California Foreclosure Blog

Phoenix mini-bubble: (more) market manipulation

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Tue, 21 Jul 2009 10:12:23 -0500

AP put out a story yesterday about "bidding wars" that are affecting home values in the greater Phoenix area. The article states that in several markets throughout the country, prices on bank-owned homes are being inflated by a combination of investors keen on getting a deal, regular home buyers (many of them first time buyers), but mainly by the fact that lenders are not putting homes on the market as fast as they are taking them back in foreclosure. The proof: for each of the last four months (March through June 2009), over 300,000 foreclosures were reported by RealtyTrac. That's over 1 million homes, on track for 3 million for the year. Lenders are currently the largest home sellers in the market, and they are taking back homes at an increasing rate. So the only real reason for the trickle in REOs coming to market is that lenders want things that way because it maximizes returns.

But there's another lender-controlled factor that is sure to make these mini-bubbles burst: lenders have manipulated not just the REO market by sitting on houses before offering them for resale, they are also waiting a very long time to even start foreclosure on homes in areas with severe value losses.

In my own neighborhood (I live in Solano County, California, an area that has been hard-hit by foreclosures), where home values have lost between 35 and 40 percent since the bubble burst, there are several homes that have been vacant for upwards of a year. Not only are these homes not on the resale market as REOs, some of them have not even been foreclosed on, because lenders appear to be dragging their feet in taking back certain properties. I have a client who lives in another hard-hit area in Solano County, and they have not made a loan payment in nearly a year, but the lender has not even started the foreclosure process.

This sort of lack of action begs the question: why would lenders act this way? I think the answer is simple. In my client's case, the home has lost over 2/3 of its value, and the note holder will lose hundreds of thousands of dollars the moment it becomes the owner of the property. What's more, the local market is still falling, even though lenders are holding back on putting more REOs up for resale, which would mean even greater losses to the investor who owns the loan.

So, the lenders are trying to gut it out by manipulating the supply of REOs, and even by extending the foreclosure process if they decide they could make more money by creating a mini-bubble market. After all, these same lenders will likely be asked to provide the loans to buyers in these markets, and higher sale prices lead to bigger loan fees and interest income.

So what's the risk of this lender market manipulation? Lenders cannot afford to hold off on foreclosing and reselling forever, for several reasons. Rising unemployment (estimates are that 60% of this year's foreclosures are due to job or income loss), the upcoming wave of foreclosures in commercial property (many large commercial properties are in foreclosure, with more on the way), and mounting reserve account balances (banks are required to set aside revenue in reserve accounts for bad loans) will all cause the "shadow inventory" dam to burst, probably within the next 9 to 12 months. And when that dam bursts, so will all the mini-bubbles out there, which will lead to another lender-created drop in property values and prolong the pain for real estate professionals, home builders, but most importantly for homeowners and communities.

California "foreclosure moratorium": will lenders even care?

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Tue, 16 Jun 2009 09:24:51 -0500

I've been receiving many calls and emails about California's so-called foreclosure moratorium, which went into effect yesterday. Frankly, I doubt it will actually do anything meaningful for struggling homeowners. Here's why:

Loan servicers can qualify for an exemption simply by filing a form with the state that claims the loan servicer has a modification program intended to keep people in their homes. Nothing in the law requires loan servicers to actually implement the programs (you know, where borrowers actually get their loans modified in a meaningful way), and there's no real mechanism in place to confirm that loan servicers are actually doing anything. Who from the state is going to audit the loan servicer activity? As far as I can tell, no people have been assigned to this task, and more importantly, the state has no money to pay such people because the state is currently broke.

But here's the really interesting part: all this law does is temporarily extend the time between a Notice of Default and Notice of Sale from 90 days to 180 days for lenders who either fail to comply with the requirements, or who choose not to comply.

Why would a loan servicer choose not to comply? Well, there are three reasons:

1) Waiting another 90 days costs the loan servicer little to nothing.

2) So many loans at risk for foreclosure have no lender insurance. If a loan is not guaranteed by the FHA, VA, Fannie / Freddie, or private mortgage insurance ("PMI"), then the note holder absorbs the entire loss when an upside down loan is foreclosed.

3) Lenders have a large inventory of homes already owned because of foreclosure, plus even more in the pipeline. Adding some more time to the foreclosure clock could actually help lenders, rather than homeowners, because it would spread out the lenders' mounting losses on all the upside down properties they are in the process of taking back. This is important because in addition to the actual losses incurred when an undersecured loan is foreclosed, banking regulations require many lenders to set aside reserve money out of their revenue to cover those losses. So for loans owned by banks, the mounting losses start to have a real impact on their ability to use their revenue for their business operations. While I am unsure of whether this reality was factored into the "stress tests" that the government put major banks through earlier this year, it certainly should have been a component.

Has the foreclosure crisis hit bottom? Don't bet on it

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Wed, 27 May 2009 08:30:20 -0500

So it seems we have a variety of opinions regarding the proverbial bottom of the market: folks with vested interests in a thriving real estate market, like Zillow.com and commercial real estate mogul Sam Zell, claim that there are signs the market will improve in the next few months. Well, actually, Zillow did an opinion poll of users and reported that a majority of respondents think the market has hit bottom...wishful thinking, perhaps?

Meanwhile, economists familiar with the details of the actual economy - you know, employment, consumer purchases, home sales, default rates - have a sobering, and ultimately more accurate assessment.

Here's why we're nowhere near the bottom of the foreclosure-driven real estate market:

1. Unemployment continues to rise. Unemployment is near 9% nationally, and over 11% here in California. The rate is expected to top 10% nationally by the end of the year, and may top 12% in California. What's more, unemployment has a ripple effect on salaries and household incomes, because the few available jobs generally offer lower salaries and fewer benefits than jobs in a healthier economy. Because housing values (in a stable, realistic market - please ignore the 2002 through 2006 fiasco) are inextricably linked to household incomes, the "real" (read: the part of the market other than foreclosure investors and bargain hunters) housing market cannot recover until household incomes stabilize.

2. The foreclosure rate of prime loans is increasing. I hope that Congress is paying attention to this figure. According to data released by First American CoreLogic , the number of prime loans at some stage of serious delinquency (90+ days late) or foreclosure is more than 1.5 million - nearly equal to the number of subprime loans in serious delinquency or foreclosure. What this means is that we can no longer pretend that the foreclosure crisis is limited to "irresponsible people who bought more than they could afford" - the problems in the housing market are hitting literally millions of people who fall outside that stereotype. Some economists estimate that more than half of the defaults this year will be caused by unemployment.

3. The shadow inventory. We have a large number of homes that are not currently on the market, but will be soon, as REOs. Banks have been dragging their heels on foreclosures, mainly due to political pressure and their requests for taxpayer handouts. But now, with foreclosure activity ramping up again, banks will end up owning a lot more real estate. This is in addition to the real estate they already own but have kept off the market. Rising inventories of REOs will have to be liquidated sooner or later. This inventory is estimated to be hundreds of thousands of homes, and as we're on track to see close to 3 million foreclosures this year, those numbers are sure to rise. Banks keen on ridding their balance sheets of non-performing real estate assets will dump their REOs at rock-bottom prices, which will keep values depressed.

Senate, White House sell out the American people - cram down cave in

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Fri, 01 May 2009 08:42:12 -0500

Well, the banking lobby's millions have carried the day, and the Obama Administration left over 8 million American families twisting in the wind by failing to back up an Obama campaign promise.

On Thursday, the Senate failed to pass the cram down bill. The final vote was 45 in favor to 51 against. A dozen Democrats, including Democrat of convenience Arlen Specter of Pennsylvania, voted against the measure.

This is such a shame for the American people, as well as the economy.

As I've previously written, ending the cram down exclusion on primary residence loans would have: (1) forced lenders to deal honestly and fairly with homeowners regarding upside down properties with ridiculous loans; (2) provided a means to stop the spiraling rate of foreclosures; (3) helped stem off the continuing decline in property values fueled by the foreclosure crisis; and (4) allowed banks to make more money than they will by taking back millions of upside down properties. All of this would have been accomplished without spending one penny of taxpayer money.

I am, to say the least, upset, but not deterred. This relief must happen for the economy to recover, so one way or another, we will revisit this issue. I only hope that it happens soon.

The American people should be up in arms about this failure to do right by millions of struggling families. This is a disgusting display of money at work in politics, at the expense of the greater good for the common person. How did this happen? Why was the banking industry allowed to spend millions lobbying against this bill, when most of the industry's key players have taken billions in taxpayer TARP funds, and as such are forbidden from lobbying activity? Will the House (which passed the bill back in March) investigate whether institutions funneled lobbying cash illegally through banking trade groups such as the American Bankers Association and the Mortgage Bankers Association?

And where was the Obama White House in this debacle? Candidate Obama publicly declared his support for this measure on several occasions throughout the campaign, and President Obama claimed that this bill is vital to the Administration's housing and economic recovery plan. And yet, the Administration was strangely silent when push came to shove. For the past few weeks, no one from the Administration put any real effort into helping push through this important measure.

Now, the Senate's stripped down housing bill must go into a conference committee to reconcile its differences with the House version. I only hope that the rabble rousers in the House block passage of the parts of the bill that mainly benefit banks, as a return favor to the industry on behalf of the American people.

America, the banking industry is at war with your family. If you have an unsustainable loan secured by a house that is not worth enough to cover the loan balance, the banking industry just spent your tax dollars to rob you of the right to make your lender deal with you fairly. It's time for you to let Washington know that you're mad as hell. At the end of the day, politicians need your vote, and one third of the Senate is up for re-election next year. If this issue is important to you, remember how your members of Congress voted when you vote next year.

For those of you who are already at risk of losing your home, let me propose a new cram down, one that's available under the current bankruptcy rules. If you can't cram down the loan, I propose that you meet with a bankruptcy lawyer to see about cramming your upside down house down your lender's throat. A bankrupt homeowner can surrender an upside down house to their lender in bankruptcy, avoid foreclosure, and rebuild their credit faster and easier than they could after a foreclosure. Since banks keep claiming that their loans are worth more than they really are, let's make them put their money where their mouths are by forcing a new tide of upside down REOs. In the near term, with the reserve requirements and carrying costs associated with holding REOs, and the still declining real estate market, banks would hit the tipping point of having too many properties to deal with sooner or later. Under the current system, a homeowner could surrender a home in a Chapter 7 bankruptcy (presuming they qualify for a Chapter 7 - ask a lawyer), and rebuild their credit enough to qualify for a home loan in as little as two years after receiving a Discharge. Meanwhile, home values will continue to stay low, and the bankrupt former homeowner could end up buying a better house for less money with an affordable, realistic loan. In short, at this point, homeowners may be better off walking away through bankruptcy and forcing lenders to realize their losses. As noted above, be sure to talk to a lawyer about your individual situation, because the rules are complicated, and your results may vary.

Senate screws the little guy: the cram down may be dead for now

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Fri, 24 Apr 2009 08:47:04 -0500

After spending millions on lobbying (despite the lobbying ban in place for banks who received bailout money), it looks like the banking industry has spent and lied its way into delaying Senator Durbin's cram down bill.

I am shocked, dismayed, and disgusted that in Washington, it's business as usual when it comes to regular people getting a break against powerful interests who throw money (including taxpayer money) at politicians.

According to today's Wall Street Journal, Senate Republicans are continuing their campaign of "no" and walking in lock step to kowtow to the banking industry. The end result: banks probably get the FDIC relief they want, but regular people will not get the right to have their upside down home loan treated the same way any other upside down loan is already treated.

In my opinion, this loophole should have been closed long ago, for some very good reasons.

First, the home lending market is vastly different from what it was 30 years ago, when this special exception was written into the Bankruptcy Code. The evolution of the home lending industry is such that lenders do not need any special protection to protect the availability and affordability of home loans. Lenders and their lackeys in the Congress have continued to tell the lie that cram downs would make home loans so much more expensive than they are currently, and this tactic appears to have worked.

The second reason to get rid of this special set-aside for these loans is that it will not result in increased costs for borrowers. How do we know this? Well, as mentioned above, most loans are already subject to cramdowns, including many different types of home loans - for example, on second homes, investment properties, and multiunit properties where an owner occupies one of the units. If cram down opponents were telling the truth, then we would see pricing and availaility differences between the loan products that could be crammed down, and owner-occupied loans, which are not. According to an audit of nearly 300 different loan products offered by several large lenders (just google "Adam Levitin" "cram down" and you can read the paper and judge for yourself), there is no difference in pricing or availability based on whether a loan can be crammed down. The bottom line is that bond rates and competition determine home loan availability and pricing, not back end risk factors. For example, in this very tough economy, home loan rates are nearly half what they were in the heyday of a few years ago. Why? Because benchmark interest rates like Treasury bond rates and the Prime Rate are much lower now than they were then.

The third reason to do this is that, unlike so many other measures in Washington, this one will not cost taxpayers a penny, because the bankruptcy system pays for itself through its fee structure.

The fourth reason for a cram down is that lenders actually make more money on a cramdown when compared to foreclosing on, holding, and reselling a home whose value is less than the loan balance. For a California property, a lender will spend an average of $70,000 in hard dollars for every foreclosure. The lender's total losses (lost interest income, etc.) are estimated at nearly $150,000 per house foreclosed. This problem is compounded in a declining market, such as the one we are in now.Then there's the drag effect of REOs on housing prices and local property tax bases, which harms already hurting local communities.

And by the way, where do you think the banks look to recoup their bad loan losses? If banks are right about cramdowns increasing loan costs, then it stands to reason that foreclosure losses are already being passed on to borrowers. If they are, then why are loans cheaper now than they were when the housing boom was happening, as noted above?

But the most important reason for Congress to do this is simple: it's the right thing to do for millions of American families who are saddled with houses they cannot sell to pay off their loans because of the market, and loans that contain ridiculous terms when compared to reality.

Banks and their kept politicians may have stolen a real opportunity to fix a root cause of the current world economic crisis. People are very angry about the state of things. Unfortunately, this shameful act of greed at the expense of common sense and fairness will likely extend what now appears (despite the lip service from pundits) like it's turning into a depression - maybe not on Wall Street, but certainly on Main Street.

More nail-biting as the Senate works to pass the cram down bill

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Thu, 16 Apr 2009 10:24:24 -0500

The Senate is officially in recess until Monday, April 20, but many senators are hard at work, trying to make - or break - the bankruptcy cram down reform bill.

At stake for banks: increased FDIC insurance, perhaps lower FDIC premiums (banks have to pay for FDIC insurance, and because of the many bank failures over the past year, rates are set to skyrocket). But for the rest of us, the American people, the stakes are much greater.

According to a few news reports, a deal may be in the works to get the banking industry to call off its dogs regarding the cram down, in return for changes to the FDIC system that would benefit banks. The possible political fallout is that banks would alienate the senators who are currently holding up the cram down bill, so it is still touch and go at this point.

Everyone understands that this economy will not stabilize unless and until we do something to stop the continuing tsunami of foreclosures. Two thirds of the American people favor helping homeowners remain homeowners, and unlike most recent efforts, the cram down bill will not cost taxpayers one red cent.

The problem? The myopia of the lending industry, and their cronies in Washington. I found a great article in the Miami Herald - it's an interview of the local chief bankruptcy judge, the Honorable A. Jay Cristol. I encourage readers to share this article with anyone (especially their Senators) who, for whatever reason, think that cram downs hurt banks or other borrowers.

Judge Cristol doesn't pull punches: he sees banks as being greedy and stupid in opposing cram downs, because banks make more money through a cram down than they do through foreclosure. Given that banks are supposed to be about making money, it makes no sense to oppose a solution that makes them more money.

Let's all hope that the Senate can muster enough votes, or better yet, use some leverage with the banking industry, to get this important legislation passed right away. Closing this loophole (remember, every other type of secured loan is already subject to well-established cram down rules) is long overdue, and our economy's recovery could be riding on it.

Video about the bankruptcy cram down process

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Fri, 10 Apr 2009 13:57:18 -0500

This is a clip from "A Day in the Neighborhood," a local San Francisco a public affairs program I appeared on back in February. We discuss how bankruptcy cram downs would work under the proposed legislation (which is still working its way through the Senate). Special thanks to Myrna Lim, the host of the program, and also to Ben Menor, the other panel member.

More news on the cram down bill - Senate edition

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Thu, 02 Apr 2009 16:38:17 -0500

I just read that the cram down bill, which already passed the House of Representatives, is facing stiff opposition in the Senate from...Senate Democrats?

Senate Majority Leader Harry Reid (D-NV) has recently commented that he may have to pull the provision from the Senate banking bill, because of opposition from lender-friendly Democrats in the Senate, led by Senator Evan Bayh (D-IN). Bayh, claiming to be acting as a "centrist," is threatening to side with Republicans in opposing the Senate version of the bill, as well as the Senate Democrats' efforts to add the bill to the budget bill.

Incidentally, is it really a "centrist" position to oppose a measure that roughly two-thirds of Americans support?

Bayh's opposition is especially troublesome for his state of Indiana, which has been very hard hit by the ongoing foreclosure crisis. The cram down bill would reduce Indiana's foreclosures by at least 20%, at no cost to taxpayers.

So why would Bayh oppose a measure that could help so many of his constituents? That's easy: Bayh took in over $3 million in campaign contributions from various corporate interests - lenders, insurers, pharmaceutical companies, and their corporate law firms - between 2003 and 2008. His single biggest contributor? Goldman Sachs, at $123,750.

Ghastly.

If you live in Indiana, maybe Senator Bayh should hear what you think about his position on this important legislation. If you know people in Indiana who are struggling to keep their homes, encourage them to contact Senator Bayh. Senator Bayh can be reached online through the U.S. Senate's website, www.senate.gov.

UPDATE: In case anyone was wondering, Senator Bayh has to face voters in 2010, as he will be running for re-election. Maybe the Hoosiers out there could remind him of that...

More proof that cram downs will not make mortgages cost more

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Tue, 24 Mar 2009 19:22:50 -0500

So the bankruptcy cram down bill is currently stuck in the Senate. Opponents (read: the banking industry, and a few "let them eat cake" conservatives) continue to tell the lie that cram downs in bankruptcy will make home loans so much more expensive than they would be otherwise. I think they hope that if they tell the lie enough times, it will be accepted as the truth.

These people are full of it. Make no mistake, it is a bald faced lie to claim that bankruptcy cram downs will cause significant increases in home loan costs, or decrease availability.

Recently, I posted about Professor Adam Levitin's analysis of cram down's actual effects on mortgage costs and availability. After reading his entire paper, it seems I left out some very important information. My prior post talked about the historical period when some parts of the country allowed cram downs and others did not. But there is even more evidence that cram downs do not affect loan pricing and availability.

Professor Levitin also did an exhaustive comparison between owner occupied single family residence loans (that cannot be crammed down under current law), with other loan types: rental properties, vacation homes, and multi-family dwellings where one unit is owner-occupied (all of which can be crammed down under current bankruptcy law).

Now, if the lending industry's claims about cram downs is true, one would expect to find two-tiered pricing: lower pricing for owner occupied SFR loans, and higher pricing for the other property types, since the other types are subject to cram down risk.

The actual result? For the nearly 300 loan quotes that Professor Levitin received from four major lenders, pricing for owner occupied SFRs was exactly the same as for vacation homes, and at least one of the multi-family property types. This is in spite of the fact that vacation home and multi-family loans are already subject to cram down.

In short, there is no real risk of increased loss to a lender in a cram down. The reason is actually quite simple: lenders usually make more money even on a cram down modified loan than they would in a foreclosure. Here's why: in a cram down, the principal balance is cut to the current market value of the property. The borrower has to make loan payments on that principal balance, at an interest rate that equals current market rates for a conforming fixed-rate loan, plus a "risk premium" of 1 to 3 percent, to protect the lender. At current rates, the lender will receive 5.5% to as much as 8%. By contrast, if the lender is allowed to foreclose, they have to spend about $70,000 to take back the property, hold it, get it ready for resale, and resell it. This means that the most a lender can hope to recover in a foreclosure is current market value less about $70,000 - and that's assuming the market value of the property holds steady. All the while, the lender is collecting no interest payments.

Revised (narrowed) Cram Down Bill Passes House

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Thu, 05 Mar 2009 19:55:54 -0600

Today, the House of Representatives passed a revised version of the bankruptcy bill. This is welcome news for the millions of homeowners at serious risk of losing their homes because their lender refuses to be realistic about the real value of the home securing the loan.

For some strange reason, recent press reports are calling the bankruptcy provision "controversial" and "sure to face stiff opposition" in the Senate.

The only real controversy is this: why the hell should mortgages secured by a borrower's primary residence be the only type of loan off-limits under the cram down rules? A short history lesson: back in 1978, the banking industry was able to convince Congress that home loans would become unavailable unless lenders were afforded special treatment in the form of an exemption from the general cram down rule. Granted, the home loan market was drastically different in 1978 than it is today; however, it is the very evolution of the home loan market that weighs in favor of ending this special treatment.

Also, as I previously mentioned, from 1981 to 1993, we actually had cram downs allowed in some parts of the country, but not others. If there were any truth to the banking industry's claims about loans costing more or being less available if cram downs are allowed, then we should see such differences in the different parts of the country during this period in history. The actual result is that there was no difference in the cost or availability of home loans between cram down jurisdictions and non-cram down jurisdictions.

The bottom line is this: the American people are really pissed off right now. There is a palpable feeling on the ground that, unless the little guy gets some real and meaningful relief, we're headed towards rioting in the streets.

If cram downs are good enough for the bank executive (who likely got taxpayer money), to cram down loan balances on his vacation home, his commercial real estate, his yacht, or his airplane, then it should be good enough for the regular folks who only want to find a way to hold on to their primary residence.

I encourage readers to contact their Senators to urge swift passage of the Senate version of this important legislation. It's time to eliminate the special treatment lenders have enjoyed, especially when the harm it does is so devastating to so many people.

Break out the shovels - bank lobbyists push to kill bankruptcy reform

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Fri, 13 Feb 2009 10:40:22 -0600

Yesterday, I posted information about the bankruptcy reform proposals under consideration in the Congress. This morning, on the front page of Yahoo!, there's a story entitled "How Banks are Worsening the Foreclosure Crisis."

It's interesting reading, to say the least.

The banking industry thought that the housing market would turn around, and the foreclosure mess would work itself out. Under normal economic circumstances, this could have happened. Of course, had the banking industry pulled its head out of the sand to look at what was propping up the economy, they would have realized that the housing bubble had burst and their assumptions were invalid.

So, what are lenders doing to take on the growing problem?

They're denying that it exists.

Mortgage lenders claim that they've "modified" uhndreds of thousands of loans...I'm surprised they can keep a straight face while making such absurd statements. They also claim that there is no real problem - in their world, "irresponsible borrowers" are solely to blame for the current, but nonexistent, unpleasantness in the housing market. And yet, this same industry asks for handouts in the hundreds of billions, at taxpayer expense.

The lending industry is also going to Washington this week to lobby Congress to kill, or at least seriously curtail, the proposed bankruptcy reforms I posted about yesterday.

Here's the thing: if there's no problem, what are these guys afraid of? Having their loans treated the same as a yacht loan?

The bottom line is this: for whatever reason, there appear to be many people within the lending industry who are out of touch with objective reality. Even their own lobbyists acknowledge that lenders should have addressed the foreclosure crisis two years ago by making meaningful adjustments to bad home loans.

Now, instead of addressing the problem, banks are trying to buy their way out of a remedy that will give some real leverage and relief to regular people. If the prospect of this upsets you, I urge you to contact your Congressional Representative, and your Senators, and let them know what you think about caving in to the lending industry. Hopefully, the politicians will side with the people over the well-heeled special interests.

Big news: We're still waiting, but Bankruptcy reform may save the day

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Thu, 12 Feb 2009 12:50:24 -0600

So it's been quite awhile since I've posted anything. I've had my hands full trying to bring lenders to the table to work with my clients. We have had some successes and some disappointments, but mostly it's waiting around for lenders to get back to us.

One exciting development is the prospect of a change to the Bankruptcy Code that will allow judges to treat home loans like any other secured debt. Under current law, if your car, boat, farm, or vacation home is worth less than the loan(s) secured by it, the judge can reduce the principal balance to reflect the lender's actual secured value, and adjust the payment terms accordingly. In bankruptcy circles, this is referred to as a "cramdown." For the past several years, home loans, especially first position loans, have been off limits to this sort of treatment.

Senator Richard Durbin has been trying to change that. He first introduced legislation to fix this issue back in 2007, and again in 2008, but the Bush Administration made it clear that any such measure would receive a veto. Now that we have an Obama Administration (President Obama has long expressed support for this type of reform), many people believe that the present form of the bill could be approved in the coming weeks. The proposal is being called the "Helping Families Save Their Homes in Bankruptcy Act of 2009."

Senator Durbin, along with Representative John Conyers, Jr. in the House, have worked on getting the measures through their respective chambers in Congress. The House version has already been amended and approved by the House Judiciary Committee, and floor hearings started earlier this week. The Senate version is still in the Judiciary Committee. The Senate bill is SB 61, and the House version is HR 200.

For obvious reasons, the lending industry is fighting against the proposal tooth and nail. Banking trade groups are using scare tactics by claiming that the cost of home loans will go up as much as $297 per month - of course, no evidence is offered in support of such a wild claim.

In fact, Professor Adam Levitin with the Georgetown University Law Center did a statistical analysis of actual loan rates the last time bankruptcy judges had this power. From 1981 to 1993, some parts of the country allowed judges to cramdown home loans, while other parts of the country did not allow it. As a result, we had a two tiered bankruptcy system, and the ability to compare home loan rates in cramdown areas to rates in non-cramdown areas. The result? Rates were not higher in the cramdown areas.

If passed, the changes proposed will give homeowners leverage to get lenders to make reasonable, sustainable changes to their loans. This is because most lenders will want to avoid bankruptcy like the plague - especially on homes with severely under water values.

One last benefit of the current proposal ties back to TILA. If a homeowner can show that the lender violated TILA in such a way as to give the owner a right to rescind, the judge would have the power to invalidate the debt entirely. This is a huge risk for lenders, especially on loans made during the bubble, because so many signings were done with mobile notaries and little to no follow up or oversight. While some may see this as a heavy penalty, take a look at the Bankruptcy Code sometime - it's full of heavy penalties that are intended to punish a debtor or creditor who fails to play by the rules.

Loan Modification Madness

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Wed, 03 Dec 2008 07:55:34 -0600

Now that the election results have begun to sink in, and economists have decreed that our economy is officially in recession (actually, the recession started a year ago), lenders are starting to see the writing on the wall. If lenders don't do more to work with homeowners to fix bad loans, then the new Congress and incoming Obama Administration will likely pass legislation that will force lenders to do things that the lenders will not like.

As a result, lenders have been announcing new and improved loan modification programs at a blistering pace. The problem is, there are too many new programs for the average homeowner to keep track of, and many programs have conflicting eligibility requirements.

The most publicized program is that of the FDIC, which has set a great example of how to work out bad loans through its mandated modification program for IndyMac borrowers. As the FDIC takes over more and more troubled lenders, its program may well become the standard that other lenders look to. Even so, the IndyMac plan is far from perfect: IndyMac's implementation of the plan has been slow because of the need to hire and train enough people to do the work, the FDIC may have scrapped IndyMac's traditional workout guidelines in favor of its new approach, and an IndyMac representative told me flat out that the FDIC workout options will not be discussed with any borrower representative, even a lawyer.

Then we have the Fannie Mae and Freddie Mac workout plans. I would love to tell you more about how these plans work, but I can't because I haven't spoken to anyone who's done one or is even in the process of doing one. The main reason for this is that these plans have what I believe is a major flaw: borrowers must be at least 90 days late on their loan payments to qualify for these plans. Many homeowners who are that late on loan payments really cannot afford to keep their homes. I think the folks who came up with these plans understand that. As a result, nearly no one will qualify for these workouts. It's a case of Fannie and Freddie refusing to take objective reality on the ground for what it is. That happens to be the very reason the government had to take over the ailing companies in the first place.

Then we have the hodgepodge of private, voluntary programs offered by lenders, which range from laughably unrealistic to very good long term solutions. While there are too many to comment on individually, I can say that my own experience has made me realize that two rules generally apply: it's a tightrope walk even under the best of circumstances, and borrowers will do better if the lender stands to take a huge loss in a foreclosure.

The continuing wave of bank takeovers and forced buybacks of loans present challenges to homeowners seeking help with their loans - your loan may be with one bank today, and with another bank or the government next week. If you are a homeowner struggling with a bad loan, you should consider getting qualified professional help to deal with your lender.

Banking meltdown highlights absurdley weak federal oversight

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Sat, 11 Oct 2008 08:24:43 -0500

Remember how, after the September 11 attacks, Congress moved swiftly to eliminate law enforcement "turf wars" over sharing information and cooperating to catch evildoers? In light of recent events in the financial world, it's time for bank regulators to work together for the common good and stop the current practice of pissing contests and flat out refusal to hold bad lenders accountable. There's a great article on the issue from The Seattle Post-Intelligencer.

Here's what's been going on to date: literally dozens of state Attorneys General have attempted to take large, nationally chartered lenders like Washington Mutual and National City Bank to task for predatory lending practices and violations of state consumer protection laws. Their efforts always end up hitting a brick wall.

The culprits: the federal Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS), the two agencies that oversee federally chartered banks. Actually, under the Bush Administration, these agencies have consistently refused to oversee lenders.

Often, the OTS and OCC would come to the aid of the banks, ordering state investigators to back off because the federal agencies claim exclusive regulatory authority.The agencies have gone so far as to obtain court orders barring state regulators from even visiting the offices of the banks in question.

Normally, this would not be a problem, except that neither the OTS nor the OCC has any authority to enforce state laws.

So the banks got a free pass. In effect, these banks are currently above the law, because states are nearly barred from going after them, and the federal agencies who are supposed to be regulating them have done a laughable job in making them play by the rules.

It is precisely this sort of perversion of a regulatory system that's supposed to protect the public that cries out for reform. The OTS and OCC have abdicated their responsibilities to the American people, and have caused grave harm to countless American homeowners by shielding bad lenders from having to answer for their actions.

There is a very easy solution to this miscarriage of justice. We need a financial equivalent to the Patriot Act, at least as to the law enforcement cooperation and information sharing aspects. Congress could very easily require the OTS and OCC to step aside in matters of state enforcement of state consumer protection laws, or require that banks under federal charters abide by all general consumer protection laws in the states where they do business, and empower state agencies to enforce those laws.

At any rate, Congress should do something right now, because allowing federal agencies to thwart legitimate state investigations simply rewards bad behavior and encourages lenders to get federal charters for the sole purpose of being shielded from often tougher state consumer protections.

"Cash for trash" set to include help for homeowners

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Thu, 25 Sep 2008 07:10:18 -0500

It's 4:42 AM.

I've been up since 4:00, scouring Google News for the latest headlines on the bank bailout bill.

Here's the latest:

Everyone hates investment bank executives, so executive pay will get clipped in some way under the plan.
Mr. Paulson, the Treasury Secretary, will not get the blank check he asked for over the weekend. Rather, he will have to answer to Congress on how he spends taxpayer money.
The government will take debt and equity positions in banks it bails out. This means that Mr. Paulson will buy mortgage backed bonds, as well as stock and "warrants" (special equity positions with repayment protections built in). The rationale is that taxpayers stand a better chance of recovering most or all of the money put in if the banks' stock value rises after the bailout.
The government will require help for homeowners in junk loans.

We should know more later today, as Congress, Treasury and the Administration continue negotiations.

Here's what's still unclear:

How homeowners will be helped under the plan,
Whether the final plan will include Bankruptcy Code changes to allow the court to modify a home loan (something taken away as part of the 2005 Bankruptcy Act in a 1993 Supreme Court case), and
Whether the government will pay hedge-fund prices (20 cents on the dollar) or 1980s government contract prices (12,800 cents on the dollar - remember the $640 toilet seat?) or something in between for distressed bank debt and assets.

Stay tuned, folks. This should get even more interesting as the day progresses.

The new biggest junk debt buyer: you

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Sat, 20 Sep 2008 11:06:18 -0500

Awhile back, I wrote a post warning about the impact that junk debt buyers could have on the housing crisis. The business model is as simple as it is brutal: buy delinquent loans for as little as 20 cents on the dollar, foreclose on the homeowners, sell the properties at 50 cents on the dollar, and double your money after costs. Never mind that the activity wrecks home values and destabilizes communities - this is business, after all.

Don't you love how it's "business" when common people get screwed, but it magically becomes "a confidence crisis" once the fat cats start losing money?

In a move that has the potential of making a bad situation worse for millions of Americans, the Bush Administration is trying to scare the Congress into approving a $700 BILLION blank check for Treasury Secretary Paulson to make US taxpayers the biggest junk debt buyers in history.

Members of Congress are wary, and many are calling for additional help for regular people, like tougher mortgage workout requirements for lenders and additional jobless benefits for the increasing number of people unable to find work.

The questions that the Administration must be required to answer before any plan is approved are these:

How will the government behave as a note holder? Will Uncle Sam be required to provide workouts for the homeowners suffering under the junk loans that Wall Street seeks to dump?

As hard as it is dealing with a lender's Loss Mitigation Department, that experience will likely pale in comparison to dealing with the government, unless the Congress puts in place clear ground rules that favor turning these junk loans into affordable, stable loans.

I would think that, if the Congress has the courage to require this as part of any bailout, the value of junk loan portfolios could actually be enhanced by converting them to stable, low risk loans. Over the long run, taxpayers would see three net positives: investment banks would stop dying off in droves, the retail lending market would start working again, and most importantly, the foreclosure crisis could be put in check.

Sadly, political reality is such that these protective measures probably won't end up in the final version of the law, even though they would be in the best interests of the taxpayers being asked to foot the bill.

I'm not holding my breath, but I will hope for a miracle.

MA Attorney General: lenders refusing voluntary loan mods

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Fri, 19 Sep 2008 09:11:39 -0500

In the midst of this week's market turmoil, Congress was taking testimony about the new FHA refinance program set to start on October 1. The testimony was a study in contrasts.

On the one hand, representatives from major lenders were grumbling about the prospect of mandatory principal writedowns under the FHA program. Most banks stated that they prefer to try their own approaches to loan modifications before resorting to the FHA plan.

On the other hand, the Attorney General of Massachusetts, Martha Coakley, pulled the curtain back to shine some light on what lenders have really been doing - NOTHING.

In her testimony, Coakley detailed how major lenders including Bank of America, Citigroup and Wells Fargo reneged on an agreement to form a loan modification system for Massachusetts homeowners. Her story is sadly typical: banks love to say nice things to get good PR, but refuse to take any meaningful action.

Coakley also testified about reality on the ground: lenders are not voluntarily making meaningful changes that will help homeowners avoid foreclosure.

"Regrettably, this approach has not been successful. Indeed, the voluntary approach to loan modification has failed."

Coakley went on to testify that lenders are approving far too few workouts, and most so-called modifications that lenders currently approve fail to decrease debt or promote affordability for homeowners. The result is that many homeowners who have received bad loan mods will still end up losing their homes.

I can tell everyone from personal experience that, even when you have dirt on a lender (like a TILA violation that allows the borrower to cancel a loan), lenders are extremely difficult to deal with, and it is a long battle to get a lender to act reasonably and fairly.

Just this week, a major lender contacted my client (rather than me) to attempt to trick the client into waiving a TILA rescission. Their method: a purported "Loan Modification" that was really a repayment plan that offered my client no real relief.

If lenders are willing to flaunt the rules for homeowners with representation, then homeowners going it alone have ZERO CHANCE of getting a fair shake. Lenders, through their arrogant actions, have drawn a line in the sand. For homeowners, the only thing that will force lenders to act fairly is government action. If you are a homeowner who's getting nowhere with your bank, call your Representative in Congress, and your Senators.

Another foreclosure scam cautionary tale

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Sun, 14 Sep 2008 12:16:40 -0500

I found this news item about two Bay Area foreclosure scammers recently sentenced to prison for their crimes.

The two women were running a scam where they have homeowners deed an interest to a shell company so the scammers could stall a foreclosure by filing a phony bankruptcy in the name of the shell company. Usually, the scammer will tell the homeowner that the deeded interest is required because then the scammer can negotiate with the bank as an owner on title. Lenders usually get out of the phony bankruptcy and proceed to foreclose on the property.

The two convicted scammers were charging homeowners from $1500 to $2500 a month while running the scam. The scammers made other false promises to homeowners, including claims that they could repair homeowners' credit. They found their victims through direct mail campaigns, getting addresses from Notice of Default records.

The two saddest facts from this story:

1) these scammers were taking in over $170,000 a month when they were charged back in March, and

2) through a plea bargain, the scammers have to make restitution to their victims, but they will only serve a maximum of 16 months in prison.

I think they got off too lightly, given the fact that these two are likely responsible for hundreds of people needlessly losing their homes.

For homeowners, here's the moral of the story: if you are in foreclosure, get proper help. Most scammers will send you direct mail, call you, or even knock on your door. In contrast, legitimate help usually requires you to do the legwork, so beware of people contacting you. Also, remember what you learned as a kid: if it sounds too good to be true, it probably is.

There are legitimate solutions available to homeowners, from legitimate sources, that are usually much less expensive than these scams. As an example, my flat fees for services to homeowners in trouble are usually less than the first monthly fees that the two scammers above were charging, so shop around.

Worst of the worst: beware of foreclosure rescue scams

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Thu, 11 Sep 2008 08:03:42 -0500

I just read yet another account of a common foreclosure scam. The article is a transcript from a story broadcast on the radio program Marketplace.

The moral of the story is twofold. First, if it sounds too good to br true, it probably is. Second, homeowners in distress are easy to take advantage of because of the real psychological despair that comes with serious financial problems.

If you are a homeowner in trouble, or if you know a homeowner in trouble, there are real options available other than falling for some scam. And if you think you are the victim of the scam, contact your District Attorney as soon as possible. Most DAs in California have task forces to deal with this type of crime. Yes, the situatuin is so bad that DAs have to have task forces to deal with it.

If you are a real estate professional, warn your clients, friends and colleagues about avoiding scam artists. And do the profession a favor: take a few minutes to report people if you think they could be scam artists. It's all too common for real estate professionals to be contacted with offers for "big referral fees" from people with dubious backgrounds. All the real estate pro has to do is hand the henhouse to the fox. If you do it, you're no better than the scam artists.

And if you happen to be a scam artist who somehow stumbled across this post, I have a warning. Many states, including California, have ways of dealing with your type. You are the most despicable sort of scumbag - those who prey on the vulnerable through deceit, who have no problem stealing families' equity and homes. If I happen to find out about you, I will go out of my way to make sure the law comes down on you like the wrath of a very angry God. Just be glad we don't execute people for the kind of misery you visit upon others through your scams.

4 million homeowners delinquent or in foreclosure

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Fri, 05 Sep 2008 22:27:35 -0500

Now it's official: the Mortgage Bankers Association, a major banking industry interest group, has released a report that confirms what many (myself included) have feared for the past several months.

Four million American homeowners with a mortgage were either delinquent on their payments or in some stage of foreclosure for the quarter ending June 30, 2008. That's nine percent of all homeowners with a mortgage.

What's worse, it's not just subprime loans that are going belly-up. An increasing number of homeowners are being caught short by a combination of resetting loan rates and declining home values. Many people with good credit are suffering because of exotic loan products like option ARMs with negative amortization. In many parts of the country, homeowners cannot sell or refinance, because their loan balances exceed the value of their properties.

This situation will get worse before it gets better: something like 2 million ARMs are going to reset to higher rates in the next 12 months...unless lenders heed their own trade group and step up to the plate.

The latest from the rumor mill: possible Fannie/Freddie takeover

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Fri, 05 Sep 2008 22:07:56 -0500

The Associated Press is reporting that a federal takeover of Fannie Mae and Freddie Mac may happen as early as this weekend, quoting a source "briefed on the matter," who spoke on condition of anonymity.

What a difference a month makes.

Fannie, Freddie, and Treasury officials declined comment.

Get set for another wild ride, folks.

Homeowner beware: primer on foreclosure scams

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Thu, 21 Aug 2008 08:16:37 -0500

In my law practice, I get more calls than I should from desparate homeowners in foreclosure who paid a lot of money - often many times (like 10 to 20 times) what I charge for actual legal services from a real live lawyer - to some company who sent them direct mail or cold called them.

The story goes like this: homeowner in default gets an unsolicited contact, is told what they want to hear: their house can be saved, etc., homeowner forks over thousands of dollars up front, which they have because the lender stopped taking their payments when they fell behind, and now, three months later, homeowner learns that their house will be auctioned in a couple of weeks. Meanwhile, the foreclosure consultant (and the homeowner's money) is nowhere to be found.

Minnesota's Attorney General just filed suit against two such outfits, in their home states of Florida and New Jersey. Overall, the Minnesota A.G. has filed ten such suits in the past year. While this is great news for some, the sad truth is that it's just a drop in the bucket, as there are probably thousands of scam artists preying on growing homeowner desparation.

California has several laws designed to protect vulnerable homeowners from scam artists who prey on the desparation of people at risk of losing their homes. There are two types of activity that are covered under the law: "foreclosure consulting," which is any activity outside a bona fide attorney-client relationship where a consultant purports to offer assistance or advice to a homeowner in default regarding their foreclosure, and "equity purchasing," which is any type of investment activity between an investor and an owner in default, other than a traditional bona fide financing transaction.

Foreclosure consultants and equity purchasers are required to give specific disclosures, and a three day right to cancel form, to homeowners. Homeowner rights under these laws cannot be waived, and any waiver provision in a contract is void and could be deemed a violation of the law. The consultant or equity purchaser cannot require the homeowner to pay an up front fee - payment is not due until after the consultant or equity purchaser does everything they promised to do. In an equity purchase, the homeowner cannot be required to sign any transfer document like a Deed or Option Agreement until after the equity purchaser has fully performed.

For homeowners caught in a bad deal with a consultant or equity purchaser, call your District Attorney. Most California DAs have task forces to deal with this type of consumer fraud. But remember, time is your enemy, so make the call right away.

More data on foreclosures tanking home values

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Thu, 21 Aug 2008 07:47:01 -0500

Recent data from DataQuick bear out the negative impact foreclosures are having on home values.

In July 2008, REOs accounted for one third of all sales in the San Francisco Bay Area, compared to just 4.2% of sales in July 2007. In some areas, like Solano County (where I happen to live), as much as two thirds of all sales were foreclosures. The median sale price in the Bay Area is down nearly 30%, pushing home values back to what they were 53 months ago.

Some people see a silver lining: sales were up 2.2% compared to July 2007. In Solano County, sales were up 56% compared to a year ago. It appears that the only people buying right now are investors and first time buyers who can meet the underwriting requirements to get a loan.

Some people in the real estate community claim that foreclosures are "skewing" home value data downward, and are quick to point to "core Bay Area communities" where prices have not declined as drastically...yet. But I disagree: no one ever claims that values are skewed when the trend is upward.

The current value declines are very real, and are bound to spread because of the large number of people stuck in junk loans that are about to explode. I'd be willing to wager that a fair number of those loans will affect those "core" Bay Area communities just as they have already wreaked havoc on communities like mine. For anyone in doubt, call an owner who just put their house on the market because their rate is about to reset or their option ARM was recast early, and their lender won't work with them.

California foreclosure figures for July 2008

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Fri, 15 Aug 2008 09:03:07 -0500

July 2008 may be looked upon as a study in contrasts. On the one hand, it was the month that Congress and the White House put aside their differences to enact sweeping legislation aimed at stemming off foreclosures and propping up Fannie Mae and Freddie Mac.

And then there's the bloodletting on the ground.

In July, the rate of foreclosures in California was estimated at a staggering 1,300 per business day. That's triple the estimate from a year ago. California's foreclosure rate was up 22.5% from June 2008.

The most depressing news: Notices of Trustee's Sale are recording at a rate of 97% of Notices of Default. Under normal circumstances, this figure would be at or below 50%. This means that nearly all homeowners who go into default will end up losing their home at auction.

Speaking of auctions, lenders are taking back over 96% of properties put up for auction, despite opening bids that cut up to 40% off a property's current value.

In a move to clear its backlog of REOs, Fannie Mae is opening offices in California and Florida and considering bulk sales to distressed asset investors.

So these contrasting events beg the question: when are lenders going to start working with homeowners to turn these junk loans into more stable, performing loans?

With the new rules enacted last month, a loan servicer can modify a loan without risking an investor lawsuit, as long as the net present value of the modified loan exceeds the value of the loan as a foreclosure.

New Fannie Mae loan workout incentives

Jason Buckingham (Law Offices of Jason S. Buckingham, Inc.) — Wed, 13 Aug 2008 16:00:42 -0500

Fannie Mae has announced new loan servicer incentives, designed encourage loan workouts instead of foreclosures.

Here's a link to a PDF of the announcement.

Some highlights:

A "HomeSaver Advance" loan program, to provide unsecured loans to homeowners as part of a workout
Increased payments for loan workouts ($700), the unsecured loans described above (up to $700), repayment plans ($400), short sale approvals (from $1000 to $1500), and deeds in lieu of foreclosure ($1000)

The incentives are limited to loans that Fannie Mae has to cover the risk of investor losses for nonperformance.

This is certainly welcome news for struggling owners. The Fannie Mae incentives, along with similar Freddie Mac incentives announced in July, apply to a significant number of home loans. Hopefully, we'll see some improvement in meaningful loan workouts going forward.