Mortgage and Foreclosure Law Blog

One of the things I try to do in my blog is answer questions that people ask me on almost a daily basis. One of those that I haven't addressed yet involves bankruptcy and specifically Chapter 7. You may remember from an earlier post that all your debts are discharged in a Chapter 7 Bankruptcy. In other words, you won't owe them anymore.

The question I get from so many people is, "Can I keep my car and can I keep my house?" The answer is Yes! If you have a car loan, you can keep your car and re-affirm the debt/loan. Once your Bankruptcy is discharged, your loan servicer will send you papers to Re-affirm your debt. Basically an agreement where you agree to continue paying on the loan.

If you own your car, it is exempt and you can keep it. By Exempt, I mean that you won't have to sell it to pay off your debts. You can be in a Chapter 7; but let's say you have three cars and two of them are collector's items and classics. The Bankruptcy court may force you to sell those to pay off some or all of your debt. You will be able to keep at least one car. If you have multiple family members they can usually keep their car too.

You can also keep your home. Not a vacation home; but your primary residence. That's if you want to keep it. You can walk away from it too. It used to be that everybody would just "stay and pay", meaning that you just continue to make your mortgage payments after the bankruptcy. Nowadays it is a good idea to consider asking your mortgage company to re-affirm your mortgage after the bankruptcy. There are good and bad results from this. The good is that you can qualify for a Mortgage Modification later if your debt is re-affirmed. Further, you eliminate some troubles when you are ready to sell the home. The downside of re-affirming your mortgage after a Bankruptcy is that you can't walk away from it later if you get into financial trouble. So that is a personal preference/balance that each debtor has to decide on his/her own. Next time I am going to to into more detail about exempt property and what you can keep and have to get rid of during a bankruptcy.

This is a question I have been getting a lot of lately. Since a big part of our business right now is Mortgage Modification we have clients that are way behind on their mortgage payments and are wondering when they will come home to a locked door telling them to vacate. Well the answer is one of my favorite answers for any "legal" questions....It Depends. Let me go over the general foreclosure process and hit on some expectations you should have.

Once a Mortgage payment is missed, most banks usually don't do anything for the first 90 to 180 days. This depends on many factors including temporary laws, investor guidelines, how many foreclosures they are undergoing, etc. The first step in most states is for your lender/servicer to file a Notice of Default. This Starts a Time line. I'm going to highlight California; but the process is similar in many states.

Once the Notice of Default is filed, the bank has a waiting period before they can Sell the Home at Auction. In California, this is called the Redemption Period and is 90 days. After that 90 days is up, the bank can schedule a Sale Date. Most States Require a Publication Period. This is a period where the bank has to let the public know about the upcoming auction. In California the publication period is 20 days. Once the publication period is over, they can schedule a sale date at any time.

So, in this example the shortest time line your house could go to sale is 201 days after missing your first payment. What happens after the sale, though? There are specific rules for renters; but let's talk about home owners. After a Sale date it takes a few days before a Notice to Vacate is placed on your door. Depending on your State's specific eviction laws you may still be able to live in your home for some time. Often times an eviction proceeding has to be filed with the court and you can live in your home for another 30 days before the Sheriff comes and forces you out.

So what do you need to do? Always check your mail and don't avoid a process server. You need to be on the lookout for a Notice of Trustee's Sale or similar document that gives you the Sale Date for your property. Call your bank. You will have to deal with collection efforts; but you should be able to get information on how much longer you have in the process. I would suggest not trying to live in your house after the Sale Date. That should be your moving day.

Right now I am seeing Sale Dates that are 8 to 10 months after a missed mortgage payment. Next time I am going to go into a little more detail on how the Sale Date and Foreclosure time line is affected by a Mortgage Modification Request.

What do you think the price of a loaf of bread was 40 years ago? The average price for a loaf of bread 40 years ago was .10 cents. Today it is about $2.50. Any guesses what it will be 40 years from now? Over $16! No way you say? Don't you think that's what people would have said 40 years ago if you told them they would be paying $2.50 for a loaf? That's what inflation does and it is going to continue to happen. So again, what does this have to do with consumer debt? The answer is here in part three of my series on winning the money game. You CAN NOT win the money game while you are in debt.

Let's take the same folks 40 years ago. What do you think somebody aged 65, with social security had to save to retire with a meager; but middle class retirement? 40 years ago they could have retired with $75,000 and a social security benefit. But what if you were 25 years old back then and you are getting ready to retire at 65 today? How much would you need along with social security to retire in a meager, yet middle class lifestyle? Today you would need $400,000 and that social security check. Well guess how many people who retire today have saved up $400,000? Less than 10 percent. Guess how many have saved up $75,000? Over 90 percent. Do you see the problem here? People didn't adjust for inflation. Do you know how much you will need in 40 years to retire middle class? $2.5 million! Don't think social security will be there either. So are you ready to do something about that debt?

So why am I trying to explain the money game? We are a law firm doing Mortgage Modification, Debt Settlements, Bankruptcy, and general consumer advocacy, right? I'm trying to stress the importance of getting out of debt and making your money work for you. I am going to give you an example of how devastating taxes can be on your investment earnings. This is going to be a simple example to show you the importance of getting out of debt at any cost and putting any amount of money you can into a tax free investment vehicle. For simplicity's sake let's say that you take a Dollar and double it every year for 20 years. How much do you think you will have in 20 years? Let's see...

Dollars--------Year
1-----------------2
2-----------------4
3-----------------8
4-----------------16
5-----------------32
6-----------------64
7-----------------128
8-----------------256
9-----------------512
10---------------1,024
11---------------2,048
12---------------4,096
13---------------8,192
14---------------16,384
15---------------32,726
16---------------65,536
17---------------131,072
18---------------262,144
19---------------524,288
20---------------1,048,576

Now who guessed you would have over a million dollars? Let me show you what happens when your money gets taxed every year after it doubles. I am going to use a 28% tax rate. So you start with a dollar. You double that dollar in year one. That means you earned a dollar. The government is going to tax the dollar you earned at 28%. That reduces your earnings by 28 cents in year one ($1.00 * 28% = .28 cents.....$1 - .28 cents = .72 cents). That plus your original dollar gives you $1.72. So in year two you are going to double your money and earn another $1.72 for a total of $3.44; but the government taxes your $1.72 at 28% leaving you to only add $1.24 and you have $2.96. Repeat this process for twenty years and guess right now how much money you think will be there in 20 years...

Dollar--------Year
1-----------------1.72
2-----------------2.96
3-----------------5.09
4-----------------8.75
5-----------------15.05
6-----------------25.89
7-----------------44.53
8-----------------76.60
9-----------------131.75
10---------------226.61
11---------------389.77
12---------------670.41
13---------------1,153.11
14---------------1,983.34
15---------------3,411.35
16---------------5,867.53
17---------------10,092.15
18---------------17,358.49
19---------------29,856.61
20---------------51,353.37

Now, all that money you are paying towards your credit cards and other debt is post tax dollars!! That means again, your money is working against you. See why it is so important to get out of debt by any means necessary? Debt Settlement, Bankruptcy, whatever. You can't depend on Social Security or the government to take care of your retirement. You must get out of debt and start saving in the highest interest rate accounts you can that are tax free! Next time I'll go over inflation and how that affects how much money you will need to plan on having in the future. Stay Tuned for part three.

Have you ever heard of Compound Interest and the Rule of 72? For those of us who need a refresher, let me quickly explain. If you are earning compound interest on an investment, divide 72 by the interest rate you are earning and that is the number of years it will take for your money to double.

Let's say you're earning 1% interest compounded annually. You put $100 in the bank. Divide 72 by 1% and you get 72. That means you will have $200 in about 72 years. What if you are earning 10% interest? 72 / 10% = 7.2years. Your money will double every 7.2 years. You can see that in the same 72 years (assume a longer than average life span) your money would double 10 times over the same period that your 1% interest investment doubles once. After 72 years your 10% interest investment of $100 would be worth $102,400!!

Do you know where you get 1% returns? Bank savings accounts. Why would anybody keep money in there when so many other investments guarantee higher returns? So what does this have to do with consumer debt? Your credit cards compound interest against you!! They are investments for the credit card companies. They are charging you outrageous interest rates and when you continue to pay the minimums you are making them rich. If you ever want to win the money game you must eliminate your credit card debt and stop compounding interest from working against you. There are many options to get out of debt including bankruptcy, debt settlement, borrowing from a 401K, even laddering your payments. If you are in a situation where your debt is too much call us to discuss what options might be best for your situation. Next time I'm going to explain how taxes work against you and why you need to avoid them at all costs.

As a Consumer Debt Protection Attorney, I have been getting calls and complaints lately from Consumer's who have excellent credit and have never been late on their mortgage or credit card payments. What they are telling me is that their Credit Card Companies have either raised their rates arbitrarily, or that they have simply raised the amount of their minimum payment. They are desperately looking for help with either their mortgage or their credit card debt. So what is going on?

I titled this entry as "The Big Squeeze" and that is exactly what is happening to Prime Borrowers. In fact, Prime borrowers now account for more than half the mortgages that are 90 days late, which exceed sub prime borrowers. Credit Card companies are looking for more cash to keep their bottom line from disappearing. Bankruptcies are up, people are settling their debt, and millions just can't afford to pay anything. Compounding the problem, so many people are without jobs, that wage garnishment isn't an option.

Normally, your credit card companies have ways to hedge their losses from people who don't pay. One of the first ways is to write off losses, including bankrupted debt, against their taxes. There is a limit to how much of this debt can offset taxes each year. They can also get a judgment against the debtor and put a lien on property, levy a bank account, or garnish wages. These options are very limited in this economy. So many people are in foreclosure, that putting a lien on property is a waste of time. People are so broke there is often nothing in their bank accounts to levy. Finally so many people are out of work or on unempolyment (which can't be garnished) there is no option to garnish wages either. So what are the bank's options?

The answer is to get more money out of their "good" customers. Don't be fooled, it has been proven over and over that these companies aren't scared to employ guerrilla tactics to take your money. It is confusing people why they would employ these tactics against their best customers. I am telling you that it is because they have tapped out everybody else. First of all let me tell you that most changes to your credit account are legal. They can change the rules on you almost at will. Generally, all they have to do is give you 30 days notice and an option to close your account if you don't like the changes.

What seems so amazing is that too many of their "good" customers, who have never been late are now being forced into making a choice between paying their credit cards or their mortgage. Not much of a choice. In the end if you can transfer your balances to another card, do it. If you have any money in your 401K, use it to pay off your debt. Most people don't realize that compound interest works against them, just as it can work for them. If you are paying high interest rates on your credit card and getting a low rate of return on your 401K or other investment, YOU ARE LOSING MONEY!

In my next blog I am going to explain the money game in more detail. Particularly, I am going to explain why Taxes, Inflation, and Interest are so important to have working in your favor and not against you. Stay Tuned.

Hola! So last time I was explaining that even though some folks qualify for the MHA program, they are denied for a modification. When this happens there are still some benefits that the MHA program may provide through alternatives to foreclosure like a Short Sale or Dee-in-Lieu. So now that we know what those are, how about those program benefits?

How The Home Affordable Short Sale/DIL Program Works:
So in a prior post we discussed the main eligibility requirements for the MHA. Then we went over some of the income and expense requirements. People who meet the main requirements; but not the income and expense requirements will be eligible for the Foreclosure Alternative Program.

So before the bank goes to foreclosure, participating servicers must evaluate each eligible borrower to determine if a short sale is appropriate. Considerations in the determination include property condition and value, average marketing time in the community where the property is located, the condition of the title including the presence of junior liens and a determination that the net sales proceeds are expected to exceed the investor's recovery through foreclosure Incentive Payments. So the incentives are:

1) Servicers may receive incentive compensation of up to $1,000 for successful completion of a short sale or DIL.

2) Borrowers may receive incentive compensation of up to $1,500 to assist with relocation expenses.

3) Treasury will also share the cost of paying junior lien holders to release their claims, matching $1 for every $2 paid by the investors, up to a total contribution of $1,000 by Treasury.

Furthermore, and of great importance is the effort of the program to publish streamlined and standardized documentation, including a Short Sale Agreement and an Offer Acceptance Letter. These documents will outline specific marketing terms, describe the rights and responsibilities of all parties and establish clear time frames for performance. Creating one standard set of documents that the industry can use is expected to minimize the complexity of these transactions and significantly increase use of the short sale option.

The servicer will independently establish both property value and the minimum acceptable net return in accordance with investor guidance and will provide instruction to the borrower regarding the list price and any permissible price reductions. The price may be determined based on either: an appraisal and/or one or more Broker Price Opinions either of which must be dated within 120 days of the Short Sale Agreement.

Under the program, servicers will allow borrowers at least 90 days to market and sell the property, with possibly more time based on local market conditions. The property must be listed with a licensed Realtor experienced in selling properties in the neighborhood. Marketing of the property may run concurrently with the foreclosure process, however no foreclosure sale can take place during the marketing period specified in the Short Sale Agreement as long as the borrower is acting in good faith to sell the property. There will be a maximum marketing period of 1 year for the property, provided any longer period not otherwise delay foreclosure sale, to ensure diligence by servicers and borrowers in moving as quickly as possible to complete the short sale and deed-in-lieu process.

Reasonable and customary real estate commissions and selling costs that may be deducted from the sales price will be specified in the Short Sale Agreement. The Servicer will agree not to negotiate a lower sales commission after an offer has been received. Servicers may not charge borrowers fees for participation in the Foreclosure Alternative Program.

Any junior liens, mortgages or other debts against the property must be cleared for the property to be sold as a short sale or deeded to the servicer. The servicer can proceed with a short sale or deed-in-lieu if there is a reasonable belief that all liens on the property can be cleared.

Eligible borrowers will be accepted until December 31, 2012. Program payments will be made upon successful completion of a short sale or DIL.

The MHA, as discussed above, helps borrowers avoid foreclosure by modifying mortgage payments. However, there are just many situations where a borrower, who otherwise qualifies for the program, still doesn't qualify for a modification. To address this situation, the program also has incentives for borrowers, servicers and investors to encourage short sales and deeds-in-lieu. Both allow families and servicers to avoid the costly foreclosure process, and to minimize the negative impact of foreclosures on borrowers, financial institutions and communities.

First we should explain what a Short Sale or a Deed-in-Lieu is. In a short sale, the servicer allows the borrower to sell the house at its current fair market value, even if that amount won't cover the amount owed on the mortgage. In a depreciated market such as our current housing market, this is a common occurrence. If the sale is approved, the borrower is relieved of the difference owed and the sale price. For instance if you owe $500,000 on your house and the house's current fair market value is appraised at $400,000; you would conduct the short sale offering $400,000. If sold, the bank would accept the $400,000 to pay off the entire $500,000 loan balance. Of course this is a simplified example that doesn't even include sales costs and such. This works because the bank realizes that a foreclosure is expensive and that even in an ideal foreclosure situation the result would be an auction sale of fair market value. This would still result in the same loss of $100,000 not including all the foreclosure costs. Thus time, effort, and money can be saved this way.

If the borrower actively markets the property but is unable to sell it within the agreed upon time period, a servicer may consider a Deed-in-Lieu (DIL). With a DIL, the borrower voluntarily transfers ownership of the property to the servicer – provided the title is free and clear.

Historically Short Sales and DILs have not been pursued, rather the servicers have gone after foreclosures. The reason is that these transactions are complex and involve careful coordination of servicers, appraisers, borrowers, purchasers, real estate brokers, title agencies and often mortgage insurance companies and junior lien holders.

The MHA Foreclosure Alternatives Program simplifies and streamlines the short sale and DIL process by providing a standard process flow, minimum performance time frames and standard documentation. To compliment a standardized approach, Treasury provides incentives to borrowers, servicers and investors to pursue short sales and DILs. Our next post will begin to flesh these incentives out.

OK, our last entry went over the more basic/fundamental requirements needed to qualify for the MHA program. We explained the hardship briefly and explained the 31% rule briefly. Now I'd like to go over the general application process and some of the major underwriting requirements for qualification. In most cases, these requirements are the same for the MHA as for regular modification programs each servicer may have, sometimes referred to as Business As Usual Modifications.

The MHA is designed to help people afford their monthly payment. Therefore the main concern in qualifying is the borrower's monthly income and expenses. The process is similar to what is needed when originally qualifying for a loan in the first place. The bank will ask for several pieces of information in order to determine what a borrower's monthly income is. These may include some or all of the following; Pay Stubs, Bank Statements, Filed Taxes, Profit and Loss Statements, Rental Agreements, various other proofs of income.

The bank will have an underwriter who takes this information and specializes in determining a person's monthly income. The process is to varied and specific to fully explain the nuances here. One reason people benefit from our services is the fact that we understand how this process works and what is needed to ensure that the numbers we present to the bank are the same numbers the bank will use.

The next piece of information is critical. The bank will ask for the borrower's monthly expenses.
The reason almost all loan modification requests get denied when borrower's submit a request by themselves is due to a lack of understanding in how the monthly income and expenses work together. The bank understands that people who are requesting a modification are tight on money. Most of the time people are already behind on their mortgage and facing impending foreclosure. However, the bank doesn't want to spend time and money granting a modification, only to find the borrower in the same situation in a couple months, and end up foreclosing on the property anyway.

Therefore the main goal of presenting the finances properly is to determine the following:
1) Does the Income Exceed the Expenses every month? If so, does it exceed it enough the the borrower should be able to afford the mortgage? If not, then they should modify.
2) Do the Expenses exceed the Income every month? If so, by how much? Depending on that answer they may or may not qualify for modification. Let's use some simple numbers to illustrate.

For Simplicity, let's say your monthly GROSS/NET income is $10,000. Your currently Monthly mortgage payment is $4000. From our prior post we know that the program goal is to get you down to $3100 a month. That is a savings of $900 a month. Now, let's say that your monthly expenses, including your current mortgage payment of $4000 is $11,000 a month. That means you are spending $1000 a month more than you are making. Therefore, even if you lower your payment by by $900 a month through a modification, you will still be short $100 every month. The bank will not qualify you.

This is a high level view and an oversimplification of the process. There are many way to make lifestyle changes to change your income and expenses. There are certain expenses some banks use and others don't in the above calculations. The number of nuances that goes into the whole process is the reason we have an extremely high success rate with our modifications and that people who try it by themselves rarely get approved. We love to hear about people who are able to obtain positive results on their own; but we are here to help when the bank denies you without telling you why. Give us a call if this is your situation.