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April 12, 2011

Watch Out For the Newest Foreclosure Scam in California

Scams involving purported mortgage modifications and foreclosure assistance have abounded since the California foreclosure crisis in 2009. The California Department of Real Estate recently warned consumers about the newest version of these scams. (To learn more about foreclosure, check out Nolo's Real Estate & Rental Property area.)

In this scam, a "lawyer" invites homeowners to join a mass joinder or class action against a bank or mortgage company. The "lawyer" promises results such as stopping foreclosures, lowering mortgage payments, lowering principal balances, or eliminating mortgages altogether. "Clients" must pay a nonrefundable fee, often between $3,000 and $9,000 to join the litigation. The litigation is a sham, and the clients receive nothing.

Scammers often solicit victims by mass mail or advertise the "litigation" on the Internet. The solicitations often sound legitimate, and require clients to sign lengthy retainer agreements.

To learn more about this scam, and how to protect yourself, check out the California Department of Real Estate's consumer alert.

by Guest Blogger Kathleen Michon

February 7, 2011

Lawsuits Allege Banks Broke Promises to Homeowners Facing Foreclosure

Two recent lawsuits, in Washington and California, use "promissory estoppel" (a legal theory in contract cases) to get monetary damages from banks that broke their promises to homeowners facing foreclosure

The Washington Case: Promissory Estoppel as a Cause of Action

Abuses by mortgage banks and servicers committed while dealing with homeowners seeking foreclosure relief or mortgage modifications have been well documented. They are especially and eloquently detailed in a class action lawsuit filed on January 10, 2011 in the State of Washington. Reading the Introduction to the complaint (if not the whole document) will be well worth your while. 

Among the claims contained in the class action complaint is a type of breach of contract known as promissory estoppel. Promissory estoppel may seem like an impossible-to-understand example of legal jargon but i'ts actually relatively simple. It means that a party making a promise is prevented (estopped) from reneging on the promise. You can sue for promissory estoppel if 1) someone makes you a promise that is clear and unambiguous, 2) your reliance on the promise is reasonable and foreseeable, and 3) you suffered damages as a result of your reliance. 

You can't hold someone to a naked promise just by itself. In other words forget about suing your parents who failed to deliver on their promise to send you to Harvard. But if you go through all the motions of enrolling, signing a lease for your housing, and buying textbooks, and your parents had good reason to believe that you would act on their promise, you may have a winning case to recover, at the very least, your out-of-pocket expenses, and possibly even for other liabilities you incurred. 

In the class action complaint the promissory estoppel claim deals with a common practice in the mortgage industry. There the bank promised the named plaintiff a permanent mortgage modification if she completed a trial period during which the modified payments were to be paid to the bank. The plaintiff did, in fact, complete the trial period but the bank refused to give her the modification as promised. Here, the requirements for promissory estoppel were clearly met. The bank promised a permanent modification in exchange for three (or more) trial payments. The homeowner reasonably and foreseeably relied on the promise and made the payments. The bank reneged on the promise, and the homeowner suffered damages in that the trial payments would not have been made absent the promise.

You might wonder why this isn't a common-variety breach of contract case. For a contract to be enforceable both sides have to receive something of value (called consideration) in exchange for their agreement to perform the terms of the contract. Also, there has to be an offer and an acceptance. In the situation where the bank makes a promise to modify, it's arguable that only the homeowner is receiving consideration and so a valid contract has not been made. But the law, through the doctrine of promissory estoppel, eliminates the need for mutual consideration and will, under the appropriate circumstances, enforce the promise or award damages if it is not carried out.

Promissory Estoppel in a Recent California Foreclosure Case

The doctrine of promissory estoppel was recently applied to a mortgage workout situation in a California appellate court case titled Claudio Aceves v U.S. Bank (Court of Appeal, Second Appellate District, Div One (1/27/11)). Here Ms. Aceves fell behind on her mortgage and filed for Chapter 7 bankruptcy after the bank served a Notice of Default, a required step in the California foreclosure process. She decided to convert the case to chapter 13 bankruptcy and raise the necessary money to reinstate the loan and pay off the arrearage over the course of the chapter 13 plan. The bank told her they would work with her and that she needn't pursue her Chapter 13 remedy. Relying on this representation, Ms Aceves did not file Chapter 13 and also did not object when the bank filed a motion in her Chapter 7 case to lift the automatic stay (which legally enabled the bank to continue with its foreclosure remedy).

In fact the bank failed to enter into good faith negotiations and instead completed the foreclosure. Ms. Aceves sued the bank alleging a cause of action for promissory estoppel, among others. She argued that 1) the bank's promise to work with her in reinstating and modifying the loan was clear and unambiguous, 2) the bank in fact failed to negotiate the modification, 3) she relied on the bank's promise by forgoing bankruptcy protection under chapter 13 and failing to oppose the motion to lift the stay, 4) her reliance was reasonable and foreseeable, and 5) she suffered damages in the form of losing her house. 

The lower court dismissed the action but the court of appeals ruled that in fact Ms. Aceves had stated a claim for promissory estoppel and should be allowed to proceed with her lawsuit in the trial court. In making its ruling the court specifically found that "U.S. Bank never intended to work with Aceves to reinstate and modify the loan. The bank so promised only to convince Aceves to forgo further bankruptcy proceedings, thereby permitting the bank to lift the automatic stay and foreclose on the property."

As long as this case remains published (and isn't ordered de-published by the California Supreme Court) it provides great precedent if you decide to sue your mortgage lender or servicer for breaking its promises. If you can't find an affordable lawyer, you might consider doing your own state court lawsuit with the help of Nolo resources such as Represent Yourself in Court, by Paul Bergman and Sara Berman-Barrett, and Everybody's Guide to Small Claims Court, by Ralph Warner.

While you may be invited to join a class action, those types of cases usually are much more  beneficial to the lawyers bringing them than they are to the plaintiffs. If possible, you should consider going your own way. However, sometimes a class action is the only way to find a lawyer without parting with an arm or a leg and if that is your situation, and self-help is not an option, by all means sign up as a class action plaintiff. . 


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.

September 14, 2010

The Government and Banks May Punish "Strategic Defaults"

What Are Strategic Defaults?

A number of articles have recently appeared in leading newspapers and magazines reporting that more and more people are engaging in what they call "strategic defaults," defined as not paying your mortgage when you can afford to do so.

The typical story involves a family with a decent income who bought into the housing market when it was high and who now are upside down on their mortgage payments. Rather than continuing to the keep the mortgage current, this family decides to remain in the home without paying the mortgage and then moving when forced to do so (usually due to foreclosure).

This tactic is similar to the advice I give clients who would benefit from stopping their mortgage payments in order to save money to use when they must leave their homes. The difference is that most of the people I speak to really can't afford their mortgage anyway (so foreclosure is probably inevitable). By stopping their mortgage payments, these folks are just trying to cut losses and save some money which they'll need to find new housing at some point in the future.

Proposed Government Actions to Discourage Strategic Defaults

It is not against any law to stop paying your mortgage, whatever the reason. However, the banking industry is pressuring lawmakers and the government housing entities (Fannie Mae, Freddie Mac, and the Federal Housing Administration) to punish people who have engaged in strategic defaults.

Effective October 1, 2010, Fannie Mae will not purchase any mortgage made to a person who has engaged in a strategic default within the past seven years, and Freddie Mac is expected to follow suit. Since almost all mortgages are purchased Fannie or Freddie for securitization and resale, if this happens to you, you will probably be banned from the home mortgage market for seven years.

And it gets worse. The U.S. House of Representatives has passed a bill [H.R. 5072, FHA Reform Act of 2010] that would deny insurance under the Federal Housing Administration to anyone who has engaged in a strategic default. Since FHA insurance is a requirement for many mortgages, this law (if passed by the Senate) might prevent you from obtaining a new mortgage loan -- forever.

Distinguishing Between Strategic Defaulters and Truly Distressed Homeowners

But how will "strategic default" be defined by the law? The House bill leaves the definition of "strategic default" to the HUD Secretary. But figuring out what is and isn't a strategic default won't be an easy task. What if you obtained a modification "in good faith" but then purposely re-default? Do you need to show proof of unemployment or other hardship? If differentiating between strategic defaulters and truly distressed borrowers were an easy task, laws would be better able to distinguish between the two groups. But it's not an easy task, and the laws are unlikely to do a good job of distinguishing between the two groups. 

Next up: Using the loan modification process to avoid a "strategic default" accusation.

September 7, 2010

How the Modification Process Can Help Even If You Can't Modify Your Loan

The fact that the Making Home Affordable Modification Program might not work for you doesn't mean you can't benefit from it. (To read about some of the reasons the program isn't working, see my previous blog post Why Hasn't the Make Home Affordable Program Worked?)

You Can Save Money by Not Making Mortgage Payments

First of all, while you are engaged in the modification application process, you won't be expected to pay your mortgage. (In fact, if you are paying your mortgage, many banks will refuse to entertain your modification request on the ground that you obviously don't need it. Talk about a Catch 22!) And as long as you do your part in the modification process -- which means completing and sending all requested paperwork -- most lenders will suspend any foreclosure proceedings they have already initiated.

Delays in the Process Means More Time In Your Home, Payment-Free

If you have decided to use delay as a money-saving tactic by living in your house payment-free as long as possible (see The Foreclosure Survival Guide, by Stephen Elias (Nolo), Chapter 9), misplaced paperwork and repetitive requests for certain documentation will contribute to the delay and provide you with an opportunity to save another couple of months (or more) of mortgage payments. While some lenders may decide to push forward with foreclosure even while they are negotiating with you, most won't. If your modification efforts ultimately fail, but the process takes six months (during which you don't make mortgage payments), your net savings may  be greater than if you received the modification in the first place.

Of course, for people who desperately want to keep their homes, money saved during the modification process won't keep you in your home (assuming you ultimately fail to get the modification you need). But if you are resigned to leaving your home sooner or later, a long and messy modification process gives you time to amass a not-insignificant amount of money to find new shelter when it becomes necessary.

Some of you may consider me overly cynical for suggesting that you take advantage of the modification process in this way. However, as I consistently remind people, the home mortgage industry is run for the benefit of the investors and has never been known for its interest in the well-being of its borrowers, so there is no particular reason for you to be concerned about its health and welfare.

Next up:  How home modifications can help homeowners avoid an accusation of strategic default.

September 3, 2010

What HUD-Counselor Shortages Mean for Home Loan Modifications

When the Making Home Affordable Program was launched, the Department of Housing and Urban Development (HUD) had a pretty good network of counselors in place. Not only were these counselors free of charge and highly trained in the ins and outs of mortgage modification procedures, but they would advocate for the homeowner in seeking the best available modification under applicable regulations and policies. Where banks might give modification seekers the cold shoulder, HUD-approved housing counselors had back channel connections that would push the request forward in a reasonable amount of time.

For these reasons, the second edition of The Foreclosure Survival Guide (which I wrote about the same time as the Making Home Affordable Program launched) strongly recommends that you hook up with a HUD-approved housing counselor to help you deal with your bank under its--and the Making Home Affordable--guidelines.

New Landscape: Not Enough HUD-Approved Counselors

Unavoidably, the number of people seeking assistance from HUD-approved housing counselors ballooned with the advent of the Making Home Affordable Program, and from all accounts HUD's housing counselor program has not kept pace. My clients have consistently reported that working with HUD counselors provides little or no advantage over working directly with the bank, and that counselors, like banks, lose paperwork and require redundant submissions over a long period of time without any tangible results.

Old Advice May No Longer Hold True

In short, my previous universal answer to people facing foreclosure ("call 1-888-995 HOPE and hook up with a HUD-approved housing counselor") may no longer be operative in all -- or even most -- cases. On the other hand, you have little or nothing to lose by starting with a HUD-approved counselor, provided you approach the relationship with a tad of skepticism. And my advice in The Foreclosure Survival Guide about not paying for modification help still holds. In most cases it won't help you to hire a lawyer or real estate broker to assist with your modification request. The fact is, too many people are seeking modifications for most banks to respond in any reasonable time frame.

August 27, 2010

Why Hasn't the Make Home Affordable Program Worked?

In my previous blog, I talked about how the Making Home Affordable programs have not been particularly successful in keeping families in their homes, especially given the amount of money thrown at the problem. (See More Money for Foreclosure Prevention: Will It Help?) So this brings me to the next inquiry: Why haven't these programs worked?
 
There are three overarching reasons why the Making Home Affordable program has failed in its primary mission, which is to keep people in their homes.
 
  • First, the program has erroneously depended on the good faith of the American mortgage lending industry, a mistaken approach for many lenders.
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  • Second, many people facing foreclosure lack an income stream to support even a radical modification.
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  • Third, even if good faith among the banking industry was widespread and unemployment wasn't so high, the Making Home Affordable program was still doomed to fail because of the sheer number of people applying for modifications. As a whole, the banking bureaucracy has not been up to the task of processing this flood of modification requests, which has resulted in many applicants giving up out of disgust and despair. 

 

August 25, 2010

More Money for Foreclosure Prevention: Will It Help?

A recent announcement by the Obama administration provides an additional two billion dollars worth of foreclosure prevention assistance in seventeen of the hardest hit states. This is on top of 1.5 billion dollars allocated earlier in the year for the five hardest hit states. And HUD will kick in one billion dollars for foreclosure prevention efforts in the additional states. The   programs target unemployed homeowners and will implement by the states to fund locally originated foreclosure-prevention programs. These programs typically help homeowners reduce their principal mortgage, deal with second mortgages, and, where appropriate, facilitate short sales and deeds in lieu of foreclosure by providing assistance to move or find rental housing.
 
But will the additional money and new programs help? It's not likely.
 
For starters, two billion dollars (or 3 or 4  billion) doesn't seem like an overwhelming number given the many billions of dollars that have already been spent in mostly fruitless efforts to halt the foreclosure epidemic. Of course those who successfully get help to stay in their homes will benefit, which has been the thinking all along for the basic Making Home Affordable programs. However, the Making Home Affordable programs have been in place for well over a year, and have only resulted in several hundred thousand mortgage payment modifications (and far fewer refinancings) out of the seven to eight million foreclosure filings on record. And even where modifications have occurred, the homeowner has defaulted anew in more cases than not. Simply put, the Making Home Affordable program has failed to make homes affordable for most of the people who have tried to benefit from its provisions, and there is no reason to think these new programs will be any different.
 
Next up: Why haven't the Making Home Affordable programs worked?
July 16, 2009

Beware of Commercial Mortgage Modification Services

Nothing gets my blood boiling faster than when I see struggling homeowners pay thousands of dollars to hire someone to represent them in a mortgage modification negotiation. My advice is always the same: attempt to hook up with a non-profit HUD-approved housing counselor and dump the commercial service. I also suggest they demand their money back and consider reporting the service to their state's attorney general and the Federal Trade Commission since these services are increasingly illegal.

From the time the foreclosure rates started skyrocketing, self-styled foreclosure-rescue operations landed on at-risk homeowners like locusts on wheat fields. When people still had equity in their homes, the operators of these scams would find ways to separate the mark from his or her home ownership -- supposedly as a temporary means of dealing with the foreclosure. It didn't take long for the home's equity to end up with the scammers and the homeowners to end up on the street.

As home values continued to plummet and homeowners were increasingly underwater on their mortgages, the foreclosure rescue operations turned to charging an up-front fee -- typically in the low thousands -- to replace their previous equity-stripping practices. When modification results were not forthcoming in the face of looming foreclosures, homeowners were told to be patient and that everything was on course. At some point, the homes would be sold in foreclosure and calls to the "rescue" company would go unanswered. 

Quick to respond to these obvious scams, many states have passed new legislation that, among other things, prohibited the collection of "foreclosure rescue" fees prior to the delivery of the service. In addition the Fair Trade Commission recently announced lawsuits in 23 states against perpetrators of these scams. Unfortunately, as is generally true with consumer protection legislation, lawyers have for the most part been exempted from their provisions -- and law firm ads on radio, cable TV and the Internet exhorting people to hire them to handle their modification activities have mushroomed.

Although I have no proof, the timeline of these developments tells me that at least some of these attorneys are simply fronting for the same companies that were scamming homeowners all along. But even if the attorneys are not fronting for foreclosure rescue scams, they might as well be -- as I point out below.


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