Thursday, March 31, 2011

MERS Update

I wrote earlier that a New York bankruptcy judge determined that the MERS system was flawed and "absurd". However, courts in California and New Hampshire have determined that the system is legal. MERS will be under attack by county registers of Deeds since MERS circumvented the filing fees in many cases. In one such case, Massachusetts is seeking over $22 million in back recording fees.

There will continune to be inconsistent results in all such cases as they will be determined on a case by case basis, and states have different laws and regulations...

MERS Update and Clarification (Mortgage Electronic Registration System)

There has been much debate regarding MERS (Mortgage Electronic Registration Systems). Recently a court in New York determined that MERS did not have the right to bundle, buy and sell mortgages nor to foreclose on mortgages. This ruling is extremely controversial not only because the judge, Robert Grossman, declared essentially that the entire operating system of MERS is “absurd,” but also because if it is enforced on a large scale, it will completely alter the way that mortgage securities are bought and sold. However, in quick succession, a number of other state judges have also ruled on MERS, and the rulings give no clear indication as to which way MERS’ fate will ultimately swing.

The day after Grossman released his ruling and statement, a Kansas judge ruled in direct opposition. The same happened in Massachusetts – a state plagued by property and note ownership ambiguity. Each of these rulings can stand independently because they are based on state laws, but challenges from contradictory rulings still exist since mortgages can be transferred from lender to lender. MERS hopes to address the issue satisfactorily by announcing a “proposed amendment to membership rule 8 requiring members not to foreclose in MERS’ name.” The hope is that by resolving the foreclosure issue, which is a big one for critics of MERS like Judge Grossman, some of the other issues may be bypassed or resolved. MERS also plans to test and appoint all “certifying officers” using an “enhanced certifying officer process.”

Tuesday, March 29, 2011

Shadow Inventory Portends Slow Housing Market Recovery

The shadow market is coming out of the shadows, and the numbers are staggering. According to a report released yesterday by LPS (Lender Processing Services), “foreclosure inventory levels [stand] at 30 times monthly foreclosure sales volume.” As a result of this massive backlog, real estate analysts expect more downward pressure on U.S. home values as most of these homes are likely to reenter the market as REO properties rather than being sold in another more profitable manner. The statistics on the foreclosure backlog are also staggering, with LPS reporting that the average U.S. loan currently in foreclosure has been delinquent for 537 days, and 30 percent of loans in foreclosure have not made payments in more than two years.

Thanks to slower processing times on foreclosures, it is unlikely that this backlog will disperse any time soon. In fact, although total U.S. loan delinquency has fallen nearly two percentage points over last year and foreclosure starts are down 14 percent from last year, the actual foreclosure rate is up as banks struggle to keep their books in order and intact. With the “non-current inventory” logging in at nearly 7 million, the backlog is likely here to stay.

Many analysts have been predicting that 2011 will be the beginning of a recovery for many sectors of the real estate market, though most agree that the residential market has a long way to go. With news such as this it is hard to see the beginning of a recovery.

Monday, March 28, 2011

Mandatory Principal Reductions in Bank Foreclosure Settlement

Several state Attorney Generals do not believe that mandatory loan/mortgage principal reductions are the way to go while many attorney generals involved in the negotiations around the “bank settlement” that lenders, politicians and homeowners alike hope will resolve much of the fallout from last fall’s robo-signer debacle think that forcing loan reductions on banks could be a good thing. The AGs from Virginia, Texas, Florida and South Carolina sent a letter yesterday to Tom Miller, who is spearheading the AG facet of the efforts, arguing that loan assistance is “largely unrelated to the foreclosure document issue.” The group believes that the settlement should deal with changes in bank behaviors that were involved in the debacle rather than targeting loan modification proposals and asserted that the public focus on principal reductions actually made the settlement more likely to perpetuate the problem behaviors by essentially ignoring “the unacceptable and unlawful practices that were widespread within the nation’s largest mortgage servicers.”

Furthermore, the group proposed the idea that the deal could actually “foster a moral hazard” by rewarding homeowners who “simply choose not to pay their mortgage”. A number of republicans in the House of Representatives have also criticized the proposal, but all agree that some settlement must be reached in order to cultivate a recovery in the lending and real estate markets.

Sunday, March 27, 2011

A Primer on Real Estate Tax Appeals

When your property taxes are assessed, the tax assessor estimates your property’s market value based on comps, depreciation/appreciation and income generated by the property (when relevant). Next, the assessor will factor in any limitations that could impact how much of your property’s value can be taxed. Once the assessor comes to a final value, that value is submitted to the city and taxes are assessed on the property. Based on the value of the property, a millage rate will be used to determine the amount of taxes that you owe. For example, if the millage rate is 20, then property owners will pay 20 dollars for every thousand dollars for which their property is assessed. If your property is worth $100,000, then the property taxes on that property would be 20 x 100, or $2,000.

When a property owner wishes to protest their property taxes, it is important that the owner understand exactly what they are protesting. Misconceptions can lead to errors in process, which render the dispute void. As a property owner, you cannot dispute your tax bill. The bill is not up for debate because the millage rate is not up for discussion. However, you can dispute your tax assessment, which is the value that the local government places on your home and uses to determine how much you owe in property taxes.

The first step in the process is to have your property reassessed. At this point, a formal grievance is not necessary as you are simply having your assessment updated, which is your right. However, if after the reassessment you believe the value set on your property is still higher than the actual value of the property itself, then you can file a formal grievance. This grievance will be filed with the appropriate Board of Assessment Review, and you must make sure to file it timely (all states and municipalities are different) to insure that your case is heard. Should your grievance be denied at this level, you will need to file a claim against the town with the appropriate state court.

The key to winning a property tax dispute is to prove that the property in question was assessed unfairly. You must show that your property is simply not worth what the tax assessor has assessed it to be. Assessors work on market value, which the amount of money that you could reasonably expect your house to sell for on the market in its present condition. If you can show that the comps for your house in your area are significantly lower than your property’s appraised value, then you may have a case.

As you are likely aware, this article is simply intended to educate and inform. Every person’s situation and every property are different, so you should definitely seek professional advice before beginning your own property tax dispute. With so many cities raising property taxes to compensate for falling property values, it may be that your local government has not actually assessed your property incorrectly, but is simply charging a higher millage rate to accommodate falling property values. In this case, a lawsuit or dispute will not necessarily help you because their market value assessment could, indeed, be correct.

Saturday, March 26, 2011

Key Considerations in a Loan Modification

People ask me all of the time to identify the key component of a successful loan modification. I advise them that BY FAR, the most important aspect of a loan modification is being persistent. Keep, keep, keep trying. I have never heard a lender say that they cannot modify and you cannot try and longer. They will consider your application, over and over again.

I have had many clients that were rejected numerous times only to receive modification later. There are many reasons why this works. The main reason that persistence pays off for you is that modifications run in cycles. Sometimes they are readily available and other times they are not. So if you keep trying, eventually your lender will be amenable to modification. Another reason that it is costing them money to process the applications and eventually they may give you something for your persistence. Persistence indicates that you are more than likely to stay in a home.

One of the reasons that many applications are being rejected is that two-thirds of modifications end up back in default so the theory is why should we modify?? If you are persistent, it shows the lender that you are sincere in your desire to stay and that you will be able to make payments if they modify.

The "positioning" of your application is critical. It is important to know the state of the industry when submitting a modification. With the help of a skilled attorney and some persistence, you can get a good modification result....but it will take some time!!

Thursday, March 24, 2011

Lender Lawsuits on the RISE!!!

There have been widely publicized reports of variuos lawsuits against lenders and most have valid, legitimate claims. There was Robo signer, MERS, and numerous actions in state in federal courts. The statistics are alarming and I believe that this is only the beginning. During the fourth quarter of 2010 mortgage servicers faced a 42 percent rise in lawsuits over the preceding months. Interestingly, however, these suits were not, for the most part, related to unwinding foreclosures due to robo-signed affidavits, but instead dealt with failures in the loan modification process. Additionally, many mortgage servicers faced lawsuits from investors thanks to problems with mortgage-backed securities. Experts like Antony Laura, a partner in the Patton Boggs mortgage banking law firm office in Newark, New Jersey, attribute the rise in litigation to “an environment where mortgage related litigation has expanded on all fronts” thanks to highly publicized inquiries from state attorneys general and the demand for transparency in the presently-murky foreclosure process.

While the increase in mortgage litigation overall is disturbing, Laura believes that investor lawsuits are likely to create the biggest problems for mortgage servicers because the stakes are so high in this type of litigation. “The increase in suits by investors alleging missteps in the origination and securitization process is especially worth noting,” he said, “as hundreds of millions of dollars are often at stake in those loan portfolio repurchase cases.”

Wednesday, March 23, 2011

Own Your Home and make No More Mortgage Payments??

Sounds ludicrous?? It absolutely is not as an Iowa couple recently discovered. In many states there is a homestead exemption for primary residences. Essentially, it means that you are declaring that you are going to stay in the home and utilize it as a primary residence. Various states have restrictions on what may qualify as a homestead property.

In most homestead states, there is a requirement that both spouses sign the mortgage documents. In many instances, only one spouse executed the documents (typically due to challenging credit of one of the spouses). In such cases, the Note can be legally voided and perhaps the mortgage or Deed of trust as well. The Iowa couple made on payment and then invoked the homestead provision to assert that the wife had never executed the loan documents with CitiMortgage (Citibank). The Court agreed.

Similar laws as the one utilized in Iowa also exist in Alaska, Arizona, Arkansas, California, Colorado, Georgia, Hawaii, and Illinois, among others. States where it doesn't apply: Delaware, New Jersey, Pennsylvania and Rhode Island.

Monday, March 21, 2011

Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA)

I have attempted to write a blog about this for a long time....for one thing, it is a long and difficult subject. It is also frequently misinterpreted and misunderstood. The MFDRA of 2007 was signed into law by President Bush (for whatever reason many seem to want to give credit to Obama for this...but it was 2007)!!! It was a response to the rapidly rising foreclosure crisis that was perceived to be the result of subprime loans.

One interesting provision of the Act is that it does NOT exlcude from forgiveness of debt consideration HELOC or equity loans unless they were provably used to improve or repair the home.

Another misunderstood and misinterpreted feature of the Act is that applies ONLY to primary residences. Too frequently, I have worked with distressed home owners and their tax professionals and heard a comment about "not worrying" about the tax ramifications of a short sale etc when it was an investment property. There may be other relief in the tax code for owners of onbvestment property, but not under MDFRA.

Another significant aspect of the MFDRA is that many believed that it was limited to dissolution of real estate on or before 12/31/2009. President Bush extended the Act until 12/31/2012 prior to the 2008 elections.

I also believe that home owners should be diligent in rcognizing that the bank is not going to sell the property for FMV. There is a strong argument that your tax should be lower since the FMV of the property was higher than what the bank accepted and hence, your forgiveness is lower and less tax therefore. I recommend getting a BPO or apprisal close to the date of dissolution. It is difficult mto get an accurtate one after the fact.

There is no question that the Act provides relief for many and I will write more on this subject in future blogs...

Who are Banks Accountable to??

This frequently asked question is becoming a common question asked of me. The answer can be a bit complicated and it partially depends upon whether the bank is state or federally chartered. However there are four ways in which banks are accountable to its customers or regulatory bodies.

The little known Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises all national banks. They DO have the power to take action against a bank that does not comply with regulations or that otherwise engages in unsound business practices. The OCC does not regulate all banks.

Every state also has a department of banking. This department has a complaint procedure that you can easily follow to communicate your dissatisfaction with your lender. Very few people take this step, but it can be helpful for you. The departments have broad power.

There are also state and federal laws regarding various legal causes of actions, which include, but are not limited to, "lender liability" actions and other contractual and tortuous causes of actions.

Finally, I have found it useful to utilize the Uniform Commercial Code (UCC) in dealing with banks on distressed real estate. There are many aspects to this, but a general, broad application is that under the UCC, banks (and all businesses) must exercise reasonable care and fair dealing with you. Alleging a violation of the UCC and backing the allegation with facts, is a sound way to get the desired result in distressed real estate.

Decrease in Homes with Negative Equity Similarly Flawed

I read a report issued by Core Logic that the percentage of homes in the US that have negative equity dropped from 23% to 22.5% by the end of 2010 was viewed by many as a positive sign that the real estate market may be turning around and/or that there are fewer homes in distress for both now and the future. The one half of one percent decline was a result of the fact that there were 200,000 fewer homes in the US that have negative equity.

The report is actually statistically a bad omen. Here is why (I am donning my Ph.D. hat now instead of lawyer costume). There were one million homes that entered foreclosure in 2010. Statistically, virtually all of them had negative equity (arguably not all of them). Once a home goes into foreclosure, the home is no longer considered to have negative equity (because in most cases, the debt has been written down etc).

Accordingly, the report is clearly misleading since it appears that 200,000 homes have been removed from the negative ranks when in fact one million homes with negative equity were removed from consideration. The 200,000 homes statistic is a misnomer. But is it is actually worse...

Foreclosure Statistics are Misleading

I recently read a report that state officials were touting that the foreclosure rate is dropping and they were really beaming and telling all who would listen that the markets have turned around in Florida. Their statistics are flawed.

There were marginally fewer foreclosures filed in 2010 as opposed to 2009 in Florida. HOWEVER, the pool of homes that could possibly enter foreclosure was smaller so the foreclosure rate actually increased. Here is an example...if in Year 1 a state has 1,000,000 homes and 200,000 go into foreclosure, that is a foreclosure rate of 20%. Simple enough. I am going to keep this simple although it is really more complicated. In Year 2, 190,000 homes go into foreclosure and it appears that the rate of foreclosure is slowing down. It isn't!!

The reason is that presumably there is only now 800,000 homes in the foreclosure pool since the 200,000 that entered the prior year would more than likely not be foreclosed upon again so quickly (it could happen but is probably statistically insignificant). In Year 2 of this example, the foreclosure rate was actually 23.75% (190,000 out of 800,000).

Apparently good news sometimes is actually bad news..depends upon how you spin it...this applies to government run healthcare too by the way!! LOL

Sunday, March 20, 2011

Tax Incentives in Commercial Real Estate

In the past few years, the federal government has used tax incentives to try to spur growth in the residential housing market. Now, commercial investors want their turn. The Community Recovery and Enhancement Act (HR 1147), a bill being pushed by lobbyists for the International Council of Shopping Centers (ICSC), would provide “short-term tax incentives to jump start reinvestment in commercial real estate”. ICSC believes that the bill would help stabilize community banks, prevent foreclosures and job losses and help lenders see their way clear to refinancing for borrowers with underwater commercial properties.

“This temporary and targeted legislation [would incorporate] market factors and economic incentives rather than direct government involvement,” explains Betsy Laird, ICSC’s senior vice president of global policy. The bill would require that at least “80 percent of the newly invested capital must be used to reduce the outstanding balance of the commercial loan, with the remainder going toward capital improvements such as energy efficiency enhancements and leasehold improvements to attract new tenants.” Investors would also be able to deduct losses “without regard to passive loss limitations” and the new investments would qualify for 50 percent bonus depreciation.

More on HAMP, HAFA, Bank of America

n a recent sampling of 60-day (or more) delinquent mortgages, Bank of America determined that only 14 percent of them could qualify for a permanent HAMP loan modification. As Republicans in Congress take aim at HAMP and other government-sponsored homeowner assistance programs, numbers like these – in conjunction with the high costs of running such programs – are likely to make many think twice about keeping them around. And while the White House is threatening to veto bills that eliminate housing relief, more and more people are starting to question the efficacy of these programs.

In total, HAMP has permanently modified 600,000 loans – far short of the projected 4 million originally slated to benefit from the program. BofA reports that 28 percent of the loans studied fell out of the program almost immediately because the lender could not get in touch with the borrower via “110 phone calls and eight customized letters in addition to door-knocking in hard hit markets and hundreds of outreach events across the country.” More than half of the remaining 72 percent failed to pass HAMP underwriting guidelines, and 6 percent of the remainder did not make three consecutive payments under the new terms.

Executive vice president of BofA, Terry Laughlin, describes the position of the lender as one “at a cross roads”: “Despite the loan modification programs [and] our best efforts … foreclosure will be unavoidable moving forward,” he said

Isn't this Special...........

As if it is not bad enough that taxpayer money (in the amount of more than $100 million) is being used to defend Fannie Mae executives accused of accounting fraud, taxpayers stand to be on the hook for the damages if those executives are convicted. Investors who are suing government-controlled Fannie Mae for the losses that they sustained due to “alleged corporate mismanagement [and] shareholder feuds” are demanding billions in compensation. If Fannie Mae loses, the government has to pay up – and that means the taxpayers have to pay up as well.

Randy Neugebauer (R-TX), calls the situation a catch-22, pointing out that either way, taxpayers are going to suffer and the investors, as taxpayers, have suffered and will continue to do so both as investors and taxpayers. “The only people benefitting on this are lawyers,” he said. On the other hand, “30 million specific individuals…were wronged” according to lead plaintiff Ohio attorney general Mike DeWine,who believes that some type of compensation is mandatory from Fannie Mae regardless of extenuating circumstances.

Fannie Mae is required to pay defense costs due to legal indemnification agreements with former executives. The government agreed to take over these agreements when it placed the GSE in conservatorship. Neugebauer insists that the federal government did not have to take over these agreements and could have refused to do so at the time of entrance into conservatorship. Other officials disagree, saying that not only would overturning the contracts have been “inappropriate and possibly unconstitutional,” but that it would have made it difficult to attract other skilled professionals to the company.

The entire issue is becoming more convoluted as the federal government makes clear its intentions to attempt to unwind or otherwise diminish both Fannie Mae and Freddie Mac in the coming years.

Friday, March 18, 2011

"Experts" Believe that the Real Estate market has Hit bottom..Agree??

According to Jan Hatzius, chief economist of the Goldman Sachs Group in New York, the U.S. housing market could, finally, be approaching the bottom. And that’s good news: “Over the next few years,” says Hatzius, “the housing sector is going to improve” although there is still “a lot of excess supply out there.” Other analysts agree, saying that since “the economy doesn’t seem to be falling off any more,” sales in many areas around the country will likely level throughout 2011 and could slowly climb in 2012. This seems hypocritical to me...if there is excess inventory, it is going to be hard to believe that we have hit bottom. Simple laws of supply and demand would dictate that if there is excess inventory, prices would continue to fall.
Naturally, the markets throughout the country will improve at various times just as they were damaged at different times in this cycle.  In my opinion, until inventory stabilizes, lending improves and unemployment and the economy improve, there will be no meaningful real estate market improvement.

Practical Considerations in Distressed Real Estate

Many home owners have real estate that is worth less than they owe on the property. They wonder what are there options and they have heard confusing terms.  People advise them to seek a "Deed in Lieu" (DIL) or a short sale, loan modification or workout.  Some of the homes are in foreclosure too.

There are frequently many options available for home owners.  things are never as dire as it may seem.  Careful strategy and planning and dedication to a desired result will often yield the results that you seek.  My legal approach starts with focusing on your goals.

There are three central issues: your monthly cash flow in and out (your income and expenses), tax ramifications and credit issues.  I advise to select one of those issues because your strategy will affect each one of these issues in a different manner.  Start by selecting the one that you care least about. Frequently, it is credit since the loan is already being reported negatively to the three credit bureaus.

The next step depends upon your situation and the particular real estate, but I have discovered that there is almost always a solution that can be of tremendous value to you.  I never recommend "walking away" from a property and letting the lender deal with it. this rarely results in a positive outcome and there can be sever repercussions to you.

Short Sale Overview

Most real estate sellers, buyers and investors understand what a "short sale" in real estate means. It is not a new concept and simply means that there are not enough proceeds from an anticipated sale to payoff the existing liens and encumbrances.  However, many people do not realize that the methodology to obtain and approval changes as does the terms that a lender may require in order to approve a short sale.

There are business cycles that affect whether a short sale will be approved.  Lenders have different times when they are more amenable to a short sale.  There are many reasons for this, but the short version of the story is that a lender is a business, just like anyone else and there is a business cycle to the lender's revenue and profit.  My experience indicates that these business cycles are in six month intervals for most lenders. This means that is they are not amenable to a short sale today, they may be in six months.

Of course there are many more variables and this is a general overview. A lender will look at the value of the real estate, the market in the particular area, the seller's financial situation and other details.  Frequently, a lender will change their emphasis in determining whether to accept a short sale.  Sometimes it is the property itself while other times (and other lenders) will focus upon the seller's financial status.  This is why it is essential to seek guidance from an experienced  short sale expert.