Florida Asset Protection Blog

Deeds In Lieu Of Foreclosure : Make Sure Lender Is Offering The Real Thing

Each week I talk to several people about negotiating a deed in lieu of foreclosure with their mortgage lenders. Like so many people around the county, these clients are experiencing problems paying mortgages on their upside down real estate. I typically tell people that as long as they are current on their mortgage they are wasting time trying to convince a mortgage lender to accept a deed in lieu. Banks will not consider a deed in lieu, short sale, modification or any other work out proposal until the borrower is in default, and usually not until loan payments are at least three months past due. My clients report that it is impossible to negotiate a deed in lieu until the property is in foreclosure; one reason is that until a foreclosure lawsuit is started and both sides are represented by attorneys it is difficult for you or your attorney to reach a bank representative who has authority to negotiate a deed in lieu or modification.

So I was surprised today when a client reported that his mortgage lender readily accepted a deed in lieu on one of his upside down rental homes after he was only two months behind in mortgage payments. Was it true, and were lenders finally beginning to accept owner’s offers to voluntarily deed back properties in lieu of foreclosure? Not exactly.

A deed in lieu of foreclosure is supposed to be a final settlement between owner and mortgage lender. The lender accepts a deed to the property in consideration for releasing the borrower of any further liability under the loan or mortgage. When my clients tell me they want to offer a deed in lieu they intend for the deed to the lender will end their liability under the mortgage loan. When I looked at this client’s "deed in lieu" I found that the lender did not include a release of liability, and in fact the document referred to the borrower’s continued liability for a deficiency. This client had negotiated a deed in lieu of foreclosure by not a deed in lieu of deficiency liability. Also, by surrendering title to the property without the bank having to foreclose, the client gave up all the defenses available in a foreclosure action which he could use as leverage to negotiate a complete release.

If your mortgage lenders offers you a deed in lieu make sure it’s the real deal. You give them the property back and they release you from any further liability. Anything less may be a trap.

posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida

Mortgage Modification: An Explanation Of Why Lenders Prefer Foreclosure Of Delinquent Mortgages

A good percentage of my clients over the past three years have been trying to save homes from foreclosure by modifying their mortgages. Successful modifications are becoming more common, but still, the vast majority of people who call me state that their mortgage lender is not willing to modify their loan in a way that would permit the borrowers to maintain the mortgage until the housing market recovers. Clients wonder, and they asked me, why their mortgage company would rather force them into foreclosure than modify the mortgage so that the loan can be paid. Why, clients asked, would the bank want their vacant property rather than whatever amounts of money the clients can afford to pay.

I just read an interesting article by Mr. Richard Kessler, CEO of a web based company called www.cancelthemortgage-now.com, about the mortgage lending industry's loan modification policies. Mr. Kessler suggests several reasons why mortgage service companies have difficulty entering into flexible mortgage modifications and why they have rational reasons to foreclose delinquent mortgages. His article tries to explain the difficulty you may experience trying to modify your own home mortgage. Rather than try to paraphrase the article, I offer selected portions for your own reading:

Mr. Kessler states as follows:

"The cost of a foreclosure, it turns out, is pretty staggering and one wonders why lenders and the investors they represent aren't jumping at a solution, any solution, that would allow them to avoid going to foreclosure whenever possible... The fact is the banks prefer to take large losses in foreclosure rather than offer various types of smaller discounts to enable the debtor to convert a loan in default into a performing loan. Part of the problem is the moral cost dilemma. If defaulting loans are getting a better deal than those loans which continue to perform, it is but a question of time until more and more loans go into default. If bad behavior is rewarded instead of punished, more and more people will behave badly...."

"What everyone overlooks is the institutionalized constraints to mortgage modification which have resulted from the securitization of mortgages. More than 80% of all mortgages have been converted into securities. This practice has divided those who control the mortgage from those who suffer from the incidence of loss. The certificate holders bear the losses. The trusts and servicing companies control the mortgage. ..For the banks which control but do not own the mortgages in default, foreclosure is far, far more profitable. It is highly profitable to collect the fees associated with foreclosure rather than to forego the profits in favor of an alternate dispute resolution. This is a major constraint to mortgage modification of securitized mortgages."

"In addition, there are many constraints to mortgage imposed upon securitized mortgages. These restrictions either prohibit or restrict the changes which can be made to mortgages in default. Some of these restrictions are contained in the master pooling and servicing agreement which form the investment vehicle."

posted by Jonathan Alper, asset protection and bankrupty lawyer, Orlando, Florida

Cash Payments Offered To Tenants Of Foreclosed Properties

As previously mentioned on this Blog a new federal law protects tenants of foreclosed properties. The law requires the lender to honor the terms of bona fide leases after the lender takes back the property at foreclosure sale. At least one federal lender, "Freddie Mac" is offering to pay tenants to move out of properties after foreclosure. I received a letter from a law firm representing Freddie Mac addressed to the "unknown tenants" who leased and occupied a foreclosed house wherein Freddie Mac offered the tenants $4,000 cash to leave the property in 30 days. The proposed settlement required the tenants to deliver the property in broom clean condition. Freddie Mac offered to deliver a check payable to the occupants who sign the stipulation. Not only does the new tenant law protect tenants’ lease occupancy rights after foreclosure, but the federal government mortgage agencies are now paying tenants to move into another dwelling.

Making cash offers to unknown tenants is generous and also advantageous to the mortgage lender which wants quick control of the foreclosed property. The practice also invites abuse. A homeowner facing probable foreclosure could enter into bogus lease contracts with existing tenants, or even fake tenants, and then try to extract payments from lenders. Fake lease arrangements are certainly civil fraud and may also be criminal. Many borrowers lied on mortgage loan applications, and I suspect some will use misrepresentations to gain cash payments offered by lenders after foreclosure.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Mortgage Foreclosure Defenses Using New Tenant Protection Laws

Tenants of single family homes had been facing sudden eviction when the homes they rented were sold to a mortgage lender at a foreclosure sale.  After the foreclosure sale the mortgage lender evicted the tenants even though the tenants’ lease payments were current. To better protect tenants victimized by foreclosures against their landlords Congress passed a law which required the non-occupant purchasers at foreclosure sales (such as banks) to honor existing leases on the foreclosed property provided that the lease was bona fide and the tenants were not in default. Some "foreclosure defense" companies are using this new law to delay foreclosure law suits. These homeowners are creating bogus lease arrangements to prevent the lenders takeover of property and gain negotiating leverage for the homeowner.

Here’s how a typical defense scheme could work- I am omitting some details and issues for sake of the example. Assume Joe Homeowner has ceased making mortgage payments and the bank is threatening foreclosure. Joe creates a revocable trust which he calls "the Save My Home Trust" ; Joe is the sole beneficiary of the trust, and Joe names a friend or business associate as trustee. Joe sells his home to the trust for nominal consideration over the mortgage balance. The trust leases the property to Joe for a below-market rent for a five year term- a sale and leaseback arrangement. When the bank sues for foreclosure the trust asserts typical foreclosure defenses, and Joe intervenes as the tenant arguing that the bank must honor his five year lease. Obviously, a court will eventually rule that the lease is not bona fide and is not a valid defense. However, the additional defense frustrates the bank’s foreclosure suit and gives Joe more power to either live in his house for free or negotiate a favorable settlement.

I have never defended a homeowner in a foreclosure suit.  However, based on conversations with asset protection clients I have learned  that mortgage defense attorneys and non-lawyer companies are using varieties of this lease defense which was designed to protect bona fide tenants in foreclosed properties .

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida 

Short Sale With BOA Is Bad Deal For Borrower

A couple consulted with me concerning a proposed short sale of an "upside down" investment property. They had give a purchase money first mortgage to Bank of America, and subsequently, borrowed additional money under a line of credit second mortgage from the same bank. A buyer had submitted a contract for about 90% of the first mortgage balance. BOA approved the short sale. They gave the borrowers a document to sign which said that BOA would release their two mortgage liens, but it did not state that the debt would be released. The bank told the borrowers that they had to speak with representatives of another department to discuss their personal liability after the short sale. The couple asked if they could speak with someone from the department about liability prior to signing the bank’s documents which would contractually obligate the borrowers to complete the short sale. They were told that they first must agree to the BOA short sale terms before the bank would discuss their personal liability.

The story is another example of why short sales are often not in the borrower’s best interest. The banks refusal to even discuss with the borrowers their personal liability after the short sale should be unacceptable to mortgage borrowers. I have stated before my opinion that short sales benefit banks and real estate agents more than they benefit borrowers. If you sign a short sale document presented by a mortgage lender in which you consent to personal liability after the short sale you have forfeited most of your defenses to a collection suit brought by your lender. I’ve heard from many clients that their real estate salesman and their bank representatives orally assured them that short sale documents with banks are a formality and that the bank will not sue after they get the proceeds of a short sale. These assurances are not legally binding and will not protect you in court. Most people should not agree to short sales unless the lender gives you a full release in exchange for finding a buyer for the distressed property.

The Truth About Short Sales According To Wall Street Journal

Today, April 30, 2009, the Wall Street Journal published an article on Short Sales. The Journal report is consistent with items previously posted on this Blog. Foremost, the Journal warned that most lenders accepting short sales are not waiving personal liability or deficiency judgments. These lenders require the homeowner to sign a new promissory note for the short amount. I previously posted my opinion that short sales are a trap for homeowners. The buyer, lender, and real estate agent each gain from a short sale, whereas the homeowner is left with the same liability he would face if he let the property go to foreclosure. Actually, the homeowner is in worse shape- in the case of a foreclosure the lender would have to prove the property’s fair market value in order to pursue a deficiency judgment. Proof of value takes time and money invested in attorneys fees and appraisals. When the borrower agrees to a short sale and signs a new note the borrower has liquidated value, that is, he has consented to a property value equal to the sale amount. Short sales still affect your credit, and even if the credit impact is less than foreclosure, you should consider whether the credit benefit is worth the liability. The Journal tells of one homeowner who walked away from a short sale ready to close when the bank insisted he sign a promissory note for the forgiven value.

There is another article in today’s Journal about short sale which makes interesting reading for distressed homeowners. A Short Sale May Not Mean You're Home Free - WSJ.com. This article explains the potential income consequences from a short sale. Its a relatively clear and comprehensive explanation of taxation issues in mortgage debt foregiveness. I learned new things about the tax consequences of foreclosure. Read the article before you consider foreclosure or short sale, and always talk with your CPA to make sure you understand your situation. A bank may not chase you to collect  a deficiency judgment, but the Internal Revenue Service will likely pursue collection of income taxes triggered by debt foregiveness.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Mortgage Foreclosure: Second Mortgage Lender Sues Directly On Promissory Note Instead Of Deficiency Action

I have reported recently that some second mortgage lenders have become more aggressive by suing defaulting homeowners personally. I recently received an email from a litigation attorney representing New York residents who purchased an investment home in Florida subject to a first and second mortgage. I had referred the client for mortgage foreclosure defense. If the second mortgage holder (Chase Mortgage) had pursued a deficiency claim in the foreclosure proceeding they would have had to domesticate the Florida judgement in New York in order to pursue a personal claim against the New York residents. In this case, the second mortgage is pursuing a more aggressive (and more effective) attack against the borrowers by proceeding directly against the mortgage’s underlying promissory note.

The email I received from the litigation attorney explains the situation;

"A client you referred to me (from New York ) is getting pursued by an aggressive 2d mtg. The 1st Mtg on a property in Hernando County (Brooksville) is in foreclosure. Chase ignored the action and instead has filed a separate suit against the owner in his home state of New York. They do not mention the mortgage in the suit, rather they are suing strictly on the note. This is a big problem as there will be no offset for the property value and New York does not appear to afford the same homestead protections as we have here. In other words they are seeking what is tantamount to a deficiency decree and will not have to go through any procedure to domesticate it in the state where the assets are located."

This tactic is prevalent in foreclosures of commercial loans against developers and builders. I would pursue the same tactic if I owned this second mortgage. I still rarely see deficiency claims from first mortgage lenders, but this report is another example of more aggressive collection by second mortgage lenders who receive nothing from foreclosure of "under water" Florida real estate.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Second Mortgage Does Not Need "Deficiency Judgment" To Sue Borrower Personally

The risk of  personal liability from a mortgage foreclosure depends on the nature of the mortgages and the lenders. Second mortgage holders are more likely than first mortgage holders to pursue personal liability after a foreclosure. Among second mortgage holders, the risk of personal liability after foreclosure also depends on the nature of the second mortgage loan. Second mortgage loans by large, national lending institutions were most often made to help finance the purchase of the property or to finance an addition or improvement to the property. These second mortgages are typically conforming FNMA mortgages which were sold on the secondary mortgage and ended up as part of a marketable security sold to investors (the so-called toxic mortgages). These second mortgage holders are less likely to sue the borrower after either the first or second mortgage holder forecloses on the property.

Other second mortgages were made to secure personal or business lines of credit extended by local banks. These loans were essentially consumer loans or business loans where the lending bank insisted on security in the form of a junior lien or mortgage on the borrower's real property. These consumer loans are not conforming FNMA loans and are not sold on the secondary market. The notes are held by the issuing bank or other commercial lender, and if you do not pay the loan on time the lender is likely to sue you for the money. In most cases, the lender will not wait for the first mortgage to complete a foreclosure and the lender itself will not foreclose the second mortgage. Instead, the lender will sue you directly on the underlying promissory note. If the lender gets a judgment against you, the judgment is a lien on all of your real estate subject to the superior rights of the first mortgage.

Although these types of commercial lender holds a second mortgage its lawsuit to collect money is not a deficiency judgement because the lender's action does not depend on the value of the property or the results of a foreclosure sale. These second mortgage holders are simply suing to collect an unpaid promissory note.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Mortgage Foreclosure Defense Explained In Online Blog Post

A large percentage of the asset protection inquiries I have received in the past year have been from people concerned about a mortgage foreclosure on one or more of their properties. Most people who contact me are interested in asset protection from deficiency judgments. One of the issues I discuss with my clients facing a foreclosure and a potential deficiency claim is whether the homeowner should hire an attorney to defend the foreclosure even though the homeowner is  unable, or unwilling, to continue making mortgage payments. There are advantages and disadvantages to foreclosure defense, and the decision to defend or default depends on the individual debtor's situation and his assets. I found blog post  by the Florida law firm of Parker and DuFresne in Jacksonville which post  discusses legal defenses to a foreclosure action even when the homeowner is behind in payments. I am providing an  excerpt from the post below so that homeowners can learn how some attorneys defend foreclosure suits.

The Parker and DuFresne blog states, in part, the following:

"While you are litigating the foreclosure case, you are not required to make your normal monthly mortgage payments.  The legal process will afford you time to reinstate the mortgage, sell your home, file a bankruptcy or move out.  You may be able to force the lender to completely rewrite the terms of your note and mortgage, enabling you to keep your home.

This may sound too good to be true, but you may actually have valuable defenses and counterclaims against your mortgage company that could actually prevent foreclosure and even require your lender to pay you damages.  Across the country, judges are punishing mortgage companies for incomplete record keeping and for violations of the Truth In Lending Act.  You may be able to allege valid defenses including fraud and Truth In Lending Act violations.

Are you aware that your mortgage company is probably not the same company that actually loaned you the money to buy or refinance your home?  How do you know if the mortgage company suing you has been properly assigned your note and mortgage?  Your mortgage company may have failed to properly assign the note and mortgage before initiating the foreclosure.  Does your foreclosure complaint even have copies of the note, mortgage and purported assignment attached? 

Most likely, these documents are not attached, and may not even be in the possession of your mortgage company.  Your mortgage company may be attempting to substitute your original note and/or mortgage with a purported copy.  This is called a “Count to Establish Lost Documents."  There are strict legal requirements to establish a lost note or mortgage, and your mortgage company may be unable to meet the requirements if challenged.  

If your current mortgage company is not your original lender, it probably has never read your mortgage.  Your mortgage may require that the plaintiff accelerate (i.e. demand) the entire balance of the note.  Your mortgage company may have failed to do that, which may entitle you the opportunity to cure the mortgage by paying the reinstatement amount.  It is also common for mortgage companies to inflate the balance due on the mortgage by charging homeowners junk fees, such as Broker Price Opinions (BPO), property inspections and other "property preservation expenses."

So, essentially, your mortgage company may have filed an improper foreclosure lawsuit, but your time is limited.  You have or will be served a copy of the foreclosure complaint by a process server.  You typically have only 20 days to respond to the mortgage company's complaint, so you need to see an attorney immediately if you wish to defend against the foreclosure.  If you are beyond the twenty days, there are still defenses that can be raised."

I do not handle mortgage foreclosure defense. I know several attorneys in the central Florida area to whom I refer mortgage defense clients.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

 

 

Loss Mitigation Contact List

One of the bankruptcy trustees in Tennessee has assembled a list of loss mitigation contacts at the national mortgage lenders. If you would like to discuss a modification of your mortgage with these lenders you might try contacting the people on the list. Download Mortgage-001