On December 9 and 10, 2010, I’ll be speaking at the 2010 Tennessee Real Estate Law Conference, presented by M. Lee Smith Publishers.
This group always puts on great seminars on relevant topics, and the faculty looks really strong.
My portion is going to be presented on December 10, at 2pm to 3pm, titled “A Primer on Real Estate Liens.” Here’s the full agenda.
Disclaimer: I represent the banks. So, I read this piece in the Washington Post with biased eyes, but the central theme is spot-on: sure, the big banks screwed up their paperwork and their shoddy records are being exposed, but, at the end of the day, the borrowers still borrowed the money and aren’t paying it back.
The article goes on to make points that everybody should agree with: The paperwork issues raised are valid, and a bank that can’t answer these simple questions (such as, do you really own the debt?) shouldn’t be foreclosing. Also, this situation puts pressure on banks to finally take aggressive and sincere efforts to implement troubled loan restructuring programs.
The Calculated Risk blog first pointed to this article, and their comments section is wild with discussion.
The Tennessean ran a story on the decision by Bank of America to freeze all pending foreclosures so BOA can review its documents and records for accuracy.
The root of all this mess is the wholesale practice of buying, assuming, and assigning mortgage debt. Unlike your local bank that keeps its own payment records and the original loan documents in-house, Bank of America may only have a computer printout with a (partial) copy of the relevant loan documents and a third party’s payment history, and there is probably nobody at BOA who can affirm and swear to the amount of the debt, the default, or the existence of the original loan documents.
So, when it came to light that one person was signing 100s of foreclosure authorizations a day without any actual review or knowledge of the status of the loans, BOA had no choice but to stop all foreclosures, lest it risk certain legal attacks on any of its foreclosures pending now or in the near future. Now that the cat is out of the bag, BOA has to deal with this issue head on and, frankly, I think we’ll be surprised at how difficult this problem ends up being for BOA.
Keep in mind, however, that this “freeze” only applies to Bank of America mortgages, and so other lenders have no reason to cease foreclosure activity–on the contrary, they’d have every incentive to foreclose in order to get their inventory off the books (while the BOA foreclosures aren’t flooding the market).
The next few months will most likely not offer any guidance or resolution for borrowers. The foreclosure process will resume at some point, probably in early 2011, without any further issues. Those who don’t take any action, either by seeking modification or default forgiveness, will end up exactly where they are today.
I get asked all the time: “After I’ve exhausted all the leads I have and still can’t find assets, what do I do to collect?” My typical response has always been to try a random bank levy.
A bank levy is a form of execution, issued through the clerk’s office, that directs a bank to freeze a judgment debtor’s bank account and send the funds, if any, to the judgment creditor. Obviously, it works best when you know where your debtor banks. Otherwise, you’re blindly asking banks if they have any money of the debtor and, depending on how many banks are in your area, that’s a lot of dead ends.
But, if you’re out of good leads, my reasoning has always been “What’s the harm?”
That was before Tennessee Attorney General Opinion No. 10-100, issued on September 27, 2010, changed the procedure on garnishments under Tenn. Code Ann. 8-21-401.
Under the old practices, you didn’t pay garnishment costs up-front; you only paid when your garnishment was successful. So, there was no disincentive from issuing as many garnishments as you wanted. Under this new opinion, the Clerk collects the $25 fee in advance.
This new opinion changes the strategy on blind garnishments, at least from a cost/benefit perspective.
The lesson? When your customer starts having payment problems, just keep a copy of an old check.
Just because someone who owes you money files Bankruptcy, it doesn’t mean the that you’ll never receive any money and you should throw away your judgment.
Even in bankruptcy, there’s still a chance of monetary recovery. In addition to the benefits to the debtor (i.e. the discharge of debts), the secondary point of the bankruptcy process is to maximize return for creditors by organizing and selling the debtor’s non-exempt assets. But, to be candid, most creditors in bankruptcy only receive pennies on the dollar in the process.
Keep in mind, however, the success rate in Chapter 13 bankruptcy cases (where debtors repay a percentage of their debts over 3 to 5 years) can be as low as 20%, meaning that most of those cases end with a dismissal. A dismissal is good for a creditor, because there is no discharge of the debt. Instead, the full amount remains due and owing. Debts are eliminated only when debtors receive a “discharge.” That’s an important distinction to know.
Finally, remember that a bankruptcy discharge only discharges “debts”—not “lien” rights. So, if you’ve already obtained a judgment and recorded it as a lien, then your lien on the debtor’s property may survive the bankruptcy discharge. As a result, even though you can’t collect your debt, you can enforce your lien in the event of an attempted sale or refinance.
Of course, a bankruptcy filing invokes the automatic stay, which requires a cessation of all collective efforts. But, even though your collection may be stayed, that doesn’t mean that it’s the end of the line on your efforts.
The New York Times reports that foreclosures may slow down, as lenders have learned about mistakes in their processing of documents and default documentation.
Needless to say, finding a defect in documents isn’t uncommon (nor fatal), but the results can be catastrophic if the defects are found too late. The worst time to discover defects in your loan documents is after you’ve started the adversarial enforcement process.
At that point, it may be too late to have the customer agreeably sign any corrective documents. Even more dangerous is the Bankruptcy Trustee, who can exploit certain defects in security documents and take collateral from both the customer and you.
Before a creditor declares default, it should take a few minutes to review the signatures and terms of the loan documents and to confirm that your collateral documents are in order and properly recorded.
That way, every subsequent step in the collection action on those documents will be on solid footing.