Foreclosure Freeze from the Banks’ Perspective: Don’t Forget that the Borrowers Aren’t Paying

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.

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.

New Attorney General Opinion Requires Advance Payment of Garnishment Fees

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.

A Bankruptcy Filing Doesn’t Always End the Collections Process

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.

Review Loan Documents in Advance of Collection to Avoid Delays and Potential Issues

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.

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.

Recession is Over, But Bank Caution Remains

The report from the National Bureau of Economic Research that the Great Recession had ended in June 2009 comes at a time when commercial construction projects are perfectly positioned to pick back up.

Labor is readily available. Materials are available (and for discount). Land for construction has never been this cheap.

Ask any builder or general contractor what’s the hold-up, and they’re most likely to point to their bank. From what I’m hearing from contractors, the number one impediment to new growth appears to be the banks’ resistance to fund new deals, especially those with any element of risk.

Maybe the market will gain some confidence in response to this report, and then the banks will look again to the construction sector for growth. Until then, we’re all waiting.

Update: The Nashville Business Journal just posted an online article on this issue, noting that Tennessee construction projects are down 32% from this time last year.

Creditor’s Rights: From the Judge’s Perspective

Yesterday, I attended a TennBarU CLE course, called “Creditors Practice: A View from the Bench.”

Aside from the opportunity to earn brownie points as a smiling audience member to a Judge’s speech, the program gave the opportunity to hear about general sessions (a.k.a. small claims court) practice from the judge’s perspective. These courts often deal with unrepresented parties, and the practices and procedures are often confusing. The fast paced practices of the Shelby County General Sessions Court have been dubbed the “Rocket Docket.”

A common refrain was the difficult task of working with unrepresented people who don’t understand their rights. When asked about the non-lawyers’ ability to defend themselves, one judge noted that most people are “confounded by the whole process” and “surprised that it’s not more like The People’s Court.”

The Judges all try to protect anyone from being taken advantage of, but, at the same time, there are too many cases for the Judges to look after the rights of all who appear before them. From a creditor’s perspective, dealing with a pro se litigant offers those same challenges, and it’s good to hear that our judges recognize and account for those difficulties as well.

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.

Lien Litigation takes a Starring Role in “Holmes on Homes: Lien on Me”

The HGTV show Holmes on Homes aired a two hour special episode called “Lien on Me,” in which the host and his crew do remedial work on a house after the contractor has abandoned all work and filed a lien lawsuit against the homeowners. Apparently, the bank had canceled all further contractor draws on the construction loan, due to the lack of sufficient progress on the construction.

Like any Holmes on Homes episode, host Mike Holmes did a thorough inspection of the work performed and found the work to be incomplete, unprofessional, and, in some instances, dangerously incompetent. During the course of the filming, over 100 subcontractors were brought in, and the entire remediation took 30 months to complete. All that time, the lien litigation continued.

To say that “most homeowners aren’t so lucky” is a huge understatement.  In these situations, an owner may not have the financial resources to bring in a second contractor to complete or repair the existing work. Then, in the rush to correct the deficiencies, the owners don’t keep sufficient evidence and records of the work in dispute to prove the problems.

Holmes had a TV crew and a team of experts taking detailed notes (and HD video of all the problems).  I pity the contractor who has its work subjected to the glare of the video cameras and a TV host who has made his living identifying shoddy work.