South Florida Bankruptcy Law Blog

FDIC's Blair: Millions of Foreclosures Could be "Infected"

2011-06-05T18:28:00.003-04:00

The issues present in the many of the mortgages that are part of today's mortgage crisis have been much debated. It appears that there is much more yet to be debated or learned. In order to help resolve the mortgage crisis, many have urged mortgage servicers and the state Attorney Generals to reach a "global settlement." Among those is Chairman of the FDIC, Sheila C. Bair who testified on May 12, 2011 before the Senate Committee on Banking, Housing and Urban Affairs.

Chairman Bair states that one reason that she has "urged the servicers and the state Attorneys General to reach a global settlement" was that the

"Flawed mortgage banking processes have potentially infected millions of foreclosures, [emphasis added] and the damages to be assessed against these operations could be significant and take years to materialize. The extent of the loss cannot be determined until there is a comprehensive review of the loan files and documentation of the process dealing with problem loans."

Chairman Bair also stated that it is important for the mortgage lenders to "remedy the foreclosure backlog, which has become the single largest impediment to the recovery of the U.S. housing markets."

From Where Will Help Come for Homeowners ?

2011-06-05T18:04:00.004-04:00

Yesterday's New York Times has an article "For the Jobless, Little U.S. Help on Foreclosure".

The article states or quotes those who suggest the following:

That the present governmental housing efforts have been "plagued by delays, dubious benefits and abysmal participation."
Data suggest that the task is only growing more difficult due to unemployment
New job growth in May was weak
A widely watched index found that housing price have dropped to their lowest level in almost a decade
Foreclosures have slowed due to delays in processing, not a housing recovery
The Treasury Department was given $46 billion to spend on helping homeowners, but has only spent about $2 billion
Only 670,000 homeowners have received permanent modifications under HAMP program instead of the 3 to 4 million that were promised to be helped
An official from the Boston Federal Reserve has called on the government to provide loans or grants to unemployed or underemployed homeowners
The debate is playing out on the sidelines of partisan Washington politics

"Anatomy of a Financial Collapse"

2011-04-14T19:23:00.002-04:00

On April 13, 2011, the United States Senate Permanent Subcommitte on Investigations, Committe on Homeland Security and Governmental Affairs issued its report "Wall Street and the Financial Crisis: Anatomy of a Financial Collapse."

Change in Miami-Dade Foreclosure Mediation Program

2011-03-05T09:32:00.003-05:00

The Miami Herald reports today that the 11th Circuit Court, which includes Miami-Dade County, has made a change in the organization that has been managing the mortgage foreclosure mediation program since its initiation. It has replaced the Collins Center with the Oasis Alliance Corporation, apparently based in Tampa. Herald quotes a director of the Collins Center that it operates in "six of Florida's judicial districts and receives $275 for each case it handles, [and] has managed about 8,000 foreclosure mediations in Miami-Dade over the past two years."

Change in Miami-Dade Foreclosure Mediation Program

2011-03-05T09:32:00.002-05:00

The Supreme Court's Decision in Ransom

2011-01-11T20:06:00.005-05:00

The U.S. Supreme Court issued its 8-1 decision in Ransom today. Justice Kagan wrote for the majority and Justice Scalia wrote a dissenting opinion. It is reported that this is Justice Kagan's first opinion.

The majority opinion held that an over-median income debtor in chapter 13 is not entitled to the "ownership costs" deduction (approx. $471.00) in the computation of the means test (used to determine "disposable income") for a vehicle that is not encumbered by debt. The debtor is though is entitled to a deduction for the "operating costs" deduction (approx. $388.00) for an unencumbered vehicle.

Yet Further Congressional Hearings on the Foreclosure Crisis

2010-12-16T16:15:00.007-05:00

As reported in the media, the House Committee on the Judiciary held a further hearing on the mortgage foreclosure crisis on December 15, 2010. The witness list included Senator Sheldon Whitehouse (D-RI). It is reported that Senator Whitehouse is seeking "to introduce legislation early next year that would give [Bankruptcy Court] judges comfort that they have the authority to force parties, including banks, to the table to discuss modifications."

Senator Whitehouse noted that in today's "age of securitization, the [mortgage] servicer merely serves as processing agent and may not work in the interests of the people who actually own the mortgage and in the age of corporate bureaucracy, the left hand may not know what the right hand is doing." He further reviewed his efforts to give bankruptcy court judges the power to modify mortgage on principal residences just as they are able to for other loans including those on vacation homes, cars, and boats. He reviewed efforts in various Bankruptcy Court loan mitigation programs and some mortgage servicer challenges thereto. He noted his proposal to pass legislation to clarify the power of Bankruptcy Courts to run foreclosure loss mitigation programs.

HAMP has "Failed to Make a Dent in the Foreclosure Crisis"

2010-12-14T17:58:00.009-05:00

Today the Congressional Oversight Panel issued its oversight report of over 170 pages reviewing the Department of Treasury's Foreclosure Prevention Programs. The report reviews where HAMP stands today, reviews the future of HAMP, and sets forth conclusions and recommendations. Annex I to the report reviews lessons from the Home Owners' Loan Corporation of the 1930s and 1940s. The report states that despite the tweeking of HAMP since its April 2010 report, the concerns with the program have not been resolved. The report states that it presently estimates that HAMP will "prevent only 700,000 to 800,000 foreclosures - far fewer than the 3 to 4 million foreclosures that Treasury initially aimed to stop, and vastly fewer than the 8 to 13 million foreclosures expected by 2012." It further notes that since "Treasury's authority to restructure HAMP ended on October 3, 2010, the program's prospects are unlikely to improve substantially in the future." The report concludes that HAMP has failed to "make a dent in the foreclosure crisis" and that Treasury has "failed to acknowledge HAMP's shortcomings in time."

Professor Levitin Refutes the American Securitization Forum

2010-12-06T13:21:00.014-05:00

Professor Adam Levitin posted this blog post on Creditslips.org refuting the position of the Tom Deutsche of the American Securitization Forum's testimony before the Senate Banking Committee last week. Professor Levitin also recently testified before Congress on November 16, 2010 and November 18, 2010.
One of the important involved issues is the "chain of title" problem in mortgage securitization, including whether an endorsement is required from every party in the securitization chain.

Yet More Congressional Hearings on Foreclosure Crisis

2010-12-02T17:40:00.004-05:00

The House Committee on the Judiciary held a hearing on "Foreclosed Justice: Causes and Effects of the Foreclosure Crisis" today. Yesterday, the Senate Banking Committee held hearings on the foreclosure crisis. Further hearings are scheduled for December 8, 2010.

Among the speakers were officials from

Department of Treasury
Federal Housing Finance Agency
Comptroller of the Currency
New York State Supreme Court Judge F. Dana Winslow
Louisiana Bankers Association
American Securitization Forum
Professor Christopher L. Peterson, University of Utah

Among the issues addressed were:standing to foreclose, "Robo-signing", MERS, and projected future foreclosures. Rep. John Conyers (D-Mich.) stated some project that up to 13 million more homes will be lost to foreclosure before the crisis is over.

Senate Hearing on "Problems in Mortgage Servicing - Part II"

2010-12-01T10:14:00.008-05:00

The Senate Committee on Banking, Housing, and Urban Affairs will be holding a hearing on "Problems in Mortgage Servicing from Modification to Foreclosure, Part II" today.

The witnesses include representatives from

US Treasury
FDIC
Federal Reserve
Comptroller of the Currency
FHFA
Fannie Mae
Freddie Mac
American Sercuritization Forum
Professor Kurt Eggert, Professor of Law

In 2007, Professor Eggert wrote on article entitled "Limiting Abuse and Opportunism by Mortgage Servicers"

Roundup of Recent Bankruptcy Scholarship

2010-11-22T11:46:00.010-05:00

"Divided Loyalties: The Attorney’s Role in Bankruptcy Reaffirmations" - Gregory M. Duhl, William Mitchell College of Law, American Bankruptcy Law Journal, Vol. 84, No. 4.

"The Rise in Elder Bankruptcy Filings and Failure of U.S. Bankruptcy Law" - John Pottow, University of Michigan Law School, University of Michigan Public Law Working Paper No. 210

"The Costs of BAPCPA: Report of the Pilot Study of Consumer Bankruptcy Cases" - Lois R. Lupica, University of Maine School of Law, American Bankruptcy Institute Law Review, Vol. 18, 2010

"Is Chapter 15 Universalist or Territorialist? Empirical Evidence from United States Bankruptcy Court Cases" - Jeremy Leong, Wisconsin International Law Journal, Forthcoming

"Committee Capture? An Empirical Analysis of the Role of Creditors' Committees in Business Reorganization" - Michelle M. Harner and Jamie Marincic, Vanderbilt Law Review, Vol. 64, 2011, U of Maryland Legal Studies Research Paper No. 2010-47

House Committee on Financial Services Hearing

2010-11-18T19:02:00.003-05:00

The House of Representative's Committee on Financial Services held a hearing today on "Robo-Signing, Chain of Title, Loss Mitigation and Other Issues in Mortgage Servicing."

Among the witnesses were:

Mr. Adam Levitin, Associate Professor of Law, Georgetown University Law Center

Mr. Anthony B. Sanders, Professor of Finance, Distinguished Professor of Real Estate Finance, School of Management, George Mason University

Ms. Julia Gordon, Senior Policy Counsel, Center for Responsible Lending

Ms. Linda Fisher, Professor of Law, Seton Hall School of Law

Ms. Anne Anastasi, President, American Land Title Association

Also on the witness list were officials from the U.S. Department of Treasury, the Federal Reserve, U.S. Department of HUD, Office of the Comptroller of the Currency, the Federal Housing Finance Agency, Bank of America, Ally Financial Inc, JPMorgan Chase, Wells Fargo Home Mortgage Servicing, Citi Mortgage, and MERS.

American Securitization Forum - White Paper

2010-11-17T10:51:00.006-05:00

On November 16, 2010, the American Securitization Forum has posted a white paper on the topic of "Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Market." The white paper was drafted to address "a number of legal theories questioning whether securitization trusts ...have valid legal title ... to the mortgage notes in those trusts."

The white paper asserts as one of its most critical principles is that when ownership of a mortgage note is transferred in accordance with common securitization processes, ownership of the mortgage is automatically transferred pursuant to the centuries old common law rule that "the mortgage follows the note." It further asserts that "this means that the assignment of a mortgage to a trustee does not need to be recorded in real property records in order for it to be a valid and binding transfer."

November Oversight Report

2010-11-16T14:44:00.003-05:00

On November 16, 2010, the Congressional Oversight Panel issued its 127 page November Oversight Report - Examining the Consequences of Mortgage Irregularities for Financial Stability and Foreclosure Mitigation

Another "Robo-Signer" Class Action Suit

2010-11-12T11:40:00.007-05:00

Various "Robo-Signer" class action suits have been filed across the country. The case of Geoffrey Huber, et al. vs. GMAC, LLC, n/k/a Ally Financial, Case 10-2458-SCB was filed in the Federal District Court of the Middle District of Florida on November 2, 2010. The complaint alleges that the Defendant engaged in a fraudulent scheme to fabricate and falsify affidavits and other documents to support foreclosure complaints and judgments.

The action is being brought as a statewide class action on behalf of all other similarly-situated obligors who have been obligors on notes and mortgages in the State of Florida served by the Defendant within the previous three years. The relief sought is based on an alleged violation of constitutional rights under color of state law 42 U.S.C. 1983, abuse of process, and unfair and deceptive trade practices pursuant to Fla. Stat. 501.201 et seq.

House Judiciary Committee Sets Hearings on Foreclosures

2010-11-11T14:02:00.003-05:00

The House Committee on the Judiciary has set a hearing for Wednesday, November 17, 2010 on "Foreclosure Justice: Causes and Effects of the Foreclosure Crisis." The list of witnesses is not yet available.

Senate Banking Committtee Sets Hearing on Foreclosures

2010-11-10T16:45:00.005-05:00

The Senate Banking Committee has announced that it will hold a hearing on Tuesday November, 16 "to investigate allegations of improper and fraudulent mortgage servicing and foreclosure processing." The witnesses scheduled to testify are

Attorney General of Iowa, Tom Miller
President of Bank of America Home Loans, Barbara Desoer
CEO of Chase Home Lending, David Lowman
CEO of MERSCORP., Inc., RK Arnold
Associate Professor of Law, Adam J. Levitin
Counsel for National Consumer Law Center, Diane E. Thompson

Bankruptcy Technical Corrections Act of 2010

2010-10-04T08:55:00.004-04:00

On September 29, 2010, the House of Representatives passed H.R. 6198 , the "Bankruptcy Technical Correction Act of 2010" and referred it to the Senate Judiciary Committee. HR 6198 was introduced by Rep. John Conyers (D-MI) on September 23, 2010. The bill would make technical corrections to the Bankruptcy Code and bankruptcy-related crime statutes in Title 18. The bill "does not alter substantive rights" but only fixes spelling errors, incorrect cross-references, and minor language disagreements, many of which were enacted in the 2005 BAPCPA.

Insurer of Mortgage Backed Securities Sues Countrywide

2010-10-01T11:03:00.003-04:00

A recent case provides some insight into the world of insurance obtained by subprime mortgage companies to back their mortgage backed securities. The insurance was purchased by the mortgage companies to enhance the credit worthiness of the mortgage-backed securities.

Businessweek reported yesterday about the civil action filed on September 28, 2010 in the New York state trial court, by Ambac, the insurer of mortgage backed securities issued by Countrywide entities. The insurer, Ambac Assurance Corp. alleges that Countrywide fraudulently induced Ambac to insure bonds backed by improperly made loan. Ambac alleges that the "secret of Countrywide's short-term success-and long-term demise-has become clear," - it abandoned its underwriting standards and condoned fraud by its employees and others.

Its reported that Ambac's division that wrote the policies was placed in rehabilitation in March, 2010 by Wisconsin's insurance commissioner.

Securitization

The lawsuit involves twelve Countrywide sponsored residential mortgage securitization transactions that closed between 2004 and 2006, involving second mortgages. The twelve transaction contained 268,000 loan that served as collateral for about $16.7 billion in securities. Certain of the classes of securities were insured by Ambac. Ambac alleges that to date, over 35,000 loans with an aggregate principal balance of more than $1.95 billion has defaulted or been charged off and as a result, Ambac has been forced to make more than $466 million in claim payments to Countrywide.

Ambac alleges that its review of the defaulted mortgage shows that over 97% of the loans reviewed breached Countrywide's representations regarding the quality of the mortgages and conformance to Countrywide's purported underwriting guidelines. Pursuant to the agreement, Ambac demanded that Countrywide cure the breaches or substitute or repurchase the "breaching loans." Countrywide is alleged to have refused to do so.

Predatory Lending

Ambac further alleges that Countrywide engaged in "predatory and abusive lending practice in marketing its products to borrowers who could not afford them." It alleges that "Countrywide enticed borrowers to borrow beyond their means by promoting loans with low introductory 'teaser' interest rates while obfuscating the steep increase in monthly payments that would occur when these teaser rates reset at higher levels."

Vicarious Liability

Ambac alleges that Bank of America is liable for its damages as Countrywide's successor. Bank of America acquired all of Countrywide's assets through an all-stock merger on Ju

Modifying Your Mortgage in Chapter 13 Bankruptcy

2010-08-12T15:15:00.004-04:00

New mortgage modification rules make it easier to combine a HAMP or "Obama Plan" mortgage modification with a Chapter 13 Bankruptcy. Combining a HAMP mortgage modification may be beneficial to many homeowners.

The filing of a chapter 13 bankruptcy generally stays all foreclosure and collection actions by mortgage companies and other creditors. This allows a person to formulate a chapter 13 plan to reorganize their financial situation.

A typical homeowner who owes more on their home than it is valued at will propose a chapter 13 plan to avoid their second mortgage lien and categorize it with other unsecured claims, such as credit cards. The homeowner will also file a HAMP mortgage modification request if they haven't already file it. The chapter 13 plan will provide for payment of the estimated and anticipated HAMP modified mortgage payment. The chapter 13 plan provides also provides for a percentage dividend to unsecured creditors.

Filing for a HAMP modification together with a chapter 13 bankruptcy may increase the likelihood of obtaining a HAMP modification for various reasons, including the increased feasibility of making the new payment for the first mortgage, as the second mortgage is avoided and categorized as an unsecured creditor. Also, as the HAMP is being filed in the context of the chapter 13 case, it may receive more prompt review by the mortgage company.

A typical HAMP modified mortgage payment is calculated as 31% of the homeowner's gross income. The 31% amount would cover principal, interest, taxes, insurance and associations.

Mortgage Modification and Chapter 13 Bankruptcy

2010-08-05T16:08:00.003-04:00

The new HAMP rules that went into effect June 1, 2010 greatly increased the attractiveness of Chapter 13 as a platform to obtain a HAMP mortgage modification. Basically, by filing both a HAMP mortgage modification and a chapter 13 bankruptcy at the same time, one may be able to do all of the following at the same time:

Obtain a modification of the first mortgage
Avoid the second mortgage (ie. "equity line") if it is "underwater" due to a fall in value
Reorganize unsecured debt

The new HAMP guidelines provide the following new provisions:

Bankruptcy - Homeowners in chapter 13 are required to be considered for HAMP upon request.

Chapter 13 Plan - The chapter 13 plan may provide for anticipated or estimated HAMP modified mortgage payment which is normally 31% of gross income.

Waiver of Application - The mortgage servicer may accept the bankruptcy schedules in lieu of the Request for Modification and Hardship Application to determine eligibility for HAMP.

Cooperation Required - Mortgage servicer must work with the homeowner to obtain Bankruptcy Court approval.

Waiver of Trial Period - Mortgage servicer may waive trial period mortgage modification and provide a permanent mortgage modification if the chapter 13 plan had been providing the amount of the proposed modified mortgage payment.

Investor Approval - Mortgage servicers must use "reasonable efforts" to obtain approval from investors to participate in HAMP.

Reconsideration - Ability to seek reconsideration of HAMP denial.

Observations on the South Florida Foreclosure Crisis

2010-08-05T11:36:00.013-04:00

The mortgage foreclosure crisis in South Florida is far from resolved. I offer the following observations.

It is astounding to note that about 30% of all foreclosure sales in Miami-Dade County, Florida are being canceled on recent calendars. Not clear whether this is an indication that the mortgage holders are not that eager to become the owners of more South Florida real estate or whether they are cooperating more in efforts by homeowners to modify their mortgages.

The Federal Reserve Bank of Cleveland issued a report on August 3, 2010 on the mortgage cramdown policy debates and lessons that may be learned from the chapter 12 agricultural bankruptcy reform in the 1980's.

Miami condos for less than the price of a car.

Foreclosure crisis and abandoned homes contributes to Miami being rated 9th worst place to live in the USA, behind El Centro, California, Cleveland, Detroit, and Las Vegas

"The Dodd-Frank Wall Street Reform and Consumer Protection Act" - Some Residential Mortgage Provisions

2010-07-23T18:46:00.017-04:00

H.R. 4173

The Dodd-Frank Wall Street Reform and Consumer Protection Act - was signed into law by President Obama on July 21, 2010 as Public Law 111-203. It contains various residential mortgage provisions.

Section 4 - General Effective Date - one day after enactment

Section 941 - Regulation of Credit Risk Retention - Regulations are to be prescribed "to require any securitizer to retain an economic interest in a portion of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells or conveys to a third party." The securitizer is also to be prohibited from "hedging or otherwise transferring the credit risk that the securitizer is required to retain" and the securitizer is to be required to retain not less than 5 percent of the credit risk for certain assets.

Section 1001, et seq. - The Consumer Financial Protection Act of 2010.

Section 1400, et seq. - The Mortgage Reform and Anti-Predatory Lending Act

Section 1411 - Ability to Repay - The Truth in Lending Act (15 U.S.C. 1631 et seq.) is amended that, in accordance with regulation, creditors may not make a residential mortgage loan unless it makes a "reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance...and assessments."

Section 1442 - Establishment of Office of Housing Counseling

Section 1446 - Study of Defaults and Foreclosures - HUD is to conduct an extensive study of the causes of default and foreclosure of residential home loans, including the role of escrow accounts and the role of "computer registeries of mortgage" (that must refer to MERS)

Section 1471 - Property Appraisal Requirements

Section 1482 - HAMP Guidelines - the HAMP supplemental directives and other guidelines are to require the mortgage servicer to provide the borrower whose request for mortgage modification is denied, "all borrower-related and mortgage-related input data used in any net present value (NPV) analyses". The input data is to be provided "at the time of such denial." A website is to be established to provide a calculator of the NPV analyses of a mortgage so that a homeowner can enter the information regarding their own mortgage and make a determination regarding whether their mortgage would be accepted or rejected for a HAMP modification.

Section 1483 - Public Availablity of HAMP Data

Update on HAMP

2010-07-22T20:26:00.002-04:00

Testimony Before the Senate Committee on Finance on July 21, 2010

Neil Barofsky - Special Inspector General of TARP
Elizabeth Warren - Chair of the Congressional Oversight Panel
Richard Hillman - Managing Director of Financial Markets and Community Investment Team for the GAO

Improper HAMP Denials and Servicer Noncompliance - The GAO Report to Congress

2010-07-04T10:56:00.014-04:00

On June 24, 2010, the U.S. Government Accountability Office ("GAO") released its report to the Congressional Committees entitled "Troubled Asset Relief Program - Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs." The report reviewed various issues, including the extent to which HAMP servicers have treated borrowers consistently and the action that Treasury has taken to address "the challenges of trial modification conversion, negative equity, redefaults, and program stability." The GAO report issued several recommendations to Treasury, including that it establish increase efforts to inform borrowers to use the HOPE Hotline if they have been incorrectly denied HAMP and to clarify the consequences for mortgage servicers for noncompliance with HAMP.

HAMP Inquiries and Complaints

The GAO report notes that Treasury directed the HAMP servicers to establish procedures to respond to borrower inquiries and complaints. To that end, HAMP contracted with the "HOPE Hotline" to handle incoming borrower calls about HAMP, including complaints about potentially incorrect denials. The present hierarchy of referrals is as follows:

Borrower to call HOPE Hotline at (888) 995-4673
Referral by HOPE Hotline to HUD Approved Counseling Agency or its "Making Home Affordable Escalation Team"
Escalation, as needed, to HUD Approved Counseling Agency's Management
Escalation, as neeeded to, Fannie Maes' HAMP Solution Center

HUD-Approved Counseling and MHA Escalation Team

The HOPE Hotline may refer the borrower to a HUD-approved counseling agency or a Making Home Affordable ("MHA") Escalation Team (which is "housed within a HUD-approved counseling agency") if there is an assertion that they have been wrongfully denied a modification or if their servicer has not applied the HAMP guidelines appropriately.

HUD-Approved Counseling Management

If "additional intervention is needed", the HUD-approved counsel is to "'escalate' the complaint to the housing counseling agency's management." The GAO report states that [a]s of mid-April, 2010, more than 37,000 borrower complaints had been escalated to the MHA Escalation Team."

Fannie Maes' HAMP Solution Center

If the counseling agency's management is unable to resolve the complaint, the case is "referred to an escalation team within Fannie Mae known as the HAMP Solution Center" which also handles escalations referred by "housing counselors and government agencies outside of the HOPE hotline." The GAO report states that as of April 1, 2010, more than 3,700 complaints had been escalated to the HAMP Solution Center of which 2,900 were resolved with 19% resulting in the initiation of a modification, 35% with a determination of ineligibility, and 17% being referred back to the servicers or the HOPE Hotline. The report notes that "Fannie Mae has set a goal of 7 business days for the HAMP Solution Center to resolve complaints, but as of mid-April 2010, the average resolution time was 23 days."

GAO on the Effectiveness of the HOPE Hotline and Escalation Processes

The GAO report states that [i]t is unclear whether the HOPE Hotline and the escalation processes are effective mechanisms for resolving concerns about potentially incorrect HAMP denials" and notes that neither "the MHA Escalation Team counselor nor [the] HAMP Solution staff review the borrower's application or loan file." Treasury advised the GAO that it "would be difficult to obtain borrower's loan files because they are so large" but that they are working toward access to at least some information from the loan files.

The GAO report also states that Treasury has not explicitly informed borrowers that the HOPE hotline can be used to raise concerns about their HAMP applications and potentially incorrect denials.

Servicer Noncompliance with HAMP Program Requirements

The GAO report notes that while Treasury has taken "some steps to ensure that servicers comply with HAMP program requirements," it has "yet to establish specific consequences or penalties for noncompliance with HAMP guidelines." Although the Treasury's HAMP Compliance Committee drafted a policy to establish consequences for servicer noncompliance with HAMP program requirements, the policy has not yet been finalized. In the meanwhile, issues of servicer noncompliance are to be reported to the Treasury's HAMP Compliance Committee for evaluation, with resulting "financial remedies," "targeted reviews"and requirements for servicers to "take action to correct areas of noncompliance."

In its April, 2010 report, the Congressional Oversight Panel "recommended that Treasury ensure compliance through established enforcement mechanisms that provide a clear message of the consequences for servicer actions."

GAO Recommendations

The GAO report's recommendations include recommendation that the Secretary of Treasury "finalize and issue consequences for servicer noncompliance with HAMP requirements as soon as possible."

Palm Beach County Mortgage Foreclosure Mediation

2010-07-01T10:09:00.007-04:00

Palm Beach County Circuit Court Foreclosure Mediation

The Circuit Court of the 15th Judicial Circuit of Palm Beach County issued administrative order number 3.308-6/10 dated June 28, 2010, to take effect on July 12, 2010, providing for certain "Case Management of Residential Foreclosure Cases and Mandatory Mediation Referral."

Scope

The administrative order is to generally apply to "all residential mortgage foreclosure actions filed in the Fifteenth Judicial Circuit" as of the effective date of the order, in which the involved mortgage was subject to the federal Truth in Lending Act, Regulation Z. All mortgage foreclosure actions against homestead residences are to be referred to the Residential Mortgage Foreclosure Program ("RMFM Program") unless otherwise agreed or unless certain pre-suit mediation was previously conducted. Other procedures apply to non-homestead foreclosure actions. The Court may order mortgage foreclosure actions filed prior to order's effective date to be subject to this Administrative Order.

Program Manager

The administrative order appoints the Palm Beach County Bar Association as the Program Manager of the "Residential Mortgage Foreclosure Mediation Program." The mediations will be held at 1601 Belvedere Rd., Suite 304, West Palm Beach, Florida. It is to manage the program in accordance with the administrative order and the Florida Supreme Court's Administrative Order SC09-54.

Disclosure for Mediation

The homeowner may request the following information and documents from the lender prior to the mediation session:

proof of ownership and status as holder in due course as to note and mortgage

history of application of payment

lender's position on the present net value of the mortgage loan

lender's most current appraisal of the property

Pre-Suit Mediation

Mortgage lenders are encouraged to use alternative dispute resolution, including mediation, prior to filing a mortgage foreclosure action.

U.S. Supreme Court in Lanning Adopts "Forward Looking Approach"

2010-06-07T17:36:00.015-04:00

The U.S. Supreme Court issued its decision today on an important issue of chapter 13 bankruptcy law in the case of Hamilton, Chapter 13 Trustee v. Lanning. Justice Samuel Alito authored the Court's decision in which only Justice Scalia dissented. The issue involved was how "a bankruptcy court should calculate a debtor's 'projected disposable income'" which is one of the factors upon which the amount of a chapter 13 debtor's monthly plan payment is based. The Court rejected the "mechanical approach" and adopted the "forward-looking approach" pursuant to which the Court may, in the "the most unusual cases," go beyond the statutory formula for determining "disposable income" and "take into account other known or virtually known certain information about the debtor's future income or expenses."

The Court first reviewed the pre-BAPCPA (which was enacted in 2005) situation in which the Bankruptcy Code only "loosely defined 'disposable income'" and did "not define term 'projected disposable income.'" The Court stated that "in most cases, bankruptcy courts used a 'mechanical approach' in calculating projected disposable income" pursuant to which monthly income was multiplied by the number of the months of the plan and then the portion of the result that was "excess" or "disposable" was determined for dedication to the chapter 13 plan. "In exceptional cases, the bankruptcy courts took into account foreseeable changes in a debtor's income or expenses."

The Court noted that the BAPCPA "left the term 'projected disposable income' undefined but specified in some detail" the manner in which it is to be calculated. In general "disposable income" is based upon "current monthly income" less certain "amounts reasonably necessary to be expended" for maintenance and support and other items. The term current monthly income is statutorily defined and generally based on the 6-month period prior to the date preceding the filing of the bankrkuptcy case. "Amounts reasonably necessary to be expended" is calculated in a different manner for those below and those above the State median income amount.

The Court adopted the "forward-looking approach" which would allow for the consideration of the debtor's actual projected income in addition to the historically based "current monthly income." The court held that this approach is supported by the "ordinary meaning of the term 'projected.'" The Court noted that the term "projected" is not defined in the statute and that in "ordinary usage future occurrences are not 'projected' based on the assumption that the past will necessarily repeat itself.

The Court also noted the usage of the word "projected" in other federal statutes and stated that "Congress rarely used it [the phrase "projected"] to mean simple multiplication." In contrast, the Court referred to certain provisions in the Bankruptcy Code and noted that when Congress wished to mandate "simple multiplication, it does so unambiguously-most commonly by using the term 'multiplied'".

The Court remarked that pre-BAPCPA case law favors the "forward-looking" approach in that the general rule was that "courts would multiply a debtor's current monthly income by the number of months" of the plan as the first step in determining projected disposable income. But the Court also observed that the courts also "had discretion to account for known or virtually certain changes in the debtor's income." The Court noted that pre-BAPCPA practice is telling based on the principal that it "will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure."

The Court also observed that the mechanical approach "clashed" with the terms of 11 U.S.C. section 1325 in that it would read out of the statute the phrase "to be received in the applicable commitment period" and the direction to determine projected disposable income "as of the effective date of the plan" (as opposed to the filing date).

But the Court noted that the statutory formula for determining "disposable income" still plays an important function under the forward-looking approach in that in "most cases, nothing further is required" and that only "in the most unusual cases" may a court "go further and take into account other known or virtually certain information about the debtor's future income or expenses." In short, the Court adopted the Tenth Circuit's analysis that "a person making a projection uses past occurrences as a starting point."

The Court further noted that the mechanical approach would "produce senseless results that we do not think Congress intended" where the debtor's income has changed since the historical six month period.

Justice Scalia dissented and held that the Court's conclusion is "contrary the Code's text" and "refus[es] to hold that Congress meant what it said."

Options for Distressed South Florida Homeowners

2010-04-27T11:21:00.008-04:00

The following are some of the options open to the South Florida distressed homeowner:

1. Mortgage Modification - HAMP or otherwise. As the mortgage companies have ramped up their staffing, the ability to achieve a HAMP or other modification has been increasing. The government regulations have also been improved over time to increase the achievement of modifications.

2. Short Sale - often favored by real estate brokers, but may soon have more actual benefit for homeowners if FNMA guidelines are changed to allow for better future credit for short sales rather than foreclosure.

3. Deed in Lieu of Foreclosure - the homeowner gives a deed to the mortgage company to avoid a full judicial foreclosure. Often not requested by mortgage companies due to possible title issues.

4. "Walk Away" from Home

5. Chapter 13 Bankruptcy - often combining a HAMP modification for the first mortgage and an avoidance of the second mortgage. Recent changes in HAMP rules has approved the use of HAMP within chapter 13 bankruptcy.

Making Home Affordable Program Updates

2010-03-10T21:03:00.024-05:00

April 27, 2010, hearings before the Senate Permanent Subcommittee on Investigations, "Wall Street and the Financial Crisis: The Role of Investment Bank"

April 23, 2010, hearings before the Senate Permanent Subcommittee on Investigations, "Wall Street and the Financial Crisis: The Role of Credit Reporting Agencies"

April 14, 2010, House Financial Services Committee hearings on the "Recently Announced Revisions to the Home Affordable Modification Program (HAMP)"

April 13, 2010, House Financial Services Committee hearings on "Second Liens and Other Barriers to Principal Reductions as an Effective Foreclosure Mitigation Program"

On March 25, 2010, Neil Barofsky, Special Inspector General of Sigtarp, the "Office of the Special Inspector General for the Troubled Asset Relief Program" released his 60 page report on "Factors Affecting Implementation of the Home Affordable Modification Program." The report states that "the number of permanent modifications entered into during HAMP's first year has been below expections."

March 25, 2010 testimony before the Committee on Oversight and Government Reform, "Foreclosure Prevention: Is the Home Affordable Modification Program Preserving Homeownership?"

Home Affordable Modification Program ("HAMP"), Supplemental Directive 10-02

On March 8, 2010, the Home Affordable Modification Program ("HAMP") issued 38 pages of updated "frequently asked questions."
It also released its "Servicer Performance Report" through February, 2010.
The Federal Reserve Board issued a public statement dated December 3, 2009 that advises that a "adverse action" notice under Regulation B of the Equal Credit Opportunity Act is required for a mortgage declination of a mortgage loan modification under the U.S. Treasury's Making Home Affordable Modification Program ("HAMP") if the mortgage is not in default or delinquent. The letter notes that even if an adverse action notice is not required under Regulation B as to borrowers who are in default or delinquent, that it "understand[s] that Treasury has directed HAMP services to provide written notice to a borrower that has been evaluated form HAMP but is not offered a trial period plan or modification, or is at risk of losing eligibility for HAMP because the borrower has failed to provide the required financial documentation" HAMP Supplemental Directive 09-08 at 1 Nov. 3, 2009)

"HAFA" - the Home Affordable Foreclosure Alternatives - Short Sale and Deed-in-Lieu of Foreclosure, Supplemental Directive 09-09

Other Interesting Recent Updates

Alan Greenspan, "The Crisis", Brookings Institute, March 9, 2010.

Proposed Changes to HAMP

2010-02-26T17:40:00.006-05:00

It was reported earlier this week, that the Obama administration may seek further changes to its Home Affordable Modification Program ("HAMP"). These change may prohibit the referral to foreclosure "until a borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed."In testimony before a House Committee, a Treasury representative testified that the administration expects to release new guidance for improved protection of borrowers under HAMP. The proposal include

Requirement of a reasonable effort to solicit borrower for HAMP (already implicit under present policy)
Prohibition of referral to foreclosure until the borrower is evaluated for HAMP or reasonable contact efforts have failed
Cessation of foreclosure action once borrower in trial period plan
Written certification that a borrower is not eligible for HAMP before an a foreclosure sale may proceed

Among the reported HAMP changes as to bankruptcy are:

Servicers must consider borrowers in bankruptcy upon request
Servicers may use bankruptcy schedules instead of "request for modification" form
Trial period waived for borrowers that have completed three or more months on bankruptcy plan where payment is greater than HAMP payment
Trial period may be extended up to 5 months in order to obtain delay in obtaining needed court approvals.

HAMP presently sets a standard for affordablity and sustainable modification at 31% of gross monthly income. HAMP matches the reductions in monthly payments dollar-for-dollar with the investor in reducing the payments from 38% to 31% of gross monthly income. HAMP requires participatingn servicers to evaluate every eligible mortgage using a Net Present Value test. If the test is positive, "the servicer must modify the loan."

HAMP offers services a "pay for success" incentives with an up-front payment of $1,000.00 for each modification after completion of the trial modification period, and up to $1,000.00 a year for three years. Homeowners may also earn up to $1,000.00 toward principal reduction for each year, up to five years, that they remain current on the mortgage payments.

Over a hundred servicers together with thousands of Fannie Mae and Freddie Mac servicers are participating in HAMP and about 89% of all outstanding residential mortgage are covered by the HAMP program. The U.S. Treasury Dept. reports though that only about 116,000 homeowners have received permanent modifications.

Some "Chatter" on Mortgage Principal Reduction

2010-02-26T16:06:00.003-05:00

The Washington Post reports today that the FDIC is developing a program to test whether principal reduction on "underwater" mortgage balances owed by distressed homeowners "is an effective method for saving homeowners from foreclosure." The program would reportedly only apply to loans acquired by the FDIC from a failed bank, which would amount to less than one percent of outstanding mortgage.

But the Washington Post notes that this "effort adds to the growing debate about whether principal reductions should become a large part of mortgage-relief efforts." Apparently, some in the mortgage industry have recently become more willing to grant principal reductions. It is reported that during the third quarter of 2009, thirteen percent of mortgage modifications included a reduction in principal. It is also reported that Wells Fargo has increasingly used principal reductions with option ARM mortgages, which it primarily acquired from Wachovia in 2008.

Keeping Your Florida Roof Over Your Head - HAMP and Chapter 13

2010-02-25T21:53:00.007-05:00

One way for the distressed homeowner to keep his roof over his head, is to combine the use of HAMP and chapter 13 bankruptcy reorganization. HAMP is used to modify the first mortgage down to 31% of one's gross monthly income and chapter 13 is use to avoid the second mortgage if it is "underwater" and to pay usually only a small dividend to unsecured creditors.

If one can obtain a HAMP mortgage modification before filing chapter 13, it would usually be preferrable, but otherwise, many mortgage servicers will consider a HAMP mortgage modification request during the chapter 13.

An "automatic stay" against creditor action is imposed upon the filing of chapter 13 bankruptcy.

First Mortgage - until the HAMP mortgage modification request is approved or denied, you pay the anticipated HAMP modified payment under your chapter 13 plan to the chapter 13 trustee

Second Mortgage - in most cases, you are able to stop paying it in a chapter 13 plan as it is avoidable due to being "underwater," the debt is modified to be unsecured

Unsecured debt, such as credit cards and personal loans - you only usually pay back a percentage of such claims under a chapter 13 plan.

Another Mortgage Modification Proposal

2010-02-25T10:27:00.002-05:00

The Mortgage Bankers Association (MBA) announced today a proposal for a new voluntary forbearance program that would allow qualified borrowers who have lost their jobs to remain in their homes while they seek new employment.

According to the proposal, loan servicers would reduce the borrower's mortgage payment to an affordable amount for up to nine months while the homeowner seeks employment. "The program is designed to allow borrowers time to find a new job, after which they could hopefully qualify for a loan modification." The borrower would be reevaluated as to employment and income status every three months for a total forbearance of nine months. Once reemployed, the borrower would be evaluated for a modification under the federal government's Home Affordable Modification Program (HAMP).

December Treasury-HUD Report on the HAMP

2010-01-16T10:19:00.008-05:00

Yesterday the Department of Treasury and HUD released a report that there has been a "significant acceleration in the rate" in which Home Affordable Modification Program ("HAMP") trial period mortgage modifications are being converted into permanent modifications. The report that as of December, more than 110,000 permanent modification have been approved of which 66,000 have been accepted by the borrowers. The HAMP was "designed to offer through 2012 up to 3-4 million homeowners reduced mortgage payments that are affordable and sustainable."

The administration estimates that several million homeowners are eligible for the program. During the 4th quarter of 2009, the number of servicers agreeing to participate in the HAMP with respect to their non-GSE loans rose from 63 to 102. This is in addition to the approximately 2,300 other lenders who service GSE loans (owned or guaranteed by Fannie Mae or Freddie Mac).

The report relates the following steps made in the permanent mortgage modifications (by "waterfall steps") : 1. interest rate reduction (100% of mortgages), 2. term extension (43.2% of mortgages), and 3. principal forbearance (26.6% of mortgages).

HAMP Notes

2010-01-15T12:00:00.004-05:00

Housing Wire reports that the number of permanent mortgage modifications that the Bank of America has made after a trial loan modifications under the Home Affordable Modification Program ("HAMP") rose from 98 mortgage as of the end of November, 2009 to 3,200 by January, 2010. The HAMP program began in March, 2009.

Bank of America reportedly has more than 200,000 customers in HAMP trial modifications and started more than 34,000 new trial modification in December, 2009.

HAMP Mortgage Modification and Chapter 13 Bankruptcy

2010-01-12T20:18:00.005-05:00

The effectiveness of the HAMP or "Obama Plan" for mortgage modification has been widely criticized. Many homeowners complain that it is extremely difficult to communicate with their mortgage servicers.

One way to attempt to overcome this difficulty is to combine a request for a HAMP mortgage modification with a chapter 13 bankruptcy filing. Although the bankruptcy laws cannot force a mortgage servicer to approve a HAMP mortgage modification request, the filing of a chapter 13 bankruptcy in conjunction with a HAMP request may be of benefit in many cases. In fact, the Bankruptcy Court in the Southern District of Florida has recently begun to confirm some chapter 13 plans that provide for the anticipated payment under a HAMP modification request. Although the Bankruptcy Court cannot require a mortgage modification, it can prohibit the mortgage servicer from resuming a mortgage foreclosure until it properly considers a HAMP modification request and duly denies or accepts it.

A typical chapter 13 plan would provide for the anticipated HAMP modified mortgage payment as 31% of the homeowner's gross income. The 31% amount would cover principal, interest, taxes, insurance and associations.

The chapter 13 plan would also provide for the avoidance of any second mortgage that is wholly "under-water" and for a dividend to unsecured creditor. Some mortgage servicers may be more favorable to the modification of the first mortgage if the homeowner is no longer required to pay the full amount of his second mortgage, credit cards, and other unsecured debt.

Third Quarter 2009 "Mortgage Metrics"

2009-12-23T11:28:00.004-05:00

The Office of the Comptroller of the Currency and Office of Thrift Supervision just released its "Mortgage Metrics Report for Third Quarter 2009" which provides "performance data on first-lien residential mortgages serviced by national banks and federally regulated thrifts." It reports that

the percentage of current and performing mortgages dropped for the sixth consecutive quarter to 87% of the servicing portfolio
only 67.7% of "option ARM" mortgages were current and performing
serious delinquencies (more than 60 days past due) rose to 6.2%
3.2% of the servicing portfolios were in the process of foreclosure
deterioration among prime mortgages of which 3.6% were in serious delinquency
only 781 or less than 1% of HAMP trial period plans have been converted to permanent HAMP modifications

Mortgage Bankruptcy Amendment Defeated

2009-12-14T10:56:00.003-05:00

On Friday, the House of Representatives rejected an amendment to the "Wall Street Reform and Consumer Protection Act of 2009" that would have added provisions to allow bankruptcy judges to modify home mortgages in chapter 13. The amendment was similar to that previously passed by the House on March 5, 2009 in H.R. 1106, the "Helping Families Save Their Homes Act of 2009" but was rejected by the Senate.

Under present law, mortgages that are secured only by a principal residence may not be modified, but mortgages on investment property may be modified.

It should be noted that some homeowners may be able to obtain a mortgage modification under present chapter 13 or chapter 11 bankruptcy law by changing the use of their home from being their principal residence to investment property. A modification in chapter 13 or chapter 11 bankruptcy may involve a reduction in principal balance and changes in interest rate, monthly payment and term.

Proposed Bankruptcy Reform and Mortgage Modification

2009-12-08T21:29:00.007-05:00

It was reported yesterday that Congressman John Conyers (D-Mich.) has submitted Amendment 201 to the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 1473) that would allow the modification of home mortgages in bankruptcy. This modification would include a principal reduction and interest rate changes.

The House Rules Committee was to meet today regarding this measure and debate on the legislation may start this week. The House passed similar bankruptcy measures earlier this year but they were defeated in the Senate.

House Hearings on Mortgage Crisis

2009-12-08T21:21:00.002-05:00

Today the House Financial Services Committee held a hearing on "The Private Sector and Government Response to the Mortgage Foreclosure Crisis".

Rent Out Your House and Get the Ability to Modify Your Mortgages in Chapter 13 or 11 ??

2009-11-21T10:24:00.017-05:00

Contrary to some logic, owners of investment properties have more rights to modify their mortgages in a chapter 13 and 11 bankruptcy reorganization case than do homeowners.

Due to the economic crisis, some Florida homeowners have begun to move out of their homes and rent them out to reduce expenses. The renting out of one's principal residence may have a significant benefit under chapter 13 or 11 bankruptcy -- the much sought ability to "cram down" one's mortgages.

Mortgages secured only by a principal residences are protected from modification in chapter 13 and 11 (wholly unsecured second mortgages though may be avoided), but mortgages on investment property may be modified by reducing their principal down to the present value of the real estate. The interest rate and term of the mortgages may also be modified. In short, once the property is no longer a "principal residence" -- the mortgages may be "modified."

The renting out of one's home before filing for bankruptcy may be sufficient to constitute a change in status from "principal residence" to non-principal residence. There may be arguments though that this is not sufficient. The change in status would certainly have to be in "good faith" and not a sham to be accepted by a bankruptcy court.

It would seem, though, that homeowners have a strong argument that they have the right to rent out their homes and convert them into a status of non-principal residence as most standard mortgages contain a provision that requires homeowners to maintain the property as their principal residence only for a certain short period of time. Paragraph six of a typical Fannie Mae mortgage only provides that the homeowner shall "continue to occupy the Property as Borrower's principal residence for at least one year after the date of occupancy..." Indeed even this one year period may be waived by the mortgage company's consent or if there are extenuating circumstances. In short, the ability to convert from usage as a principal residence to to a non-principal residence was contemplated and provided for in the original mortgage agreement.

The ability to modify a mortgage under chapter 13 gives one broad powers -- the mortgage payoff may be "bi-furcated" into "secured" and "unsecured" portions. The unsecured portion would be provided for with the other unsecured claims such as credit cards. Unsecured claims typically receive only a small percentage dividend in a chapter 13 plan. For example, if the payoff on the mortgage is $400,000.00 and the value is $150,000.00, the mortgage company would have a $150,000.00 secured claim and a $250,000.00 unsecured claim.

One issue would be how to provide for the portion that is secured claim. Some mortgage companies simply agree to a reduction in monthly principal and interest payments based on the reamortization over the original term based on the reduced secured claim. Others may insist on the "maintenance" of the originally monthly payment which was computed on the full payoff. This would result in the now reduced mortgage being paid off in a shorter period of time.

The media continues to report that "Florida Still Leads in Foreclosures" and that few homeowners are receiving trial modification under the administration's HAMP program and even fewer permanent modifications. Perhaps, the rental of one's property and change in status to non-principal residence may be of use to obtain mortgage modifications and help save homes.

Florida Mortgage Foreclosure and Liability

2009-11-14T15:53:00.002-05:00

A topic of much concern is liability in a residential mortgage foreclosure in Florida.

In the origination of a typical residential mortgage transaction, there are two instruments - the promissory note and the mortgage. The promissory note documents the actual terms of borrowing and the mortgage provides for a lien on the real property to secure the debt of the promissory note.

In a typical residential mortgage foreclosure action in this part of Florida, the foreclosure case initially usually only seeks a judgment setting a foreclosure sale of the involved real estate. This judgment of foreclosure seeks the setting of a foreclosure auction sale by the Clerk of the Court. A typical judgment of foreclosure is not a "money" judgment upon which the mortgage company can seek "execution" or collection of the sum due other than via the proceeds of the foreclosure auction. It should be noted though, that some residential mortgage foreclosure cases contain an additional count for a judgment on the promissory note which would be a "money" judgment and allow the mortgage company to seek "execution" or collection from any non-exempt assets

After the foreclosure sale, the mortgage company may be able to seek a "deficiency" judgment or otherwise sue for the balance due on the promissory note that was not paid from proceeds of the foreclosure sale. In recent times in South Florida, most mortgage companies have not pursued deficiency judgments for a variety of reasons. This policy though could change.

In a situation of a first and second mortgage on a property in today's market, often the second mortgagee will not pursue a foreclosure but will sue on the promissory note to obtain a "money" judgment upon which it may seek collection.

Where a husband and a wife own a property, it needs to be clarified if both parties actually signed the promissory note. Often one of the spouses only signed the mortgage and not the promissory note and such spouse would not generally face liability for a deficiency or on the promissory note. The spouse would have signed the mortgage but not the promissory note if he or she was a title holder or even if not on title, due to the Florida homestead provisions.

Senator Reed Introduces Bill to Strengthen Mortgage Modification Efforts

2009-10-02T18:34:00.008-04:00

On September 30, 2009, Senator Jack Reed (D-RI) issued a press release that he introduced "Preserving Homes and Communities Act of 2009" (S. 1731) which is a bill to help "keep families in their homes and prevent communities from deteriorating as a result of skyrocketing mortgage defaults." The bill is cosponsored by Senators Dick Durbin (D-IL), Sheldon Whitehouse (D-RI) and Jeff Merkley (D-OR).

One aspect of the bill will require that "qualified homeowners are evaluated for and offered loan modifications." The bill will apparently prohibit foreclosure while the homeowner waits for loan modification analysis and provide legal relief where lenders fail to follow the mortgage modification program rules. The bill will apparently "force lenders to modify qualified mortgages."

On September 30, 2009, the bill was referred to Senate Committee on Banking, Housing, and Urban Affairs.

Update on Proposed Bankruptcy Cramdown

2009-09-11T09:25:00.002-04:00

At a House subcommittee meeting this week, Congressman Barney Frank stated that if the mortgage servicers do not act to stem the foreclosure crisis by modifying more mortgages, there would be an increased chance that Congress will enact bankruptcy laws allowing certain mortgage modifications. Frank stated that “the best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of getting mortgages modified.”

Frank reportedly told the Wall Street Journal that he intends to eventually include a mortgage modification provision in legislation that will overhaul the financial system. He also stated that legislation should address the problem of mortgage service's claiming lack of authority due to securitization. Frank also argued that proposed bankruptcy mortgage modification will not affect the flow of credit as it will be limited to mortgages already in existence.

It is also reported this week that Michigan Congressman John Conyers told a House panel that it is time to reconsider the proposed bankruptcy mortgage modification bill - the Helping Families Save Their Homes in Bankruptcy Act.

HAMP Hearing by House Subcomittee

2009-09-10T17:05:00.006-04:00

The House Subcommittee on Housing and Community Opportunity held a hearing yesterday on the "Progress of the Making Home Affordable Program: What are the Outcomes for Homeowners and What Are the Obstacles to Success?"

Assistant Treasury Secretary Michael Barr's written testimony outlined the steps being taken by the Administration to strengthen the housing sector and help homeowners. He referenced the new home buyers tax credit and the Making Home Affordable Program, including the Home Affordable Modification Plan ("HAMP") which is a "$75 billion program to lower mortgage payments for at risk borrowers" for up to 3 to 4 million borrowers. He stated that forty-five servicers have sign up for HAMP, that offers have been extended on over 570,000 trial modifications, and that over 360,000 trial modifications are already underway. But the Wall Street Journal reports that these figures amount to only 12% of eligible borrowers having started trial loan modifications under HAMP according to a Treasury report and that there are increasing concerns about the number of borrowers who will actually receive a permanent modification after receiving three month trial period modification.

Assistant Secretary Barr stated that HAMP's guidelines require servicers "to service all loan in their portfolio according to HAMP guidelines, unless explicitly prohibited by pooling and servicing agreements, and further must make reasonable efforts to obtain waivers of any limits on participation."

He also that that the parties are working on "establishing denial codes that will require servicers to report the reason for modification denials, both to Treasury and to borrowers." He expects the denial codes to become operational on October 1.

Alys Cohen of the National Consumer Law Center also offered written testimony. She testified that the HAMP program is not providing a sufficient number of loan modifications and that the offered modifications often do not meet the HAMP guidelines. She also stated that the implementation of HAMP has been slow and sporadic. She advocates that Congres should mandate a stronger approach to loan modification, including allowing bankruptcy judges to modify appropriate mortgage loans. She suggested the following improvements: 1. the Net Present Value model for qualifying homeowners should be made public, 2. the HAMP guidelines and directives should be consolidated and clarified, 3. institution of an independent review process upon denial, and 4. access to an ombudsman for complaints.

Congressman Barney Frank argued that proposed bankruptcy mortgage modification will not affect the flow of credit as it will be limited to mortgages already in existence. He stated that if the mortgage servicers do not act to stem the foreclosure crisis by modifying more mortgages, there would be an increased chance that Congress will enact bankruptcy laws allowing certain mortgage modifications. Frank stated that “the best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of getting mortgages modified.” Frank reportedly told the Wall Street Journal that he intends to eventually include a mortgage modification provision in legislation that will overhaul the financial system. He also stated that legislation should address the problem of mortgage service's claiming lack of authority due to securitization.

Divorce Attorneys Fees and Bankruptcy

2009-08-16T20:10:00.003-04:00

In a recent decision in the case of In re Maria D. Lopez, Case No. 08-18101-BKC-LMI (Bankr. S.D.Fla. April 17, 2009)(Isicoff, J.), the Bankruptcy Court held that the involved attorney fees were not entitled to priority status as a "domestic support obligation".

The debtor's ex-husband was awarded his attorney fees in their dissolution of marriage proceeding and sought priority status for the claim in the debtor's chapter 13 case. Priority status would require full payment and the lack thereof would subject to claim to status as a general unsecured creditor and typically only a small dividend.

The Court explained that the Bankruptcy Code provides that a domestic support obligation ("DSO") owed to a former spouse is entitled to priority status and that while an award of attorney fees in some instances may be considered a DSO, not every award of attorney fees in a dissolution of marriage case are entitled to DSO status.

The Court states that for a claim to be considered as a DSO, it must meet all the requirements of section 101(14A) of the Bankruptcy Code. Generally, the claim must be

owed to a spouse, former spouse, or child of the debtor, or such child's parent or guardian
be in the nature of alimony, maintenance or support
established or subject to establishment by reason of a separation agreement, divorce decree, or property settlement agreement or by court order
not assigned to a nongovernmental entity unless voluntarily assigned for purposes of collection

At issue in this case was whether the attorney fees are "in the nature of alimony, maintenance, or support." The Court noted that the 2005 BAPCPA amendments to the Bankruptcy Code amended certain provisions relating to claims arising from "alimony, maintenance, or support" and renamed these obligations "domestic support obligations," but that the pre-BAPCPA case law does to a certain extent continue to have applicability post-BAPCPA.

The Court rejected the claimant's argument that the attorney fees met the requirement of being "in the nature of alimony, maintenance or support" as they related to custody, parentage, or visitation. The Court noted that the determination of what constitutes "support" is a matter of federal law. The Court further noted that in determining whether an award of state court attorneys' fees constitutes "support", the Bankruptcy Court may "only undertake a simple inquiry as to whether the debt can be characterized as 'support'" and that it may look to state law for guidance on whether the obligation should be considered in the nature of "support". The Court noted that the state court judgment awarded claimant attorney fees based on the debtor's litigation misconduct and not based on their respective wages or ability to pay.

Dragnet Clauses

2009-08-11T15:14:00.000-04:00

Dragnet clauses are agreements in lending documents that the collateral will secure in addition to the involved debt, other pre-existing and after after acquired debt.

Some courts in Florida have held that "dragnet clauses" are generally enforceable so long as the language of the clause is clear and unambiguous as to the parties intent to secure pre-existing and after acquired debt. Robert C. Roy Agency, Inc. v. Sun First National Bank of Palm Beach, 468 So.2d 399 (Fla. 4th DCA 1985). But the 4th District Court of Appeals has held that the dragnet clause would not be enforced against someone other than the borrower unless it specifically includes within its terms or unless it can be shown that the third party otherwise had notice that the specific pre-existing debt was to be included within the grasp of the dragnet clause. Starlines International Corp. v. Union Planters Bank, N.A., 976 So. 2d 1172 (2008).

Other Florida courts though hold that dragnet clauses are unenforceable to secure pre-existing debt unless the pre-existing debt is specifically identified in the dragnet clause of the mortgage and possibly also in the note. United National Bank v. Tellam, 644 So. 2d 97 (Fla. 3d DCA 1994).

Senator Durbin Gives Banks Mortgage Cramdown "Ultimatum"

2009-08-04T09:58:00.008-04:00

The media reports that Senator Durbin has "put the banks and mortgage servicers on notice" that Congress will renew efforts in three months for bankruptcy reform to allow residential mortgage cramdown unless the banks become aggressive in modifying mortgages to prevent foreclosure. It is reported that Senator Durbin want to see 500,000 mortgage modifications by November. Recently House Financial Services Committee Chairman Barney Frank made a similar threat.

This is amid recent revelations that the Administration's foreclosure mitigation efforts, of which the $75 billion Home Affordable Mortgage Program ("HAMP") is the centerpiece, have failed to slow the foreclosure crisis and stabilize the nation's housing market. The Administration initially estimated that HAMP would prevent 3 to 4 million foreclosures, but yet only about 200,000 modifications have been accepted and most of these are merely three month trial period agreements. This amounts to only 9% of delinquent borrowers.

The Treasury Department reports that approximately 85% of mortgages are covered by HAMP participating servicers, that 38 servicers have signed servicer participation agreement to modify loans under HAMP and that approximately 2,300 others automatically participate in HAMP as they service loans owned or guaranteed by Fannie Mae or Freddie Mac.

The banking industry reportedly spent $42 million on lobbyists to defeat bankruptcy reform efforts earlier this year when it failed to pass the Senate by 15 votes.

It is reported that mortgage companies are reluctant to modify mortgages as they collective lucrative fees on mortgages in default.

Options for the Distressed Florida Homeowner

2009-08-02T12:39:00.001-04:00

Summary
In recent days, some distressed homeowner have started to receive offers for mortgage modifications from their mortgage companies. These appear to be prompted by the new guidelines under the Treasury Department's "Making Home Affordable Program." The proposed modifications appear to reduce the monthly payment on a first mortgage to about 37% of the family's gross monthly income. The proposed modifications do not appear to propose to reduce the principal balance which usually greatly exceed the value of the home. A further amount may also be due on a second mortgage. Distressed homeowners may contact their mortgage servicer if they desire to review options for refinancing or modification.

One approach which may be considered where appropriate, is to "piggy-back" or combine a first mortgage modification with avoidance of a wholly "underwater" second mortgage while in a chapter 13 bankruptcy reorganization. The goal would be to avoid a wholly underwater second mortgage and modify a first mortgage. The modification of the first mortgage would either under the Treasury Department's "Making Home Affordable Program" or possibly a even better modification terms upon any appropriate review of "defects" of the first mortgage (such as a "lost note", unfair terms, etc.) during the chapter 13 case. Proposed changes to the chapter 13 laws are pending in Congress and may be adopted in the near futures. These changes are expected to be retroactive to pending chapter 13 cases and may offer modification of first mortgages by reducing the principal balance down to the present value and a reduction in interest rate.

1. Present Real Estate Crisis
Many homeowners owe more on their home mortgages than their present value (are “underwater”) and many are unable to pay their monthly payments. Many South Florida homeowners are in a situation where the amounts owed on their first and second mortgages substantially exceed the value of his or her home. Many of the comparable sales are short sales or sales of foreclosed homes. Many first mortgages may be adjustable rate mortgages. Property taxes may be high as they are based on pre-decline assessments. Condominium and association fees may have risen dramatically due to the default of other unit owner’s default.

2. Non-Bankruptcy Refinancing or Modification - the Treasury Department's New Guidelines for the “Making Home Affordable Program”
Most distressed homeowners should immediately contact their mortgage servicers or lenders to attempt refinancing or modifications. Patience may be required as the new provisions of the “Making Home Affordable Program” are now being implemented. Efforts should be made even if you were previously turned down.

Last week the federal government announced updated information on its “Making Home Affordable Program.” This program provides for the refinancing or modification of a mortgage on owner occupied principal residences (1-4 units) under certain circumstances. More information is available from the federal government’s “Homeowner’s HOPE Hotline” at (888) 995-HOPE. Borrowers in bankruptcy are not apparently excluded from consideration for modification. There is "no requirement to use principal reduction" under this program but "servicers may forgive principal to achieve" a certain monthly debt service to gross monthly income target.

3. Participate in Florida Circuit Court Foreclosure Actions
A person who has been served with a mortgage foreclosure action should appropriately address foreclosure actions filed in the the Circuit Court. There may be opportunities to mediate a modification with the mortgage company. The participation should begin by “answering” the foreclosure complaint within the time period set forth in the summons attached to the foreclosure complaint.

4. Chapter 13 Bankruptcy for Mortgages on Principal Residences
In the past (before the general decrease in South Florida real estate prices), Chapter 13 bankruptcy plans typically provided to reinstate first and second mortgages on a principal residence over a five year plan while at the same time paying the ongoing regular monthly mortgage payments. This was due to the fact that mortgages secured only by a principal residence are generally not “modifiable” under chapter 13 bankruptcy laws. Second mortgages though that are wholly “underwater” may be avoided and deemed as “unsecured” claims and put in the same category as credit cards.

5. Negotiation of First Mortgage Modification in Chapter 13 for Principal Residences
Although under the present provisions of chapter 13, a debtor cannot force the modification of his or her first mortgage on his or her principal residence, he or she may be able to obtain an agreed modification while under chapter 13. The debtor may pursue modification under President Obama's “Making Home Affordable Program” or on any other voluntary basis. As mortgage companies usually appoint a bankruptcy attorney to represent their claim in the chapter 13 process, there is usually an increased ability to communicate with the mortgage company. While in chapter 13, the debtor is able to explore any defenses to or defects in the mortgage which may provide more leverage to negotiate a mortgage modification.

Furthermore, the homeowner may yet be able to obtain modification of his or her first mortgage if the proposed changes to chapter 13 bankruptcy are passed as in their present form, they are retroactive to pending cases. The proposed bill allows certain mortgage modification by way of reduction of the principal balance down to the value of the home and a change in interest rate. Adjustable rate mortgages may be modified to be fixed.

6. Chapter 13 Bankruptcy for Investment Property
The rules as to modification of mortgages on non-principal residences in chapter 13 bankruptcy are actually be more liberal although prior to the recent steep declines in property values, modifications of mortgages on non-principal residences was not very common. Modification may include reduction in principal amount and interest rate. The ability to modify may be limited by a need to payoff or refinance the reduced principal amount during the five year chapter 13 plan. There may be arguments available or an ability to negotiate a payoff that continues after the chapter 13 plan is over. Since the recent declines in property values, many mortgage companies have agreed to reduce the principal balance upon the filing of a motion to value during the chapter 13 process.

7. Chapter 12 Bankruptcy for Family Farmers
Chapter 12 also provides for more extensive mortgage modification for family farmers.

8. Proposed Changes to Chapter 13
The proposed changes to chapter 13 include a provision allowing in some circumstances the modification of a first mortgage (as well as junior mortgages) on a principal residences by reducing (“cramming-down”) the principal balance down to the value of the home as well as a possible reduction in interest rate. The proposed changes to chapter 13 bankruptcy may require an attempt by the homeowner to refinance or modify under the federal government’s new “Making Home Affordable Program” prior to attempting to modify the mortgage under chapter 13 bankruptcy. Changes to chapter 13 bankruptcy laws have not yet been enacted by Congress (as of March 13, 2009). Although a bill was passed by the House of Representatives on March 6, 2009, the bill has not yet been passed by the Senate.

9. Other Chapter 13 Considerations
a. Automatic Stay – With certain exceptions, the filing of a chapter 13 bankruptcy stays or stops much creditor collection actions, including mortgage foreclosure. The automatic stay provides a homeowner a “breathing spell” in order to allow him or her an opportunity to reorganize their debt while under the protection of the U.S. Bankruptcy Court.

b. Timing – Generally, a chapter 13 bankruptcy must be filed before a foreclosure sale if a person desires to attempt to save their home under a chapter 13 bankruptcy plan. A foreclosure sale is normally set by the Florida Circuit Court a number of weeks after the entry of the final judgment of foreclosure.

Hearing Set for HAMP Constitutional Claim for Preliminary Injunction

2009-08-02T11:38:00.008-04:00

A hearing on the motion for a preliminary injunction in the case of Nichole Williams et al. vs. Timothy F. Geithner, et al., case 09-CV 1959 (DC Minn.) has been set for September 28, 2009 in the Federal District Court of Minnesota. The Plaintiffs seek the injunction of all foreclosures by the involved defendants in the State of Minnesota until the HAMP program is procedurally sound. The lawsuit alleges the the homeowners' Constitutional right to procedural due process was violated, including by way of lack of notice of the basis of the decision and lack of an opportunity to appeal. The HAMP application of one of the plaintiffs was denied and he was not give any reason or an opportunity to appeal. The HAMP application of another plaintiff was ignored.

The memorandum of law in support of the motion for a preliminary injunction detailed the background of HAMP. The Emergency Economic Stabilization Act of 2008 (the "Act") was signed on October 3, 2008. 12 U.S.C. Section 5201. The Act allocated $700 billion to the Treasury Department and granted the Treasury Secretary the authority to establish the Troubled Asset Relief Program or "TARP." 12 U.S.C. Sections 5211, 5225. Section 109 of the Act provides for the Treasury Secretary to implement a plan to "maximize assistance for homeowners." 12 U.S.C. Section 5219(a). The Act also requires the Treasury Secretary to consent to any loan modification offer. Section 110 requires the Federal Housing Finance Agency, as conservator of Fannie Mae and Freddie Mae, to create and implement a plan to prevent foreclosures.

Pursuant to this authority, the Department of Treasury, the Federal Housing Finance Agency, Fannie Mae and Freddie Mac created and announced the Making Home Affordable Program, which consists of two sub-programs, on February 18, 2009. The first provides for certain mortgage refinancing and was called Home Affordable Refinance Program or HARP. The second provides for the implementation of a uniform loan modification protocol and was call Home Affordable Modification Program or HAMP. Approximately 3 to 4 million homeowners are potentially eligible for HAMP and the Treasury Department allocated $75 billion of TARP and non-TARP funds to fund HARP and HAMP. Beginning with March 4, 2009, a series of directives as to HAMP were issued to mortgage servicers.

The memorandum argues that as HAMP is being presently implemented, there are no requirements that homeowners be told the specific reasons for the denial of a HAMP modification and there is no uniform procedure to provide for the ability to appeal. The Plaintiffs argue that approximately 40-60% of the foreclosures conducted in Minnesota are by mortgage servicers bound by HAMP requirements. It is also points out that the General Accountability Office (the "GAO") just last week confirmed that procedural safeguards were not yet in place to protect homeowners.

Plaintiffs seek a preliminary injunction to preserve the status quo. They note the similarity to cases related to the government's loss mitigation and foreclosure prevention programs during the farm foreclosure crisis in the early 1980's. In these cases, the courts issued preliminary injunction of foreclosure proceedings until the government promulgated proper procedures making its foreclosure prevention program constitutionally sound. In the case of Allison v. Block 723 F.2d 631 (8th Cir. 1983), the Court ruled that "[n]otice to the borrower is therefore indispensable...the Secretary is required to give notice to defaulting CFRDA borrowers and to create a procedure for asserting section 1981a claims." The Allison Court also held that [a]gainst this backdrop of statutory language and legislative history, we cannot accept the Secretary's assertion that Congress left the implementation of section 1981a a matter of unfettered administrative discretion." The Court enjoined the farm foreclosure until "the intent of Congress becomes the action of the Secretary."

The Plaintiff also cited the case of Johnson v. U.S. Dep't of Agric., 734 F.2d 774 (11th Cir. 1984) where the 11th Circuit Court of Appeals held that the District Court abused its discretion by denying a motion for preliminary injunction in view of the fact that there was a substantial likelihood that the mortgagors would prevail, at least in part, on due process and equal protection claims. The Court found that the farm loans involved a statutory entitlement and a property interest protected by the due process clause of the Fifth Amendment and that, at a minimum, due process assures notice and a meaningful opportunity to be heard before a right or interest is forfeited.

The memorandum argues that HAMP is a government program authorized by Congress and jointly created by the Department of Treasury, Fannie Mae, and Freddie Mac. 12 U.S.C. Section 5201. The memorandum further argues that there is government action by the Department of Treasury and the Federal Housing Finance Agency (as conservator for Fannie Mae and Freddie Mac), the program creates an entitlement, and that the administration of Sections 109 and 110 of the Act are at issue. In short, the plaintiffs argue that the case involves government actors implementing a federal law with federal funds, that is not an issue of private actors making private decisions and that it satisfies the "government action" requirement for bringing a constitutional claim.

In summary, the memorandum argues that the Plaintiffs are entitled to due process in the administration of HAMP - a $50 to $75 billion federal entitlement program. The Fifth Amendment of the Constitution requires "due process of Law" before any person can be "deprived of life, liberty, or property" and the concept of property includes statutory entitlements derived from an independent source as well as government-fostered expectations. "Once a property interest in a statutory entitlement is identified, a person is entitled to notice, an opportunity to be heard, and reasonably accurate process for determining eligibility." The Plaintiffs also argued that the lack of the right to appeal to a neutral party is also a violation of their procedural due process rights.

HAMP Class Action Lawsuit

2009-07-28T13:46:00.004-04:00

The Housing Preservation Project, a public interest law firm in St. Paul Minnesota, filed a class action lawsuit in Minnesota federal district court today alleging that the federal government's loan modification program violates Constitutional procedural due process requirements. Pursuant to its press release, the " lawsuit alleges that the program fails to provide homeowners with proper notice and a right to appeal decisions by loan servicers administering the program." The lawsuit seeks to enjoin Minnesota mortgage foreclosures until the government promulgates the necessary procedures to ensure HAMP fair administration.

The lawsuit is reportedly "modeled after similar lawsuits filed in the early 1980s, which sought and successfully stopped all farm foreclosures until the government ensured that the farmers’ procedural due process rights were not violated when administering a similar foreclosure prevention program." Count one of the complaint alleges that the failure to promulgate rules requiring servicers to provide notice of denial under HAMP is a violation of the fifth amendment's protection of procedural due process and alleges that there has been a lack of promulgated regulations, guidelines, and rules for servicers. Count two alleges that the failure to promulgate rules requiring servicers to provide a right to appeal is a violation of procedural due process. A memorandum in support of the motion for a preliminary injunction was filed.

Hearings on Foreclosures Before Joint Economic Committee

2009-07-28T12:50:00.005-04:00

The Congressional Joint Economic Committe held a hearing today entitled "Current Trends in Foreclosures and What More Can be Done to Prevent Them" to investigate the ongoing foreclosure crisis in the residential housing market. It is reported that the Committee "will review past federal regulatory failures" and efforts by the current Administration and Congress to address the situation.

Congresswoman Carolyn Maloney remarked that the foreclosure crisis is not striking evenly across the U.S. and that there are heavy pockets of concentration in certain areas such as California, Florida, Illinois, Massachusetts, Nevada, and New Jersey.

Professor Joseph R. Mason explained that the following factors are among those why mortgage servicers are having difficulties dealing with distressed mortgages: 1. mortgage modification is expensive to service, 2. mortgage arrearages hurt servicer's profits as they have to advance the mortgage payments to the investors, 3. mortgage servicing fees cease upon default, 4. increased fees to do not cover typical increased costs, and 5. difficulties in retaining staff. He also noted that mortgage investors, such as Aaa-class investors and senior bondholders, are weary that the current policy may be gamed by the servicers to protect its interests, such as maintaining the value of the servicer's residual or interest-only strip or to allow the release of overcollateralization to the servicer.

Dr. Susan M. Wachter noted that foreclosure rates are presently four time the historical average and the highest since the Great Depression. She stated that the residential foreclosure crisis began with a wave of subprime mortgages and that the next wave will be payment option mortgages. She also explained that the crisis will abate when home prices stop falling as "level of prices determines whether it is possible to repay the mortgage upon sale." Dr. Wachter further stated that mortgage servicers may lack the incentive and capacity to provide mortgage modifications, that loan modifications with principal write-down are necessary, and that regulatory supervision is necessary to avoid a failure of regulatory and market structure such as the present which triggered a crisis and brought down the system.

GAO Report to Congress: HAMP Needs to be More Transparent and Accountable

2009-07-28T06:35:00.002-04:00

The U.S. Government Accountability Office (the "GAO) released its report dated July 23, 2009 to Congressional Committees entitled: "Troubled Asset Relief Program - Treasury Actions Needed to Make the Home Affordable Modification Program More Transparent and Accountable."

The GAO reports that the first-lien mortgage modification effort under HAMP "may not fully meet Treasury's goals." The GAO further states that Treasury's estimate of the number of borrowers who would likely be helped under its HAMP loan modification program "may be overstated" as it may reflect data gaps and faulty assumptions, including rates of borrower response and servicer participation. The reports also notes that Treasury has not finalized all of the processes for the implementation of HAMP and is not systematically evaluating servicers' capacity.

The report states that as of July 20, 2009, only about 180,000 borrowers have started trial modifications.

Chapter 13 and "HAMP" Mortgage Modification

2009-05-25T22:45:00.012-04:00

Chapter 13 bankruptcy may present a platform to obtain modification of first mortgages under the U.S. Treasury Department's "Home Affordable Modification Program" (HAMP).

As most people are aware, Congress did not yet pass the "cram-down" provision for principal residential mortgages. Despite this, the legal landscape does seem to indicate that the HAMP program will be of substantial assistance to homeowners - perhaps in many instances - more than the much sought after "cram-down".

The chapter 13 plan may be a good platform to obtain relief under HAMP. As part of the chapter 13 plan, modification of the first mortgage may be sought under HAMP. Usually the mortgage company retains an attorney to represent their interests and this lawyer will serve as a contact person to insure review for HAMP relief. A substantial portion of first mortgage are eligible for HAMP relief either as Fannie Mae or Freddie Mac related mortgages (GSE Loans) or as the mortgage servicer has agreed to participate in HAMP (non-GSE Loans).

Some homeowners have trouble communicating with their mortgage company to obtain HAMP relief. But as most mortgage company usually retain an attorney to represent their interests, this mortgage company attorney will serve as a contact person to insure review for HAMP relief.

Upon filing of the chapter 13 case, most foreclosure actions are stayed until further order of the court. This automatic stay allows for pursuance of approval of the chapter 13 plan, HAMP modification of the first mortgage, avoidance of wholly underwater junior mortgages, and substantial discharge of unsecured debt.

Fannie Mae Guidance for Lenders and Appraisers

2009-05-24T18:20:00.003-04:00

Efanniemae.com sets forth "Guidance for Lenders and Appraisers" dated April, 2009.

"HAMP" Mortgage Modification

2009-05-24T15:29:00.015-04:00

The Home Affordable Modification Program (HAMP) was established by the U.S. Department of the Treasury pursuant to section 101 and 109 of the Emergency Economic Stabilization Act of 2008 (EESA)(section 109 of the EESA has been amended by section 7002 of the American Recovery and Reinvestment Act of 2009). HAMP includes loan modification and other foreclosure prevention measures.

Application of HAMP as to GSE Loans, Fannie Mae Announcment 09-05R

All Fannie Mae and Freddie Mac approved servicers are being directed through their servicing guides and bulletins to implement HAMP with respect to "mortgage loans owned, securitized, or guaranteed by Fannie Mae or Freddie Mac (the “GSE Loans”).

Fannie Mae provides Announcement. 09-05R (posted May 15, 2009) "Introduction of the Home Affordable Modification Program, HomeSaver Forbearance™ and Frequently Asked Questions thereunder, and New Workout Hierarchy."

Application of HAMP to Non-GSE Loans

Fannie Mae and Freddie Mac approved servicers as well as all other servicers may agree to participate in HAMP by agreement as to non-GSE Loans.

Role of Fannie Mae and Freddie Mac

Fannie Mae was designated by the Treasury as financial agent of the United States in connection with the implementation of HAMP to fulfill the roles of administrator, record keeper, paying agent, creation of certain standardized mortgage modification and foreclosure prevention practice consistent with EESA and in accordance with the directives of and guidance of Treasury. Freddie Mac was also designated as a financial agent to fulfill a compliance role for the program.

Key Information and Documents under HAMP

Fannie Mae as administrator of HAMP makes available on Hmpadmin.com key information and documents, including, a sample servicer participation agreement, supplemental directive 09-01 guidelines, the supplemental directive 09-02 dated April 21, 2009, the Servicer Reporting Requirements, data dictionary, net present value model overview, and borrower solicitation material. A self-guided training presentation is also provided.

Another Fannie Mae self-guided presentation is provided as to "Bankruptcy Filings on Loan Servicing", "Loss Mitigation in Today's Market", and "The New 2009 MBS Trust Agreement: An Introduction."

Net Present Value Model

Fannie Mae provides a "standardized guidance and a base net present value (NPV) model" for HAMP participating servicers. Such a servicer "must modify any loan "if the modification test for NPV is positive as "it is in the best interest of the lenders, servicers, investors, and borrowers." If the NPV is negative, modification is in the discretion of the servicer.

NPV refers to the "value today of a cash-generating investment." In the context of a distressed mortgage borrower, the choice is between modifying the mortgage or leaving as-is with each choice to generate expected cash flows with different net present values. If the NPV of the modified loan is higher than the NPV of the mortgage as-is, a modification is said to be "NPV positive." The Program is structured to "produce modifications that are more likely to test NPV positive... by lowering the probability that borrowers will default by making borrower payments more affordable and, second, by providing incentive payments that are added to cash flows received by lenders (or investors)."

NPV Assuming Non-Modification

The NPV calculation is to determine the net present value of the mortgage assuming it is not modified based on a. the probability that the mortgage defaults, b. the projection of the future cash flows of the mortgage if it defaults and the present value of these cash flows, c. the projection of the future expected cash flows of the mortgage if it does not default and the present value of these cash flows, and d. the probability weighed average of the two present values.

NPV Assuming Modification

The NPV calculation is to determine the net present value of the mortgage assuming it is modified based on the same manner with the incorporation of the effects on cash flows and performance of the modification terms and subsidies under the Program.

HAMP Modification

"The Making Home Affordable Program is structured to produce modifications that are more likely to test NPV positive, increasing the number of modifications that will be done and keeping more Americans in their homes." If eligibility criteria for HAMP are met, the servicer will adjust the terms of the mortgage to reduce the borrower's payment to HAMP's target front-end debt-to-income (DTI) ratio of 31 percent. Servicers are required to "reduce payment in the precise manner specified" by HAMP (the "Standard Waterfall") starting with reducing the interest rate on the mortgage. Once the modified loan terms are known, the NPV model calculation is run.

Principal Factors in the NPV Model

The NPV model was especially designed by an expert group for HAMP and takes into account the principal factors that can influence cash flows including the following:

1. Value of the home relative to the size of the mortgage.

2. Likelihood that the loan will be foreclosed on.

3. Trends in home prices.

4. Cost of foreclosure including:
a. legal expenses,
b. lost interest during the time required to complete the foreclosure action,
c. property maintenance costs, and
d. expenses involved in reselling the property.

5. Cost of conducting a modification including:
a. a lower monthly payment from the borrower,
b. likelihood a borrower will default even after the loan is modified,
c. financial incentives provided by the government, and
d. likelihood that a loan will be paid off before its term expires (prepayment probability).

Fannie Mae states that due to customization allowed within certain constraints and guidelines, servicer NPV results and resulting modification decisions may vary.

Discount Rate

In the base NPV model servicers are permitted "limited discretion to adjust the discount rate by up to 250 basis points because different investors may place different values on future payments versus payments received today." The discount rate may be as low as Freddie Mac's Primary Mortgage Market Survey rate ("PMMS") for 30-year fixed-rate conforming loans and as high as the PMMS rate plus 250 basis points. The PMMS are available on Freddie Mac's website. A rule is provided as to loans not owned or guaranteed by Fannie Mae or Freddie Mac. The servicer must apply the rate specified in Fannie Mae and Freddie Mac guidelines as to loans owned or guaranteed by Fannie Mae and Freddie Mac.

Default Rates

The probability of default if the loan is modified and if not modified depends on a number of variables particular to the loan and in general is assumed to vary based on the credit quality of the borrower, his debt burden, and the loan-to-value (LTV) of the home, and "whether the loan is modified early or later in the delinquency cycle."

The default rates are "generated by a model based on the performance of GSE and non-GSE loans" and the base model is to be updated as performance data under the Program becomes available to reflect actual program experience. Large servicers with a book exceeding $40 billion are allowed to customize the model to reflect their own portfolio experience, which customization must be empirically validated, commercially reasonable, and subject to review and oversight.

Home Prices

"Future increases or decreases in home prices impact a borrower’s willingness to stay in a house and potential financial loss in the event of foreclosure. A servicer must use the home price projection provided in the base NPV model. A servicer does not have discretion to substitute a different projection. The home price projection for the program has been made available by FHFA exclusively for this program, is based on data from a broad cross section of mortgage transactions, and will be updated quarterly. The projection is not based on the FHFA House Price Index and does not represent an official forecast of FHFA or any other government agency."

REO "Stigma"

"The REO stigma values used in the base NPV model are based on an analysis of sale prices of foreclosed homes sold by Fannie Mae and Freddie Mac. REO stigma values vary by state and home price. Servicers are not permitted to change the REO assumptions in the base NPV model."

Mortgage Servicers Participating under President Obama's Home Affordable Modification Program

2009-05-22T16:52:00.000-04:00

Makinghomeaffordable.gov lists that the following mortgage servicers have contracted with the government under the "Home Affordable Modification Program" as of May 22, 2009:

Financialstability.gov provides a link to the agreements with the participating servicers.

Hope Now's website contains a directory of links to mortgage companies.

Massachusetts Subprime Mortgage Settlement with Goldman Sachs

2009-05-19T19:59:00.017-04:00

Attorney General Martha Coakley of Massachusetts held a press conference in Boston and issued a press release on May 11, 2009 announcing her settlement agreement dated May 7, 2009 with Goldman Sachs & Co. "on behalf of itself and its affiliates Goldman Sachs Mortgage Company and GS Mortgage Securities Corp." regarding certain subprime mortgage lending issues. The agreement is reported to be the first of its kind in its pursuance of an investment bank facilitating the origination of unfair loans. The AG alleged that many of the loans were unfair and "destined to fail."

Investigation

The agreement states that the AG's investigation concerned:

whether securitizers may have facilitated the origination of "unfair loans" under Massachusetts law

whether securitizers may failed to ascertain whether the loans purchased from originators complied with the originators' stated underwriting guidelines

whether securitizers may failed to take sufficient steps to avoid placing problem loans in securitization pools

whether securitizers may have been aware of allegedly unfair or problem loans

The investigation reportedly concerned whether there were failures to correct inaccurate information in securitization trustee reports concerning repurchases of loans and whether there were failures to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan diligence and the pre-securitization process, as well as information concerning their practices in making repurchase claims relating to loans both in and out of securitizations.

Settlement Terms

The settlement agreement is set report to be valued at about $50 million for about 700 Massachusetts subprime borrowers and for $10 million to the Commonwealth of Massachusetts. The AG is to continue with its investigation of subprime mortgage securitization practices.

The deal allows for the provision as to certain "performing" (as of April 1, 2009) first mortgages owned by Goldman Sachs on certain Massachusetts real property of certain incentives (the smaller of 25% of unpaid principal balance or such amount as sufficient to bring the LTF to 96.5%) for refinancing with FHA and similar lending programs and for similar loan forgiveness in connection with arm's lenth shores sales. Goldman Sachs is to use its "best efforts" to facilitate principal forgivenss by any second lien lender to assist in such refinancing or short sale.

As to certain "non-performing" (as of April 1, 2009) first mortgages owned by Goldman Sachs on Massachusetts real property, Goldman Sachs is to offer to forgive up to 35% of the unpaid principal balance to facilitate a refinancing or arm's length short sale. Its mortgage servicer is to instruct it loan servicer to forgo from foreclosure for six months to allow a good faith effort for refinancing or short sale.

Certain "performing" second mortgage liens on Massachusetts real property are to be forgiven up to 50% in exchange for the payoff of the remainder. The listed "non-performing" second mortgages are to be written off.

It is noted that certain of these offers are only "open until November 30, 2009." Goldman Sach's servicers are to use their best efforts to communicate the offers to the borrowers.

Goldman's Mortgage Servicing Affiliate Litton Loan Servicing LLP

Pursuant to the settlement, Goldman Sach's mortgage servicer affiliate Litton Loan Servicing, LLP is also to modify various mortgages. Litton is to hold certain sessions with borrower to help them understand and take advantage of the offers or to "develop other loss mitigation alternatives."

It is reported that settlements with other investment bankers in Massachusetts may be to come. It is also speculated that Attorneys Generals of other States will follow suit in a similar manner.

Bloomberg reported that Goldman Sach's mortgage business (part of its fixed-income, currencies and commodities unit) produced a "record $16.2 billion in revenue in 2007 and helped the securities firm set a Wall Street pay record." Bloomberg further reports that the $60 million settlement was about one and one-third day's revenue for 2007 for its fixed income, currencies and commodities unit which was the largest source of revenue for the firm.

Short Positions - Goldman Sachs as an Empty Creditor

According to Bloomberg, Goldman Sachs, which was the "world's largest securities firm before it became a bank holding company last year, used the ABX Index and credit default swaps to hedge its subprime holding." According to an October 30, 2007 letter to the Securities and Exchange Commission made public on January 14, 2008, the chief Goldman Sachs accounting officer wrote that "During most of 2007 we maintained a net short subprime position with the use of derivaties and therefore stood to benefit from decling prices in the mortgage market."
Bloomberg writes that the collapse of the subprime mortgage market in 2007 caused "at least $1.4 trillion of asset writedowns and credit losses" at various companies.

City of Cleveland "Public Nuisance" Case

Goldman Sachs was named as one of the 21 financial institution defendants in a class action suit brought in the Northern District of Ohio by the City of Cleveland alleging that the defendants' activities in securitizing subprime mortgage constituted a "public nuisance" under Ohio law. The case is reported to have been dismissed as a matter of law in a May 15, 2009 decision. City of Cleveland v.Ameriquest Mortgage Securities, Inc. et al., No. 1:08 cv 139 (N. D. Ohio, May 15,2009)The Ohio Court's rejection of the "public nuisance" claim is reported to have "far-reaching ramifications."

Fremont Investment & Loan Action

The AG's press release referred to her office's previous suit against Fremont Investment & Loan (reviewed here) which was filed on October 4, 2007 in Superior Court civil action number 07-4373-BLS1. The court issued a preliminary injunction enjoining Fremont from foreclosing on any any "structurally unfair" loan without further prior court approval and a final hearing on the merits. The lower court's preliminary injunction was subsequently upheld by the Supreme Judicial Court of Massachusetts ruling on December 9, 2008 on a direct appellate review. Commonwealth v. Fremont Investment & another, 452 Mass. 733 (2008)(Botsford, J.) The lower court's ruling February 25, 2008 was reportedly the first of its kind in the nation that restricted a subprime lender's ability to foreclose based on unfair or deceptive loan origination misconduct. The four characteristics found by the Freemont court as establishing unfairness were

the loans were ARM loans with an introductory rate period of three years or less

an introductory rate for the initial period that was at least three per cent below the fully indexed rate

made to borrowers for whom the debt-to-income ratio would have exceeded fifty percent measured on the fully indexed rate

the loan-to-value ratios was 100% or the loan featured a substantial prepayment penalty.

The AG's office also previously sued also sued Option One and its parent H&R Block alleging unfair, deceptive and predatory lending practices.

Status of the Mortgage Rescue

2009-05-18T12:50:00.004-04:00

According to Cnn and New York Times articles, mortgage rescue efforts face several hurdles.

Loan servicers are "overwhelmed by a flood of applications" according to the Cnn article. The administration's guidelines were issued on March 4, but it has taken servicers many weeks to implement their programs. "Many did not even start accepting applications until early-to mid-April..." Servicers may take many weeks to process an request for modification.

Investors in mortgage backed securities are angry about congressional bills providing loan servicers a certain "safe harbor" from suit based on mortgage modifications. Mortgage servicers may be otherwise limited in their ability to modify mortgages due to their contracts with the investors. Investors argue that servicers already have some flexibility to modify mortgages.

Administration Announces Progress Under "Making Home Affordable Program", New Programs

2009-05-14T16:12:00.006-04:00

Today Treasury Secretary Tim Geither and HUD Secretary Shaun Donovan announce d details of the implementation of the Making Home Affordable ("MHA") program. It is about two months since the program guidelines have been released.

Some data has been published as the the number of homeowners that have obtained relief under the U.S. Treasury Department's Making Home Affordable Program ("MHA") since it was and initiated in early March, having been first announced by the Administration on February 18, 2009.

The Secretaries report that "thousands of underwater borrowers" have refinanced under the Home Affordable Refinance Program. The program is expected to provide access to refinancing for up to 4 to 5 million homeowners. Apparently "more than one million" other Americans have been otherwise able to refinance since the implementation of the Home Affordable Refinance Program due to historically lower interest rates with FNMA seeing 233,000 eligible refinancing application.

It was also announced that more than 55,000 loan modification offers "have been extended to qualifying borrowers" under the Home Affordable Modification Program. This program is expected to assist up to 3 to 4 million troubled homeowners.

Home Price Decline Protection Incentives

Secretary Geithner also announced the new $10 billion "Home Price Protection Incentives("HPD P") program. This program is designed to provide an additional incentive to lenders for modification where "home price declines have been most severe and lenders fear these declines may persist... " Under HPD P, an "innovative payment" will be made to "provide[ ] compensation based on recent home price declines." This additional incentive together with the already provided incentive payments for all modified home is meant to "help cover the incremental collateral loss on those modifications that do not succeed." The HPD P payments are to be "linked to the rate of recent home price decline in a local housing market, as well as the average cost of a home in that market."

Foreclosure Alternatives - Short Sales and Deeds-in-Lieu

Another new program provides incentives to servicers and borrowers to pursue "short sales" and "deeds-in-lieu" where modification is not possible. This program is for situations where "the borrower is generally eligible for a MHA modification but does not qualify or is unable to complete the process". The program is meant to "simply and streamline the process of pursuing short sales and deeds-in-lieu by standardizing the process flow and documentation and offering financial incentives to the servicer and borrower.

Servicer Contracts and Coverage Otherwise for GSE Loans

The Secretaries reported that fourteen servicers, including the five largest, have signed contracts under the program and have begun modifications. It is reported that between the loans covered by these servicers (non-GSE loans) and loans serviced by Fannie Mae or Freddie Mac (GSE loans), more than 75% of all mortgage loans are accounted for.

The refinancing program is set to end in June, 2010 while the loan modification program is set to end December 31, 2012. Reportedly fourteen servicers, including the five largest, have already executed contracts under the program.

U.S. Senate Fails to Pass Bankruptcy Mortgage Modification Bill

2009-04-30T17:27:00.004-04:00

The S. Amdt. 1014 to S. 896, the "Helping Families Save Their Homes Act of 2009", failed to pass in the Senate today by a vote of 45 to 51 with 3 not voting.

Despite the lack of passage of these amendments to the bankruptcy code, there remain various measures that may be of assistance to a struggling South Florida homeowner, including the following.

1. A second mortgage on a principal residence that is wholly "underwater" is generally avoidable in chapter 13 or chapter 11 bankruptcy

2. Voluntary mortgage modification may be available under President Obama's "Making Home Affordable Program"

3. Modification of mortgages on non-principal residences is presently allowed under chapter 13 or chapter 11 bankruptcy

4. Chapter 12 allows certain modification for mortgages for "Family Farmers"

5. Mandatory mediation of homestead mortgage foreclosures as of May 1, 2009 in Miami-Dade County, Florida

Vote Expected in Senate on Bankruptcy Mortgage Modification Bill

2009-04-29T22:26:00.004-04:00

The Washington Post reports that a vote is expected tomorrow in the Senate on S. 896, the "Helping Families Save Their Homes Act of 2009". Senator Richard Durbin's amendments to S. 896 includes provisions for bankruptcy reform to allow certain modification of mortgages on primary residences.

The Wall Street Journal reports that a defeat it expected unless there is a last minute compromise. Senator Richard Durbin (D, Ill.) is reportedly continuing efforts to reach an agreement with banking leaders.

Miami-Dade Circuit Court Mandates Mediation of Homestead Mortgage Foreclosures

2009-04-23T18:27:00.008-04:00

As reported in the media, on April 9, 2009, Judge Joseph P. Farina, Chief Judge of the the Circuit Court of 11th Judicial Circuit in Miami-Dade County, Florida signed Administrative Order No. 09-08 establishing the "11th Circuit Homestead Access to Mediation Program ("Champ") and generally requiring mediation of residential homestead mortgage foreclosure cases filed on or after May 1, 2009. The mediation services though are available to mortgage foreclosures filed prior to May 1, 2009 on a case by case basis.

Pursuant to the administrative order and unless otherwise agreed, parties will be deemed to have agreed to referral of the foreclosure mediation to the "Collins Center for Public Policy" for mediation and assignment of a certified circuit civil mediator. No action will be taken by the Court to set a final hearing or enter summary judgment until certain requirements are met. The Collins Center's website provides and overview of the program, frequently asked questions, as well as a link to a video as to the establishment of its foreclosure mediation program.

Under the plan, the plaintiff mortgage lender is required to pay the fee of the Collins Center. Under the plan, the Collins Center is to contact the homeowner within 30 days and advise of the availability of financial counseling and mediation. The Collins Center may refer the homeowner to a HUD or National Foreclosure Mitigation Counseling Program agency which is to contact the homeowner within 21 days for counseling and to assist with the completion of financial documentation for use in renegotiating the loan. The lender and homeowner may register at the Collins Center's website and retrieve forms for financial documentation. Upon completion of the financial documentation, a mediation session is to be scheduled with the Collins Center to pay the certified mediators who have received additional training in foreclosure mediation. The mortgage holder's attorney and the homeowners are required to be physically present at the mediation with the mortgage lender's representative available with full authority to settle.

If the homeowner fails to appear at the mediation session or an impasse is reached, the mortgage foreclosure case may proceed to a final hearing. Within 10 days after completion of the mediation, the mediator is to file a report with the Court as to the lack of agreement or a signed written agreement. This mediation is available only once per case.

It is noted that Form "A" which includes the "Certificate of Plaintiff Regarding Status of Residential Property" and "Certificate of Plaintiff Regarding Representative at Mediation" requires that a copy of certain pooling or servicing agreements with investors (ie. as to securitized mortgages) are to filed with the foreclosure complaint and brought to the mediation session.

Chase Opens Loan Modification Centers

2009-03-31T21:10:00.003-04:00

Default Servicing reports today that Chase has opened several "loan modification centers across the country." Chase's website reports that these are for Chase, WaMU, and EMC customers in need. In person meeting are available. Chase's toll free number is set forth as (866) 550-5705 from 8:00 a.m. to 11:00 p.m. Monday through Friday and other hours on the weekends.

Offices in are set for Miami (South Dade) at 10301 S. Dixie Highway (Tel. 305 669-8025) and in Aventura (North Dade) at 20803 Biscayne Blvd. (Tel. 305 682-3018). Other offices in Florida are set for Orlando, Tampa, and Ft. Myers.

The website indicates that a homeowner should prepare by gathering

loan number
two recent pay stubs (self-employed persons should provide 4 months of bank statements and the most recent tax return and income statements for corporations/LLCs)
hardship letter
monthly budget outlined

Chase indicates that the information will be reviewed and sometimes further information as to an appraisal or mortgage insurance pursued. After a review, Chase will send a letter to advise if a person qualifies for any loan modification and its terms.

A video presentation by JPMorgan Chase's President/CEO Jamie Dimon before the U.S. Chamber of Chamber is available.

Connecting the Dots - AIG's United Guaranty Mortgage Co., Countrywide, and Pool Insurance

2009-03-21T18:01:00.016-04:00

An AIG unit - United Guaranty Mortgage Indemnity Co.., which is based in Greensboro, North Carolina, filed a suit in federal court in Los Angeles in case number 09-1888 (another suit was apparently also filed ins California state court per Reuters) , against Countrywide Financial Corp. alleging misrepresentation as to $1 billion of mortgage loans upon which it issued mortgage insurance. The Bank of New York Trust Co. (part of Bank of New York Mellon Corp.) , a trustee for the mortgage-backed securities issued by Countrywide was also named as a defendant. The media styles this a paradoxical situation in which two bailed out entities are suing each other - "two kingpins of the crisis are now suing each other for misrepresentations" according to Paul Kedrosky. AIG/United Guaranty Corporation is partially owned by (80%) and was bailed out ($173 billion) by the federal government and Countrywide and Bank of America were also bailed out by the federal government. The complaint alleges that Countrywide misrepresented the underwriting standards upon which it obtained private mortgage insurance from United Guaranty Mortgage. The allegations include assertions that mortgages were underwritten in violation of Countrywide's own guidelines, were missing documents, misrepresented credit scores or contained false social security numbers.

According to Reuters, the involved mortgage insurance was purchased by Countrywide "to increase the credit ratings of its mortgage-backed securities offerings" ("pool insurance") as distinct from "private mortgage insurance." Apparently United Guaranty faces huges losses due to the downturn in real estate and is seeking to deny coverage on assertions of Countrywide misconduct.

The United Guaranty Corporation is in the business of issuing "private mortgage insurance." United Guaranty's website explains that private mortgage insurance "protects lenders against increased risk of borrower default related to high loan-to-value (LTV) mortgages" and that it "lets you [mortgage companies] lend more money to more people and sell those loans more easily in secondary markets" and that "your customers can get the home they want, with as little as zero down" and so that "new homeowners can reasonably count on an equity line of credit later for home improvement, unexpected expenses, education, or other purchases." United Guaranty also explains that "mortgage insurance is a partnership - a cooperative arrangement between the mortgage and insurance industries - that enable the largest, most diverse population possible to obtain a mortgage and realize the dream of home ownership." There are two types of "private mortgage insurance" - "borrower-paid" and "lender paid." The amount of the premium is dependent on the nature of the mortgage loan as fixed or adjustable, the loan to value ratio, coverage, and exposure. The rates appear to range from about .24% to 1.25%.

United Guaranty also provides "pool insurance" for mortgage-backed securities. Fannie Mae and Freddie Mac purchase mortgage loans in the secondary market and set there own guidelines. Loans within these guidelines are called "conforming" and those that do not are called "nonconforming or jumbo loans." As nonconforming or jumbo loans are "considered more risky" they are sold to "someone other than Fannie Mae or Freddie Mac" -- "Wall Street firms, private conduits, and other issuers of jumbo mortgage-backed securities - in other words, the 'private-label marketplace.'" United Guaranty explains that "when these large loans are packaged together, pool insurance comes into play." United Guaranty further explains that "with pool insurance, the loans are more attractive to the investors in the secondary market, where mortgages are bought from lenders. Also called a form of credit enhancement, pool insurance protects the purchasers of these jumbo loans against borrower default."

United Guaranty's website explains that "Coverage" is "the portion of the mortgage risk assumed by the mortgage insurance company." "Delegated Mortgage Insurance" is "an agreement between a mortgage lender and mortgage insurer to forgo mortgage loan underwriting by the mortgage insurer and to assign MI [mortgage insurance] coverage based on the lender's underwriting acceptance of the loan." A "Master Policy" is an agreement whereby "instead of each loan receiving an individual policy, the mortgages are insured under the lenders' master policy, then a commitment and certificate of insurance are issued for each individual loan." "Loss Mitigation" "involves step to decrease the amount of a [mortgage default or foreclosure] claim, through (1) bringing the homeowner up to date in the payments (and avoiding foreclosure), (2) taking title to the property and maximizing the final sales price, or (3) other means."

Aig/United Guaranty issued its "declining market list and policy changes" effective January 30, 2009. The new "market classifications" are "moderately", "standard" and "severely." The entire states of Florida, Arizona, California, Michigan, and Nevada "are considered to be Severely Declining Market States." Apparently the "additional underwriting restrictions" for "severely" declining markets includes:

minimum 720 credit score

maximum loan amount of $417,000.

maximum debt to income ratios (DTI) of 45% for certain borrowers

Pursuant to the website, in Florida, certain housing is "ineligible" such as "condos, co-ops, townhomes, etc."

IndyMac Federal Bank FSB acquired by OneWest Bank, FSB

2009-03-20T19:22:00.008-04:00

The FDIC announced today that it has completed the sale of IndyMac Federal Bank, FSB to OneWest Bank, FSB which is a newly formed federal savings bank organized by IMB HoldCo LLC. All deposits of IndyMac Federal Bank, FSB were transferred to OneWest Bank, FSB.

On July 11, 2008, IndyMac Bank, FSB (prior to the establishment of IndyMac Federal Bank, FSB) was closed by the Office of Thrift Supervision ("OTS") and the FDIC was named Conservator. "All non-brokered insured deposit accounts and substantially all of the assets of IndyMac Bank, FSB" were transferred to the newly created IndyMac Federal Bank, FSB" as the "assuming institution."

The FDIC further announced thath it entered into a "loss share transaction on the single family residential portfolio" and that pursuant to the agreement, OneWest will "continue the FDIC's existing loan modification program."

A "loss share" agreement typically provides that nonperforming assets are managed and collected by an acquiring bank and the FDIC agrees to absorb a significant portion of the loss - "typically 80 percent" as well as further loss protection.

IndyMac Mortgage Services mortgage modification - download financial packet.

Mortgage Terms in the Post-Bubble Era

2009-03-15T21:01:00.004-04:00

Automated Valuation Model ("AVM") - a method of using mathematical modeling and databases to obtain property valuations. A servicer under the new guidelines of the U.S. Treasury Department's "Making Home Affordable Program" may use a Fannie Mae or Freddie Mac's or its own internal AVM among other methods for rendering a valuation.

Credit-Default Swap - an insurance-like policy against default.

Counterparty - the party on the other side of a financial transaction.

Debt to Income ("DTI") - the percentage of a person's gross monthly income that goes to paying certain debt.

Government Sponsored Entity ("GSE") - a type of quasi-governmental organization, such as Fannie Mae or Freddie Mac, that falls in between the categories of the private sector and governmental entities. Congress defined the term GSE in the Omnibus Reconciliation Act of 1990.

Median Family Income ("MFI") - used by HUD program as basis for income limits in various HUD programs.

Troubled Asset Relief Program ("TARP") - a federal program including efforts to purchase assets or equity from financial institutions to strengthen the financial sector.

Mortgage Refinancing and Modification (Non-Bankruptcy) - President Obama's "Making Home Affordable Program"

2009-03-08T16:41:00.010-04:00

Updated information for homeowners is available on President Obama's "Making Home Affordable Program" including refinancing and modification options. Fannie Mae and Freddie Mac have also released further information. The following summary of the information would appear to reflect some of the features of the programs, but further inquiry should be made directly with these federal websites as well as with the appropriate mortgage servicer, lender, or governmental agencies.

Refinancing - Fannie Mae/Freddie Mac Owned or Controlled Mortgages

Homeowners (owner-occupants, 1 to 4 unit property) may be eligible for refinancing. Under this program Fannie Mae and Freddie Mac may refinance certain mortgages loans that they own or control.

Eligibility Criteria:

Borrower current on mortgage (or not more than 30-days late during the last 12 months)
Balance owed on first mortgage is about equal (up to 105%) to the current value of the home (value determined after application)(agreement of any second mortgage holder may be required)
Homeowner has stable income to support the new mortgage payment

Refinancing Terms:

Interest rate per market rate (may vary by lender and over time)
30 to 15 year fixed rate loans
No prepayment penalty
No balloon
No reduction in principal amount
Transaction costs, such as appraisal or title report may be included in refinancing

Application Process:

Apply through mortgage servicer or lender
Determine Fannie Mae/Freddie Mac Ownership or Control per inquiry with mortgage servicer or confirmation with Fannie Mae (800) 7FANNIE or Freddie Mac (800) FREDDIE
Gather paycheck stubs, recent tax return, information on second mortgage, information on monthly payments for credit cards, student loans, and car loans
Streamlined processing by lenders/brokers using Fannie Mae platform
Fannie Mae "expanded refinance flexibility ends in June 2010"

Modification - "Most Conventional Mortgages" (Excluding Second Mortgages)

Homeowners (owner-occupants, 1 to 4 unit property) who are already behind or are struggling with a mortgage may be eligible for modification.

Eligibility Criteria::

May be current, delinquent or struggling with present mortgage
Unpaid principal balance is equal to/less than $729,750.00 (higher for 2 -4 unit property)
Loan originated before 1/1/09
Present mortgage payment (including taxes/insurance/association dues) is more than 31% of gross (pre-tax) monthly income
Present mortgage payment no longer affordable

Eligible Mortgages:

Include "most conventional loans" (except second mortgages) held by private lenders or owned or controlled by Fannie Mae or Freddie Mac or held by a mortgage backed security including

prime mortgages
subprime mortgages
adjustable mortgages
FHA, VA, and USDA mortgage not yet eligible (but may be soon, but presently may be modifiable under other programs)

Other aspects of the modification program are:

Participating servicers/mortgage holders to be posted at www.financial stability.gov
Patience requested as Treasury just published program requirements on 3/4/09
Mortgage servicer to evaluate eligibility if behind more than two or more payments
Mortgage servicer participation is voluntary, but there are incentives to servicer
No cost to borrower for "Home Affordable Modification"
No charge for assistance from HUD-approved housing counseling agency (888) 995-HOPE
HUD-approved housing counseling required if mortgage payment as modified together with second mortgage, car loan, credit car, and child support exceed 55% of gross monthly income
Servicer to determine if cost of modification (including government incentive) less costly than foreclosure

Modification Terms (to Payment of 31% of Gross Monthly Income):

Trial modification - 3 months at new rate as low as 2% to reach payment of 31% of gross monthly income
Permanent modification thereafter if current after 3 months
If modified interest rate is below market rate -fixed for first 5 years and then may increase not more than 1% per year until reaches cap based on prevailing interest rate as of date of modification
If modified interest rate is at or above market rate, modified rate is fixed for life of loan
Modification payment to include escrow for taxes and insurance
Successful borrowers on modified mortgage may receive success incentive by U.S. Treasury over 5 years up to $5,000.00

Other Types of Modification May Be Considered by Servicer: (If a 2% interest rate will not result in an affordable payments of 31% of gross monthly income):

Extension of mortgage term up to 40 years
Deferring of payment on portion of amount with later balloon payment ("principal forbearance")
Forgiveness of portion of debt may be done but is not required ("principal forgiveness")

Borrower Q&A's is also set forth regarding refinancing and modification.

The federal government's "Homeowner's HOPE Hotline" is (888) 995-HOPE.

House of Representatives Passes H.R. 1106

2009-03-06T00:07:00.004-05:00

The U.S. House of Representatives today voted to pass H.R. 1106, the "Helping Families Save Their Homes Act of 2009" by a vote of 234 to 191. This bill allows Bankruptcy Judges to modify principal residence mortgages in certain respects under certain circumstances.

A companion bill will next need to be considered and approved by the Senate. Any differences in a Senate approved bill will need to be reconciled between the House and the Senate in a conference committee.

U.S. Treasury Deptment Announces Mortgage Modification Guidelines

2009-03-04T12:49:00.004-05:00

The Treasury Department today announced new guidelines "to begin modifications of eligible mortgages under the Administration's Homeowner Affordability and Stability Plan." The press release states that the "guidelines will implements financial incentives for mortgage lenders to modify existing first mortgages and set standard industry practice for modifications." A summary of the guidelines was also released by the Treasury Department.

Further information including as to eligibility for refinancing or modification is available at http://www.financialstability.gov/makinghomeaffordable/.

House Democrats Reportedly Reach Agreement on H.R. 1106, House Rules Committee Set to Reconvene Tomorrow

2009-03-03T21:42:00.009-05:00

The Washington Post reports the House Democrats have reached on agreement on H.R. 1106, the "Helping Families Save Their Homes Act of 2009" with changes to "narrow" some of the bill's provisons.

H.R. 1106 has apparently been sent back to the House of Representative's Rule Committee which is reconvene on the bill tomorrow March 4 at 2:00 p.m. Congressman John Conyers, Jr. (D. Mich.) offered a "proposed revision to Amendment #1 printed in House Report 111-21."

The House of Representative meeting as a "Committee of the Whole House on the state of the Union" considered H.R. 1106 on February 26, 2009, but left is as "unfinished business."

Provisions in the proposed revisions include a new defined term "qualified loan modification" (as section 101 (43A)) and a change in the "clawback" for the mortgage holder on a subsequent sale at an appreciation to 90% for the first year, 70% for the second year, 50% for the third year, 30% for the fourth year and 10% for the fifth year. The clawback would give the mortgage holder a share of the increase in value for five years. "Lack of good faith" would exist if the debtor "can pay all of his or her debts and any future payment increases ...without difficulty for the foreseeable future, including positive amortization of mortgage debt." There is also a provision providing for a reduction in mortgage interest rate to achieve an affordable monthly payment as a percentage of monthly income as an apparent second choice in addition to mortgage principal reduction.

House Majority Leader Reports Agreement Likely on Bankruptcy Mortgage Modification

2009-03-03T18:44:00.006-05:00

Bloomberg and the Wall Street Journal report today that House Majority Leader Steny Hoyer (D. Md.) states that a compromise agreement may be reached today on the bankruptcy mortgage modification proposals pending in Congress in H.R. 1106. Bloomberg also reports the House of Representatives may vote as early as Thursday on the bill. The bill provides that Bankruptcy Judges may modify mortgages on principal residences under certain circumstances.

Talk to Your Congressmen about H.R. 1106

2009-03-02T09:05:00.005-05:00

NACBA (The National Association of Consumer Bankruptcy Attorneys) has set up a toll free number to enable the public to speak to their Congressmen about the proposed bill H.R. 1106, which would authorize judicial modification of residential mortgages in Chapter 13 bankruptcy. The vote on H.R. 1106 was postponed until later this week.

By calling 1-877-354-4958 between 9 a.m. and 6 p.m. (Eastern Standard Time) you will be routed to the office of your Congressman, Senator, or the White House.

House Consideration of H.R. 1106

2009-02-27T21:09:00.005-05:00

The House of Representatives met as a "Committee of the Whole on the State of the Union" on Thursday to consider H.R. 1106, the "Helping Families Save Their Homes Act of 2009." H.R. 1106 includes provisions that will allow Bankruptcy Judges to modify certain mortgages on principal residence in Chapter 13 bankruptcy. After the Committee's consider of H.R. 1106, the full House did not vote on the bill. A vote may be set next week.

A Committee of the Whole is a committee consisting of all members of the House of Representatives and is used to expedite House action. The Committee of the Whole cannot pass a bill, but after it is done with its debate and amendments to the bill, "the committee rises" and its Chair reports the bill back to the full House of Representatives, where it is voted on or sent back to a legislative committee from which it was reported.

The comments of the various Congressmen can be found on the House's website.

C-Span Live Proceedings on Floor of House of Representatives

2009-02-26T12:37:00.004-05:00

C-Span live debate on the floor of the House of Representatives on H.R. 1106 the "Helping Families Save Their Homes Act of 2009".

Although last evening the Washington Post reported the expectation that H.R. 1106 would pass today, C-Span reports this afternoon that a vote on passage of H.R. 1106 has been postponed until next week.

Action by House Rules Committee on H.R. 1106

2009-02-25T21:20:00.008-05:00

The House Rules Committee's website indicates that today at 12:00 p.m. was the deadline for amendments to H.R. 1106 the "Helping Families Save Their Homes Act of 2009" to be submitted. H.R. 1106 includes provisions that will allow certain principal residence mortgage modification in Chapter 13 bankruptcy. The Committee's website lists the numerous proposed amendments that were submitted by the various Congressmen. The Rules Committee was set to meet today at 4:00 p.m.

One interesting proposed amendment by Congress John Conyers of Michigan would require the Bankruptcy Court to use FHA appraisal guidelines for property analysis where the fair market value of a home is in dispute.

Bankruptcy Mortgage Modification Bill Expected on House Floor on Thursday

2009-02-24T19:56:00.007-05:00

It is reported that H.R. 1106, the "Helping Families Save Their Homes Act of 2009" will be on the floor of the House of Representatives on Thursday as part of a major housing package. H.R. 1106 includes provisions that will allow modification of mortgages on principal residence in a Chapter 13 bankruptcy case.

Report that Congress to Vote on Bankruptcy Mortgage Bill this Week

2009-02-23T12:37:00.007-05:00

House Speaker Nancy Pelosi stated today that she expects H.R. 200, "The Helping Families Save Their Homes in Bankruptcy Act", to reach the floor of the House of Representatives this week on Thursday. Reportedly it will be packaged with other bills already approved by the House Financial Services Committee relating to FDIC insurance, Hope for Homeowners, and other issues. Apparently, the Senate will vote on its version of the bankruptcy bill, S. 61, after the House's action.

The Helping Families Save Their Homes in Bankruptcy Act would allow bankruptcy judges to modify mortgages on principal residences by reduction of the principal to market value, modification of interest rate, and extension of term of payments.

Commercial Lease Default

2009-02-22T18:45:00.000-05:00

The case of Quntero-Chadid Corp. v. Gersten, 582 So. 2d 685 (3rd DCA, 1991) dealt with the issue of a landlord's damages upon a commercial lease default. The Court held that a landlord has three alternative courses of action upon a commercial tenant's default:

Treat the the lease as terminated and retake possession for the landlord's account, ends further tenant liability
Retake possession for the account of the tenant and hold him liable for the difference of the rent due under the lease and what in good faith the lessor may recover from reletting the property
Do nothing and hold the tenant liable for all rent due if the lease contains an acceleration clause which is exercised

The Court noted that if the landlord exercises an acceleration clause, it cannot collect the full amount due and also relet to a third party. The exercise of the acceleration clause itself does not terminate the lease, it only requires all future rent to be paid in advance. Once a lessor accelerates the rent, it cannot also demand possession of the premises. The Court also cited with approval a case that held that a landlord's future monetary losses must be reduced to present money value.

Homeowner Affordability and Stability Plan

2009-02-18T21:52:00.011-05:00

Today's remarks by President Obama on the mortgage crisis.

The U.S. Department of Treasury has published questions and answers for borrowers about the Homeowner Affordability and Stability Plan. It is divided into q & a's for borrowers who are current with their mortgage and those who are at the risk of foreclosure.

The U.S. Department of Housing and Urban Development's website has various links to further information.

Fannie Mae's website and the Treasury Department's financialstability.gov also have further information.

Former Secretary of Labor Robert Reich wrote a blog post on the proposal stating that the two most important aspects of the proposal are its support for bankruptcy modification of mortgage and the administration's support for Fannie Mae and Freddie Mac.

New York Times editorial supporting bankruptcy reform allowing principal residence mortgage modification.

Obama to Endorse Bankruptcy Mortgage Modification

2009-02-18T10:42:00.004-05:00

The media reports today that President Obama will endorse legislation to allow for modification of mortgages in chapter 13 bankruptcy as part of his housing and foreclosure plan (the Homeowner Affordability and Stability Plan) in his press conference today in Arizona.

Report that Bankruptcy Mortgage Bill to be part of Obama's Housing Plan

2009-02-14T15:08:00.004-05:00

The Washington Post reports today that the bankruptcy mortgage modification bill will be part of President Obama's housing plan to be announced this Wednesday in Arizona. This plan would pull together into one plan the various housing measures presently before Congress.

The proposed bankruptcy legislation will allow bankruptcy judges to modify mortgages on principal residences by reducing their principal down to the property present fair market value and by changing the interest rate.

The Effective Date of the Proposed Bankruptcy Bill

2009-02-06T23:59:00.006-05:00

Section 8 of the proposed H.R. 200, the "Helping Families Save Their Homes in Bankruptcy Act of 2009" (which has not yet been enacted by Congress) provides that its effective date is the date of its enactment, but that its provisions apply to bankruptcy cases filed "before, on, or after" the date of its enactment.

Congressional leaders announced in January that the bill would be moved quickly and it has been approved by the House Judiciary Committee. There has not been much public information during the past week about movement of the bill except that there was a desire for the bankruptcy bill not to be part of the economic stimulus bill.

Bankruptcy Mortgage Modification Bill Expected on House Floor Next Week

2009-01-29T18:20:00.006-05:00

Democratic leaders are reported to be preparing to wrap the amended version of H.R. 200 (the "Helping Families Save their Homes in Bankruptcy Act of 2009") into the omnibus spending package set to come to the House floor next week.The House Judiciary Committee approved the amended bill on Tuesday.

"The Origins of the Financial Crisis"

2009-01-29T13:30:00.011-05:00

The article "The Origins of the Financial Crisis" was released today by the Brookings Institution. The authors explain that the present financial crisis has its origins in an asset price bubble that interacted with financial innovations that hid risks, with companies that failed to follow their own risk management procedures, and with regulators who failed to restrain excessiveness. The housing market asset bubble developed as prices increased yearly from the mid-1990's to 2006 out of line with fundamentals such as household income and with an unrealistic expectation of future price increases. The financial innovations with rapidly increasing subprime lending, masked the inherent risk included Adjustable Rate Mortgages with low "teaser rates", no down-payments, and negative amortization predicated on the expectation of future increases of housing prices.

The development of private sector mortgage-backed securities backed by "non-conforming" loans with other means of "credit enhancements" allowed the growth in subprime lending. This technique of "securitizing" mortgages was developed in the 1970's by the government-sponsored entities Fannie Mae and Freddie Mac for "conforming" loans or loans below a certain dollar amount and for borrowers with good credit scores. The private sector mortgage-backed securities market remained small until the late 1990's until the investment banks developed new ways of securitizing subprime mortgages, including dividing cash flows from the mortgage-backed securities into various "tranches" with different levels of risk, high credit rating agency ratings for the highest "tranches", and "monoline" bond insurance that would pay off in the event of loan defaults. The increase in homeownership due to the availability of subprime lending increased housing demand and inflated home prices.

The article notes that during this period of new mortgage financial innovations there was an environment of easy monetary policy by the Federal Reserve and poor regulatory oversight. Financial institutions borrowed to finance their increased purchases of mortgage-related securities and created "off-balance sheet" entities that were not subject to regulatory capital requirements. The authors relate taht financial institutions turned to and relied on short-term collateralized borrowing such as repurchase agreements, so much that by 2006 investment banks were rolling over a quarter of their balance sheets every night. Once panic hit in 2007, the uncertainty over asset values caused lenders to abruptly refuse to rollover their debts and overleveraged banks found themselves undercapitalized and with assets with falling values.

The authors are shocked to find that institutions along the mortgage securitization chain grossly failed to perform adequate risk assessment with respect to the mortgage-related assets they held and traded. These institutions along the chain include the mortgage originator, the loan servicer, the mortgage-backed security issuer, and the credit rating agencies. There was a lack of due diligence in each link in the securitization chain and instead there was a reliance on computer models.

The article finds that due to the nature of the securitization model, financial institutions had little concern about the risks in the mortgage-related assets as they were able to pass the risk down the chain -- the so called "originate to sell" model. The authors question why the ultimate buyers of the mortgage-backed securities failed to understand the involved risk. They suggest that factors were that the ultimate buyers were caught up in the "bubble mentality" as were the others, the complexity of the securitization system, reliance on rating agencies, and complex flawed computer models.

House Judiciary Committee Approves Chapter 13 Bankruptcy Mortgage Modification Bill

2009-01-27T18:59:00.012-05:00

It was announced late today that the House Judiciary Committee approved an amended version of H.R. 200 (the "Helping Families Save their Homes in Bankruptcy Act of 2009") which would permit bankruptcy courts to modify mortgages on principal residences in Chapter 13 bankruptcy. The bill will now move to the full House where leaders hope to move the bill quickly.

Amendments to the bill were adopted to exempt FHA and VA loans from modification. A provision was also added to provide for a measure (decreasing with each year) of shared subsequent increase in value with modified mortgage lenders if the home is sold before the Chapter 13 case is discharged.

Judiciary Committee set to Markup H.R. 200 Bankruptcy Mortgage Modification Bill

2009-01-24T10:29:00.008-05:00

The House Judiciary Committee reports that it will markup H.R. 200 the"Helping Families Save their Homes in Bankruptcy Act of 2009" on Tuesday, January 27, 2009. H.R. 200 was introduced on January 6, 2009 and would amend federal bankruptcy law to allow modification of mortgages on a person's principal residence. Presently, modification of a mortgage on a person's principal residence is only allowed for a junior mortgage that is wholly unsecured (ie. "underwater"). In a markup session, committee members may make opening statements and offer amendments to sections of the proposed bill. H.R.225 and S.61 are related bills.

"Top Priority" for Bankruptcy Code Change for Mortgage Modification, Congressional Hearings Held

2009-01-22T18:33:00.009-05:00

The media reported today that Speaker of the House, Nancy Pelosi (D-Calif.) stated today that the Bankruptcy Code change to allow judges to modify mortgages on principal residences of chapter 13 debtors is a top priority and that Congress may move quickly to enact the amendments. House Majority Leader Steny Hoyer (D-Md.) stated that he belives that there is sufficient support in both houses of Congress to pass the bill as a stand-alone bill.

The House Judiciary Committee today held hearings on the amendment measures that were introduced by John Conyers (D-Mich.) as H.R. 200, the “Helping Families Save Their Homes in Bankruptcy Act of 2009" as well as H.R. 225, the "Emergency Homeownership and Equity Protection Act," introduced by Rep. Brad Miller (D-N.C.).

Professor Adam J. Levitin of the Georgetown University Law Center testified in favor of the bills. He stated that the bills would "significantly help ease the nationwide foreclosure crisis and stabilize financial markets." He made four major points in his testimony: 1. that voluntary, private-market attempts to manage the foreclosure crisis have failed, 2. that bankruptcy reorganization is the only method that can fully address the issues inherent due to mortgage securitization, including fragmentation of mortgage ownership, 3. that the modification of mortgages in bankruptcy will not result in higher interest rates or effect the availability of credit, and 4. that bankruptcy modification does not create issues of "moral hazard" or windfall. He pointed out that foreclosure is not a desirable outcome for borrowers, lenders or municipalities. He referred to a study that found that a single foreclosure can cost the city of Chicago over $30,000.00.

Congressman Miller's Bill H.R. 225 Introduced

2009-01-10T18:16:00.004-05:00

As previously anticipated, Congressman Brad Miller introduced H.R. 225 into Congress on January 7, 2009 together with 34 cosponsors. The bill is identical to Senator Durbin's bankruptcy mortgage modification bill S.60 except certain minor parts. The bill was referred to the House Committe on the Judiciary.

Citigroup On Board with Bankruptcy Mortgage Modification

2009-01-08T16:23:00.008-05:00

In a news conference this afternoon,Senate Democratic leaders announced that Citigroup has endorsed the recently introduced bankruptcy bills S.61 and HR 200 which will allow Bankruptcy Judges to modify ("cramdown") mortgages on principal residences. This proposal will generally allow troubled homeowners with mortgage debt in excess of the home's value to be able to reduce the amount owed, the interest rates, and the mortgage's term. The bill will apply to all mortgages made prior to the enactment of the bill. It is anticipated that Citigroup's endorsement of the proposal will make it easier to bring other larger lenders on board quickly.

The media also reports that the National Association of Home Builders has also reversed its previous opposition to mortgage cramdown.

Bankruptcy Mortgage Modification Plan Introduced in New Congress

2009-01-06T22:30:00.011-05:00

Today on the first day of the new 111th Congress, Senator Richard Durbin (D, IL) introduced S. 61, the "Helping Families Save Their Homes in Bankruptcy Act." Representative John Conyers (D, MI), chairman of the House Judiciary Committee, introduced identical legislation in the House in H.200. The bills propose various changes to the Bankruptcy Code to allow certain modifications of mortgages on principal residences, including as to reduction in amount amount, modification in interest rates, and extension of length of payment. It is reported that Representative Brad Miller (D, NC) will soon introduce another bill with a similar plan for mortgage modification.

It is reported that plans for moving the legislation are somewhat unclear although there are efforts being made to include the legislation in the economic recovery plan now being drafted by Congress and or in other broader packages expected to move early in the new Congress such as "TARP 2". The plan could become law quickly if it is included in an economic stimulus package being drafted now by congressional leaders or it could take many months to work its way through Congress.

It is also noted that today 23 state attorneys general sent letters to Congress endorsing mortgage modification in bankruptcy.

Primary Residence "Cram Down" Legislation Reported to be Introduced in Congress Today

2009-01-06T16:25:00.005-05:00

The media reports that mortgage "cram down" legislation designed to help Americans save their homes from foreclosure by allowing bankruptcy judges to modify some mortgage debt will be introduced by Congressional Democrats today. Supporters are confident that the legislation will pass into law this time as the housing crisis has significantly worsened. Senator Richard Durbin of Illinois has promised to push for the new bankruptcy provisions to be included in an economic stimulus package being drafted by Congressional Democrats.

Wall Street Journal Reports Principal Residence Cram Down Proposal is "Gaining Steam"

2008-12-31T02:00:00.002-05:00

Today's Wall Street Journal reports that the proposal to grant bankruptcy judges the power to rewrite or "cram down" primary residential mortgage is "gaining steam." It futher reports that this proposal is gaining momentum in the Democratic controlled Congress as evidence mounts that the current voluntary foreclosure mitigation programs are falling short. For example, The Hope for Homeowner's program was supposed to help 400,000 homeowners avoid foreclosure, but so far only 37 homeowners have signed up due the narrow eligibility requirements.

The cram down proposals would give the Bankruptcy Judges the power in certain circumstances to reduce principal, reduce interest rates, and extend terms. Bankruptcy Judges presently have the power to modify mortgages that are not secured only by a principal residence, such as a vacation vacation home, but they are prohibited from modifying mortgage secured only by a lien on a debtor's principal residence.

As previously reported Senator Richard Durbin and Congressman Brad Miller announced recently that they will introduce the cram down bill on the first day of the new Congress. It is widely expected that the mortgage cram-down provision for principal residences is likely to be as part of Congress's economic-stimulus package in early 2009. The Wall Street Journal even reports that the he National Association of Home Builders is now saying the cram down proposal is worth considering.

Proponents of bankruptcy reform note that about one in six houses in now worth than the amount owed on the mortgage, ie. "under water" and that only a program that reduces the principal owed and restores equity to homeowners is likely to stem the tide of foreclosures. Proponents of bankruptcy reform also note that without bankruptcy reform mortgage servicers are having difficulties modifying mortgages that have been carved up and sold to investors as part of mortgage backed securities as the mortgage servicers as uncertain of their liabilities in agreeing to a modification. Indeed recently Countrywide and Bank of America were sued by mortgage certificate holders due to their contention that they will bear the economic brunt of the settlements reached with the various Attorney Generals.

Innovative Use of Chapter 13 to Save Principal Residences and Non-Principal Residences from Foreclosure - A Working Blog Post

2008-12-21T21:10:00.000-05:00

The widely-anticipated bankruptcy amendment, The Helping Families Save Their Homes in Bankruptcy Amendment of 2008, has not yet been enacted by Congress. This amendment would provide the Bankruptcy Courts with the power to modify mortgages secured only by principal residences. It is reported though that Senator Christopher Dodd (D. Conn.) may push this legislation again as early as next week. In the meanwhile, the provisions of the present Bankruptcy Code may offer substantial relief to the distressed homeowner and may be considered by a person who is running out of time before an impending foreclosure sale. The relief available under the present Bankruptcy Code for a homeowner involves various considerations, including whether the real property is a principal residence, whether the mortgage is secured "only by" a principal residence, the value of the real property, and the amounts owed on the involved mortgages.

Mortgages on Non-Principal Residences in Chapter 13
An owner of investment real estate or non-primary residence real estate may also be able to achieve a modification of their mortgage under chapter 13. The "anti-modification" provision of Section 1322(b)(2) of chapter 13 does not apply. This mortgage modification may include a reduction of principal to the value of the property, a reduction in interest rate, and a modification in term. My recent experience has shown that a substantial portion of mortgage companies are presently agreeing to or not objecting to mortgage modification as many mortgage companies realize it is in their own interest to agree to a mortgage modification rather than suffer another foreclosure and "REO." First priority and junior mortgages may be avoided to the extent that they exceed in amount the value of the underlying collateral. To the extent that a real property owner is able to prove that a mortgage is unsecured, the Bankruptcy Court will usually grant an order "avoiding" the mortgage lien under Section 506 of the Bankruptcy Code. This order would be recorded in the county public records for reference by future title examinersIn addition to the reduction in mortgage principal, the chapter 13 plan may also propose to reduce the interest rate to a market rate of interest. One may also consider proposing a chapter 13 plan that modifies the terms of the mortgage. The payments to the mortgage company would be made for perhaps 30 months (of a 36 month plan for an under-median income debtor) through the chapter 13 trustee under the chapter 13 plan and then would continue on directly to the mortgage company after the chapter 13 plan is completed.

Second or Other Junior Mortgages on Principal Residences
The present chapter 13 provisions already offer the owner of real property used as his principal residence the ability to avoid a mortgage that is "wholly" unsecured. A claim in bankruptcy is deemed "unsecured" to the extent it is not secured by an interest in collateral. Second and third priority junior mortgages would be deemed unsecured where the amount owed on the first priority mortgage exceeds the value of the real estate collateral, leaving no value to "secure" the second and third priority junior mortgages. If a real property owner is able to prove that a junior mortgage is "wholly" unsecured, the Bankruptcy Court will usually grant an order "avoiding" the junior mortgage under Section 506 of the Bankruptcy Code. This order would be recorded in the county public records for reference by future title examiners.

First Mortgages on Principal Residences
A principal residence owner may also be able to achieve a modification of a first priority mortgage while under the protection of the Bankruptcy Court under chapter 13 in a manner like that described above for non-principal residence real estate. This modification may be voluntary by the first mortgage or perhaps involuntary. Although chapter 13 generally prohibits the modification of a mortgage secured "only by a security interest in real property that is the debtor's principal residence" (11 U.S.C. 1322 (b)(2)), there may be various legal theories that may apply or be developed to possibly avoid application of this "anti-modification" provision.

Due to the present economic and political situation, a mortgage holder may agree to or not contest a proposed chapter 13 modification of a first priority mortgage on principal residential real property as it may recover more under a modified mortgage than that received in a mortgage foreclosure. Professor Nouriel Roubini of the Stern Business School at New York University estimates that foreclosure recoveries are averaging 30% in some markets. It appears that the Bankruptcy Court would be able to approve a chapter 13 plan that includes a modification of a first priority primary residential mortgage if the mortgage holder agrees to the modification or does not oppose the chapter 13 plan.

Legislative Intent
Bankruptcy Judge Robert D. Berger recently reviewed the legislative intent of the "anti-modification" provision of Section 1322(b)(2) noting that is was "meant to protect traditional home mortgage lenders." In re Picht, Slip Copy, 2008 WL 4382658 (Bkrtcy.D.Kan.,2008). One just might question whether the likes of Countywide and their two month teaser rates and "pick a payment" mortgages are what Congress had in mind as worthy of protection from modification pursuant to Section 1322(b)(2). Other Courts have noted that the legislative history of § 1322(b)(2) “indicates that it was designed to protect and promote the increased production of homes and to encourage private individual ownership of homes as a traditional and important value in American life.” In re Davis, 989 F.2d 208, 210 (6th Cir.1993). The statute does that by affording anti-modification protection to home mortgage lenders in order to “to encourage the flow of capital into the home lending market.” See Nobelman v. Am. Sav. Bank, 508 U.S. 324, 331, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) (Stevens, J., concurring). Is a "cash out refinance" with a teaser rate of 1.9% for 2 months followed by a "pick a payment" or Libor plus 7% actually in accordance with the legislative intent of Section 1322(b)(2)? Seems like many of the vintage 2004- 2007 "cash out" mortgage refinancing of real estate already owned may not be in accordance with this Congressional intent of furthering individual homeowner. Indeed, many or most of these subprime-mortgages have had just the opposite effect and created substantial damage to the American economy.

One may also question whether the mortgage's explicit provisions actually provide that the mortgage is to be secured only by a "principal residence" as per the anti-modification provision of Section 1322(b)(2). One wonders whether the language of standard mortgage paragraph six actually implicates Section 1322(b)(2). A typical paragraph six seems quite ambivalent in providing that borrower need only "occupy, establish, and use" the real estate as his principal residence within 60 days after the execution of the mortgage and only use it as his principal residence for at least one year "unless the Lender otherwise agrees...which consent shall not be unreasonably withheld..." Is this standardized provision something less than that required to implicate Section 1322(b)(2)? Apparently the standardized mortgage form has evolved over the years and perhaps this language is not that which Congress had in mind when it drafted Section 1322(b)(2). Could this standardized paragraph be a drafting error?

Equity
One might also question how a particular bankruptcy court, a court of equity, may view standard paragraph six and its implication or non-implication of Section 1322(b)(2) upon consideration of old fashion principles of contract law, including issues of procedural or substantive unconscionability, good faith, fair dealing, unclean hands, breach of fiduciary duties, fraud, and misrepresentation. Other issues may include "predatory" or "improvident" lending. How should the maxim that "the plaintiff who seeks equity must behave equitably" apply? What about the holding that "Courts do not favor oppressive acts on the part of mortgagees, even though claimed to be founded on strict legal rights." Graf v. Hope Building Corp., 254 N.Y. 1 (1930). Why would the mortgage contract's requirement as to use as a principal residence be enforced against the homeowner when a particular mortgage and mortgage note contain unconscionable and unfair provisions? Perhaps a bankruptcy court could be persuaded that mortgage company should not withhold its hypothetical consent as to non-use as a principal residence.

Plain Meaning
One might even question who really is the "holder" of the secured claim and whether its secured claim is secured "only by" a principal residence. Although the mortgage servicer has the right to service the mortgage and the securitized trust may hold or have the right to "enforce" the mortgage note and/or mortgage, perhaps further thought should be given as to whether the actual secured creditor is in reality the various beneficiaries of the trust, ie. the certificate holders issued by the securitized trust. One might further question that if the certificate holders are deemed to be the actual secured creditors, whether their secured claim is secured "only by security interest in real property that is the debtor's principal residence." Were not the certificate holders of the securitized mortgage trust given all kinds of other added-on collateral or contractual rights in addition to the mortgage note when they bought their interests in the mortgage notes that form the corpus of the securitized trust?

It is interesting to review the Bankruptcy Court's decision in In re Lago, 301 B.R. 365, (Bkrtcy.S.D.Fla.,2003)(Cristol, J.). In this decision, county tax certificate holders normally serviced by the county tax collector were recognized as creditors and the real parties in interest. Although it would appear to be black-letter law that the trustees of the securitized trusts are normally able to act on behalf of the certificate holders (as the county tax collector was unwilling in In re Lago), this does not detract from the fact that the ultimate holder or benefactor of the mortgage note and its flow of capital is the holder of the certificates issued by the securitized trust. Are the various holders of the fragmented interests (ie. tranches) in the secured claim secured only by the principal residence?

"Securitization Facilitated Predatory Lending"

2008-12-21T17:35:00.007-05:00

Professor Kenneth C. Kettering of the New York Law School recently reviewed the legal foundations and product growth of asset "securitization" in his article Securitization and its Discontents: The Dynamics of Financial Product Development, 29 CARDOZO L. REV. 1553 (2008).

Interestingly enough, Professor Kettering lists various articles dating back as far as the year 2002 where critics contended that mortgage securitization faciliates "predatory" lending and misleading disclosures . One of the earliest proponents of this thesis was Kurt Eggert's article Held Up in Due Course: Predatory Lending, Securitization, and the Holder in Due Course Doctrine, 35 CREIGHTON L. REV. 503 (2002). Other articles cited are Kathleen C. Engel & Patricia A. McCoy, Turning a Blind Eye: Wall Street Finance of Predatory Lending, 75 FORDHAM L. REV. 2039 (2007), Christopher L. Peterson, Predatory Structured Finance, 28 CARDOZO L. REV. 2185 (2007), David Reiss, Subprime Standardization: How Rating Agencies Allow Predatory Lending to Flourish in the Secondary Mortgage Market, 33 FLA. ST. U. L. REV. 985 (2006).

The "Gridlock" of the Many Owners of the Securitized Mortgage

2008-12-17T12:42:00.000-05:00

It is well know to commercial attorneys that business or "commercial" trusts have come to dominate many types of modern financial transactions. Trusts are widely used in the structuring of pensions, mutual funds and asset securitization trusts. See, Steven L. Schwarcz, Commercial Trusts as Business Organizations: Unraveling the Mystery, 58 BUS. LAW. 559 (2003), Steven L. Schwarcz, Alchemy of Asset Securitization, 1 STAN.J.L.BUS. & FIN. 133 (1994), John H. Langbein, The Secret Life of the Trust: The Trust as an Instrument of Commerce, 107 YALE L.J. 165 (1977). Now, due to the crisis with mortgages and the needs for mortgage modifications, even the average American citizen is aware of the commercial usage of the trust for the securitization of mortgages as well as the "gricklock" created thereby.

The "commercial" use of a trust is in contrast to the traditional "gratuitous trust" that a family member may set up as part of his estate planning. In a traditional gratuitous trust, the donor of the gift is the "settlor" of the trust and transfers assets to the trust to be managed by the trustee for the benefit of the beneficiaries. In contrast, with a commercial trust, such as an mortgage securitization trust, a settlor transfers financial assets in return for payment for the financial assets. With mortgage securitized trusts, mortgages are originated and then quickly assigned by the originators and brokers into large pools held by trusts. Christopher L. Peterson, Predatory Structured Finance, 28 CARDOZO L. REV. 5 (2007), Adam B. Ashcraft, Til Schuermann, Understanding the Securitization of Subprime Mortgage Credit, Federal Reserve Bank of New York Staff Report no. 318 (2008).

Trust certificates are then sold to investors to raise funds from the capital markets. "A trust certificate is simply a writing that evidences the holder's undivided interest, to the extent specified in the writing, in the trust assets." Schwarcz, Commercial Trusts, supra note 25. This is in accordance with basic trust law that the creation of a trust divides title to the trust property, placing legal title in the trustee and equitable title in the beneficiary. A beneficiary's interest in the trust property constitutes a vested interest in the property itself. 76 Am Jur., Trusts, Section 258, 259.

Certificates in securitized mortgage trusts are issued in various tranches with various ratings by the three national rating agencies, Standard and Poor's, Moody's, and Fitch Investment Company. One certificate may entitle an investor to receive all the interest income (an "interest-only tranche") while another may entitle an investor to receive all payments from loan principle (a "principle-only tranche"). The credit worthiness of some tranches is augmented by "credit enhancements", such as letters of credit, guaranties, insurances, and swaps.

Pursuant to a "pooling and servicing agreement", the mortgage held by the trust are serviced by one or more servicers, such as a master servicer, default servicer, and special servicer. Due to their limited authority, servicers have been unable to meet the needs of homeowners for "loss mitigation" or mortgage modification. Servicers are fearful of being sued by the trusts or certificate holder if they modify the mortgage. In fact, in a recent case, certificate holders have filed suit against Countrywide and Bank of America for agreeing to modify mortgage in their settlements with the various state's Attorney Generals. Underlying the servicers' lack of authority is the inherent structure of the trusts where interests of varying natures in the mortgage have been sold to the certificate holders which produces an inherent conflict of interest whereby a mortgage modification may be beneficial to one group of certificate holders but harmful to another. The result is gridlock.

Professor David Dana of Northwestern University School of Law recently explored in his article The Feudal Mistake the "excessive fragmentation" of ownership interests in securitized mortgages and the creation of a situation whereby it is nearly impossible to re-work a mortgage. This theme of excessive fragmentation of property interests, whether in land, intellectual property, or finance, is the subject of this year's "must read" (Business Week, December 25, 2008, page 82) The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives by Columbia University law Professor Michael Heller. In this work, Professor Heller explores the "free market paradox: usually, private ownership creates wealth, but too much ownership has the opposite effect – it creates gridlock. When too many people own pieces of one thing, cooperation breaks down, wealth disappears and everybody loses."

Which bring us to the today's American mortgage crisis and Chapter 13 of the Bankruptcy Code and its capability of cutting this Gordian knot of "gridlocked" securitized residential mortgages. Particularly, section 1322(b)(2) of the Bankruptcy Code provides that claims, such as mortgages, are not modifiable if they are secured only by an interest in real property that is the debtor's principal residence.

The first question presented is who is the claimant, ie. who owns the mortgage held by the securitized trust. Although legal title to the securitized mortgage is held by the trust's trusee, it would appear that the beneficial ownership of the securitized mortgages has been fragmented and diffused. Per basic trust law, although the securitized trust holds the legal title to the mortgage, the certificate holders hold the equitable title. In fact, with securitized trusts, the equitable title may be split among the hundreds or thousands of certificate holders who have competing interests per the various tranches in the mortgage. Hence the gridlock in modifying the securitized mortgages and the optimization of this "resource."

Perhaps deserving closer examination is the issue whether the claim in the mortgage as beneficially held by the hundreds or thousands of the certificate holders is secured only by an interest in real property? If not, apparently the mortgage would be modifiable under Chapter 13 of the Bankruptcy Code.Perhaps there have been "add-ons", such as the various credit enhancements, as the mortgage was passed along to the trust and certificate holders.

Massachusetts Appellate Court Affirms Preliminary Injunction against Foreclosure of Subprime Mortgages

2008-12-15T19:11:00.013-05:00

In a landmark decision, the Supreme Judicial Court of Massachusetts issued it opinion on December 9, 2008 unanimously upholding the lower court's order in the case of Commonwealth v. Fremont Investment & Loan & another, 452 Mass. 733 (2008)(Botsford, J.) preliminarily enjoining subprime mortgage lender Fremont Investment & Loan from foreclosing on any "structurally unfair" loan without further prior court approval and a final hearing on the merits. The lower court's ruling of February 25, 2008 was reportedly the first of its kind in the nation that restricts a subprime lender's ability to foreclose based on unfair or deceptive loan origination misconduct.

The trial court issued the preliminary injunction upon a finding of a likelihood of success on the merits that Fremont's loans were "unfair" based on four characteristics of the loans. Massachuetts General Laws c. 93A, section 2 (a) makes unlawful any "unfair or deceptive acts or practices in the conduct of any trade or commerce." It is noted that in a similar manner, Florida's Deceptive and Unfair Trade Practice Action provides in section 501.204(1), Florida Statutes (2008) that (1) Unfair methods of competition, unconscionable acts or practices, and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful. The four characteristics found by the court as establishing unfairness were

1. the loans were ARM loans with an introductory rate period of three years or less
2. they feature 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 percent measured on the fully indexed rate, and
4. the loan-to-value ratios was 100% or the loan featured a substantial prepayment penalty.

The court reasoned that "Fremont as a lender should have recognized that loans with the first three characteristics ...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 lower introductory rate." The court also found that the fourth characteristic, the prepayment penalty, "would make it essentially impossible for subprime borrowers to refinance unless housing prices increased..." The court's preliminary injunction required Fremont to work with the Attorney General to "resolve" their differences regarding foreclosure, presumably through a loan workout.

Most of the involved Fremont loans, which were procured through independent mortgage brokers who received a commissions, were subsequently sold to the secondary market with Fremont acting as servicer for the purchaser. The majority of Fremont's subprime loan products were adjustable rate mortgages with fixed interest for the first two or three years which then adjusted every six months to a higher variable rate. The court found that Fremont determined loan qualification based on a debt-to-income ratio of fifty per cent or less based on the payment at the introductory rate not the payment that would ultimately be required after the introductory period. Furthermore, Fremont offered loans with no down payment by providing a first mortgage at eighty percent financing with an additional "piggy-back loan" providing twenty percent.

The court's order does not bar foreclosure nor relieve borrowers of their obligations to repay their loans, but it requires Fremont to "explore alternatives to foreclosure" and then seek approval of the court to foreclose which may not be granted, leaving the preliminary injunction in place until the Attorney General has the opportunity to have a final hearing on the issue of unfairness.

"Excessively Fragmented" Mortgages and Property Law

2008-12-09T15:00:00.008-05:00

Professor David Dana of Northwestern University School of Law makes some interesting observations in his article The Feudal Mistake on the problem that the carving up of mortgages in securitized trusts has created whereby it is nearly impossible to re-work a mortgage. Professor Dana reviews how excessive fragmentation of ownership interests has been dealt with by English and American property law where judges created and used legal doctrines to "undo the excessive fragmentation of ownership interest in land" such as in feudal England and oil rights in nineteenth and early twentieth century. Professor Dana writes that "[o]ur property law and property rights tradition simply does not require, or even allow, our lawmakers to sit back while the ill-advised chopping up of property into competing interests creates a gridlock that undermines national prosperity. As Abraham Lincoln famously remarked, the Constitution is not a suicide pact."

Bankruptcy Mortgage Bill to be Reintroduced Again in January

2008-12-09T11:40:00.011-05:00

Senator Richard Durbin (D-Ill.) held a press conference today where he announced that he will reintroduce on the first day of the new 111th Congress the "Helping Families Save Their Homes in Bankruptcy" legislation. This legislation would amend the bankruptcy laws to allow modification of mortgages secured only by a "principal residence" to assist struggling mortgage borrowers. It is also reported that he will seek to have this legislation included in the economic stimulus package that will be considered in the first weeks of the new Congress.

It is also reported that House Financial Services Committee Chairman Barney Frank told participants at a Office of Thrift Supervision conference on Monday that he expects lawmakers may revive efforts to change bankruptcy law early next year if foreclosure rates are not on the decline.