Category: Foreclosure

Bank of America Foreclosure Freeze Unlikely to Help Homeowners

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.

Homeowners Remain Frustrated with Short Sale Process, and New Legislation Unlikely to Correct Issues

The Washington Post ran a story on the rise of short sale home transactions, along with the disappointment and frustrations home owners have with the process.

Generally, a “short sale” of a house is a sale for a purchase price that is less than the amount of the debt owed to the bank on the property. In order to do this, the home owners must obtain an agreement from their bank or lien-holders that the liens on the property will be released in exchange for the proceeds generated by the sale. Since the proceeds will not pay off the lender in full, the seller cannot force the bank to accept the deal–it can only be done with approval by all lien-holders.

And there’s the difficulty. In this foreclosure crisis, banks are overwhelmed with short sale proposals, all of which must be reviewed to determine if the “short sale” price is reasonable and better than the bank can do at foreclosure. In almost all cases, the prices will be better. But, still, the approval process requires that a bank officer agree to release the lien rights for something less than the bank is entitled to under its lien, which isn’t a decision that a bank can quickly make.

The most common complaint from sellers is that this process takes far too long, especially when there’s a buyer waiting who can simply move on to another house. In response, some law makers have filed legislation, HR 6133, that would require expedited processing and responses to short sale proposals.

This new legislation is unlikely to solve these issues, because who is to determine what is the proper timing to process short sales? Ten days? A month? And what’s the proper penalty? A forced sale? Release of the lien or deficiency rights?

I doubt that the legislators want to force their own terms onto what should be a typical “business decision” by the banks, and, if they do, there’s the risk that the lenders will simply respond immediately…with a “No” to all requests.

Real Property Taxes Always Get Paid First

In this economy, the best way to get paid on outstanding debt is to claim a lien on real property. Whether you’re a judgment lien creditor or a homeowner’s association, a lien can give you some sort of collateral for an otherwise unsecured debt.  In order to actually get paid, there must be equity in the property (otherwise, your lien has no value); where there’s no equity, the creditor’s lien must be recorded in advance of other creditors to get paid.

Unless, of course, that creditor is the county tax assessor, who gets to move to the front of the line for repayment. Tenn. Code Ann. § 67-5-2101(a) provides that:

The taxes assessed by the state of Tennessee, a county, or municipality, taxing district, or other local governmental entity, upon any property of whatever kind, and all penalties, interest, and costs accruing thereon, shall become and remain a first lien upon such property from January 1 of the year for which such taxes are assessed.

So, even though the bank’s deed of trust may have been recorded way back in 2002, the unpaid ad valorem county taxes for 2010 still trump that deed of trust. It’s no wonder that banks routinely require payment of the property taxes as part of the monthly loan payments.

This is one of the few exceptions to the “first to record” rule in Tennessee, and, if you’re a lien creditor, the rule of thumb is: you’ll always lose to the county property taxes.

Expired Homebuyer Tax Credits Only Part of the Drop in July Home Sales

Yesterday, the real estate sales numbers for July were released. CNBC was predicting “armageddon”, citing the expiration of the home buyer tax credits as the primary cause of the drop in sales.

While the home buyer credit is probably responsible for the April and May spikes, it’s not entirely responsible for the July swoon.

As a recent homebuyer who received absolutely no benefit from the tax credits, I’m painfully aware that the tax credit wasn’t the “cure all” needed to fix the housing market. And while dropping prices and low interest rates have historically been a boon for home sales, the biggest issue now is that existing home-owners, a.k.a. home sellers, have less room to cut prices and are stuck staying in their existing house.

These home sellers are those who bought homes in the last 4-6 years with 0% to 10% down, and, with falling prices, they can’t pay off their existing mortgage (and a realtor) in any sale, but they’re not Bankruptcy/default risks. Long story short, they’re stuck: they can’t sell and, as a result, can’t buy.

The tax credits only helped these home sellers in an indirect way: the tax credit added cash into the transaction that allowed the seller to give the buyer less of a price break. But, the tax credits helped the real estate markets by greasing only one wheel of the car. Now, we have to look at the others.

Recent Foreclosure Study from California Refutes Foreclosure Stereotypes

The Center for Responsible Lending has issued an interesting new report regarding the California foreclosure crisis.

As described by the Credit Slips blog, the findings contradict “the stereotype of the California foreclosure crisis as resulting from house flippers and social climbers overreaching to buy 4,000 square foot mansions.”

Credit Slips notes that “the typical foreclosure story is not a family reaching too far in order to buy an unaffordable house, but more likely, of using home equity to pay credit card debt and maintain a middle-class standard of living in the face of stagnating incomes” and concludes that “…the last to arrive at the bottom rungs of the middle class ladder are the first to be pushed back off.”

Tennessean Reports a Steady Increase in Nashville Bankruptcy Filings

The Tennessean ran a story this morning, Bankruptcy Filings Rebound, that discusses the fact that Bankruptcy filings in Nashville and the Middle District of Tennessee went up in July 2010, after declining the prior few months.

Although the article doesn’t say so, I wonder if the re-commencement of foreclosure sales under the new Tennessee foreclosure law is playing some part. (Remember, under this law, creditors must mail out a “Notice of Right to Foreclose” to borrowers, and the timing of the new law resulted in a drastic drop in foreclosures in May and June, 2010.)

In discussing the rising rates, the article cites continuing unemployment rates, expiring unemployment benefits for many laid-off workers, and a general rise in small business failures. The article says that the current number of bankruptcy cases is the highest since the changes in the Bankruptcy laws in 2005, but other experts note that we’re seeing less filings than we actually should be.

New Tennessee Foreclosure Deficiency Judgment Statute Becomes Effective Soon

In addition to imposing new notice requirements on foreclosing creditors, the 2010 Tennessee Legislature has also passed House Bill 3057, which provides post-foreclosure protections to debtors regarding deficiency balances. This new law becomes effective September 1, 2010.

A “deficiency balance” is the amount of debt remaining after the foreclosure sale proceeds are applied to the creditor’s debt. Because most foreclosures don’t net sufficient proceeds to fully pay the debt, lenders often sue their borrowers to recover this difference.

This new statute allows a debtor to question whether the foreclosure sale price was truly representative of the “fair market value” of the property. Under this law, the debtor can attempt to prove “by a preponderance of the evidence that the property sold for an amount materially less than the fair market value…” If successful, the debtor may be able to increase the amount of credit he or she is entitled to.

Additionally, the statute potentially shortens the time to file a lawsuit to recover a deficiency balance, requiring that such actions be brought by the earlier of: two years after the foreclosure; or within the original statute of limitations for suit on the debt.

For most lenders, this new law should not have any practical impact. While you might imagine there would be various horror stories of lenders bidding $10,000 to buy a half-million property, in reality, most lenders were already calculating their foreclosure bids by starting at what the fair market value of the property is, and then subtracting sale expenses and carrying costs. The most prudent lenders have a standard procedure in place for all foreclosures, and many go the expense to order pre-foreclosure appraisals.

The key to avoiding issues under this law is to have some reasonable basis for determining “fair market value” when preparing foreclosure bids, whether it’s the tax records, recent sales, or new appraisals.

Foreclosure Auction Sales: Buyer Beware

In my post from last week about ways to avoid disaster when buying real property at a foreclosure sale, one of the “nightmare” scenarios I noted is when “the house is still subject to prior liens or taxes.”

Well, that exact nightmare came true for these California foreclosure auction bidders, who bought their dream house for half of what it was worth…only to learn that they bought it subject to an existing $500,000 mortgage.

They paid nearly $100,000 for a house they thought was worth $200,000 (great deal so far)…but, under the foreclosure laws, they purchased the house still subject to a pre-existing $500,000 lien (not a great deal anymore).

This is the perfect example of my earlier advice: don’t bid at a foreclosure sale unless you do your homework in advance or consult with someone who will do your homework for you.

As a general rule, foreclosure sales wipe out liens behind the foreclosing instrument, but they are subject to any senior liens (liens recorded before the lien being foreclosed). The foreclosing lender didn’t do anything wrong here, and this isn’t that out-of-the-ordinary. Sometimes, the buyer mistakenly bids so much money above a junior mortgage that the lender is forced to pay that money to the defaulted borrowers–not upstream to those senior liens.

Over the next few years, we’re going to hear a lot about people who made a lot of money in foreclosure sales…just like we’re going to see stories like this one.

Hat-Tip: Calculated Risk Blog.

Foreclosure Sales: Only the Well-Informed Buyers Avoid Disaster

Foreclosure is bad. It’s bad for the homeowner (who loses their property). It’s bad for the lender (who gets a house it doesn’t want back). It’s bad for the neighbors (who may have to deal with a vacant house and decreasing property values).

But, for those with available cash or credit, this economy can offer the deal of a lifetime on the house of their dreams.

For every story like the one above, though, there are dozens more involving people who only buy trouble at foreclosure sales. Maybe the house still has people living there. Maybe the house is still subject to prior liens or taxes. Maybe the sale is on “as is, where is” terms for a reason.

Successful foreclosure purchases require advance homework, involving an inspection of the property records, the tax records, and maybe even an inspection of the property (or at the very least a drive-by). A buyer who does none of the above is running a very good risk that she’ll be buying a nightmare, not a dream home.

Home Sales Drop in June, While Existing Home Inventory Rises

The National Association of Realtors released a report today that home sales dropped in June 2010, mainly as a result of the expiration of the home buyer tax credits. The silver lining, they say, is that June 2010 was still better than June 2009.

What’s really scary is that existing home inventory continued to rise in June. Apparently, in the rush to get homes built and sold prior to the end of the tax credit, builders were left with far more houses than buyers.

The tax credit isn’t coming back, so July probably will not be much better. My prediction? The next report you’ll be seeing is that foreclosures are up in August and September.