With payment defaults and resulting foreclosures, the mainstream news will have you believe the mortgage industry is somewhere between a state of major reform and the tipping point of colossal failure. Realistically it’s somewhere in between, but that’s not a very newsworthy view.
Markets are cyclical in nature. The stock market demonstrates this with such redundancy; the terms Bear and Bull are associated with buyer or seller purchasing conditions rather than animals, on Wall Street.
The mortgage industry experienced unprecedented growth from 2000-2005 as interest rates dipped to historical lows and the number of new program types swelled, which reduced qualification standards, which afforded home ownership to a huge new pool of people. More money in the market caused more demand which caused higher home values or prices…nonetheless everyone could run with Bulls. Today, many of those newly entitled borrowers are fighting the Bears.
Many of the people clamoring that this down cycle is solely due to the predatory nature of the mortgage industry also probably keep news of Paris Hilton's latest dealings in their feed readers. It makes great front page news but the predatory aspect of the mortgage industry has been around far longer than the past five years. Listen to me, The XBroker, playing down the predatory nature of the mortgage beasts...whoda thunk it.
In any case, the unfortunate action of foreclosure is being levied against a record number of consumers for a myriad of reasons, mainly the sharp increase in monthly payment requirements due to short term ARM’s and the overall relative ignorance of consumers when it comes to personal financial planning...and you can sprinkle on some grievous mortgage professional conduct.
Regardless of why one is facing foreclosure, its water under the bridge at that point...you can’t change the past but you can address the future. So, what can one do that is facing foreclosure?
Fight it.
~8-10, yes 80% of mortgages originated are in violation of the Truth-In-Lending-Act (TILA) due to material misrepresentation by either the mortgage originator or funding lender. Now, this is sure to shock even the most ethical mortgage professional and cause an angry rebuttal of denial from mortgage jocks of all moral standards, but it’s true.
I’m not saying that 80% of mortgage professionals are consciously trying to mislead consumers, so please hear me correct…80% have violated some aspect of the TILA that was meant to protect the consumer.
""TILA “was passed to aid the unsophisticated consumer so that he would not be easily misled as to the total costs of financing.” (Thomka v. A.Z. Chevrolet, Inc., 619 F.2d 246, 248 (3d. Cir. 1980); Shepeard v. Quality Siding & Window Factory, Inc., 730 F.Supp. 1295, 1299 (D.Del. 1990). See also Mourning v. Family Publications Service, Inc., 411 U.S. 356, 363-69, 93 S.Ct. 1652, 1657-60, 36 L.Ed.2d 318 (1973)). It was thought that “through TILA, Congress [could] remedy the [sq]divergent and often fraudulent practices by which credit customers were apprised of the terms of the credit extended to them.” Smith v. Fidelity Consumer Discount Co., 898 F.2d 896, 898 (3d. Cir. 1988). “Congress designed the law to apply to all consumers, who are inherently at a disadvantage in loan and credit transactions.” (Jackson v. Grant, 890 F.2d 118, 122 (9th Cir. 1989)).
To further this congressional policy TILA achieves its remedial goals by a system of strict liability in favor of consumers when mandated disclosures have not been made. 15 U.S.C. §1640(a) (emphasis added). The standard applied is considered “strict liability” in the sense that absolute compliance is required and even technical violations will form the basis for liability.” (Shepeard v. Quality Siding & Window Factory, Inc., supra. at 1299). This means that “technical or minor violations of TILA, or Reg. Z, as well as major violations impose liability on the creditor and entitle the borrower to rescind [the loan].” (Smith v. Wells Fargo Credit Corp., 713 F.Supp. 354, 355 (D.Ariz. 1989)) (emphasis added).
The first circuit Court of Appeals has unequivocally stated that any violation of TILA, regardless of the technical nature of the violation, must result in a finding of liability against the lender. (Bizier v. Globe Financial Services, Inc., 654 F.2d 1, 3 (lst Cir. 1981)). TILA is a remedial statute which is designed to balance the scales “thought to be weighed in favor of lenders,” and is therefore to be liberally construed in favor of borrowers. ""
I’m not an attorney, nor did I stay in a Holiday Inn Express last night…but black letter law is irrefutable. None the less, it should go without stating that hiring an attorney is mandatory if you chose to challenge the validity of your mortgage, which comes at an expense. I personally know of attorneys who are well versed in successfully litigating these types of complaints at a cost of about $4000. Understandably this may not be economically practical for many people who are experiencing the financial difficulty commonly associated with foreclosure…if you had an extra $4k you probably would pay your mortgage current, although on many occasions, after adding up past due payments, an assortment of late fees, and other 3rd party costs, the amount to ‘come current’ far exceeds $4k.
A few other notes of interest if you choose to fight the validity of your mortgage due to TILA violations:
- There is a 3 year window from the date you signed for the mortgage to file a right to rescind.
- It’s most effective if the mortgage was a refinance with cash-out transaction.
- The more TILA violations the greater the probability of success.
- Prepare for a long fight. Lenders will try and stall you out, filing repeated motions to dismiss, hoping you quit the claim. The upside is that you keep your home during this time.
- It greatly helps if you have another tendered offer, in other words, another entity or individual who will finance the home. Terms are irrelevant; the fact that you can get some form of financing somewhere is the important part.
If you’re interested in learning more about this option, contact me and I’ll divulge all the secrets you need to know ;)
Disclaimer: I'm not an advocate of trying to rescind your mortgage simply because you can. If your mortgage professional didn't provide 3 separate notices of rescission at the time of closing, while still a TILA violation, it's pretty frivolous and shallow to try and side-step an obligation based on a loop-hole.
Stay in close contact with the lender.
Silence is deadly when you go delinquent on your mortgage payments. Open and honest communication will get you a lot further towards getting a lender to work with you than ignoring the situation. Lenders aren't in the business of repossessing property, it’s an expensive process that consumes their resources and tarnishes their portfolio. Internal employees, attorneys, real estate professionals, and contractors are all cost outlays a lender would rather not have to spend.
If you’re going to be late on your mortgage payment, some pro-active measures will go a long way. Prepare by having an articulate plan ready to demonstrate your financial shortcomings are short term.
Don’t Dwell in Denial.
If you’re in over your head with no relief in sight, market the home for sale. This is no time to be trying to fetch top dollar, price the home to move, preferably ~15% below market value. If you don’t have this type of equity in the house, there are plenty of investors out there who’ve taken Carlton Sheets or some other overpriced real estate riches seminar and understand how to consummate a ‘short-sale’. You’ll probably receive two tons of mail from individual investors looking to engage you under these exact terms. Many investors will offer you some sort of cash benefit to work with them, which is better than a fat ugly ‘I8’ on your credit bureau and little else to show. Swallow your pride, recognize the circumstances you’re in, and make the best of a bad situation.
Certain investors may even agree to lease the home back to you under a lease option to purchase strategy. Ask if they’ll buy the home from the bank under short sale terms, and then lease the home back to you with an option to purchase it back from them within a specific time frame, usually ~2 years. Be prepared to articulately demonstrate that you’re not a deadbeat, just in a short term bind. Words aren’t enough, go the extra mile and document how you got into this situation and how you plan to get out. Unfortunately the buy back price and other terms won’t be friendly, but beggars can’t be choosers…at least you don’t have to vacate the premises.
Know Your Property.
There are plenty of on line tools and resources out there that yield similar if not identical information that a real estate professional would use to research and market your house. Zillow, e-Appraisal, Trulia etc contain enough data to create a knowledgeable compelling marketing piece for a potential buyer. The traditional Realtor 6% commission (equity) whack likely doesn’t fit into the budget if you’re staring at a foreclosure, so prepare to do some homework and late night candle burning. A little extra work here will go a long way towards sounding like a person who is in a temporary pinch rather than desperate (sharks smell blood).
Pimp Your Property
GoogleBase, Craigslist, Zillow Postings, Edgeio, even e-Bay are cheap (free) places to list your property. Don’t be afraid, actually I encourage you to describe your situation as ‘distressed’ and priced to move. Demonstrate it’s priced below market value, show comparables and other supporting data.
If you really want to be aggressive here, go down to the County (where your property is located in) court house where they display ‘Notice of Public Sale’ information. There are sure to be investors carousing around the board looking for deals…approach them with some cursory information about ‘a house you know about’ and see if they (or others of similar ilk) are interested. Use the above mentioned strategies to negotiate a deal.
Whatever you do, prepare, prepare, prepare.
I Have No Equity nor do I Make Any Money
Well, you probably shouldn’t have bought the house in the first place.
Update on RealESpace tomorrow…Stay Tuned!
Jeff, What are the advantages to the homeowner if they do win a case against their lien holder? I'm assuming the lien holder isn't just going to go away. Will the lien holder be forced to modify the loan? Bring it current? Or will they need to be paid off by a new loan? Is it the investor(note holder) that's liable of the person that originated the loan?
It's been my experience with preforeclosures and short sales that the last thing thing the seller would want to do is let the purchaser(investor) negotiate the short sale on their behalf. This actually opens a a entirely new avenue for fraud i.e aggressive appraisals etc to get the lender to accept quite a bit less than they would get on the open market. Which in the end will leave the seller with a bill due the IRS and a judgement against other assets or deficiency judgement on their credit. While these thing MAY be better than a foreclosure the seller can certainly get screwed by not having someone looking out for them, as an attorney or experienced real estate broker would.
In my opinion, unless the seller is extremely knowledgeable about this stuff, they should not attempt to go it alone.
Good to see you btw.
Parked :)
Wink. Wink.
TLW...ROAR!
Jeff
I want to applaud this post for it's obvious commitment to the consumer and the betterment of the industry. Consumers are finally finding paths to empowerment in the courts and in time the process will become more efficient. It's not unlike the work of class action litigators taking aim at the title industry and bringing about reform slowly and indirectly. It's a process, or evolution, rather than a single event.
BB...The advantages afforded the homeowner are rooted in the amount it cost the borrower to have the loan originated, plus all interest expense over the duration of time the loan was held...trebled...as in 3x the principle amount.
I can cite hundreds of cases where homeowners have been awarded $ amounts ranging from a few thousand (plus removal of any derog credit markings) to well over a million dollars...and clear title to the property.
As stated in one of the paragraphs, the borrower must demonstrate the ability to 'tender' another offer (from a lender or individual willing to extend credit) in case the damages do not exceed the lien amount.
The lender will honor the rescission in lieu of going to court and potentially having a precedent setting case decided against them, as this would open the door to a class action suit paramount to a HUGE swell of attorneys screaming 'PILE ON!'
Isn't it the investor (buyer) who must negotiate with the banks loss mitigation dept? The seller (defaulting borrower) usually goes along for the ride by proving insolvency, or anti-mortgage qualification. In my experience the banks are so tight with short sale values you couldn't pull a pin out of their a** with a John Deere tractor...I agree there are caveats, but most of them have an upside compared to the certain death they're staring in the face...
Ed...Thx :) I was actually asked by Mike Mueller in a comment thread on my blog.xbroker.org site to address this side of the sub-prime meltdown.
It resonated with me that all the media reports on is either the poor consumer with no anecdote, or the investors getting rich of the misfortune of others...A different perspective needed to be voiced...
TLW..a pleasure as always ;)
Thanks Jeff. It sure sounds like it would be well worth their time if they are in the right. I would think that in quite a few cases the borrower was a party to fraudulent activity as well. whether naively or not. I guess they would want to make sure this wasn't the case before proceeding with a suit against the lender. I can see them now standing in front of the judge trying to explain away the stated income amount that they provided with the help of their LO. Not good.
There are seminars out there right now teaching "investors" how to negotiate short sales at pennies on the dollar by making the property look as bad as possible to the lien holder in the hopes they will agree to a lower price. That is not in the seller or the lender's best interest. My goal when listing a "short sale" property is to get at least 85% of the true market value to present to the bank. 85% won't work for an investor. I will not let my sellers accept an offer where the buyer is in charge of the negotiations. The seller or their representative should be handling this not the buyer. "Going along for the ride" is NOT the way to go. After all it's the Seller's credit and property that are at risk. Not to mention future tax ramifications and possible judgements. You don't think an investor would care about that do you? A representative for the Seller would at least attempt to have the lender waive any deficiency judgements as part of the deal.
I completely agree that a seller who finds themselve in this precarious situation would be far better served working with a professional, especially one of your ilk BB...Unfortunately the cost of doing so is usually prohibitive.
The complaints brought forward by the plaintiff are limited in scope strictly to the TILA violations addressed against the lender...Arguments begin and end around these very specific complaints, and a counselor worth their weight in salt would definitively lay out that their client wouldn't purposely harm them self. As case law states, the lender or broker/banker is held in 'strict liability'.
This would also indicate that a lender was willing to go to court...which just doesn't happen. The scales of justice are tipped too heavy favor of the consumer under this Federal document...
Wow! Jeff, that's a very interesting spin - I love it!
It's a read it once, then read it again, then come back and read it again a week later kind of post!
Here's my next request...
Can I put this on an outside blog I've been working on?
In it's entirety - with all links coming back to you.
Jeff, You wrote this "Unfortunately the cost of doing so is usually prohibitive." The reality is it's the lender who will be paying. The property will sell for about the same price whether a commission is involved or not. What it will do is just lower the "net short" to the lender. But lenders prefer dealing with an experienced broker or attorney and in most cases are willing to allow a commission. Even though it is usually 4% to 5% not 6%. The loss mitigation reps are very very busy and it is to their advantage not to have to walk a seller through the short sale process. They just don't have time to do this. Plus if they foreclose the lender will still have to pay a commission when the property goes back on the market as a REO. So 9in my opinion the cost is NOT prohibitive at all but rather it is an expected expense that the lender is willing to pay to avoid a costly foreclosure and a negative mark on their books.
As you know, if the foreclosures rack up for a particular lender then investors are going to be real hesitant to buy their loans. Sounds like the subprime fiasco doesn't it?
I just lost one of my short sale listings to foreclosure about 3 weeks ago. The lender was just not prepared to deal with it in their under staffed L&M department. We submitted a very strong offer in January and took the 4 months and 5 reps later to not deny it but ask for more info!! It was ridiculous. Needless to say the buyer was long gone by then and values had dropped another 10%. They were foolish. We submitted 2 more offers that they never got around to looking at. So they now own a property where they had to pay the first lien holder about $175,000(the 2nd foreclosed). The property may be worth $169,000!!! The offer we had submitted in January was for $200,000. Go figure.
Again, I agree with most of what you're saying BB...Lenders will typically shut out perceived novices and definitely would rather work with a professional, alas there are more professionals in the short-sale market than just real estate professionals (Realtors)...
I know many an investor who can work a short-sale like Tiger Woods can work a golf course, they are true professionals at their craft, just not licensed real estate professionals.
About two months ago I was interviewed by Inman news regarding short selling and the high frustration levels many investors were experiencing. I attributed most of the frustration to the overall inexperience level of the the status quo which is saturated with relative novices. It seems like everyone takes a stab at being a 'real estate investor' nowadays... Ill have to dig up the link...
I must insist that investors are looking to pick up equitable property, thus don't take away an extra % from the bottom line (or at least it's still in the kitty to barter with)...needless to say, lenders are bottom line driven. 4%-5% can be the difference between an accepted offer and a turn-down.
Your experience is becoming all to common BB (a real professional tendering a real offer, only to be ignored) due in large part to the quality of employees (as you note) typically found in loss mitigation depts... they're the equivalent of underwriters...which is to say they're not the most responsive of types, nor the sharpest tools in the shed...The pounding these understaffed depts receive from Carlton Sheets Community College grads and other like educated sheeple creates a quagmire rather than an investment or escape (the foreclosure) opportunity, depending on who you are...
That was kinda harsh...but it be what it be ;)
I had a situation that involved the three day rate of rescision after the closing. The client came to me with three weeks to go until the sale on the court house steps. Due to health reasons they fell behind. I was using a new lender based in Colorado that I had not used before. As we got with in a week and half of the closing the lender started badgering me to get the client to forgo the right of rescision at closing, essentially giving up this legal right since we would not have time to close and fund the loan.. I refused and told them I would get the sale stopped. I spent three hours on the phone with the rep while he tried to convince me to get my client to do the above. I told him I had to talk with the attorney I use for closings to get his take on it and that I was not happy that he was not giving me the opportunity to have the sale cancelled or postponed.
I called the attorney and he told me that they were fighting a case at that time that involved the fact that the lender had the client wave their right to the three day and because of that when they went into Foreclosure he was able to successfully argue that their legal rights at closing had been taken away illegally as it is federal law to have the right of the three day and as such the lender was forced to eat the loan and in addition because the loan was now deemed illegal the lender had to pay back to the client all of the payments he had made on the loan (sorry for the run on sentence).
Once I told the rep this the lender happily gave me the opportunity to stop the sale and close the loan. They stopped the practice once I told them and the rep said they had been doing this as a common business tactic when the loan wasn't near the sale date....