Archive | February, 2009

California Issues Foreclosure Moratorium

25 Feb

Carrie Bay | 02.25.09

California Gov. Arnold Schwarzenegger approved a bill appended to the state’s budget package last week that institutes a 90-day foreclosure moratorium throughout the Golden State. Introduced by Sen. Ellen Corbett (D-San Leandro), the moratorium applies to first mortgages recorded between January 1, 2003 and January 1, 2008.

State regulators, however, can deem loan servicers and lenders exempt from the new law if they have a mortgage modification program already in place that includes principal deferral, interest rate reductions for five years or more, or extended loan terms. The lender’s loan restructuring program also has to ensure new monthly payments are no more than 38 percent of the borrower’s income. The state’s stipulated debt-to-income ratio is significantly lower than the 31 percent target called for in the Obama Administration’s Homeowner Affordability and Stability Plan.

Kevin Stein, associate director of the California Reinvestment Coalition, told the San Francisco Chronicle, “It was a step backward from where things were going from an industry standpoint and a federal standpoint.”

According to the Chronicle, Corbett herself said that she would have liked a bill with stronger enforcement for modifications but was limited from more aggressive measures by the state’s banking regulators.

Mortgageorb.com reported that California’s banking groups, including the California Bankers Association and the California Mortgage Bankers Association, have written strong oppositions to the bill, arguing the moratorium will negatively impact home sales and further delay recovery.

Beth Mills, a spokesperson for the California Bankers Association, told the Chronicle that struggling borrowers and their lenders already have more than enough time to search for mutual solutions. Mills pointed out that a state law passed in 2008 increased the required time span between first notification of foreclosure and final sale of the property by 30 days, to a total of 141 days. According to Mills, more time is not the silver bullet to every troubled loan, the Chronicle said.

Federal bill would let judges modify home mortgages

23 Feb

Orlando Business Journal – by Richard Bilbao

The proposed Helping Families Save Their Homes in Bankruptcy Act of 2009, for the first time ever, would let judges modify the terms of a home mortgage for someone who’s filed for personal bankruptcy.

More specifically, Senate Bill 61 and its companion bill H.R. 200, introduced in the House and Senate on Jan. 6, would allow judges to:

• Modify or reduce the principle balance on a home mortgage to its current market value, as opposed to when the home was bought.

• Stretch out a home mortgage for up to 40 years to help lower payments.

• Reduce and change a variable mortgage interest rate to a fixed-rate.

However, not every distressed home falls under the guidelines of the bill.

Both the Senate and House bills — sponsored by Sen. Richard Durbin, D-Ill., and Rep. John Conyers , D-Mich., respectively — require homeowners who’ve filed for personal bankruptcy to have:

• Been informed, beforehand, that the home will be subject to a foreclosure.

• A mortgage created prior to the date the bill passes.

• Certification that they tried and failed to negotiate a loan modification with the lender 15 days before filing for bankruptcy. However, this requirement would be waived if the home faces foreclosure within 30 days.

Modifying a loan to help a property stay out of foreclosure is common in the commercial sector, such as hotels and office buildings, as well as in some consumer sectors, such as cars.

But it’s unheard of for bankruptcy courts to modify home mortgages, said Roy Kobert, a bankruptcy attorney for Broad and Cassel in Orlando. “The present inability to modify home mortgages for Americans is the holy grail in consumer bankruptcy — it’s virtually impenetrable.”

In commercial bankruptcies, “the code permits judges to modify the mortgage amount and the interest rate, but also allows commercial lenders to participate in the appreciation of the collateral on a sliding scale basis,” he said.

That provision for residential lenders is not included in the Senate bill, but is in the House version, he said.

Risky business

Central Florida businesspeople have mixed reactions to a proposed federal law that could tip the balance of power in personal bankruptcy cases in favor of homeowners over lenders.

At least one local Realtor likes the proposed Helping Families Save Their Homes in Bankruptcy Act of 2009.

Keeping homes out of foreclosure would make them easier to sell, because prospective buyers typically don’t look at foreclosed properties, said Kathleen Gallagher McIver, a broker with Re/Max Town and Country Realty in Winter Springs.

But giving courts the power to restructure a loan may leave a bitter taste in lenders’ mouths that can backfire on homeowners, said Rob Nunziata, president of FBC Mortgage LLC, an Orlando-based mortgage broker.

The proposed law would introduce a whole new type of risk for lenders and investors, who would have to fear having a court judge change the amount of return the investor originally expected to get. “Mortgages in bankruptcy have been considered sacred, but this could change the ground rules” for lending, said Nunziata.

For example, although the plan is only for existing mortgages, this could cause lenders to raise rates on future mortgages in fear of the law being modified to include new mortgages, he said.

But the proposed law may also help lenders, said Chip Herron, an attorney with Wolff, Hill, McFarlin & Herron P.A. in Orlando. “Creditors will be better off when there’s an owner who wants [to stay in a distressed home] and continue taking care of it,” he said.

The bill, if passed, also could cause a dramatic drop in personal bankruptcy filings and foreclosures due to some homeowners wanting to work things out instead of walking away, said Herron.

“This goes a long way to solving the real estate crisis. Someone will be setting a floor to what these homes are worth instead of letting them continue to devalue.”

Lenders Fighting Mortgage Rewrite Measure Targets Bankrupt Homeowners

21 Feb

Sen. Richard J. Durbin’s bill would allow bankruptcy judges to alter the terms of first mortgages for primary residences.
Sen. Richard J. Durbin’s bill would allow bankruptcy judges to alter the terms of first mortgages for primary residences. (By Alex Wong — Associated Press)

By Jeffrey H. Birnbaum
Washington Post Staff Writer
Friday, February 22, 2008; Page D01

The nation’s largest lending institutions are lobbying hard to block a proposal in Congress that would give bankruptcy judges greater latitude to rewrite mortgages held by financially strapped homeowners.

The proposal, which could come to a vote in the Senate as early as next week, is being pushed by Democratic congressional leaders and a large coalition of groups that includes labor unions, consumer advocates, civil rights organizations and AARP, the powerful senior citizens’ lobby.

The legislation would allow bankruptcy judges for the first time to alter the terms of mortgages for primary residences. Under the proposal, borrowers could declare bankruptcy, and a judge would be able to reduce the amount they owe as part of resolving their debts.

Currently, bankruptcy judges cannot rewrite first mortgages for primary homes. This restriction was adopted in the 1970s to encourage banks to provide mortgages to new home buyers.

The Democrats and their allies see the plan as an antidote to the recent mortgage crisis, especially among low-income borrowers with subprime loans. The legislation would prevent as many as 600,000 homeowners from being thrown into foreclosure, its advocates say.

“We should be giving families every reasonable tool to ensure they can keep a roof over their heads,” said Sen. Richard J. Durbin (Ill.), the Senate’s second-ranking Democrat and author of a leading version of the legislation.

But the banks argue that any help the proposal might provide to troubled homeowners in the short run would be offset by the higher costs that borrowers would have to pay to get mortgages in the future. The reason, banks say, is that they would pass along the added risk to borrowers in the form of higher interest rates, larger down payments or increased closing costs.
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If banks were unable to pass on the entire cost, they could be forced to trim their profits.

“This provision is incredibly counterproductive,” said Edward L. Yingling, president of the America Bankers Association. “We will lobby very, very strongly against it.”

The Durbin measure is part of a larger housing assistance bill being pushed by Democrats in the Senate. A separate version of the measure was approved late last year, mostly along party lines, by the House Judiciary Committee. The Bush administration has said that it opposes both provisions as overly coercive and potentially detrimental to the already strained mortgage market.

Lobbyists for major banks have made the proposal’s defeat a top priority. They have been meeting at least weekly to coordinate their efforts and have fanned out on Capitol Hill to meet with lawmakers and their staffs.

At least a dozen industry associations have banded together to fight the proposed legislation. They include the American Bankers Association, the Financial Services Roundtable, the Consumer Bankers Association and the Mortgage Bankers Association. These groups and others have signed joint letters to lawmakers on the issue.

In one of their letters, sent to Senate leaders last week, the groups wrote that the legislation would “have a very negative impact in the financial markets, which are struggling in part because of difficulties in valuing the mortgages that underlay securities [and] would greatly increase the uncertainty that already exists.”

Bank lobbyists have also gone online to make their case. The mortgage bankers have set up a Web site, http://www.mortgagebankers.org/StopTheCramDown, that can calculate how much mortgage costs might increase by state and by county if the Durbin measure were to become law. “Cram down” is the industry term for a forced easing of mortgage terms.

Supporters of the measure are also sending letters and meeting with lawmakers. A letter urging a quick vote on the proposal was delivered to Senate Majority Leader Harry M. Reid (Nev.) last week. It was signed by 19 organizations, including the Consumer Federation of America, the AFL-CIO, the National Council of La Raza, the U.S. Conference of Mayors and AARP.

The letter said, “The court-supervised modification provision is a commonsense solution that will help families save their homes without any cost to the U.S. Treasury, while ensuring that lenders recover at least what they would in a foreclosure.”

The Center for Responsible Lending, a pro-consumer watchdog group that backs Durbin’s effort, is trying to instigate voter e-mails to lawmakers on the subject. The group’s Web site includes a page that allows people to send electronic notes supporting the measure to their elected representatives with just a few clicks of a mouse.

AARP spokesman Jim Dau said his group will also ramp up its efforts. It may soon ask its activists to urge lawmakers to back the mortgage-redrafting legislation. AARP, which is the nation’s largest lobby group, has a list of 1.5 million volunteers whom it says it can call upon to contact lawmakers on legislative matters.

Banking and Lender Liability – Is the Genie Slipping out of the Bottle?

15 Feb

Title: Banking and Lender Liability – Is the Genie Slipping out of the Bottle?
Date: March 1998
Publication: Commercial Lending UPDATE
Author(s): Kenneth M. Van Deventer
Area(s) of Practice: Financial Services, Litigation

Recent decisions from courts in the State of New Jersey and a new wave of lawsuits against financial institutions – particularly class action lawsuits – may be a signal that this is no time for complacency in banking. Plaintiffs’ lawyers have regrouped and are ready for a creative new wave of attacks on banking practices. The present case law may give the plaintiffs’ lawyers the openings they have been waiting for. A general survey of some of these developments follows:

Sons of Thunder – The Duty of Good Faith and Fair Dealing

In Sons of Thunder, Inc. v. Borden, Inc., the Supreme Court of New Jersey fundamentally altered generally accepted rules of contract construction. Before Sons of Thunder, if a party did not breach its contractual obligations it could not be liable for bad faith. In the banking context, this meant, among other things, that a bank could call a loan, refuse to fund, refuse to roll over a loan, set off accounts, etc., no matter how drastic the foreseeable consequences might be to the borrower/customer, so long as the bank acted within expressly granted rights under the controlling loan documents. That may no longer be the case.

In Sons of Thunder, one party (“Borden”) to a contract for the supply of clams exercised a termination clause in the contract with the knowledge that the foreseeable consequences of its action would be the demise of the other party (“Sons of Thunder”). The Supreme Court upheld a jury verdict that, even though Borden did not breach express obligations of the contract in terminating the contract, it did breach the implied covenant of good faith and fair dealing and was, therefore, liable to Sons of Thunder for consequential damages, including lost profits.

In other words, the Court found that Borden had breached the implied covenant of good faith in fair dealing in performing its obligations under the contract. Specifically the Court ruled:

Because its conduct destroyed Sons of Thunder’s reasonable expectations and right to receive the fruits of the contract, Borden also breached the implied covenant of good faith found in New Jersey’s common law.

Bankers should not take comfort in the fact that Sons of Thunder involved clams instead of dollars. In Maharaja Travel, Inc. (“Maharaja”) v. Bank of India (“BOI”) a federal judge ruled that, under New York law, a bank could be liable for breach of the implied covenant of good faith of fair dealing even if it performed correctly under the expressed terms of the contract. In Maharaja, BOI entered into a credit facility with Maharaja pursuant to which it would provide letters of credit and other arrangements necessary for Maharaja to operate its travel business. The commitment letter signed by the parties specifically stated that “[t]hese facilities are available at [BOI’s] discretion.” After BOI refused to provide funds to Maharaja, Maharaja’s business failed and the law suit ensued. As in Sons of Thunder, the court found that BOI had not breached its contractual obligations under the credit facility. Nevertheless, the court refused to dismiss Maharaja’s claim for breach of contract because it found that even where a party performs according to the express terms of the contract:

A party’s action implicates the implied covenant of good faith if it acts so directly to impair the value of the contract for another party that it may be assumed that they are inconsistent with the intent of the parties.

Read together, Sons of Thunder and Maharaja signal an erosion, if not an outright end to the general rule of contract construction that a party will not incur liability for simply exercising the rights it contracted for, even if the consequences of that action are harsh on the other party to the contract. Banks in particular will now have to consider both the express terms of its contractual obligations, as well as the consequences of its acts or failure to act. Indeed, banks should assume that in every loan document there is a covenant substantively providing as follows:

Notwithstanding any right granted herein to Bank, nor any obligations undertaken by borrowers/customer, Bank shall be obligated to take such action as necessary to carry out the purposes for which this Agreement was made and to refrain from doing anything that would destroy or injure borrowers/customers’ right to receive the reasonably anticipated benefits of this Agreement.

Fiduciary Duties/Duty to Disclose

Last year, the New Jersey Appellate Division issued two important opinions addressing the legal relationship between a bank and its borrower/customer. In United Jersey Bank, Central v. 914 Westfield Avenue Associates, et al., the borrower claimed that the bank had fraudulently induced him to borrow funds in order to purchase a business that was also a customer of the bank and which t he bank knew was in declining financial condition.

According to the court, the borrower’s contentions raised “novel and far-reaching issues concerning a bank’s relationship with a client/customer and whether such relationship carries some fiduciary obligations.” The court denied summary judgment to the bank on the theory that a duty to disclose may exist even in the absence of a fiduciary relationship. Here, where the allegation was that the bank officers did offer some opinion as to the viability of the business, the allegations were sufficient to state a prima facia case for common law fraud against the bank. United Jersey Bank v. Kensey, et al., the courts were presented with different facts but substantively the same issue. In Kensey, the borrower knew that it was borrowing money to purchase a business and some property from an individual who was also a borrower of the bank, but whose loans were in default and being handled by the work-out department. The bank did not disclose, however, that it had an appraisal in its files indicating that the value of the property/business was less than the purchase price the borrower was paying for the property/business. When the new borrower defaulted and litigation ensued, he claimed that the bank breached a fiduciary duty owed to him to disclose the value in the bank’s own appraisal. Once again, the Appellate Division saw the case as presenting “novel and far-reaching issues concerning a bank’s relationship with its customers.”

The court noted, however, “the growing trend to impose a duty to disclose in many circumstances in which silence historically sufficed.” According to the court, “the common thread running through them is that the lender encouraged the borrower to repose special trust or confidence in its advice, thereby inducing the borrower’s reliance.” Finding that factor to be absent in the case before it, the court reaffirmed the general rule that banks have no duty to disclose information they may have concerning the financial viability of the transactions their borrowers are about to enter into. Accordingly, summary judgment was entered for the bank.

Although Kensey was a win for the bank, it is troubling that the Kensey and 914 Westfield Avenue courts recognized a trend of cases imposing liabilities on banks that historically were only imposed in the context of fiduciary relationships.

Other Banking Litigation Developments

Class Actions. There is a trend, which we predict will grow, for class actions attacking any uniform bank practice. Earlier updates discussed the wave of collateral protection insurance class action lawsuits. Now, the New Jersey Supreme Court in Lemelledo v. Beneficial Management, has ruled that the New Jersey Consumer Fraud Act, which allows treble damages and recovery of attorney’s fees, applies to a financial institution’s sale of insurance in conjunction with loans. Also, in Noel v. Fleet Finance, Inc., a Federal Judge in the Eastern District of Michigan recognized, among other things, the viability of a class action claim against lenders and mortgage brokers under the Truth In Lending Act for failing to disclose the yield spread premium paid by the lender to mortgage brokers. And this year, after the Eleventh Circuit in Culpepper v. Inland Mtge ruled that yield spread premiums were prohibited referral fees under RESPA, plaintiffs instituted a RICO class action based on that practice. Finally, in Cannon v. Nationwide Acceptance Corporation, a Federal Judge in the Northern District of Illinois allowed a RICO class action to be maintained on the basic premise that the lenders’ solicitation of new business induced existing borrowers to refinance existing loans rather than going the cheaper route of just borrowing more funds.

Environmental. In CoreStates/New Jersey National Bank v. D.E.P., a New Jersey Administrative Law Judge ruled that a lender obtaining property through foreclosure may lose the protections otherwise provided to lenders under the Spill Act if, after obtaining the property, it acts negligently in its maintenance of the property.

ECOA. In Machis Savings Bank v. Ramsdell, the Maine Supreme Court ruled that wives who co-signed a series of loans to their husbands’ construction company could defeat summary judgment on a foreclosure action on the basis of the allegation that they had not signed the loan modification agreements and on the affirmative defense of ECOA violations.

Parole Evidence/Statute of Frauds. In Nation Banks of Tennessee v. JDRC Corporation, et al., the Court of Appeals of Tennessee ruled that an internal commercial loan memorandum could satisfy the Statute of Frauds and that such internal bank documents were admissible, notwithstanding the Parole Evidence Rule, to prove an oral modification to written loan documents.

Bankruptcy. In, In re: Shady Grove Tech Center Associates Limited Partnership, a federal bankruptcy court in Maryland found “cause” to lift a stay where the debtor had executed a pre-p etition stay waiver, even though the real estate mortgage lender was adequately protected. The case is particularly interesting for its thorough discussion of the enforceability of pre-petition stay waiver agreements.

Lawyers that get it Niel Garfield list

14 Feb

Lawyers that get it Niel Garfield list
lawyers-that-get-it-02092

Fannie, Freddie Suspend Foreclosures Pending Administration’s Housing Plan

13 Feb

Carrie Bay | 02.13.09

Mortgage giants Fannie Mae and Freddie Mac announced on Friday that they are suspending all foreclosure sales and evictions of occupied properties through March 6th, in anticipation of the Obama Administration’s national foreclosure prevention and loan modification program.

Treasury Secretary Timothy Geithner touched on the idea of a national mortgage relief program when he outlined the new administration’s Financial Stability Plan on Tuesday, but did not divulge any details on the specifics of the program. Geithner promised congressional leaders in a follow-up hearing that the program would be finalized within the next three weeks.

In a concerted effort to offer the full spectrum of assistance to troubled borrowers facing foreclosure, a number of large lenders also committed to a temporary foreclosure moratorium this week – holding out for a March 6th deadline for the government’s housing and mortgage aid initiative.

Fannie and Freddie had previously put in place a suspension of foreclosure sales and evictions through January and extended the eviction freeze through the end of February. In addition, the companies adopted a national Real Estate Owned (REO) Rental Policy that allows renters of foreclosed properties to remain in their homes or receive transitional financial assistance should they choose to seek new housing.

Watch for the Substitution of Trustee if they are recorded late INVALID FORECLOSURE SALE

8 Feb

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