December 10th is the deadline for  California homeowners who are over 62 or disabled to apply for low interest loans from the state to pay property taxes.  When the interest rate on delinquent real estate taxes is now 18%, this program could make a significant difference to elders with financial challenges.

To qualify, you must have lived in the home since December 31, 2007; have 20% equity in the property; and have a household income of less than $35,000.

To apply, call 1 800 952-5661 or see the State Controller’s webpage on the program.

California’s legislature passed changes to state foreclosure law that attempts to require dialog between an unpaid mortgage lender and a homeowner facing loss of his home.

SB1137 adds a requirement that the parties meet and discuss options to foreclosure before a notice of default can be recorded. Lenders must advise the debtor of the availability of HUD certified housing counseling.

What are the constraints on the advice HUD counselors can give? Can they suggest the borrower look for violations of applicable law in their loan transactions? Will they suggest Chapter 13 as an alternative to foreclosure? Do they have contact information for the loan modification staff at the lenders?

I applaud the California politicians who took some action on the problem. (Congress, Mr. Bush, are you listening?). My concerns go to whether any form of “counseling” will make a difference.

The typical problem is that the terms of the existing loan are simply beyond the capacity of the borrowers. The only solution is a modification that includes a fixed interest rate and often a forgiveness of interest or even principal. Otherwise, at the end of a longer foreclosure process, the bank is going to own another home.

As I look over the mortgage rescue legislation the Senate is considering, I conclude they are clueless about what it takes to keep families in their homes. No foreclosure is going to be prevented by counseling. No home is saved by giving buyers at foreclosure sales a tax credit. Measures to prevent this mess from occurring again don’t help today’s sufferers an iota.

The one provision in the proposed bill that might help today’s homeowners facing foreclosure was the provision that allows bankruptcy courts to perform the loss mitigation that the lenders talk about but don’t do. Let bankruptcy courts write secured claims down to the value of the property today; let the court excise the indexed increases in interest rates. Provide some meaningful help to real, live families who may otherwise be homeless.

If Congress can’t do that (and they show few signs of willingness to buck the bankers who brought us this mess) they should at least refrain from claiming they are doing anything to keep people in their homes. Would you say that’s likely?

My inquiries among other bankruptcy lawyers nationwide has yet to unearth a real, live homeowner who has been able to meaningfully rework a bad mortgage into a tolerable one. Not one homeowner.

From where I sit, I cannot tell whether it’s because the lenders are unwilling to do anything significant or because the homeowners are not effective in asking for enough to make a difference. Which ever it is, the foreclosure avalanche continues.

I suspect that the lenders (or their agents, the mortgage servicers) haven’t committed to making meaningful changes and haven’t staffed their loss mitigation departments with sufficiently empowered employees. It isn’t enough to allow a delinquent borrower to make a payment and a half til they catch up, or to tack the arrears onto the end of an ever adjusting ARM.

Which makes it more imperative that Congress pass, and the President sign, the Foreclosure Prevention Act with its provision allowing the modification of existing mortgages on family homes in bankruptcy.

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.

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.

Sometimes you need reminding about what you know. I’ve been so involved in looking for Truth in Lending violations or other defenses to my clients’ awful mortgages that I forgot the line of attack that is dependent on market value not wrong doing.

Karen Oakes reminded me that a Chapter 13 debtor can avoid a mortgage where there is no equity to secure the debt. At least in the 9th Circuit, even a voluntary lien, such as a mortgage or deed of trust, is avoidable if senior liens equal or exceed the value of the property at the time the bankruptcy is filed.

Supposing that you avoid a junior mortgage, you are still left with the question of whether it makes sense to keep the house: making payments on a loan that equals or exceeds the value of the house is not obviously a smart use of money.

I think, on today’s news, we have to figure that it will be a long while before property values recover from the hit they have taken. More and more, I am advising clients that the best use of the property is to live in it without making payments for as many months as possible before the lender takes it back.

Usually, I try to be the voice of common sense, conservation of energy, and moving on after a debacle. The client I saw the other day had the warrior side of me overwhelming the lawyer’s logic.

The facts: the client, an immigrant carpenter with limited English literacy, “invested” in a rental house with partners who bailed on him. The loan was the typical sub prime, adjustable rate loan where the rents on the house could never have covered the debt service.

Then the “friendly” real estate professional helped him borrow some money on the rental to pay the closing costs on a no-money-down purchase of a home for himself. Realtor gets a real estate commission on the purchase and a fat commission on the two loans to buy the house. Again there were supposed to be partners who would contribute to the debt service and own some interest in the property. None of it was in writing, others bail, and again my client is left holding the mortgage “bag”.

Meanwhile, the home’s value goes down and the mortgage payments go up. While the client is willing to walk away from the rental, some self interested “expert” tells him that if he defaults on the rental mortgages, he will lose his home, on which he is current, even though the property is upside down. He works huge amounts of overtime, loses sleep, figures he will lose everything. He’s near tears when he sees me.
The good news in this scenario is, such as it is, that all the client has invested in these deals is about $15,000, and a year and a half of inflated mortgage payments on “investments” that are worthless now, and probably when purchased.

When I analyzed the first loan on the home, I calculated what the mortgage payment would be if, instead of an exploding ARM, it were a conventional, 30 year fixed rate note at 6.5%. The answer was that the monthly mortgage payment on a loan of that size, if it could be restructured, equaled his gross monthly income! What lender makes such a loan?
The rational part of me wants to tell the client, take your lumps, be glad you didn’t lose any more than you did, following the American dream. The warrior side of me says, who were this guy’s friends who engineered these “deals”, with commissions to themselves? Who gets away with misrepresenting the consequences of a foreclosure on the rental? Who were the lenders who participated in exploiting a simple man who couldn’t read the relevant documents?

Again, my advice will probably be to live in the property payment free til the lender forecloses . But my personal inclination is to sue the assorted bastards involved in this mess.

Carmen Dellutri looked at the effect of the mortgage modification bill in Congress and the claims of bankers that interest rates will rise if bankruptcy judges can modify residential mortgages. He pointed out that the mortgage industry has not offered any proof that interest rates would rise.

Enter Prof. Adam Levitin. He has looked at data from a time when mortgages on a borrower’s principal residence could be modified in bankruptcy. Guess what he found? The risk of judicial modification made no discernible difference in interest rates.

So perhaps there is a very good reason, Carmen, that the bankers offer no proof to back up their scare mongering. Perhaps, there is no such evidence.

As each week brings a new wave of clients who have mortgages they can’t afford even before the loan resets, I ponder what happened in the Northern California real estate market.

While it has been practically a law of nature that California real estate only increases in value (despite not so recent evidence to the contrary), the increases over the past couple of years have been eye popping. With median home prices around $700,000, first time home buyers should be a very small subset of the population.

Yet the clients in my door have been middle income at best, yet they bought one or more properties with mortgages in the $700,000-$800,000 range. Almost invariably, they were told that the “friendly” mortgage broker would get them a better mortgage before the miserable one on the table reset. The ability to do that, of course, was predicated on a rising real estate market which would lower the loan to value ratio.

When you think about it, of course the real estate market was rising, when housing in the Bay Area is a limited commodity, and easy mortgage money has made practically anyone with a pulse eligible for a home loan and therefore a potential buyer. More people chasing fewer goods=price increase.

Of course the housing mania was also dependent on these buyers never having to make a fully amortized payment on a $700,000 mortgage. In most cases, the illusion of affording the house was dependent on mortgage “products” that required payments less than even the interest alone.

So, consider that the loss of value we are seeing, at least here in the Bay Area, merely represents the market wringing out the “value” created by mortgage madness.