Attempt to require “losers” to pay attorney fees fails

 Consumer Law, Indiana  Comments Off on Attempt to require “losers” to pay attorney fees fails
Feb 012013

Indiana Senate Bill 88, which would have required the “loser” in a civil lawsuit to pay the “winner’s” legal fees, has been withdrawn by the author, Sen. Mike Delph, R-Carmel. Hallelujah.

Why was this a bad idea? First, not all cases have a clearly defined “winner” and “loser” when all is said and done. Sometimes, each party wins on at least one issue, and loses on at least one more. Sometimes nobody “wins,” especially in divorce and guardianship cases.

Second, assuming the reason for this change was to prevent frivolous lawsuits, this purpose is already served by IC 34-1-32-1, which allows a court to award attorney’s fees to a  prevailing party, if it finds that another party brought or maintained a frivolous, unreasonable or groundless claim or defense,or litigated the action in bad faith.

Third, just the possibility of being forced to pay the other side’s fees – even if there is a really, really good case – would have a chilling effect on bringing lawsuits altogether, including those with merit. This is especially true for those with the most to lose – individuals who have already been taken advantage of, who are already loathe to rock the boat again and call attention to their problems, who are on the brink of financial ruin (if they haven’t already gone over) and the only way they can afford to get help for their problems is to seek out pro bono legal counsel, agree to contingency fee arrangements, or proceed  without an attorney at all and hope for the best. Agreed, not all cases should be brought, and not all problems are best resolved through the judicial process. However, if we take away the last hope of those who have been victimized, scammed, or treated unfairly, then those that victimize, scam, and act unfairly will only continue to gain power and resources at the expense of those that don’t.

Finally, this is America.  The English require the loser to pay – which is why it is called the “English Rule.”  The rule that requires each party to pay its own fees and costs is called the “American Rule.” Let’s keep it that way.

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.

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.”).

Crawling Away from Your Indiana Home

 Bankruptcy, Consumer Law, Foreclosure, Indiana  Comments Off on Crawling Away from Your Indiana Home
Feb 072011

Last week, Ryan Grimm of the Huffington Post (you know, the online news channel that just sold itself to AOL) did a piece called “Learning to Walk: Fear, Shame and Your Underwater Mortgage” where he wrote about his conversations with people who were thinking about walking away from their homes and the mortgages dragging them under.  A year after the conversations started, of 58 initial homeowners he interviewed, only 8 were still paying on their mortgages, and 10 could not be found anymore (and I would posit that most them had moved away).  As for the rest of the homeowners, all of them were either in the process of walking away or had already done so.  Many said their interactions with their lenders left them feeling alone and powerless; others were left with just hostility towards their lenders.  Most felt a mix of relief and shame. 

Of course, there are ramifications for walking away (even if you are really just crawling away), and it ain’t just your FICO score.  Indiana’s laws make it darn near impossible to walk away from an underwater home without paying some penance or penalty.   Indiana is a “recourse” state, meaning that the lender can come after you for more money if your house sells for less than the amount you owe.  And, once the lender has that foreclosure judgment against you, the lender can either try to collect the judgment debt itself (plus interest at 8%), or sell that judgment debt to a third-party debt buyer.  Even after you home is sold, you can be hauled in front of a judge to tell the lender or debt buyer (and everyone else there) how much you make, what you own, and how you’re going to pay back this debt (this is called a “proceedings supplemental” – and if you don’t show up, the court can issue a warrant for your arrest).  Oh – and the collection efforts can continue to haunt you for the next 20 years (or more).  Plus, if you ever buy another home, that unpaid judgment might even attach to the new place.  Just walking away doesn’t necessarily mean you’re free. 

So, you want to get rid of this deficiency.  And soon.  There are ways, none of them pleasant:

  1. Pay it off.  The lenders prefer this method, and will continue to push for it as long as possible.  However, if you had the money to pay the deficiency, you probably would have paid your mortgage, or qualified for a modification. 
  2. Get a bankruptcy discharge.  A bankruptcy filing can be done before or after the foreclosure.  Determining whether bankrutpcy makes sense for a particular couple or individual requires assistance and counsel from a knowledgable bankruptcy attorney. 
  3. Negotiate a settlement with the lender (or whomever buys the debt).  This can be done before a foreclosure (through a short sale or a deed-in-lieu) or afterwards (just like settling an old credit card debt).   In certain circumstances (e.g., the HAFA program), the deficiency must be waived.  Otherwise, it’s up to the lender (or more likely the investor or the mortgage insurance company) whether or not to accept the house as “payment in full.”  The good news is, in Indiana at least, if the lender approves a short sale or deed-in-lieu and the agreement does not expressly preserve the lender’s right to sue you for the deficiency, you’re off the hook.  The lesson: if you do a short sale or deed-in-lieu, make sure that the lender can’t come after you for the rest later before you agree to it. 
  4. Die.  I really don’t recommend this method.  In addition, the lender may still try to collect from your estate, even after you’re gone.   

That said, walking away can, in many circumstances, still be the best thing to do.  I do have clients that, after running and scrambling on the HAMP-ster wheel for months on end, finally decided to get off and walk away (usually using bankruptcy to lock in this new-found freedom).  And yes, they also feel that mix of relief and shame.  However, as time goes on, the feeling of shame fades, and is replaced with more relief, and even joy – the joy of walking without the weight of unaffordable mortgage payments; the joy of knowing that their energy is no longer being drained from fighting with a nameless, unresponsive, and sometimes even abusive lender; and the joy of re-gaining their focus on their families, their faith, and planning for a new future.