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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.

Help for Troubled Homeowners: Do You Qualify?

Kathleen A. Scanlon — Tue, 31 Aug 2010 15:54:31 +0000

The federal government has made various initiatives to try to help troubled homeowners with their efforts to remain in their homes. I wanted to revisit the current loan modification program, HAMP as well as the refinance program, HARP, that is already in effect for non-defaulting borrowers to refinance their current mortgage. The question is: Will you qualify? Question yourself the following questions:

Do I have to really fall behind on my loan payments to be eligible for a loan modification?

No. Borrowers must simply demonstrate that they are in danger of falling behind on their mortgage and that they don’t have sufficient income to make future mortgage payments. Borrowers with ballooning mortgage payments or interest rates that are resetting may benefit from the new plot.

What are the loan modification requirements?

To be eligible for modification under the plot, the following criteria must be met:

the loan must be a first mortgage on the borrower’s primary residence, and
borrowers must currently be paying more than 31% of their monthly yucky income toward mortgage payments,

Jumbo loans that exceed Fannie or Freddie loan limits are not eligible.

Ultimately, of course, your eligibility will be determined by your mortgage lender.

What if I am “under water” and my mortgage is more than the value of my property?

As long as the amount owed on a first mortgage does not exceed 105% of the home’s current value, borrowers with limited equity can refinance into a 30-year or 15-year fixed-rate mortgage. This refinance option is open to only to borrowers with conforming loans that are owned or guaranteed by Fannie Mae or Freddie Mac. Borrowers must show that 1.) they are current on mortgage payments and 2) that they will be able to meet the new mortgage payments.

How do I know if my mortgage is owned or guaranteed by Fannie or Freddie?

Borrowers should contact their lender to see if their mortgage is owned or guaranteed by Fannie or Freddie or you can look up your loan online here to check.

Does my lender HAVE to participate in the program?

No. Participation by lenders is voluntary, but the government provides subsidies to encourage lenders to modify loans. For example, mortgage servicers receive $1,000 for each loan modification and can also get another $1,000 annually for three years if the borrower stays current on the loan.

For more information, please visit MakingHomeAffordable.gov

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.

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.

Contract Contingencies: Sale of Purchaser’s Current Residence

Kathleen A. Scanlon — Wed, 06 Jan 2010 04:34:41 +0000

While the first time home buyers are out in force looking to buy a home, the reality is that a excellent part of the elusive purchaser pool is made up of homeowners looking to trade up to a new home. Which means, for the most part, they need to sell their current residence to be able to buy a new residence. Contracts often contain certain contingencies which, if not met, allow the parties to unilaterally cancel a contract and the buyer recoup their down payment monies. One such contingency is conditioning contract performance on the sale of the Purchaser’s current residence.

In the seller’s boom market in years past, any prospective purchaser who would dare question for this contingency would never even make it to the binder stage let alone contract. Contracts often crossed my desk that were missing mortgage contingencies, even though Purchaser needed a mortgage to complete the transaction – competition was so fierce that these buyers would agree to nearly anything to cinch the deal. But that market has come and gone – we are in the midst of a buyer’s market and now the purchaser has some leverage.

Still, most real estate attorneys will balk on including a Sale of a Purchaser’s Current Residence (SPCR) Contingency in their Contract. The rationale is that the Seller has to take their home off the market and risk losing the opportunity to snag a qualified Purchaser who doesn’t need such a contingency. This is a very sound rationale and certainly makes sense in the Seller’s market. Here, but, there is some bargaining room as “qualified” purchasers aren’t lining up in droves so that the Seller’s risk is lessened.

There are a few strategies that can be employed on a Purchaser’s behalf in this type of situation. If Purchaser is obtaining a mortgage and needs the funds from the sale of the current residence (or the removal of the debt obligation), this will often be a condition in the mortgage commitment. So, even if seller’s attorney won’t include an actual SPCR Contingency, the mortgage contingency clause will therefore indirectly include the SPCR contingency. I am not overly fond of this strategy because of its ambiguity. Ambiguity makes issues of fact which can lead to uncertainty and litigation. Also, please note, attorneys have caught onto this trick and include language that specifically states the contract is not contingent upon the sale of the purchaser’s home and that a mortgage commitment will be considered firm and unconditional (and therefore satisfy the requirements of mortgage contingency clause which causes its removal) even if it has a condition requiring the sale of Purchaser’s real property or the payoff of certain debts and liens.

I have a unique solution to this very problem and it is usually well received by other real estate attorneys. Modify the SPCR Contingency to include an escape clause for the seller. Allow the Seller to continue to market the property for the time the contingency is in effect. If a prospective buyer makes a bona fide offer, Seller gives notice to the Contract Purchaser of the offer and allows Contract Purchaser to either remove the SPCR contingency and continue with the Contract or cancel the Contract and receive a refund of the down payment monies. With this modification, Purchaser does not have to worry about jeopardizing their down payment and Seller does not have to take their house off the market and lose out on potential qualified buyers.

The modification of the Sale of a Purchaser’s Current Residence Contingency is a way to balance and satisfy the needs of both parties while removing an nearly impossible roadblock to a potentially successful real estate transaction. Careful examination of the terms of the proposed contract and wording of the SPCR Contingency with modification language is key and should be left to the expertise of a real estate attorney.

Merry Christmas & Happy New Year: My Gift to You

Kathleen A. Scanlon — Mon, 28 Dec 2009 21:31:26 +0000

No related posts.

U.S. Treasury: Putting the ‘Short’ Back in Short Sales?

Kathleen A. Scanlon — Sun, 06 Dec 2009 03:33:16 +0000

Any real estate professional, who engages in small sale negotiations, is fully aware of just how frustrating the process can be or even downright impossible. There are financial incentives for mortgage servicers to drag out the process as long as possible. It takes weeks, sometimes months, to get a response from the banks, who often misplace packages and request that they be faxed over and over again. This past Monday, but, the U.S. Treasury has issued guidance in its new Home Affordable Foreclosure Alternatives Program (HAFA) which takes effect April 5 , 2010 (supposedly, many servicers are already modifying their programs to be compliant). In small, HAFA provides incentives in accepting a small sale or a deed-in-lieu of foreclosure (DIL) on a loan eligible for modification under the HAMP program. HAFA applies to loans not owned or guaranteed by Fannie Mae or Freddie Mac (they will be implementing their own versions of HAFA shortly).

Highlights of the HAFA program are as follows:

Servicers have 10 days to approve or disapprove a request for small sale.
Uses borrower financials and other documents already submitted for a loan modification.
Allows borrowers to receive pre-approved small sales terms before listing the property (including the minimum acceptable net proceeds).
Prohibits servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent).
Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
Uses standard processes, documents, and timeframes/deadlines.
Provides financial incentives: $1,500 for borrower relocation help; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 for investors (note holders).
Caps proceeds to second lien holders at $3,000.00. (fascinating but I wonder at how those lien holders in the second position feel about this)

Requirements:

Loan must be HAMP eligible – Services must evaluate a buyer for a HAMP modification first before giving any consideration for a HAFA small sale or Deed in Lieu (DIL);
Property is borrower’s principal residence;
the mortgage is a first lien and was originated before January 1, 2009;
the loan must be delinquent or default reasonably foreseeable;
loan amount limit is 729,750 (on 1 family units);
borrower’s total monthly payment exceeds 31 percent of the home owner’s income and attested to by affidavit;
Sale must be an arm’s length agreement and the buyer must agree not to sell the property for 90 days (problematic and I believe will diminish the potential of this program);
Requires property to be listed with a real estate broker (I wonder who lobbied for this…so this has to be added on to the servicer’s Minimum Net Proceeds and thus increases the cost to Purchaser)

While I admire the government’s attempt at allieviating the small sale log jam, as usual, they overstep their bounds. The American people are being questioned to yet again foot the bill for the banks’ irresponsible lending practices to the tune of $3,000 per closing. Further, mandating that properties be listed with a real estate broker across the board is excessive and will, in effect, add to the buy price paid by the prospective buyer. The arm’s length rule eliminates family attempting to save the home and the 90 day prohibition against resale will chill real estate investor participation which plays a major role in moving houses (I find this restraint on alienation to be disturbing as well and question its enforceability). Lastly, I question how many second lienholders are going to participate with their payments limited to $3,000.00. Without their participation, it will be an exercise in futility as many of these homeowners have 2 loans.