Bankruptcy & Loan Modifications

The term loan modification is not a new one, but it has picked up a lot of speed over the past year. In the past, homeowners and lenders have been able to workout deals to change the essential terms of a mortgage through private negations. However, in March of 2009, the United States government released their Home Affordable Modification Program (“HAMP”) and all of a sudden it was the new craze. The problem is now that the Government is involved at least to some extent, consumers seem to believe that banks have an obligation to “modify” or change a loan. When in reality, the government has no teeth to force the banks to do anything. A loan modification or credit workout is purely an optional program.With that said, many consumers and frankly even Consumer Debt Advocates have been taken advantage of by the banks who have at the very least given the appearance of acting in a deceptive manor with respect to these loan modifications. Many homeowners were accepted into a loan modification trial program, in order to prove that they could make modified payments. The homeowners has made these payments for several months and after they have been faithfully making good on that agreement are kicked out for no reason, or even fraudulent or deceptive reasons and are facing foreclosure.

Many of use know the deal; the bank requests a bunch of documentation to review. They claim that they have not had a chance to review it and so ask for updated information. They do this while arrears are building up, and then finally offer a trial plan. Once the homeowner is in the trial plan for what is represented to them as 3 months, they soon learn that it can become two to three times as long, all the while the homeowner faithfully performs their obligations under a new agreement and pays sometimes tens of thousands of dollars to the bank, instead of investing that money in other avenues that my be more effective, such as filing for a chapter 13 bankruptcy, or challenging the standing of the banks.

It has been suggested by many on the interest though various blogs and chat rooms that this loan modification is nothing more then the banking industry’s “well-thought-out scam where the lender, knowing full well they ultimately intend to foreclose string the homeowner along to collect a few additional payments.

What many people do not seem to realize, is that there are other opportunities to save your home, or in the alternative, cut your losses before they arrears get too great to manage. The key to remember is that should you want to walk away from your home, if the home is sold for less then you owe, you may be liable for the debt. In order to avoid this, a simple Chapter 7 bankruptcy can eliminate that risk. Additionally, you can file a Chapter 13 case and pay back the missed payments over 5 years interest free. Perhaps more importantly, when you file a bankruptcy, the bank must stop any foreclosure or collection attempts for past due amounts. It may provide you with the time you need to go into court whether it be through the bankruptcy court, the land court or even superior court to challenge the standing of the bank.

The lender must prove that they even have a right to foreclose and in order to do this, they must have a copy of your original mortgage and note. If they can not produce that note, then a judge may indefinitely stay their foreclosure. If they file a claim for past due amounts, the bankruptcy court may hear this as evidence of a challenge to the proof of claim. You also may request a copy of your loan application and find out that there are many untrue statements that bank used to issue the loan. If this is the case, you may even be able to strengthen your position and negotiate a “real modification” where you have now come full circle.

Additionally, should you have a second mortgage that is not supported by any equity, you may be able to strip the lien entirely though a Chapter 13. In the event that the home is not your primary home, but rather an investment, you may even be able to cram down the principal to its current fair market value and a reasonable interest rate through a court order.

The bottom line is this, do not trust that you will obtain a loan modification even if you have been put into a trial period. You have several options, and should contact a qualified consumer debt attorney to learn what options are at your disposal.

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Let me preface this blog by stating that I am a consumer debt attorney.  I typically represent homeowners or small business owners in negotiations with banks and other creditors, or in protecting consumer rights though use of the Bankrutpcy code.  Now with that said, I am going to do somthing for my brothers and sisters, stick up for the “Dark side”.

 Last week the highest court in the land rendered a decision relative to the Fair Debt Collection Practices Act that will greatly empower home owners to negotiate with their mortgage companies.  More importantly, the ruling in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, limits a lawyer’s ability to deceive a homeowner and claim it was a “bona fide error”.  Should Creditors counsel advise their client to take certain steps where there is conflicting case law regarding the Fair Debt Collection Practices Act, and if a court rules that the route taken by the lawyer was not the proper interpretation, then the court may access personal liability against Creditors Counsel.

The ruling stemmed from a case where a law firm representing a mortgage company sought to foreclose on a home. It sent a letter to the debtor that said the debt would be considered valid unless the debtor disputed the claim in writing, even though the Fair Debt Act does not require a written dispute. The mortgage company acknowledged that the debtor had already paid the debt in full, and the firm withdrew the foreclosure suit.

In my opinion, this is a very scary ruling.  Even though, I represent consumers and Debtors in these types of actions and almost always find myself on the other side of the fence from Creditors Counsel, it is hard to agree with a ruling that limits any attorneys ability to interpreter law.  I mean, isn’t that what we have been trained to do from the first day of Law School to studying for the bar exam and now in practice.  More importantly, isn’t our entire judicial system built on the adversarial concept of two parties arguing different points of view over the same issue?  This seems like an awfully slippery slope to me.

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The Massachusetts Consumer Protection Act is a law which allows consumers to take legal action against unfair or deceptive business activity. M.G.L c. 93A is the Massachusetts statute which is used in order to deal with such matters. Violation of the regulation gives the individual litigant an opportunity to obtain actual damages and equitable relief, the Attorney General may obtain injunctive relief, and a civil penalty may be imposed. United Cos. Lending Corp. v. Sargeant, 20 F. Supp. 2d 192, 204 (D. Mass. 1998)

In relation to banks and their lending practices to prospective homebuyers or consumers the Massachusetts Consumer Protection Act is a useful tool in order to protect those subject to the unfair and fraudulent practices used by banks and lender services. One way courts determine whether a bank or lender has violated this particular statute is if the conduct was done so with the intent to deceive or fraudulently induce a purchase.

With respect to banks offering loans to homeowners, sub-prime loans tend to be the most common loans involved within consumer protection cases. Sub-prime loans are defined as “…loans offered by banks to borrowers who generally would not qualify for traditional loans offered at the generally prevailing rate of interest for conventional mortgages” Commonwealth v. Freemont 452 Mass. 733, 734 (Mass. 2008).

There are times were banks and lending institutions will use various tactics in order to avoid their duties or responsibilities which the court has deemed unfair and deceptive according to the Massachusetts Consumer Protection Act. For example, in one case,the lender breached their agreement when they made the borrower believe certain procedures needed to be followed in order to obtain loans but the lender never followed through with these procedures. The court found this behavior to be unfair and a violation of the Consumer Protection Act. Zuker v. GE Capital Corp., 20 F. Supp. 2d 254, 263 (D. Mass. 1998).  In another example,extremely high brokerage fees were charged to the borrower. The court ruled that charging such high fees was unfair and deceptive according to the Consumer Protection Act because the lender substantially deviated from industry-wide practice United Cos. Lending corp. v. Sargeanty, 20 F. Supp. 2d 192, 209 (D. Mass. 1998).

For those who may find themselves subjected to the tactics and unfair behavior of banks and lending institutions be mindful that the Massachusetts Consumer Protection Act will prevent those banks and lending institutions from allowing their acts to go unpunished.

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I recently came across a great article drafted by a former paralegal of our firm, Rick D. Misitano regarding foreclosure defense.  Below are the pertinent parts of that article.
When a lender can’t produce the original note, allowing a foreclosure to proceed puts the homeowner at risk of owing that debt again to another party in the future.

So, what happens when the lender tells the Court it can’t produce the original note, because it is lost? Let’s start with the basics. If a lender wants to foreclose on a property, it has to be able to show that it is, in fact, the appropriate person to whom the money is owed. That right to foreclose belongs ONLY to the person who has legitimate POSSESSION OF THE ORIGINAL NOTE - not a copy, not an electronic entry, but the original note itself with the original signature of the person(s) who allegedly owes the money along with appropriate raised notary seal and signature. So, if you are faced with a foreclosure, you have every right to demand that the person or entity trying to take your property, first prove to the Court that they have the legal right do to so in the first place by proving they have legal possession of the original promissory note.

In my opinion, an original mortgage note is a VERY valuable legal instrument, much like legal tender and should be guarded and protected as such by the person holding such an asset. Loosing an original mortgage note is like loosing a $100 bill or a gift card or a lottery ticket.

Let’s say (as an example) I scratched a million dollar winning lottery ticket and I just stuck it somewhere and misplaced it and now cannot find it. Do you think I could just show up at lottery headquarters and claim my prize without having the actual winning ticket? What if I made a photo copy of the ticket? Would I get my winnings then? What if you loaned me $100 and I tried to pay you back with a photo copy of a $100 bill? Would you accept my payment? What if I paid you back with a photo copy of a personal check made out to you for $100? Would you accept my payment then? Do you think your bank would honor a photo copy of my personal check made payable to you for the hundred bucks? Or do you think they would want the original check from me with my original signature so they can verify my check is authentic and is a payment I authorized? The same principle applies to the person or entity claiming to be the legal holder of an original mortgage note. He who holds the note holds the key and has an absolute duty to safeguard such an important legal instrument at all costs!

What the Lender Must Do

What often happens, however, is that the lender claims it doesn’t have the original note, because that note has been lost or destroyed. If the lender is making such a claim, the law requires the lender to prove all of the following under the “Uniform Commercial Code”, which is a set of laws governing commercial transactions that many states have adopted. It contains a specific provision on this subject (Section 3-309) which states that a person can enforce a promissory note without having the original, BUT only under certain limited circumstances.

1. The person or entity has to swear and attest that it no longer has the original note;
2. The person or entity has to prove that it was properly in possession of the note and was entitled to enforce it WHEN it lost possession of the note;
3. The person or entity has to prove it didn’t “lose” possession simply because it transferred the note to someone else (i.e., it’s not really lost); and
4. The person or entity has to prove that it cannot produce the original note because the instrument was destroyed or its whereabouts cannot be determined or it was stolen by someone who had no right to it.

All of these matters have to be definitively proven by the person or entity trying to foreclose on the property. It is not the obligation of the borrower to prove or disprove any of this. The borrower can challenge the right of the person or entity trying to foreclose and demand proof.

The Court’s Important Role

It is up to the Court to determine whether the lender has satisfactorily proven why it no longer can produce the original note. The Court also has to be satisfied that when the original note was lost, the person trying to foreclose on the property had possession of the note at the time it was lost. Until the Court has been satisfied of all of this, the foreclosure cannot proceed.

It is also important for the Court itself to understand that this issue is not merely a “technicality” and the judge should not be satisfied with anything less than full proof of this issue. The Court itself needs to appreciate the fact that if it should agree that an original note has been legitimately lost (and allows the foreclosure to proceed) it is the borrower who is still at risk.

Why? Because incredibly, even if a Court has found that the original note is lost and the foreclosure sale is finalized, if someone later turns up with the original note and proves that it is the proper holder of the note (and not the person who foreclosed on the property) the original borrower is STILL LIABLE.

That’s right. Someone took your home and the Court allowed it because it believed that the lender proved that the note was lost and it was the proper party. Then someone legitimate shows up in the future with the actual note and you still owe that person the money even though your property was taken with the blessing of the Court. Trust me, this is a very serious issue regarding foreclosures! Homeowners pursuing a short-sale should be very concerned and should seek out the advice of legal counsel if seeking such option. Homeowners who are seeking to do a loan modification should be even more concerned! This issue has affected many of our our own clients who have retained us because they negotiated a short sale themselves (or via their real estate agents) and are now being sued by parties claiming to be the legal holders of their mortgage notes even after they have already sold their homes! These homeowners had the need to sell their property by means of a negotiated short-sale (so they could avoid a foreclosure) only to find out that the entity claiming to have the legal right and authority to enter into such negotiations and accept such settlements sold their note to another entity and weren’t even aware of it. Several months (and even years) later, the newly assigned lenders (now claiming to be the rightful owners of our client’s original notes) have since come forward and have filed suite seeking to recover their entire outstanding principle balances owed to them (prior to the homeowners closing their short-sale transactions with the wrong note holders). And (if you are a homeowner seeking a loan modification) you absolutely need to verify who currently holds your original note. Otherwise, if you enter into a loan modification agreement with the wrong party (or should be successful in getting your note totally re-written for better terms) you could be creating a whole new mortgage debt that you would be responsible for if there were someone else out there claiming to legally hold your original note.

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Agents and brokers have been asking us what happens when a lender winterizes a home and changes the locks on a homeowner while they are in the process of doing a short sale.

First of all, let me make it perfectly clear: A homeowner remains the homeowner until they no longer own their home. This means that unless and until the lender auctions the home and completes the foreclosure process by recording the foreclosure deed, the homeowner continues to have all of the full legal rights, authority and benefits of being a homeowner.

Keep in mind, the lender/investor has a collateral stake in their investment and has the right to make certain their investment is protected. This means if the lender has a reasonable suspicion that a property has been vacated or abandoned, they have a right to make reasonable entry to secure the property in order to prevent damage, vandalism, etc. However, just because a lender takes precautionary measures to “secure” a property does not mean they can take “possession” from the homeowner. If locks are changed at anytime prior to a foreclosure deed being recorded, the homeowner has the right to change the locks out themselves and continue their possession until the disposition of their property is concluded.

Also keep in mind that even if the homeowner’s property is auctioned and they are still occupying their home at the time, they can remain in their home until a judge tells them they need to vacate. All tenancy laws would need to be followed and the new owners (whether it be a bank buyback (REO) or third party purchase) would have to follow proper eviction procedures.

IMPORTANT - Foreclosed homeowners should NOT accept any “Cash for Keys” offers from the lender or third party purchaser unless they are absolutely certain they can realistically fulfill the terms of such agreement, which include the ability to vacate the property by a certain date. If the homeowner should accept such an agreement, they will loose any protections and rights they may have had available to them.

The forgoing post was written by Rick D. Misitano

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The United States Treasury Deptartment published a press release in March of this year that details the new Home Affordable Modification Program (”HAMP”).  I have written many blog posts with respect to this program and have personally been able to use this program to help many clients.  I thought it would be a good idea to post the link on the Massachusetts Bankruptcy Blog to this Press Release: http://www.treas.gov/press/releases/reports/modification_program_guidelines.pdf

 If you have any questions, you can always contact a bankrutpcy attorney in your area to discuss HAMP.

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As many homeowners have found it increasingly difficult to make ends meat and afford their home mortgage payments, mortgage defaults and foreclosure proceedings have risen.  These homeowners have several options that may put them in a position to bring their accounts current and allow them to make their subsequent mortgage payments.  One such option if a homeowner qualifies is to take part in the United States Treasury Department’s Home Affordable Modification Program.

This program is a shared debt reduction program between your lender and the government.   The first step is for your lender to reduce your monthly mortgage payments including (principal, interest, taxes, insurance and condo fees) to reflect no more then 38% of your gross income.  Gross income is defined as your total salary, tips, dividends and other income prior to taxes.  Once the lender or bank reduced your payments to 38% of your monthly gross income, the Treasury Department will then step in and match dollar for dollar any additional reduction that the lender provides down to 31% of your gross monthly income for up to five years. 

The benefit to a homeowner is rather obvious, in many cases a very large reduction in monthly mortgage payments.  Additionally, should the monthly payment be reduced by 6% or more, homeowners are eligible to receive $1,000 per year for up to five (5) years, payment that goes straight towards reducing the principal balance on the mortgage loan as long as the homeowner is current on their monthly payments.  

In order to  encourage lenders and banks to take part in the program, the lender also receives various significant financial benefits.  First and foremost is their ability to avoid foreclosing on another house that likely has no equity.  The lender shares the financial burden with the Treasury Department; additionally the lender or bank receives compensation from the Government in the amount of $1,000 for each loan modified pursuant to the program.  The lender will also receive up to $1,000 per year for each year the homeowner remains in the program and stays current on their new mortgage obligation.  Should the homeowner be current when entering into the modification, an additional benefit is a one-time incentive payments of $1,500 to lender will be provided.

Granted, this program sounds like a fantastic win-win situation for both a homeowner in financial distress and a lender uncertain as to the borrower’s ability to stay current on their mortgage obligation.  What are the requirements to take part in this program?

Homeowners:

First and foremost, the homeowners, mortgage itself must qualify.  In order to qualify, the loan must have commenced prior to January 1, 2009. 

• The home must be your primary residence and a single family dwelling of no more then 4 units.  More specially, the home may not be investor owned, it may not be vacant.  The homeowner will need to prove they live in home though a tax return or a utility bill.
• The payoff on the primary mortgage must not exceed: 1 Unit: $729,750, 2 Units: $934,200, 3 Units: $1,129,250, or 4 Units: $1,403,400
• A homeowner must have a current or imminent financial hardship.
• Loans can only be modified once under this program, as such, if you have modified once, you will not be able to go back to the well a second time.
• The home must have an appraised or assessed value not older then 60 days.
• The borrower will need to verify their income by submitting an IRS form that allows the lender to request taxes directly from the IRS.  Additionally, the borrower will be required to submit the two most recent pay stubs.
• Borrowers must also represent to the lender that they do not have enough money in the bank to stay current.
• If a homeowner’s overall debt is greater then 55% of their gross monthly income, you will need to first take part in a credit counseling session with an HUD- approved counselor and receive a certificate of compliance.

Lenders:
Participating lenders are required to consider all eligible loans under the program guidelines unless there is a pre-existing agreement which expressly states otherwise.  For any modification request originating from a homeowner in default, a net present value of cash flow test will be applied.  This test essentially looks at whether a modification will increase the homeowner’s cash flow should a modification be granted.

How does the Process work?
The process starts by providing your lender with all the required documentation and information.  This is a step that can be very time consuming and is a prime reason to work with a licensed attorney in your area.  Once the bank or lender has confirmed they have received your full package, and has reviewed the package, a loan negotiator will be assigned to the case.  The lender then must start by determining if there are any missed loan payments in.  If so, the lender may capitalize the late payments.

The next step is for the lender to determine 31% of the homeowner’s gross income.  Once this income level is determined, the lender must follow a 3 step process to reduce the monthly payment to that 31% amount. 

• Reduce the interest rate as low as 2%.   
• If the rate reduction does not bring the mortgage payments down to the 31% mark, then the lender is to extend the duration of the loan to 40 years from the date of the modification.  It should be noted that a full 40 year extension may not be required, but the lender only needs to extend to the point where the payment reaches the 31% watermark.
• The next step is for the lender to forbear principal.  Should interest forbearance be used, no interest will accrue on the forbearance amount.  If there is a principal forbearance amount, a balloon payment of that forbearance amount will due on the maturity date, upon sale of the property, or upon payoff of the interest bearing balance.
• If a homeowner has a junior lien (second mortgage, equity line, etc) and the first or primary mortgage is modified through the program, then and only then can the junior lien be modified.  The Government is offering certain incentives to modify junior liens in this timeline.

The Loan Modification Approval Process

The first step in the approval process is for the homeowner to take part in a 90-day trial period based upon the new loan modification monthly payment.   The borrower must remain current for the first three (3) months or 90-day period.

If the borrower’s total monthly debt exceeds 55% of their gross income, the lender or bank must notify the borrower in writing of HUD approved credit counselors.  The borrower must complete a credit counseling program and obtain a certificate.  If the homeowner’s debt does not rise to the 55% level, the forgoing is not required.

The lender must waive any late fees upon completion of the 90-day trial period.

The investor may not require the borrower to contribute cash

What about homes in foreclosure?

Subsequent to a modification agreement being entered into by the homeowner and the lender, any foreclosure action will be temporarily suspended during the 90-day trial period, In the event that the Home Affordable Modification or alternative foreclosure prevention options fail, the foreclosure action may be resumed.  However, pursuant to the Affordable Home Modification Program, should the modification fail, banks and lenders are required to consider other programs before foreclosure including but not limited to short sales and deed in lieu of debt.

If you found this article helpful but would like to work directly with an attorney who handles these matters, you may want to contact a local bankruptcy or debt relief law firm, such as the author of this article, The Law Office of Goldstein and Clegg, LLC, Loan Modification Attorneys.

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A common practice in the mortgage industry is to buy and sell mortgages. This practice has a specific legal term, “assignment”. What many lenders have tried to do though is to buy mortgages that have a foreclosure order already on record. The new lender then buys the loan at a very deep discount and tries to sell the house though the foreclosure process. This slick strategy on the part of lenders has been deemed illegal in Massachusetts. More importantly, pursuant to a recent Massachusetts Land Court case, any foreclosure on record that is assigned has been reversed and ordered void.

More specifically, in the Land Court case of, US Bank National Association v. Ibanez (Misc. Case No.384283), where the foreclosing lender was assigned a mortgage dated prior to the date of publication of notices under M.G.L.c. 244, Section 14, the mortgagee had no title to foreclose. Basically, the court has effectively invalidated every foreclosure sale where the foreclosing party could only produce an assignment dated after the date of the publication but with the stated effective date of the assignment prior to the publication date.

The legal ramifications of the aforementioned case are highly significant. As long as the assignment vesting the title into the mortgagee did not physically exist at the date of the publication of foreclosure sale notices, the foreclosing entity was not the mortgagee within the meaning of M.G.L.c. 244, and thus had no authority to foreclose.

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            In the past, “Foreclosure” and “Bankruptcy” were considered two of society’s dirty words.  Today these terms are viewed by many as relief from Financial Black holes that can not otherwise be escaped.  In the current economy, inundated with bad mortgages, many of which stem from predatory lending practices, coupled with credit card debt spinning out of control, bankruptcy and the loss of ones home have become common place.  For many homeowners, a decision needs to be made as to which of these terms is the lesser of two evils.

            For homeowners whose debt has spun out of control, and whose income does not cover expenses, foreclosure and or bankruptcy are options that may be inevitable.  However, which of these terms truly is the lesser of two evils? 

            Should a homeowner file for bankruptcy, they may be able to eliminate all of their credit card debt, medical bills, court ordered judgments and even electric and gas bills.  With the assistance of a bankruptcy discharge, they may then be able to stay current on their mortgage.  However, many people are even more concerned about their credit score.  They may ask, “Will we be able to obtain future financing?”

            Should a homeowner rather, opt for foreclosure, they will certainly loose their home, but do they really want to keep it in this market where the house may be worth far less then what is owed.   If a homeowner opts to walk away from their house, they may own other investment property, and be able to live in a multi-family house, or they may simply want to rent and not deal with all the hassles of homeownership.  “If something breaks, let someone else fix it, repair it, deal with this problem”. 

           Neither option is an easy choice.  A bankruptcy will remain on your credit for 10 years, while a foreclosure will only remain for 8 years, but many credit counselors report it has twice the negative impact on your credit score compared with a bankruptcy. It will be extremely difficult to obtain a new mortgage for many years after you have lost a home to foreclosure.  Many homeowners may see foreclosure as a better option then simply obtaining the financial relief that the Bankruptcy Laws provide.  What many do not realize is that a foreclosure may be even a darker mark on their credit then a bankruptcy.  As a result, it may be even more difficult with a foreclosure on their record to obtain subsequent housing.  Many mortgage lenders look at a foreclosure more seriously than they will a bankruptcy.  As a result, a former homeowner may not qualify to rent the apartment or house they want, even though they may be able to afford it now that the mortgage obligation is gone. 

            One of the key factors to keep in mind is that when you file and receive a discharge of your debt in a bankruptcy, even if your credit score is lower, you are still a better candidate to receive future financing and in very short order.  The reason is simple.  After your bankruptcy discharge, you do not owe anything to anybody.  Additionally, creditors realize that you can not file for a new bankruptcy for another eight (8) years, and as such can not walk away from any new debt that you may incur as a result of credit extended to you by a new creditor, be it landlord, credit card, or other financing option.

            Now it should be pointed out that in many cases, you may be so far behind that a foreclosure is going to happen no matte what.  If this is the case, it may be in your interest to file for bankruptcy right before the order.  The reason is that if the bank sells the property for less then what is owed, the difference (commonly referred to as the deficiency) will be discharged.  As a result, the bank will often sit on a foreclosure order for some time before they act upon it, so as to not loose more money.  In the meantime, a homeowner can possibly short sell their house and move on with their life.

            Based upon the foregoing, if you are facing a financial crisis that may end in either foreclosure or bankruptcy, consult an attorney to explore what your best option may be. The right decision may save you years of restricted credit in the future.

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