owners, servicers, trusts: identifying and understanding ... · mortgage depositor certificates...

©National Consumer Law Center 2013

Owners, Servicers, Trusts: Identifying and Understanding the

Players Alabama Foreclosure Training

June 2, 2016

$$

Borrower

Lender

RMBS Securitization Map

$$$

Originator Processes and funds

individual loans

Note & Mortgage

$$$ Mortgage Payments

Borrower

$$$

$$$

Interim Servicer Services loans until

securitized

Primary Servicer Services individual loans, collects

payments, performs duties under PSA

Master Servicer Prepares reports for Trustee; remits monies; ensures Primary performs

$$$ Pool revenue less

servicing fee

Seller Purchases loans from originator; forms pool

Note & Mortgage

Depositor Creates issuing entity

Note & Mortgage

Trust Holds pool of loans; issues

certificates

Note & Mortgage

Trustee Oversees servicers

$$$ fees

$$$ purchase price

$$$ purchase price

Underwriter Sells certificates to investors,

collects proceeds

Certificates

Certificates $$$ offering proceeds

Various Classes

Investors/Certificate Holders Purchase mortgage-backed securities as defined in certificates

Certificates $$$ offering

proceeds

$$$ less servicing fee

$$$ less Trustee’s fee

Other parties not shown may include Credit Risk Manager, Securities Administrator, Swap Counterparty, and Rating Agencies

MLPA

PSA

PSA

PSA

PSA

MLPA or PSA

Document Custodian

Stores and maintains mortgage loan collateral files

Collateral File

Mortgage Broker Received broker’s fee, YSP

and processing fees

Securitization: Practical Problems

• Who has authority? – to modify the loan – to settle – to litigate

• Who has the documents?

– the note – the mortgage – the loan file

Who Owns the Loan? • Loans “held in portfolio”

– Traditional way of holding loans – Whole loans – Easier to modify

• Securitized loans – Owned by bond holders via a trust – Tranches, Ownership divided – PSA limits ability to modify

Who’s Who in Securitization • Lender/Originator • Sponsor/Seller • Depositor • Underwriter • Trust/Trustee • Servicer • Custodian • Rating Agencies • Insurers • Investors

RMBS Securitization Map

$$$

Originator Processes and funds

individual loans

Note & Mortgage

$$$ Mortgage Payments

Borrower

$$$

$$$

Interim Servicer Services loans until

securitized

Primary Servicer Services individual loans, collects

payments, performs duties under PSA

Master Servicer Prepares reports for Trustee; remits monies; ensures Primary performs

$$$ Pool revenue less

servicing fee

Seller Purchases loans from originator; forms pool

Note & Mortgage

Depositor Creates issuing entity

Note & Mortgage

Trust Holds pool of loans; issues

certificates

Note & Mortgage

Trustee Oversees servicers

$$$ fees

$$$ purchase price

$$$ purchase price

Underwriter Sells certificates to investors,

collects proceeds

Certificates

Certificates $$$ offering proceeds

Various Classes

Investors/Certificate Holders Purchase mortgage-backed securities as defined in certificates

Certificates $$$ offering

proceeds

$$$ less servicing fee

$$$ less Trustee’s fee

Other parties not shown may include Credit Risk Manager, Securities Administrator, Swap Counterparty, and Rating Agencies

MLPA

PSA

PSA

PSA

PSA

MLPA or PSA

Document Custodian

Stores and maintains mortgage loan collateral files

Collateral File

Mortgage Broker Received broker’s fee, YSP

and processing fees

Pooling and Servicing Agreement

• Usually attached to a “prospectus,” filed with SEC for public securitizations, available at www.sec.gov. See specific instructions in the materials.

• Prospectus identifies the players and is a good source of information on the underwriting standards and characteristics of the loans anticipated to be in the pool.

• PSA will usually specify who can institute foreclosure proceedings.

• PSA will set out guidelines and authority for modifying loans or approving other workout options.

• PSA will provide information on where the notes and mortgages should have travelled.

Pooling and Servicing Agreement and Prospectus

Example: • Named foreclosing party is “Bank of New

York as Trustee for CWABS Asset-Backed Certificates Trust 2006-15”

Who Are Servicers?

• Servicers not the same as investors, holders, or lenders

• Servicers accept the payments and pass on to the trust

• Servicers’ compensation largely independent of loan pool performance

• Borrowers can’t hire or fire servicers

Investor Restrictions Identifying the investor is critical: • GSE? • Federal agency like the FHA? • None of the above? (typically a mortgage pool) Mortgage Pools Investors in mortgage pools have little say in

which loans are modified and what guidelines will be used.

Servicers instead rely on PSAs

Government Sponsored Enterprises (GSEs)

• Fannie Mae and Freddie Mac placed in government “conservatorship” in September 2008

• Federal Housing Finance Agency (FHFA) designated as federal agency to regulate the GSE’s

• Great influence over industry practices • Publish guides for servicing GSE loans

Government Insured Loans

• Three Federal agencies guarantee loans: • Federal Housing Administration (FHA), a

department of HUD • Rural Housing Service, part of USDA • Veterans Administration • RHS/USDA also makes direct single

family home loans

Loan Documents

• Note & Mortgage/DOT

• HUD-1 Settlement Statement

• TIL Disclosure

• Notice of Right to Cancel

• Loan Application

• Complete Payment History

MERS • Mortgage Electronic Registration Systems, Inc. • Established early 1990s by GSEs, large lenders

to save money on recording fees • MERS sells two basic services:

– Loan IDs (MIN Numbers) for members to use – Signing authority - 20,000 individuals (employees of

servicers & foreclosure mills) can sign documents as secretaries or vice presidents of MERS

MERS

• What can be done in MERS’ name? • Conduct a foreclosure sale? • Provide a foreclosure notice? • Assign a mortgage? • Transfer a note?

Identifying the Servicer • Homeowner usually knows

– check account statements

• Check MERS – www.mers-servicerid.org (search by many methods) – 888-679-6377 (search by MIN or SSN) – MERS data on loan ownership is not reliable

• Servicing Transfer Notices 12 USC §2605(b)

http://www.mers-servicerid.org/



Identifying the Owners - TILA • Servicer must, upon written request, provide

borrower with contact information for the owner. TILA 15 U.S.C. § 1641(f)(2)

• New Note owner must inform borrower of change in ownership within 30 days. TILA 15 U.S.C. § 1641(g)

• Statutory damages up to $4,000 per violation. 15 U.S.C. § 1640

Identifying the Owner - RESPA • “Request for Information” under CFPB Mortgage Servicing

Rules. 24 C.F.R. § 1024.36, also 12 U.S.C. § 2605(k)(1)(D)

• Servicer is required to respond to any written request for information “with respect to the borrower’s mortgage loan”

• Expedited response time frame: “Not later than 10 days (excluding legal public holidays, Saturdays, and Sundays) after the servicer receives an information request for the identity of, and address or other relevant contact information for, the owner or assignee of a mortgage loan.”

Getting Information • www.mersinc.org

• freddiemac.com/mymortgage/

• fanniemae.com/loanlookup/

• TILA § 1641(f)(2)

• RESPA 24 C.F.R. § 1024.36

Primary System of

Record

Electronic Loan

Boarding

Default Processing

Loss Mitigation

Vendor Management

Servicing Modules

Servicer of Performing Loans Owners of Note

Usually Investors via Trust

Master Servicer

Primary Servicer

Borrower

Servicing in Foreclosure (or Bankruptcy)

Note Owner MERS

National Counsel for foreclosure and bankruptcy

Special Servicer

Default Servicing (Fidelity National)

Local Counsel for foreclosure and bankruptcy

The Problem: Foreclosures Are Costly

To homeowners

• Neighbors, probably $500 billion in 2009 alone • Local governments, $20,000-$30,000 per foreclosure—tens

of trillions of dollars

To communities

• Loss severities of 65% • Average per home $145,000 • Billions of dollars

To investors

The Solution: Loan Modifications

• Saves money for everyone (in theory) • Net Present Value test

– Measures benefit to investors – Includes cure and redefault statistics

• Don’t know exactly how many loan mods would pass, but probably more than are being done given severity of losses to investors

What Happens When There Is a Foreclosure?

• Servicers get paid/ reimbursed for expenses first

• Investors take what’s left

• E.g., – $400,000 loan – $100,000 current value – $50,000 in advances

and expenses paid by servicer

– Servicer gets $50,000, investors get $50,000

– Investors have $350,000 loss

– Servicer has no out-of-pocket loss

How Does a Servicer Make Money?

• Monthly servicing fee • Default fees and costs

• Servicers want to increase the size of the

pool and pile on fees – Capitalization mods – Up-front fees – Fee padding


INTRODUCTION TO HAMP

Alabama Foreclosure Law Training June 2, 2016

What Is HAMP? • Home Affordable Modification Program • Component of Making Home Affordable

initiative. • Uniform modification characteristics

– Payments reduced • To 31% of gross monthly income for HAMP Tier 1 • By any amount for HAMP Tier 2

– Modification results in a positive Net Present Value (NPV) for investors

– Trial modification followed by permanent modification

Flavors of HAMP

Treasury’s HAMP

Participating servicers screen

everybody, subject only to investor

limits

GSE HAMP

All loans guaranteed/ owned by Fannie or Freddie must be

screened for GSE HAMP

Other governmental insured loans

FHA

VA

RHS

Finding Out If a Loan Is Covered

• List of participating servicers at makinghomeaffordable.gov

Standard HAMP

• https://knowyouroptions.com/loanlookup Fannie Mae

• https://ww3.freddiemac.com/loanlookup/ Freddie Mac

• HUD-1 Governmental Insured Loans

Proprietary Mods

• Interest rate may not be permanently fixed

• May extend term before reducing interest

• No principal reduction typically • Waivers may sneak in

Generally less

favorable than HAMP

Should be evaluated for proprietary mod after HAMP turndown

Payment Reductions Really Do Matter

Source: MHA Performance Report, 4Q 2015

Where Is There HAMP Guidance?

• Non-GSE: – Handbook (currently version 5.0) – Supplemental Directives – Model Forms – hmpadmin.com

• Fannie Mae: Fannie Mae Single Family Servicing Guide Subparts D2-3; F-1-18 (April 2016) (efanniemae.com)

• Freddie Mac: Bulletins & Chptr 9205 of Seller/Servicer Guide (March 2016) (freddiemac.com)

• FHA: Handbook 4000.1 (March 2016) (hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm)

• VA: Circulars (homeloans.va.gov/valeri.html) • USDA: Final rule (75 Fed. Reg. 52429 (Aug. 26, 2010))

HAMP Is Floor, Not Ceiling

• Servicers can do modifications that go deeper than HAMP and still receive incentive payments

• Servicers can offer non-HAMP modifications, although everyone should be screened for and offered a HAMP mod

Participating Servicers Must Modify Loans

• Servicers who sign contract must modify all eligible loans – Approximately 85% of eligible mortgage debt

covered by HAMP servicers – HSBC only major non-participating servicer

• Servicers of GSE loans must modify GSE loans (even if not a participating servicer)

• Servicers, not investors, participate • http://www.treasury.gov/initiatives/financial-

stability/TARP-Programs/housing/mha/Pages/contracts.aspx

http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/mha/Pages/contracts.aspx



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1. Eligible to Apply?

2. Qualify for a Mod?

YES

NO

• Participating servicer • Payment > 31% (Tier 1)

• Default or Imminent Risk

HAMP: Basic Eligibility • One to four unit residential property • Property is not vacant or condemned • Mortgage was originated on or before Jan. 1, 2009 • Borrower is delinquent or faces imminent risk of default • Unpaid principal balance is no greater than

– 1-Unit: $729,700 – 2-Unit: $934,200 – 3-Unit: $1,129,250 – 4-Unit: $1,403,400

• Property is borrower’s primary residence* • Current mortgage payments exceed 31% of borrower’s gross monthly income* • No prior HAMP Mod* * = HAMP Tier 1 Rule (not Tier 2)

43

Tier

1

HAMP Tier 1 Modification Analysis

• TWO PARTS • Part 1: Waterfall to calculate affordable

modified payment • Part 2: Net present value test – is this

modification in best interest of owners of loan?

44

Modification Analysis The “Waterfall” • Determines the modified terms of the loan hypothetically. • The goal is to reduce the borrower’s monthly payment to 31% of gross monthly income.

– This is the Target Payment • Payment includes principal, interest, taxes, insurance and, if applicable, association fees (“PITIA”). • Net present value test – is this modification in best interest of owners of loan?

45

31% of What? Income • Gross income for all

borrowers • Unemployment

income excluded

Doing the Math Multiplier

Non-taxable income

125%

Rental income 75%

• Non-wage income (including baby-sitting and odd-jobs) less than 20% does not need to be documented; all other income does

• Some income is optional, at borrower’s election − Child support or alimony − Income of non-borrower household members

Incentives

Borrowers, servicers, and investors all receive

payments for modifications

Payments are only for permanent modifications

HAMP Mods Are Standard Mods

Capitalize arrearages

Reduce interest rate

Extend amortization term to up to 40 years

Principal forbearance

Payment reduced to 31% of the gross income

Waterfall Analysis

Proceeds sequentially through the waterfall, unless

PSA forbids one step or

Principal reduction substituted for any step

Driven by target payment

Capitalization of Arrearages=Principal Debt

Increases

Capitalized arrearage includes:

• Past due principal and interest • Escrow deficiencies/advances, though doesn’t

have to be. • Foreclosure costs • Servicing fees: property inspections, credit

report fee

CANNOT include:

• Late fees: unpaid fees will be waived • Additional modification fees: no charge for

HAMP

Interest Rate Reduction

• Reduced to as low as 2% for 5 years (to get to 31%)

• Can go lower, but incentives only paid down to 2%

• Increase at 1% after 5 years to lower of – Freddie Mac rate – Interest rate cap in note

• Once rate increases to cap, fixed for life of loan.

Amortization Term

• Payments extended up to 40 years • Term can be extended even if payments

can’t be balloon payments

Principal Forbearance vs. Principal Reduction

• Principal forbearance—interest free forbearance of principal until loan paid off large balloon payments

• Servicers required to run an NPV analysis including principal reduction and investor incentives for principal reduction if LTV > 115%, but need not implement it

• Borrowers who stay current receive up to $1,000 a year in principal reduction for 5 years

NPV Test

• Measures the benefit to the investor of a loan mod – Not servicer – Not borrower

• Weighs value and probability of unmodified loan vs. modified loan

• A pass means value of loan mod, in present terms, allowing for possibility of redefault, is greater than the value of the loan unmodified

Modified vs. Unmodified Loan Unmodified Loan • Current payments • Chance of foreclosure • What the foreclosure net will

be

Modified loan • Modified payments • Chance of foreclosure after

loan mod (redefault) • What the future foreclosure

net will be

What Is a Modified Loan Worth?

Value of payments

• Interest rate • Discount rate • How long will

payments be made

Chance of redefault

• Numbers drop with • Payment

reduction • Principal

reduction • HAMP mods

Two Public NPV Versions • HAMP NPV (CheckMyNPV.com)

– Standard used by all HAMP servicers – Available to May 1, 2018

• FDIC Loan Mod in a Box – http://www.fdic.gov/consumers/loans/prevention/NPVCalculator.html

• Can use either to check NPV with – Computer – Internet – Excel – Basic info from servicer and homeowner

• Both produce the terms of the HAMP modification

Applying for HAMP

Submission of “Initial Package” triggers servicer’s duty to review for HAMP • Request for Modification and Affidavit (RMA) • 4506T-EZ form

• RMA and 4506T-EZ Forms available at makinghomeaffordble.gov or hmpadmin.com

• Proof of income • Checklist available at

http://makinghomeaffordable.gov/checklist.shtml

If Approved . . . .

• 3 month Trial Period Plan – Arrears will accrue during trial. Payments are held

in suspense and only credited when equal to full monthly payment under note.

– Will be reported to credit bureaus as either in default or making payments under a plan

• Will be converted to permanent modification upon completion of trial modification – Borrower should not be penalized for servicer’s failure

to timely convert • If fails trial period: no further HAMP Tier 1 mod.

“1 bite at the apple.” – Unless servicer set payments too high

Conversions

• Conversions to permanent mods often stalled

• If no mod, then arrearages due in lump sum

• If mod, capitalize arrearages – After effective date of trial plan (when

permanent mod was supposed to start) interest accrues at reduced rate

Delayed Conversions Trials Aged 6+ Months (Percent of all Active Trials)

Source: MHA Quarterly Performance Report, 4Q 2015

If Denied . . . .

• Written denial notices providing basis of denial must be provided

• Borrower has, in general, 30 days to challenge denial

Investor Restriction Denials • HAMP doesn't override PSAs, but the

program follows the “usual and customary industry standards”

• Vast majority of all PSAs permit modifications • If the PSA only prohibits one step in the

HAMP waterfall, servicer must still modify, omitting only the prohibited step

• Servicers expected to use “all reasonable efforts” to get waivers

• 15 U.S.C. §1639a creates safe harbor from investor litigation for servicers who modify under HAMP

NPV Denials • If an NPV test was run, even if not the reason

for the denial, borrower is entitled to all inputs (2.3.2)

• If borrower identifies an error, and changing the error results in a different NPV result, the servicer must re-run the NPV

• The servicer should only change the value corrected by the homeowner; no other values should change

• CheckMyNPV.com

Excessive Forbearance Denials

Standard language in

denial letter says:

• We are unable to offer you a Home Affordable Modification because we are unable to create an affordable payment equal to 31% of your reported monthly gross income without changing the terms of your loan beyond the requirements of the program

What Is Excessive Forbearance?

Principal forbearance greater than

(i) 30 percent of the UPB (after capitalization under Step 1) or

(ii) UPB less the current mark-to-market.

Can an Excessive Forbearance Be Resolved?

Substitute principal reduction for all or part of the excessive forbearance

Income increased, or escrow decreased may also reduce the required forbearance

Is the interest as low as it can go?

What Isn’t Grounds for Denial

“Insufficient income”

• Low income can cause NPV failure or excessive forbearance denial, but can’t be denied solely on low income.

High DTI

• Back end DTI over 55% formerly required the promise of housing counseling, but was never a basis for denial

Bankruptcy

• Borrowers in an active bankruptcy filing must be considered

• Borrowers cannot be denied because of prior bankruptcy filing

Common Servicer Violations

• Failure to process application in a timely way • Failure to convert • Requiring resubmission of income information • Asking for an upfront downpayment • Telling homeowners they have to be in default • Using incorrect income information in processing

NPV • Inserting waiver into the documents

Escalations

• Every servicer supposed to have a designated team Inhouse

• [email protected] • Phone: 1-800-7FANNIE Fannie Mae Loans:

• [email protected] • Phone: 1-800-FREDDIE Freddie Mac Loans:

• [email protected] • Phone: 1-866-939-4469; Fax: 1-240-

699-3883

Non-GSE Loans -- HAMP Solution

Center:

mailto:[email protected]



mailto:[email protected]?Subject=Counselor%20Escalation

HAMP Tier 2 • Started June 1, 2012 • Offered to people who fail or are not eligible for

standard HAMP mod • Offered for investment properties (not owner-

occupied) • Loan mods not as well tailored to individual

circumstances, but broader eligibility – Cookie cutter mods that aren’t based on borrower

income – Interest rate will not go as low; fixed at standard rate – Principal forbearance if underwater sufficiently,

whether you need it or not

71

HAMP Tier 2: Plan B • If not eligible for HAMP

– Failed NPV test – Excessive forbearance – Not owner-occupied – Payments already under 31%

• Failed a previous HAMP trial or permanent mod – If permanent mod, either

• 12 months since effective date or • Change in circumstances

72

HAMP Tier 2: Terms • Driven by modification characteristics, NOT

by payment or affordability – Resulting modification must lead to a payment

within acceptable DTI range – Servicer may require payment reduction

• Fixed interest rate (Freddie Mac Primary Mortgage Market Survey)

• Standard amount of forbearance • No borrower pay-for-performance incentives

73

HAMP Tier 2 Waterfall • Loan is modified by

– Capitalizing arrears – Principal forbearance (if LTV > 115%) – Reducing interest rate – Extending term to 480 months

• NPV test • Modified loan checked against affordability

requirements – DTI must fall within acceptable DTI range (10-55% or

25-42%, depending on the servicer) – Payment reduction requirement (varies by servicer)

74

GSE HAMP

• Determining if the loan is owned by Fannie or Freddie:

• fanniemae.com/loanlookup/ • https://ww3.freddiemac.com/loanlookup/

(note: requires last 4 digits of borrower’s SSN)

75

http://www.fanniemae.com/loanlookup/

https://ww3.freddiemac.com/corporate/

GSE-HAMP: Basic Differences

• No Servicer Participation Agreement • No investor bar on HAMP modifications • Standard application form (Form 710, not

RMA) • No principal forgiveness allowed in

borrower-initiated applications • No optional forbearance beyond program

guidelines

HAMP Tier 1 = GSE-HAMP

• Basically the same waterfall of steps to reach affordable payment (31% DTI) – But no principal forgiveness allowed (still can

have forbearance) • Anything better than -$5,000 is a “passing”

NPV result = approval!

77

HAMP Tier 2 = “Standard Mod”

• Very similar to HAMP Tier 2 calculations • IF the LTV is at least 80%... If not, different

rules apply… • Acceptable DTI range is 10-55% • Interest rate is fixed at the:

– Fannie Mae Mod Rate (4% as of 2/13/15), or – Freddie Standard Mod Rate (4% as of

2/13/15)

78

Standard Mod for LTV < 80% • Capitalize arrearage • Interest rate:

– If fixed-rate now, keep the same interest rate – If adjustable now, fix at Fannie Mae Mod Rate if

current rate is lower; or fix at current rate • Term: Offer the borrower up to 3 options:

– 480 months if <= current P&I payment – 360 months if P&I payment reduced by 20% – 240 months if P&I payment reduced by 20%

79

When Does HAMP End?

HAMP is currently slated to end Dec. 30, 2016

Initial package must be placed in the mail/ faxed/ emailed no later than that date

Permanent modification in

effect as of September 30,

2017

Scope of Termination • Termination applies to array of MHA

Programs • HAMP Tier 1 • HAMP Tier 2 • HAMP Streamlined Modification • 2MP Second Lien Modification • HAMP – UP • HAFA (DIL, Short Sale)

And Outside Treasury HAMP

• Other HAMP Programs ending • GSE-HAMP – December 31, 2016 for

applications and September 30, 2017 for Modification Effective Date

• FHA-HAMP - not clear • RHS and VA HAMP ?

Timing of Treasury-HAMP Phase-Out

• Servicers can stop soliciting September 1, 2016 • Borrower must submit an “Initial Package” by

December 30, 2016 for HAMP Tier I and Tier II

• “Effective Date” of permanent modification must be before September 30, 2017

Review: What is an “Initial Package?”

• “Initial Package” that must be submitted by December 30, 2016 consists of:

• Request for Mortgage Assistance “RMA” Form • Either (i) IRS Form 4506-T or 4506T-EZ or (ii) a

signed copy of the borrower’s tax return for the most recent tax year (servicers may not reject an Initial Package that includes either the borrower’s complete tax return for the most recent tax year or the IRS Form 4506-T or 4506T-EZ)

• Evidence of income • Dodd-Frank Certification (part of the RMA Form)

Review: What is Evidence of Income?

• “Evidence of Income” means: • Each wage earning borrower must provide

copies of two recent pay stubs, not more than 90 calendar days old at time of submission, indicating year-to-date earnings.

• Each self-employed borrower must provide his or her most recent quarterly or year-to-date profit and loss statement. Audited financial statements are not required.

“Streamline” Modifications • One likely future replacement for HAMP

modifications • Based on similar GSE model now available

since 2013 • Treasury HAMP Streamlined modification

available since Jan. 1, 2016 • Basic HAMP eligibility requirements apply,

but need not submit Initial Package • Eligible if defaulted or were ineligible for a

past Tier I or Tier II modification in past

Streamline Modification Procedure

• Automatic offer at 90 days delinquency • Servicer reviews defaulted loans on portfolio basis,

selects NPV positive loans for Streamlined mod offers • NPV process not public • Offer/terms not based on borrower income, only on

loan terms and property value (info in servicer’s file) • Borrower accepts Streamlined TPP offer by making

first payment and then completing application • Permanent Streamlined mod executed after

completing TPP and submitting application

Policy Issues • What will replace HAMP? • Models targeting affordability – target a

percentage of income payment, like current HAMP and FHA HAMP

• Cookie cutter models – current GSE mods, HAMP Tier II, Streamline mods (capitalize arrears, fixed interest rate reduction and fixed term extension, maybe limited principal forbearance)


Government-Insured Mortgage Loan Programs

Alabama Foreclosure Training June 2, 2016

THREE FEDERAL AGENCIES • HUD – manages FHA single-family insured loan program • VA – manages VA single-family insured loan program • USDA – manages two distinct programs:

– USDA insured single-family home loan program – USDA direct loan program (purchase and home repair

loans)

Structural Similarities - Authority

• Federal Statute • Codified Regulation (C.F.R.) • Agency Handbook • Administrative updates (on website) • Court decisions

91

Defense to Foreclosure • Compliance with regulatory framework as

condition precedent to foreclosure • Enforce regulations to defeat foreclosure • Enforce loan contract that incorporates

regulatory obligations

• Compare Campbell v. Bank of Am., 141 So.3d 492 (Ct. App. Ala. 2013) and Wells Fargo v. Neal, 922 A.2d 538 (Md. 2007) (both addressing FHA equitable defense)

92

FHA LOSS MITIGATION AUTHORITY

• Statute; 12 U.S.C. § 1715u • HUD Regulations: 24 C.F.R. § 203.500, et seq. and §203.600,

et seq. • HUD Mortgagee Letters • New HUD Handbooks 4000.1 (effective March 2016) • Court Decisions • HUD/FHA website: http://www.hud.gov/offices/adm/hudclips/ (contains Mortgagee Letters, Handbooks)

http://www.hud.gov/offices/adm/hudclips/

The Federal Statute: FHA Loss Mitigation Review is Mandatory

• The National Housing Act states: Upon default of any mortgage insured under this title, mortgagees shall engage in loss mitigation actions for the purpose of providing an alternative to foreclosure.

• 12 U.S.C. § 1707u(a) • Obligation is also in the mortgage –

enforceable as contract term

FHA Loss Mitigation Tools • What loss mitigation techniques must be

reviewed under § 203.501 & Handbook 4000.1? – “Special forbearance” – FHA Standard Modification – FHA HAMP, including:

• Income-based modification and/or • “Partial Claim” (principal forbearance)

– Pre-foreclosure sale – Deed in lieu of foreclosure

FHA-HAMP: The Basic Concept • Combines a partial claim with a loan modification (30-

year term, fixed interest rate) • Uses “partial claim” (principal forbearance) to reach a

target payment – Either percentage of income, or – Percentage payment reduction

• The total partial claim (principal forbearance) may not exceed 30 percent of the unpaid principal balance as of the default date.

• No formal NPV test. • New “FHA Loss Mitigation Home Retention Option

Priority Order Waterfall” in HUD Handbook 4000.1 Part III (2016)

FHA National Servicing Center

Oklahoma City Office U.S. Department of HUD

301 NW 6th Street, Ste 200 Oklahoma City, OK 73102

Fax: (405) 609-8405 or

(405) 609-8421

www.hud.gov/offices/hsg/sfh/nsc/nschome.cfm E-mail: [email protected]

1-877-622-8525

See also HUD Neighborhood Watch: https://entp.hud.gov/sfnw/public/ (data on FHA loss mitigation activity by state and by servicer)

https://entp.hud.gov/sfnw/public/

RURAL HOUSING LOANS

• U.S.D.A.’s Rural Housing Service (“RHS,” formerly “FmHA”) manages two single-family home loan programs for borrowers in rural areas. – Guaranteed Loan Program: private lender,

guarantee not obvious from mortgage and note

– Direct Loan Program: The United States is the lender and they tell you they are

RHS RESOURCES Guaranteed Loans: 42 U.S.C. § 1472, et seq. USDA Regulations: 7 C.F.R. § 1980.301, et seq. RD Instruction 1980-D (tracks regulations) at

http://www.rurdev.usda.gov/regs/ RD Administrative Notice 4433 at

http://www.rurdev.usda.gov/regs/ • Includes USDA Rural Development Loss Mitigation

Guide (Single Family Guaranteed Loan Program) – Appendix 4: Loss Mitigation Checklist – Appendix 5: Loss Mitigation Forms

http://www.rurdev.usda.gov/regs/



RHS Guaranteed Loan Program

• RHS Guaranteed Loans: Loss Mitigation obligation: 42 U.S.C. § 1472(h)(13)

• Options for RHS Guaranteed Loans – Special Forbearance – Loan Modifications (including “RHS-HAMP) – Pre-Foreclosure Sale – Deed-in-Lieu

Rural Housing Direct Loans These are loans directly from the United States

government (USDA) to the borrower for purchase or construction of residence

• “Section 502” loans under U.S. Housing Act – Regulations: 7 C.F.R. Part 3550 – Handbook HB-2-3550 (Centralized Servicing

Center): http://www.rurdev.usda.gov/regs/hblist.html

http://www.rurdev.usda.gov/regs/hblist.html

RHS Direct Loans

• Direct Loans Special Features: • Interest credit/payment assistance

reduces monthly payment toward interest based on household income

• Periodic payment adjustments and review • Forborne interest is subject to “recapture”

VA Loans - Introduction

• VA guarantees loans by private lenders • Available for eligible veterans • Can be for purchase, construction,

refinance • Relatively low interest rate, no down

payment

VA Loans Resources • Regulations: 38 C.F.R. § 36.4800-4893 &

38 C.F.R. § 4316-19 • VA Handbook H26-94-1 • Servicer Loss Mitigation Program

Handbook • Both handbooks at

http://www.homeloans.va.gov/servicers.htm

• Help from regional servicing centers



What are the VA Options? • Repayment Plan • Special Forbearance • Loan Modification • VA-HAMP • Compromise (short) sale • Deed-in-Lieu of foreclosure • Refinance • Assumption • Refunding- VA takes over loan


The CFPB’s Mortgage Servicing Rules


CFPB Mortgage Servicing Rules

• Dodd-Frank Act of 2010 amended RESPA and TILA to include new servicing requirements

• CFPB issued mortgage servicing regulations in Feb. 2013

• Regulations became effective January 10, 2014 (some revisions underway 2016)

107

CFPB Servicing Rules

• Applies to mortgage servicers – Small servicer exemption (certain provisions) – Most credit unions, community banks

exempted • Covers most first lien loans: GSEs,

government insured loans – But not loans securing open-end lines of credit – Not reverse mortgages

Notices of Error and Requests for Information

• Separate qualifications and procedures for: – “notice of error” - Reg. X § 1024.35 – “request for information” - Reg. X § 1024.36

• Written inquiry can be a NOE or RFI even if

not a former “Qualified Written Request”

• Ban on fees for responding to either a NOE or RFI – § 1024.35(h) – error resolution – § 1024.36(g) – information requests

109

Notice of Error 12 C.F.R. § 1024.35

Failure to accept a conforming payment

Failure to apply a payment correctly

Failure to timely credit a payment

Failure to make timely escrow disbursements

Imposing an unreasonable fee

Failure to provide a payoff statement

Failure to provide accurate loss

mitigation information

Failure to do a servicing transfer

correctly

Filing a foreclosure without giving the correct notices re.

loss mitigation

Moving for foreclosure judgment

or sale without following the loss

mitigation protocols

Any other error relating to the servicing of a

borrower's mortgage loan

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CFPB Error Resolution Procedures Time Frames

• 5 days to acknowledge receipt • 30/45 days to respond (reasonable

investigation, report on error correction) • For errors related to dual tracking

submitted up to 7 days before sale, servicer must respond before sale. 12 C.F.R. § 1024.35(f)(2)

Request for Information • Servicer is required to respond to any written

request for information “with respect to the borrower’s mortgage loan”

• Unlike QWR, a RFI is not limited to information “related to the servicing” of the loan

• RFI may seek: – information about a loan modification application – “servicing file” vs. “mortgage file”

Identity of Mortgage Loan Owner RESPA/TILA

– RESPA Request for Information: Servicer must respond within 10 business days to request for identity, address, and other contact information about owner or assignee of loan. Reg. X § 1024.36(d)(2)

– Supplements TILA § 1641(f), but provides time deadline

RFI for Loan Owner

• Who is the current “owner or assignee” of mortgage loan?

• Generally the beneficial owner – party ultimately entitled to receive payments

• Guarantor role • Considering special rule for GSEs.

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Asking the Servicer to Identify the Mortgage Loan Owner

Useful commentary in the RESPA Official Interpretations,

§ 1024.36(a)-2

TILA - § 1641(f)(2) RESPA - Reg. X § 1024.36(d)(2)

Time Presumptively “reasonable” 10 business days

Fees Not discussed Banned

Remedy $4K plus actual damages, but servicer liability?

Actual damages, plus $2K if can prove pattern and practice

Statute of limitations 1 year 3 years

115

Recent Decision

• Renfroe v. Nationstar Mortgage, LLC, -- F.3d --, 2016 WL 2754461 (11th Cir. May 12, 2016) – Timing of violation – Duty to take concrete steps to investigate,

correct

Loss Mitigation Rules

Rules effective Jan. 10, 2014 dealing with foreclosure avoidance:

• Early Intervention - Reg. X § 1024.39

• Continuity of Contact - Reg. X § 1024.40

• Loss Mitigation - Reg. X § 1024.41

117

Jan. 10, 2014 Effective Date

• Does not apply to applications received before effective date

• Applies to applications received after effective date even if borrower evaluated for loss mitigation before effective date

118

Pre-Foreclosure Review Period

By 36th day of delinquency

Attempt live contact with borrower

By 45th day

Send written notice and assign personnel to borrower

After 120th Day

If complete application not received, may initiate foreclosure by making first notice or filing

119

Loss Mitigation Procedures • CFPB: nothing in § 1024.41 imposes duty on

a servicer to provide borrower with a specific loss mitigation option

• Borrowers do not have private right of action under § 1024.41 to enforce terms of agreement between servicer and mortgage holder concerning evaluation for loss mitigation options

• Borrowers do have private right of action to enforce the procedural requirements in § 1024.41

120

The Loss Mitigation “Application”

• Key concept: the “Application” • Expansive definition of a loss mitigation

“application” – May be verbal or in writing – Borrower must:

• Express interest in foreclosure avoidance • Provide some information relevant to evaluation for

an available option

Receipt of Application 45 Days or More Before Sale

Servicer must:

• Conduct review to determine whether application is complete

• Within 5 business days of receiving application, provide written notice to borrower that: • acknowledges application is complete, or • describes documents and information needed to

complete the application, and • provides “reasonable date” by which borrower

should submit missing documents and information

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The “Complete” Application

• When is an application “complete?” • When servicer “has received all the

information that the servicer requires” to evaluate for “the loss mitigation options available to the borrower.” (§1024.41(b)(1))

• You need to know how applicable owner/investor guidelines determine the options “available”

The “Complete” Application • Servicers have flexibility to establish their

own application requirements, but must exercise “reasonable diligence” to obtain information needed to complete the application

• Application is complete if borrower provides all required information within borrower’s control even if additional information not in the control of the borrower is required (e.g., credit report)

124

A “Facially Complete Application”

• Means borrower submitted all missing docs, nothing more due (12 C.F.R. 1024.41(c)(iv))

• Servicer may later request more docs, but borrower retains all protections re: notices, dual tracking, appeals

“Incomplete Application”

• Servicer has duty to assist in completion • Must give 5-day notice of:

– What is needed to complete the application – Deadline for completion

What Happens When the Servicer Gets a “Complete” Application? • Upon receipt of “complete” application • Servicer must “evaluate” • For all “available” options

– Not just the ones borrower asked about • Written notice of decision in 30 days

– Describe options being offered – Specific reason for denial of each available

loan modification option – Notice of right to appeal (escalate)

CFPB Dual Tracking Restrictions

Two stages

120 day pre-foreclosure review

period

Period from initiation of

foreclosure to sale

CFPB: Dual Tracking Restrictions Before Initiation of Foreclosure

• Runs 120 days from start of delinquency • Bars “first notice” to start foreclosure • Insulation from foreclosure activity • Emphasis on soliciting application (“early

intervention” notice) • Pre-emption of state foreclosure laws

CFPB: Dual Tracking Restrictions After Initiation of Foreclosure

• Duty to evaluate and give written notice of decision for complete application submitted up to 37 days before sale date

Date of Foreclosure Sale • If no foreclosure sale has been scheduled

as of date complete loss mitigation application is received, the application is considered to be received more than 90 days before any foreclosure sale

• Dual track and other protections that apply based on timelines remain in effect even if foreclosure sale is later scheduled or rescheduled

131

Summary: Loss Mitigation Application Received . . .

120 days of delinquency

Full evaluation, notice of incomplete application, and appeal rights No referral to foreclosure

90 days or more before sale

Full evaluation, notice of incomplete application, and appeal rights No foreclosure sale until application reviewed

45 days or more before sale

Full evaluation and notice of incomplete application No foreclosure sale until application reviewed

38 days before sale

Full evaluation No foreclosure sale until application reviewed

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Evaluation of Incomplete Loss Mitigation Application

Servicer may offer:

• A short-term payment forbearance (for payments due over no more than 6 months)

• Other loss mitigation option if application remains incomplete for a significant period of time

If forbearance provided,

servicer must:

• Not initiate or continue with foreclosure if borrower is performing under agreement

• Continue to comply with loss mitigation rule and seek documents to complete application and review if later becomes complete

133

Loan Modification Denial • If loan modification denial based on a requirement

set by loan owner or assignee, notice must identify owner or assignee and specific requirement that was basis for denial

• If loan modification denial based on net present value test, notice must state this reason and include the inputs used for the calculation

• Denial notice must also describe borrower’s right to appeal, the deadline to appeal, and any requirements for making an appeal, if applicable

134

Loss Mitigation Process Appeal Rights

• Appeal rights apply only to decisions: – involving eligibility for loan modifications – made on complete (or facially complete) applications

submitted 90 days or more before a scheduled foreclosure sale

• Borrower must request an appeal within 14 days after servicer provides initial notice of determination

• Review must be by “different personnel than those responsible for evaluating” application

• Servicer must decide appeal and provide notice of determination to borrower within 30 days of appeal request

135

Four Basic Notices Required by Rules

Initial pre-foreclosure notice (w/in 45 days of delinquency)

Notice of acknowledgement of receipt of application (5 days from receipt) • Both for complete and incomplete application

Notice of decision on application & appeal rights (30 days after complete app. received)

Notice of appeal decision

Transfer Requirements • New servicer must obtain loss mitigation

documents and information submitted by borrower to former servicer and comply with § 1024.41

• If borrower’s complete application is being evaluated when mortgage is transferred, new servicer should “continue the evaluation to the extent practicable”

• Documents in a complete application are received for purposes of timelines as of date they were received by former servicer, not new servicer

137

“Duplicative” Applications • Section 1024.41(i): “A servicer is only required to comply

with the requirements of this section for a single complete loss mitigation application for a borrower’s mortgage loan account”

• Does this really mean borrowers have only “one bite at the apple,” regardless of when earlier application was submitted or whether there have been changed circumstances?

138

What Must Still Be Done for “Duplicative” Applications

• Rule does not apply if: – Application is made to a different servicer –

comment 41(i) states that transferee servicer must comply (but does this include transfers between affiliates or through merger?)

– Servicer provides short-term forbearance or other loss mitigation option on an incomplete application

139

Pending Revisions

• Possible revision of § 1024.41(i) “duplicate application” limitation

• Borrower may be able to submit more loss mitigation application and receive RESPA procedural protections if not delinquent at all times since last application

140

Servicers’ Duties under TILA – Regulation Z

• Promptly Credit Payments

• Provide Periodic Mortgage Statements

• Provide Payoff Statements

• Provide Payment Change Notices

• Provide Transfer of Ownership Notices • 12 C.F.R. §§ 1026.20, 1026.36, 1024.41

141

Periodic Statements • Servicer must send statement for each billing cycle

with the following categories of information: – amount due for the billing period – explanation of amount due including fees imposed – past payment breakdown – transaction activity – partial payment information – contact and account information, and – delinquency information, if applicable

• Disclosure required of payments servicer decides to

hold in suspense account rather than apply to account

142

Periodic Statements When Homeowner Is > 45 Days Late

Date consumer became delinquent;

Notification of possible risks, such as foreclosure, and expenses, if delinquency is not cured;

Account history for previous six months or since last time account was current, showing the amount remaining past due from each billing cycle;

Notice of any loss mitigation program to which the consumer has agreed;

Notice of whether the servicer has initiated foreclosure by making the first notice or filing required by state law;

Total payment amount needed to bring the account current; and

Either the CFPB list or the HUD list of homeownership counseling organizations and the HUD toll-free telephone number

143


Saving Homes in Bankruptcy


*Fresh Start for Debtors

*Fair and Equitable Distribution of

Non-Exempt Assets to Creditors

Key Bankruptcy Concepts

Fresh Start

Fair and Equitable Distribution among

Creditors

Automatic Stay

Exemptions

Discharge

Avoiding preferential transfers to creditors

Claims bifurcation

Pro rata distribution among creditors

The Automatic Stay

Limits of the Stay: Repeat Filers

Date petition

filed One year

Within one year before filing: One dismissal = auto stay for 30 days (unless extended) Two or more dismissals = no automatic stay! (§ 362(c))

Eligibility to File: Repeat Filers

Date petition

filed 180 days

Within 180 days before filing: Voluntary dismissal after a Motion for Relief from Stay? Court order dismissing with prejudice for willful failure? = Ineligible to file, and no auto stay (§ 109(h), § 362(b)(21))

The Bankruptcy Estate

150

1. Debtor’s assets go into the estate upon filing

2. Property claimed as exempt comes out of the estate

Debtor’s prepetition assets

Debtor’s exempt property, part of the fresh start

Chapter 7 vs. Chapter 13 Chapter 7 Chapter 13 * Creditors get paid from liquidation of any non-exempt assets

* Creditors get paid from Debtor’s disposable income over a 3-5 year payment plan

* If Debtor owns property beyond what she is allowed to claim as exempt, the Trustee may sell it

* Debtor gets to keep non-exempt assets

* Case is over and discharge is entered in about 4-6 months

Case is over and discharge is entered after the Debtor completes plan payments (3-5 years)

Credit Counseling

Filing Fee/Fee Waivers

Means Test

Why not Chapter 7? Secured Creditors Stay Secured

• Unless a Court orders otherwise, the lien (or security interest) survives the bankruptcy

• Thus, secured creditors will still be able to foreclose on a home or seize other property if consumer is in default – They may file a motion for relief from stay or wait for the

discharge to be entered • Personal liability on secured debts is wiped out (no

deficiency after foreclosure, for example)

Saving Homes In Chapter 13

Secured Claims • “Allowed secured claim” is limited to the

value of the collateral – § 506(a) • Undersecured claims may be bifurcated

into their secured and unsecured portions

Debt Owed - $10,000

Value- $6,000

Allowed Secured Claim $6,000

Allowed Unsecured Claim

$4,000

Anti-modification Rule (mortgage on principal residence)

Section 1322(b)(2) – The plan may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims”

So… what can you do?

• Automatic Stay to stop foreclosure • Cure and maintain the mortgage (unwind

acceleration) • Apply for loan mod while in ch 13 • Modify/strip off some mortgages • Avoid judicial liens

Cure and Maintain

Right to Cure • 1322(b)(5) the plan may provide for the curing of any

default within a reasonable time and maintenance of payments while the case is pending on any claim in which the last payment is due after final plan payment

• Arrearages include reasonable pre-petition foreclosure costs

• All payments are made under the plan even if debtor disburses ongoing maintenance payments.

POC Requirements

Payment Change Notices

Notice of Fees or

Charges

Proof of Claim Requirements • For all claims, itemized statement of

interest, fees and other charges • For security interest in debtor’s property,

amount necessary to cure any default • For security interest in debtor’s principal

residence, Official Form B10, Attachment A and mortgage escrow statement prepared as of petition date

Payment Change Notices • Applies to security interest in debtor’s

principal residence treated in plan under § 1322(b)(5)

• Notice of payment change 21 days prior to change – Fed. R. Bankr. P. 3002.1(b)

Notice of Fees and Charges • Applies to security interest in debtor’s principal

residence treated in plan under § 1322(b)(5)

• Notice of fees or charges imposed during the chapter 13 case, no later than 180 days after fees incurred – Fed. R. Bankr. P. 3002.1(c)

• 180-day period based on date when fees “incurred,” not when advanced or determined to be recoverable

Notice of Final Cure • Notice of final cure filed by trustee no later than 30

days after plan completion - Fed. R. Bankr. P. 3002.1(f)

• If trustee does not file the notice and debtor believes all cure and plan payments have been made, debtor may file notice

• Mortgage holder must file a response • If response says the loan is not current, debtor may

object and court will determine after notice & hearing • Mortgage holder who does not respond may be barred

from later presenting evidence to the contrary

Loss Mitigation and Litigation in Bankruptcy

Loss Mit in Bankruptcy

• Borrower may apply for a loan mod during bankruptcy (or continue with an application that was initiated prior to the bankruptcy)

• No HAMP rule prohibits mods while in bankruptcy (MHA Handbook, Ch. II, §§ 5.2, 8.6) – Fannie Mae: at servicer’s discretion, § 609.01 – Freddie Mac: borrower in active bk must be considered if

borrower, borrower’s attorney, or the trustee submits request; § C65.7.1

• Bankruptcy attorney may have to sign a form or send a letter authorizing servicer to keep communicating with borrower or the borrower’s 3P rep 169

Loss Mit in Bankruptcy Options for the Ch. 13 Plan:

1) Standard plan to cure mortgage arrears • Can client afford it? Does this contradict the request for

mod? 2) Plan for a loan mod, saying arrears will be cured through

loan mod and including the anticipated modified payment of 31% of debtor’s gross monthly income in the budget (may serve as pre-confirmation adequate protection)

• In re Arizmendi, 2011 WL 2182364 (Bankr. S.D.Cal. May 26, 2011) (finding that TPP payments provided sufficient adequate protection even though contract interest not being paid)

3) Confirmable plan with lump sum at the end to treat the arrearage

• Feasibility is based on the expected loan modification * Remember the binding effect of plan confirmation order.

170

Bankruptcy and HAMP Court Approval of loan mods: • Servicer and its counsel must work with borrower or

borrower’s counsel to obtain any court and/or trustee approvals required in accordance with local court rules and procedures. – MHA Handbook Ch II, 8.5

• In re Smith, 409 B.R. 1 (Bankr. D. N.H. 2009) (finding

that motion for approval of loan mod. does not present court with a case or controversy unless filed in connection with proceedings for stay relief, plan confirmation, or plan modification)

171

Loss Mit/Litigation in Bankruptcy • RESPA Reg on Loss Mitigation, 12 USC 1024.41,

does not have a bankruptcy exemption! • Servicer must acknowledge application and notify

borrower if it is complete, docs needed to complete it (and deadline) within 5 business days

• Servicer must evaluate within 30 days of receipt of a complete application

• Dual tracking restrictions (use them to argue against Motion for Relief from Stay?)

• Consider filing an Adversary Proceeding for a claim under RESPA

Stripping Off 2nd Mortgages

Anti-modification Provision


Parsing the Language


Underwater Homes

Value of Home: $120,000 Amount due on First Mortgage: $125,000 Amount due on Second Mortgage: $15,000 Total Amount of debt: $140,000

Underwater Mortgages

Value of home

$120,000

Underwater Mortgages

Value of home

$120,000

Amount owed on first mortgage

$125,000

Undersecured by $5,000

Underwater Mortgage

Value of home

$120,000

Amount owed on first mortgage

$125,000

Amount owed on second mortgage - $15,000

Undersecured by $5,000

Doing the Calculations • If total of all senior liens equal or exceed property’s

value, junior lien creditor has no allowed secured claim • Homestead Exemption not considered • Other considerations:

– Effect of first lien loan mod with principal reduction?

Proving Value of the Property • Valuation date (three approaches):

– Petition date – Effective date of plan (helpful in declining market) – Flexible approach

• Discovery – Obtain pre-foreclosure appraisal by servicer – Make use of request for admissions

• Debtor may initially rely upon BPO or recent appraisal, but

will need appraiser to testify if value contested

• Debtor may testify as to condition of property, neighborhood, etc. as lay witness (F. Rule Evid. 701)

Strip Off Procedure *Check Local Decisions, Rules and Practice Adversary proceeding?

– Complaint to determine validity and extent of lien • Motion/Contested matter?

– Motion to determine value of claim secured by lien (Rule 3012)

• Chapter 13 plan provision – Make explicit and serve under Rule 7004 (due

process) • Objection to Claim

– Avoid decisions on preclusive effect of claim allowance process

Other Permissible Mortgage

Modifications

Mobile Homes

Loans on mobile homes that are considered personal property

under state law are not subject to the anti-

modification provision

Multi-family Buildings

Modification permitted when other real

property, such as rental units, is part of

security interest


Section 1322(c)(2): “in a case in which the last payment on the original payment schedule for a claim secured only by… the debtor’s principal residence is due before the date on which the final payment under the plan is due…” … may be modified.

Short-term loan/ final payment within next 5 years

Loans where the final payment will come due within the term of the

chapter 13 plan are not subject to the anti-

modification provision (people near the end of

their 30-year mortgage…)

Lien Avoidance

Lien Avoidance • Debtor may avoid “fixing of a lien” on interest of the

debtor in property to the extent the lien impairs an exemption

• Judicial liens • A lien shall be considered to impair an exemption to

the extent that the sum of – – the lien; – all other liens on the property; and – the amount of the exemption that the

debtor could claim if there were no liens on the property;

– exceeds the value that the debtor’s interest in the property would have in the absence of any liens

• Courts have held that this formula is to be applied literally

Discharge of Indebtedness (Cancellation of Debt)

• Whenever debt is forgiven, normally treated as income

• Why? – Income received when loan taken out – But not taxed because of obligation to

repay • Interest & fees need not be treated as

DOI, only principal

Examples of DOI

• Foreclosure sale, if for less than amount of debt & lender does not seek deficiency judgment

• Short sale • Loan modification with reduction of principal • Theoretically, loan modification with significant

interest reduction or principal forbearance

Why Does DOI Matter?

• Lenders usually file 1099-C’s. • If borrower does not report the DOI

income on her tax return, the IRS’s automated audit system will pick it up.

• Borrowers can get dunned by IRS for interest and penalties on underreported tax

Common Exclusions from DOI

• Bankruptcy (timing is important!) • Insolvency

Can’t pay

• 2016 extension

Acquisition (qualified principal residence) indebtedness

• Disputed indebtedness • Fraud in purchase

Illegal debt

The Bottom Line

• Homeowner needs to know why the debt was discharged and how much

• Homeowners must: – File long form 1040 – Attach Form 982

• If a homeowner gets a dunning notice from the IRS, they can contest it

• These issues are out of scope for VITA and Tax Counseling for the Elderly sites, with a few limited exceptions

The Special Case of HAMP Principal Reduction Modifications

(General Welfare Payments)

Annual borrower incentive payments under HAMP (pay-for-performance) don’t count as income

• IRS Rev. Rul. 2009-19

Payments to the investors to encourage principal reductions, subsidize loan modifications don’t count as income.

• IRS Rev. Proc. 2013-16, at 14

Payments made to or on behalf of borrowers under the Hardest Hit programs don’t count as income.

• IRS Notice 2011-14, 2011-11 I.R.B. 544


The Role of Mediation in Foreclosure Loss Mitigation


State Responses to Need for Loan Modifications: Mediation/Conference Programs

• Seventeen states have required by statute or court rule some type of mediation/conference requirement to consider loan modification before foreclosure.

Labels

• The process itself: mediation, diversion, conference, ADR, conciliation

• The outside third party: mediator, referee, facilitator, judge pro tem.

Authority for Foreclosure Mediation Programs

• State Statutes: Connecticut, Delaware, New York, California, Michigan, Indiana, Oregon, Nevada, Maine, Maryland, Washington, Hawaii, Vermont, Rhode Island, D.C.

• State Supreme Court plans: Ohio, New Jersey

• Many local court initiatives, including Pennsylvania (Philadelphia & Pittsburgh), Illinois counties.

Procedural Variations • Programs requiring opt-in over limited time:

Ohio, New Jersey, Maryland, Nevada • How much time? • Other procedural limits • Programs with automatic participation:

Delaware, New York, Connecticut, Philadelphia

• Stay of proceedings • Automatic or must request • Must file motion

Foreclosure Mediation Programs

• Can require authorized representative of mortgage holder to meet with borrower.

• Can require compliance with mediation rules as condition to proceeding with foreclosure.

• Can require consideration of specific loan modification and other workout options.

Mediation: Things a Servicer May be Asked to do

• In certain programs (depending on jurisdiction) may be asked to: – Provide document showing modification/NPV

analysis – Provide specified documents: psa, loan

origination docs, appraisal, payment history

Mediation: Things a Mediator May be Asked to do

• In certain programs: – May certify compliance with servicer

obligations. – May not allow foreclosure to proceed unless

servicer has complied with mediation obligations:

• Produced documents • Show considered all options

Common Servicer Practices Mediations Can Address

• Incorrectly stating not a HAMP participant • Incorrectly stating investor does not permit

HAMP modifications • Offering non-HAMP mods with less favorable

terms • Demanding redundant, unnecessary

documents not required under Handbook • Routine loss of documents • Erroneously stating did not receive

documents


• Demanding fees and charges for HAMP mod • Referral to foreclosure, proceeding with

foreclosure, or conducting sale in violation of foreclosure stop requirements of Handbook § 3

• Foreclosure upon borrower current in trial plan • Negative credit reporting while non defaulting

borrower current under trial plan • Extension of trial plans beyond date of

conversion promised in trial agreement


• Soliciting HAMP application, then refusing to give decision

• Failure to send accurate notices of denial/cancellation, or missing documentation (Handbook § 2.3)

• Failure to disclose NPV data as required by Dodd-Frank

Connecticut Mediation Program

• Data provided by the Connecticut Judiciary covering the period from July 2008 through Dec. 2015 indicates as follows:

• 24,000 completed mediations • 70% settlement with agreement to stay in home • 15% settled with agreement to move from home • 15% had not settled, foreclosure action continued • In 84% of mediations completed with agreement for

borrower to stay, borrower received permanent loan modification

The nonprofit National Consumer Law Center® (NCLC®) helps build family wealth for low-income and other disadvantaged people in the U.S. by offering advocacy expertise through publications, policy analysis, research, litigation services, and training. www.nclc.org