Bay Area Real Estate Law Blog

Check that "mortgage modification" company before you give them any information (or money)

david@dcwintonlaw.com (David Winton) — Sun, 04 Jan 2009 16:47:46 -0800

There's an old saying: Beware of Greeks bearing gifts. It refers to the Trojan horse that the Greek army used to trick its way into Troy during the Trojan War. It has come to refer to situations and people that hide fraud and trickery behind a friendly and perhaps even generous demeanor.

The hottest new business in California? One guess.... Mortgage modification. Everyone and their brother is now opening up "mortgage modification" companies. They appear friendly and eager to "help you save your home," but be careful.

For instance, one I recently heard about is American Home Mortgage Servicing Company. This company is not licensed as a real estate broker by the California Department of Real Estate. (If you want to check whether the company that is pitching you to modify your mortgage is a licensed real estate broker, use the DRE license check tool here.) Therefore, it is not a licensed "mortgage broker" and is thus not legally licensed to modify mortgages. It is not a law firm. It is not a non-profit credit counselor. In fact, a little research reveals that it is nothing but a debt collector. An unlicensed debt collector phishing for people with financial difficulties, which it refer to as "customers." (For reasons unknown, California doesn't require debt collectors to be licensed any more. It does, however, require them to comply with the California Fair Debt Collection Practices Act.)

Do what I did. Call their toll free number. Once you get past the language preference, the first thing on the tape is: "American Home Mortgage Servicing Company is a debt collector and may record and/or monitor calls." Then, follow the various links on their website as if you are looking to modify your mortgage. You will eventually wind up on a form that you need to fill out and return to them. Do not do this. This form is designed to solicit highly confidential financial information from you which will, in all likelihood, be used against you in the event that you default on your mortgage.

There is no need to provide this information at this stage of the conversation with anyone. (I'm a bankruptcy attorney subject to very strict rules of confidentiality. I usually have very good reasons to request this information from clients. Yet I never solicit this level of detail from prospective clients until they are an actual client and I have a rational and business-related reason for collecting this information.) How do I know this isn't a bona fide form for dealing with a mortgage modification? Look at it. It doesn't even ask who your lender is. How are they going to modify a loan or provide you with advice and an opinion on the criteria required to modify the loan if they don't know who the lender is? (Lenders' criteria for modification are not uniform, and a loan that one lender may modify may not qualify under another lender's program.)

Here's the fact: No one has authority to modify your mortgage except you and your mortgage lender. Anyone who claims to be able to assist you in modifying your mortgage but doesn't ask who holds that mortgage right out of the chute is probably up to something very different. Fortunately, these people tell you: They are "debt collectors." I wouldn't give them the name of my dog without a written disclosure of who they represent, what they are actually authorized to do and a written representation from them as to what exactly is going to be done with the information I provide them. I suspect that if you call them and make this demand as a precondition to your giving them any confidential financial information, they will hang up on you.

Who are these people? Are they licensed? Are they supposed to be? Who's regulating these guys?

In short, no one. It's the Wild Wild West. The California Department of Real Estate is supposed be on it, but in practical reality, it looks more like substitute teacher day in 5th Grade, erasers flying, tongues wagging, the whole works. And who can blame the CDRE? They're overwhelmed. So it will fall on the consumer. If you try to do this without counsel, make sure that the person you're dealing with knows what she is doing and that you're protected.

Here are the rules, at least regarding licensing:

First, in order to function as a "mortgage modification company" in California the company must first be licensed as a "real estate broker" by the California Department of Real Estate. (California does not have a separate licensing category for "mortgage brokers" nor for "mortgage modifiers.") Modifying a mortgage is essentially the functional equivalent of originating a mortgage, so the same licensing rules prevail. (Here's an interesting opportunity to get a fly-on-the-wall ear to brokers talking to each other about this topic.)

Next, in order to collect any fee in advance for "mortgage modification" services, the entity must be licensed by the DRE and must submit its contract for services for approval to the DRE. So if someone tells you they're a "mortgage modifier" and wants you to pay them for providing those services, first demand their DRE brokers' license number and then check the DRE website to see if their contract has been approved yet by the DRE. If it hasn't, then tell them you'll pay them if and when they get a result for you.

There is list of companies whose agreement has been approved. It's very short. You can find it here.

American Home Mortgage Servicing is not on that list. American Home Mortgage Servicing is also not a licensed real estate broker in the State of California. In fact, American Home Mortgage Servicing does not appear to be licensed to do anything more complicated than exist in the State of California. And it's a Delaware corporation so it's not even domiciled here. (Debt collectors no longer need to be licensed in California.)

(Here's a link to the California Attorney General's recent online posting about how to avoid being ripped off by foreclosure rescue scams. Here's another link by the DRE.)

There is a growing number of unscrupulous people out there right now looking to take advantage of people who are in financial extremis. There are also tons of folks who, while maybe not slimeballs, are woefully unqualified to "modify" anything more complicated than a typo on a spelling test.

Current statistics suggest that only 5% of the people who attempt to modify their mortgages are actually succeeding right now, and of those? More than 50% re-default in the first 6 months! I'm not going to blame all of that on slimeballs and idiots, but I can't think of any argument that suggests that the presence of opportunistic and unscrupulous slimeballs and idiots posing as "mortgage modifiers" is helping matters.

But there are also a lot of good, qualified and experienced people who want to help, who charge a reasonable fee and who know what they're doing. (And I absolutely guarantee you that they don't refer to themselves on their voicemail as "debt collectors.") Some are mortgage brokers, some are attorneys, some are credit counselors. None are debt collectors. Look for non-profit credit counselors as a start.

I'm not suggesting that everyone who wants to investigate mortgage modification hire an attorney. But at least do a little homework and make sure the person or company you hire is qualified and licensed. If they disclose that they are "debt collectors" run the other way. Such people have nothing of value to offer you.

Massachusetts Supreme Court decides (potentially) landmark case determining criteria for loans that are "presumptively unfair"

david@dcwintonlaw.com (David Winton) — Sat, 13 Dec 2008 09:50:53 -0800

So what's a "predatory loan?" Well, people who live in Massachusetts now know because on Tuesday of this past week the Massachusetts Supreme Court weighed in on the issue. (Here's the Massachusetts Attorney General's press release.)

I'm pretty sure that for all the non-lawyer readers out there, reading case law is only slightly more interesting than watching paint dry or grass grow. But for those who pay attention to things like "judicial activism," and have been wondering what the Courts have been up to while Nero fiddles, Rome burns and Congress hands out 11-figure welfare checks to the profligate lunatics who created this problem in the first place, the Massachusetts Supreme Court has just handed us a whopper. Well, at least I think so. You may quote me a year from now: This is the leading edge of a wave, and is a harbinger of what we will be seeing more and more of if Congress doesn't take comprehensive action.

On December 9, the Massachusetts Supreme Judicial Court published its slip opinion in the case of Commonwealth v. Fremont Savings & Loan. (The published version on that link is a bit hard to read, so I have cut and pasted the whole opinion here.)

(Fremont Investment & Loan was a high flyer that went down in flames last year when its parent, Fremont General filed bankruptcy on June 18, 2008. Its receivership is now called "Fremont Reorganizing Corporation." For those interested in the gory details of its crash, there is a lot of, um, fascinating, information available on the Fremont General website.)

The Court held that the loan in question was "presumptively unfair" due to the presence of four characteristics. These are:

1. The loan is adjustable (keyword there being "ARM"), with the first adjustment set to occur within the first three years.

2. The teaser rate is 3% or more lower than the ultimate indexed rate.

3. At the full indexed interest rate, not the introductory or teaser rate, the debtor's monthly mortgage dept-to-income ration is 50% or more at the fully indexed rate. What does this mean? It means the borrowers' mortgage payment, after the adjustment to the fully indexed rate is calculated exceeds 50% of their monthly income.

4. It was a "no down payment" loan. The amount of the home purchase financed was 100%.

So what does this mean? Well, if you don't live in Massachusetts or have a loan with Fremont Investment, technically it means nothing. Opinions of the Massachusetts Supreme Judicial Court are not binding on the rest of the country, and you can't really use this to help you much. It isn't "law" anywhere other than Massachusetts.

However, what it does mean is that at least one Court is starting to do what Congress hasn't (so far) had the cojones to do; smack the lenders down and start giving homeowners some relief. This is, essentially, a judicially created "predatory lending" law. (Here in California, we have had a predatory lending statue for several years. It is codified at Financial Code §4970 (Definitions and General Provisions); §4973 (Prohibited Acts"), and §§4774-4979.8 (Remedies and other Procedural minutiae.)

These are the sorts of judicial opinions that cause quiet revolutions. They also scare bankers and the legislators who depend on them for reelection campaign contributions down to their toes.

Commonwealth v. Fremont Investment and Loan (Original Full Text)

david@dcwintonlaw.com (David Winton) — Sat, 13 Dec 2008 08:00:31 -0800

I am posting the full test of the December 9, 2008 Massachusetts Supreme Judicial Court case Commonwealth v. Fremont Savings here as a temporary source until the full opinion is published by the Court.) Formatting peculiarities and typographical errors are in the original.

________________________________________________________________________________

NOTICE: The slip opinions and orders posted on this Web site are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports. This preliminary material will be removed from the Web site once the advance sheets of the Official Reports are published. If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us

COMMONWEALTH vs. FREMONT INVESTMENT & LOAN & another. [FN1]
SJC-10258
October 8, 2008. - December 9, 2008.
Practice, Civil, Preliminary injunction, Consumer protection case. Attorney General. Consumer Protection Act, Unfair act or practice. Massachusetts Predatory Home Loan Practices Act. Words, "Unfair."

CIVIL ACTION commenced in the Superior Court Department on October 4, 2007.

A motion for a preliminary injunction was heard by Ralph D. Gants, J.

After review was sought in the Appeals Court, the Supreme Judicial Court granted an application for direct appellate review.

James R. Carroll (Peter Simshauser & Christian R. Jenner with him) for Fremont Investment & Loan.

Christopher K. Barry-Smith, Assistant Attorney General, (John M. Stephan, Assistant Attorney General, & Jean M. Healey, Assistant Attorney General, with him) for the Commonwealth.

The following submitted briefs for amicus curiae:

Richard F. Hans & John P. Doherty for the American Securitization Forum & another.

Jo Ann Shotwell Kaplan, Martin J. Newhouse & John Pagliaro for New England Legal Foundation & another.

Stuart T. Rossman, Daniel Mosteller, Melissa Briggs, Matthew Brinegar, Jean Constantine-Davis, Nina F. Simon, Michael R. Schuster, Tara Twomey, and Ira Rheingold for National Consumer Law Center & others.

Paul Collier & Max Weinstein for WilmerHale Legal Services Center of Harvard Law School.

Robert B. Serino, Matthew P. Previn & Kirk D. Jensen for American Financial Services Association & others.

Present: Marshall, C.J., Greaney, Ireland, Spina, Cowin, Cordy, & Botsford, JJ. [FN2]

BOTSFORD, J.

The Commonwealth, acting through the Attorney General, commenced this consumer protection enforcement action against the defendant Fremont Investment & Loan and its parent company, Fremont General Corporation (collectively, Fremont), claiming that Fremont, in originating and servicing certain "subprime"

[FN3] mortgage loans between 2004 and 2007 in Massachusetts, acted unfairly and deceptively in violation of G.L. c. 93A, § 2. Fremont appeals from a

preliminary injunction granted by a judge in the Superior Court in favor of the Attorney General that restricts, but does not remove, Fremont's ability to foreclose on loans with features that the judge described as "presumptively unfair." All of the loans at issue are secured by mortgages on the borrowers' homes.

Based on the record before him, the judge concluded that the Attorney General had established a likelihood of success on the merits of her claim that in originating home mortgage loans with four characteristics that made it almost certain the borrower would not be able to make the necessary loan payments, leading to default and then foreclosure, Fremont had committed an unfair act or practice within the meaning of G.L. c. 93A, § 2. Fremont filed petitions for interlocutory relief pursuant to G.L. c. 231, § 118, first par., in the Appeals Court from the original preliminary injunction order and a subsequent order entered by the judge that modified the original preliminary injunction. A single justice of the Appeals Court declined to reverse either order, and at the request of Fremont, reported the matter to the Appeals Court. We granted the Commonwealth's application for direct appellate review. [FN4] We affirm the motion judge's grant of the preliminary injunction, as modified.

1. Background. [FN5] Fremont is an industrial bank chartered by the State of California. Between January, 2004, and March, 2007, Fremont originated 14,578 loans to Massachusetts residents secured by mortgages on owner-occupied homes. Of the loans originated during that time period, roughly 3,000 remain active and roughly 2,500 continue to be owned or serviced by Fremont. [FN6] An estimated fifty to sixty per cent of Fremont's loans in Massachusetts were subprime. [FN7] Because subprime borrowers present a greater risk to the lender, the interest rate charged for a subprime loan is typically higher than the rate charged for conventional or prime mortgages. [FN8] After funding the loan, Fremont generally sold it on the secondary market, which largely insulated Fremont from losses arising from borrower default. [FN9] Fremont General Corporation, Annual Report (Form 10-K) 1, 6 (Mar. 6, 2006).

In originating loans, Fremont did not interact directly with the borrowers; rather, mortgage brokers acting as independent contractors would help a borrower select a mortgage product, and communicate with a Fremont account executive to request a selected product and provide the borrower's loan application and credit report. If approved by Fremont's underwriting department, the loan would proceed to closing and the broker would receive a broker's fee.

Fremont's subprime loan products offered a number of different features to cater to borrowers with low income. A large majority of Fremont's subprime loans were adjustable rate mortgage (ARM) loans, which bore a fixed interest rate for the first two or three years, and then adjusted every six months to a considerably higher variable rate for the remaining period of what was generally a thirty year loan. [FN10] Thus, borrowers' monthly mortgage payments would start out lower and then increase substantially after the introductory two-year or three-year period. To determine loan qualification, Fremont generally required that borrowers have a debt-to-income ratio of less than or equal to fifty per cent--that is, that the borrowers' monthly debt obligations, including the applied-for mortgage, not exceed one-half their income. However, in calculating the debt-to-income ratio, Fremont considered only the monthly payment required for the introductory rate period of the mortgage loan, not the payment that would ultimately be required at the substantially higher "fully indexed" interest rate. [FN11] As an additional feature to attract subprime borrowers, who typically had little or no savings, Fremont offered loans with no down payment. Instead of a down payment, Fremont would finance the full value of the property, resulting in a "loan-to-value ratio" approaching one hundred per cent. Most such financing was accomplished through the provision of a first mortgage providing eighty per cent financing and an additional "piggy-back loan" providing twenty per cent. [FN12]

As of the time the Attorney General initiated this case in 2007, a significant number of Fremont's loans were in default. [FN13] An analysis by the Attorney General of ninety-eight of those loans indicated that all were ARM loans with a substantial increase in payments required after the first two (or in a few cases, three) years, and that ninety per cent of the ninety-eight had a one hundred per cent loan-to-value ratio.

On March 7, 2007, Fremont executed a "stipulation and consent to the issuance of an order to cease and desist" (consent agreement) with the Federal Deposit Insurance Corporation (FDIC), settling charges of unsound banking practices brought by that agency. The consent agreement ordered Fremont, inter alia, to cease and desist from originating ARM products to subprime borrowers in ways described as unsafe and unsound, including making loans with low introductory rates without considering borrowers' ability to pay the debt at the fully indexed rate, and with loan-to-value ratios approaching one hundred per cent. In entering into the consent agreement, Fremont did not admit to any wrongdoing.

On or about July 10, 2007, Fremont entered into a term sheet letter agreement (term sheet agreement) with the Massachusetts Attorney General, agreeing to give the Attorney General ninety days' notice before foreclosing on any Massachusetts residential mortgage loan. If the Attorney General objected, Fremont agreed to negotiate in good faith to resolve the objection, possibly by modifying the loan agreement. If no resolution could be reached, the Attorney General was granted an additional fifteen days in which to determine whether to seek an injunction.

As it turned out, the Attorney General objected to every proposed foreclosure that Fremont identified except those where the home was not owner-occupied and Fremont had been unable to contact the borrower. On October 4, 2007, the Attorney General filed this action. On December 10, 2007, Fremont exercised its right to terminate the term sheet agreement, on the grounds that the Attorney General had "no intention of engaging in a meaningful review process on a borrower-by-borrower basis." However, in the same letter Fremont stated that it would continue to seek to avoid foreclosure and to provide the Attorney General with loan files prior to foreclosure. The Attorney General then filed the motion for preliminary injunctive relief.

The judge granted a preliminary injunction in a memorandum of decision dated February 25, 2008. In his decision, the judge found no evidence in the preliminary injunction record that Fremont encouraged or condoned misrepresentation of borrowers' incomes on stated income loans, or that Fremont deceived borrowers by concealing or misrepresenting the terms of its loans. However, the judge determined that the Attorney General was likely to prevail on the claim that Fremont's loans featuring a combination of the following four characteristics qualified as "unfair" under G.L. c. 93A, § 2:(1) the loans were ARM loans with an introductory rate period of three years or less; (2) they featured an introductory rate for the initial period that was at least three per cent below the fully indexed rate; (3) they were made to borrowers for whom the debt-to-income ratio would have exceeded fifty per cent had Fremont measured the borrower's debt by the monthly payments that would be due at the fully indexed rate rather than under the introductory rate; and (4) the loan-to-value ratio was one hundred per cent, or the loan featured a substantial prepayment penalty (defined by the judge as greater than the "conventional prepayment penalty" defined in G.L. c. 183C, § 2) or a prepayment penalty that extended beyond the introductory rate period.

The judge reasoned that Fremont as a lender should have recognized that loans with the first three characteristics just described were "doomed to foreclosure" unless the borrower could refinance the loan at or near the end of the introductory rate period, and obtain in the process a new and low introductory rate. [FN14] The fourth factor, however, would make it essentially impossible for subprime borrowers to refinance unless housing prices increased, because if housing prices remained steady or declined, a borrower with a mortgage loan having a loan-to-value ratio of one hundred per cent or a substantial prepayment penalty was not likely to have the necessary equity or financial capacity to obtain a new loan. The judge stated that, "[g]iven the fluctuations in the housing market and the inherent uncertainties as to how that market will fluctuate over time ... it is unfair for a lender to issue a home mortgage loan secured by the borrower's principal dwelling that the lender reasonably expects will fall into default once the introductory period ends unless the fair market value of the home has increased at the close of the introductory period. To issue a home mortgage loan whose success relies on the hope that the fair market value of the home will increase during the introductory period is as unfair as issuing a home mortgage loan whose success depends on the hope that the borrower's income will increase during that same period."

The judge concluded that the balance of harms favored granting the preliminary injunction, and that the public interest would be served by doing so. The injunction he granted requires Fremont to do the following: (1) to give advance notice to the Attorney General of its intent to foreclose on any of its home mortgage loans; and (2) as to loans that possess each of the four characteristics of unfair loans just described and that are secured by the borrower's principal dwelling (referred to in the injunction as "presumptively unfair" loans), to work with the Attorney General to "resolve" their differences regarding foreclosure--presumably through a restructure or workout of the loan. If the loan cannot be worked out, Fremont is required to obtain approval for foreclosure from the court. The judge made clear that the injunction in no way relieved borrowers of their obligation ultimately to prove that a particular loan was unfair and foreclosure should not be permitted, or their obligation to repay the loans they had received.

In March, 2008, approximately one month after the issuance of the preliminary injunction, Fremont announced it had entered into an agreement with Carrington Mortgage Services, LLC, to sell certain rights to service mortgage loans. In response, the Attorney General sought a modification of the injunction to require that any assignment, sale, or transfer of ownership rights or servicing obligations by Fremont be conditioned on the assignee's or purchaser's acceptance of the obligations imposed by the preliminary injunction. The judge granted this relief with respect to all future assignments or sales that Fremont might make, modifying the original preliminary injunction in a separate order dated March 31, 2008 (modification order). [FN15]

2. Standard of review. We review the grant or denial of a preliminary injunction to determine whether the judge abused his discretion, that is, whether the judge applied proper legal standards and whether there was reasonable support for his evaluation of factual questions. Packaging Indus. Group, Inc. v. Cheney, 380 Mass. 609, 615 (1980). Before issuing a preliminary injunction, the judge must determine that the plaintiff has shown a likelihood of success on the merits of the case at trial. Commonwealth v. Mass. CRINC, 392 Mass. 79, 87 (1984), citing Packaging Indus. Group, Inc. v. Cheney, supra at 617. If the plaintiff is the Attorney General, the judge must then determine "that the requested order promotes the public interest, or, alternatively, that the equitable relief will not adversely affect the public." Commonwealth v. Mass. CRINC, supra at 89. "[W]hile weight will be accorded to the exercise of discretion by the judge below, if the order was predicated solely on documentary evidence we may draw our own conclusions from the record." Packaging Indus. Group, Inc. v. Cheney, supra at 616.

3. Discussion. Fremont argues that the judge committed two "fundamental" errors of law in concluding that the Attorney General was likely to prevail on the merits of her c. 93A claim: first, the judge in effect, and improperly, applied the provisions of the Massachusetts Predatory Home Loan Practices Act, G.L. c. 183C, to Fremont's loans, even though the loans are not subject to c. 183C; and second, the judge failed to recognize that under G.L. c. 93A, § 3, Fremont's loans are exempt from c. 93A because all of Fremont's challenged loan terms were permitted under the Federal and Massachusetts laws and regulatory standards governing mortgage lenders. Fremont also contends that the judge erred in determining that the public interest would be served by the preliminary injunction order. We address these arguments separately below. Before doing so, we consider a basic claim that lies underneath all of Fremont's legal challenges to the injunction.

a. Retroactive application of unfairness standards. Fremont's basic contention is that, while the terms of its subprime loans may arguably seem "unfair" within the meaning of G.L. c. 93A, § 2, if judged by current standards applicable to the mortgage lending industry, they did not violate any established concept of unfairness at the time they were originated; the judge, in Fremont's view, applied new rules or standards for defining what is "unfair" in a retroactive or ex post facto fashion--a result that is not in accord with the proper interpretation of c. 93A, § 2, and also represents "bad policy," because (among other reasons) lenders cannot know what rules govern their conduct, which will reduce their willingness to extend credit, hurting Massachusetts consumers. We do not agree that the judge applied a new standard retroactively.

General Laws c. 93A, § 2 (a ), makes unlawful any "unfair or deceptive acts or practices in the conduct of any trade or commerce." Chapter 93A creates new substantive rights, and in particular cases, "mak[es] conduct unlawful which was not unlawful under the common law or any prior statute." Kattar v. Demoulas, 433 Mass. 1, 12 (2000), quoting Commonwealth v. DeCotis, 366 Mass. 234, 244 n. 8 (1974). The statute does not define unfairness, recognizing that "[t]here is no limit to human inventiveness in this field."Kattar v. Demoulas, supra at 13, quoting Levings v. Forbes & Wallace, Inc., 8 Mass.App.Ct. 498, 503 (1979). What is significant is the particular circumstances and context in which the term is applied. See Kerlinsky v. Fidelity & Deposit Co., 690 F.Supp. 1112, 1119 (D.Mass.1987), aff'd, 843 F.2d 1383 (1st Cir.1988). It is well established that a practice may be deemed unfair if it is "within at least the penumbra of some common-law, statutory, or other established concept of unfairness." PMP Assocs., Inc. v. Globe Newspaper Co., 366 Mass. 593, 596 (1975). See Milliken & Co. v. Duro Textiles, LLC, 451 Mass. 547, 562-563 (2008), and cases cited.

Fremont highlights the judge's statement that at the time Fremont made the loans in question between 2004 and March of 2007, loans with the four characteristics the judge identified as unfair were not considered by the industry or more generally to be unfair; Fremont argues this acknowledgment by the judge is proof that the judge was creating a new definition or standard of unfairness. The argument lacks merit. First, the judge's statement that Fremont's combination of loan features were not recognized to be unfair does not mean the converse: that the loans were recognized to be fair. More to the point, at the core of the judge's decision is a determination that when Fremont chose to combine in a subprime loan the four characteristics the judge identified, Fremont knew or should have known that they would operate in concert essentially to guarantee that the borrower would be unable to pay and default would follow unless residential real estate values continued to rise indefinitely [FN16]--an assumption that, in the judge's view, logic and experience had already shown as of January, 2004, to be unreasonable. The judge concluded that the Attorney General was likely to prove that Fremont's actions, in originating loans with terms that in combination would lead predictably to the consequence of the borrowers' default and foreclosure, were within established concepts of unfairness at the time the loans were made, and thus in violation of G.L. c. 93A, § 2. The record supports this conclusion.

Fremont correctly points out that as a bank in the business of mortgage lending, it is subject to State and Federal regulation by a variety of agencies. [FN17] Well before 2004, State and Federal regulatory guidance explicitly warned lending institutions making subprime loans that, even if they were in compliance with banking-specific laws and regulations and were "underwrit[ing] loans on a safe and sound basis, [their] policies could still be considered unfair and deceptive practices" under G.L. c. 93A. Consumer Affairs and Business Regulation Massachusetts Division of Banks, Subprime Lending (Dec. 10, 1997). [FN18] More particularly, the principle had been clearly stated before 2004 that loans made to borrowers on terms that showed they would be unable to pay and therefore were likely to lead to default, were unsafe and unsound, and probably unfair. Thus, an interagency Federal guidance published January 31, 2001, jointly by the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the FDIC, and the Office of Thrift Supervision, stated: "Loans to borrowers who do not demonstrate the capacity to repay the loan, as structured, from sources other than the collateral pledged are generally considered unsafe and unsound" (emphasis supplied). [FN19] Expanded Guidance for Subprime Lending Programs at 11 (Jan. 31, 2001). On February 21, 2003, one year before the first of Fremont's loans at issue, the OCC warned that certain loans could be unfair to consumers:

"When a loan has been made based on the foreclosure value of the collateral, rather than on a determination that the borrower has the capacity to make the scheduled payments under the terms of the loan, based on the borrower's current and expected income, current obligations, employment status, and other relevant financial resources, the lender is effectively counting on its ability to seize the borrower's equity in the collateral to satisfy the obligation and to recover the typically high fees associated with such credit. Not surprisingly, such credits experience foreclosure rates higher than the norm.

"[S]uch disregard of basic principles of loan underwriting lies at the heart of predatory lending...."

OCC Advisory Letter, Guidelines for National Banks to Guard Against Predatory and Abusive Lending Practices, AL 2003-2 at 2 (Feb. 21, 2003). [FN20],

[FN21]

The record here suggests that Fremont made no effort to determine whether borrowers could "make the scheduled payments under the terms of the loan." Rather, as the judge determined, loans were made in the understanding that they would have to be refinanced before the end of the introductory period. Fremont suggested in oral argument that the loans were underwritten in the expectation, reasonable at the time, that housing prices would improve during the introductory loan term, and thus could be refinanced before the higher payments began. However, it was unreasonable, and unfair to the borrower, for Fremont to structure its loans on such unsupportable optimism. As a bank and mortgage lender, Fremont had been warned repeatedly before 2004 (in the context of guidance on loan safety and soundness) that it needed to consider the performance of its loans in declining markets. See, e.g., Consumer Affairs and Business Regulation Massachusetts Division of Banks, Subprime Lending (Dec. 10, 1997) ("[M]ost subprime loans have been originated during robust economic conditions and have not been tested by a downturn in the economy. Management must ensure that the institution has adequate financial and operational strength to address these concerns effectively"). [FN22] Fremont cannot now claim that it was taken by surprise by the effects of an economic decline, or that it should not be held responsible.

Finally, the conclusion that Fremont's loans featuring the four characteristics at issue violated established concepts of unfairness is supported by the consent agreement that Fremont entered into with the FDIC on March 7, 2007, the date Fremont stopped making loans. [FN23] The consent agreement contains no admission of wrongdoing by Fremont, and we do not consider it as evidence of liability on Fremont's part. However, we view it as evidence of existing policy and guidance provided to the mortgage lending industry. The fact that the FDIC ordered Fremont to cease and desist from the use of almost precisely the loan features that are included in the judge's list of presumptively unfair characteristics indicates that the FDIC considered that under established mortgage lending standards, the marketing of loans with these features constituted unsafe and unsound banking practice with clearly harmful consequences for borrowers. Such unsafe and unsound conduct on the part of a lender, insofar as it leads directly to injury for consumers, qualifies as "unfair" under G.L. c. 93A, § 2.

We turn to the specific challenges to the judge's order that Fremont raises.

b. General Laws c. 183C. General Laws c. 183C, the Massachusetts Predatory Home Loan Practices Act, effective November 7, 2004(act), prohibits a lender from making a "high-cost home mortgage loan" [FN24] unless the lender reasonably believes at the time the loan is made that the borrower "will be able to make the scheduled payments to repay the home loan based upon a consideration of the [borrower's] current and expected income, current and expected obligations, employment status, and other financial resources other than the borrower's equity in the dwelling which secures repayment of the loan." G.L. c. 183C, § 4. This section further states, however, that a borrower is presumed to be able to repay the loan if the borrower's debt-to-income ratio, calculated based on the fully indexed rate associated with an ARM loan, does not exceed fifty per cent of the borrower's verified monthly gross income. Id. at § 4, second par. The act prohibits a high-cost home mortgage loan from containing any provision for prepayment fees or penalties. G.L. c. 183C, § 5. Chapter 183C expressly provides that a violation of the statute constitutes a violation of G.L. c. 93A. G.L. c. 183C, § 18 (a ).

Fremont's mortgage loans were not "high cost home mortgage loans" governed by G.L. c. 183C, as the judge recognized. Fremont contends, however, that the judge improperly interpreted c. 183C to reach Fremont's loans, and thereby violated basic rules of statutory construction that prohibit inferring a legislative intent to reach conduct that the statute's unambiguous language clearly does not cover.

Fremont's argument lacks merit. Even though the loans have different terms from Fremont's, the conduct the act prohibits, and deems a violation of G.L. c. 93A, is similar to the central element of unfairness the judge found in Fremont's lending practices: the origination of a home mortgage loan that the lender should recognize at the outset the borrower is not likely to be able to repay. See G.L. c. 183C, § 4. That the Legislature chose in the act to focus specifically on home loan mortgages with different terms and features from Fremont's is not dispositive; the question is whether the act may be read to establish a concept of unfairness that may apply in similar contexts. As stated by the single justice of the Appeals Court, the judge appropriately could and did "look to Chapter 183C as an established, statutory expression of public policy that it is unfair for a lender to make a home mortgage loan secured by the borrower's principal residence in circumstances where the lender does not reasonably believe that the borrower will be able to make the scheduled payments and avoid foreclosure." [FN25]

c. General Laws c. 93A, § 3. Fremont argues that the Commonwealth's claim is barred by G.L. c. 93A, § 3, because Fremont's actions were permitted by the law as it existed at the time it originated the loans. [FN26] We disagree.

General Laws c. 93A, § 3, provides:

"Nothing in this chapter shall apply to transactions or actions otherwise permitted under laws as administered by any regulatory board or officer acting under statutory authority of the commonwealth or of the United States.

"For the purpose of this section, the burden of proving exemptions from the provisions of this chapter shall be upon the person claiming the exemptions."

This provision must be read together with G.L. c. 93A, § 2. That section " 'created new substantive rights,' " and thus "[t]he fact that particular conduct is permitted by statute or by common law principles should be considered, but it is not conclusive on the question of unfairness." Schubach v. Household Fin. Corp., 375 Mass. 133, 137 (1978), quoting Commonwealth v. DeCotis, 366 Mass. 234, 244 n. 8 (1974). See Kattar v. Demoulas, 433 Mass. 1, 13 (2000) ("Legality of underlying conduct is not necessarily a defense to a claim under c. 93A"). A defendant's burden in claiming the exemption is "a difficult one to meet. To sustain it, a defendant must show more than the mere existence of a related or even overlapping regulatory scheme that covers the transaction. Rather, a defendant must show that such scheme affirmatively permits the practice which is alleged to be unfair or deceptive" (emphasis in original). Fleming v. National Union Fire Ins. Co., 445 Mass. 381, 390 (2005), quoting Bierig v. Everett Sq. Plaza Assocs.,34 Mass.App.Ct. 354, 367 n. 14 (1993).

The judge concluded, as have we, that the Attorney General is likely to succeed on her claim that Fremont's practice of originating loans bearing the particular combination of four features identified in the preliminary injunction was unfair. To carry its burden under G.L. c. 93A, § 3, of demonstrating that a regulatory scheme "affirmatively permits the practice which is alleged to be unfair," Fremont must show that some regulatory scheme affirmatively permitted the practice of combining all of those features. Fremont has not done so. Rather, it cites authority demonstrating, it asserts, that each of the four features was permitted by statute and regulatory authorities. Assuming, without deciding, that Fremont is correct that every feature was affirmatively permitted separately, it was Fremont's choice to combine them into a package that it should have known was "doomed to foreclosure"; the relevant question is whether some State or Federal authority permitted that combination. No authority did. [FN27] Cf. Commonwealth v. DeCotis,366 Mass. 234, 239-240 (1974) (defendant lessors and managers of mobile home park failed to show that under laws as "as administered " by local board of health they were permitted to charge resale fee [emphasis in original] ).

d. Public interest. Because the Attorney General, in the name of the Commonwealth, brings this case to carry out her statutory mandate to enforce the Consumer Protection Act, it is necessary to consider whether the preliminary injunction order promotes the public interest. Commonwealth v. Mass. CRINC, 392 Mass. 79, 88-89 (1984). Fremont argues that it does not, primarily because in Fremont's view, the order imposes new standards on lending practices that were considered permissible and acceptable when the loans were made. The result, Fremont claims, will be an unwillingness on the part of lenders to extend credit to Massachusetts consumers because they will be unwilling to risk doing business in an environment where standards are uncertain and the rules may change after the fact.

Our previous discussion, and rejection, of Fremont's claim that the judge retroactively applied new unfairness standards disposes of Fremont's public interest argument; we do not accept the premise that, in concluding that Fremont is likely to be found to have violated established concepts of unfairness, the judge's order has created an environment of uncertainty that lenders will shun. The injunction order crafted by the judge strikes a balance between the interests of borrowers who face foreclosure and loss of their homes under home loan mortgage terms that are at least presumptively unfair, on the one hand; and the interest of the lender in recovering the value of its loans to borrowers who received the benefit of those loaned funds and continue to have a contractual obligation to repay, on the other. The order does not bar foreclosure as a remedy for the lender, nor does it relieve borrowers of their obligations ultimately to repay the loans. Rather, it requires, where the mortgage loan terms include all four features deemed presumptively unfair, that Fremont explore alternatives to foreclosure in the first instance (a step that Fremont has indicated its desire to take in any event), and then seek approval of the court. If the court does not approve the foreclosure, that decision merely leaves the preliminary injunction in place until the Commonwealth has an opportunity to try to prove that the particular loan at issue actually violated c. 93A--a burden that is never shifted to Fremont. We conclude the order serves the public interest.

4. Conclusion. A judgment is to be entered affirming the grant of the preliminary injunction and remanding the case to the Superior Court for further proceedings.

So ordered.

FN1. Fremont General Corporation. We are informed that this defendant filed a voluntary petition for bankruptcy on June 18, 2008, in California. Pursuant to 11 U.S.C. § 362(b)(4) (2000), that filing does not automatically stay the Commonwealth's present consumer protection action. See In re First Alliance Mtge. Co., 263 B.R. 99, 107 (9th Cir.2001). The defendant Fremont Investment & Loan represents that it is now known as Fremont Reorganizing Corporation. We shall refer to a single defendant (Fremont).

FN2. Justice Greaney participated in the deliberation on this case prior to his retirement.

FN3. "Subprime" loans are loans made to borrowers who generally would not qualify for traditional loans offered at the generally prevailing rate of interest for conventional mortgages. See text accompanying note 8, infra.

FN4. Shortly after we granted the Commonwealth's application for direct appellate review, we solicited amicus briefs. We acknowledge the amicus briefs filed on behalf of Fremont by New England Legal Foundation and Associated Industries of Massachusetts; the American Securitization Forum and the Securities Industry and Financial Markets Association; and the American Financial Services Association, the Consumer Mortgage Coalition, the Housing Policy Council of the Financial Services Roundtable, and the Mortgage Bankers Association; and on behalf of the Commonwealth by WilmerHale Legal Services Center of Harvard Law School; and National Consumer Law Center, Center for Responsible Lending, AARP, National Association of Consumer Advocates, and National Association of Consumer Bankruptcy Attorneys.

FN5. The factual information set out in this section is taken from the judge's memorandum of decision concerning the preliminary injunction requested

by the Attorney General, unless otherwise stated. Neither party appears to dispute the judge's factual findings, which were derived from the affidavits and other materials submitted in support of and in opposition to the motion for a preliminary injunction.

FN6. As of July, 2007, Fremont owned and serviced approximately 290 loans in Massachusetts, and serviced but no longer owned approximately 2,200 other Massachusetts loans, all covered by the preliminary injunction.

FN7. The judge made this estimate based on the fact that sixty-four per cent of all Fremont's loans were adjustable rate mortgage loans (ARM loans), and 38.4 per cent were "stated income" loans, in which the borrower provided no documentation of his or her income. The judge inferred, based on the limited record available at the preliminary injunction stage, that all of the stated income loans were subprime ARM loans, and a majority of the remaining ARM loans were also subprime.

FN8. It is not clear that the higher interest rates on Fremont's loans were always appropriate. Federal agencies have warned that the subprime lending market creates incentives to inflate interest rates unnecessarily. Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation,

Office of the Comptroller of the Currency, Office of Thrift Supervision, Interagency Guidance on Subprime Lending at 5 (Mar. 1, 1999). In 51.4 per cent of Fremont's loans generally, and seventy-three per cent of a sample of delinquent Fremont loans analyzed by the Attorney General, Fremont paid a "yield spread premium" to the broker as compensation for placing the borrower into a higher interest rate bracket than the one for which he or she would otherwise qualify.

FN9. Affidavits of former Fremont employees that are included in the preliminary injunction record support the view that Fremont's mortgage loan products and its underwriting policies were influenced by the interest of investors in purchasing the loans.

FN10. The variable rate was based on the six month London Interbank Offered Rate (LIBOR), a market interest rate, plus a fixed margin (referred to as a "rate add") to reflect the risk of the loan. For example, the variable rate might be expressed as "LIBOR plus 5," meaning the LIBOR interest rate increased by an additional five percentage points as the rate add.

FN11. The "fully indexed" rate refers to the interest rate that represents the LIBOR rate at the time of the loan's inception plus the rate add specified

in the loan documents. The judge noted that calculation of the debt-to-income ratio based on the fully indexed rate generally yields a ratio that exceeds fifty per cent.

FN12. Two other features bear mention, although they are not directly relevant to the preliminary injunction. As previously indicated (see note 6, supra ), 38.4 per cent of all Fremont's loans were stated income loans without income documentation required. In addition, 12.2 per cent of Fremont's loans offered the borrower lower monthly payments based on a forty-year amortization schedule, with a balloon payment required at the end of thirty years; the usual amortization schedule was based on a thirty-year period.

FN13. As of January 15, 2008, Fremont had allegedly indicated to the Attorney General that it intended to foreclose on approximately twenty per cent of its loans. We take notice that the industry-wide delinquency rate has increased in the intervening months.

FN14. The judge's prognosis of doom followed from the fact that the interest payments required when the introductory rate period ended and the fully indexed rate came into play would be significantly greater than the payments called for under the introductory rate (so-called "payment shock"). As a result, the

borrower's debt-to-income ratio would necessarily increase, probably and foreseeably beyond the borrower's breaking point.

FN15. While the judge issued two separate orders and Fremont has appealed from both, Fremont does not offer separate arguments in connection with the two orders. We follow the same course, and refer hereafter to a single preliminary injunction order.

FN16. It would be necessary for housing values to continue to rise so that the borrower could refinance his or her loan at the end of the introductory rate period, before the (likely) unaffordable indexed rate came into play.

FN17. State agencies regulating mortgage lending by banks such as Fremont and other lenders include the Massachusetts Division of Banks, and Federal agencies include the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision.

FN18. See also Interagency Guidance on Subprime Lending at 5 (March 1, 1999); Interagency Guidance on High LTV [Loan-To-Value] Residential Real Estate Lending at 6 (Oct. 8, 1999); OCC Advisory Letter, Guidelines for

National Banks to Guard Against Predatory and Abusive Lending Practices, AL-2003-2 at 1 (Feb. 21, 2003); Unfair or Deceptive Acts or Practices by State-Chartered Banks (Mar. 11, 2004) (FDIC); Interagency Guidance on Nontraditional Mortgage Product Risks, 71 Fed.Reg. 58,609, 58,617 (Oct. 4, 2006).

FN19. "Unsafe and unsound" refers to practices that carry too high a risk of financial harm to the lending institution, rather than to the consumer. Not all conduct that is institutionally unsafe and unsound is harmful to borrowers. However, when the lending institution's practices are deemed unsafe and unsound because they create too high a risk of default and foreclosure, the borrower, as the counterparty to the loan, obviously faces the same risk. Accordingly, such lending practices may indicate unfairness under G.L. c. 93A. Cf. Consumer Affairs and Business Regulation Massachusetts Division of Banks, Subprime Lending (Dec. 10, 1997) (warning of both safety and soundness, and consumer protection, risks from subprime lending); OCC, Guidelines for National Banks to Guard Against Predatory and Abusive Lending Practices, AL 2003-2 at 1 (Feb. 21, 2003) ("even where the particular attributes of a loan are not subject to a specific prohibition, loans reflecting abusive practices nevertheless can involve unfair and deceptive conduct and present significant safety and soundness, reputation, and other risks to national banks").

FN20. This guidance uses the words "predatory" and "abusive" as descriptive terms for certain lending practices; the guidance is not seeking to interpret terms that appear in a statute. OCC, Guidelines for National Banks to Guard Against Predatory and Abusive Lending Practices, AL 2003-2 at 1 (Feb. 21, 2003). Fremont argues that the guidance did not apply to its activities because it is not a national bank. That fact notwithstanding, we find the guidance instructive as to established concepts of unfairness that applied to national banks and other banks at the time, for a number of reasons: the discussion of "predatory" lending is part of an analysis of the OCC's enforcement powers under § 5 of the Federal Trade Commission Act, the Federal analog to G.L. c. 93A, id. at 2; the guidance notes that the same rules may be enforced against other banks by other agencies, id. at 4 n. 11; and the guidance was issued in response to "inquiries as to whether state laws and local initiatives addressing certain types of abusive lending practices" applied to national banks, id. at 1.

FN21. Other Federal regulatory guidance advisories made similar points concerning the importance of lenders' evaluating the borrowers' capacity to pay the mortgage loan as structured. See Credit Risk Management Guidance for Home Equity Lending (May 16, 2005) (interagency) (regarding home equity lines of credit, underwriting standards "should include an assessment of the borrower's

ability to amortize the fully drawn line over the loan term and to absorb potential increases in interest rates"); Interagency Guidance on Nontraditional Mortgage Product Risks, 71 Fed.Reg. 58,609, 58,613 (Oct. 4, 2006) (for "nontraditional" loans, an analogous category to Fremont's loans, "analysis of a borrower's repayment capacity should include an evaluation of their ability to repay the debt by final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule").

FN22. See also Interagency Guidance on High LTV Residential Real Estate Lending, at 2 (Oct. 8, 1999); Expanded Guidance for Subprime Lending Programs (interagency) (Jan. 31, 2001) ("Institutions should project the performance of their subprime loan pools under conservative 'stress test' scenarios, including an estimation of the portfolio's susceptibility to deteriorating economic, market, and business conditions"); Credit Risk Management Guidance For Home Equity Lending (interagency) (May 16, 2005) ("Financial institutions should ensure that risk management practices keep pace with the growth and changing risk profile of home equity portfolios. Management should actively assess a portfolio's vulnerability to changes in consumers' ability to pay and the potential for declines in home values").

FN23. The consent agreement ordered Fremont to cease and desist from "unsafe

and unsound practices and violations of law and/or regulations," including "making mortgage loans without adequately considering the borrower's ability to repay the mortgage according to its terms," and "marketing and extending adjustable-rate mortgage ('ARM') products to subprime borrowers" with practices such as:

"(i) qualifying borrowers for loans with low initial payments based on an introductory or 'start' rate that will expire after an initial period, without adequate analysis of the borrower's ability to repay the debt at the fully-indexed rate; ...

"(iii) containing product features likely to require frequent refinancing to maintain an affordable monthly payment and/or to avoid foreclosure;

"(iv) including substantial prepayment penalties and/or prepayment penalties that extend beyond the initial interest rate adjustment period; ...

"(vi) approving borrowers for loans with inadequate debt-to-income analyses that do not properly consider the borrowers' ability to meet their overall level of indebtedness and common housing expenses; and/or

"(vii) approving loans or 'piggyback' loan arrangements with loan-to-value ratios approaching or exceeding 100 percent of the value of the collateral...."

FN24. A "high cost home mortgage loan" is defined in G.L. c. 183C, § 2, as a loan securing the borrower's principal dwelling and that either exceeds by more

than eight percentage points (for a first mortgage) the yield on Treasury securities with a comparable maturity period, or features total points and fees the greater of five per cent of the total loan or $400.

FN25. Fremont further argues that, rather than looking to G.L. c. 183C, the judge should have analyzed the Commonwealth's claim under Penney v. First Nat'l Bank, 385 Mass. 715 (1982), and Zapatha v. Dairy Mart, Inc., 381 Mass. 284 (1980). Those cases dealt with alleged unfairness arising from contractual unconscionability, a concept of unfairness established by G.L. c. 106, § 2-302, and 940 Code Mass. Regs. § 3.16(1) (1978). See Penney v. First Nat'l Bank, supra at 720; Zapatha v. Dairy Mart, Inc., supra291, 299. Because we agree with the judge that Fremont violated an established concept of unfairness in issuing loans without meaningful consideration of borrowers' ability to repay, we need not look to other concepts of unfairness such as unconscionability.

FN26. Fremont's reliance on G.L. c. 93A, § 3, properly should have been stated as an affirmative defense in its answer. Fleming v. National Union Fire Ins. Co., 445 Mass. 381, 389 (2005) ("In essence, the exemption enunciated in § 3 is an affirmative defense that must be asserted in the pleadings and proved at trial"). However, where Fremont's answer generally argued that

"Massachusetts and federal law specifically permit the loans and products offered by [Fremont]," and where Fremont raised the defense in its opposition to the Commonwealth's motion for a preliminary injunction, we see no prejudice to the Commonwealth, and consider the substance of Fremont's claim.

FN27. Fremont asserts that the loan characteristics were "permitted when combined," but the only authorities Fremont cites are the October 4, 2006, Interagency Guidance on Nontraditional Mortgage Product Risks, 71 Fed.Reg. 58,609 (2006), and the July 10, 2007, Statement on Subprime Mortgage Lending (interagency), 72 Fed.Reg. 37,569 (2007). Only the former was in effect for even a small part of the relevant time period, and in any case, neither authority supports Fremont's contention.

I don't know...Maybe YOU think it's funny

david@dcwintonlaw.com (David Winton) — Fri, 12 Dec 2008 11:54:29 -0800

Okay, in the Department of the Totally Gratuitous, Irrelevant, and Not Particularly Funny, there's now a comic strip called Bankruptcy Bill. Can anyone explain this to me because I don't get it. It's like Where's Waldo only the line would be Where's the Funny Part? They're selling ties and mugs. Huh?

It's not that I have a rigid belief that there is nothing funny about bankruptcy, it's just that there's nothing funny about the strip. No wonder they're having a hard time finding sponsors and advertisers.

Have questions?

david@dcwintonlaw.com (David Winton) — Fri, 12 Dec 2008 11:52:43 -0800

Most of the time I choose subjects for blog posts either from actual questions from people I meet, or from developing news stories. But I'm curious to hear any ideas for topics that may be causing fits or worry or curiosity.

If you have a question that you'd like to see addressed in this blog, or an idea that you think would be an interesting subject area to see covered in a face-to-face speaking engagement, I'd love to hear it. Feel free to email me at david at dcwintonlaw.com. You know what to do in place of the word "at" right? If you put the phrase "BLOG Questions" in the subject, it'll escape my aggressive spam filter.

I am starting to make myself available for speaking engagements, and if you have a thought for a Northern California venue or, again, specific topics you'd actually get in a car to go talk about, let me know. The presentations will be part prepared presentation, but more Q&A. I find that audiences tend to get the most from the back and forth on how to solve particular and specific problems or set of problems than just listening to a talking and wagging head. Especially when that wagging head is attached to a lawyer!

Subject areas could include general real estate, business or personal insolvency, bankruptcy, deficiencies, foreclosures, news. Obviously I can't promise to address all questions, but with the traffic on this blog increasing, it occurs to me that folks are looking for answers to lots of questions, and it would make morse sense if I knew what they were rather than just trying to guess at them.

Thanks for your thoughts.

Bankruptcy: The Ultimate Mortgage Modification Tool

david@dcwintonlaw.com (David Winton) — Wed, 10 Dec 2008 11:30:20 -0800

Now, I don't mean to be overly flippant or anything, nor to be accused of promoting "irresponsible behavior" by advocating that people walk away from valid and legitimate debts, but I have to say that the single most effective "mortgage modification" tool for most borrowers these days is found the United States Bankruptcy Code.

So here--with a nod to Letterman for borrowed style points--counting backwards from 10 to 1, are the Top 10 Reasons why, more often than not, I advocate filing a bankruptcy petition instead of incurring the brain damage of trying to deal with banks.

(Lawyerly or, the obligatory "all things being equal" caveat: This is true in many, but not all cases, and I'm assuming that the borrower has a fair and real choice between these two options. Like with ANY legal remedy, it has to make sense for your particular circumstances, and, of course, the numbers have to crunch. Bankruptcy is a technical and specialized area of law, so the decision should be made neither lightly, nor without expert guidance. Things may also change over the coming months when--or more accurately, if--the lending industry gets its "mortgage modification" act together and actually raises their success ratio to something more respectable. As it is now, in some areas, the default rate is as high (around 5%) as the "mortgage modification" success rate is low. That's a disgrace.

Anyhow, on with the Top 10 List.

10. Bankruptcy doesn't require you to bare your soul to some faceless, nameless banker only to have them tell you you're not "qualified" for their mortgage modification program. Of course, this is inane to start with: If a borrower was "qualified" for the unaffordable, predatory loan that got them into the dilemma in the first place, how could they not be "qualified" for something more affordable now? This is "bank logic" talking. And it's "bank logic" that caused this mess to begin with. Arguing YOUR personal finance with a banker is like arguing about Halloween candy with an 8-year old. Generally, you can't win this argument so why have it? (For an absolutely classic example of this absurd paradigm in action, check out this story on MSNBC.)

Recent reports suggest that only about 5% of attempted mortgage modifications are actually succeeding. Success being defined as a negotiation that concludes with a new, supposedly more affordable mortgage. What about the other 95%?

First of all, the bank has probably squeezed another few months of interest payments out of the borrower as they strung them along leading you to believe that your "application" for a modification was being seriously considered. And second, all the information you worked so hard to assemble for your banker will now to go into your "file," to be used for who-knows-what-purpose. Since I'm a lawyer, I'm paranoid by habit and profession. I assume it goes into storage to be be puled out and used against you later when when the bank decides to sue you for a deficiency.

9. The lender doesn't get a vote. Generally, if you file a bankruptcy petition with a goal being to jettison a burdensome and onerous mortgage, barring something going seriously awry, you're going to achieve that goal. No matter what the bank has to say about it. In the vast majority of cases, they don't get to vote.

8. Bankruptcy is faster and will get you back on the road to financial recovery much faster than a bank sponsored "mortgage modification." Chapter 7 can be over and done with in as little as 3 to 4 months. Chapter 13 can have you in an affordable payment plan even sooner. In order to even qualify for a "mortgage modification" program right now, in most instances, you need to be at least 60 to 90 days delinquent before they'll even talk to you.

Then, after you've prostrated yourself on the altar of some Loan Modification Committee of Third National Bank of Timbuktu trying to get a modification approved, or worse, had to deal with some newly minted "loss mitigation specialist," you are likely to wait for another 3 to 6 months for any word. Why? Because they are up to their eyeballs in "loan modification requests" and they are not eager to make those painful modifications. Banks are not modifying loans because they think it's a good idea; they're doing it because they have no choice. But if they can suck a few more months of interest out of you then, in the bankers' logic, they're making lemonade out of lemons. It's a get-what-we-can-while-we-can mentality. If your financial statement leads them to believe that you're a likely Chapter 7 candidate anyhow, it's in their best interests to recover as much as they can before that happens.

7. It's (probably) cheaper. This is a hard one to be sure of, but if you hire an attorney (or worse, one of these new "loan modification companies" that are popping up like weeds these days) to try to assist you with a mortgage modification application, and then pay him or her to run all that interference for you, your final bill is likely to be significant. (And don't shop for a mortgage banking/loan workout lawyer based on the low bidder. You get what you pay for in the legal profession and there aren't a whole lot of low cost lawyers who understand the law of mortgage and real estate finance. (Mortgage, bankruptcy and insolvency law is not a first offense DUI or uncontested divorce where pretty much anyone with a bar card can get you through the process. In banking law you get what you will get what pay for.)

In bankruptcy, most attorneys charge a fixed fee for taking the client all the way through the process, and those fees are subject to the approval (and possible adjustment) by the Bankruptcy Court. Filing fees are relatively cheap, at present, $299 for a Chapter 7 and $234 for a Chapter 13.

Paying an attorney to try to get a home loan modification approved is tantamount to handing over a blank check. As much as I love my profession and trust in the utmost integrity of my fellow members of the bar, only a fool gives a lawyer a blank check.

6. You don't have to talk to any bankers. Nothing personal to any of my banker readers (as if) but dealing with bankers is only slightly less painful and irritating than a root canal. Contrary to what you may have heard, bankers don't care about you. Their job is to lend money and maximize their company's return on investment, or, in this economy, minimize loss. Converting an asset that is returning 8.5% interest into one that only returns 6.5% is going backwards. Bankers created this mess. I don't believe it's realistic to believe that they're going to be the ones to fix it.

5. When bankruptcy is over, it's over, and it feels very good. Mortgage modifications are forever. Or until you default again.

There is no doubt but that, in addition to the day they graduated from college, the day they were married, and the day their first child was born, other Red Letter Days in the lives of people who have endured financial stresses severe enough to make them consider bankruptcy, include the day they got their discharge and emerged from bankruptcy. It's like the relief one might expect to feel when you stop banging your head against a brick wall. In my experience, I've never heard anyone who relieved themselves of mountains of unmanageable debt say they wish they hadn't filed. What I hear is that they wish they hadn't waited so long.

4. You can't get scammed by a bankruptcy court that's giving you relief from the guy who scammed you in the first place. LoanSafe.org is reporting that "loan modification scams" are one of the hottest new consumer ripoff industries. I suppose they take a lot of different forms, but be careful. At least lawyers have to be licensed, bankruptcy fees are subject to the supervision of the court, and loan modification scam artists generally don't hang around in Federal court rooms wearing black robes.

3. The Bankruptcy discharge is forever. More than half of mortgage modifications are headed for another default. What do I mean by this? Well, first of all, a little background, and if you don't want the background, skip the next paragraph and race to the "payoff."

One of the Federal government's official keeper of mortgage statistics is the Office of Thrift Supervision, known--as with any self-respecting government bureaucracy--by its acronym OTS. (OTS is a wholly owned subsidiary of the US Department of Treasury for those keeping track.) Every quarter, OTS releases its "Mortgage Metrics" report, which is a 25 to 30 page impenetrable tome of economic gobbledy gook. If you don't believe me, here's Q1 2008 and here's Q2 2008.

Now the payoff: The Mortgage Metrics Q3 2008 report will, when it is released, report that 53% of all mortgages that are modified wind up back in default. This is what is being reported by sources that have seen it, or at least talked to people who have seen it. My source? MortgageDaily.com.

2. Bankruptcy is less stressful. Financial fear and worry is one of the worst sources of stress that we can suffer from. It's only exacerbated when the cause of that stress is also the very roof over our heads.

1. When it's over, you get a REAL fresh start. Bankruptcy is a financial reboot. A whole new day. Yes, if you are successful in completing a loan workout with your lender, there will be relief. Probably substantial relief. But you also don't get to start a rebuild, or get rid of other debts and liabilities that may threaten to drag you down again later. If your oppressive mortgage is your only financial woe, then you may get some real relief from a mortgage modification attempt. But those sorts of problems are not usually so isolated.

Again, I don't mean to sound flip, nor to minimize the impact of having to file bankruptcy. But if you are able to do so, and if your mortgage is only one part of a larger scheme of financial woes, what better way to "modify a mortgage" than to get rid of it? Of course, this means that you will also lose the property, but in most of the cases that I'm reviewing these days, that isn't a priority anymore. When the loan is $750,000 and the house is worth $600,000, what's left to save? (Those are Northern California numbers; your examples may vary if you live in other parts of the country.)

Upshot: Know your options before you dive into a process that may not do as much for you as you hope it will.

Countrywide Releases Mortgage Modification Details

david@dcwintonlaw.com (David Winton) — Mon, 08 Dec 2008 22:34:38 -0800

Countrywide, by way of its new owner Bank of America, has released general details of its mortgage modification arrangement with the various states' attorneys general (including California) that sued it last summer alleging predatory lending violations. The details are as of December 1, 2008, and include a Press Release and a Fact Sheet.

Quoting from the actual eligibility Fact Sheet, following are the criteria:

Eligibility

Borrowers eligible for loan modifications under this program must have received a qualifying subprime mortgage or a Pay Option adjustable rate mortgage prior to December 31, 2007, and the property must be a 1-4 unit owner-occupied residential property. In addition, certain other requirements are set out in the program:

The borrower is 60 days or more delinquent and the current loan-to-value ratio is 75% or higher;

The borrower is current today but becomes 60 days or more delinquent at any time prior to June 30, 2012, and the loan-to-value ratio at the time of the modification is 75% or higher;

The borrower has a subprime hybrid ARM and the borrower is current but reasonably likely to become 60 days or more delinquent as a consequence of a rate reset, and the loan-to-value ratio at the time of the modification is 75% or higher;

The borrower has a Pay Option ARM and the borrower is current but reasonably likely to become 60 days or more delinquent as a consequence of a rate reset or payment recast based on negative amortization, and the loan-to-value ratio at the time of the modification is 75% or higher.

In addition, customers may be eligible for the early payment default benefit of this program if: (1) the customer has a Countrywide-originated first lien loan; (2) the loan was on or prior to December 31, 2007; (3) the customer's primary residence is the property that secures the loan; (4) the customer has made three or fewer payments over the life of the loan (the borrower's state may expand eligibility); and (5) the customer has either lost his home to foreclosure or is at least 120 days in arrears on mortgage payments.

I have been asked by more than one person if it makes sense to intentionally default so as to become eligible for the program. I have to say that I would tread very lightly. Modifying a mortgage is one approach, but another smarter way may to refinance your existing mortgage if your FICO and other financial profile details permit it.

My general thought is that, the better your FICO, the better your chances of refinancing to a better loan with another lender. If you intentionally let your mortgage fall 60 days late just to satisfy the Countrywide criteria, and you later find out that you can't fit into that eligibility envelope, then you will have trashed your credit for nothing and may find yourself shut out of better options when rates and underwriting requirements come down to a comfortable place.

You may be eligible, but you may not. It's best to find out first before you do take action that may do irreversible damage to your other options.

California Mortgage Deficiencies (Part 2): The Purchase Money Security Interest

david@dcwintonlaw.com (David Winton) — Tue, 02 Dec 2008 17:52:03 -0800

California property owners are lucky in that there is a fairly strict set of so-called "anti deficiency statutes" which control if, when, and how a lender may pursue a deficiency as part of, or after foreclosure.

The most important restriction is the anti-deficiency prohibition in cases of a "purchase money security interest" set forth in California Code of Civil Procedure 580b. While I hesitate to risk boring my reader with statutory language, it is important to understand this provision, so I'll restate the abridged version:

No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.

It's the italicized and bolded stuff that is most widely applicable in the garden variety situation. Here's what it means: If the loan being foreclosed on is the loan you got when you bought your house (a "purchase money loan"), then you can't be hit with a deficiency judgment.

So what's the catch? How can this be screwed up? The most common trap for the unwary is when the loan is a refinance of a purchase money loan, or a post purchase HELOC. In these cases, the the statute doesn't apply.

But it's not enough to just be a "second." It has to be a true refi or HELOC. Meaning that the second you got when you bought the house because the lender couldn't do the whole mortgage amount in one loan, that is still purchase money.

California Mortgage Deficiencies (Part 1): What's a Deficiency Anyhow?

david@dcwintonlaw.com (David Winton) — Mon, 01 Dec 2008 23:02:05 -0800

Now, first off, I know that the title I've chosen for this post is about as unsexy and non-juicy as it can be. That's okay. I can take it. It's boring. I can hear marketing consultants hollering about how I need to make my title more grabby, sticky, etc. Yawn. What can I say? Trying to make this stuff fun and exciting is like trying to turn a root canal into a spectator sport. And besides, if you're reading this, you didn't come here to be entertained. Maybe someday I'll change the title but for the moment it stays.

So, anyhow, on the subject of deficiencies...

Far and away the most common question I get asked by clients and potential clients is whether they will be liable for what's called a "deficiency" after they let a property go in foreclosure. Please note that the discussion below is limited to California law. If your property is not in California--it doesn't matter where you are; what matters is where the property is--then the discussion below will not apply to your situation because the laws in each state about foreclosures and deficiencies is unique to each state's laws.

First, what is a deficiency anyhow?

A deficiency is, simply defined, the difference between what you owe on your loan(s) minus the value of the property at the time of the foreclosure. Here's an absurdly over-simplified example: You owe $250,000 on the loan. At the time of the foreclosure, the property value is $200,000. If the lender is entitled to a deficiency (and that's a HUGE "if" in California) then it would be calculated at $50,000 ($250,000 - $200,000 = $50,000)

Lots of people right now are trying to weigh their options about whether they want to let a property go in foreclosure, file bankruptcy, do a "short sale," try for one of those "deeds in lieu" or even try to work something out with the lender. (Right!) What I am seeing quite frequently is that decisions are being made based on completely wrong information about the extent to which they are at risk for

Next, how do you evaluate the risk of being chased for a deficiency by a lender after foreclosure?

Web resources and info on mortgage fraud

david@dcwintonlaw.com (David Winton) — Mon, 01 Dec 2008 22:35:13 -0800

As I wander around the web researching topics, I often find resources that might be useful for folks looking to research the rapidly expanding field of mortgage fraud law. Here follows a list of various resources that the reader may want to check out.

The Mortgage Fraud Blog maintained by Santa Rosa attorney Rachel Dollar.
This YouTube video by a couple of guys doing sort of Click & Clack routine. Artsy? No, not really, but it may be useful to someone wondering if they were a victim.
And another YouTube video, this one a clip of a news story from Las Vegas on one particular scam.

I'll be updating this post as as I find more resources.

Countrywide wins "worst mortgage loan servicer" in national poll

david@dcwintonlaw.com (David Winton) — Mon, 01 Dec 2008 08:07:27 -0800

The non-profit agency LoanSafe.org has conducted a poll of several hundred homeowners involved in attempts to engage in some phase or variety of actually working out a non-working mortgage. You may be familiar with the millions and millions of "consumer outreach" letters that the banks are sending out in an effort to appear as though they're doing something.

78% give the big thumbs down to Countrywide Home Loans.

Congrats to Angelo Mozilo. He must be beaming with pride.

What are the tax implication of foreclosures?

david@dcwintonlaw.com (David Winton) — Fri, 21 Nov 2008 12:09:50 -0800

An issue where questions keep recurring and I'm hearing from a variety of sources that there is not much good advice available is with the tax treatment of cancelled debt on foreclosure of investment property.

I posted a few months back on the tax treatment of foreclosure of one's principal residence, but how, if at all, does that change if the real estate securing the debt is investment property?

The short answer is that if the real property is Qualified Business Real Property and the debt that is being cancelled is Qualified Real Property Business Debt, then there is NO income tax on the cancelled debt.

Now we need to back up to figure out how you get there. I think the easiest way to approach it is through a gatekeeper or flowchart approach.

Here are the various IRS publications which address the issue.

The uber-publication in the IRS library that deals with the tax treatment of canceled debt is IRS Publication 4681. This deals with the the subject from several different angles, and addresses both the principal residence exception, as well as the exception for so-called "qualified real property business indebtedness."

1. There is no tax liability incurred for the cancellation of debt when the cancellation is incurred in a bankruptcy proceeding. (See 26 USC 108(a)(1)(A).) It doesn't matter what the property securing it is, how much the cancelled debt is, or what the nature of the property that secured the debt might have been.

2. There is no tax liability for the cancellation of debt that was incurred to purchase, improve or construct one's principal residence. This subject is addressed elsewhere on this blog, and I won't repeat myself here.

IRS Publication on taxation of cancelled debt.

IRS Publication 523 on Selling Your Home

IRS Publication 544 on Sales and Other Dispositions of Assets

IRS Publication 908 Bankruptcy Tax Guide

IRS Publication 334 (Chapter 5, page 23) on "Qualified Real Property Business Debt." Page 23

Also IRS Publication 334 here. This is a better cite. With hyperlinked sections. This is done by filingIRS Form 982.

California Sues WaMu seeking to Halt ALL California Foreclosures

david@dcwintonlaw.com (David Winton) — Fri, 21 Nov 2008 10:31:59 -0800

The California AG has sued Washington Mutual in San Diego Superior Court seeking an injunction halting all foreclosures on a predatory lending theory A copy of the AG's Complaint can be found here.

I'll post more on this when I learn it.

California AG Busts up "Mortgage Modification" Fraud Scam

david@dcwintonlaw.com (David Winton) — Fri, 21 Nov 2008 08:49:59 -0800

In a recent press release, the California Attorney General's Office announced that it has busted up a scam in which a company charging borrowers between $1,500 and $5,000 to help with mortgage modifications.

New "Reg Z" rules apply to ALL lenders, and are designed to curb predatory lending across the board

david@dcwintonlaw.com (David Winton) — Wed, 19 Nov 2008 08:54:18 -0800

The following is a verbatim reprint of a news item from the Federal Reserve Bank of St. Louis.

They did such a great job, I thought it a shame to tinker with it.

The Federal Reserve Board recently approved a final rule for home mortgage loans. The rule is intended to provide better protections for consumers and facilitate responsible lending.

The rule amends Regulation Z (Truth in Lending) and was adopted under the Home Ownership and Equity Protection Act (HOEPA). The final rule largely follows a proposal released by the Board in December 2007, with some changes that take into account public comments, consumer testing and further analysis.

“Importantly, the new rules will apply to all mortgage lenders, not just those supervised and examined by the Federal Reserve,” says Federal Reserve Chairman Ben S. Bernanke. “Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers.”

The final rule adds four protections to a newly defined category of “higher-priced mortgage loans” secured by a consumer’s principal dwelling:

• A lender is prohibited from making a loan without regard to the borrower’s ability to repay the loan from income and assets other than the home’s value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this rule, a consumer does not need to demonstrate that it is part of a pattern or practice.

• Creditors are required to verify the income and assets they rely on to determine repayment ability.

• Prepayment penalties are banned if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.

• Creditors are required to establish escrow accounts for property taxes and home owner’s insurance for all first-lien mortgage loans.

The rules also adopt the following protections for loans secured by a consumer’s principal dwelling, regardless of whether the loan is higher-priced.

• Creditors and mortgage brokers may not coerce a real estate appraiser to misstate a home’s value.

• Companies that service mortgage loans may not engage in certain practices, such as pyramiding late fees. In addition, servicers are required to credit consumers’ loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.

• Creditors must provide a good-faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required for home-purchase loans. Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumers’ credit history.

For all mortgages, advertising rules now require additional information about rates, monthly payments and other loan features. The final rule bans seven deceptive advertising practices, including representing that a rate or payment is fixed when it can change.

The rule’s definition of “higher-priced mortgage loans” will capture virtually all loans in the subprime market, but generally exclude loans in the prime market. To provide an index, the Federal Reserve Board will publish the average prime offer rate, based on a survey currently published by Freddie Mac. A loan is higher-priced if it is a first-lien mortgage and has an annual percentage rate that is 1.5 percentage points or more above this index, or 3.5 percentage points if it is a subordinate-lien mortgage. This definition overcomes certain technical problems with the original proposal, but the expected market coverage is similar.

One element of the original proposal has been withdrawn. The Federal Reserve Board had asked for public comment on certain requirements pertaining to so-called “yield-spread premiums.” During the intervening period, the Board engaged in consumer testing that cast significant doubt on the effectiveness of the proposed rule. As part of its ongoing review of closed-end loan rules under Regulation Z, however, the Board will consider alternative approaches.

The new rules take effect on Oct. 1, 2009. The single exception is the escrow requirement, which will be phased in during 2010 to allow lenders to establish new systems as needed.

FDIC tosses hat into loan modification ring...

david@dcwintonlaw.com (David Winton) — Fri, 14 Nov 2008 09:35:34 -0800

The Federal Deposit Insurance Corporation yesterday announced its plan to help rescue homeowners and attempt to stop foreclosures.

By my count, that's four high-profile programs that have been announced with great fanfare just this week, including Fannie Mae, Freddie Mac, Citi and FDIC. That adds to those already "in place" by Countrywide, HSBC, Washington Mutual (who?), etc.

So everyone who's actually had a loan modified raise your hand.

That's what I thought.

And so what is that experience actually like? Well, the first challenge is to get an English speaking bank official on the phone. (This assumes the borrower is an English speaker. If not, other wrinkles and obstacles arise.) First attempts at Countrywide go straight to a calling center in India. If you would like to be transferred back to the US, ask the person on the other end of the phone to "please transfer me back to the United States," which my informant tells me they will politely do. The other way to skip the Bangalore calling center? Hit two for Spanish when the robo-machine first picks up. Since Spanish speakers are rare in India, the call stays domestic. And, since the folks answering the phone are mostly bi-lingual, your chance of getting an English speaker is quite high. And finally, since most people don't "prima numero dos," the hold time is much shorter.

HUD unveils "new" mortgage disclosure rules. Yay! Another new form!

david@dcwintonlaw.com (David Winton) — Wed, 12 Nov 2008 16:00:16 -0800

The United States Department of Housing and Urban Development ("HUD") today announced new regulations intended to make the mortgage shopping experience more transparent. Whew. And not a moment too soon!

The centerpiece of the new regulation is the requirement that mortgage lenders and brokers provide borrowers with a "Good Faith Estimate" of the anticipated closing costs of the proposed home loan. Here's a .pdf of the currently proposed form that will be required. In its November 12, 2008 press release HUD states that it believes that use of the GFE will save borrowers up to $700 of the cost of a loan. I'm not sure how that works. It's just more information and disclosure, and as is shown below, it's information that is already required to be disclosed by Reg Z and the Truth in Lending Act.

In a remarkably candid characterization of the home loan process, HUD notes that "since 1974, little has changed about the process Americans endure when they buy and refinance their homes. Now, HUD's final reform will improve disclosure of the key loan terms and closing costs consumers pay when they buy or refinance their home."

Like its brethren, the "HUD-1," the new Good Faith Estimate will be known by its acronym, "GFE," so we should all start looking for that catchy new phrase to start creeping into the mortgage lexicon sometime in late 2009. The new regulation also modified the HUD-1 for the first time in decades. Use of the new forms isn't required until January, 2010.

After a prolonged comment period, HUD apparently rejected a proposal that the broker/lender read a canned script of disclosures and other information to borrowers. I can't begin to imagine what the comments to such a clever idea might have been....but my mind conjures images of harassed borrowers running screaming from the room while an automaton mortgage broker drone reads an endless list of mandatory disclosures.

Will this new rule do anything helpful? Maybe. Maybe it will help people get a better idea of the deal that they're actually getting themselves into. The new form requires disclosure of:

What's the term of the loan?
Is the interest rate fixed or can it change?
Is there a pre-payment penalty should the borrower choose to refinance at a later date?
Is there a balloon payment?
What are total closing costs?

What I'm not sure I'm getting is what this adds to the already existing requirements of the Truth In Lending Act Disclosures. True, TILA is an FDIC consumer protection statute, not a HUD lending regulation. And that is relevant to what? (For an exhaustive and tedious recitation of the requirements of TILA, check out the Office of the Comptroller's TILA Handbook.)

So what does this mean? What's the upshot to the consumer? Sorry to sound cynical, but it seems to just be the same required information in a different format. Same wine, new bottle. Different versions of the same information that is already required to be disclosed. I'm not sure what is gained here.

I can tell you that, as a real estate lawyer who has analyzed and litigated many failed loan transactions, the HUD-1 has always been a useful tool. But when I ask clients to send it to me? They rarely know what I'm talking about. To most borrowers it's just another layer in an endless pile of already mostly meaningless paper. More stuff to sign.

What HUD and the FDIC need to do is simplify the loan application and documentation process so that anyone smart enough to fill out a loan application can also understand what is happening to him or her after that application is done and the deal is in escrow. It is inconceivable that anyone smart enough to get to the close of escrow should be so uniformly and broadly baffled by a process which its governmental sponsors will jump and down claiming is intended to be simple.

Are "short sales" worth the hassle?

david@dcwintonlaw.com (David Winton) — Wed, 12 Nov 2008 01:10:02 -0800

(Spoiler Alert:: If you don't want to read the rest of the post, the short answer is a resounding "No.")

One of the biggest myths in the housing crunch and the stress of the foreclosure process is the belief in the possibility of salvation from a so-called "short sale." They're being oversold by brokers and agents because, well, with mortgage lenders being mostly shuttered while they ride out the credit confusion roller coaster, the normal purchase and sales market is shut down. With no real lending market, home sales cant really happen They have to generate sales commissions somehow right? For many, short sales are it for the moment.

What is a "short sale?" A short sale is nothing more than the sale of a piece of real estate for less than the amount of the total debt which it secures. Example: If the home is worth $300,000, and the loan balance is $350,000, a normal sale is not going to generate adequate proceeds to satisfy the loan. That means, in this example, that the seller (or someone) is going to have to pony up another $50,000 in order to get title released from the lien and complete the sale. A "short sale" happens when the borrower (or more commonly, his or her agent) is able to convince the lender to accept less than the full loan amount and release the property anyhow.

Why would a lender do this? Simple really. If the value of the property is really only $300,000, the lender isn't likely to be able to sell it for any more than that after foreclosure anyhow. So why spend the money and time to go through a cumbersome foreclosure process which, after all is said and done, isn't going to net the lender any more than what the short sales offers? If the lender concludes, after crunching the numbers, that it's going to lose $50,000 anyhow, why spend the money and time to foreclose to suffer that inevitable loss? Let the borrower and his agent do that work. (I don't know exactly what it costs a lender to foreclose, but it is a cost which won't be recouped by the lender.)

Why would a borrower do this? There is only one reason: To salve a bruised conscience. There is no good legal, business or economic reason to incur this heavy burden and take on the time and expense risks. Let me explain.

The concept of a short sale is attractive, though the reality is significantly less so. Whether it's worth the hassles and heartburn is going to depend on your particular situation.

However, assuming you've decided to actually go through with trying to do this, here are some thoughts and cautions...

First of all, I don't take any credit at all for the following advice and observations. They come from a recent seminar I attended hosted by Fidelity National Title in Novato, at which the guest speaker was Bill Gordon of TMG West. Although based in Burlingame, California, TMG's website indicates that they're doing these all up and down the West Coast. Bill gave a seminar to a group of brokers and sales agents recently and he knows his stuff. He was kind enough to allow me to attend, and was even patient with me when I couldn't keep my mouth shut a couple of times

Here's what I learned from Bill.

1. Interview several agents and look for one who has some experience doing them. They are not easy to close, can take months and the risk of a having a deal fall out at the last minute can be significant. They are not for the feint of heart, the impatient or someone who lacks really tight organizational skills. Don't hire an agent who has never done one. Period. You're asking for serious trouble if you do. If you don't know how to find one, call the resident broker in charge of a reputable and large real estate agency and ask them.

2. Determine up front whether or not you and your property fit the profile of a possible success story or whether you're wasting your time. You will have to be at least two months behind on the mortgage and have a signed purchase contract in hand before the lender will even talk to you. That's a tall order for someone who's also stressed about the possibility of losing their home in foreclosure. So try to grasp that first point: You must already be in default at least two to three months before the bank will even consider your proposal.

So if you're still current on your loan and someone (maybe even a local real estate agent) has called you up and made an offer to buy your condo at way below market, you're still three to four months away from having any information on which you can really act or from really even being able to present the deal to your lender. How long is that lowball offer going to hang in there? Long enough for you to screw up your credit and set yourself up for success?

3. The lender will require you to provide, together with the signed purchase and deposit receipt mentioned above, at least two years of tax returns (federal alone will usually suffice); Two to three months of pay stubs; A hardship letter in which you bare your soul and in an attempt to pluck the tender heartstrings of your reader--who, remember, will be a banker; A comprehensive financial statement; Two to thee months of bank statements; Current property tax statements; Estimated HUD-1. Then you submit it all to some "loss mitigation specialist" in St. Louis or Phoenix or Orlando...and wait...and wait...and wait....

Last, there are still risks on a short sale. I think most notable of these is the possible that you might get taxed on the debt forgiveness. Because forgiveness of debt on a mortgage is legally considered ordinary income and is usually a taxable event, you could be liable for income tax on the amount by which the outstanding debt exceeds the value of the property at the time of foreclosure.
If you would like to read more about this issue, I would suggest downloading IRS Publication 908.

Would I do a short sale? No. I don't believe that the advantages of a short sale are worth the headache. Furthermore, who's bacon are you trying to save, yours or the bank's? The damage you have to do to your credit in order to even be considered for a short sale are substantial: Basically, if you haven't defaulted on your mortgage and gotten to the brink of losing it in foreclosure, you're not eligible. But if you have defaulted on your mortgage and gotten to the brink of foreclosure, then your credit is already trashed. There is no meaningful difference between a short sale after a 90 to 120 day default and a foreclosure or Chapter 7.

By the time you're a candidate for a short sale, you've already done as much damage to your credit as a foreclosure or bankruptcy. So what's the point? The old saw about rearranging deck chairs on the Titanic comes to mind.

Of course, your mileage may vary, and there may be circumstances where it makes sense to try it. But if I were going to do it, I'd pick up the phone and call an expert.

Countrywide and B of A close the deal

david@dcwintonlaw.com (David Winton) — Tue, 11 Nov 2008 12:35:00 -0800

The Street.com is reporting that, as of yesterday, November 10, 2009 Countrywide and B of A finally closed the deal on B of A's purchase of "substantially all" of the assets of Countrywide. I guess that means that it's going to be B of A that going to renegotiating the old loans.

NY Times Reporting Mortgage Relief Efforts Underway

david@dcwintonlaw.com (David Winton) — Tue, 11 Nov 2008 11:10:32 -0800

The New York TImes is reporting this morning that some mortgage relief may be coming to Main Street.

Well, perhaps it's a bit cynical to say this, but, now that the Republicans are out and there is at least some mandate for a broader effort to bring some relief to Main Street to assist beleaguered homeowners, it appears that Fannie Mae and Freddie Mac are going to start providing some relief.

The details remain unclear, but it appears that the primary concentration will be on borrowers who are more than three months in arrears. As of the time of this writing, Reuters was reporting that the focus seems to be on the amount of the borrowers' monthly payments, with the renegotiation outcome being focused on reducing the borrowers' monthly mortgage payment to not more than 38 percent of monthly income. Reuters' source didn't specify whether that was net or gross.