in default to transfer the deed to the property back to the lender in exchange for partial or full payoff of the mortgage. The vacancy date must be at least 30 days after the deed-in-lieu agreement is signed.

In either case, HAFA requires that the lender agree to suspend all foreclosure sales in good faith, pending the outcome of either transaction. In the case of a short sale, the lender also must agree to pay the administrative closing costs.

The Department of the Treasury, which authorizes all programs under the Making Home Affordable umbrella, has designated Freddie Mac as its compliance agent.

The HAFA program is set to begin on April 5, 2010. Servicers may initiate a HAFA transaction earlier in 2010 under certain conditions. As of this writing, all HAFA agreements must be finalized and signed by December 31, 2012.


-Christopher Rockey
www.facseducation.com

Fed to Save the Day? And if Not?

The Federal Reserve today reported on their weekly purchases of agency mortgage-backed securities (MBS).

In the week ending January 27, 2010, the Federal Reserve purchased a total of $12.50 billion agency MBS. In those five days the Federal Reserve sold $500 million (supported the roll market) for a net total of $12 billion purchases.

The goal of the Federal Reserve's agency MBS program is to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally. Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for the program. The program includes, but is not limited to, 30-year, 20-year and 15-year securities of these issuers.

Since the inception of the program in January 2009, the Fed has spent $1.16 trillion in the agency MBS market, or 92.87 percent of the allocated $1.25 trillion, which is scheduled to run out in March 2010. This leaves $89.1 billion left to purchase MBS coupons in the TBA market.

Uh-Oh...

Until this very moment I have not considered the Federal Reserve Bank of New York to suffer from Dawn syndrome...

A new study found that borrowers who receive loan modifications that reduce loan balances, and not simply interest rates, are less likely to redefault on the loan, according to the Federal Reserve Bank of New York.

Principal reductions are more successful at avoiding redefaults because they reduce negative equity and provide the borrowers with greater incentive to remain current on the loan, according to the study. The study also found that borrowers who owe 15 percent or more than their homes’ value have a 51 percent higher risk of redefaulting in any given month.

I'm not going to waste too much time on this but i will say that Dawn syndrome is popularly named after a famous radio disk jockey who carries the first name of Dawn and always states the obvious. Most of her listening audience want to present her with a bouquet of roses complimented with a nice fresh slap.

Home Prices Dropping?

At the FACS certification program we are the hugest advocates of stabilization and standardization. Lenders have potentially decided to manipulate the housing economy by withholding REO inventory which has boosted demand the highest we have seen it since early 2006. unfortunately that is a bet lenders could loose if defaults continue to rise which they have. After four months of gains, home prices flattened in October. Worse yet, industry insiders think that they'll soon start to fall.
Prices have risen more than 3% since May, according to S&P/Case-Shiller.
But most forecasts predict price declines in 2010, with possible losses ranging from anywhere from 3% on up. Fiserv Lending Solutions, a financial analytics firm, forecasts that prices will fall in all but 39 of the 381 markets it covers, with an average drop of 11.3%.

"We've seen recent price stabilization because of low mortgage interest rates and the impact of the first-time homebuyers tax credit," said Pat Newport of IHS Global Research. "But there are really good reasons to think prices will now start going down."

There are three main reasons for the reversal: a coming flood of foreclosures, rising interest rates and the eventual end of the tax credits.

More foreclosures
For Gus Faucher, the director of macroeconomics for Moody's Economy.com, the huge number of foreclosures that remain in the pipeline is the big problem.

Moody's upped its estimate of defaults recently because of shortcomings of the government-led mortgage modification programs. Trial workouts are not being made permanent and completed modifications are redefaulting at high rates.

"There are going to be fewer [successful] modifications than we thought," said Faucher.

Even so, he added, much of the price decline has already occurred and Moody's forecast is for only another 8% drop. The worst-hit markets will be the ones suffering the most foreclosures, places like Arizona, California, Florida and Nevada.

Resetting option ARMs (adjustable rate mortgages) will also aggravate the foreclosure problem. These mortgages allow borrowers to pick their own payments, which can be so low they don't even cover the interest. Balances swell.

For many of the more than 350,000 option-ARM borrowers, it's time to pay the piper. Their loans will change into fully amortizing mortgages that will carry much higher monthly payments. A very large percentage of these homeowners will default, according to Shari Olefson, author of "Foreclosure Nation: Mortgaging the American Dream."

"We've still only seen the tip of the foreclosure iceberg," she said.

She also predicts more strategic defaults, people deliberately walking away from even fixed-rate mortgages as the value of their homes dips well below the amount they owe.

Olefson's forecast is for price declines of 5% to 15%, depending on the area, with a national median price drop of about 10% for 2010.

Rising interest rates
Also affecting prices will be higher interest rates. Some analysts, according to Newport, think rates for a 30-year mortgage will pass 6% next year as the government curtails housing market support.

The Federal Reserve has helped keep rates low through purchases of mortgage-backed securities. But that program is winding down and will end in March.

"The government is throwing everything at the market but the kitchen sink," said Peter Schiff, president of Euro pacific Capital. "It can't prop up housing markets forever."

Schiff is among the bigger bears. Though he gave no specific prediction, he thinks prices -- already down 29% from the peak -- are only halfway to the bottom.

The end of the tax credit
As a tool for supporting housing markets and prices, the tax credit for homebuyers is a two-edged sword. It reduces taxes dollar-for-dollar by up to $8,000 for new homebuyers and $6,500 for buyers who already own a home and should support home prices. But it ends at the end of April.

Many buyers will push their deals forward to get in before the deadline and then demand for homes could sink afterward.

One of the few bulls out there is NAR, whose chief economist, Lawrence Yun, is counting on the tax credit to provide temporary support for housing markets until the economy recovers enough to start fueling sales. He predicts price improvement in 2010 of more than 3%.

"The headwind we face is rising mortgage interest rates," Yun said, "but the compensating factors will be the homebuyers tax credit in the first half of the year and increased job creation in the second half."

At FACS we believe that several economists have tried to rely on there influential position to induce consumer spending. Remember the saying 'If your mother tells you she loves you get a second opinion'