August 26, 2008

Watching train wrecks

We first have to point out to our readers that we’re biased in favor of consumers and borrowers. Our company philosophy revolves around people not having to resort to the “legal system” to get a company to do something it should have done to correct a problem before the train goes off the track and the court filings start.

But there’s a hidden parallel problem a lot of otherwise responsible and even well-meaning business executives don’t seem to be aware of.

Consider these four important facts:

  1. A large portion of the consumer population is employed by major corporations (according to the Census Bureau there are over 57 million people working for companies that have more than 500 employees).
  2. Some (we believe a fairly large) portion of that employed population is in or approaching a debt crisis.
  3. Most employees will talk about almost anything, except serious financial problems.
  4. People experiencing financial problems will all-too-often delay taking effective action.

Which means some of those responsible and even well-meaning executives aren’t seeing the train wrecks and don’t understand the impact they have on their companies.

Granted, with a few exceptions for some positions, for privacy and confidentiality reasons an employer really shouldn’t delve into the financial problems of its employees. They shouldn’t have to. But there needs to be an awareness that people facing serious financial problems aren’t exactly functioning at their best and are spending inordinate amounts of on-the-job time and mental energy dealing with non-work issues.

And we’re not talking about providing “consumer credit counseling.” That’s nothing more than cleaning up after the train wrecks.

Everyone needs to finally admit that the only viable, long-term answer for many people (and our economy) is debt prevention, and how to get that message to those who need it most before the train accelerates is going to take more than some quick-fix web sites and alarming news articles.

(To be continued)

Craig and Dave

August 19, 2008

Mathematically Challenged

Those who have been around this mess for a number of years are used to hearing the same questions from newly-impacted borrowers, and another frequent one is “If the bank is losing so much money on foreclosing, why won’t they let us work something out?”

The fact that the borrower still thinks they’re dealing with a “bank” that made their loan is revealing; in fact, it you were actually dealing with a bank or credit union that retained its own loans they may very well be willing to work something out.

But in the real world of securitization and subprime and alt-A lending, the party who you have to deal with is the servicer, and the servicer is a captive to the pool trustee under something called a “Pooling and Servicing Agreement” (PSA). That PSA dictates the terms and conditions under which a servicer is supposed to manage defaults and foreclosures, and it is all but impossible to find the PSA that allegedly governs a borrowers loan until the name of the trust is uncovered in a lawsuit and the SEC filing for the trust can be found.

Maybe this diagram will help:

Note that the "servicer" can be as many as four separate entities, but a single servicer can perform all four functions - all of which are defined and legally contracted to in the PSA.

Bond investors generally don’t pay a lot of attention to the PSA if it appears to be one of the standard so-called “boilerplate” versions that go into the securities offering. They pay more attention to the ratings of the servicer until something goes wrong and they start looking into how the pool is supposed to be serviced. The servicer can be (and in some cases today is being) sued for not handling the loans they way they’re supposed to be in terms of default management. Most trustees have the right to change servicers if the terms and conditions of the PSA aren’t being met. If they get into the details of some of the more toxic loans, the trustee may even push back against the originating lender and force them to purchase the loan back out of the pool.

Of course, in most subprime loans, PMI (Private Mortgage Insurance) is in place as a "risk enhancement" to improve the pool's marketability, thus the insurer also has an interest in the loan.

As you can see, there are multiple players, all with their own interests to protect and all with their own version of the numbers involved.

If we use the numbers recently provided in testimony before Congress, the average loss in a foreclosure is in the neighborhood of $50,000. We're pretty confident that is wildly exaggerated, but the more exaggerated it is the more it makes our point:

Why are they in such a rush to lose money?

In the formal statement of David G. Kittle, Chairman-Elect of the Mortgage Bankers Association, he rails on and on about the enormous costs of foreclosure and how “MBA members are devoting significant time and resources to finding ways to help borrowers keep their homes.”

Again, why then the rush to lose money by foreclosing?

The only legitimate defense has to be the terms and conditions of the PSA - but that also requires the parties to say they aren't willing to modify it. And if that decision is resulting in $50,000 losses per foreclosure, either that number is simply a myth or these entities are truly mathematically challenged and their stockholders should be asking more questions about who is making business decisions.

We have some suggestions; if the industry really wants to avoid losing $50,000 per foreclosure, they're going to have to start acting as if they really stand to lose that much. Someone trying to avoid a $50,000 loss would not:

(1) Send payments back to borrowers for any reason or put payments into suspense accounts.
(2) Let a modification opportunity wait until the loan was in serious default, thus trashing a borrowers credit score to preclude refinancing.
(3) Add absurd fees and charges for forbearance or reinstatement.
(4) Give borrowers the run-around and not have a single point of contact for an at-risk borrower.
(5) Continue to tack on fees and charges while "processing" the modification.
(6) Refuse to respond to RESPA QWR letters.
(7) Ignore requests from agents and refi lenders for payoffs.
(8) Keep blaming a third (or even fourth) party for the lack of a decision.
(9) Have ill-informed personnel handling something that could result in a loss of $50,000.

Now, if the real losses were much smaller (or in some cases weren't losses at all), a servicer would do all of the above (and more) to ensure the loan went into foreclosure.

It's all about the math.

Craig and Dave

August 13, 2008

The TILA rescission craze

We are hearing – or we should say, receiving emails – from borrowers who are being inundated with offers to save them from foreclosure through not only the scams we outlined in the last post, but through the Truth In Lending Act. There seems to be some misunderstanding not only about the outcome but the process.

Let’s start by quelling the rumor that you can get a house free-and-clear by just sending a letter rescinding your loan. It’s not that simple.

Keeping in mind our standard disclaimer about legal advice, understand that if you think you can get a TILA-based rescission, you’d better be ready to pay back the original principal balance. True, what you’ve paid (principal, interest, escrow) as well as the originating fees, points, etc., is going to be credited to you in the process. That will come in handy in reducing the original principal if the loan has been in force for a while.

Let's say you took out a $100,000 loan and over some time (less than three years) you've paid in about $12,500 in interest, principal, escrow, etc., and you paid a total of $2,500 in fees, points, etc. The letter goes out and the court battle ensues. If you prevail in that process, the loan may be rescinded, but there will still be the original principal balance to deal with MINUS the amounts you've paid, i.e., $15,000.

You bring $85,000 with you and wham, the loan will be rescinded. If you don't or you don't have a lender lined up it depends on the court. In the 3rd district, we know from an appellate court ruling that the loan won't be rescinded unless the borrower can pay off the principal.* We have heard from sources in others that the debt becomes unsecured. You need your own local legal counsel to navigate this one.

In general, the easiest way to view a TILA rescission is that the parties are put back to where they were before the transaction took place. It's as if the loan was never made. But you have to remember that to get back to where they were before, the lender would have to get back the principal they loaned. Obviously, they can't go after the previous lender/creditor and ruin their day - the principal is tied up in the homeowner's equity.

Now some of you may be thinking along the lines we've been talking to people about: Depending on the legal landscape where you live and the servicer/trustee you're facing, a viable TILA action may be the catalyst to get a major loan modification if you act before you're in default or foreclosure (once you're that far along the balance of power swings to their side. Remember a TILA case can also result in them paying your attorney's fees, so you may have some serious leverage if you have some bona fide TILA violations.

And just a note about timing: The statute of limitations on TILA doesn’t “toll” from the date you discover the flaws – you have three years, period.

“.... the three year limitation on actions for rescission is not a statute of limitations subject to tolling, but rather it is a statute of repose, which creates a substantive right, not subject to tolling”); Spann v. Community Bank of Northern Virginia, 2004 WL 691785, *4 (N.D. Ill. Mar. 30, 2004)

As always, there are more nuances than simple answers and we can't reiterate often enough that knowledgeable local legal counsel is the place to begin.

Craig & Dave

*More case law on rescission:

FDIC v. Hughes Dev. Co., (8th Circuit. 1991) District court did not err in conditioning rescission on tender of $100,000 principal within one year.

Williams v. Homestake Mortgage Co., (11th Circuit, 1992) Voiding of creditor’s security interest in home may be conditioned on consumer’s tender of amount owed to creditor after subtracting all finance charges and penalties.

Bustamante v. First Fed. Sav. & Loan Ass’n, (5th Circuit, 1980) Creditor’s TILA obligations were not automatically triggered until obligor tendered repayment.

August 1, 2008

There’s more to the mess than just the mortgages

For several years we’ve focused on mortgage servicing issues, particularly on how to avoid being taken advantage of. After all, as Will Rogers said, “It’s easier to stay out than get out.”

But something we’ve discovered which really shouldn’t surprise most people is there are far more borrowers out there headed toward the brink of mortgage trouble than those already being harassed or foreclosed on.

And like millions of people, they’re carrying mountains of other debt, primarily credit card balances and other unsecured debt with astronomical interest rates.

Not exactly news, is it? What is, or needs to be news is some people are so desperate to stay in their homes that they’ll turn to almost anyone or try anything to get out from under their other debts so they can keep making the house payment.

Which brings us to a word of warning: Never pay anyone who says they can eliminate your debt for you – especially if it’s a web site offer or is being marketed through a network of referral participants. And we’re not talking about reducing debt via negotiation which anyone can do for themselves with a little knowledge. The dangerously expensive programs are those that claim to actually eliminate your debt over a very short period of time.

We’ll be outlining some of the more common schemes in more detail as well as the new ones that keep cropping up, but there are some huge red flags too many people just don’t see in their desperate search for a solution. Major red flag examples are claims like:

1 – The bank loaned you their credit, not money. According to the promoters, it's supposedly illegal for banks to do that.

2 – There is an “administrative remedy” process that you can use (or that they’ll conduct for you) that will not only eliminate your debt but will make it so the creditor actually owes you money. You’ll find these embellished with terms like “international” and “admiralty” in some versions.

3 – You can protect yourself from creditor lawsuits by filing UCC statements and separating yourself from your all-capitals name “strawman.”

4 – For a fee, they’ll take care of your debt, even assume it from you and they know how to turn the tables on the creditors through a unique arbitration program or something that's known as novation.

5 – You can submit things such as an “affidavit of truth” or a “bill of exchange” or file a commercial lien against a creditor.

6 – That you can prevail through common-law arguments.

The promoters have learned to flood the Internet with press releases and affiliate web pages so they show up in Google searches. They use recorded audio messages, some have “conference calls” to listen in on and even YouTube videos are appearing. Trying to keep a list of them would be a full-time job so the best bet is to look for those red flags and NOT SEND THEM MONEY!

Craig and Dave