By now, we all know that federal and state officials have announced a $26 billion foreclosure settlement with five of the largest home lenders (Bank of America, Citigroup, Ally Financial/GMAC, JP Morgan Chase and Wells Fargo). 

The deal is supposed to protect consumers from unsound practices in mortgage servicing and foreclosure processing, and requires banks to give money back to borrowers who have been foreclosed on, and principal reduction to homeowners who are currently underwater.  It also sets aside funds to help borrowers refinance or modify their loans.

While this sounds like great news for homeowners, there are some caveats…

Bad news: But only by an average of $20,000.

Bad news: This only works if assiduously and tirelessly enforced.

Good news: Eligibility.

Bad news: Borrowers whose loans are held by Fannie Mae or Freddie Mac need not apply.

Already foreclosed on?

Good news: You are eligible for restitution if you lost your home in 2008—2011 due to “robo-signing”. 

Bad news: $2,000 max—not much help for families who have lost their homes.

Conclusion?  I am cautiously…(un)optimistic about this settlement!  

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 For more information, check out the Legal Resources page at my website for a summary of the settlement, who is affected by it, and the projected timeline. 

 All of the details, including FAQs and further links can be found at www.nationalmortgagesettlement.com.

 Contact my office today and set up an appointment to discuss your options and how this settlement could affect you. 

The Foreclosure Mediation Program

New alternatives for homeowners in distress

Details

As of Friday, July 22 The Washington State Foreclosure Fairness Act Mediation Program began. Washington is the third non-judicial foreclosure process state in the country with a program designed to help homeowners resolve and find solutions to foreclosure proceedings with their lender or servicer. To read the actual law, click here.

Funding

The Foreclosure Fairness Act requires lenders and servicers conducting more than 250 foreclosures in Washington State in the previous year to pay $250 for each Notice of Default issued. The fee provides funding for free homeownership counseling, attorneys to prosecute violations of the Washington Consumer Protection Act and foreclosure prevention outreach.

Exempt Lenders

Some lender are exempt from The Foreclosure Fairness Act because they have certified under penalty of perjury that they were not the beneficiary of deeds of trust in more than 250 trustee sales of owner-occupied residential real property between January 1, 2010 and December 31, 2010. To see a list of exempt lender click here.

Foreclosure Mediation Timeline

1.     Lender must notify homeowner by letter and telephone of the right to a 60-day window of opportunity for an in-person meeting before lender issues a Notice of Default. The notice must also indicate the homeowner�s right to request mediation through a housing counselor or attorney. Mediation may be requested up until the Notice of Trustee Sale is issued.

2.     Mediation is requested ONLY by a housing counselor or attorney sending a request for mediation to the Department of Commerce. The homeowner does not have to establish or prove reasons for the request. Once mediation is requested, the foreclosure process stops until mediation is completed.

3..     Within 10 days of receiving the request for mediation, Commerce will notify all parties that mediation has been requested, select a mediator, and notify the parties of documents that are required for the mediation.

4.     The mediation will be scheduled no later than 45 days after the mediator is selected, unless otherwise agreed. The mediator will set a time, date and place for the mediation 15 days before the mediation session. The homeowner may be represented by an attorney or other advocate such as a housing counselor. The lender must have a person with authority to modify the loan or negotiate an agreement either at the mediation or available by telephone.

5.     At least 10 days prior to mediation session: Homeowner will prepare and exchange with the lender: a financial statement with current and future income information, debts and obligations, and last two years of tax returns. Lender will prepare and exchange with the homeowner: loan balance, an itemized list of fees and charges, payment history, net present value and loan modification inputs, and other required documents.

6.     At the mediation, both the homeowner and the lender must participate in good faith. The mediator will encourage the parties to examine all options, including loan modification, to      avoid foreclosure. Within seven days after mediation, the mediator will make a written certification of the results of the mediation and whether the parties participated in good faith.

7.     The parties either come to an agreement (a loan modification or other alternative) or the parties do not come to an agreement, and the foreclosure process will proceed. If the lender does not mediate in good faith, the homeowner may be able to stop the foreclosure sale in court.

Eligibility

Homeowners who received a Notice of Default on or before July 22, 2011 and their owner occupied house has not yet been sold at foreclosure sale.

Homeowners who received the Notice of Pre-Foreclosure Options and requested mediation before the Notice of Trustee Sale has been recorded.

Cost

The homeowner is responsible to pay a $200 fee and the lender will pay a $200 fee for the mediation.  The fee must be paid prior to mediation.

Last Thursday Gov. Chris Gregoire signed into law a new bill giving homeowners the statutory right to sit down with their lenders and discuss modifying their loan. 

 In an effort to protect WA homeowners from foreclosure, under the new WA Foreclosure Fairness Act, lenders must now send to homeowners in default a letter explaining their right to a sit-down to discuss alternatives to foreclosure. If that letter goes unanswered, the bank must make three attempts by phone, and then send a certified letter before proceeding with the foreclosure process. 

 Lenders must conduct �a good faith review� of the homeowner�s financial situation and offer loan modifications, if possible. The new law allows a mediator to handle a negotiated agreement between the lender and homeowner. 

The problem, as I see it, is that many homeowners will simply ignore these communications. After all, homeowners behind on their payments are already overwhelmed with harassing collection calls and letters and may simply view these as just another collection attempt by their lender and not their statutory right to mediate.

Some parts of the law are effective immediately and the entire House Bill 1362, aka the Foreclosure Fairness Act can be found here.

Click here to find out more about the Second Substitute House Bill 1362

Is a Short Sale Really an Alternative to Foreclosure? 

By: Lynn Arends

 I am both an attorney and managing broker. Most of my law practice involves negotiating debt and advising borrowers on foreclosure, deed-in-lieu, bankruptcy, short sales, and loan modifications. As a Managing Broker, I am predominantly a listing agent and most of my listings are short sales. I start with a thorough, two-hour consultation. No one gets to see me as a real estate agent until they first see me as a lawyer. This is very important because more often than not, a short sale is not the answer. 

Short Sale Basics

A short sale occurs when a bank agrees to accept less than what is owed on a mortgage or deed of trust to release its lien. Negotiated correctly, a short sale can be an excellent alternative to foreclosure to both sellers and buyers. And banks will consider a short sale because it allows them to recoup some of their investment without the work and expense of selling the home themselves. 

New Obama administration initiatives, such as the Home Affordable Foreclosure Alternatives Program (HAFA) and recent changes to HUD's Pre-Foreclosure Sales Program (PFS) for FHA loans, have made short sales an ever more viable option in today's current economic state. But before signing up for a short sale, here are some issues to consider:

Who Qualifies?

Assuming the property is underwater (more is owed than what it's worth), here are the necessary criteria to be considered for a short sale. 

Deficiency Judgements

 A deficiency is the difference between the amount received and the amount owed. Although a promissory note makes the seller personally liable for the debt, whether the bank can pursue a deficiency judgment after a foreclosure or short sale depends in part on the security instrument used and that state's deficiency statute. 

Most lenders foreclose through a trustee's sale. In some states, that extinguishes the debt and usually does not give the lender the right to pursue a deficiency judgment. However, when a senior lienholder nonjudicially forecloses and the second lienholder is wiped out during a foreclosure under a trustee's sale, the junior security interest is extinguished but the obligation on the note is not - possibly giving the junior lienholder the right to pursue a judgment on the debt. 

And yes, a lender can issue a 1099 to a borrower and still attempt to collect the remaining debt. The mere issuance of the Form 1099 does not alter the creditor's legal right to attempt to collect the debt and it does not act as an admission that the debt is no longer due (although the creditor will need to amend the 1099 issued to the borrower upon collection).

But lately some junior lienholders have been demanding outrageous sums of money to approve the short sale and requiring contributions from the buyer, seller, and/or real estate agents. Often, all of this occurs without any disclosure to the first lender. Monies not disclosed or paid outside of closing? That's called mortgage fraud. 

To me this is a case of the junior lender cutting off its nose to spite its face. In the event that the short sale fails, the first lender will most likely get the property back in the foreclosure, thus eliminating the second lien entirely. 

It's All About the Debt!

Even if a client is a perfect short sale candidate, I spend a lot of time walking people through what nonjudicial foreclosure looks like. To me, this is the "what if I wake up tomorrow and do nothing" option. That's the baseline. Everything else - short sale, deed-in-lieu, loan modification, or bankruptcy - requires some action and needs to yield a better result. What that means is that I need to negotiate a better settlement in a short sale than any of the other options, especially with respect to the remaining debt.  

For example, when my office receives the standard short sale letter of consent from a certain lender on a first mortgage, it always says that the lender is not waiving its right to a deficiency. If the client is delinquent in its payments, and facing a nonjudicial foreclosure on the first, given that the Washington Non-Judicial Foreclosure Statute prohibits the lender from obtaining a deficiency (except against a guarantor, which does not apply in virtually all residential sales), the client is better off simply allowing the property to go to foreclosure rather than allowing it to go to short sale. So the question is: Why does the lender not recognize this reality and waive its deficiency in transactions involving a pending nonjudicial foreclosure? Or if the mortgage insurer is calling the shots, why is it not able to convince the mortgage insurer to pay the claim without proceeding to foreclosure? 

So who is the perfect short sale candidate? Three scenarios immediately come to mind. 

- There is only one loan and there is a program for dealing with the deficiency. HAFA, HUD's PFS, and the VA's Compromise Sale Program are all attempts to waive deficiencies in short sales and deeds-in-lieu.

- Two loans and the first is being fully paid off in the short sale. Foreclosure does not benefit the borrower in any way. It's all about the second lien and I can negotiate that debt as part of the short sale.

- Borrowers who are able and desire to remain current on their payments. Obviously, being current never triggers the foreclosure. And if credit is important, clearly the biggest hit to credit is every month a borrower doesn't make a payment. Again, this is debt I can negotiate. 

In the end, it's all about the debt. 

Beware of Condominiums and Any Super-Priority Liens

Unless the former owner of the unit files bankruptcy, he or she remains liable for the preforeclosure assessments on the foreclosed unit. But in states such as Washington, the association may also have a six-month preference for association dues owed prior to a foreclosure sale. What that means is that HOAs are a force to be reckoned with in any short sale transaction because if an HOA can collect six months of dues from the lender or new buyer in a foreclosure, they will need to be offered more than that amount to accept a short sale and release its lien. So it's important to do the math when dealing with an HOA. But the good news is that when an HOA approves a short sale, it is usually for satisfaction of debt and the seller is not liable for any additional preforeclosure or short sale assessments. 

Buying Again After a Foreclosure or a Short Sale

At the time of this writing, the dust has not yet settled on the requisite waiting period after a short sale or foreclosure. Not long ago, Fannie Mae came out with new guidelines. Unless the foreclosure was the result of documented extenuating circumstances, which only requires a three-year waiting period (with additional requirements), all borrowers will now be required to meet a seven-year waiting period after a prior foreclosure to be eligible for a new mortgage loan eligible for sale to Fannie Mae. Contrast that to the waiting period after a short sale which can be as little as two years depending on the loan-to-value ratio and other factors.

Final Short Sale Thoughts: Seller Beware!

A short sale is nothing more than a voluntary agreement on the part of a lender to release its security interest. Unless an express written term of the short sale approval is the waiver of any right to a deficiency, that lender, or the lender's assignee, will have the right to seek recovery of the deficiency, and may pursue an action up to the expiration of the statute of limitations for collection of a note. In my opinion, any attorney advising a borrower otherwise is committing malpractice. Finally, always seek legal counsel before attempting to pursue a short sale. A real estate agent cannot give legal advice.

The final rule does not affect attorneys who provide mortgage assistance relief services (MARS) in connection with the practice of law if certain basic requirements are met, but the FTC warns of MARS providers that try to use attorneys as fronts to avoid state laws.

Over the past three years, the FTC noticed a spike in the number of consumers scammed by MARS providers that charge advanced fees in the hundreds or thousands of dollars then disappear or fail to provide the promised service. Often, the delay and the cost combine to leave homeowners in a much worse position.

Many states have responded by passing state laws, commonly known as mortgage rescue statutes, under which MARS providers cannot charge advanced fees. Lawyers often are exempt from these mortgage rescue statutes.

Mortgage assistance relief services

In general, MARS means "any service, plan, or program" that offers or provides assistance in preventing or postponing foreclosure sales, negotiating loan modifications, obtaining forbearances or modifications in the timing of loan payments, or negotiating extensions.

Lawyers often provide these services in connection with representing clients in bankruptcy, foreclosure, or other administrative proceedings. Without an exemption, lawyers would become subject to all the requirements of the new federal rule.

Under the new rule, any for-profit entities providing mortgage assistance relief services are, among other things, prohibited from misrepresenting any material aspect of their services, advising a consumer to cease communication with a lender, or taking advanced fees. The prohibition on advanced fees is not effective until Jan. 31, 2011.

In addition, a person violates the rule by providing substantial assistance to a MARS provider if the person knows (or consciously avoids knowing) the provider is violating the rules.

The rule also is designed to prevent abuses by mandating that MARS providers disclose certain information to the consumer, including their "for-profit" status.

Attorney exemption/client trust accounts

Attorneys who are providing MARS "as part of the practice of law" are partially exempt  from the new rule as long as the attorney is  licensed in the state in which services are provided (or where the consumer's "dwelling" is located) and the attorney complies with applicable state laws and regulations.

However, to get the full benefit of the exemption, attorneys must comply with certain provisions regarding client trust accounts. In order to be fully exempt, lawyers must place advanced fees in a client trust account before performing legal services and comply with state laws and regulations, including licensing regulations, applicable to client trust accounts.

A lawyer who does not comply with the client trust account provisions cannot charge advanced fees, or "request or receive payment of any fee or other consideration" until the lawyer executes a written agreement between the consumer and the consumer's loan holder. In addition, the lawyer must make specific disclosures through the written agreement, but is otherwise exempt from other provisions of the final rule.

The proposed rule did not exempt lawyers at all, but several state bar associations, along with the American Association, sought an amendment to the proposed rule that would provide an exemption for lawyers.

Without an exemption, these bar associations feared the rule could undermine the confidential attorney-client relationship and "make it difficult or impossible for many consumer debtors to obtain the legal services that they desperately need to help negotiate changes to their residential mortgages with their lenders and keep their homes."

All in all, it is hoped that the new FTC MARS rule will curb the "mortgage rescue" charlatans who prey on the most vulnerable of our public.  

Attorneys are fully exempt if they:

·         Provide mortgage assistance relief as part of the practice of law; and

·         Are licensed to practice law in the state in which the consumer for whom the attorney is providing mortgage assistance relief services resides or in which the consumer�s dwelling is located; and

·         Comply with state laws and regulations that cover the same type of conduct the rule requires; and

·         Deposit any funds received from the consumer prior to performing legal services in a client trust account; and

·         Comply with all state laws and regulations, including licensing regulations, applicable to client trust accounts.

Click here for more information on the new FTC MARS Rule

Freddie Mac announced Wednesday it will suspend foreclosure evictions from December 20^th through January 3^rd. This is the third straight year Freddie Mac has suspended evictions during the holiday season. (This move only applies to those homes that have mortgages backed or guaranteed by Freddie Mac).  Sibling company, Fannie Mae, also won't evict people over the holidays, but that has not yet been announced via news release regarding their upcoming suspension of holiday foreclosures. Fannie Mae and Freddie Mac purchase home loans from lenders and package them into bonds with a guarantee against default and sell them to investors. Today they own or guarantee about half of all U.S mortgages.

So Happy Holidays from Fannie and Freddie!

·         REO's sold for an average discount of nearly 41% and accounted for 15% of all sales in the third quarter.

·         Pre-foreclosure sales, which are often short sales, sold for an average discount of 19% and accounted for nearly 10% of all sales.

Looking at those statistics, it makes you wonder why investors Fannie and Freddie seem so eager to foreclose.

But at least for the Holidays...Merry Christmas!