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MARS Attacks! Newest Loan Modification Legislation and What You Need to Know NOW!

Kathleen A. Scanlon — Thu, 20 Jan 2011 14:43:22 +0000

Throwing its hat into the arena in the crusade to protect distressed home owners, the FTC imposed new regulations on mortgage relief companies effective December 29, 2010, except for their advance fee ban which goes into effect January 31, 2011. Although many states, including New York, have imposed their own statutory regulations, the FTC sought to address consumer abuses in those States that had not enacted protective legislation. The FTC issued the Mortgage Assistance Relief Services (MARS) Rule (16 C.F.R. Part 322: Mortgage Assistance Relief Services; Final Rule and Statement of Basis and Purpose, FTC File No. R911003) to prevent bogus operations falsely claiming, for a fee, that they will negotiate with the consumer’s mortgage lender or servicer to obtain a loan modification, a short sale, or other relief from foreclosure. Several of these types of companies pretended to be affiliated with the government and government housing assistance programs.

In the November 2010 press release, FTC Chairman Jon Leibowitz said, “By banning providers of these services from collecting fees until the customer is satisfied with the results, this rule will protect consumers from being victimized by these scams.”

The MARS rule has a three-prong approach – it bans advance fees, requires certain disclosures and prohibits certain claims:

Advance Fees

Mortgage Relief companies may not collect any fee until they have provided the homeowner with:

a written offer from their lender or servicer that the consumer decides is acceptable; and
a written document from the lender or servicer describing the key changes to the mortgage that would result if the consumer accepts the offer.

Required Disclosures

In any advertising and in communications directed at individual consumers (such as telemarketing calls), the mortgage relief companies must make the following disclosures:

they are not associated with the government, and their services have not been approved by the government or the consumer’s lender;
the lender may not agree to change the consumer’s loan; and
if companies tell consumers to stop paying their mortgage, they must also tell them that they could lose their home and damage their credit rating.

Further, these companies must also disclose in their communications to consumers that

they can stop doing business with the company at any time,
can accept or reject any offer the company obtains from the lender or servicer, and
if they reject the offer, they don’t have to pay the company’s fee – said fee must also be disclosed

Prohibited Claims

The MARS Rule prohibits mortgage relief companies from making any false or misleading claims about their services, including claims about:

the likelihood of consumers getting the results they seek;
the company’s affiliation with government or private entities;
the consumer’s payment and other mortgage obligations;
the company’s refund and cancellation policies;
whether the company has performed the services it promised;
whether the company will provide legal representation to consumers;
the availability or cost of any alternative to for-profit mortgage assistance relief services;
the amount of money a consumer will save by using their services; or
the cost of the services.

In addition, the rule prohibits mortgage relief companies from telling homeowners to stop communicating with their lenders or their representatives. Further, these companies must also have reliable evidence to back up any claims they make about the benefits, performance, or effectiveness of the services they provide.

Lastly, it is a violation of the MARS Rule for any person to provide substantial assistance or support to a MARS Provider when that person knows or consciously avoids knowing that the MARS Provider is engaged in any act or practice that violates this Final Rule. (16 CFR Section 322.6).

Q&A:

What Exactly Are Mortgage Relief Services?

Mortgage Assistance Relief Services (MARS) are services offered or provided to a Consumer for consideration that are intended directly or indirectly to assist the Consumer with regard to:

Stopping or postponing a foreclosure sale;
Negotiating or arranging a Modification of a Dwelling Loan;
Obtaining a forbearance in the timing of payments due on a Dwelling Loan;
Negotiating or arranging any extension of the time period for curing a default or reinstating the Dwelling Loan;
Obtaining a waiver of an acceleration clause or balloon payment in a Dwelling Loan;
Negotiating or arranging a short sale, deed-in-lieu of foreclosure, title reconveyance, sale/leaseback or any other disposition of the Dwelling other than a sale to a third-party purchaser;
Offering or conducting a Forensic Loan Audit which is a legal analysis of mortgage loan documents for the purpose of finding compliance violations under federal and/or state law or regulation for the alleged purpose of helping Consumers acquire leverage over their Servicers;
Marketing of services to assist consumers in selling a Dwelling to a third party if the intent of the sale is to enable the Consumer to avoid foreclosure; and
Marketing of refinancing options by Mortgage Brokers if offered to avoid a foreclosure.

Does MARS Apply to Attorneys?

Attorneys are fully exempt if they:

Provide mortgage assistance relief as part of the practice of law;
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;
Comply with state laws and regulations that cover the same type of conduct the rule requires;
Deposit any funds received from the consumer prior to performing legal services in a client trust account and withdraw fees only as they are earned; and
Comply with all state laws and regulations, including licensing regulations, applicable to client trust accounts.

Does MARS Apply to Real Estate Agents?

It appears from examination of the language contained in the Supplementary Information in the Federal Register that the intent was to avoid including real estate brokers and agents handling sales of real property in the definition of MARS. However, it is certainly clear that real estate agents and brokers handling short sales, title re-conveyance or any other sale or endeavor undertaken in an effort to stop a foreclosure sale would be covered by the MARS definition.

The Supplementary Information states that the FTC does not consider the typical functions of real estate brokers, including showing homes, finding homes for Borrowers and listing homes for sale, to be MARS functions. Nonetheless, any endeavor undertaken by a real estate agent or broker in an effort to prevent a foreclosure other than these typical functions, such as negotiating with a Servicer the terms of a short sale,WILL be considered a MARS activity.

The MARS rule is something with which everyone involved in, either directly or indirectly, assisting consumers avoid foreclosure will need to understand and be in compliance with. It is broad and far reaching. The penalties for non-compliance with the FTC’s new MARS rule are $11,000 a day.

A New Year: Looking Back and Looking Forward at Fraudclosure

Kathleen A. Scanlon — Mon, 17 Jan 2011 15:48:33 +0000

2011 was ushered in with the usual fanfare in my family – lots of tasty appetizers, hanging out with the kids until the stroke of midnight and off to bed. I spent the end of 2010 trying to push a few small sales, despite overwhelming resistance by ignorant negotiators and researching a new gun to hold to the bank’s head – the faulty securitization of the mortgages and the resulting lack of standing of these various Plaintiff trustees to bring foreclosure actions.

It is not light reading by a long stretch. Understanding the securitization process from the originator to the Trustee, locating and understanding the governing document, the Pooling & Servicing Agreement (PSA), is no simple matter. But we have done just that and analyzed numerous defective Assignments of Mortgage for New York City properties. These banks and their respective attorneys flagrantly ignore the rule of law, routinely perjury themselves, do documents without authority, and directly violate the terms of the PSA. These banks have also been paid over and over for the same loan because of the over-collateralization of these mortgage securities, but seek to enrich themselves further by availing themselves of the remedy of foreclosure. And yet, the tax payer pays them yet again, via the Obama Administration, instead of taking that same money to make jobs to bolster our sagging economy.

These banks are posting record profits for 2010 as our country fails to recover for lack of not only jobs but of credit. The purpose of the TARP funds was to give an incentive to the banks to extend credit but they failed to do so and really decreased lending. Congress, in their haste, failed to include any strings in that gift package. The Wall Street Journal indicated that such failure was the reason for the decreased lending:

The fact that loan portfolios are shrinking at many of the largest TARP recipients underscores how few strings Treasury Department officials attached to the infusions. That has made it hard to prevent banks from using the money to pay dividends, make acquisitions and fund bonuses for top executives.

Pioneers saw what the banks were doing – getting rich from tax payers’ monies and then enriching themselves further through foreclosure of these overcollateralized securities or peoples’ homes. They fought the banks in court by going back to the basics and not just blinding accepting the banks’ right to foreclose on their “security”. It started with “produce the note” because the whole mortgage industry had gotten sloppy and couldn’t locate their documents. But then it went further, questioning whether the bank really owned the Note and if you could foreclose on a mortgage once it had morphed into a security. MERS‘ role was being investigated and foreclosure defense lawyers questioned whether or not it could bring a foreclosure action as plaintiff, because it did not really own the Note as well as failed to maintain a proper chain of assignment.

These very foreclosure defense attorneys and judges, inundated with millions of foreclosure actions, started to see an hideous pattern and the same names over and over again, executing assignments, affidavits of merit etc. Brooklyn’s own Judge Schack has been on the forefront of demanding legal compliance from the banks and making them account for their failure to adhere to the law as well as outright committing fraud. Our courts have been on the forefront of insuring that homeowners’ rights are not trampled – that the banks act in excellent faith and when they don’t – holding them liable for it. The banks and their attorneys step very carefully into our courts these days for dread of the ultimate punishment – dismissal of their action with prejudice.

I reckon 2011 is the year we take back our country from Wall Street and the banks. The tide is turning.

NY Appellate Division Overturns LI Couple’s Mortgage Victory

Kathleen A. Scanlon — Sat, 04 Dec 2010 04:22:22 +0000

On November 16, 2010, the NY Appellate Division delivered a stunning blow to the foreclosure defense community when it reversed the trial court’s choice in Indymac Bank v. Diana J. Yano-Horoski, 890 N.Y.S.2d 313 (Suffolk County, 2009)

In the highly publicized choice, Judge Spinner had not only vacated the Judgment of Foreclosure, but ordered that the mortgage and note be cancelled in their entirety. Spinner blisteringly castigated the plaintiff and characterized its course of conduct as “wholly unsupportable at law or in equity, greatly egregious and so completely devoid of excellent faith that equity cannot be permitted to intervene on its behalf. Indeed, plaintiff’s actions toward defendant in this matter have been harsh, repugnant, shocking and repulsive to the extent that it must be appropriately sanctioned”.

The Appellate Division held that the such a severe sanction was “not authorized by statute or rule” and the bank was not given “honest warning that such a sanction was even under consideration”. Further, the court held that the trial court’s equity powers did not include the “authority to cancel the note and mortgage since there was no acceptable basis for relieving the homeowner of her contractual obligations to the bank” noting that a judgement had already been entered in the bank’s favor. The court’s opinion can be found here.

Judge Spinner has gotten the attention of the banks in a huge way – his three recent decisions, Indymac Bank v. Yano-Horoski (cancelling note and mortgage), Wells Fargo v. Tyson (awarded $155,000 in hurts to the homeowner) and Emigrant Mortgage v. Corcione (awarded $100,000 in hurts to the homeowner) has made him the hero of the foreclosure defense community and a fearsome figure to the foreclosure plaintiffs. Spinner just issued another crushing choice on December 1st in U.S. Bank v. Mathon 2010 NY Slip Op 52082(U) granting Defendant’s Order to Show Cause, staying all proceedings and scheduling a hearing for possible sanctions against the Plaintiff and other possible remedial relief based on the bank’s appalling terrible faith dealings on a loan modification. The Banks’ attorneys no longer entrust their cases to junior associate,s when appearing in his courtroom at mandatory settlement conferences, because apparently, the risks are too fantastic.

Am I shocked at the Appellate Division’s reversal? Not at all – I really predicted this would be the outcome. As you get higher up the food chain, it gets to be more about policy than law sometimes. The Yano-Horoski trial court choice would have set a perilous precedent and sent shock waves through the mortgage credit industry. A mortgage is a debt security and should a judge just cancel such a debt based upon broad powers of equity, what bank would lend on a home in such a climate? And if the bank were willing to risk it, at what cost to the consumer? The banks would need to insulate themselves against the risk of mortgage cancellation and the way they do that is by increasing the profit margin dramatically. Also, lets look to the every day people who are paying their mortgage every day, even if their house is underwater – what would be their reaction if all of sudden, homeowners left and right were given free houses? The outrage would start to build (if it hasn’t already) – and they would start to wonder why should they pay their mortgages?

I believe that the parties will quietly come to a settlement, probably sealed of course, and the Horoskis will receive a nicely, modified loan with a stout principal reduction and the bank has a stellar precedent on the appellate record.

Suffolk County Crushes Deutsche Bank Over Fraudulent Foreclosure Docs

Kathleen A. Scanlon — Tue, 05 Oct 2010 01:06:28 +0000

The judges in Suffolk County (along with their Brooklyn counterparts) have been proactive in the fight against fraudulent foreclosure actions from the beginning. They have refused to rubber stamp the banks’ foreclosure filings and have consistently required them to adhere to the law. In Deutsche Bank, as Trustee v. McCoy, the judge denied the bank’s Motion for an Order of Reference based upon lack of standing to even bring the foreclosure action. Apparently, the bank attempted to retroactively file an Assignment to make standing. The Assignment was dated February 28, 2008 but declared an effective date of “January 19, 2008″. The court noted,

If an assignment is in writing, the execution date is generally controlling and a written assignment claiming an earlier effective date is deficient, unless it is accompanied by proof that the physical delivery of the note and mortgage was, in fact, previously effectuated (see, Bankers Trust Co. v Hoovis, 263 AD2d 937, 938, 694 NYS2d 245 [1999]). A retroactive assignment cannot be used to confer standing upon the assignee in a foreclosure action commenced prior to the execution of the assignment (Countrywide Home Loans, Inc. v Gress, 68 AD3d 709, 888 NYS2d 914 [2d Dept 2009]; Wells Fargo Bank, N.A. v Marchione, 69 AD3d 204, 887 NYS2d 615 [2d Dept 2009]).

The court also demanded the appearance of ”Sherry Hall,” who purports, in this particular case, to be the Vice President of Homecomings Financial Network, Inc., the attorney-in-fact for the plaintiff Deutsche Bank and ”Nikole Shelton,” the person who notarized Ms. Hall’s signature in this particular action, as well as in another action entitled GMAC Mortgage, LLC v Ingoglia, also pending in Suffolk County at the November 17, 2010 foreclosure settlement conference. Apparently, Ms. Hall is Vice President for Homecomings as well as GMAC – a state of facts that the court finds extremely suspect. Also problematic was that one of the affidavits was executed after it was notarized. I would hazard a guess that these two ladies are going to be in a bit of hot water when they appear before this judge.

This is, indeed, the tip of the iceberg. For too long, the banks have been filing thousands of foreclosure actions without a hitch…until now. The problem is, but, two-fold: the possible chill on lending if the banks cannot foreclosure on their security and second, those homeowners who faithfully pay their mortgages are going to be mighty upset at the thought of people getting a free house. These are two serious issues which I believe will guide policy at the appellate level. So although the trial courts may dismiss foreclosure actions and so forth, the appellate level might certainly see things in a far different light and have a far different ruling – if it reaches that point. I am sure that the banks and homeowners probably reach some sort of settlement, be it modification or otherwise, so these cases do not end up on appeal.

The Party is Over: GMAC Halts Foreclosures Amid Pervasive Foreclosure Fraud

Kathleen A. Scanlon — Fri, 24 Sep 2010 10:09:20 +0000

This past week GMAC issued directives to its servicers and agents to halt evictions tied to foreclosures on homeowners in 23 states including Florida, Connecticut and New York. Apparently, one officer of GMAC Mortgage’s servicing unit has admitted during testimony given in a deposition that, while he signs thousands of affidavits each month (to the tune of 6,000 to 8,000) as part of the necessary documents that must be filed with the foreclosure action, he lacks personal knowledge of certain critical facts in the affidavit which he asserts to be right. The affiant must be directly involved with the facts he is asserting and this error is certainly not limited to this officer, as evidenced by this defective affidavit and its subsequent withdrawal or, for that matter: GMAC.

Bloomberg reported that,

GMAC Mortgage may “need to take corrective action in connection with some foreclosures” in the affected states, according to a two-page memo dated Sept. 17 marked “urgent.”….Brokers were told to immediately stop evictions, cash- for-key transactions and lockouts, according to the document, addressed to GMAC preferred agents. GMAC is also suspending sales on properties which it has already foreclosed on and extending closing dates in those transactions already in contract. The following is a list of the affected states, which are judicial foreclosure states:

Connecticut
Florida
Hawaii
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Nebraska
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Pennsylvania
South Carolina
South Dakota
Vermont
Wisconsin

Now of course, GMAC is attempting to downplay the seriousness of this matter and calling it a mere “technical” defect. But, foreclosure defense attorneys and agencies have advised that the questionable affidavits are only the “tip of the iceberg” and represent the beginning of the end for the foreclosure mills and for the banks and servicers who have been seeking to exercise foreclosure under fake pretenses. What foreclosure attorneys have been saying is finally coming to light: the nation’s foreclosure system is riddled with faked documents, forged signatures and lenders cutting corners when reviewing borrower’s files.

Not only are the Lenders, Servicers and Foreclosure Attorneys overwhemed but apparently the courts are too. The Washington Post reported yesterday that,

In theory, a judge should review the files one more time. But after the crisis produced massive numbers of delinquent homeowners, judges in many cases became overwhelmed. Some simply took at face value the documents handed over to them by the lenders – who in many cases were not checking the files, either, according to interviews with judges, attorneys and consumer groups.

This go by GMAC makes an opening for borrowers to contest some of the more than 2 million foreclosures that have taken place since the bubble burst. Every New York foreclosure defense attorney should be closely examining the foreclosure pleadings in current proceedings, as well as those that have already been foreclosed upon, for reliance upon faulty affidavits, which are tantamount to fraud and deposing all affiants. More than one case has been dismissed, with prejudice, because of fraud upon the court. Neil Garfield of Living Lies provides an brilliant analysis of a defective affidavit that was really submitted in support of an action to foreclose real property:

In general the affidavit is insufficient because it does not satisfy the basic requirements of personal knowledge.

1. “Affiant is an employee”: Affiant should be an officer or otherwise identified as having a specific scope of employment that should be identified and described for the period starting with the loan closing up through the date of the affidavit.

2. “Of Plaintiff or Plaintiff’s servicing agent”: Now they are withholding what entity employs the affiant so there is no presumption that the affiant in fact has personal knowledge of anything, or if affiant has personal knowledge of everything involved in the loan transaction and payments. Nor are they identifying or describing the function of either plaintiff or the servicing agent.

3. “Personally familiar”: Doesn’t mean personal knowledge. He probably got information from others (hearsay), and he does not identify himself as custodian of records for anyone on anything.

4. “The information is found in the servicing agent’s records”: So he might not employed by the servicing agent but he is swearing that the information is contained in their records. Hearsay, and lack of competence to testify because he is allowing that he might NOT have personal knowledge, which is the key component of a witness’ competency to testify — the four elements being oath or affirmation, personal knowledge, recall and the ability to communicate information that is relevant to the case from his personal knowledge and recollection. In addition there is no indication when the servicing agent started to service, who the servicing agent is, and whether they are still the servicing agent. And there is no indication of what information is tracked by the servicing agent — for example, does the servicing agent pay the holder in due course? who is the holder in due course? Since this loan was most likely securitized, what insurance, third party guarantees, reserves, cross collateralization and/or over collateralization payments have been made? Has the obligation been satisfied or assumed and assigned to a government sponsored entity, or in a bailout by the U.S. Treasury or Federal Reserve. Chances are the servicer can only say whether the maker of the note paid the servicer. The servicer cannot say and doesn’t know about third party payments on the note. He also cannot say whether payments were received by the payee or holder of the note by the borrower nor does he state the authority of the servicer to intermediate the payments.

5. “The entries are made”: How does he know that the entries are made and if so, by whom, under what authority and based upon what information. We already know he might be an employee of the Plaintiff and not the servicer. So he lacks competency to state anything about the business process or record keeping of the servicer.

6. “either people with first hand knowledge or…”: if they didn’t have first hand knowledge then somehow they got information from people who had first hand knowledge. Really? who? And how would he know about any of it?

7. “recording such entries is a regular practice of servicer or plaintiff”: Well, which is it? Which one is he saying has what information? He clearly is only saying that the records of only one company are involved, but he won’t say which one. What about the other one. Were payments made by borrower to one or the other or both? This second admission that there are two entities involved means at the very least that two affidavits are required — one from the servicer and one from the payee on the note. If the note has been assigned, then a third, fourth fifth etc affidavit needs to be executed by all those who have or ever had a claim to the revenue from the note.

8. “There is now due”: Lack of foundation for all the above reasons. Affidavit is subject to Motion to strike.

9. The numbers stated as charges to the account are unsubstantiated by copies of invoices or any other corroboration.

What does this mean for distressed homeowners? This will have to play out in the courts as only time will tell. You can be sure that all the servicers and lenders have already changed their procedures to rectify this glaring error although it couldn’t hurt to pursue this line of defense. Certainly the sheer volume of foreclosure filings is going to make it extremely hard for the Plaintiff to have affidavits executed by a capable party that will pass muster. Also, if a defective affidavit is grounds for dismissal, the question remains – with or without prejudice? That will depend upon the judges as they have broad powers of relief under the laws of equity which governs civil fraud. Judges have already dismissed foreclosure complaints, with prejudice, for fraud. We will have to wait and see what happens on the appellate level.

Beat the Bank: Legal Defenses to Foreclosure

Kathleen A. Scanlon — Tue, 31 Aug 2010 14:26:48 +0000

If you are served with a summons and complaint from your Lender seeking to foreclose on your home, you should seek advice and retain a real estate attorney who is well versed in mortgage banking and the laws governing foreclosure in your state. Some of the viable defenses your attorney may raise on your behalf are listed below:

General legal defenses to foreclosure:

1. Truth in Lending Act (TILA) violations enabling rescission. If your loan is a refinance, the bank must have provided you a set of disclosures at the time of closing. If these disclosures are inaccurate, the loan is statutorily rescindable under TILA. For example, in a foreclosure action, the finance charge must have been accurate within $35 or the loan may be rescindable. This means the loan is cancelled and all money paid to the lender is refunded.

2. Truth in Lending Act (TILA) violations enabling hurts. If you bought the property with the loan or used the proceeds to refinance and proper disclosures were not given, then you may be entitled to money hurts to offset the foreclosure.

3. Home Ownership and Equity Protection Act (HOEPA). This is a very powerful federal law governing high cost refinance loans. If your loan is under $150,000 or the initial rate was above 8%, you should evaluate your loan for violations of this act. Violations here enable rescission and substantial money hurts that can be in excess of the loan’s dollar amount.

4. Failure to Provide a Right Notice of the Right to Rescind. There is a specific notice that must be provided to refinance customers at closing. If this form is inaccurate or incorrect, the loan is rescindable up to three years after the closing date.

5. Breach of Contract. Many times the lender will do things that are unfair or unjustified before starting the foreclosure process. Just as you have an obligation to pay the mortgage, the lender has a responsibility not to interfere with your ability to do so – like force placing insurance making the payments substantially more expensive than they should have been.

6. Real Estate Settlement Procedures Act. This federal law governs many types of disclosures that lenders must provide at the time of closing, in addition to prohibiting things like kickbacks and unearned fees. It enables hurts, and sometimes rescission if the error triggers TILA.

7. Honest Debt Collection Practices Act. This federal law requires servicers or lenders who obtain the mortgage after default follow specific protocol in attempting to collect on the debt. A failure to follow this law enables statutory hurts and attorney’s fees.

8. Honest Credit Reporting Act. This federal law governs lenders ability to report information about the mortgage and requires the accurate reporting of negative information. Violations of this act also enables hurts and attorney’s fees. Punitive hurts might be available under this act.

9. Real party in interest. This is a procedural defense to foreclosure that can be extremely effective at stopping the lender’s ability to foreclose. It essentially questions the ownership of the mortgage and questions whether the foreclosing party is, in fact, the holder of the mortgage and note.

10. Unconscionability. This defense is focused on the events surrounding the creation and closing of the mortgage loan. A violation here gives the court fantastic leeway in deciding whether the mortgage should be voided or changed.

11. Failure to state a claim upon which relief can be granted. This general defense attacks the lender’s ability to foreclose and is can be used in conjunction with one of the other foreclosure defenses.

12. Failure to establish conditions precedent. Want to get a foreclosure action thrown out of court straight away? Use this defense that attacks the lender’s pre-foreclosure processes.

13. Failure to comply with FHA pre-foreclosure requirements. FHA requires every lender to mail a booklet called “How to Avoid Foreclosure” and set up a face-to-face meeting with the borrower before foreclosing (in most cases). If the lender does not take these steps, then it cannot foreclose.

Something for Everyone on the S&P Networking Site

Kathleen A. Scanlon — Sun, 25 Jul 2010 18:35:37 +0000

Its summer I've been out having fun with my family at the pool, beach, BBQs etc. and unfortunately, my blog posts have become few and far between. But, I wanted to alert everyone to some new posts over at our S&P Networking site:

Events:

In person networking is vital – online networking often starts the relationship but in-person cements it. I posted several events in the NY metro area that are not be missed including the NYC Business Networking Event – Luxury Series (7/27) and Queens Real Estate Group Summer Soiree (7/28) among others. Extend your knowledge by taking a class – Dealing with Banks: REOs and Small Sales or a webinar such as Understanding Titles & Closings for Real Estate Investors .

Small Sales

Small Sales are now the focus of the real estate loss mitigation community and the banks have finally realized that a small sale is the premier solution as the return, dollar for dollar, is far superior to foreclosure and REO. Check out the webinar, Understanding Fannie Mae, Freddie Mac HAFA Small Sale Rules to make sure you are abreast of the new rules. Watch some of the new videos, like Internal Bank Form Gives Insight Into Small Sales vs Foreclosure or Citimortgage Changes Small Sale Policy Again! as the banks are constantly changing how the game is played. Visit the forums as some of our own gurus post their tips and experiences.

Remember, the S&P Real Estate Networking Site is a "members-only" site so apply for membership now (it is free!) for exclusive access.

Delight in your summer!

Foreclosure Proceedings and the Right of Redemption in NY

Kathleen A. Scanlon — Fri, 12 Mar 2010 01:42:54 +0000

New York is a judicial foreclosure state and the process can take over a year to proceed from Summons & Complaint through judgment and then auction. A homeowner has a right to redeem up and until auction, but unlike many states, there is no right of redemption after Sale (but see Bill proposing to allow right of redemption for up to 1 year post Sale.).

The New York Court of Appeal recently opined in NYCTL 1999-1 Trust v. 573 Jackson Avenue Realty Corp., 13.N.Y.3d 573 (December 15, 2009) that the definitive requirement for redeeming real property during foreclosure proceedings is the “unconditional tender [to the foreclosing party] of the full amount due” before auction. This general rule in mortgage foreclosure proceedings also applies to the foreclosure of a tax lien.

But, note that the Courts will exercise their broad equitable powers to void judgments and even set aside sales (extending the homeowner's right of redemption), where homeowners are seeking to modify or reinstate their mortgages while the lender continues with the foreclosure action. Jimmy Lathrop, Esq., the Director of Foreclosure Intervention at the Brooklyn Bar Association Volunteer Lawyers Project, recently discussed in his blog post, three cases where the court found that the homeowner's excellent faith negotiations mandated an equitable solution and a possible complete bypass of RPAPL §1341 which defines the requirements and time frame of the borrower's right of redemption.

Round Two: Suffolk County Supreme Court’s Judge Spinner Takes on Wells Fargo

Kathleen A. Scanlon — Tue, 09 Mar 2010 14:58:11 +0000

Having recently issued a choice canceling an Indymac mortgage lien in another foreclosure action, Judge Spinner turns his attention to the outrageous actions of Wells Fargo and holds the mortgage behemoth liable for trespass, resulting in $155,092.00 judgment, in Wells Fargo v. Tyson. At the outset, the court pointed out that the Plaintiff sent a per diem attorney to the first settlement conference who had no knowledge of the case so that any potential progress was thwarted. It is a common problem and a recurring complaint that usually Plaintiff’s representative, at these settlement conferences, has no authority to negotiate, thus preventing any meaningful settlement and violating the spirit of the law. Having aroused the ire of numerous judges, you would reckon that these foreclosure mill law firms would figure out that they had better send counsel with authority to enter into some sort of settlement or at least have the ability to get someone on the phone who has it.

Certain facts were not disputed – that Wells Fargo had a representative enter the premises, without notice, not once but twice. The representative changed the locks despite the fact that the premises were obviously not abandoned by the defendant. Defendant had previously winterized the home, secured it, maintained the exterior of the premises and did not remove his furniture, clothing, food etc. Defendant also visited the home at least once a week and had questioned a neighbor to keep an eye on the premises.

Plaintiff relies on certain language in the mortgage itself: “Lender, and others authorized by Lender may enter on and inspect the Property. They will do so in a reasonable manner and at reasonable times. If it has a reasonable purpose, Lender may inspect the inside of the home or other improvements on the Property. Before or at the time an inspection is made, Lender will give me notice stating a reasonable purpose for such interior inspection.” as well as the express provisions in another paragraph regarding abandonment: “If…I have abandoned the Property, then Lender may do and pay for whatever is reasonable and appropriate to protect Lender’s interest in the Property…Lender’s actions may include but are not limited to: (a) protecting and/or assessing the value of the Property; (b) securing and/or repairing the Property;…Lender can also enter the Property to make repairs, change locks…and take any other action to secure the Property.”

In its analysis, the court first noted that mortgage documents and their terms are not negotiable and as such, are contracts of adhesion. Therefore, they are to be construed strictly against the drafter – the plaintiff herein. Belt Painting Corp. v. TIG Insurance Company 100 NY2d 377 (2000). “Under the circumstances presented to this Court, it is appropriate and honest that the terms of the instrument be construed in favor of Defendant.” Using a honest reading of the above language, it is apparent that the Lender’s actions must be reasonable and entry can only be upon adequate notice. Further, abandonment of the property is a condition-predicate to entry and the testimony of the defendant substantiated defendant’s claims that he had not abandoned the property.

Based upon the foregoing facts, Spinner declared that the Plaintiff engaged in a Trespass on at least two occasions:

Distilled to its very essence, trespass is characterized by one’s intentional entry, with neither permission nor legal justification, upon the real property of another, Woodhull v. Town of Riverhead 46 AD3d 802, 849 NYS2d 79 (2nd Dept. 2007). The injury arising [*4]therefrom afflicts the owner’s right of exclusive possession of the property, Steinfeld v. Morris 258 AD 228, 16 NYS2d 155 (1st Dept. 1939), Kaplan v. Incorporated Village of Lynbrook 12 AD3d 410, 784 NYS2d 586 (2nd Dept. 2004). The elements of a claim for trespass are intent coupled with the entry upon the land that is in possession of another. In order for trespass to lie, general intent is legally insufficient. Instead, there must be a specific intent, either to enter the land or to engage in some act whereby it is substantially certain that such entry onto the land will result therefrom, Phillips v. Sun Oil Co. 307 NY 328, 121 NE2d 249 (1954). The intent need not be illegal or unlawful, MacDonald v. Parama Inc. 15 AD2d 797, 224 NYS2d 854 (2nd Dept. 1962) but even one who enters the land upon the erroneous belief that he has the right to enter thereon will be held liable in trespass, Burger v. Singh 28 AD3d 695, 816 NYS2d 478 (2nd Dept. 2006). Trespass will lie against a party if entry upon the land was perpetrated by a third party, such as an independent contractor or other party, at the direction of the party to be charged, Gracey v. Van Kamp 299 AD2d 837, 750 NYS2d 400 (4th Dept. 2002). Id.

Turning to the issue of hurts, the court expressed that a foreclosure action is an action in equity and as such, it may impose punitive hurts. “In a suit in equity, the Court is empowered with jurisdiction to do that which ought to be done.” Id. Spinner then turned to address the bank’s egregious conduct:

Here, the Court is constrained to find that the conduct of Plaintiff in this matter was both willful and wanton, as evidenced by not one but two unauthorized entries into Defendant’s dwelling, occurring in complete derogation of Defendant’s right of possession. This conduct becomes even more glaring when consideration is given to the fact that Defendant affirmatively told Plaintiff that he had secured the property and that it was not abandoned and still contained his personal property. Even so, Plaintiff maintains that it has entered the property under a color of right, which turns out to be illusory under the circumstances. In spite of these declarations, Plaintiff willfully took it upon itself to enter the property on more than one occasion, doing so unreasonably and without notice, in direct contravention of the terms of its mortgage promulgated to Defendant by its assignor. This is even more distressing when it is considered that Plaintiff breaches its obligations to Defendant under the mortgage, running roughshod over Defendant’s rights with a specious claim that it is acting to protect its rights and the property. In small, the conduct of Plaintiff was nothing small of oppressive and would best be described as heavy handed and egregious, to say the very least. Certainly, the trespass was willful and calculated and was not accidental in any way and the Court finds that Plaintiff did not act in excellent faith. Under these circumstances, an award of both actual and exemplary hurts is necessary and appropriate in order to properly compensate Defendant for the losses he has sustained by way of Plaintiff’s shockingly wrongful conduct as well as to serve as an appropriate deterrent to any future outrageous, improper and unlawful deeds. Id.

Unfortunately, it appears that this type of behavior is not unheard of by members of the real estate bar. One member noted that a similar situation occurred with a foreclosure defendant client of his. Although he had secured and winterized the premises, the bank’s inspection service alleged the premises were wide open and entered the premises. They also changed the premises, turned the valves to “turn off the water” which instead resulted with the water being turned on. The pipes burst and flooded the home.

The court’s actions in Wells Fargo v. Tyson should send a clear and unequivocal message to Lenders and their various contractors that they do not have an absolute right to enter a mortgagor’s property and such behavior will not be tolerated.

Don’t Believe the Hype: FHA’s Temporary Waiver of 90 Seasoning Rule

Kathleen A. Scanlon — Sun, 17 Jan 2010 17:05:18 +0000

On Friday, January 15, 2010, HUD Secretary Shaun Donovan issued a press release, as part of HUD’s Neighborhood Stabilization initiative, temporarily waiving FHA’s 90 Day Seasoning Rule. Amazingly, HUD is cognizant that the seasoning guideline is having a negative impact on alleviating the problem of abandoned and blighted homes:

“In today’s market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.”

The online real estate community was buzzing yesterday as news of this waiver spread quickly. The investor “gurus” are, of course, rejoicing and spreading the news far and wide, without a careful read of the Waiver itself. The intent of this temporary policy change is to allow investors to take title to a property, rehab it and sell it quickly. It is not a panacea for those investors who pick up a property at a discount, seeking to flip it for a profit in a “back to back” or “double” closing. For those types of transactions, the 90 day seasoning rule is a non-issue if you utilize a land trust correctly.

HUD’s Mortgagee Letter 2006-14 clarified the Rule and Regulations set forth in 24 CFR 203.37a concerning the eligibility of properties for FHA insurance and the rules governing sales of property. As I have discussed in a previous blog post, Legal Analysis of FHA’s Seasoning Requirements, the real estate and mortgage industry routinely misunderstands and applies these eligibility rules incorrectly and it appears that the trend is continuing with this new Waiver.

FAQS:

1. Does it have to be a property bought through a small sale, bank auction or an REO to be eligible under the Waiver?

No. There are no requirements in the Waiver concerning the status of the property itself. It is not necessary to demonstrate the distressed nature of the property.

2. So I can get a property under contract, do a contract with a potential FHA buyer and close with my FHA buyer the same day or the day after I buy the property?

No this transaction would not be eligible for FHA insurance. The waiver is really of the requirement that the real estate contract be executed on the 91st day after the investor takes title to the property. The requirement that the investor own the property is still in effect and therefore Contract Vendees and Assignments of contract are still prohibited. Further, an application for an FHA mortgage cannot be submitted to a Lender for consideration without a fully executed Contract. Therefore, Back to Back Closings will be impossible.

3. So I can close a week after I take title?

Virtually impossible for several reasons. I venture that there are nearly no Lenders in this post-bubble market that will take an application for an FHA mortgage and be in a position to close a week later. I am going to stretch that to probably 30 days. This is certain if your sale price to your FHA buyer is 20% or more higher than your acquisition price (do the math – its not that hard to hit that number – especially in certain areas of the country where housing prices are below $50,000). If the sale price exceeds the 20% threshhold, the investor will have to document the increase in value with supporting documentation and/or a second appraisal and the Lender will have to obtain a Property Inspection Report (see paragraph 2 of the Waiver). This report will not be ordered prior to application submittal and as discussed previously, that doesn’t take place until there is a fully executed Contract of Sale.

4. I found this fantastic property that my buddy picked up 2 months ago for $120,000.00. He rehabbed it and I am in contract to buy it from him for $220,000. I want to flip it to an FHA buyer for $250,000.00 can I do it?

You will have to wait until the 91st day after you close title to enter into a Contract of Sale with the FHA buyer. The Waiver will not apply if there is a history of prior flipping activity in the 12 month chain of title (see paragraph 1(c) of the Waiver).

5. In April, the Treasury’s Small Sale Program goes into effect and there should be a lot of distressed properties coming on to the market. The Waiver is going to be a huge help in moving those properties!

No, it isn’t. Apparently, government offices do not communicate with each other before issuing rulings – one of the requirements under the Treasury small sale program is that the Contract include a representation that the Purchaser will hold the property for 90 days post-closing. Perhaps the Treasury will revise its Directive and remove this offending language (which, as I had discussed previously, is extremely small-sighted).

Conclusion

Investors should rejoice as finally they are receiving the recognition they deserve: properties are moving because of their hard work and without the proper incentive, it wouldn’t happen. Instead of being the black sheep of the real estate community, investors are a major part of the solution. This Waiver is what investors need to get the properties rehabbed, sold and occupied to ameliorate the problem of abandoned and blighted homes. It is not a license to flip and should you wish to engage in that type of activity, you will not be able to use this Waiver to accomplish your goals.