Tucson Land Use Law Blog

Cash Out Refinance - No More Anti-Deficiency Protections in Arizona

Michael Fleishman — Fri, 23 Mar 2012 14:44:15 -0800

The Arizona Court of Appeals (Division 1 in Maricopa County) just issued an opinion entitled Helvetica v. Pasquan, which addresses the scope of Arizona's anti-deficiency protections in the judicial foreclosure (non-trustee's sale) context.

The first issue the Court addressed is whether refinancing a purchase money loan forfeits a borrowers' anti-deficiency protection, to the extent that the proceeds from the refinancing transaction were used to satisfy the underlying purchase money obligation. The Court held that refinancing alone does not destroy the purchase money status and the borrower does not lose the protections of Arizona's remedial anti-deficiency protections.

The Court next addressed the open question of whether a loan that funds construction of a statutorily qualifying residence (as defined in A.R.S. Section 33-729(A)) is a purchase money obligation. The Court held that a construction loan qualifies as a purchase money obligation if: (1) the deed of trust securing the loan covers the land and the dwelling constructed on the land and the loan proceeds were in fact used to construct a residence that meets the size and use requirements set forth in A.R.S. Section 33-729(A).

Finally, the Court addressed an issue that has been hanging in the balance since 1997, when the same Court decided Bank One, Arizona v. Beauvais, which held that regardless of whether the subject workout note was an extension, renewal, or new obligation, it was a purchase money obligation and the borrower was protected by the anti-deficiency laws. However, Bank One did not address the propriety of segregating non-purchase money portions of the loan, as Bank One abandoned that argument in that case.

On this issue, the Court of Appeals held that loan proceeds used to construct a qualifying residence (as set forth in A.R.S. Section 33-729(A)) merit anti-deficiency protection under certain circumstances, but those sums disbursed in a loan transaction for non-purchase money purposes may be traced, segregated, and recovered in a deficiency action.

This decision now opens the door for lenders to pursue borrowers who took out money in a refinance and used it for purposes other than the purchase (or construction of a property on vacant land) of a home. While this decision is limited to judicial foreclosures, as opposed to the trustee's sale context (which accounts for almost all foreclosure sales in Arizona), the logic would seem to apply to the trustee's sale context, but it remains to be seen whether the courts will extend this ruling to the deed of trust statutes. Stay tuned as always.

Pima County Tax Lien Sale - 2012 Update

Michael Fleishman — Sun, 04 Mar 2012 05:50:36 -0800

Pima County just finished up its 2012 tax lien sale. Pima County offered up nearly 14,000 tax liens over the two day live auction. One thing was readily apparent this year - the competition for these liens was stiff. The influx of private equity money into the Pima County sale was obvious. Competition for $500 liens was nearly unheard of a few years back, but I saw bidding representatives calling out seven and eight percent for liens on manufactured homes in Avra Valley. In years past, these liens would fetch sixteen percent all day long, but these big money players obviously had money to spend.

Each year Beth Ford, the Pima County Treasurer takes a roll call on whether to continue the live auction format, and each year she maintains the format. Whereas Maricopa County and many other counties have gone to online auctions, Pima County maintains a live auction. While some of the well-healed fund managers decried the result of the roll call, there is no question that the live auction format provides for a spirited auction with potentially uncertain results.

There is not much fun in placing a secret bid and the computer generates the result. It is far more fun to have someone throw up their paint stirring stick with a bright yellow piece of paper stapled to it with a number on it, yelling eight percent on a lien that they did not even mean to buy. It is interesting to watch the furious bidding pace when the sale starts and compare it to when people slip into their 2:00 p.m. post-lunch comas - that is when the bidding mistakes can come out.

It was also interesting to see thirty Richard Kiyosaki (of Rich Dad Poor Dad fame) students roll into the auction on the second day to learn how the whole tax lien process actually works. In fact, I heard a few people say that one of the these green students signed up for a bidder number and actually bid on a lien only to go over the Treasurer and ask that the bid be reversed - proof that there are indeed pitfalls in tax lien investing and, oh by the way, you don't pick up houses for a couple hundred dollars in tax lien investing, despite what the late-night tax lien seminar peddlers claim.

Arizona Joins the Mortgage Servicer Settlement

Michael Fleishman — Mon, 13 Feb 2012 05:47:19 -0800

Arizona will receive $1.6 billion of the purported $25 billion joint federal-state settlement with the nation's five largest mortgage servicers for their role in wide-spread servicer and foreclosure abuses. Arizona Attorney General Tom Horne's decision to join the broad settlement also means that his office has reached an agreement with Bank of America over allegations that it has violated an earlier consent agreement that was reached with Countrywide and allegations that Bank of America has systematically violated Arizona's Consumer Fraud Act.

The agreement requires Bank of America to pay $10 million to the Arizona Attorney General to be used to: (1) avoid preventable foreclosure; (2) mitigate the effects of the mortgage and foreclosure crisis in Arizona; and (3) enhance law enforcement efforts to prevent and prosecute financial fraud or unfair or deceptive acts or practices, and/or provide compensation for harm resulting from conduct alleged in the lawsuit. The agreement also requires Bank of America to pay the Attorney General’s costs and attorneys’ fees incurred in the lawsuit.

Bank of America has also agreed to the following Arizona-specific provisions, which are not included in the broad federal-state settlement: (1) retain an unaffiliated third party to maximize the response rate for loss mitigation programs; (2) confirms that even borrowers who were previously denied for or defaulted on loss mitigation will not be prevented from applying again solely because of the previous denial or default; and (3) requires Bank of Ame to report Arizona-specific information about modifications and other assistance provided to Arizona borrowers.

Arizona’s estimated $1.6 billion share of the global settlement is broken down as follows:

$1.3 billion principally for principal reduction, but also including a menu of other relief to homeowners (how this will actually be implemented obviously remains to be seen).
Arizona’s borrowers who lost their home to foreclosure from January 1, 2008 through December 31, 2011 and suffered servicing abuse will be eligible for an estimated $110.4 million in cash payments to borrowers, estimated at approximately$2,000 per borrower.
The value of refinancing loans to Arizona’s current, underwater borrowers will be an estimated $85.8 million.
The state will receive a direct payment of approximately $102.5 million (yet no mention of what this $102.5 million will be used for).

While the global settlement does not grant any immunity from criminal offenses and will not affect criminal prosecutions, as far as allegations of servicer abuse, including robo-sigining and dual-tracking go, the five largest banks have the green light to push through many of the foreclosures that have been stalled while this agreement was hammered out. The agreement also does not prevent homeowners or investors from pursuing individual, institutional, or class action civil cases against the five servicers. The pact also enables state attorneys general and federal agencies to investigate and pursue other aspects of the mortgage crisis, including securities cases, which may be the next big fish to land.

The final agreement will be filed in the form of a consent judgment in U.S. District Court in Washington, D.C. and will have the authority of a court order. The consent judgment will require that Arizona’s share of the state’s direct payment be used by the Attorney General to carry out the purposes of the settlement, including to avoid preventable foreclosures, to remedy the effects of the mortgage and foreclosure crisis, and to enhance law enforcement efforts to prevent and prosecute financial fraud and unfair or deceptive acts or practices.

The Perpetually Imminent AG Settlement Has Arrived

Michael Fleishman — Tue, 07 Feb 2012 07:13:07 -0800

A long-vaunted settlement arising from the sixteen-month 50-state investigation into faulty bank foreclosure practices, which has perpetually been imminent, has finally concluded. The deal was struck between federal banking officials, 49 states Attorneys General, and the five largest mortgage servicers - Bank of America Corp., JPMorgan Chase Co., Wells Fargo Co., Citigroup Inc., and Ally Financial Inc, which will release these servicers from liability for robo-signing and other forms of servicer abuse in exchange for a host of financial "penalties." In addition, nine other unnamed loan servicers may join the settlement later, which will notably increase the overall settlement value. Loans owned or backed by Fannie Mae and Freddie Mac will not be part of the deal.

Roughly $5 billion of the funds will be used as potential $1,800 - $2,000 payouts to hundreds of thousands of borrowers affected by the abuses and were foreclosed on between the beginning of 2008 and the end of 2011 (sorry we foreclosed, but here's a little check for your troubles). A portion of this $5 billion will also go to the states, which can use them for legal aid services, foreclosure mitigation programs, and ongoing fraud investigations in other areas

Another $17 billion will be used as "credits" toward writing down principal on roughly one million loans mainly held in by the banks as part of their own portfolios, as opposed to loans there were originated, sold, and securitized. Officials have said that some of the principal reductions will go toward mortgages held in private-label securities, which means that investors will take some of the hit, even though they would likely take a hit if any of the subject loans went to foreclosure.

Roughly $10 billion of the $17 billion held for principal reduction "credits" will go to borrowers who are delinquent on their mortgages.

The banks will not get dollar-for-dollar credit for every write-down; reductions on loans bundled in private-label mortgage-backed securities, for example, will be under 50 cents on the dollar, and write-downs for second liens (mostly home equity lines of credit) will be more like 10 cents on the dollare. Housing and Urban Development Secretary Shaun Donovan has stated that HUD will be able to get between $35-$40 billion in principal reduction in real dollars out of this settlement. Good luck trying to figure out who exactly is most deserving of the write-downs. No wonder Oklahoma's AG bowed out of this deal. The real issue - short changing the foreclosure process has not really been addressed.

Another $3 billion will be spent on refinancing borrowers who owe more on their mortgage than their home is worth.

As part of the deal, Bank of America will send $1 billion cash to the Federal Housing Administration. It also appears that Nevada’s and Arizona’s suits against Countrywide and Bank of America for violating its past consent decree on mortgage servicing has been “folded into” the settlement.

California will get $18 billion of the agreement. New York will receive $648 million in assistance from foreclosure settlement, including $495 million for principal reductions.

New York AG Eric Schneiderman will co-chair a task force with the Justice Department and HUD, reversed his previous decision to not sign onto the foreclosure deal. He was removed from the central negotiation committee last year when he tried to expand the scope of the investigation into securitization and other issues. His task force, along with California AG Kamala Harris and several other AGs, will look into secondary market and other fraud outside of the robo-signing probe.

Also as part of the deal, Schneiderman will not have to drop his suit against the banks for their use of the Mortgage Electronic Registration Systems or "MERS."

The servicers will send plans to a federal monitor, North Carolina banking commissioner Joseph Smith, who will have oversight responsibilities over the settlement. However, the monitoring process begins with a self-assessment from the banks through quarterly reports, which Smith and a committee can then review. This enforcement process is likely to take months to actually properly assess the settlement.

While this settlement sounds pretty large ($35-$40 billion), which, as David Dayen of Firedoglake points out, is at best, "a guess since the direction of the principal reduction is mostly at the discretion of the banks, pales in comparison to the negative equity in the country, which sits at $700 billion. And the banks have three years to implement the principal reductions, drawing out the loss on their books." In the end, this is a pretty minor slap on the wrist. “It’s not new money. It’s all soft dollars to the banks,” said Paul Miller, a bank analyst at FBR Capital Markets.

Indeed, of the purported $26 billion, the five largest banks only have to pony up $5 billion in cash, which they already had reserves for. No wonder bank stocks were all up on the news of the settlement. Some commentators have said that this settlement "is a a stealth bailout that strengthens bank balance sheets at the expense of the broader public." So the banking oligarchy wins again - shocker.

Principal Reduction - Who's Willing to Take the Haircut?

Michael Fleishman — Mon, 30 Jan 2012 15:21:09 -0800

Democrats on the House oversight committee have apparently been pushing to subpoena the Federal Housing Finance Agency ("FHFA") to obtain an analysis looking at what effects principal reductions would have on Fannie Mae and Freddie Mac.

As HousingWire has reported, FHFA Acting Director Edward DeMarco has long defended the agency's policy of keeping Fannie and Freddie mortgage servicers from writing down principal. "We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer." It turns out that Mr. DeMarco's agency has yet to produce an analysis, which was requested last year by Democrats.

Several Democrats have cited a recent White Paper from the Fed allegedly acknowledging the need for principal reduction to coerce borrowers into staying in their home and provide a boost to the overall economy. However, Fed researchers "admitted the potential benefits would be hard to quantify."

Given that Fannie Mae and Freddie Mac already owe the Treasury roughly $151 billion in bailouts, it should come as no surprise that many are rightfully concerned about principal reductions, even if the pain of such reductions would be spread across the American populace. DeMarco believes instead, Congressional action is required to force him to write down principal on loans held by Fannie Mae and Freddie Mac. Between the two government sponsored agencies, the total of underwater mortgages is currently about $303 Billion. The estimated loss to both agencies for principal reductions would amount to $101.7 Billion. The scope of such a principal write down would cause great havoc for Fannie Mae and Freddie Mac's accounting, which would require immediate accounting losses.

Interesting though, in the third quarter of 2011, servicers cut principal on 10,722 modifications, roughly 7.8% of all workouts during the period, according to the Office of the Comptroller of the Currency. That is not an insignificant number, given the general reluctance of any servicer to consider a principal reduction. While this number is interesting, it does not say exactly who is doing the principal reductions. Either way, Fannie Mae, Freddie Mac, and many, many banks continue to face the specter of continued downward pressure on home prices, which will create additional underwater owners, which creates greater incentive to walk away (especially in non-recourse states). We are no where close to getting out of the thicket on this one.

Election Year Bravado

Michael Fleishman — Fri, 27 Jan 2012 15:15:23 -0800

A new federal federal task force, dubbed the "Residential Mortgage-Backed Securities Working Group" led by New York Attorney General Eric Schneiderman has sent subpoenas to the 11 largest financial institutions in the past few days as part of its investigation into possible residential mortgage-backed securities fraud.

Attorney General Eric Schneiderman who was cast off the central negotiation committee of Attorneys General trying to crack down on several securitization issues related to the major banks, seems to be gaining a foothold in his attempt to forge his own settlement with the major banks outside the realm of the federal regulators and AG Tom Miller's crew.

Schneiderman will be joined by Delaware AG Beau Biden, Massachusetts AG Martha Coakley, Nevada AG Catherine Cortez Masto, California AG Kamala Harris and Illinois AG Lisa Madigan, several of whom refused to bow to continued pressure to try and settle legacy issues surrounding the robo-signing scandal and other securitization issues.

It is very interesting that President Obama allegedly formed this task group, which he announced during his State of the Union address Tuesday. President Obama has come under increasing pressure to do something substantive about the ongoing foreclosure crisis, which has not been curtailed in the slightest by the introduction of yet another acronym.

U.S. Attorney General Eric Holder said 15 lawyers and investigators are working with the group. The FBI will add 10 agents, and another 30 lawyers and staff will join the group, along with the

The SEC will also participate. SEC Director of Enforcement Robert Khuzami said there "would be no stone unturned, no dark corner unexposed to the light."

Schneiderman, in a clear shot across the bow to the major banks commented: "We have jurisdiction to go after every aspect of the mortgage bubble and the crash of the financial market . . . We have jurisdiction over every MBS issued over the last decade with Delaware and New York joining the group."

Secretary of the Department of Housing and Urban Development, Shaun Donovan, has also made clear the investigation and ongoing settlement negotiation between other state AGs and mortgage servicers over foreclosure problems would be separate and any charges would not release the banks from liability in the robo-signing scandal.

"It became clear very quickly that Eric [Schneiderman] and I shared a vision that it would be a grave injustice to hold these institutions accountable and potentially have hundreds of billions be paid to private investors and pension funds but not make sure homeowners who hold those loans who depend on being able to get those loans fixed to be able stay in those homes," Donovan said.

Iowa Attorney General Tom Miller, who has been heading up the mortgage servicer investigation, has said the resulting settlement would not release the banks from securitization or lending liabilities.

This is going to produce a very interesting political sideshow as AG Tom Miller tries to keep his band of AG's together, while Schneiderman forges ahead with the new found support of the Obama administration, which it seems only recently, was looking to help the major banks and servicers find a quick settlement to documented abuses that have been alleged by the AG's for some time now.

The task force represents the Obama administration’s attempt to address complaints from the "Occupy" part of his constituency that it has simply failed to address the housing crisis or bring banks to account for causing it through subprime home loans that were repackaged and securitzed and sold to investors. Critics correctly point out that the Obama administration's attempts to solve the problem through government-sponsored refinancing programs and gentle begging to the banks, have been ineffective. This is going to be a campaign issue and if the Obama administration is not going to try to spin, the Republicans certainly will. It has been over three years since the credit crunch in earnest and the housing market had started its full-force downward spiral, and little has changed. Not surprising to see yet another attempt by the administration to try and appease another part of the base.

Closing Your Loan - Do What It Takes to Get Bank of America's Attention

Michael Fleishman — Fri, 30 Dec 2011 20:41:00 -0800

Anyone who has been involved in dealing with banks in the realm of loan modification have come to accept (at least at some level) that banks move with glacial speed. Well, for those with a high credit score who actually just want to close a loan - this may be the way to go.....

"Independent Foreclosure Review" - Oh, Sorry About That....

Michael Fleishman — Tue, 01 Nov 2011 09:42:55 -0800

Fourteen U.S. mortgage servicers and their affiliates are making available a free, "impartial" Independent Foreclosure Review process (website - Independent Foreclosure Review) to certain of their borrowers, as part of certain consent orders entered into with federal bank regulators, the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the Board of Governors of the Federal Reserve System.

The review process was put into place by the regulators to determine how many borrowers were harmed by faulty procedures including: robo-signing, dual-track foreclosures, and a shortage of qualified staff to work with delinquent borrowers. The process has been set up to identify customers who were part of a foreclosure action on their primary residence during the period of January 1, 2009 to December 31, 2010. The reviews will span nearly 4.5 million loan files and could take up to a year to complete, according to Acting Comptroller of the Currency John Walsh.

If eligible borrowers believe that they were financially injured as a result of servicer errors, misrepresentations or other deficiencies in the foreclosure process on their primary residence, they can request a review of their foreclosure file to verify that their foreclosure process was handled properly.

An estimated 4.5 million borrowers will be notified by a letter explaining the review process and a Request for Review Form. The mailings will be staggered to better manage volumes in stages beginning Nov. 1, 2011, with an ad campaign to follow. A 1-800 number has been established as well. A review administrator will allegedly send a confirmation one week after the borrower sends in a five-page request form.

Joe Evers, deputy comptroller for large banks at the OCC, said a remediation plan is still under development to determine how borrowers will be paid. He added that it could take months to figure out how to do that and it was difficult to estimate when a borrower would receive a check. "It will be a lengthy process," Evers said.

The OCC said it would release the names of the independent consultants soon. The consent orders did leave room for a fine, but Evers said the fine will be determined after the reviews are completed.

So, another government led program aimed at addressing the fallout from the financial crisis brought on by the ramp up of securitization of home mortgages. It appears that the Independent Foreclosure Review will be a time-consuming procedural morass that has no pre-defined mechansim for determining what remedies will be made available to eligilble homeowners. Let's hope the various attorneys general are able to reach a substantive settlement with lenders and servicers that has some meat to it.

The list of participating servicers includes:

America’s Servicing Co.
Aurora Loan Services
Bank of America
Beneficial
Chase
Citibank
CitiFinancial
CitiMortgage
Countrywide
EMC
EverBank/EverHome Mortgage Company
GMAC Mortgage
HFC
HSBC
IndyMac Mortgage Services
MetLife Bank
National City Mortgage
PNC Mortgage
Sovereign Bank
SunTrust Mortgage
U.S. Bank
Wachovia Mortgage
Washington Mutual (WaMu)
Wells Fargo Bank, N.A.

Hunting Season Has Opened on MERS

Michael Fleishman — Fri, 14 Oct 2011 13:16:05 -0800

The Mortgage Electronic Registration System ("MERS") is increasingly under attack from multiple angles. MERS describes itself as "an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked." Created by the real estate finance industry, including many of the largest lenders and Fannie Mae, MERS allegedly "eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans." This bypassing mechanism is what has garnered the attention of recording offices throughout the country.

Geauga County in Ohio just filed suit against MERS alleging that it bypassed the recording of mortgage assignments in local registry offices (as MERS was intentionally designed to do), thereby depriving numerous Ohio counties on revenue from filing fees.

The lawsuit comes only weeks after the Dallas County District Attorney sued MERS and its parent company, Merscorp. Inc., alleging the system acts as a shadow recording system that allows lenders to avoid local mortgage registration fees - this according to HousingWire.com.

HousingWire reports that the suit was filed by David Joyce, prosecuting attorney for Geauga County.

"The MERS business model and practices comply with the recording statutes and regulations of Ohio," a MERS statement of response reads. "This position has been upheld in numerous cases in Ohio courts and countless cases across the country on the state and Federal level. We are confident that MERS’ business practices will be upheld in court as complying with Ohio law."

The complaint also names various financial institutions as defendants – including Bank of American, Chase Home Mortgage, Citi, HSBC Bank, and others, all of whom used MERS to bypass the need to record transfers of the beneficial interest under deeds of trust on properties.

In the suit, Geauga County claims "the defendants systematically broke chains of land title throughout Ohio counties' public land records by creating gaps due to missing mortgage assignments they failed to record, or by recording patently false or misleading mortgage assignments." The county claims MERS' failure to pay filing fees is a violation of Ohio state laws.

These suits may signal the opening of the floodgates by counties seeking to recoup lost revenue; though one must question the level of damages suffered, as each county also did not have to do the work necessary to receive the money they charge. Makes me wonder how much it costs to record versus how much they charge for each recording.

The Dirty Dozen Feeling the Heat from the Feds?

Michael Fleishman — Thu, 01 Sep 2011 20:07:39 -0800

When it rains, it pours. The fallout from the artificially generated housing bubble and the attendant financial crisis is really starting to take hold against the various major players in the banking industry. It seems everyone with any stake in the mortgage meltdown, from individual home owners to purchasers of mortgage-backed securities, are seeking their pound of flesh from the likes of Bank of America, JP Morgan Chase, CitiBank, Ally Financial, Wells Fargo, UBS, Goldman Sachs, Deutsche Bank, and others.

The New York Times broke the story yesterday that the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, the failed government agencies relegated to taxpayer-backed conservatorship three years ago, is set to file lawsuits against twelve of the major banks. The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under the nation's securities laws and missed evidence that borrowers' incomes were inflated or falsified.

The FHFA issued sixty-four subpoenas last year to issuers and servicers of mortgage-backed securities - one of the largest investigations to date of alleged securities fraud stemming from the housing bust. The FHFA, with subpoena power, has a huge advantage over private investors, which have had a harder time gaining access to the loan files, critical to filing lawsuits against the banksters. The suits are likely to be filed now because regulators are concerned that it will be much harder to make claims after a three-year statute of limitations soon expires.

In the heyday of loan originations and sales into the secondary market, Fannie and Freddie couldn't purchase those loans directly, but they were allowed to invest in slices of "private-label securities" that were backed by subprime and other risky loans, but were rated as safe AAA investments by the ratings agencies. Indeed, Fannie and Freddie were among the largest investors in those securities. Freddie and Fannie began increasing their purchases of private-label securities early last decade in order to boost profits while satisfying government mandates to support affordable housing. By law, Fannie and Freddie were required to back loans to low-to-moderate income borrowers, and the private-label securities were counted toward those goals. In 2005 alone, Freddie Mac purchased $180 billion in private-label securities, up from $24 billion four years earlier.

In the the lead up to the financial crisis, “the market was so frothy then it was hard to find good quality loans to securitize and hold in your portfolio,” said David Felt, a lawyer who served as deputy general counsel for FHFA until January 2010. Moreover, the private-label securities carried higher yields at a time when the two mortgage giants could buy them using money borrowed at rock-bottom rates, thanks to the implicit federal guarantee they enjoyed. According to Felt, “Fannie and Freddie thought they were taking AAA tranches, and like so many investors, they were surprised when they didn’t turn out to be such quality investments." This despite the fact that Freddie was warned by regulators in 2006 that its purchases of subprime securities had outpaced its risk management abilities, but the company continued to load up on debt that ultimately soured.

Fannie and Freddie still hold billions of dollars in mortgage securities backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A loans. Sadly for the American taxpayer, these securities have been among the poorest performing mortgages. The U.S. government has spent $141 billion to keep Fannie and Freddie afloat. Freddie Mac allegedly estimates its total gross losses stand at roughly $19 billion, while Fannie Mae allegedly estimates its losses at nearly $14 billion.

While the FHFA has been making noise about pursuing the banks for some time, as Naked Capitalism has reported, "the overarching story remains the same: the more rocks you turn over in mortgage land, the more creepy-crawlies emerge." In Arizona, when you turn over rocks in the desert, you often find scorpions. They creep and crawl and they pack a mean sting. It remains to be seen just how many stingers the Too Big To Fail camp have.

No More Tax Liens For JP Morgan

Michael Fleishman — Thu, 11 Aug 2011 06:07:39 -0800

On July 29, 2011, J.P. Morgan Chase & Co. announced that the firm would begin exiting the tax lien business. Plymouth Park was a New Jersey-based unit of Bear Stearns Cos. Inc., but was doing business as XSPAND and headed by a former New Jersey governor. Plymouth Park was a major purchaser of tax liens throughout the country and one of the largest purchasers of tax liens at the Pima County tax lien sale over the past several years. According to a Bloomberg article, J.P. Morgan claims that the unit is "not central to its operations."

While most of the media outlets were quick to report that J.P. Morgan was shedding its tax lien unit, few have given any analysis as to why. However, according to Bloomberg, Plymouth Park "was among companies that received grand-jury subpoenas in 2009 as part of a U.S. Justice Department antitrust probe of bidding at municipal tax-lien auctions in New Jersey according to an August 2009 prospectus for New York City tax-lien bonds that were serviced by the firm. The Bloomberg article goes on to say: "Antitrust officials investigated whether investors colluded to limit competition on sales to win a higher return, said Vincent Belluscio, executive director of the Tax Collectors & Treasurers Association of New Jersey."

Why exactly J.P. Morgan is exiting the tax lien market may remain unknown to the general public, but others entities have quickly filled J.P. Morgan's void. Indeed, at the 2011 tax lien sale in Pima County, the same representative that used to bid for J.P. Morgan was believed to be bidding on behalf of Fortress, a large hedge fund.

Another Sputtering Government Program - FHA Short Refi Program

Michael Fleishman — Sun, 10 Jul 2011 09:31:15 -0800

It seems the federal government is never short on ideas on how to head off the foreclosure crisis. Launched less than a year ago, the Federal Housing Administration's "Short Refinance Program" is an alleged effort to help "responsible homeowners," who owe more on their mortgage than the value of their property, to refinance their loans.

The Federal Housing Administration will offer certain underwater non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.

To be eligible for a new loan, the homeowner must owe more on their mortgage than their home is worth and be current on their existing mortgage. The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500. The property must be the homeowner's primary residence. And the borrower's existing first lien holder must agree to write off at least 10% of their unpaid principal balance, bringing that borrower's combined loan-to-value ratio to no greater than 115%.

In addition, the existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent. One catch in all this is that servicers must have executed a Servicer Participation Agreement (SPA) with Fannie Mae, in its capacity as financial agent for the United States, on or before October 3, 2010.

This program, like many the federal government has already put in place, is long on hope and short on efficacy. After spending $50 Million (of the $8 Billion slated for the prorgram), a pathetic 246 borrowers have made it through the program. Do the math - that's $203,252 per borrower. The program was supposed to have helped 500,000 to 1.5 Million borrowers. Well, that obviously is not going to happen.

One of the major hurdles to the program's success is that Fannie Mae and Freddie Mac are not participants. Ironically, participating servicers must execute the SPA with Fannie Mae. It is as though the government doesn't understand the often conflicting interests of investors and servicers. Follow the money. Without a realistic incentive structure in place, why would servicers or investors sign on? Well, not surprisingly, only about 24 servicers have signed on. So long as borrowers are current on their loans, most servicers and investors are not going to bother with a program like this.

It should not come as any surprise that our legislative leaders have been quick to put this one on the chopping block. Representative Robert Dold (R-Ill.) sponsored legislation to kill the program, but the bill is unlikely to reach the Senate floor. Rep. Dold said the program was well-intentioned but predictably doomed. He further noted, "It’s time for Washington to learn the same lesson instead of focusing only on prolifically inventing new programs and stubbornly persisting with them at all costs."

President Obama recently commented: "We are going back to the drawing board to put more pressure on banks to see if we can help more homeowners through modification and see where reducing principal is possible" Good luck with that. Well, fortunately, the debt ceiling will be raised here soon to help finance another knee-jerk program that no rightful lender, investor, or servicer would want to get wrapped up in.

Tax Lien Foreclosure & Attorney's Fees - The Supreme Court Weighs In

Michael Fleishman — Thu, 05 May 2011 19:25:07 -0800

The Arizona Supreme Court just weighed in on the issue of attorney's fees in tax lien foreclosure cases. Under Arizona Revised Statutes section 42-18206 (2010), a tax lien purchaser is entitled to a judgment for costs and reasonable attorney fees if the delinquent taxpayer redeems the lien after the purchaser commences a foreclosure action. After years of litigation, the Arizona Supreme Court held that a tax lien purchaser is only entitled to reasonable attorney fees incurred before the tax lien is redeemed and a certificate of redemption issues.

Under Arizona Revised Statutes ("A.R.S.") section 42-18206 (2010), a tax lien purchaser is entitled to a judgment for costs and reasonable attorney fees if the delinquent taxpayer redeems the lien after the purchaser commences a foreclosure action. We hold that a tax lien purchaser is only entitled to reasonable attorney fees incurred before the lien is redeemed and a certificate of redemption issues.

The court of appeals noted that this statute neither places a "temporal limit" on recoverable fees nor limits eligibility for fees "to certain matters and not others." The Arizona Supreme Court noted though although the legislature did not expressly place temporal and subject matter restrictions in the text of A.R.S. § 42-18206, such restrictions are apparent from the context of the statutes governing tax lien redemption.

The Court went on to say that A.R.S. § 42-18206 protects against a loss to the purchaser from pre-redemption litigation, but it does not ensure a profit. Nor should it subsidize unlimited litigation to contest redemption in pursuit of that profit.

In its most foreceful reasoning, the Court stated: "Thus, interpreting § 42-18206 to allow post-redemption fees and costs skews the statute to subsidize unsuccessful litigation. Such a reading creates an incentive for protracted and potentially meritless litigation. It allows tax lien purchasers to coerce landowners otherwise able to redeem to forfeit their property by the threat of continued litigation conducted at the landowners' expense. We discern neither a legislative intent nor any sound policy reason to award fees for a losing argument, especially when doing so encourages protracted litigation, discourages redemption, and interferes with litigants' and the courts' interests in finality."

Though this decision does not undercut the basic protections afforded tax lien purchasers in the statutory scheme, unfortunately, this decision does leave tax lien purchasers slightly exposed to the costs associated with having to file for a judgment after a property owner redeems and refuses or is unable to pay the costs and fees incurred by the tax lien purchaser. A strict reading of this opinion seems to indicate that seeking a tax lien holder seeking a judgment after a redemption, for failure to pay the pre-redemption costs and fees incurred, will not be recoverable.

The Death of Dual-Tracking?

Michael Fleishman — Fri, 29 Apr 2011 05:31:07 -0800

Housing Wire recently reported that the Federal Housing Finance Agency (FHFA) has directed the two government sponsored agencies, Fannie Mae and Freddie Mac to align their guidelines for servicing delinquent mortgages.

Previously, they maintained different requirements for how their mortgage servicers would treat loan backed by Freddie and Fannie. This new push for alignment may be the death knell for the practice of "dual tracking." Dual tracking has been a common practice by servicers of working on a loan modification at the same time as it is purshing a loan towards foreclosure. The new FHFA forced allignment will push servicers into engaging the borrower as soon as they become delinquent and will prevent the initiation of the foreclosure process if the borrower and servicer are working toward solving the delinquency in a good-faith effort.

Housing Wire furtehr reports that "under the new requirements, servicers must engage in a single track for considering foreclosure alternatives up to the 120th day of delinquency" and "must also perform a formal review of the case to confirm the borrower was considered before starting foreclosure. Even then, servicers are required to continue work with the homeowner on other alternatives."

Servicers for both Fannie and Freddie will also apprewarded and penalized the same under the new guidelines.

"FHFA's directive to align Enterprise policies for servicing delinquent mortgages should result in earlier servicer engagement to identify the best solution available for homeowners, given their individual circumstances," said FHFA Acting Director Edward DeMarco.

Freddie Mac CEO Ed Haldeman said: "Alignment of key servicing practices between our two companies will help servicers . . . to streamline their operations and more effectively target resources to distressed borrowers . . . For example, it will simplify the process for seeking help by giving borrowers one application to fill out and servicers one application to review for all Freddie Mac loan modifications and foreclosure alternatives."

This allignment, if actually followed by Fannie and Freddie-backed servicers will have a huge impact for borrowers seeking to modify the terms of their loans. Indeed, the dual-track process is precisely what has led to many unsuspecting homeowners losing their homes, as they never understood that dual tracking was the policy. Perhaps the common lament of "how could they sell my home, I was in the middle of a loan modification" may be a thing of the past. I won't be holding my breath on that one.

Short Sale vs. Foreclosure - What's the Difference

Michael Fleishman — Mon, 25 Apr 2011 06:22:04 -0800

It seems that real estate agents will no longer be able to rely on the credit score rationale for pushing short sales. The old mantra has been that shorts sales have less impact on your credit rating. Unless you have a bank that is proactive enough to approve a short sale before you have actually defaulted on your loan, it appears that the difference between a short sale and a foreclosure is no longer appreciable.

According to Fair Issac Corporation, the company that brought us the FICO score, homeowners with short-sales and foreclosures on their records ended up with similar credit scores, assuming their scores were similar as distressed homeowners.

Turf Battles: the Feds vs. the Attorneys General

Michael Fleishman — Wed, 13 Apr 2011 19:57:09 -0800

The "robo-signing" scandal unearthed substantial regulatory meddling into the practices of the mortgage servicing industry, which has only further exasperated any hope of a recovery in the housing industry. In October 2009, the 50 Attorneys General allegedly joined forces with the Justice Department, the Federal Trade Commission, the Treasury Department, and the Department of Housing and Urban Development to investigate whether home-loan servicers violated state laws against deceptive practices by submitting affidavits and foreclosure documents without confirming the paperwork's accuracy. The investigation also looked into loss mitigation practices by the servicers.

It was not long before the coalitioin of attorneys general began to fracture and word of a separate federal investigation involving the Federal Reserve and the Office of the Comptroller of the Currency began to take shape.

The AGs prepared a 27-page "Term Paper" that reads like a wish list of changes to the servicing industry, many of which do not take into account the inherent restrictions that servicers face in their relationship with the mortgage pool trusts they serve and their own vested financial interests.

Federal regulators have just announced a consent agreement with 14 of the largest servicers. The consent agreements require these companies in part to comply with state law (imagine that!) and retool their loss mitigation processes to give homeowners a chance at modification before foreclosure. While the federal regulators made room for monetary sanctions, they have yet to release an exact amount. Early talk by the FDIC and the AGs of a $20 Billion sanction seems to have been undercut by this consent agreement.

Iowa Attorney General, Tom Miller, who has been leading the investigation and settlement on behalf of the 50 AGs commented that the federal consent agreements "will not impact our investigation of the nation’s largest servicers and pursuit of a joint settlement."

In apparent frustration of how the federal regulators have undercut the AGs settlement, Housing Wire reports that Rep. Elijah Cummings (D-Md.) introduced a bill in the House of Representatives pushing for more requirements such as modifications and disclosures before servicers can file a foreclosure case. The bill, H.R. 1477, is a companion to S.489 introduced by Sen. Jack Reed (D-R.I.). Both bills would apply to loans not only covered by the U.S. government, but to all mortgages falling under the supervision of the Consumer Financial Protection Bureau.

The mortgage service industry is under severe scrutiny right now (and rightfully so), and it will be very interesting to see how the AG's collective efforts, the federal consent agreement, potential federal legislation, class actions, and individual borrower lawsuits will will reshape how securitization of mortgages and the attendant servicing rights evolve. The turf battles will have their own story line, but it is clear that changes to how servicers approach loan modification is long overdue.

Bank of America - Doing What it Seems to Do Best

Michael Fleishman — Fri, 31 Dec 2010 22:39:49 -0800

I took three different calls this past week from homeowners who have sought the assistance of Bank of America's servicing subsidiary, BAC Home Loans Solutions, for a loan modification. What most unsuspecting homeowners do not realize is that BAC simply has no vested interest in actually making good on the false promises it continues to peddle to these homeowners. Is it any wonder that the Arizona Attorney General has intervened. In summing up the over 400 complaints it has received about Bank of America and its servicer BAC's handling of loan modifications, the A.G. states the following in its Complaint against these entities:

"Defendants have continued to engage in widespread consumer fraud by misrepresenting to Arizona consumers whether they were eligible for modifications of their mortgage loans, when Bank of America would make a decision on their loan modification requests, whether Bank of America had approved their modification requests, why Bank of America declined their modification requests, and whether and when Bank of America would foreclose upon their homes."

BAC, like many other servicers, systematically lulls homeowners into believing that a loan modification is something other than a pipe dream. However, and as noted in the A.G.'s Complaint, BAC, again, like many other servicers, has been "dual tracking" delinquent loans. While BAC promises that it is working on a homeowner's loan modification, it is at the same time, in a different department, pushing forward with a foreclosure action. Indeed, servicers habitually allow howeowners to make lower "trial modification" payments and then send the homeowner a Notice of Intent to Accelerate. So the servicers accept the lower payment and then use the fact that the homeowner is paying less each month to create lump sum delinquencies that most homeowners cannot pay.

Indeed, in one case I reviewed this past week, the homeowner had never missed a payment, but sought a loan modification to try and ease their struggle. They sent in the requisite paperwork, then sent it in again, then sent it in again. They were promised a lower trial modification payment, which they dutifully made each month for several months, and then they received word a Notice to Accelerate. While BAC was happy to take the new trial modification payments each month and cash those checks, it was at the same time reporting to credit agencies that the homeowners were delinquent each month (due to the difference between the old payment and the lower trial modification payment). BAC was again dual tracking this loan towards foreclosure.

We would have been far better off if the banks had just said to homeowners, "Sorry, we are not offering any loan modifications. Make your payment or lose your house." Instead, in no small part due to the federal HAMP program, howeowners are instead lulled into the very mistaken belief that they are going to receive a loan modification. Well, guess what, BAC, like most other laon servicers, get paid whether they string you along or foreclose. Indeed, it is best to "dual track" by stringing people along and then foreclosing on them. That way, the servicer makes the most money - even if it is contrary to the best interest of the actual investor holding the mortgage. Perverse times we live in, eh?

Bank of America in the Cross Hairs

Michael Fleishman — Sat, 18 Dec 2010 06:52:46 -0800

Arizona Attorney General Terry Goddard announced that on December 17, 2010, his Office filed a lawsuit against Bank of America and its affiliated companies alleging violations of the Arizona Consumer Fraud Act and violations of the consent judgment entered in March 2009 between Arizona and the Countrywide companies owned by Bank of America.

The lawsuit, filed in Maricopa County Superior Court, was triggered by hundreds of consumer complaints and follows a year-long investigation into Bank of America’s residential mortgage servicing practices, particularly its loan modification and foreclosure practices.

Goddard stated that Bank of America, the nation’s largest residential mortgage loan servicer, should be leading the way out of the country’s foreclosure crisis. Instead, he said, “Bank of America has been the slowest of all the servicers to ramp up loss mitigation efforts in response to the housing crisis. It has shown callous disregard for the devastating effects its servicing practices have had on individual borrowers and on the economy as a whole.”

The complaint asks the court to hold the defendants in contempt for violating the consent judgment and to order them to pay restitution to eligible consumers and civil penalties, attorneys’ fees, and costs of investigation to the State. It further asks the court to order the defendants to pay up to $25,000 for each violation of the consent judgment and up to $10,000 for each violation of the Arizona Consumer Fraud Act.

Goddard noted that Arizona has been particularly hard hit by the foreclosure crisis, as evidenced by recent reports ranking the state second behind Nevada in foreclosures. Nevada plans to file a similar lawsuit against Bank of America today.

The consent judgment was entered into on March 13, 2009 to resolve the Attorney General’s allegations that Countrywide had engaged in widespread consumer fraud in originating and marketing mortgage loans. In the judgment, Countrywide agreed to develop and implement a loan modification program for certain former Countrywide borrowers in Arizona. Bank of America acquired Countrywide on July 1, 2008 and has assumed responsibility for Countrywide’s compliance with the consent judgment.

The complaint filed today alleges that, since the consent judgment was entered, Bank of America has repeatedly violated the judgment’s provisions related to loan modifications. Instead of providing the relief to which eligible homeowners were entitled, Bank of America has failed to make timely decisions on modification requests and proceeded with foreclosures while modification requests were pending in violation of the agreement.

The complaint also alleges that Bank of America has violated the Consumer Fraud Act by misleading Arizona consumers about its loss mitigation process and programs, including matters such as:
• Whether homeowners must be delinquent on their mortgage payments to be considered for a loan modification.
• How much time it would take to receive a decision from Bank of America on a modification request or a short sale request.
• Whether foreclosure would proceed while a modification or short sale request was pending, or while a homeowner was making trial payments.
• Whether the homeowner had been approved for a loan modification.
• Failure to provide valid reasons why the homeowner was declined for a modification.
• Whether the homeowner would be approved for a permanent modification if the consumer successfully made all trial modification payments.

As a result of Bank of America’s deceptive practices, many homeowners who were already contending with other financial hardships have been led to unnecessarily deplete their dwindling savings in futile attempts to obtain the promised relief and save their homes. Many homeowners who tried to obtain a modification from Bank of America ended up owing more principal on their loans or having less equity (becoming more “underwater”) in their homes. Others gave up their chances to pursue other financial options, such as short sales, while trying to modify their loans with Bank of America. These consumers endured months of frustrating delays, not knowing whether or when they would lose their homes. They called Bank of America and resubmitted their paperwork over and over again in futile efforts to get the help they were promised.

“I am filing this lawsuit today because, after years of delay and broken promises, Arizonans should not have to wait any longer to seek redress,” Goddard stated. “Our homeowners and communities need and deserve relief. Bank of America must be held accountable for its deceptive conduct and failed commitments.”

For anyone in the front lines of the foreclosure debacle, this should come as little surprise. The Attorney's General's lawsuit joins many across the country seeking class-action status, alleging that Bank of America regularly falsely informs borrowers that it did not receive requested information and demands that documents be re-sent. Bank of America is not exactly alone here. The entire loan modification "extend and pretend" system is flawed and implicitly intended to allow servicers of loans the opportunity to make more money while stringing people along with the false hope that they will receive a permanant loan modification.

Breathing Underwater

Michael Fleishman — Thu, 04 Nov 2010 13:47:31 -0800

A great article by Don Lee - Tribune Washington Bureau - highlights how underwater mortgages are a serious contributor to the dismal performance of the national economy. It is estimated that there are 15 million homeowners who are undewater on their mortgages, many of whom can and continue to pay on their mortgage, but have no means to refinance and are stuck paying on homes in which the value may not return for 10-15 years. In other words, they are stuck. Lenders are not likely to offer any modifications so long as they are current on their loans. So for many, it is continue to pay and hope for a quick (though unlikely) recovery in home prices, walk away and suffer the attendant consequences, or hope that lenders become more proactive in offering modification or refinance options. If the economy continues to drag, which by all accounts it will (even with new quantitative easing by the Federal Reserve), the threat of more strategic walkaways in non-recourse states is likely to become a more serious problem.

Careful When You Close The Door Behind You

Michael Fleishman — Wed, 03 Nov 2010 19:09:32 -0800

A San Diego police officer and his wife recently pleaded not guilty to accusations that they trashed their foreclosed home in Riverside County, taking $44,000 in appliances and fixtures with them when they moved out. Both have been charged with one felony count of damaging or carrying away items from a foreclosed property. Damage was estimated at over $165,000.

If convicted, they could face up to four years in prison. As reported in the Press-Enterprise and the Signon Sand Diego, the damage included stones smashed off the facade, dye poured on carpets, wiring pulled out of walls, spray-painted the walls, cut and chopped-down shrubs tossed in the backyard swimming pool, and pulled out electrical wires and cut them.

Supervising Deputy District Attorney Arthur Chang said the damage was "indicative of a great deal of maliciousness and bitterness." Robert Acosta's attorney, Albert Arena, raised questions about the ownership of the property and the conduct of the Acostas' lender. He said it was "a stretch" to charge the couple with a crime

Robert Acosta is a 12-year veteran of the San Diego Police Department and served eight years in the U.S. Marine Corps. San Diego police officials said Acosta is on administrative leave.

Riverside County authorities said this is the only case they can recall in which a former homeowner has been charged with a crime for damage to a foreclosure.

A witness saw the Acostas June 12 removing items from the home, court records state. Later, investigators recovered $7,920 in stolen property, including appliances, chandeliers, shutters, iron gates and exterior lights in the Acostas' storage units in San Diego County.

While a likely majority of homeowners in Arizona will be protected by the anti-deficiency statutes in the event of a foreclosure, if a homeowner causes "waste," the lender can seek recourse against those borrowers. It will be interesting to see whether criminal charges become more prevalent as the foreclosure crisis continues.