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Hidden Dangers In Tapping The Reverse Mortgage Piggybank

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broken piggybank-images of moneyActor Fred Thompson used to appear on my Sunday morning news program every week touting the benefits of a “government insured”,  safe, reverse mortgage.

Get the money you deserve to live the good life, he urged.

I’m watching the aftermath of that sales pitch play out for one of my clients, and it’s not “the good life” I’m watching.

In fact, the foreclosure sale on the home is scheduled for next week.

Intentions thwarted

The borrower, a single woman of many decades,  took out the reverse mortgage and drew down on the loan.

She has passed away, leaving the house to my client.

The house may have as much as $300,000 in equity over and above the reverse mortgage.

But because the borrower has passed away, the lender won’t take payments from anyone else.  The loan is due and full, says the lien holder, and that’s that.

The climate for a refinance of the property in the hands of my client isn’t auspicious, so the house, and all that equity, may go, not to the relative of choice, but to the “friendly”, reverse mortgage lender.

Bankruptcy possible

A bankruptcy filing may solve this particular problem.  We’ll see.

Bankruptcy is an option only because the heir to the house is an individual.  Individuals can file bankruptcy.  Trusts and estates cannot.

If the elderly borrower had left the house to her estate, the automatic stay that comes with a bankruptcy filing, would not be available to the probate estate.  The probate estate isn’t eligible for bankruptcy relief.

House as piggybank

The risks of reverse mortgages are becoming more apparent, summarized in this Consumer Financial Protection Bureau report to Congress.

A surviving spouse who is not on the loan may have no right to stay in the home on the borrower’s death.   The loan is complex and may encourage premature tapping of home equity.

In the bigger picture, the pressure to tap home equity to support retirement is the predicable result of regarding your home as your piggybank or your retirement nest egg.

The only way to take advantage of that nest egg is to either sell the house or to borrow against it.  By retirement age, most homeowners aren’t great candidates for a conventional loan contemplating monthly payments.

And as we’ve seen in the Great Recession, you can’t count on a robust real estate market when you need that equity for retirement.

So, the gap in the retirement safety net is created, and in steps Fred Thompson and the company he shills for.

As the sergeant on Hill Street Blues said every shift:  Hey, let’s be careful out there.

 Image courtesy of Flickr and Images of Money

 

How 13 Works To Save Your House From Foreclosure

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save house

Saving a house from foreclosure is the single reason most people file bankruptcy.

Bankruptcy stops foreclosure- that’s a given.

But then what?

How can bankruptcy save the house,  rather than just putting off the inevitable loss?

The mortgage lender has a lien on the house, and liens aren’t discharged in bankruptcy.

So, how does bankruptcy help?  Meet Chapter 13 of the Bankruptcy Code.

Chapter 13 bankruptcy is the chapter of choice if your goal is to keep living in the house, as opposed to selling it to realize equity or to avoid the credit hit of a foreclosure.

Chapter 13 imposes a payment plan on lender

Baked in to Chapter 13 is the power to cure defaults on long term debts like mortgages.

Gone is the ability of the lender to refuse to take catch-up payments or to insist on cure in a single payment.

This is federal law, and the homeowner is at the helm of this ship. [Read more…]

So You Keep Your Home Through Bankruptcy- What Then?

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California house underwaterWhat happens to your home after your bankruptcy case is over?

Most people who file bankruptcy are terrified that just filing bankruptcy will cost them their home.

They won’t let me keep my home, will they?

Sure they will.

The bankruptcy trustee doesn’t want the house if there’s no value in it that can be paid to unsecured creditors.  The senior lender is content if you pay the mortgage.

But what about the junior lien, the HELOC or line of credit loan, that is behind the mortgage?  That lien remains a valid encumbrance on the house, after the bankruptcy discharge.

If the house is underwater, as many California houses still are,  the junior lien is unlikely to foreclose.

Just like the trustee in bankruptcy, the junior lien holder understands there’s nothing there for them.

Now, at least.

Surviving lien

That underwater mortgage lien is like a leach:  it attaches to the house and it sucks up any appreciation that the house may enjoy.

If the market makes the house more valuable, that increase in value is available for the junior lien.

If the market stays the same, but you pay down the senior mortgage, more of the house’s value is available to secure the junior lien.

So, unless you do something, any improvement in the home’s price just benefits the HELOC.

Alternatives

If what you are paying on the first mortgage is comparable to rent, and you are content to never have equity in the house, you don’t need to do anything.  Just know that you’ll never be able to sell the house and put money in your pocket.

If the junior lien is totally underwater, consider filing a Chapter 13 to strip off the lien,  Or converting your open Chapter 7 to 13.

If the price of keeping the house is reasonable and you hope to build value for yourself in the property, you may want to try to buy out the junior lien.  There is a real appeal for some lenders in cash now.  They may not have the patience to wait for things to improve.

Make a plan for the house you are keeping after a bankruptcy.

Image courtesy USGS.

Loan Modification: The $100,000 Mistake

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loan payoff

 

The job of a mortgage servicer is to collect loan payments and keep track of what’s owed on the mortgage.  That shouldn’t be too hard.

But the evidence is that they don’t do that basic job very well.

Throw a loan modification into the mix, and who knows what you’ll get.

Accounting for modification

I got a glimpse of what we face when my client requested a loan payoff in connection with a sale.

The loan had been modified some five years ago, with the result that a sizable hunk of the amount due when the loan was modified was due only upon sale.

Asked for a payoff, the servicer returned a payoff that failed to include some $127,000 of non interest bearing principal.

Granted, this particular mistake cut in favor of my client.  Who are we to complain?

But it is just as easy to image that the blunder works the other way:  the requested payoff doesn’t take into account the changes made to the debt when the loan was modified downward.  The payoff demand could just as easily have been calculated at the old, higher rates in effect before modification.

Multiply this instance by a fraction of the modified loans out there, and we need to tell Houston we have a problem.

Mortgage modifications to the rescue

Mortgage modifications were supposed to save both individual homeowners and the economy as a whole.

They promised to keep homeowners in their homes despite the housing crash of the Great Recession.

To some extent that has worked.

Or at least mortgage modifications spread the failures out over time so that the market wasn’t glutted with foreclosed properties.

But anyone who has attempted a mortgage modification knows first hand the frustration of submitting an application to the servicer.

Over and over, the servicer claims that you haven’t sent the documents, or the documents are stale or incomplete.

That inability to account for the modificiation application documents is, I’m afraid, just a sneak-peak at the next mortgage horror:

Servicers have no records about the loans they did modify.

Or, more precisely, the records they have are not to be trusted.

Rotten record keeping

The casualness with which servicers approached modifications has scared me for sometime.

  • modification agreements were poorly drafted
  • borrowers never got copies signed by the lender
  • changes in terms not part of public record

Mortgage accounting departmentThe quality of the customer interface at the servicer was laughable, if it wasn’t frightening.

The problems are compounded when the servicing on loans changes hands.

The new servicer starts with the ending balances from the prior servicer.  Few records other than an electronic data base change hands.  Any mistakes made by the prior servicer are now impenetrable.

The terms, or maybe even the enforceability of the modification itself, are lost in the mists of time.

Practice self defense

Who knew that homeownership was going to be a contact sport?

But you have to assume, if you got a loan modification, it will be up to you to defend the modification when the time comes to pay it off.

Here’s the homeowner’s two step:

  1. Keep good records– find and preserve the loan modification agreement.  Treat it as being just as important as the deed to your home.
  2. Request mortgage accounting each year –  make an annual request for the state of your loan, and preserve the response

Your goal is to have your own records supporting the terms of the loan modification and to catch any problems in accounting early.

May all the lender’s mistakes cut in your favor, and may the Force be with you.

You’ll need all the help you can get.

Nightmare image: 

Monkey at typewriter:  Oliver Hammond

Getting A Loan Modification Is Only Half The Fight

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loan modification battlesFor all of you who stressed, strained, fretted, wheedled, worried, fought, kicked, and even gouged to finally wrest a loan modification from the lender/servicer that controls of your home loan, I have a message.

The fight may not be over.

“We Don’t Have Any Record of Your Loan Modification.”

I’ve seen and heard dozens of different variations on this theme. When my law partner and I see more than 2 or 3 unrelated clients with the exact same fact patterns, we know that the problem is massive.

We’ve seen scores of homeowners with the exact same problem.  It’s the same despite the fact that they are dealing with different lenders in different parts of California and out of state.

The themes for this horror-story fall into at least two different categories.

The Train Never Was on the Track

[Read more…]

You Keep Underwater Property in Bankruptcy

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underwater real estate

 

Good news or bad news, the bankruptcy trustee doesn’t want your underwater property.

Trustees only want the good stuff, the assets that generate cash to pay creditors.

That doesn’t include real estate where the debt is on par with the property’s fair market value.

Will we have to sell?

My clients this week own a number of rental properties where the loans  match the properties’ value.

The clients thought the properties had long-term appreciation potential and were just certain that filing Chapter 7 meant giving up the properties.

Not so.

The trustee’s focus is the here and now. [Read more…]

What Are Your Rights In A California Foreclosure

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Foreclosure AuctionThe old saw about Oakland, California is that there is no “there” there.

I suggest it’s the same about being “in foreclosure”:  foreclosure is not a place, it’s a path.

Nothing legally meaningful changes until you get to a foreclosure sale.  Everything before that is prelude.

Yet several  Bay Area clients have asked whether they can remove personal property from their home while it’s “in foreclosure”.

Another client wanted to know what the rights of the foreclosing creditor were to come into her home before any sale was held.

Another thought he needed to vacate the house before the sale.

Your rights to the property remain the same,  unchanged by any default on the mortgage payment.

Rules of California foreclosure

Be clear:  it’s your property until there is a foreclosure sale.

Likewise, the lender is still an outsider unless and until it obtains title to the property by being the highest bidder at the foreclosure sale. [Read more…]

New Tool For Homeowners Against Mortgage Lender Mistakes

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mortgage abuse

 

Pstt! Homeowners.  Bankruptcy Lawyers.

We’ve been handed a new tool for dealing with problems with mortgage lenders.

Or maybe the courts are just showing us how to use some tools we’ve accumulated.  Tools to make sure that homeowners who emerge from Chapter 13 are right and square with their mortgage lender.

Scott v. Caliber (Bankr. N. D. Okla 2015)  holds the lender who snoozed through the bankruptcy case guilty of violating the discharge by claiming there was a mortgage delinquency.

Here’s how it developed.

Mortgage woes in Chapter 13

Getting current on a delinquent home loan is often the central goal of a Chapter 13.

The problem is that too often the debtor completes the bankruptcy case, only to get a notice from the lender that he’s not current, but facing foreclosure again.

This happened often enough that the Bankruptcy Rules Committee gave us a new rule to flush out these problems before a Chapter 13 case closes.

This is huge (to use a currently popular term) because while the bankruptcy case is open, you have a judge available to hear and resolve disputes about whether the mortgage is current or not.

Or, put another way, you find out, while you have options, whether the lender agrees you’re good to go.

Bankruptcy Rule 3002.1

The basic new tool is the rule that requires a Chapter 13 trustee to send out a notice at the end of the case declaring the mortgage fully current.  The lender or the servicer must then file a written response, agreeing that the loan is current, or asserting that deficiencies remain.

The rule mandates a loan history be attached if the servicer asserts that the loan isn’t current.

Right there, we’re ahead of the usual game, where the lender used to just say “you’re behind” but provides no evidence.

What happened to the Scotts

At the end of Ms. Scott’s Chapter 13, the trustee gave notice to the servicer that the mortgage was current.  Caliber didn’t respond.

But just weeks later, Caliber sent a statement to Ms. Scott claiming that payments were overdue and imposing late charges of more than $1000.  Then they sent back the regular monthly payment the Scotts made.

The bankruptcy judge was having none of it.

Citing 11 USC 524(i), Judge Michael held that the attempt to collect late fees violated the discharge.

(i) The willful failure of a creditor to credit payments received under a plan confirmed under this title, unless the order confirming the plan is revoked, the plan is in default, or the creditor has not received payments required to be made under the plan in the manner required by the plan (including crediting the amounts required under the plan), shall constitute a violation of an injunction under subsection (a)(2) if the act of the creditor to collect and failure to credit payments in the manner required by the plan caused material injury to the debtor.

When Caliber failed to dispute the trustee’s notice that the mortgage was current, that became an established fact.

If the mortgage is current, there can’t be any late fees owed, the judge reasoned, and the claim that there are unpaid fees proves that Caliber didn’t properly credit the payments made during the Chapter 13.

And failure to properly credit the payments is a discharge violation.

Hallelujah!

Mortgage servicing

In my view, mortgage servicing is a pus pocket in the financial services industry.

Servicers make money when they can find borrowers in default.  They have been virtually unaccountable in the real world.

Up until recently, it’s been difficult to get timely, meaningful information from servicers.  When you find a problem in how your loan is handled, it’s difficult to get it fixed.

And most state courts still think that banks must be capable and trustworthy.

Things are changing with the CFPB regulations making it easier to get information and the comparable changes in bankruptcy rules.

I continue to recommend that every homeowner with a loan make an annual request for information to check on what the servicer is doing with your payments.

Discharged Debts Don’t Bar Chapter 20 Lien Strip

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304526237_6d1acf58bb_z_opt

Underwater liens that linger after an earlier bankruptcy don’t count in Chapter 13.

At least, they don’t count against the unsecured debt limit that restricts entry into Chapter 13, says the 9th Circuit Bankruptcy Appellate Panel in Free.

Great news for homeowners for whom Chapter 13 was not initially available because they exceeded the debt limits.

Free settles the question of whether the lien that passed through a prior bankruptcy case is a “debt” counted for eligibility purposes in a subsequent Chapter 13 if there is no collateral value to secure it.  The answer is no.

Neither the Code nor case law compels inclusion of the discharged in personam liability in such calculation.

What survives a bankruptcy discharge

Without getting so technical that only a lawyer would care, the problem when a Chapter 13 case is filed after a Chapter 7 is characterizing what’s left of the liens in effect when the 7 was filed.

The Chapter 7 discharge eliminated any personal liability of the debtor for the debt that was secured by a lien, but left the lien as a valid charge on any collateral to which it had attached. [Read more…]

Mortgage Lenders Lurk

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old mortgage defaults

 

They hadn’t paid the line of credit loan on their home for seven years.

All was quiet for the longest time until a notice of impending foreclosure was served last week.

In a rational world, you’d think the lender would have noticed some time over those seven years that there were no monthly payments.

You’d also think this was an aberration.

But last month, in another of my cases,  a lender moved for relief from the automatic stay in a pending Chapter 13, citing missed payments from four years ago.  The default was $38,000 before the lender took action.

Time doesn’t heal this wound

Unlike credit card debts or unsecured loans, debts secured by your home don’t hit the statute of limitations quickly.  In California, the statute on a mortgage is 30 years. [Read more…]

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