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Mortgage Forbearance And The Hidden Gotcha: Escrow

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forbearance escrow

Got a mortgage forbearance? Watch out for the escrowed taxes after the forbearance is up.

While the CARES Act made forbearance on federally backed mortgages available for the asking. But no one talked about the escrow portion of the skipped mortgage payments.

Federal guidance urged servicers to offer easy ways to pay the skipped payments after forbearance but seems to have skipped any discussion of a timeline for making the lender whole for taxes due during the forbearance.

So, if you need a forbearance, make a plan for the escrow shortage.

What are escrow items

If your lender or mortgage servicer collects property taxes and/or homeowner’s insurance along with your loan payment, those are escrow items.

In essence, the servicer collects monthly a slice of funds that are paid out only once or twice a year, but are required to keep the taxes paid and the home insured. The servicer pays them when due, on your behalf.

Escrowed taxes after forbearance

At the end of the forbearance period, the payments skipped remain due. But, there’s no single way that the details of the repayment will be handled. The skipped payments may simply be due at the end of the loan. The loan may be modified. The rules may change yet again.

But what seems clear, now, is that the skipped escrow payments may be due far sooner than the principal and interest accrued during the forbearance. Existing law gives the lender/servicer the right to increase the escrow portion of the future payments to recapture the missed escrow payments.

The standard period for recapturing escrow shortages is to add one/twelfth of the total escrow default to the monthly payments for a year. Fannie Mae and Freddie Mac have instructed servicers to extend the period for paying the escrow shortfall to 60 months.

Keep escrow in mind

The issues arising in the COVID-19 emergency and the multitude of different kinds of home loans make this subject complicated and not subject to a single, simple answer.

And whatever guidance we have now may well be upended by the next legislative remedy that governments and lenders propose.

The takeaway is to be mindful of the escrow portion of the payments missed in any forbearance, and to ask questions about how any deferral or modification affects escrow shortages.

Or, if your circumstances permit, set aside the escrow portion of your regular monthly payment each month of the forbearance, so you can pay that amount at the end of the forbearance.

How to tell if your mortgage is backed by Fannie or Freddie.

Fannie and Freddie have online look up tools that need only the property address and the last four digits of your Social Security Number to perform a search.

• Fannie Mae: http://www.knowyouroptions.com/loanlookup
• Freddie Mac: https://ww3.freddiemac.com/corporate

More on finances and Covid

Guide to surviving the pandemic driven economic downturn

Facing Foreclosure, You Need A Plan B

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foreclosure defense

Bankruptcy stops foreclosures, with certainty.

It’s the surefire defense to a scheduled foreclosure sale.

Then why do homeowners keep waiting til the day before the sale to find a bankruptcy lawyer?

Most of the other ways to stop a foreclosure sale require either gobs of money or an agreement with the existing lender or a new lender to dig you out of the hole.

And you don’t control either the other party’s decision making nor the timeline on which decisions are made.

So, two homeowners called my office last week, with foreclosure sales scheduled within a day or two.

One expected a modification of the troubled loan.

The other expected a refinance.

Neither came through and they were both shopping for bankruptcy lawyers at the 11th hour.

Last minute foreclosure defense

Filing bankruptcy, even a skeleton filing (the bare bones of the needed papers) takes time. If you don’t do the credit counseling briefing before you file bankruptcy, your case can be thrown out of court. How do you choose the right chapter?

But more important than the necessary papers, you’re going to need the help of an experienced bankruptcy lawyer to figure out what happens next.

The automatic stay, the injunction that comes automatically when you file bankruptcy, just stops everything related to your debts, including foreclosures.

But, then what?

What next step is going to save your house? That’s where your bankruptcy lawyer comes in.

  • Do you qualify for Chapter 13?
  • Can you cure the default over time?
  • Is a third party sale the best available options?

Last lawyer on the bench

last lawyer to stop foreclosure

If you wait til the last minute to find a lawyer to file your bankruptcy case, you’ve limited your options.

Only a lawyer who has nothing else meaningful to do this afternoon is available to take your case on short notice.

Do you really want the fate of your home to lie in the hands of a random lawyer whose most appealing quality is that he’s got time on his hands?

The better the bankruptcy lawyer, the more likely they’ve got other cases to work on and may not be willing/able to drop everything to save your house.

Line up help ahead of time

If you are pursuing non bankruptcy solutions to your foreclosure problem, shop for a bankruptcy lawyer at the same time.

How to interview a bankruptcy lawyer

Interview possible candidates and know what your lawyer will need to file a case for you. Understand your options and the implications on other parts of your financial life while you have time.

If everything works out as you hope, you won’t need to file bankruptcy to stop the foreclosure. But if you hit roadblocks, you’ve staffed your team of helpers with a lawyer, and you can move smoothly to Plan B.

More

On foreclosure and procrastination

You want more than a lawyer willing to fight for you

Make no changes til you see a lawyer

California Renter Protections From Eviction: How To Qualify

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california eviction protection California  bans evictions for non payment triggered by the COVID-19 shut-down under Gov. Newsom’s executive order of March 27,2020.

The protection comes with a big IF:  A tenant must act to trigger these protections, which run through May 31,2020.

Who is protected

The order covers tenants who have been

  • laid off
  • had hours cut
  • suffered other income reductions
  • missed work to care for a child whose school closed

The loss of income has to be traceable to the virus, the state of emergency, or related government response.

How to qualify

You need to do two things to invoke eviction protection.

One, you need to notify your landlord, in writing, that you need to delay, in whole or in part, payment of the rent due.

That notice needs to be given before the rent comes due or within 7 days of the due date.

Two, you need to keep paperwork that supports the claim that your income is reduced by COVID-19.

That documentation can be

  • pink slips;
  • payroll checks;
  • bank statements;
  • medical bills, or
  • signed statement from your employer that explains your changed financial circumstances.

What protection is provided

The order makes two changes to existing law.

First, tenants get an extension of time to answer an eviction complaint.

Normally, a tenant’s answer to an unlawful detainer action (legalese for “eviction complaint”) is due 5 days from service of the summons.

The executive order extends that period for the 60+ days this order is in effect.

Second, no writ of possession may be enforced against a tenant who qualifies under the order.  That means the sheriff can’t evict you if you have taken the steps above.

What’s unclear

This order doesn’t seem to address the situation where the tenant was behind before the order became effective.

That situation may be addressed in further orders.

In most California counties, the issue may be moot because, independently, county boards of supervisors have instructed sheriffs not to enforce pending evictions.

What’s to come

I fully expect that this order or one like it will be extended if the economic shutdown continues beyond May 31.  It’s hard to imagine that it won’t, as I write this.

In the meantime, stay home, stay healthy, and stay hopeful.

More on the virus money crunch

When you can’t pay your bills because of the virus

Car payments and the pandemic

California tax deadlines extended

SuperLawyer

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Cathy Moran

I’ve been named a SuperLawyer among Bay Area bankruptcy lawyers. That makes 10 years running.

It’s flattering, but probably not much more than that.

The real measure of my skills is in the clients’ lives whom I’ve impacted and the young bankruptcy lawyers I’ve mentored.

And I’m going to be teaching new bankruptcy lawyers and their staffs at the NACBA convention in Denver in April.  I love sharing what I know about this practice.

In the meantime, I’m waiting for my cape to be delivered, along with flight instructions.

Congress Considers Making Student Loans Dischargeable in Bankruptcy

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student loan discharge legislation

A newly introduced bill in Congress would make student loans dischargeable in bankruptcy, as they were decades ago.

The bi-partisan bill is sponsored  by  Democrat John Delaney of Maryland and Republican John Katco of New York.

Any change to the law touching discharging student loans is a long way down the pike.  But this is a start.

And start we must when student loan debt debt is $1.4 TRILLION dollars, dwarfing outstanding credit card debt.

That debt suppresses home buying; family formation; and entrepreneurship.

I heard a telling comment from another bankruptcy lawyer testifying to the ABI Commission on Consumer Bankruptcy Law:  how is it that we allow the discharge of income taxes after the passage of time but not student loans?

How?

History of student loan discharge

It’s important to remember that student loans have not always been a life sentence.  In the 80’s, a student loan was dischargeable when it had been in pay-status for 5 years.  In 1990, the pay-period element of dichargeability was extended to 7 years.

That required that the borrower make an effort to pay the loan.

In 1998, the rules changed.  A federally insured student loan could only be discharged if the borrower could prove that repayment constituted “undue hardship”.

As if that wasn’t harsh enough, the amendments of 2005 made privately funded student loans non dischargeable in bankruptcy.

Private student loans are as poisonous a debt as you can image:  made at market rates of interest they ensnare students and their families, without income-based repayment plans or procedures to rehabilitate the loan.

Chinks in the no-discharge armor

Bankruptcy courts in most judicial circuits use the Brunner test to determine if repayment of a student loan debt after bankruptcy would cause an “undue hardship”.

To achieve a bankruptcy discharge of a student loan, the debtor has to the burden to show

“(1) the debtor[s] cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for [themselves and dependents] if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor[s have] made good faith efforts to repay the loans.”

The test has acquired levels of interpretation such that discharge requires a showing of efforts to pay and assured, hopeless, unchanging poverty in the future.  That’s what you get, now, for trying to get an education.

Bankruptcy Judge Jim Pappas took up the gauntlet from Judge Easterbrook in challenging whether this hoary test from the 1980’s is properly reflective of bankruptcy law today in a persuasive concurrence in a 9th Circuit BAP case Roth.  Said Judge Pappas

the analysis required by Pena/Brunner to determine the existence of an undue hardship is too narrow, no longer reflects reality, and should be revised by the Ninth Circuit when it has the opportunity to do so. Put simply, in this era, bankruptcy courts should be free to consider the totality of a debtor’s circumstances in deciding whether a discharge of student loan debt for undue hardship is warranted.

Student loan relief in Congress

H.R. 2366 has, undoubtedly, a tortuous path forward in Congress.  But it is a clean, straight-forward approach to a complicated problem.  Without a solution to student loan debt that threatens to crush both students and their parents, it is a vehicle to start the discussion.

Let your representatives in Congress hear from you on the impact of student loan debt on the life of your family, starting here.

More

The Parent Loan Trap

The Public Service Route Out Of Student Loans

Money management and the things we “deserve”

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American Express radio commercials are touting a women’s money group, The Smart Cookies, who, we’re told, got control of their personal debt problems within two years.

The five women they featured collectively owed $50,000, which seems small relative to the clients I see.

But what set my teeth to grinding was one woman’s assurance that it is possible to master debt problems “and still get the things you deserve”.

Arghhhh!

In my view, it is this sense that one “deserves” certain purchases that underlies a significant portion of the overspending problem.  What is the source of this belief that we are entitled to a certain standard of living or accumulation of goods and experiences?

Mercifully, the radio spot I heard didn’t go into the details of the Smart Cookies’ approach to money, but if their connection with American Express didn’t put me off, their announced sense of financial entitlement did.

Bankruptcy info by email

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My colleague Jonathan Ginsberg writes about his reluctance to provide legal advice or second opinions by email. After all, he points out, it is our command of the law that is our inventory. Give it away and you go out of business.

I have a more profound reason to approach questions by strangers with caution: I have only the facts that the sender has chosen to disclose for purposes of my analysis. Often, the facts the writer thinks are central are either irrelevant or incomplete. Without all of the necessary facts, my opinion may be fatally flawed.

When I meet with a client, I have an opportunity to ask questions, develop the facts, and look for other pieces of the picture that either support or counter the facts the client has proffered. That back and forth allows me to establish the facts, then offer an opinion that is grounded in the complete factual picture.

Sell first, litigate later

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Meeting with a client with Truth in Lending claims the other day reminded me about the power of the Bankruptcy Code to facilitate the sale of property subject to disputed liens while preserving the claims against a secured creditor.

These clients had property they wanted to sell but the amount they owed the holder of the first was in dispute. They asserted that the lender had violated Truth in Lending and had elected to rescind the loan. The parties were fighting about how much the clients had to tender to the lender as a result of the rescission.

Generally, a seller has to pay off all the liens on the property in order to deliver clear title to the buyer. Outside of bankruptcy, they might have to pay the creditor’s claim and sue to get it back. There is some risk of losing a TILA claim upon sale, as well.
Under Section 363 (f), the bankruptcy court can order the property sold and the liens to attach to the proceeds of sale. Thus, the debtor/seller and the secured creditor can argue later over the fund of money created by the sale, rather than having to resolve disputes before sale of the property. The costs of preserving the property in the interim are eliminated.

This section of the code speaks of the trustee as the seller, but the Chapter 13 debtor has most of the same powers as are granted to a Chapter 7 trustee. One more in my long list of why I love Chapter 13.

30 day respite saves no homes

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The latest governmental response to the mortgage mess is an offer for a 30 day hold on foreclosures offered as a voluntary program by six large mortgage servicers. Sorry, folks, but 30 days is not enough time to solve any one family’s housing problem, let alone the country’s problem.

The two things that are necessary to make any meaningful difference in houses lost to foreclosure is 1) a real willingness on the part of lenders to change the terms and perhaps the principle balance on loans, and 2) the manpower to staff a loss mitigation effort. Right now, I’m seeing neither.

Thirty days or an offer to tack the arrears on to the end of the loan does not solve the problem where the house is worth less than is owed or the arrears have arisen on a negatively amortized loan on impossible terms. Those are fundamental, structural problems in the loan. A remedy requires not a Boy Scout with a band aid but a surgeon with a scalpel.

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