The Indiana Supreme Court is now seeking public comments on the Mortgage Foreclosure Best Practices submitted by the Indiana Attorney General and the Indiana Foreclosure Task Force in January (see my original post on the proposals here). I urge all Indiana homeowners and the attorneys that represent them to weigh in on the proposals, especially considering that the Federal programs aimed at helping homeowners are in jeopardy.
Well, the government has finally realized the obvious. And they want to do something about it. Maybe. Sorta. Well….we’ll see.
Today, John Walsh (this one, not that one – although maybe it should have been) will be presenting the resultsof the OCC’s investigation of the mortgage servicing industry to a Senate Banking Panel. As part of this investigation, the OCC apparently discovered “significant weaknesses” in mortgage servicers’ foreclosure operations. “In general, the examinations found critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third-party law firms and vendors. These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse affect on the functioning of the mortgage markets and the U.S. economy as a whole. By emphasizing timeliness and cost efficiency over quality and accuracy, examined institutions fostered an operational environment that is not consistent with conducting foreclosure processes in a safe and sound manner.”
That said, the examination also revealed that most of the loans were seriously delinquent, and that the servicers had properly maintained the ownership documentation (e.g., the notes) that supported their legal standing to foreclose. Actually, that part doesn’t surprise me. There is no question that many, many homeowners are unable to make their mortgage payments for whatever reason, and once you get behind, it becomes extremely difficult – if not impossible – to catch back up. As for “maintaining ownership documentation,” that’s certainly true for Indiana mortgages, where it is fairly simple for a lender to establish the right to foreclose.
So, back to the problems – what to do, what to do? Ah, the OCC has an idea: “The OCC and the other federal banking agencies with relevant jurisdiction are in the process of finalizing actions that will incorporate appropriate remedial requirements and sanctions with respect to the servicers within their respective jurisdictions. We also continue to assess and monitor servicers’ self-initiated corrective actions. We expect that our actions will comprehensively address servicers’ identified deficiencies and will hold servicers to standards that require effective and proactive risk management of servicing operations, and appropriate remediation for customers who have been financially harmed by defects in servicers’ standards and procedures.”
So, what are these actions and sanctions? Well, first it means paying money to the federal government, because, let’s face it, that’s who paid the banks all that money to modify homeowner’s mortgages in the first place. The amount? Less than $5 billion in fines and mortgage modification assistance. Sounds great, right? Well, keep in mind that in 2008, the state attorneys general reached an agreement with Countrywide for $8.4 billion to settle their predatory lending probe.
So, maybe the OCC has a better idea. Let’s ask the servicers to establish national servicing standards. Among the OCC’s recommendations:
- Apply payments first to principal, interest, taxes and insurance before fees;
- Provide adequate notices to borrowers about account and payment records;
- Promptly respond to borrower inquiries and complaints, promptly resolve disputes, and provide an avenue to escalate and appeal unresolved disputes;
- Make good faith efforts to engage in loss mitigation and foreclosure prevention;
- Improve document tracking to reduce the chances of losing documents provided by the borrowers;
- Provide borrowers with a single point of contact responsible for monitoring and acting on loan modification requests;
- Notify borrowers of the reason for denial of a loan modification, including NPV information;
- Suspend foreclosure proceedings for borrowers in successfully performing trial modifications when they have the legal ability under the servicing contract to do so; and
- Have an appropriate number of trained and dedicated staff, reporting to management, with the authority and responsibility to address the borrower’s concerns so they cannot “fall through the cracks.”
Great ideas, all of them. These should have been mandatory a long time ago. But these “ideas” are hardly novel – many are already required under RESPA and HAMP – and the servicers still can’t get it right.
So we know that asking for voluntary participation won’t work. We know that capping the “stick” at $2,000 (plus attorney fees – if you can get them to pay) to borrowers that push the issue won’t work. If the OCC has something that will, then fine. But the OCC should not short change borrowers for the sake of an easy fix.
The Indiana Court of Appeals has issued a significant opinion regarding Sales Disclosures, changing the rules for when a buyer can pursue a seller for a misrepresentation on a sales disclosure. As recently as 2009, the rule was that a buyer could not recover from a seller for the seller’s misrepresentations on a sales disclosure form as long as the buyer had a reasonable opportunity to inspect the property. This new opinion, however, holds that a “seller may be liable for any misrepresentation on the sales disclosure form if the seller had actual knowledge of that misrepresentation at the time the form was completed” (emphasis added).
The case involved the sale of a home and about 16 acres of land containing wetlands. Before buying the property, the buyers asked the sellers whether the property could be developed for additional residential housing. The sellers said yes, that it could be developed. The sellers also prepared and signed a “Seller’s Residential Real Estate Sales Disclosure Form” (“Sales Disclosure”) as required under Indiana law. On this form, the sellers marked “no” to the disclosures relating to (a) whether there were structural problems with the home; (b) whether they had received any governmental notices affecting the property; (c) whether there had been any additions or alterations done without the required permit; and (d) whether the property was in a flood plain. A pre-purchase inspection apparently did not reveal any major problems, so the deal closed.
Unfortunately for the buyers, they later discovered that the Army Corp of Engineers had notified the seller about violations of the Clean Water Act, and that the property could not be developed because of the impact on the wetlands. The buyers also got a structural engineer to look at the house, which revealed several code violations and structural problems with the house. So, the buyers sued the sellers for fraud and negligence for their misrepresentations on the Sales Disclosure and the sellers’ response to the question of whether the land could be developed. The trial court dismissed the case, and the buyers appealed.
The court of appeals reversed, and sent the case back to the trial court. The court looked at the general rule that a buyer of property has no right to rely on the seller’s representations – even fraudulent representations – regarding the quality of a property, if the buyer has a reasonable opportunity to inspect the property before buying it. The court also looked at the Indiana law requiring the sales disclosures, and determined that this law explicitly shielded a seller from liability for any “error, inaccuracy, or omission” if it was “not within the seller’s actual knowledge.” IC 32-21-5-11(1). However, for this logic to work, the legislature must have believed that a seller with actual knowledge of a defect has an affirmative duty to disclose the defect, and therefore could be held liable for not disclosing it. And this is what the court held.
What this means is: If you are a seller, and you know of a problem with your home, you can’t lie about it, pretend that it isn’t there, or try to cover it up. You have to be upfront about it, because you can’t expect to get away with it. If are a buyer that discovered a major problem that had to have been present before you bought the house, and that problem wasn’t disclosed on the sales disclosure, you may be able to recover against the seller, IF you can prove the seller knew about it. And that’s not just should have known about it – the standard is “actual knowledge” of the defect. In order to recover from a seller, the buyer will probably need the assistance from an attorney, the realtors, and an expert to testify regarding both the existence of the defect and whether the seller knew about it as of the date of the sales disclosure.
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:
- 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.
- 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.
- 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.
- 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.
Three House Republicans have introduced legislation to repeal the Home Affordable Modification Program (“HAMP”), calling it a “colossal failure,” and seconding an inspector general report that found the program ultimately left many participating homeowners worse off. Under the proposed bill, the unspent HAMP money would be returned to the Treasury to pay down the national debt, not to provide any kind of substitute relief for homeowners and/or consumers.
As much as I have griped about HAMP, my preferred solution would still be to fix it, or come up with another way to prevent the next wave of upcoming foreclosures.
I agree that HAMP, as it is currently structured, is far from perfect, and has even harmed many people that it should have helped. For example, several borrowers, relying on servicer’s statement that they qualified for HAMP, made the required HAMP trial period payments, only to be told several months later that they didn’t qualify for a permanent modification. This caused these borrowers to suddenly become delinquent on their mortgages and unable to make up all of the now “late” payments (plus late fees, attorney fees, and miscellaneous foreclosure costs), forcing them into a foreclosure that would not have happened if they had not sought help in the first place.
However, the problem with HAMP is not that it exists – many people have been helped through this program – but that it doesn’t have enough safeguards and protections for the borrowers when the borrowers follow the rules, but the servicers and investors do not. In the example above, assuming that the borrower continued to make all payments as required by the servicer (including trial period payments authorized by the servicer under HAMP), a servicer should not be permitted to tack on late fees, attorneys fees, or foreclosure fees; report the lower payments as late; or accelerate the mortgage and force the borrower into foreclosure (or bankruptcy) for a period of time after the modification is denied. Other protections missing from HAMP are a private right of action for borrowers (with a provision for payment of the borrower’s attorney fees is the borrower successfully challenges a servicer’s actions), and the right to be re-considered for a HAMP modification if a prior denial was based on a no-doc trial period plan (remember how well those no-doc loans worked – why anyone thought that a no-doc modifciation was a good idea is beyond me). Oh – and I’d love to have the servicers provide all of their income and NPV inputs and calculations with the denial, so that the borrower, housing counselors, and attorneys can verify the servicers’ math and input skills.
In sum, HAMP is broken. That is patently clear. However, scuttling the leaky lifeboat without having another craft – let alone life preservers – available will only cause more homeowners to drown.