New York Sues 3 Big Banks Over Mortgage Database

By REUTERS

Attorney General Eric T. Schneiderman of New York sued three major banks on Friday, accusing them of fraud in their use of an electronic mortgage database that he said resulted in deceptive and illegal practices, including false documents in foreclosure proceedings.

Mr. Schneiderman, co-chairman of a new mortgage crisis unit under President Obama, filed a lawsuit against Bank of America, Wells Fargo and JPMorgan Chase in New York State Supreme Court in Brooklyn.

The database, called the Mortgage Electronic Registration System or MERS, was created in the mid-1990s for tracking mortgage ownership. It is a collaboration of top mortgage servicers, mortgage insurers and Fannie Mae and Freddie Mac, the government entities that hold many of the country’s mortgages.

“The mortgage industry created MERS to allow financial institutions to evade county recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages en masse,” Mr. Schneiderman said.

“By creating this bizarre and complex end-around of the traditional public recording system,” Mr. Schneiderman’s lawsuit asserts, the banks saved $2 billion in recording fees.

More than 70 million mortgage loans, including millions of subprime loans, have been registered in the MERS system, rather than in local county clerks’ offices, according to the lawsuit.

The lawsuit asserts the database is inaccurate and seeks to stop the banks from filing foreclosure actions through MERS and executing false or defective mortgage assignments in New York foreclosure proceedings.

Mr. Schneiderman also is seeking all profits obtained through fraudulent and deceptive practices and other damages, including $5,000 for each violation of general business law.

Patrick Linehan, a JPMorgan spokesman, and Rick Simon, a Bank of America spokesman, declined to comment on the lawsuit. Ancel Martinez, a Wells Fargo spokesman, said the company was reviewing the lawsuit and did not have “anything to add at this time.” Janis L. Smith, a spokeswoman for Merscorp and its subsidiary, MERS, said in a statement that the firms complied with the law and mortgage regulations.

“Federal and state courts around the country have repeatedly upheld the MERS business model, and the validity of MERS as legal mortgagee and nominee for lenders,” the MERS statement said. “We refute the attorney general’s claims and will defend the case vigorously in court.”

Happy Groundhog Day!

Lately the same refrain keeps cropping up in my practice:  why did you wait so long?  I understand that very few people want to file bankruptcy, and I agree that the decision to file bankruptcy is an important one.  And while it is common to hear that bankruptcy should be a last resort, it is also true that you can wait too long.  So, in honor of Groundhog Day, while we wait to find out when spring will arrive, here are some problems that might crop up if you wait too long to file bankruptcy.

You exhaust your reserves.  This is probably the most common consequence of just hanging on too long, trying to avoid bankruptcy.  You are trying to keep up with mortgage payments or credit card payments after a job loss, illness, divorce, or the like, and you exhaust your savings, tap into your 401k or IRAs, incur taxes and penalties as a result, which makes the whole financial situation still worse.  You use up the resources that would make it easier to make a fresh start, and make it harder to recover financially.  It is easy, and probably natural, to just try to hang on and keep doing what you have always done.  It’s smarter to take an honest look at your situation and ask yourself whether you are going to be able to deal with your debt without some help.

You may lose control of assets that might otherwise be used to help you make a fresh start.  That is often the case when creditors sue you and obtain judgments against you.  A judgment becomes a lien against real property, which can be especially significant if you have investment property, or have inherited property, or, God forbid, you are holding title to family property to “keep it safe.”  The effect of a judgment on property depends on several factors, including where the property is located, whether you are entitled to claim it as exempt, and even what state you are in, but you shouldn’t wait until its a done deal to figure out what the effect will be.  At that point it may be too late.

Other issues can be decided in a law suit that will affect your ability to make a fresh start.  The amount of a debt may be determined to be higher than you anticipate, for example, by the addition of attorney fees and expenses.  Or, the court may enter a finding a fraud against you that will allow a debt to survive bankruptcy.  Other findings may also impact your fresh start as well, and if you are already in financial distress, you may find that it is prohibitively expensive to fight a lawsuit, or worse, several lawsuits.

Don’t wait until the bitter end to consider bankruptcy, and seek out competent legal advice about your bankruptcy options.   You might think that if you go see a bankruptcy lawyer that lawyer is automatically going to recommend bankruptcy, but that is not the case.  Most reputable bankruptcy lawyers are also knowledgeable about alternatives, and will advise you about those options, as well as tell you what may happen if you do nothing.  I regularly advise clients against filing bankruptcy (and sometimes that advice is because there is nothing left to protect).  You have nothing to lose, and quite a bit to gain by talking to someone as soon as you recognize that there is a problem, rather than waiting until you have no options.

Thanks to Bankruptcy Law Network.

Top 15 Lies About Bankruptcy

by Brett Weiss, Maryland Bankruptcy Attorney

Treasury Investigates Freddie Mac Investment

By SHAILA DEWAN

Bankruptcy can stop collection and eliminate tax debt in many situations. For more details on tax discharge see the article I wrote about Bankruptcy Tax Discharge on my personal site. While bankruptcy can be a very useful tool in dealing with the Internal Revenue Service and state collectors, it will not solve all problems.  In many cases, a tax debt that would qualify for bankruptcy discharge is rendered non-dischargeable when the taxpayer fails to file a tax return and the IRS or state collection authority uses their statutory authority to assess.  Some types of tax, such as employment tax, are not subject to discharge.  Fortunately, there are other ways to stop or manage collection problems.

Some types of tax can not be discharged and can be collected by the IRS after the bankruptcy case is closed.  Bankruptcy may not be available or appropriate for some delinquent taxpayers.

The IRS allows properly authorized professionals to represent taxpayers and help them get relief from enforced collection such as bank account and wage levies.  Attorneys, CPAs, and Enrolled Agents are given special permission to represent taxpayers, can establish online electronic access to IRS taxpayer records, and can negotiate a resolution for a taxpayer with IRS collections.  Tax professionals can also be authorized to represent taxpayers before most state tax enforcement agencies.  Authorization is done with a power a power of attorney form 2848 for the IRS and similar documentation for state tax collectors.

While individual taxpayers can call the IRS directly and may be able to handle a tax problem themselves, tax practitioners are given access to a special telephone number to call the IRS and are assigned to specially trained personnel to help solve tax collection problems.  In addition, the tax professional usually has experience in calculating payment agreements and is familiar with the regulations governing the tax collection process.  If the collection officer oversteps or makes unreasonable demands, it is often difficult for an unassisted taxpayer to remedy the situation.

Click here to read more.

Background

The Federal Reserve Board issued enforcement actions against four large mortgage servicers
–GMAC Mortgage, HSBC Finance Corporation, SunTrust Mortgage, and EMC Mortgage Corporation–in April 2011. Under those actions, the four servicers were required to retain independent consultants to review foreclosures that were initiated, pending, or completed during 2009 or 2010. The review is intended to determine if borrowers suffered financial harm directly resulting from errors, misrepresentations, or other deficiencies that may have occurred during the foreclosure process. The servicers are required to compensate borrowers for financial injury resulting from deficiencies in their foreclosure processes.

If you had a mortgage loan on your primary residence and believe you were financially harmed during the mortgage foreclosure process by any of the four servicers in 2009 or 2010, you can request an independent review and potentially receive compensation. The four servicers are required to make the independent reviews available to borrowers as part of their compliance with the April 2011 enforcement actions.

A number of servicers supervised by the Office of the Comptroller of the Currency (OCC) are also required to conduct independent reviews. (See below for the full list of servicers.)

Eligibility for Review

Borrowers are eligible for an independent foreclosure review if

• the property securing the loan was the borrower’s primary residence;
• the mortgage was in the foreclosure process (initiated, pending, or completed) at any time between January 1, 2009, and December 31, 2010; and
• the mortgage was serviced by one of the following mortgage servicers:

If you previously filed a complaint with these servicers about foreclosures pending during the review period, you may still seek an independent review of your foreclosure.

There are no costs associated with being included in the review; the review is a free program. Beware of anyone who wants payment to assist you in connection with the independent foreclosure review or any other foreclosure assistance program.

Click here to read the full article.

What is Net Present Value, the NPV we hear about so much? And what is NPV analysis?

NPV is what your mortgage is worth to the bank in today’s dollars. In deciding whether to foreclose or allow modification the lender compares the amount of money it will net if it forecloses versus the present value of the income stream it will receive over the years if the lender allows modification. Future payments are reduced to present value. The math is a bit complex, but you could learn how to do it if you set your mind to it.

To make it simple, I will give an extreme example. If your home is worth $300,000 even in this difficult market and you owe only $100,000, then the lender will recover its entire $100,000 if it forecloses. If the lender modifies your loan by lowering the interest rate, it will not recover as much money. People with lots of equity in their home certainly will not get a Making Home Affordable HAMP modification. The rules do not allow it. Maybe they will get an in-house modification, but the lender is not obligated to give one. Generally a lender will give a borrower a forbearance agreement – which actually raises your payments by requiring you to make your regular payment plus a portion of the arrearage until you catch up.

What if your home is worth only $250,000, and you owe $300,000 on your mortgage, then the analysis gets complicated. Off the top the lender is going to lose $50,000 plus the cost of foreclosure plus possible costs for repairing the property. If the lender gives you the 2% rate for five years, followed by 3% for a year, 4% for a year, and the Freddie rate for the balance of the loan, the lender is going to lose interest it might earn by lending out the money to someone else. The two different losses must be compared.

Note: Your lender does not consider the balance owing on your second mortgage in doing its NPV analysis.

The lender must also factor in how likely you are to default over again. If your expenses are very high, if your income is low, if you have a poor record for paying your debts, those are factors which weigh in favor of a foreclosure.

In Washington lenders are required to perform an NPV analysis under the new law passed July 22, 2011. A borrower who has been denied modification and is facing foreclosure can stop the foreclosure by demanding mediation. If the lender is going to lose less by modifying than by foreclosing, then the lender cannot foreclose. See the bill which enacted this law. The steps involved in mediation are set forth in RCW 6.24.163.

The cost of mediation is $200. The application for mediation must be filed through an attorney or a licensed non-profit foreclosure mediation group.

See this example of an NPV analysis done by Wachovia, which now is owned by Wells Fargo. This borrower was turned down because his debt load was too high and his income was too low.

The property is further underwater now than when he was previously considered. Further, the Borrower has been through Chapter 7 bankruptcy and has shed a lot of debt. Also there is more income in the family because we are counting the income of the Borrower’s children – which is allowed.

We are confident that we can succeed in getting a modification for this client.

Mortgage wizard interviews Attorney Shawn Newman on foreclosure defense.

Welcome to Freddie and Fannie’s Mortgage Shell Game

By Shawn Timothy Newman, J.D.

Adjunct Professor

Saint Martin’s University

In common parlance, a mortgage (or Deed of Trust) includes the underlying loan (promissory note) and the security on that loan (mortgage or Deed of Trust).  This ignores the fact that the note and mortgage (or DOT) are two separate contracts governed by some different laws and legal principals.

As noted in Powell on Real Property, sec. 37.27 [2] (Michael Allan Wolf ed., LexisNexis Matthew Bender 2010)

It must be remembered that the mortgagee has two interests: (1) the debt or obligation which is owned to him, and (2) the security interest in land represented by the mortgage…. In fact, the primary interest is the personalty debt obligation.  The interest in land which is available in case security is necessary because of the debtor’s default is considered as collateral interest.  Much trouble has been caused by mortgagees attempting to transfer only one of these two interests.  Where the mortgagee has “transferred” only the mortgage, the transaction is a nullity and his “assignee,” having received no interest in the underlying debt or obligation, has a worthless piece of paper.

Regarding #1, the debt is the loan contract (i.e. the promissory note).  Promissory notes are governed by the Uniform Commercial Code (UCC) Art. 3 (Negotiable Instruments).   The UCC is a uniform law adopted by every state.  In addition to promissory notes, negotiable instruments include checks.  Like a check, you must negotiate (deliver with proper endorsements) the promissory note to another for that person to claim ownership of the promissory note.  Absent proper negotiation of the note, another party cannot claim ownership.  So, for example, you find a check made payable to someone else and it is not endorsed to you; you cannot cash it because you are not the owner.

Regarding #2, the security on the debt (i.e. mortgage or deed of trust), is a contractual interest in land with the home buyer designated as the mortgagor and the lender/creditor as the mortgagee.  Because a mortgage/DOT is an interest in land, the Statute of Frauds requires such contracts to be in writing and signed to be enforceable.  Any assignment of a mortgage or deed of trust must be in writing and signed to be enforceable.  Agreements that violate the Statute of Frauds are void and unenforceable as contracts.  There are some exceptions to the Statue of Fraud’s writing requirement including an admission in court and under oath “by the party to be charged” that there is a contract (this can be done via discovery).  So, as is the case with most mortgages, they are sold by the originating bank (or mortgage company) to either Freddie Mac or Fannie Mae.  This is known as the “secondary mortgage market” (secondary, since Freddy and Fannie don’t originate the loans but buy them up from the banks and mortgage companies that do).  According to Freddie Mac’s website:

Every day, Freddie Mac provides a continuous flow of funds to mortgage lenders. We do so not by making individual mortgage loans to consumers; instead, we support the U.S. home mortgage market by providing money directly to lenders, ensuring that the system is liquid, stable and affordable.  To fulfill this vital mission, Freddie Mac buys residential mortgages and mortgage-related securities and guarantees mortgages made by lenders. We issue debt securities to the global capital markets to fund the purchase of mortgages and mortgage-related securities we hold as an investor. We also create and sell mortgage-related securities to the capital markets, providing a guarantee to investors on those securities.

Freddie Mac pools the mortgages it purchases from lenders across the country and packages them into securities that can be sold to investors. These investors include the lenders themselves, pension funds, insurance companies, securities dealers, commercial and central banks, and others. Freddie Mac also is one of the largest investors in mortgage-related securities, purchasing and holding in portfolio a portion of our own securities and those issued by others.

http://www.freddiemac.com/corporate/company_profile/our_business/securities.html

If Freddie or Fannie truly “own” your mortgage, they have “legal title” to the property and are the “real party in interest” to foreclose.

However, this brings me to an issue raised by Professor Dale Whitman in his article, “How Negotiability Has Fouled Up the Secondary Mortgage Market, and What To Do About It,” 37 Pepp. L. Rev 738, 757-758 (2010):

While delivery of the note might seem a simple matter of compliance, experience during the past several years has shown that, probably in countless thousands of cases, promissory notes were never delivered to secondary market investors or securitizers, and, in many cases, cannot presently be located at all.  The issue is extremely widespread, and, in many cases, appears to have been the result of a conscious policy on the part of mortgage sellers to retain, rather than transfer, the notes representing the loans they were selling.

This “policy” was created by Freddie and Fannie and clouds who actually has legal title to the property (i.e. mortgagee) and who “owns” the note.

First, as noted above, it is important to understand that a mortgage contract is an interest in land and, as such, must be in writing to be enforceable per the Statute of Frauds (or fall within one of the exceptions such as an admission in court).  Any “sale” or assignment to Freddy or Fannie must also be in writing per the Statute of Frauds.  Some states (like Ohio) require such transfers to be recorded.  If you are challenging a foreclosure action, the mortgagor (borrower) should ascertain if a servicer (loan originator or its successor) has sold the mortgage to Freddy or Fannie.  This can be done on line at either:

https://www.freddiemac.com/corporate/

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

Chances are Fannie or Freddie “own your mortgage.”  If you are in litigation, you should follow up with targeted discovery requests to the servicer confirming the servicer does not “own” your mortgage.  Moreover, you should inquire and demand any records showing Freddie or Fannie assigned the mortgage to the servicer.  Servicers will point to Freddie or Fannie servicing guidelines which basically provide that the servicer forecloses in its (the servicer’s) own name.  Given a mortgage is an interest in land and the requirement under the statute of frauds that such contracts be in writing, the servicer’s standing to foreclose can be challenged absent some proof that the mortgage was specifically assigned by Freddie or Fannie to the servicer.  Legally, Freddie and Fannie must assign back the note to the servicer.  In fact, Freddie has a specific form 105 to do so.

See: http://www.allregs.com/tpl/Main.aspx [Sections 66.17 and 66.54].

However, Freddie and Fannie’s guidelines have evolved over time and you may find that there is no such assignment in most cases.   Unless there is a written assignment from the mortgage owner (Freddy or Fannie) to the servicer, the servicer cannot foreclose for the simple reason they are not part of the mortgage contract.   Simply put, only the mortgage owner can foreclose on the mortgage contract.  Moreover, if the assignment of the mortgage is invalid or fraudulent, then there is a “cloud on title” which should be identified by title and mortgage insurers.

Second, according to Powell on Real Property section 37.27 (quoted above),

It must be remembered that the mortgagee has two interests: (1) the debt or obligation which is owed to him, and (2) the security interest in land represented by the mortgage ….  In fact, the primary interest is the personalty debt obligation.  The interest in land which is available in case security is necessary because of the debtor’s default is considered a collateral interest.  Much trouble has been caused by mortgagees attempting to transfer only one of these two interests.  Where the mortgagee has “transferred” only the mortgage, the transaction is a nullity and his “assignee,” having received no interest in the underlying debt or obligation, has a worthless piece of paper.

Given what Professor Whitman describes as a “conscious policy on the part of mortgage sellers to retain, rather than transfer, the notes representing the loans they were selling,” it would appear that any alleged “sale” of the note or mortgage to Freddy and Fannie is a fraud.  By analogy, you cannot cash a check that is not in your possession or that is not made payable to or endorsed to you.  Not only is the sale of the note a sham where there is no delivery and/or endorsement of the underlying loan/note to Freddie or Fannie, if their records (per the website) “show that Freddie Mac is the owner of your mortgage”, then the unity of interest (i.e. loan/note and mortgage/security must be transferred together) is destroyed leaving Freddie and Fannie with nothing.[1]

This begs the question: why would Fannie and Freddy have such a policy given the laws governing mortgage contracts and promissory notes?  Consider the fact that Freddie and Fannie are Government Sponsored Entities [GSEs] albeit private corporations owned by the major banks.  It seems to me that Freddie and Fannie have been hijacked by the major banks and are being used to buy up bad mortgages and then seek a bailout from the taxpayers.[2]

###

[1]http://stopforeclosurefraud.com/2011/08/17/complaint-knights-of-columbus-v-bank-of-new-york-mellon-did-not-acquire-residential-mortgage-backed-securities-but-instead-acquired-securities-backed-by-nothing-at-all/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ForeclosureFraudByDinsfla+%28FORECLOSURE+FRAUD+%7C+by+DinSFLA%29

[2] Note:  Freddie and Fannie are major stockholders in MERS which has some of the same legal problems regarding delivery and possession of the note.  http://www.mersinc.org/about/shareholders.aspx

On July 22, 2011, the state of Washington enacted the foreclosure mediation program, RCW 61.24.130. Among other things it states:

… the parties have a duty to mediate in good faith and that failure to mediate in good faith may impair the beneficiary’s ability to foreclose on the property …. [T]he mediator must require the participants to consider … [t]he net present value of receiving payments pursuant to a modified mortgage loan as compared to the anticipated net recovery following foreclosure …. [and] [a]ny affordable loan modification calculation and net present value calculation….

 If a servicer fails to approve a modification of a loan, I invoke this law and proceed to mediation.

Read the full text of RCW 61.24.163.

A request for mediation will stop a foreclosure.

Only a non-profit housing counseling agency or an attorney can file a petition for mediation. You cannot do it yourself.

Home-sale prices saw another double-digit drop in November, according to statistics released Monday by the Northwest Multiple Listing Service.

The median price of houses sold in King County last month was $321,700, nearly 11 percent less than in November 2010 and only a hair more than October’s post-boom low of $320,000.

The median King County condo price fell even more steeply, from $225,000 in November 2010 to $191,250 last month — a 15 percent decline.

Read the full article: http://seattletimes.nwsource.com/html/businesstechnology/2016942200_homesales06.html

A Banker Speaks, With Regret

By NICHOLAS D. KRISTOF

If you want to understand why the Occupy movement has found such traction, it helps to listen to a former banker like James Theckston. He fully acknowledges that he and other bankers are mostly responsible for the country’s housing mess.

As a regional vice president for Chase Home Finance in southern Florida, Theckston shoveled money at home borrowers. In 2007, his team wrote $2 billion in mortgages, he says. Sometimes those were “no documentation” mortgages.

“On the application, you don’t put down a job; you don’t show income; you don’t show assets,” he said. “But you still got a nod.”

“If you had some old bag lady walking down the street and she had a decent credit score, she got a loan,” he added.

Theckston says that borrowers made harebrained decisions and exaggerated their resources but that bankers were far more culpable — and that all this was driven by pressure from the top.

“You’ve got somebody making $20,000 buying a $500,000 home, thinking that she’d flip it,” he said. “That was crazy, but the banks put programs together to make those kinds of loans.”

Especially when mortgages were securitized and sold off to investors, he said, senior bankers turned a blind eye to shortcuts.

“The bigwigs of the corporations knew this, but they figured we’re going to make billions out of it, so who cares? The government is going to bail us out. And the problem loans will be out of here, maybe even overseas.”

One memory particularly troubles Theckston. He says that some account executives earned a commission seven times higher from subprime loans, rather than prime mortgages. So they looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans.

These less savvy borrowers were disproportionately blacks and Latinos, he said, and they ended up paying a higher rate so that they were more likely to lose their homes. Senior executives seemed aware of this racial mismatch, he recalled, and frantically tried to cover it up.

Theckston, who has a shelf full of awards that he won from Chase, such as “sales manager of the year,” showed me his 2006 performance review. It indicates that 60 percent of his evaluation depended on him increasing high-risk loans.

In late 2008, when the mortgage market collapsed, Theckston and most of his colleagues were laid off. He says he bears no animus toward Chase, but he does think it is profoundly unfair that troubled banks have been rescued while troubled homeowners have been evicted.

When I called JPMorgan Chase for its side of the story, it didn’t deny the accounts of manic mortgage-writing. Its spokesmen acknowledge that banks had made huge mistakes and noted that Chase no longer writes subprime or no-document mortgages. It also said that it has offered homeowners four times as many mortgage modifications as homes it has foreclosed on.

Still, 28 percent of all American mortgages are “underwater,” according to Zillow, a real estate Web site. That means that more is owed than the home is worth, and the figure is up from 23 percent a year ago. That overhang stifles the economy, for it’s difficult to nurture a broad recovery unless real estate and construction revive.

All this came into sharper focus this week as Bloomberg Markets magazine published a terrific exposé based on lending records it pried out of the Federal Reserve in a lawsuit. It turns out that the Fed provided an astonishing sum to keep banks afloat — $7.8 trillion, equivalent to more than $25,000 per American.

The article estimated that banks earned up to $13 billion in profits by relending that money to businesses and consumers at higher rates.

The Federal Reserve action isn’t a scandal, and arguably it’s a triumph. The Fed did everything imaginable to avert a financial catastrophe — and succeeded. The money was repaid.

Yet what is scandalous is the basic unfairness of what has transpired. The federal government rescued highly paid bankers from their reckless decisions. It protected bank shareholders and creditors. But it mostly turned a cold shoulder to some of the most vulnerable and least sophisticated people in America. Last year alone, banks seized more than one million homes.

Sure, some programs exist to help borrowers in trouble, but not nearly enough. We still haven’t taken such basic steps as allowing bankruptcy judges to modify the terms of a mortgage on a primary home. Legislation to address that has gotten nowhere.

My daughter and I are reading Steinbeck’s “Grapes of Wrath” aloud to each other, and those Depression-era injustices seem so familiar today. That’s why the Occupy movement resonates so deeply: When the federal government goes all-out to rescue errant bankers, and stiffs homeowners, that’s not just bad economics. It’s also wrong.

Mr. Romney on Foreclosures

Since the housing bubble began to burst six years ago, prices nationwide have fallen by a third. Nearly $7 trillion of home equity has been wiped out. Currently, some 14.7 million homeowners owe $700 billion more on their mortgages than their homes are worth. Going forward, prices are likely to fall further as banks put a backlog of foreclosed properties on the market. As home prices fall and more homeowners sink underwater, there will be more foreclosures and more price declines.

So what is Mitt Romney’s response? Bring it on.

In interviews and in the Republican presidential debates, Mr. Romney has said that the cure for foreclosures is for the government to get out of the way and let the process run its course. Once prices hit bottom, investors and want-to-be homeowners would presumably swoop in and prices would stabilize.

The argument might have some red-meat appeal, playing off the notion that any owners who lose their homes are getting what they deserve. It is wrong on several counts:

Efficiency. Mass foreclosures are a rotten way to stabilize the market. They impose huge costs on neighbors, communities and local governments, and on the broader economy, as falling prices erode equity, depress consumer spending and mire the housing market in a deep hole.

Logic. Who does Mr. Romney think will buy up millions of foreclosed properties? Borrowers who lose their homes to foreclosure or who sell their homes for less than the balance on their mortgages can be denied credit for years; many will never be homeowners again.

Many college graduates, unable to find jobs, are moving in with their parents, not starting careers, not starting families and not becoming first-time home buyers. High school graduates are despairing of any economic toehold. Investors are inclined to buy distressed properties only if they believe home values will rise, a confidence that is hard to come by in a market that is threatened by more foreclosures and renewed price declines.

Danger. With the economy still weak and vulnerable to shocks, more foreclosures and the resulting price declines would only weaken the economy further.

Fairness. The let-it-crash argument conveniently ignores that the housing bubble was the result not only of overborrowing but of reckless lending too. When the bubble burst, the banks were bailed out, while speculators and uncreditworthy borrowers — whom lenders had aggressively pursued during the boom — quickly began to lose their properties. But the economic damage went far beyond the “bad” borrowers, as evidenced by deep recession, ensuing slow growth, high unemployment and crashing home values — all of which has now harmed millions of homeowners who never went near a subprime mortgage. They are the collateral damage of the banks’ binge and bailout. They deserve help, not scorn.

That is not to say that every troubled borrower can be saved. Of the estimated 14.7 million underwater borrowers, 1.6 million are lost causes, according to Moody’s Analytics. Many have already abandoned their homes, leaving them vacant, or are hopelessly behind on their payments, often because of long-term unemployment. This group needs policies to help convert homes to rentals.

Another 1.6 million underwater borrowers have missed payments because of a setback, like job loss, that may prove temporary. They could be helped with forbearance, allowed to make no or reduced payments for a time, and make up the difference later, or with loan modifications that result in meaningfully smaller payments.

The remaining 11.5 million underwater homeowners are current in their payments, but are at high risk of default, since they have no equity to cushion a financial setback and no incentive to keep paying, especially if prices go down again.

Loan modifications that reduce principal balances are the best solution, because they restore equity and reduce monthly payments. The banks would take a hit on principal write-downs. So be it. Refinancings, which the Obama administration is in the process of expanding, also help, because a new loan with a lower rate makes staying in the home more affordable. Mr. Romney has said refinancing is “worth further consideration.” Investors in mortgage-backed securities will take a hit on refinancings. So be it.

At a recent debate, Mr. Romney was asked why he was willing to risk further huge losses in home equity by pushing foreclosures. “What would you do instead?” he replied. “Have the federal government go out and buy all the homes in America?”

No one is suggesting that. What is needed is a set of policies — rentals, forbearance, principal write-downs and refinancings — on a scale that tackles the problem.

DRIVE through any number of outer-ring suburbs in America, and you’ll see boarded-up and vacant strip malls, surrounded by vast seas of empty parking spaces. These forlorn monuments to the real estate crash are not going to come back to life, even when the economy recovers. And that’s because the demand for the housing that once supported commercial activity in many exurbs isn’t coming back, either.

By now, nearly five years after the housing crash, most Americans understand that a mortgage meltdown was the catalyst for the Great Recession, facilitated by underregulation of finance and reckless risk-taking. Less understood is the divergence between center cities and inner-ring suburbs on one hand, and the suburban fringe on the other.

It was predominantly the collapse of the car-dependent suburban fringe that caused the mortgage collapse.

In the late 1990s, high-end outer suburbs contained most of the expensive housing in the United States, as measured by price per square foot, according to data I analyzed from the Zillow real estate database. Today, the most expensive housing is in the high-density, pedestrian-friendly neighborhoods of the center city and inner suburbs. Some of the most expensive neighborhoods in their metropolitan areas are Capitol Hill in Seattle; Virginia Highland in Atlanta; German Village in Columbus, Ohio, and Logan Circle in Washington. Considered slums as recently as 30 years ago, they have been transformed by gentrification.

Simply put, there has been a profound structural shift — a reversal of what took place in the 1950s, when drivable suburbs boomed and flourished as center cities emptied and withered.

The shift is durable and lasting because of a major demographic event: the convergence of the two largest generations in American history, the baby boomers (born between 1946 and 1964) and the millennials (born between 1979 and 1996), which today represent half of the total population.

Many boomers are now empty nesters and approaching retirement. Generally this means that they will downsize their housing in the near future. Boomers want to live in a walkable urban downtown, a suburban town center or a small town, according to a recent survey by the National Association of Realtors.

The millennials are just now beginning to emerge from the nest — at least those who can afford to live on their own. This coming-of-age cohort also favors urban downtowns and suburban town centers — for lifestyle reasons and the convenience of not having to own cars.

Over all, only 12 percent of future homebuyers want the drivable suburban-fringe houses that are in such oversupply, according to the Realtors survey. This lack of demand all but guarantees continued price declines. Boomers selling their fringe housing will only add to the glut. Nothing the federal government can do will reverse this.

Many drivable-fringe house prices are now below replacement value, meaning the land under the house has no value and the sticks and bricks are worth less than they would cost to replace. This means there is no financial incentive to maintain the house; the next dollar invested will not be recouped upon resale. Many of these houses will be converted to rentals, which are rarely as well maintained as owner-occupied housing. Add the fact that the houses were built with cheap materials and methods to begin with, and you see why many fringe suburbs are turning into slums, with abandoned housing and rising crime.

The good news is that there is great pent-up demand for walkable, centrally located neighborhoods in cities like Portland, Denver, Philadelphia and Chattanooga, Tenn. The transformation of suburbia can be seen in places like Arlington County, Va., Bellevue, Wash., and Pasadena, Calif., where strip malls have been bulldozed and replaced by higher-density mixed-use developments with good transit connections.

Reinvesting in America’s built environment — which makes up a third of the country’s assets — and reviving the construction trades are vital for lifting our economic growth rate. (Disclosure: I am the president of Locus, a coalition of real estate developers and investors and a project of Smart Growth America, which supports walkable neighborhoods and transit-oriented development.)

Some critics will say that investment in the built environment risks repeating the mistake that caused the recession in the first place. That reasoning is as faulty as saying that technology should have been neglected after the dot-com bust, which precipitated the 2001 recession.

The cities and inner-ring suburbs that will be the foundation of the recovery require significant investment at a time of government retrenchment. Bus and light-rail systems, bike lanes and pedestrian improvements — what traffic engineers dismissively call “alternative transportation” — are vital. So is the repair of infrastructure like roads and bridges. Places as diverse as Los Angeles, Phoenix, Salt Lake City, Dallas, Charlotte, Denver and Washington have recently voted to pay for “alternative transportation,” mindful of the dividends to be reaped. As Congress works to reauthorize highway and transit legislation, it must give metropolitan areas greater flexibility for financing transportation, rather than mandating that the vast bulk of the money can be used only for roads.

For too long, we over-invested in the wrong places. Those retail centers and subdivisions will never be worth what they cost to build. We have to stop throwing good money after bad. It is time to instead build what the market wants: mixed-income, walkable cities and suburbs that will support the knowledge economy, promote environmental sustainability and create jobs.

11-21-11

From NG:

Dear James,

My daughter was here this evening  and we were discussing how our loan modification is going right now, explained to her how mediation works. She is so worried that we’ll lose the house. I told her not to worry and not to lose hope because if the mediation fails then we’ll file Chapter 13.

She is so worried because she’s hoping that once this loan modification is all finalized she’ll move in with her husband and their 19-month old son. It’s better if they move in because our grandson wants to stay with us all the time.

It will be economical for them and for us because we’ll split the mortgage payments so Alex and I can start saving for our retirement.

I explained to her that Chapter 13 won’t change the existing term (30 years interest only) of our loan and won’t reduce our principal balance, but we have 60 months ( 5 years) to pay the arrears in addition to our regular monthly mortgage payments.. Did I understand this correctly?

**Question on the Chapter 13: When we stopped paying for our mortgage in 2009 it was like $3,331 a month.. If we file for Chapter 13 are we going to pay that $3,331 plus arrears? The total arrears will be divided by 60 months, is that how it works? Since it will be a lot of money $3,333+ arrears, is the court going to reduce the payment we’re going to send to the trustee?

After 60 months that means we’ll just continue paying our regular payments to the bank?

At this point do you think it’s safe for my daughter to move in or wait a little while till after the mediation?

I don’t want to rush their moving in but at the same time they are only wasting their money on their lease to own house, they’re paying $2,100 a month.. They are due for signing (another 2 years) again next month.

Thank you so much, we are very grateful for your help, it gives us peace of mind.

Sincerely,

NG

***

Dear NG:

I never make guarantees, but I would say that your chances of keeping your house are very strong.

The fact that we can force mediation means that foreclosure is delayed six months or a year. That opens a big window during which settlement can be negotiated.

The investor will be better off with modification, so the investor is our ally against the greedy servicer, who makes more money if the servicer forecloses. Mediation gives us time to identify who the investor is and to reason with him.

Also, instead of dealing with underlings, I will be dealing with attorneys.

Sincerely,

James Robert Deal , Attorney

***

The situation here is that NG has a steady income and can pay payments which will retire the loan over 40 years. NG qualifies.

NG is dealing with Wells Fargo, servicer for the XYZ mortgage backed security pooled fund.Wells says it cannot modify the loan because the pooling and servicing agreement does not allow it. I want to see that pooling and servicing agreement.

I am not convince that Wells Fargo has even talked with the representative of the XYZ fund. By law Wells must tell us who the investor is and how to contact him or her.

Washington’s new law requiring mediation before foreclosure, will save borrowers’ homes and save investors a lot of money. It will slightly reduce servicer income, but servicers should negotiated their pooling and servicing contracts better.

JR

Dodd-Frank did not correct the problem. Banks which enjoy deposit insurance are still free to gamble with securities.

A proposed bill:

112TH CONGRESS – 1ST SESSION H. R. 1489

To repeal certain provisions of the Gramm-Leach-Bliley Act and revive the separation between commercial banking and the securities business, in the manner provided in the Banking Act of 1933, the so-called ‘‘Glass-Steagall Act’’, and for other purposes.

Read the entire bill here.