I Thought I Bought A Foreclosed Property, but In Fact I Bought a Worthless Piece of Paper!

As you might imagine, with the nation in the grips of a foreclosure epidemic, banks are very eager to unload mortgages gone bad. They'll do whatever's legal to recover whatever they can from a foreclosed home. Doing what's ethical? Irrelevant!

Take, for example, the Strand family in California. They took close to $98,000 out of their paidoff house and bought what they thought was a foreclosed property at a courthouse auction. In fact, they bought a second mortgage -- a useless piece of paper -- and were left with virtually no recourse.

The Strands were smart enough to get the media involved, which, of course, led to the bank suddenly being open to negotiating a settlement.

Click here to read the full story. It's a good read.

Fore some good tips on purchasing a foreclosed home, visit this page.

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We Listened To A Lender Go From Making Homes Affordable To Making Modifications Impossible

I would not have believed this if I did not hear it for myself. I listened while a banks’ “home retention” representative refused to let a homeowner pre-qualify for the federal government program, Making Homes Affordable aka Home Affordable Modification Plan aka HAMP. THE LENDER’S REASON for the refusal: The home owner was “contesting” the foreclosure action started by the same lender. They would not accept his HAMP pre-qualification app over the phone. Mind you, the HAMP program let’s homeowners enter into a temporary 3 month lower payment trial period. During the trial period the homeowner sends the lender the required financial documentation in order to get a permanent modification. The application and approval for the 3 month lower payment trial period usually happens over the phone. The approval is given within minutes after a homeowner provides the lender with his or her income and expense info over the phone. Basically the lender’s “home retention” rep enters the income and expense info into a computer program…then POOF!!!...the home owner can be approved on the spot. However, in this case, the lender refused to let a homeowner apply over the phone because the homeowner hired a lawyer to defend the lender’s foreclosure case.

At times, people will ask me to conference in during phone calls with their lenders. In this case, Paul (name changed for privacy) asked me to assist him with a loan modification, so we called the lender together. It was America's Servicing Company, a division of Wells Fargo Home Mortgage. The “home retention" rep went through the standard verification procedures: name, social security, property address, & phone no#. Paul explained to the rep that he was in foreclosure. Paul told the rep that he was advised by his lawyer to call the lender for a loan modification. Paul then asked the rep about the HAMP program. The lender’s rep said “Yes, we provide modifications under HAMP, however you cannot apply over the phone because we were advised that you are contesting the foreclosure action.” Paul and I were totally stunned. I then asked “are you telling Paul that he can’t apply for the HAMP program and get an immediate 3 month pre-trial modification JUST BECAUSE he is defending himself in court” Initially, the rep said the software program would not allow Paul to apply. Then the rep got hung up on the word “contesting”. The rep tried to raise a distinction between “contesting” a foreclosure and “defending” a foreclosure. The rep implied that Paul was trying to claim he “should not be in foreclosure” that’s why Paul is “contesting” the foreclosure. The rep kept asking “Are you trying to say ‘you should not be in foreclosure’”...

Now let’s cut to the chase. It is clear that the lender’s “home retention” rep didn’t truly understand what was going on. Why would the lender deny Paul this option for a loan modification? Why would the lender’s be advised about defending a foreclosure case? What does it mean to “contest” a foreclosure and why does it affect Paul’s ability to apply for HAMP over the phone?

These are my thoughts: The lender wanted to discourage Paul from aggressively defending the foreclosure. It always benefits a homeowner to defend a foreclosure case, even though they owe the lender money. When a homeowner defends a foreclosure case, they invariably gain some leverage and extra time. There are more courts requiring mandatory settlement conferences between homeowners and lenders thus this creates pressures for settlement. It becomes a time consuming, costly affair for the lender. It comes to mind that phone conversations are recorded, so perhaps these recordings can be admissible in foreclosure cases? What if Paul said to the rep “I am not contesting the foreclosure” or “Yes, I should be in foreclosure, I owe you the money”.

If Paul were approved over the phone for the 3 month pre-trial modification, then the foreclosure action would be stalled. Most important, Paul could tell the judge he received a 3 month pre-approval and he expects to receive a permanent modification. This flies in the face of the abysmal record regarding lenders and HAMP. Beginning March 2009 up to including December 2009, there were 787,231 homeowners in a pre-trial period and only 66,465 homeowners with a completed permanent modification. Hmmm let’s see, what if the lenders collect monthly payments during the trial period and the homeowners ends up not receiving a permanent modification. What’s 787,231 homeowners times $1400 per month mortgage payment? That’s about $1.1 billion a month. Now let's multiply that by 10 months. You do the math and read between the lines.

I wonder how lenders treat homeowners who DON'T defend themselves in foreclosure. Are lender's denying the 3 month pre-trial mods to these homeowners? Hmmm.

I want to add that the “home retention” rep was respectful to Paul. In fact, I believe that this rep believed that his employers’ policy was wrong. He was sympathetic and supportive, however he had to do what he is ordered to do…he had to do his job.

At the end, Paul was unable to get the 3 month pre-approval, so Paul will bring it to the judge.

Now you know so take control.

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Land Contract: A Great Alternative When A Traditional Mortgage Isn't An Option

No one understands the current state of the U.S. housing market more than the citizens of California, Florida, Illinois, and Michigan. Recent statistics show that the combined foreclosures of these four states represent 52% of all foreclosures in the nation (Grand Rapids Press). Americans living in these states are experiencing a housing crisis like this country has never seen, primarily due to a combination of high-risk mortgages, negative equity, and unemployment. This perfect financial storm brooding over the U.S. economy has rained heartache and headache upon countless families over the past few years, and reaches far beyond the realm of only the fiscally irresponsible. I ought to know – I lost my own home to foreclosure in 2008.

When I got married in 2004 I moved to West Michigan with my husband, a first-time homeowner who had acquired a low-cost property and performed major renovations himself in order to keep a low monthly note and gain equity fast. By the time we were married he was enjoying the fruits of his labor and, as far as he knew, doing well. He was the first person in his immediate family to own a home with a 30-year mortgage. His father, a General Motors retiree, had always lived beneath his means so that he could pay cash for almost everything, including his home. The short-term mortgage that his father did have was paid off early, so loans were not his specialty. That’s why my husband had made a fatal mistake before we got married – he refinanced his home during the big predatory refinance boom.

Borrowing against the additional equity in his home, my husband refinanced with a low introductory interest rate on an adjustable rate mortgage (ARM) with an option to refinance again in two years. His plan was to refinance again in two years and acquire a fixed rate mortgage at as reasonable rate as he could get. The money he was able to pull out of the house was used to pay off bills and theoretically create a better financial situation for him and the family he hoped to build soon. With a degree in Business Finance, my husband was not a novice when it came to loans and how they worked. Unfortunately, caught up in all of the advertising and marketing hype of that time, he forgot that he did not have a crystal ball or a prophecy ensuring his financial security two years down the road. Like so many other borrowers in Michigan at that time, he allowed emotions and predatory lenders to convince him of future financial security that was not promised. Subsequently, the house of cards began to fall.

Soon after refinancing we were married and were blessed with our first child within a year. This addition coupled with disappointment in the lack of upward mobility at his job created a great strain on our finances because bills were growing but income was not. A few missteps with his credit plus a bursting housing market bubble and before we knew it, our chances of refinancing when we wanted to were ruined. We were stuck with the balloon payments and a monthly note that we could no longer afford. We succumbed to foreclosure in 2008 and had to move into an apartment that cost more per month in rent than my husband’s original mortgage payment.

The funny thing about it all was that my husband remained optimistic that something would work in our favor soon. While the media was predicting doom and gloom henceforth and forever because of the mortgage industry ‘crisis’, my husband had some foresight that would soon become a sigh of relief – but not without a little intermittent pain to endure. We had to live in a cramped duplex for a year with then three children (twins were born while we were going through the foreclosure process) and although our living space was nice, it was simply too small. However, after gaining a more solid foothold on our finances, with badly tarnished credit and a foreclosure to boot, my husband began looking for a new home to live in. He was able to sense what many economists could not – the changes in the housing market would cause other subsequent changes that would essentially benefit even buyers with bad credit. It was obvious that buyers with good credit would be able to scoop up great properties for pennies on the dollar because of the spike in foreclosures. However, what most market watchers did not predict was the need for property owners who wanted to sell to adapt in order to survive. In the states with the highest amount of foreclosures there are more properties than buyers, and seller who own their properties free and clear or who have good credit but own more property than they are willing to manage now find themselves needing to liquidate these assets without losing too much money.

In comes the land contract, here to save the day!

In his quest for a home to rent my husband found a nice homeowner who was eager to sell, and had no one to sell to. After a few honest, productive conversations, we found ourselves in a position to get a new home that was bigger and worth at least $50,000 more than the one we had lost, without having to rely on a bank for a mortgage loan. The seller was willing to make an arrangement where we could rent with an option to buy, with no interest added to the selling price of $107,245. The deal works well for both parties. The seller is an older man who can no longer maintain his properties the way he needs to. The house we now occupy needs a little maintenance and aesthetic work as well as a new roof in a couple years. So, the option consideration clause of the lease/purchase agreement that requires a non-refundable payment of $3,000 is absorbed by the repair allowance which totaled $7,250. This exchange empowered us to move into the home without paying the lofty contract fee; we maintain control over the repair costs and we will schedule for the renovation work that needs to be done. If for any reason we were to default on the agreement, the renovation that we perform adds equity to the home, not to mention the extra $750 per month the seller stands to make as long as we stay, putting him in a better position than when he entered into the contract. This causes his risk to be minimized and our benefit to be maximized, so long as we maintain our end of the agreement, which we have done and will continue to do. Without good credit and without the help of a lending institution, we have a better home to live in and are on the road to financial recovery.

Although this arrangement is not the conventional road to home ownership, in the State of Michigan, where unemployment is the highest in the nation at a rate of 15.1% (as of October 2009 - Bureau of Labor Statistics) and foreclosures are in the top five U.S. states for number of filings (RealtyTrac), it is a welcome alternative. Prospective buyers in similar positions may find that there are more flexible sellers and renters out there than they thought. It takes some struggle, some research, and some faith, but when the market changes this drastically, buyers can still find sellers who are willing to do what banks and economists thought was virtually impossible – adapt and accommodate.

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Short Sale, Long Consequences

Short Sale

It is August 2008 and I have been divorced for two years now. What a two years it has been. Left with nearly $15,000 in credit card debt by my reckless and deceitful ex-husband, and just out of graduate school working part-time jobs to get by, it seemed like I would never catch up. Oh, and there is the deadly “foreclosure proceedings begun” on my credit report, which I’m told will be there for the next seven years. Nonetheless, it is August 2008; I am divorced, happy, and free, with a new love in my life, and more than two thirds of the debt paid off. I am able to go off the debt management program that has helped me reach this goal. I plan, and take, my first vacation in more than five years.

What do I come home to? A notice and bill from the IRS that they are increasing my 2006 reported income by more than $5,000, meaning I owe them about $800, because my ex and I sold our foreclosed house in a short sale more than two years ago.

Just when I think life is getting better, something surfaces, something bites my (thankfully, tanned) backside.

Of course, my first reaction is that this is an injustice. For one, the mortgage company (since gone bankrupt itself) never told me that I would be liable for claiming the waived debt as income, and never furnished me with a 1099 form. (In a recent phone call, their rep claimed they sent it to my ex, logical as he was the primary borrower.) For another, there is the sting of personal injustice: my ex had let the home fall into foreclosure behind my back. I still don’t know what happened to all the money that was supposedly going towards mortgage payments, thousands and thousands of dollars. (Of course, I do have my suspicions, most of which involve my ex’s internet affairs, substance abuse, and sending money to his con-artist brother in Europe for weird and always unsuccessful business ventures.)

The irony is, it was me who decided to file taxes separately for 2006, although we were technically still married for half of it, because I didn’t want to be associated with him any longer, even in the eyes of the IRS. If we’d filed jointly, he’d now be liable for half the short sale income. In fact, I might even be eligible for an IRS protection called “Innocent Spouse,” that waives the liability of a spouse when debt or income has been concealed. (He never shared the 1099.) As it is, however, two tax professionals and the IRS help desk in Providence, RI have convinced me that I am liable for the amount and will be held responsible, especially since my ex doesn’t seem to have filed income taxes at all for that year. As both of the accountants told me, “The IRS goes after the person with the deeper pockets.” It seems unimaginable but that person is me!

Ademola, another member of the www.FedPrimeRate.com Money Blog, wrote an entry about this recently. Bush and Co. have issued a special moratorium that currently prohibits taxing short sale amounts. It’s a good idea; with so many people facing foreclosure and crisis, this waiver is a welcome relief, I’m sure. After all, in my case the short sale amount, and subsequent tax, wasn’t thousands and thousands of dollars. In today’s market, however, large short sale amounts are a distinct possibility for those trying to sell their homes, especially if there’s a need to sell quickly. Read more about the moratorium here.

My story, though, is still a teaching story, I think. When you’re in financial and personal crisis, as I was when I negotiated the short sale, it’s easy to jump at the first relief without considering the long-term consequences. Don’t get me wrong, the short sale was probably still my best option, but I would have handled the taxes differently. I wish I had slowed down and asked myself questions, not yes/no questions, but open questions like: What do I need to know about a short sale?

That’s the thing about crisis: It seems like the time to act fast. Maybe, that’s really the time to slow down and do research. To ask an expert. To ask yourself: how will this affect me two years from now, when I come home from vacation, tanned, happy, and newly in love? How will this affect me when I’m almost-financially-secure again? How might this affect me in eight years or eighteen? In the moment when it’s hardest to think about long-term, we sometimes most need to.

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A Guerilla Approach to Fighting Foreclosure

I was digging through the WSJ.com archives for fun today, and came across an interesting article about Richard Davet, an Ohio native who was able to ward off foreclosure for 11 years. The part of the story I found most compelling was when a federal judge dismissed 14 foreclosure suits because the plaintiffs weren't able to prove that they in fact owned the mortgage when the lawsuit was filed.

During the housing boom of recent years, lots of lenders made millions by originating loans, then bundling them together and selling them on the secondary market. Eventually, it became difficult to know exactly who owned these mortgages.

So maybe a viable defense against foreclosure is, "Oh, so you wanna' foreclose on me? Well, I'm not moving, because I don't think you own my mortgage anymore. If you don't like it, take me to court and prove it!" With this defense, you'll probably end up on the street eventually, but it could buy a money-strapped homeowner many years in a mortgage-free home, time that can be used to save money and stabilize finances.

Here are some clips from the article:

"...Faced with the threat of foreclosure, many homeowners give up and abandon their homes.

Then there's Richard Davet.

He and his wife, Lynn, lived in a six-bedroom home in this Cleveland suburb for nearly 20 years when, in 1996, he was served with a foreclosure lawsuit. Rather than turn over the keys, he hit the law books. Flooding the courts with papers, Mr. Davet staved off foreclosure for 11 years, until this past January, when a county sheriff's deputy evicted the couple and changed the locks. They didn't make a mortgage payment the entire time..."

"...A former jewelry-business owner, Mr. Davet and his wife, a former graphic-arts tutor, bought their home in 1978 for $150,000. As its value increased they borrowed against it. They made their mortgage payments, but on one loan, they allegedly made payments late -- 90 times, according to NationsBanc Mortgage Corp., which assessed the couple some $4,000 in late fees.

After the Davets for two years refused demands to pay the late fees, during which NationsBanc began refusing to accept their regular mortgage payments, the company sued for foreclosure. At the time the couple still owed $80,000 in principal, plus an additional $160,000 on a second mortgage on the home. Mr. Davet insists the late fees were erroneous -- he points to a deposition in which a NationsBanc employee conceded that the company couldn't back up its claims for a chunk of the fees. So he began his full-time crusade in the courts to keep his home.


He started with the help of lawyers, but those arrangements didn't last. Dan Dreyfuss, who represented the couple when the case was filed, called Mr. Davet's strategy "a recipe for how to confound the courts." He quit after Mr. Davet filed a motion to disqualify a judge against his advice. Mr. Kalk eventually sued Mr. Davet, successfully, for unpaid legal fees.

On his own, as a "pro se" litigant, Mr. Davet was undeterred. Four times a week he went to Case Western Reserve University School of Law to study legal writing and case law in its library. His briefs were angry and colorful, including football analogies and an aside on Enron Corp.

Among his maneuvers: asking a judge to arrest NationsBanc's CEO for initiating a "sham" proceeding against him because the company claimed in error that it owned his loan. (The judge dismissed the request.) He later sought to disqualify the judge because she had accepted campaign contributions from real-estate developers, whose Beachwood developments Mr. Davet had publicly protested before the foreclosure litigation. When he didn't win that motion, Mr. Davet sought to disqualify the judge who had dismissed it. He appealed at every chance he could, which bought him extra years in his home..."

"...The house was later sold to another family for $410,000.

The eviction finally happened on a snowy day in January of this year. Don Saunders, who lived three doors down from Mr. Davet and is a trustee of the neighborhood association, says it came as a shock in the upscale area.

Mr. Davet continued to try, unsuccessfully, to get the federal court to agree that the state judgment was invalid. Then, a possible lifeline arrived this past October, when a federal judge in Cleveland, Christopher A. Boyko, dismissed 14 foreclosure suits because the plaintiffs that brought them couldn't prove they owned the mortgages when the suits were filed.

Such a problem can occur when mortgages are turned into securities and sold to investors. The companies involved in the transaction may not have checked that each mortgage was legally transferred, or "assigned," to the new owners. In essence, the originating lender continued to legally own the mortgage -- and would thus need to be the plaintiff in a foreclosure suit. In Mr. Davet's case, however, the mortgage, which was not securitized, changed hands multiple times and wasn't actually owned by NationsBanc until three years after the company filed suit.

Other judges have since followed Judge Boyko's lead. The Ohio attorney general has asked numerous judges to dismiss or delay foreclosures based on similar grounds.

Earlier this month, Mr. Davet filed a second federal appeal, this time citing the Boyko ruling, which he believes he inspired. It's unclear whether the latest salvo will work. If it doesn't, Mr. Davet says, he will set his sights on the U.S. Supreme Court..."

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