New Foreclosure Laws in Effect! But before you pop the cork…

 Consumer Law, Foreclosure, Indiana  Comments Off on New Foreclosure Laws in Effect! But before you pop the cork…
Jul 142011
 

This past July 1st, a slew of new (and amended) Indiana statutes went into effect, including the ones in Senate Enrolled Act 582.  SEA 582 contains several new and significantly changed laws regarding residential foreclosures.  As I see it, have some of these changes are good, some are not so good, and some just make me nervous.  Over the next few posts, I will delve into what I see as the most significant changes in SEA 582, and what they mean to Hoosiers facing foreclosure. 

To start, here is my summary of the provisions in SEA 582 that will have the greatest effect on Indiana homeowners and the attorneys that represent them:

1.    Changes to the foreclosure settlement conference process (IC 32-30-10.5 et al).  There are some helpful changes here, including improved notice to homeowners of the availability of a settlement conference, clarification of what, when, and to whom documents must be provided by the borrower and the creditor, a prohibition against charging the homeowners for the lender’s attorney’s fees for attending the settlement conference, and treating settlement conference requests as an appearance under the trial rules. 

However, there is one change makes me pause, namely, the addition of IC 32-30-10.5-8.6, which gives the judge the authority to order a borrower to make monthly “mortgage” payments, either to the court or into an attorney trust account, while the foreclosure action continues.  These payments are then to be disbursed either to the lender or the homeowner, depending on what happens during the foreclosure action.  Although the idea is worthy (a homeowner must be able to make monthly payments in order for a modification to succeed), I see some potential problems and consequences for unwary homeowners and their attorneys.  

2.    Creation of a new chapter granting immunity for lenders and others entering onto property that is “vacant” or “abandoned.”  This falls under the “nervous” category.  I’ll delve more into what constitutes “vacant” or “abandoned,” and how this can either help or, in the wrong hands, hurt certain homeowners. 

3.    A “suggestion” that the Legislature establish a committee to consider switching to non-judicial foreclosure.  Oh, boy.  I know, putting together a group of people to discuss whether to make a major change in how (and how fast) homeowners can lose their homes is a long way from actually making that change.  I also know that we are not the only state to consider this change (Florida has batted this one around, too).  So, I will go through some of the pros and cons of both types of foreclosure, and what Indiana homeowners could expect if this committee decides to recommend changes.  

 That’s enough for now.  Stay tuned – I’ll keep these postings coming over the next couple of weeks.

Chase opens mortgage counseling office in Indy

 Foreclosure  Comments Off on Chase opens mortgage counseling office in Indy
May 252011
 

The Indianapolis Star reported today that Chase has opened a new office downtown to help homeowners having trouble paying their mortgages with Chase.  So far, it is the only one in Indiana (although there are four in the Chicago area for those in da region).  Before, if a homeowner wanted to ask for help, the only choice was to call a toll-free number and hope that whoever (eventually) answered the phone would care.  Now, homeowners will be able to sit down with a Chase employee and try to work something out, face-to-face.  Chase says that these centers are much more effective at preventing forelosures (not surprising – most of us are more willing to help if we have to look the person in the eye than if they are just yet another faceless account number on the phone).   Of course, this won’t help everyone.  Those who have already lost their homes have already moved on.  Oh, and if your loan is not actually owned by Chase (like 80% of the loans Chase handles), then there is only so much Chase can do to help.   But, it is one more tool available to try to get back in the homeownership game.

Short Sales, Foreclosures, and FICO

 Bankruptcy, Consumer Law, Foreclosure, Indiana  Comments Off on Short Sales, Foreclosures, and FICO
Apr 272011
 

One of the various alternatives available to clients facing foreclosure is a “short sale.”  For those who either do not qualify for a loan modification, or who do not want to remain in the home (for whatever reason), a short sale can allow a homeowner to sell the property (albeit for less than the amount owed) instead of losing the home through foreclosure. 

Of course, most people also want to know what effect each of these alternatives would have on their credit scores.  Other than my typical response that they have more important things to worry about than a credit score – like how they are going to keep a roof over their heads and have enough money left over to put food on the table – I could only guess at what the Magic FICO Ball would have in store.

Recently, however, FICO did some research on how mortgage delinquencies affect credit scores.  What they found was that – well – it depends.  To determine the effects, FICO created three “representative” consumers, each with an active, current, “paid as agreed” mortgage.  Here’s what I took away from the charts:

  • Short sales with a deficiency balance are treated almost exactly the same as a foreclosure.  
  • BUT, once you fall behind on your mortgage payments, and you get a short sale without a deficiency balance, then then you’re not going to be penalized much more (if at all), and certainly not as much as a foreclosure. 
  • Using bankruptcy to save your home (or to get rid of a deficiency balance) has the greatest negative impact – for the short term, at least. 
  • If you’re looking to get back to a 780 credit score, it’s going to take a long time, but it is possible. 

In Indiana, lenders are allowed to pursue the (now former) homeowner for any deficiency (e.g., the amount left on the debt after the sale proceeds are deducted).  The only ways to avoid a deficiency are (a) an agreement with the lender, (b) bankruptcy; or (c) paying it.  Since most people in foreclosure don’t have the resources to pay a deficiency, we’re usually looking at the first two options.  A short sale may result in the deficiency being waived, or an opportunity to settle for a lower amount.  However, if there are more global problems (like a lot more debt than just the mortgage), then bankrutpcy may be the best option.  Of course, each of these options should be discussed with a knowledgable attorney before committing to a particular course of action.

One last thought on FICO:  FICO scores are a reflection of your ability to put yourself deeper into debt.  Too much debt is what brings people into my office.  Taking on more debt when you’re already drowning is not going to help.  Getting out of the burdensome debt, once and for all, is the real solution.  A good FICO score will only help if it allows you to refinance or consolidate your current debts so that you can actually pay them off within a reasonable amount of time.  If you can’t do that right now, then your FICO score is irrelevant.  Focus instead on what you need to do to survive and thrive, without relying on more debt.

AGs Start Settlement Process with Mortgage Servicers

 Consumer Law, Foreclosure, Indiana  Comments Off on AGs Start Settlement Process with Mortgage Servicers
Mar 082011
 

Last October, the Attorneys General of all 50 states launched an investigation of the practices of the largest residential mortgage servicers.  Apparently, progress has been made.  Yesterday, the American Banker leaked an alleged draft settlement proposal from the attorneys general.  According the AB, this initial proposal was presented last week to the five largest residential mortgage servicers (Bank of America, Citgroup, JPMorgan Chase, Wells Fargo & GMAC). 

The scope of this initial proposal is fairly broad.  Some of the proposed provisions are similar to those currently being reviewed by the Indiana Supreme Court, while others go much, much further.  I expect the servicers will push back hard against nearly all of the proposed terms, and it will be months before anything is finalized. 

Some highlights in the proposed terms, and how they would play out in Indiana, include:

  • Loss mitigation efforts.  This proposal incorporates HAMP, but goes beyond it in several ways.  Under this proposal, servicers would have an “affirmative duty to thoroughly evaluate borrowers for all loss mitigation options prior to foreclosure referral.”  Borrowers who have made three timely trial period payments under HAMP would have to be granted a permanent modification, effective the first month after the third payment is paid.  The current “dual-track” process (e.g., pursuing the judicial foreclosure at the same time the borrower is being reviewed for a modification) would be verboten – as long as the borrower is being considered for a modification, then the servicer can not file a foreclosure complaint, and before filing a complaint, the servicer will have to certify to the court that the servicer attempted loss mitigation with the borrower.  If the complaint is filed before the borrower requests assistance, then the servicer will have to stop the foreclosure process until a decision is made on the modification request.  These proposals parallel the recommendations from the Indiana AG to the Indiana Supreme Court.  In addition, if documents or information are missing from a modification request, the sevicer will have to notify the borrower in writing within 10 business days of exactly what is needed, and describe any deficiencies.  I would think this last point would be a no-brainer for the servicers.  Borrowers find the modification process confusing and overwhelming.  If the servicers help the borrowers understand exactly what the servicers want/need –> the borrower is more likely to provide the needed information –> servicer’s staff spends less time with each file –>increased profits.   Win-win. 
  • Defined Deadlines.  A servicer would be required to make a decision on a borrower’s initial modification request within 30 days.  The borrower’s financial documents will be valid for 120 days.  If denied for HAMP, the borrower must be considered for any alternative programs within 15 days.  If denied, the borrower must be notified in writing within 10 days, and all denials must be independently reviewed, and a foreclosure complaint can not be filed until the review is complete. 
  • Adequate Staffing.  ‘Nuf said. 
  • Single Point of Contact.  The servicer would be required to provide the borrower with a single employee, who would be responsible for handling all communications with the borrower.  Great idea, and already part of the OCC’s proposal. However, the only recourse if a POC dumps all calls into voice mail and/or never returns calls (which has happened to some of my clients who actually have a single POC) is to request to speak with a manager or supervisor. 
  • Loan Portals.  The servicers would have to develop the technology to give borrowers free direct access to loss mitigation information, including a way for the borrowers and housing counselor to submit documents electronically.  At least one servcier has already been working on such a system. 
  • Principal Reduction.  The proposal calls for reducing the principal balance in certain circumstances, including if the borrower is in bankruptcy.  Right now, HAMP also allows a servicer to reduce principal, but does not require it, and bankruptcy courts have no power to require lenders to reduce principal on a partially-secured residential mortgage loan.  This proposal is open to further discussion. 
  • Consider other factors affecting ability to pay.  The servicer would be required to consider the borrower’s other debt load to determine whether a loan modification would be sustainable.  In addition, the servicers’ loan modification programs would be required to cover second mortgages as well as first, and the modification terms for a first mortgage would also have to apply to the second.  Interesting, but most second mortgages are not serviced by the same company – and if they are, they can easily be sold or transferred to get around this provision. 
  • Denial of Loss Mitigation.  If a loan modification is denied, the servicer would have to disclose to the borrower the reasons for the denial, including the property value and discount rates used.  If the investor denied the modification, then the servcier must provide the investor’s name, the investor’s reason for denial, and a copy of the part of the agreement that provided the basis for the denial. 
  • Tighter short sale deadlines.  A decision must be made within 30 days. Right now, that is the law in Indiana – not always followed, but the law nonetheless. 
  • Limits on Fees.  All default and foreclosure-related fees must be bona-fide, reasonable, and disclosed in detail to the borrower.  Servicers would be required to post a fee schedule on their websites.  No fees may be charged while a modification application is being reviewed, or during a trial modification.  So-called “property preservation” fees (a/k/a “drive-by fees”) could only be charged if the servicer has a “reasonable belief” that the property is vacant, and property valuation fees may be charged only once a year.  Right now, servicers charge nearly all borrowers in default a monthly fee (usually $10-$20) just to have someone (allegedly) drive past the house, even if there is plenty of other evidence that the borrowers are still living there (e.g., borrowers are required to certify as part of the loan modification process that they are still living in the house, and frequently must provide a utility bill to back them up).  These drive-by fees are pure profit for the servicers, and I think they’ll fight hard to keep the cash flow coming.  There are also restrictions on fees paid to the servicers’ affiliate companies and fee-splitting. 
  • Force-placed insurance.  Force-placed insurance is the most expensive insurance money can buy, and it only protects the mortgage company’s interest, not the homeowner’s.  Before force-placing insurance, a servicer would be required to try to maintain the homeowner’s existing (and less-expensive) policy, even if the servicer is required to advance the funds to do so.  If the servicer does force-place insurance, then the insurance company can not be affiliated with the servicer, and fee-splitting and kickbacks would be prohibited.  Again, this would be great, but this practice contributes a too much to the servicers’ bottom lines for the servicers to cave easily. 
  • Account summary.  At least 45 days before filing for foreclosure, the servicer would be required to provide the borrower with an “itemized, plain language account summary” covering all activity over the past 36 months.  Failure to list a fee on this summary means that the fee is waived.  I like this one, especially the “stick” part to encourage servicers to inform borrowers about all the fees.  Right now, the best way to get an account summary is to make a qualified written request under RESPA, but this requires the borrower to be proactive, many times the account summary is difficult to decipher, and the servicers may “forget” to include all the fees.  In Indiana, although lenders are supposed to provide a payment history to the borrower at a foreclosure settlement conference, not all borrowers request a settlement conference, not all lenders remember to do this, and the time period covered is usually much less than 36 months. 
  • Proof of ownership.  The foreclosure complaint would have to include the basis for asserting that the plaintiff has the right to foreclose, and all assignments and transfers would have be attached to the complaint.  This is already standard procedure in Indiana, and would be further clarified under the plan proposed to the Indiana Supreme Court.  However, the AG proposal goes beyond this requirement, and would also require the complaint to identify the current location(s) of the original note, mortgage, and any interim assignments.
  • Affidavits.  Basically, servicers will have to follow state laws regarding preparation and execution of affidavits.  There are a couple small additions (e.g,, training requirements, no stamped signatures, and notary logs), but otherwise, these proposals reflect what the laws actually require. 
  • Posting Payments.  Payments will have to be posted within two business days after receipt.  If a payment is more than $50 short of the full scheduled payment amount, then it can be posted to a suspense account, but the borrower must be notified about the suspense account and any activity in that account.  Once there is enough funds in the suspense account to make a full payment, then the servicer must apply the payment to principal and interest.  Funds in a suspense account could not be used to pay fees until the regular loan payments (including principal, interest, and escrow) are current.  This last one’s the kicker.  The practice of applying suspense account money to the servicer’s fees instead of payments keeps the borrower delinquent longer, and prevents the investor from getting the funds it is entitled to.  Granted, some of the fees are paid to third parties (attorneys fees, titlework, etc.), but many of the fees are internal (late fees, some BPOs, and even some drive-by fees) and are pure profit for the servicers.  Servicers are NOT going to like this proposal. 
  • Audits.  Servciers will have to conduct regular audits of affidavits and account summaries to verify that they comply with existing law and the terms of the settlement agreement, and take appropriate remedial steps if problems are discovered.  In my opinion, the servicers’ internal auditors should already be doing this.  The AGs also want the servicers to have their independent auditors audit the servicers’ account information systems, and make copies of the report available to the AGs.  OK, nobody likes being audited, plus audits are expensive.  Then again, these systems should already be a part of the annual audit cycle.  There’s too much risk from an auditor’s perspective to ignore the system that is at the very heart of the business.   
  • Good Faith and Fair Dealing.  This means that the individual borrowers (and their attorneys) should be able to use a servicers’ failure to abide by the settlement terms as an affirmative defense in a foreclosure.  Big stuff here.  Right now, not all states allow homeowners to use a servicer’s failure to follow HAMP as a defense or counterclaim to a foreclosure (although Indiana probably would), but having this standard stated explicitly in the agreement would make it easier for borrowers to enforce the settlement provisions in their individual foreclosure actions.
  • Penalties.  Finally, the fun stuff.  It looks like the AG’s want a fund to be used to educate and pay homeowner-victims (although it will most likely be insufficient to fully compensate any single borrower).  It is not clear if this allows private remedies for non-compliance. 

What this proposal doesn’t cover:  MERS.  That bohemoth will have to wait for another day (or month). 

All in all, it’s a good start.  Of course, this is the starting position for futher negotiations, so don’t expect the final settlement to be quite as beneficial to individual homeowners.  Plus, repealing HAMP would add another twist to the process (the Magic 8-Ball answer to that: “Outlook not so good.”).

FTC investigating Ocwen

 Consumer Law, Foreclosure  Comments Off on FTC investigating Ocwen
Mar 072011
 

Ocwen Financial is one of the largest mortgage loan servicers in the U.S.  Several of my clients have loans being serviced by Ocwen, and some of their loan servicing stories seem to have been written by Kafka.  Now, the FTC is apparently investigating Ocwen’s operations and foreclosure practices, as they are doing with several other large mortgage loan servicers, and I expect that Ocwen will eventually reach some kind of financial settlement with the FTC, as other servicers have done.  But that’s just money – a cost of doing business.  As long as Ocwen is still making a profit from their servicing and foreclosure practices, they have no incentive to make any changes.  I understand that – they are, after all, doing this to make as much money as possible for their stockholders.  So, unless the FTC (or someone else) manages to find a way to align Ocwen’s profit-making goal with the rights and needs of individual homeowners, there won’t be any significant changes.  And that’s just the way it is.