October 2010 Archives

October 27, 2010

The New Bankruptcy Law: Little Change for Most Debtors (Other Than Pricier Lawyers)

In 2005, Congress made big changes to the bankruptcy laws. In the six-month lead up to those changes, Chapter 7 bankruptcy filings spiked because people were told that the new laws would make it much harder to file for bankruptcy. After the new law took effect, filings plummeted, in part because people now believed (thanks to the pre-change marketing efforts by bankruptcy attorneys) they could no longer file under Chapter 7. Due to the great recession, however, filings are once again spiking and are close to the pre-change level.

So what's the story? Is Chapter 7 bankruptcy harder to file now than it was before the law changed, or was that perception wrong (and wrongheaded)?

As with so many things in life it's kind of an 80-20 proposition. For about 80% of Chapter 7 bankruptcy filers, the main change has been that many bankruptcy lawyers doubled their fees. So, for people using lawyers, Chapter 7 has become much more expensive. Not a trivial change to be sure. But, if people in this 80% category file without a lawyer -- which is a feasible option in most cases -- then they will see little change overall. The other changes (the main ones include a credit and budget counseling requirement, submission of tax returns and wage stubs, and a reaffirmation agreement if you want to keep a late model car you're making payments on) have proved to be relatively insignificant and easy to comply with.

October 20, 2010

Robo-signing Mess Means More Leverage for Homeowners in Foreclosure

It's been all over the news -- courts are halting foreclosures and banks are freezing their foreclosure processes due to allegations of "robo-signing." This mess creates negotiation opportunities for homeowners in foreclosure.

What is "Robo-signing"?

To get a foreclosure through court, the lender has to submit proof of ownership and default on the mortgage. This proof typically consists of copies of various documents and a written statement under oath (affidavit) that the documents are true and accurate. To make such a statement, the individual signing the affidavit must not only review the documents but also have some personal basis for believing them to be true. Not just anyone can sign.

It turns out that the major mortgage lenders have assigned the "statement under oath" task to clerks who not only don't review the documents but who have no personal knowledge of the facts set out in them. The media has called them "robo-signers." (Recently bloomberg.com ran an  informative article about O. Max Gardner III, the lawyer who let the cat out of the bag.)

In other words, it looks like lots of court-ordered foreclosures have been based on false affidavits, and it's that fact that has led the major lenders to put a hold on foreclosures in states where foreclosures go through the courts.

Even in states where foreclosures happen out of court, affidavits of ownership and default in payments must typically be officially recorded before foreclosure proceedings can begin, and to the extent that these affidavits suffer from the same defect as those headed towards court, the foreclosures based on them are similarly faulty. The only real difference is that the homeowner must affirmatively sue the lender (in an action for injunctive relief) in order to have the judge rule on whether the paperwork is deficient.

What Happens if the Lender Can't Foreclose? 

For all practical purposes, the only way to enforce the terms of a mortgage is to foreclose on the property. It's true that in many states the lender can sue the homeowner for breach of contract if he or she falls behind on the payments, but the expense and uncertainty of that remedy pretty much dictates foreclosure as the lender's remedy of choice. In foreclosure the lender gains ownership of the property and the right to force the (now ex) homeowner to move out. If the homeowner decides to stop paying on the mortgage and the lender is unable to use the foreclosure remedy, the only remedy left is a lawsuit for money.

In California and a few other states, the first mortgage is what's known as a non-recourse loan, meaning the lender can't sue for breach of contract. And in those states where the lender could sue, the likelihood of collecting is small. Further, bankruptcy would wipe out the homeowners personal liability and the lender would have no remedy at all -- again, assuming that for one reason or another they can't foreclose.  

The bottom line: If the lender can't foreclose because of fraudulent affidavits, the lender may be up a creek.

Fraudulent Affidavits Means More Opportunities to Negotiate

The fact is, foreclosure paperwork in any given case may be faulty, and judges may be more inclined to reach this conclusion than previously -- based on the mounting evidence of robo-signing and banks' sloppy paperwork. To the extent that a homeowner facing foreclosure can create an aura of uncertainty around the required paperwork, he or she will have a great opportunity to negotiate a mortgage modification that includes a substantial reduction of principle to (or near) the value of the property.

If the lender refuses to come to some settlement with you and you can later convince a judge that proof of ownership is lacking, or that robo-signing occurred, the lender may be permanently deprived of the foreclosure remedy, which will mean the mortgage is effectively unenforceable. Given this threat, more and more lenders may be inclined to knock down the principal and reduce your payments to an affordable remedy. As the old saw goes, half a loaf is better than none.

Your ability to use potential problems with the mortgage and foreclosure processing in your negotiations will obviously be strengthened if you can point to the deficiencies, but it may be enough to simply allege the possibility of bad paperwork and let the lender decide whether they are able to prove the opposite. Also, it would probably be advantageous if you had an attorney negotiating for you, but to do that you'd have to raise some money for the attorney fees, which is often done by rerouting some or all of your mortgage payment to the attorney -- which can be a really good deal in the long run.

To learn more about fraudulent affidavits, and your options, see Nolo's article False Affidavits in Foreclosures: What the Robo-Signing Mess Means for Homeowners

Learn more about foreclosure and other options for struggling homeowners in Nolo's Foreclosure topic.

October 18, 2010

The Loan Modification Process Can Help Avoid a Charge of Strategic Default

Banks are beginning to punish homeowners who engage in "strategic default," and pushing for legislation to do the same. A strategic default is defined as not paying your mortgage when you can afford to do so, thereby letting your home fall into foreclosure. (For a more comprehensive discussion of strategic defaults and the steps banks and legislatures are taking to punish homeowners, see my previous blog post The Government and Banks May Punish Strategic Defaults.) 

An Ounce of Prevention:  The Loan Modification Process

One way that homeowners can reduce the risk of a strategic default accusation is to use the loan modification process.  (To learn about loan modifications, see Nolo's article Mortgage Modification and Refinancing Under the Homeowner Affordability and Stability Plan.)  Here's how it might help:

Because nonpayment when you have the ability to do so is the key aspect of a strategic default, your best protection against having this label applied to you is to make a diligent effort to obtain a loan modification. Of course if you don't really need a modification, the mere attempt to obtain one probably won't immunize you from being considered a strategic defaulter. But few people are that well off.

If your first mortgage is 31% (or more) of your gross income, you have a non-affordable mortgage under the Making Home Affordable guidelines, and failing to pay it should not be considered a strategic default on your part. And you may have additional reasons why you cannot afford your mortgage at the time you defaulted (for example, student loan repayment obligations, a second or third mortgage, or erratic periods of employment).

Defaulting After a Obtaining a Loan Modification Might Hurt You

On the other hand, If you do obtain a modification and then immediately default without a change in circumstance, you may be considered a strategic defaulter almost by definition. (However, obtaining a loan modification is no easy feat.  See my previous blog post More Money for Foreclosure Prevention: Will It Help?)

So, if your main goal in participating in a modification process is to avoid this label, success may be failure, and failure success. Such are the strange times we live in.

Document Everything

If you think that you might be considered a strategic defaulter, be sure to thoroughly document your modification efforts. Use email or the post to document all discussions with the bank or a HUD-approved housing counselor. If you receive a phone call from the bank or counselor, follow up with a confirmation letter and record the names and titles of everyone you talk with. Your goal is to be able to provide a ton of paperwork showing that you diligently sought a modification and your default was not made for "strategic" purposes.

October 6, 2010

Foreclosures on Hold Due to Fraudulent Affidavits

A number of major mortgage lenders have apparently put a freeze on pending and future foreclosure cases. The reason? Bank employees testified that they signed affidavits attesting to the truth of various foreclosure documents, but in fact had no personal knowledge of the facts to which they attested. Employees of Bank of America, JP Morgan Chase, and GMAC have all testified that they signed many thousands of affidavits a month, spending about 30 seconds on each affidavit, and that they hadn't a clue regarding the veracity of the affidavit or documents in question.

Class Actions, Criminal Prosecutions, and Problems for Owners of Foreclosed Properties?

Since this testimony implicates all past foreclosures that depended on similarly flawed affidavits, there may be humongous class actions about to hit the mortgage lending industry. Criminal prosecutions may also multiply faster than rabbits, since the practice of having these affidavits signed by unknowledgeable people is something that provably comes right from the top.

And what about people who have purchased homes that with a fraudulent foreclosure affidavit? Although some may have ownership issues in the future, many may be able to keep their new homes because of a legal doctrine that gives clear title to people who are "bona fide purchasers for value." On the other hand, foreclosed homes that are still owned by banks may now be up for grabs (and transferred back to the original owners) since the banks would have difficulty in making the bona fide purchaser for value argument. Finally, as these defects in title come to light it may be difficult for a new owner to claim bona fide purchaser for value status without having the foreclosure process subjected to an audit for fraud and ownership issues.

Challenging Foreclosures Based on Fraudulent Affidavits

There are three different judicial venues where foreclosures can be challenged. In about half the states, the foreclosures go through court - called "judicial foreclosures." Challenging a foreclosure based on a fraudulent affidavit is a relatively simple matter of raising the issue at the foreclosure trial. It is primarily the foreclosures in these states that have been frozen by the major lenders, since all judicial foreclosures require testimony under oath.

In the other half of the states, foreclosures are completed without going to court - called "non-judicial foreclosures." In order to challenging a foreclosure in one of these states, the homeowner would have to file an action in court to enjoin the foreclosure on the basis of suspect documentation. In many of these "non-judicial foreclosure" states, the foreclosure can't legally take place without recordation of appropriate documents accompanied by an affidavit attesting to their truth, so the ground for challenging the foreclosure would be similar to that used in judicial foreclosure states.

The third venue for challenging a foreclosure occurs in Chapter 13 bankruptcy. In Chapter 13 bankruptcy your mortgage lender must file a claim, and you are entitled to oppose this claim. Simply put, in Chapter 13 you can basically have the mortgage thrown out due to the inability of the mortgage owner to provide the requisite sworn testimony. And if a lender seeks permission from the judge to proceed with foreclosure, you can defeat the motion on the ground of fraudulent documents (or failure to prove ownership).

As all of this unfolds, new details will undoubtedly emerge calling into legal questions hundreds of thousands if not millions of mortgages. The negative effects this will have on the housing industry in particular, and the economy in general, are incalculable, but there is now little question that many homeowners will be able to escape their mortgage obligations for many more months than previously, if not forever.

To learn more about fraudulent affidavits, and your options, see Nolo's article False Affidavits in Foreclosures: What the Robo-Signing Mess Means for Homeowners

Learn more about foreclosure and other options for struggling homeowners in Nolo's Foreclosure topic.