Foreclosures & Failure to Prosecute

Once a residential foreclosure matter is released from the Foreclosure Settlement Conference the Plaintiff is expected to file a motion requesting a Court order appointing a Referee to compute the total amount due the Plaintiff on the underlying debt. While you'd expect a the bank and their attorneys to file the motion quickly, more times then not there is an extensive delay. 

Prior to filing a motion the Plaintiff attorney must receive an OCA Affidavit from their client and then sign an OCA Affirmation. If the Plaintiff attorney experiences a delay in receiving that affidavit or if there is an issue with standing or the bank's paperwork that precludes the attorney from signing the OCA Affirmation the attorney is unable to file the motion. 

When a motion isn't filed it remains in the foreclosure part and therefore in that part's inventory. Over the past 18 months or so these parts have received pressure to clean up their inventory. As a result, these parts have started to dismiss cases for failure to prosecute pursuant to CPLR 3215 (if an answer was not filed) or CPLR 3216 (if an answer was filed). Every county differs slightly in their approach. Some hold foreclosure status conferences whereby a Judge or Referee will question a bank attorney on the status of the case and pressure them to move their case along. Other counties (most notably Westchester County) schedule dismissal calendars where Plaintiff attorneys that cannot represent on the record that they have received the OCA Affidavit have their cases dismissed. 

As you can imagine this process drives bank firms crazy and creates numerous additional court appearances. While it may provide some temporary assistance to homeowners 99% of the time the action will eventually be restarted. The only party that really benefits if the Court which can remove their cases from inventory.

Why Banks Don't Deal on Foreclosed Homes

My friend Laurel, who is currently renting a house, was told about a foreclosed home in a neighboring community. She did some investigating on Zillow and found out the home was valued at $240,000 and through a network of friends determined the mortgage owed on the home was $350,000.

Being a determined potential homeowner and strong personality, she reached the bank that held the title prepared to offer them $200,000 in hopes that they would gladly want the asset off their hands. Not only did she receive a strong rebuff from the asset manager, but she was told they were not willing to consider less than $270,000 for it! She was flabbergasted and scratched her head when she came out of the bank.

As she was describing the scenario to myself and another friend over dinner, her main questions were:

"Why wouldn't the bank take my $200,000 and be done with it? Why wouldn't they make a deal?"

I didn't know the answer to these questions until I did a little investigative reporting of my own and spoke to a Foreclosure Legal Expert from Pulvers, Pulvers & Thompson. Here are the 3 major reasons banks don't conduct fire sales with foreclosed homes.

Reason #1: Foreclosed Homes are Assets on the Bank's Balance Sheet. 

The home is listed on their balance sheet at a value they have the property appraised at. Sometimes these appraisals may be outdated and tens of thousands of dollars off. If they dumped these properties onto the market in a big way, they could have lending problems because they would have less assets. However, it is not unreasonable to ask for a 20-30% discount on the appraised value, especially if the home has been sitting vacant for a long period of time.

Reason #2: If Thousands of Foreclosed Homes Hit the Market for Purchase, All Home Prices Would Fall. 

Think of supply and demand. According to Trulia, currently there are 13,744 homes for sale in New York City. Of which 353 (or 3%) are in foreclosure. Think if all 353 were sold tomorrow at a fraction of their value. What do you think would happen to the other 13,391 housing units? You got it! Their value would diminish, having a trickle down effect on your home, even if it is not currently for sale.

Reason #3: Banks are Trickling the Foreclosed Homes onto the Market in Order to Keep Market Prices High. 

It is estimated that only 10-15% of all foreclosed properties are on the market.

When it looks like there are not too many foreclosed properties available in an area, it helps stabilize housing values. When housing values are stabilized, market prices have the opportunity to go up. When market prices go up, the foreclosed values are higher. All of this benefits the seller and the bank when they decide to dispose of the property.

So there you have it. The banks don't deal because it is good for you, me, and them. Buying a foreclosed home is still a good idea. Just don't automatically expect a huge price reduction.



Pulvers, Pulvers & Thompson, LLP has been practicing law for over 70 years and is dedicated to providing high quality legal services to the Greater New York City Area. They assist purchasers and sellers in Residential and Commercial transactions and represent various clients in a wide range of real estate litigation matters. Contact their legal team for a FREE consultation at (212) 471-5129.

5 Fresh Fixes to Protect Your Home's Value in Foreclosure Times

Here's a hard cold fact:

"Since 2008, more than 2 million households  have either lost their homes or going to lose their homes to foreclosure in the coming years." 

And even more bad news:

According to a survey from Yahoo! Real Estate and Harris Interactive, 22% of homeowners are somewhat concerned about the possibility of foreclosure due to their inability to meet their monthly mortgage obligation. 

I have been a homeowner in the same house for the last 20 years. Our neighborhood of 60 homes has had 2 go into foreclosure over the last 12 months. In my small town of 25,000 individuals, there are currently 272 homes for sale of which 75 are in foreclosure! The homes in foreclosure represents 28% of the total homes on the market.  


So, what can a homeowner, like myself, do to protect their value? Here are 5 simple steps any household can take:

1. Invest in curb appeal. Invest in fresh paint and landscaping. Trim the bushes. Weed the gardens. Make certain the lawn is cut every week. Have your friends who are real estate agents come by and give you tips on how your home can look more inviting. When you are ready to sell, the hard work will be completed and in the meantime, you will have a home you are proud to own.
2. Form a neighborhood watch to observe foreclosed properties. Make sure there are no vandals or squatters in those homes. Call the police if you see suspicious activity.  Banks will board up homes that are vandalized and they will consider a fire-sale, just to get that property off their books -- which will greatly impact your own value.
3. Think of your home as a long-term investment. Home ownership helps create inter-generational wealth. It is the one asset that will grow over time. At some point the housing market will come around and you will be in a good position to sell your home at a fair price.
4. Don't panic. Yes, there will continue to be foreclosures for the near term. Now is not the time to sell your home just because there are foreclosures. It is like making a panic run to the bank. If everyone does it, house pricing will continue to destabilize. If you think you may be approaching foreclosure, contact an attorney for advice.
5. If you must sell your home, consider doing the following items to keep your home's selling price high: 

• Throw in some extras.  Furnishings and appliances are always good selling incentives. You can sell your place as "move-in" ready. Deck furniture, art, throw rugs are also good add-ons.
• Offer something new -- if they buy. Installing new granite tops or finishing hardwood floors can be attractive to a buyer because these things will be new or fresh to them.
• Pay the buyer's closing costs. It cuts into your profits, but you should be able to negotiate keeping the selling price high.

Pulvers, Pulvers & Thompson, LLP provides free consultations regarding all matters pertaining to New York Real Estate Law including, but not limited to the following: Residential Closings, Real Estate Litigation, Foreclosures, Real Estate Contracts & Lease Agreement and Private Note Holder Representation. Contact them at 212.471.5129 begin_of_the_skype_highlighting            212.471.5129      end_of_the_skype_highlighting  for a free consultation! 

Mortgage Contingency Clause

As a purchaser in contract it is recommended to have little to no contact with the seller and the seller’s representatives regarding the mortgage application process. Today nearly all residential real estate contracts in New York include a Mortgage Contingency Clause. This Clause provides the buyer the ability to opt out of the sales contract and receive a full refund of their deposit should they apply for a mortgage loan and be denied. The buyer typically has 45 days from the date the contract is signed to invoke this opt-out and the seller may request to see proof of the bank’s denial.

The Mortgage Contingency Clause may seem simple and straight-forward when in reality it takes a few twists and turns. As a purchaser who has likely paid 10% or more down you don’t want to say anything to the seller that may appear to indicate a loan has been approved when it hasn’t been. For this reason any communication with the seller’s representatives regarding your loan and the Mortgage Contingency Clause should be made by your attorney.

Bank of New York v. Silverberg & why it's important

MERS has become somewhat of a mysterious figure in the recent foreclosure boom. Many attorneys that work in the industry remain unsure of what exactly MERS is and who exactly works for MERS. It’s found its way into numerous magazines and newspaper articles and I’m pretty sure my mom has asked me about it a few times.

MERS serves as a common agent for numerous participating banks. It was created in the early 1990's in response to delays at local recording offices. The idea was that if all of the participants used a common agent the agent could track ownership and assignments while saving the participants recording costs and speeding up the transfer process.

While MERS does not lend money or service loans it was involved in the origination of approximately 60% of all United States mortgage loans. MERS participating banks have typically named MERS nominee on a Mortgage while leaving themselves listed as the lender on the Note. A Note is a promise to pay money; a Mortgage attaches that promise to pay to a piece of property. If someone doesn’t pay their Note (aka the promise to pay) they may be at risk of losing their property because the Mortgage clearly states that if the Note is violated the underlying property can be sold.

When MERS serves as nominee on the Mortgage it is generally stated that it has the power to assign the Mortgage. As a result, when one MERS participating bank buys a loan from another MERS participating bank they create an Assignment of Mortgage that assigns the Mortgage from “MERS as nominee for the First Bank” to “the Second Bank”. This was relatively simple and straightforward way of transferring Mortgages back and forth. Silverberg (a currently unpublished Second Department decision issues on June 7, 2011) likely changed everything.

In a typical MERS Assignment of Mortgage it states that the Note is transferred with the Mortgage. The issue, as the Court in Silverberg points out, when a Note is transferred to and accepted by an assignee, the Mortgage naturally follows. In contrast, the transfer of a Mortgage without the transfer of the Note does not actually transfer any incident. Remember….a Note is the promise to pay; the Mortgage simply backs up that promise with a piece of property. MERS (or any person or entity) would have the authority to transfer the Note if possessed or owned the Note or was given authority by the owner. Nowhere is it stated that MERS was given the authority to transfer the Note by the owner and it is rarely proven that MERS actually possess the physical Note. Therefore, in Silverberg the Plaintiff, Bank of New York, stepped in the shoes of MERS and had the power to assign the Mortgage but did not gain ownership of the Note because MERS was unauthorized to transfer ownership. In addition, since MERS did not have the power to commence a foreclosure on behalf of the previous owner Bank of New York did not have standing to bring the action and the defendants Motion to Dismiss the Action was granted.

The simple rule that comes out of this case is one that has been around forever – a foreclosing party must be the holder or assignee of the Mortgage and the Note at the time the action is commenced. The twist that is about to cause a lot of banks a lot of problems is that a typical MERS Assignment of Mortgage does not properly transfer ownership of the Note. Since so many banks have commenced foreclosure based on an Assignment that did not actually give them ownership of the underlying Debt at minimum hundreds (at most thousands) of active New York foreclosures will need to be discontinued and then re-filed after new Assignments are created. At minimum this case will slow down New York Residential Foreclosures 6 months to a year. At maximum it prolong the foreclosure boom another couple of years.

Possible Change in HAMP Modifications - Automatically Going Permanent

As I've explained in previous blog postings, HAMP modifications are government incentivized modifications that work off of a homeowners gross monthly income to determine an affordable monthly payment. After determining what the homeowner can afford the bank weighs the value of the modified loan against the value of a foreclosure of the property. If the modified loan has a greater net present value it is offered in the form of a trial modification. After 3 trial payments are made the homeowner is again reviewed prior to the modification going permanent.

A major issue with HAMP modifications is that after making the 3 monthly trial payments banks drag their feet on completing a permanent modification review or reject the homeowner(s) for the permanent review altogether. Banks had little incentive to determine the net present value of the modification compared to the foreclosure prior to offering a trial plan because the banks had no actual risk. Should the modification pass the net present value test a permanent modification would be offered. Should the bank determine the net present value of the foreclosure was greater than the modification the homeowner would be rejected and the bank would retain the 3 trial payments. It appears things may be changing.

Recently I have seen numerous HAMP trial modifications that automatically go permanent upon the final trial payment. No permanent review is required and all net present value calculations appear to have been conducted prior to the trial modification offer. This will likely lead to an increased number of rejections for homeowners who do not make enough money to pass the net present value test upon the trial modification review, it should lead to a large increase in permanent HAMP modifications. Assuming this is the new practice there will be a few side effects:

(1) Increased Bank Efficiency - Presumably each major bank has hundreds (if not thousands) of workers somehow involved loan modifications. If loan modifications are automatically going permanent the staff responsible for the permanent modification review would likely be directed towards assisting with other aspects of the modification review.

(2) Increase Court Efficiency - Every settlement conference part is bogged down with cases that require 5+ appearances to negotiate. Nearly every case that results in a permanent modification has one or two conferences that serve as a status updates where the appearing attorney simply advises that the permanent review has not yet been completed. If loan mods go permanent automatically it should result in less conferences per file.

(3) More Initial Rejections - Homeowners that don't have enough income or have too much equity in their homeowner to pass the net present value test should find out upon the initial trial review as opposed to making three (or more) trial payments before being rejected.

Prior to last week I had never seen a HAMP mod that automatically went permanent. I've explained in previous posts that in-house mods were my preferred modification mainly because they almost always went permanent upon completion of the trial. Should this be an industry-wide change in HAMP modifications it would be a major step in the right direction towards dealing with our country's foreclosure problems.

How Do I Know If I'm Eligible for a HAMP Modification?

If you are in foreclosure the Court will direct the Bank to first review you for a HAMP (Home Affordable Modification Program) Modification. If you are not in foreclosure a bank that is part of the HAMP program is supposed to review your mortgage for a HAMP modification upon request. Many of the larger banks (Bank of America, Chase, OneWest, etc.) are part of the HAMP program and offer HAMP modifications where possible. Some smaller banks are not part of the HAMP program and while they will consider you for other modifications, they will not review you for a HAMP modification.

In order to be considered for HAMP you must live in the mortgaged premises and have a mortgage below a certain threshold amount (for one family homes the threshold amount is $729,750.00). Your current mortgage payment (including taxes and insurance) must exceed 31% of your pre tax monthly income and you must pass an NPV (Net Present Value Test).


31%

To calculate this percentage, add up all of the monthly income your household earns before taxes are removed. This includes additional income such as pension or Social Security income. Contribution income that live-in relatives give you monthly and 75% of rental income is included as well. A HAMP mod will decrease your monthly mortgage amount to 31% of that number. If your mortgage payment (along with taxes and insurance) are less than the 31% figure then you are likely ineligible for a HAMP modification.


NPV

Assuming your current mortgage amount is greater than the 31% figure, the bank will then run the NPV (Net Present Value) test. Under this test the bank determines whether the value of foreclosing on your property is greater than the value of giving you a modification. This test is extremely complicated and it is normally difficult to predict whether this test will come out in your favor or not.While the banks that take part in this program are forced to consider you for a HAMP modification they are only obligated to give you a modification if the modification benefits them more than a foreclosure.




If everything goes well you will be placed on a 3 month trial plan where you will pay a monthly figure of 31% of your gross monthly income. After the trial plan you will be reviewed for a permanent modification. Keep in mind that many homeowners remain on a trial plan for far longer than 3 months and it is still possible to fail the NPV test after making all 3 trial payments.

Are Banks Stopping Foreclosures?

The short answer is that over the past month-6 weeks certain banks (ex. Bank of America, Chase, etc.) have paused some of their residential foreclosures. This does not mean that delinquent mortgages will be forgotten. It simply means that banks are slowing down their foreclosures and halting the beginning of certain new foreclosures while they review their paperwork.

The main reason banks are pausing some foreclosures is because they have discovered that many affidavits and assignments of mortgages have errors. It doesn't mean the foreclosure itself is fraudulent as many people are speculating. What it means is that banks are pumping out too many foreclosures and don't have the time to review all of their paperwork. A law firm sends a bank hundreds of affidavits a day and instead of inspecting each one carefully the Vice President sign dozens a minute. Assignments of mortgages are created in a similar manner.

Regardless of whether the bank has engaged in fraudulent practices or not, these errors can be used against the bank to your benefit. A faulty assignment of mortgage can mean that your bank does not have standing to bring a lawsuit on the mortgage. In addition, courts will no longer allow foreclosures to proceed on mass-produced affidavits and are actually requiring affidavits from attorneys to verify all of the information is correct. Therefore these issues can result in your foreclosure action being dismissed and thrown out of court. This won't solve the underlying problem because the bank will simply fix their paperwork and re-commence the action. If your goal is to annoy the bank then this is a perfect result. If your goal is to modify the better course of action would be to use this as a negotiation tool with the bank. Law firms don't want to tell their clients their actions are being dismissed and banks don't want to pay to recommence their actions.

I understand these are complicated topics and not easy to comprehend by homeowners without extensive litigation and mortgage experience. If you are in foreclosure please contact a foreclosure attorney to walk you through this process.

Reverse Mortgages and Foreclosure

A reverse mortgage operates completely differently from a normal mortgage. A person with equity in their home trades their equity for the right to live in the home for as long as they are living and the ability to cash out the equity over time similar to a Home Equity Line of Credit. Since the person, who must be over the age of 62 and from my understanding not own the home with anyone below that age, can cash out the equity there is a possibility that equity can be used to pay off outstanding mortgages and liens. The amount of money a person can receive in a reverse mortgage depends on their age (the older you are the higher percentage of equity you can take out) and the value of the home. Therefore, in certain situations a Reverse Mortgage is a viable alternative to foreclosure. The following are two examples. The first is where a Reverse Mortgage is a viable option. The second is where it is not.

Example Where It Works: Person A owns a $800,000 home with a $200,000 mortgage with Bank B. Person A receives an equity line in a reverse mortgage from Bank C for $300,000 (half the remaining equity). Person A takes out $200,000 from that equity line with Bank C and pays off the mortgage with Bank B. Person A now has a $300,000 reverse mortgage on the property with Bank C but no mortgage with Bank C.

Example Where It Doesn't Work: Person A owns a $500,000 home with a $550,000 mortgage with Bank B. The property lost a lot of value when the market fell apart and was once worth nearly a million dollars. Bank C won't give Person A a reverse mortgage because there is no equity in the home.

Reverse Mortgages are a complicated topic. If you are looking into applying for one you should see someone who has experience handling their application process.

Home Affordable Unemployment Program (HAUP)

HAUP offers unemployed homeowners who are unable to make their monthly mortgage payments a few extra months to get back on their feet while looking for employment. Homeowners are eligible if they:

(1) Are unemployed;
(2) Live in the mortgaged premises (meaning the property is their primary residence);
(3) Have a first lien mortgage originated on or before January 1, 2009; AND
(4) Have an unpaid principal balance less than or equal to $729,750.10.


Homeowners that qualify will have their mortgage payments suspended for up to three months (or until they are employed). Homeowners that find a job while on the program will be considered for the Home Affordable Modification Program. If the homeowner does not find a job they will be considered for the Home Affordable Modification program 30 days prior to the completion of the Unemployment Program forbearance plan.

HAUP does not cancel any mortgage payments, it merely suspends such payments. Homeowners that successfully complete the program will resume normal payments once the plan ends.

Home Affordable Refinance Program (HARP)

A refinance can perform a number of different functions. It can be used to consolidate debt, pull equity out of one's home, obtain a mortgage with a lower rate, change from adjustable to fixed, etc. Typically as interest rates drop the economy experiences a influx of refinances. Currently we have low interest rates but few refinances because many homes are "upside down". This means that the homeowner owes more on that property than the property is worth. HARP is the governments solution to this problem.

When a homeowner owes more on a property than what it is worth the homeowner is typically unable to find a bank that would give them a new mortgage. Here's an illustration of why this situation doesn't lend itself to refinancing:

John owns his home and owes $500,000 on the premises. The property is worth $300,000. His original mortgage is with Bank A and he'd like to refinance with Bank B. In a refinance Bank B would pay Bank A for the entire amount due (here $500,000) and John would then owe Bank B the value of his property, therefore giving him a new mortgage. In this situation Bank B would pay $500,000 to satisfy John's mortgage with Bank A and then receive a new mortgage from John of $300,000. Clearly Bank B is losing too much money. Therefore John would need to pay Bank B $200,000. In today's economy people like John don't have excess capital sitting around and therefore they are having problem taking advantage of lower rates.

The government's solution to this problem is called HARP (Home Affordable Refinance Program). A person may be eligible for HARP if they:

(1) Own a one-to-four unit home as a primary residence;
(2) Have a mortgage owned by Fannie Mae or Freddie Mac;
(3) Are current with their mortgage;
(4) Have not been late on the mortgage within the past 12 months;
(5) Have a first mortgage not exceeding 125% of the current market value of the home;
(6) Have income sufficient to support the new mortgage payments; AND
(7) Can improve the long-term affordability of the loan with the refinance.

Note that this allows homeowners with a second mortgage to refinance so long as the first mortgage does not exceed 125% of the current market value of the home. In addition, the homeowner does not need to actually live in the home. This is the first government program to allow refinancing for vacation and investment properties.

This program differs from typical refinancing because the homeowner cannot take cash out from the refinance and because the homeowner must be current on their mortgage.

Refinancing your home loan is not an easy process. If you would like more information on HARP or any other type of refinance/modification program feel free to email me at AFriedma@PulversThompson.com.

HAMP v. In-House Mod

A bank needs to put any HAMP eligible loan through a HAMP modification review prior to successfully foreclosing on any residential property. This is both good and bad. It's good because it gives the courts the power to slow down a foreclosure until they're certain the bank has reviewed a person's unique situation for a HAMP mod. It's bad because HAMP is a slow, drawn out process. While a homeowner is under review for a modification missed payments, interest and attorneys fees can still be added to the total amount due on the mortgage. The more that is owed on the mortgage the more difficult it is to get modified.

Time Before Response

HAMP mods require the bank to follow government created guidelines before offering the modification. In-House mods vary by bank but instead of requiring the extensive paperwork necessary for a HAMP mod an In-House mod may require very little paperwork. I've seen a few In-House mods that were actually "blind" meaning without any paperwork.

How the Modification is Structured

HAMP mods are required to be as close as possible to 31% of the household's pre tax income. The net present value of that loan is then compared to the net present value of the foreclosure. The bank is permitted to do whichever one has a higher net present value. In-House mods follow no set structure. Since they cost less to offer (less employee time and lawyer time spent on the loan) banks are quicker to offer them and sometimes offer better deals than the homeowner would receive under HAMP.

Reaching Permanent Status

HAMP trial mods come with a 3 month trial period. At the end of the trial period homeowners must resubmit certain documents prior to the loan going Permanent. Sometimes this can take months other times it can be quick. In-House mods are almost always (99% of the time) Permanent instantly. There is no trial plan period.

Documents Required

HAMP mods always require the following: Financial Worksheet, Hardship Affidavit, Bank Statements, Pay Stubs or Profit and Loss Statement, 4506-T and Tax Returns. You may also be required to submit proof of rental income, proof of occupancy and a number of other government required documents. As with any government program there is a lot of paperwork. In-house mods can require nothing and can require everything listed above for HAMP mods. They're not part of a government program and therefore the bank can make their own requirements.

Does the Bank Actually Want My House?

The short answer is a resounding "No".

In a foreclosure action the bank would much rather find a way to keep you in the home and paying your mortgage. A foreclosure takes a lot of time and money. During that time period no one is paying the mortgage and if the bank eventually purchases the property at the foreclosure auction they will be responsible for property taxes, homeowners' insurance and necessary repairs. This is good for a struggling homeowner because the bank will try to help you modify or conduct a short sale. Keep in mind however that just because the bank wants to keep you in your home it doesn't make a modification easy.

Many homeowners assume that the bank approaches the settlement conference stage with a negative attitude and numerous stalling tactics. Instead of viewing the bank behind the foreclosure as making deliberate actions with evil intentions keep in mind that these companies are over worked and under lots of pressure by the courts to get something done.

If it takes them a while to review your paperwork its likely because their staff is trying to get through hundreds of applications. If they lose a document you faxed in its likely because they have dozens of departments and your document may have been sent to the wrong one. This doesn't mean all hope is lost. If you are in foreclosure make sure you send a copy of every document to the firm representing the bank in the foreclosure. Make sure you follow up with a phone call to the firm to determine if everything has been received and if anything else is missing. Call the bank too and see if someone can verify that your documents have been received. Get as proactive as you can and follow up weekly to make sure you modification or short sale is moving along properly.

Reinstatement & Payoff

When you attend a foreclosure settlement conference there are a few papers that the you should request from the bank. Two of the most important (depending on your situation) are Reinstatement and Payoff quotes.

What is a Reinstatement Quote and Why/When is it Important?

A Reinstatement Quote tells you how far behind on your mortgage. It gives you a dollar amount that, if paid, would make you current on your mortgage. If you pay this amount your mortgage is Reinstated and you would make next month's payment as if you were never delinquent.

It is VERY rare that someone actually reinstates their mortgage. It is far more common to go on a forebearance to mod agreement (pay a certain elevated amount per month to help you catch up on areas and then have a modification) or receive a HAMP or In-House Modification. It is important to receive a copy of the Reinstatement so you can check the bank's math and make sure that (1) they are billing your account correctly and (2) they have credited your account for past payments. Its also good to know how much is owed because while you are in foreclosure you are typically unable to make mortgage payments so it is sometimes possible to save up enough money to offer a huge chunk up front for a more favorable In-House modification.

What is a Payoff Quote and Why/When is it Important?

A Payoff Quote will tell you exactly how much the bank is owed on the mortgage. This amount is typically larger then the original mortgage (depending on how long you've been in default and how long you paid the mortgage before defaulting). If you pay this amount the mortgage will be satisfied and you will no longer owe the bank anything.

A Payoff Quote is important for a few of the same reasons a Reinstatement Quote is important. You should check the bank's math and have an idea of how you are being billed. A Payoff Quote becomes very important if you are looking to sell the house. If what you owe is more than what the house is worth then you will need bank approval to conduct a Short Sale. If what you owe is less than what the house is worth then you will not need bank approval as this is a normal sale. Keep in mind that you'll need to pay a broker fee and will need to set aside for a few other expense.

When Will I receive these Quotes?

Bank attorneys are instructed to bring these documents with them to all settlement conferences. You or your attorney can request a copy of each at every settlement conference. If the opposing council doesn't have a copy you should request, in front of the court referee, JHO or Judge, for a copy to be emailed or faxed to you.

The NPV Test

The NPV test should only come up in one specific situation concerning your foreclosure so this post will only discuss the test as it relates to that situation. As I explained in other posts, if you earning a living that is reasonable in relation to your mortgage and you live in your home you will likely qualify for a HAMP trial modification. Once you get through the trial modification you will be reviewed for a permanent modification. If you are rejected for the permanent modification there is a great chance the reason will be that the NPV test failed. There are two ways to explain the NPV test. First I'll give you the short answer and I'll follow it up with the long, detailed answer.

What is the NPV Test? (Short Answer)

It is within the bank's power to determine which is more profitable: (1) Foreclosing on your home, winning the bid at an auction and selling your house to someone else OR (2) Modifying your loan under HAMP guidelines. If the bank determines that they will turn a higher profit through option 1 then through option 2 then they are allowed to deny your modification because the NPV of option 1 is great than the NPV of option 2.

What is the NPV Test? (Long, Detailed Answer)

When determining the Net Present Value of anything (not just your home and your foreclosure) numerous factors need to be considered. Imagine I told you I could give you $100,000 right now or $120,000 next year. You would need to determine which was more valuable to you right now and go with that choice. If you took the cash today you could invest it and at the very least earn interest on the money. You could also pay off student loan debt or your mortgage. I could also die in the next year in which case you may need to hire a lawyer to go after my estate for the money. Therefore it is very possible that the $100,000 makes more sense and its Net Present Value is higher than the $120,000 in a year.

There is convincing evidence to suggest that the $120,000 has a higher NPV. Interest rates are low right now so putting it in the bank wouldn't earn $20,000 worth of interest in a year. You may not have the desire to start your own business with the money. You might now have student loan debt or a mortgage to pay off. So maybe the Net Present Value of the $120,000 is greater. Clearly to make these determinations take time and a careful evaluation of the situation. The bank's determination is no different.

The bank will first evaluation the value of foreclosing on the property. They will need to wait another 6 months - a year to go through the foreclosure, during which time they will take in no money on the property. They will have legal fees and eventually broker fees in marketing the place. During the time they own the property they will pay property taxes, homeowners' insurance and be responsible for repairs. They need to have staff members monitor the property and the foreclosure. The bank will need to determine how much the foreclosure is worth. The most basic way to determine that is by predicting how much the property will sell for and how much the bank will spend to get to that point.

The bank will then need to determine the value of the modification. Remember everyone wants their money as soon as possible. A 30-40 year modification certainly delays the time they will collect their money. Each payment over the time period of the loan will be decreased to determine it's Present Value. All of those payments will then be added together and the bank will determine the Net Present Value of the entire mortgage. The bank will then add the incentive payments that the government provides with a HAMP modification and will compare this number to the Net Present Value of the foreclosure. If the NPV of the foreclosure is higher the bank will reject the HAMP Permanent Modification. If the NPV of the HAMP Permanent Modification is higher the bank will send you an offer and if you sign it the foreclosure will end.

How Do I Know If My Modification is At Risk of Failing the NPV Test?

Keep in mind that I am about to make generalizations. Every property is different and if you are concerning about these issues I would consult an expert on your specific situation.

If a property is "underwater" such that the mortgage is worth $500,000 and the property is worth $100,000 it is extremely unlikely that the homeowner's HAMP modification will fail due to the NPV test. If that property is foreclosed on and sold the bank can make a maximum of $100,000 if it has no legal fees or broker fees, pays no property taxes or homeowners insurance and makes no repairs. Once all of those fees are taken into account the bank is probably only collecting around half of that figure. In addition, it will need to wait months to collect. Therefore the NPV of the $500,000 mortgage, even if the interest rates are down to 2% and it is extended 40 years and a third of the principal is pushed to the back end, should always be higher than the NPV of foreclosing. The bank doesn't want your upside down house. They'd rather you pay off the mortgage at a different rate.

If the property is not "underwater" such that the mortgage is worth $250,000 and the property can be sold for $500,000 there is a great possibility that the NPV test will fail for the HAMP modification. In this situation if the bank forecloses and the property is sold at auction the bank will be able to collect its full mortgage amount at the auction. If they purchase it at auction and sell it a third party they will incur broker fees and all of the other fees listed above but they will get the substantial portion of their mortgage within one year as opposed to waiting 30-40 years to be paid in full. This does not mean that you have no options, it just means that your situation is slightly more difficult. Then again if you're having trouble paying your mortgage but you can sell your house for a quarter of a million dollar profit you're in a substantially better position than the homeowner who passes the NPV test because their property is $400,000 underwater.

What is a Foreclosure Settlement Conference?

After a bank files a foreclosure complaint against you the court will send you a notice to attend a foreclosure settlement conference. All of the bank's motions will be held in abeyance until the settlement conference is marked held and the case is referred to a judge or IAS part. In simple words the bank cannot continue to foreclosure on your home until the court is satisfied that the delinquent payments can be worked out through a compromise or a solution. An attempt to reach this compromise or solution is made at this settlement conference.

The following are a few typical questions that I have received in the past:

1. Who is in charge of the Settlement Conference? Who oversees the mediation?

This answer varies depending on the county and courtroom. In Westchester or Queens, for example, one of three court appointed referees will oversee the conference. In Kings (Brooklyn) you may see a judge or a court appointed referee. In Nassau you will meet with a bank attorney and simply report your discussions to a clerk.

2. Is Mediation helpful? Should I attend?

Mediation is generally helpful and you should always attend the conference. The bank attorney at the conference should come prepared with important info on your loan and your delinquency. They will also come with a list of numbers (phone and fax) that will tell you where to send your paperwork and who you can follow up with to ensure it was received. If you don't attend the conference will be moved along and the bank's foreclosure process will speed up. The conference is a great (if not the only) place to learn about your options and receive the correct direction in which to head.

3. Do I need a lawyer? Will one be provided for me?

A pro-bono lawyer may be available to help you. Typically at least one pro-bono is floating around and is scheduled to help homeowners who seek assistance. It is really up to you as to whether you'd like an attorney with you. Attorneys that work mainly in foreclosure law understand the system. They will know what paperwork and information is important. In addition, depending on the court, an attorney can make all of the appearances for you so you don't need to miss work. If you are great with paperwork and fully understand the basics of real estate law and mortgages you can probably handle the conference stage on your own. If you feel uneasy taking on such a task on your own it is probably best to find a foreclosure defense attorney. Make sure they have experience working with loan modification applications and have a firm grasp of foreclosure law.

4. Can the bank take my home during one of these conference?

No. The bank can do nothing until the conferences are over and even at that point there is a 45 day stay imposed prior to the bank being allowed to even file a motion. Once the motion is filed you still have a minimum of a few months before a bank has a final judgment against you or your home.

5. Do banks really negotiate with me at the conference?

Banks are supposed to negotiate in good faith at the conference. Courts will generally hold them to it. What exactly "good faith" means varies from court to court and situation to situation. Very rarely does a true negotiation take place at the conference because banks need to verify your financials and other information. A bank will have a difficult time stating that they refuse to negotiate or accept packets, however they are not forced to modify your loan or permit a short sale. They are expected to review all of your information and where possible compromise.

I hope this post provides adequate information regarding the Settlement Conference stage. If you have any further questions please email me directly at AFriedman@PulversThompson.com.

The Importance of Paperwork

I would estimate that over 95% of all homeowners currently in foreclosure attempt to modify their mortgage. For a large portion of these homeowners the difficult they face in modifying does not come from lack of income but rather from lack of well-organized, properly detailed paperwork.

In putting together a HAMP (or any type of modification) packet you need to keep a few things in mind:

1. Prove Everything. The bank will not take your oral verification of income (personal or rental) as sufficient proof. People lie to banks all the time. Your explanation that you receive $1000/month in rental income in cash is useless. You need to show the bank proof. Any time you receive rental income (cash or otherwise) deposit it in a bank account. Use the same bank account every time. When you submit bank statements highlight the rental income so it is easy for the bank to determine how much you receive. In addition, while the bank statement proof is great a bank statement plus a lease is better. Have your tenants sign on for a certain period of time. It gives the bank faith that you'll continue to receive that income.

2. Profit/Loss Statement. I had a man a few days ago show me his pay stubs. He couldn't figure out why he didn't qualify for a modification because he had already shown the bank everything they requested of him. His pay stub was for $187.45. He is a waiter that earns 90% of his money in tips. All of his taxes are removed from his hourly wages. He claims to be making somewhere around $50,000/year but only "proved" to the bank that he was making $9,000/year. If a large portion (or really any portion) of your income comes from tips or commission, or if you are self employed, you'll need to submit a Profit/Loss statement. You can wait for the bank to request it but they will. So find an accountant or put one together on your own and submit it with your packet.

3. Detailed Bank Statements. The bank does not want to see a snapshot of your ending monthly balance. A friend could loan you $4,000.00 at the end of each month just to boost your balance. Believe me, it happens. What the bank needs to see is everything coming in and out. I realize I keep saying the same thing over and over again, but if you receive cash deposit it first. Create a paper trail. Don't listen to anyone who tells you a snap shot is sufficient. You must produce a detailed breakdown. If you search through you online banking information you'll find it.

If you feel confident handling all of your paperwork on your own be sure to make sure everything is broken down in great detail. If you go to a lawyer or agency make sure they have experience putting together these packets. I have met far too many modification "professionals" who have never heard of HAMP and never worked with a Profit/Loss Statement. There are great people out there who can help you for a reasonable fee. Find them and get your modification.

31% & HAMP

HAMP works on the theory that a homeowner can devote 31% of their pre-tax income towards paying their mortgage payment. Under this program, if a bank modifies your loan the bank will bring you monthly mortgage payment to as close to 31% as possible. So what do you do if your monthly mortgage payment is less than 31% of you pre tax income and you're still struggling to pay?

1. Make sure your math is correct. Have you properly presented your financial situation? Did you say you bring in $1400 in rental income when in reality those two spare bedrooms are still vacant? Lately homeowners have been overestimating their income in order to appear more financially capable to their bank. In certain situations homeowners have flat out lied because they thought a lower salary would cause the bank to reject their modification application. Make sure you've given a true picture.

2. Check with the bank and determine what figures they are using for property taxes and homeowners insurance. In working with the 31% figure the bank will first take homeowners insurance and property taxes off the top. The remaining number is what they expect you to pay in principal and interest. If they think your property taxes are $300 a month when they are actually more like $700 a month then your principal and interest payment may be $400 a month too high. In these situations you'll need to get copies of all relevant bills. Keep in mind that in certain counties taxes may be increasing. If you can get documentation indicating such an increase provide them to the bank.

3. Look to other solutions. Ask the bank about an In-House modification. These modifications will not be bound by HAMP guidelines. Consider listing the property for sale (or short sale). The worst scenario is allowing the foreclosure to reach a judgment. Just about anything else is better in terms of a credit hit. You may even want to fight back against the bank in litigation. I would advise talking with a lawyer or housing counselor.

4. Sit down with your family and figure out if you're over-extended. Is everyone in your household of a reasonable age working? Is there a way to bring in additional rental income? Are you spending too much on vacations, personal property, entertainment, etc. ? If you intend to save your home you mortgage needs to become the priority. Talk with a lawyer experienced in foreclosure law and see what your options are.

Deed In Lieu of Foreclosure Basics

A Deed in Lieu of Foreclosure (aka Deed in Lieu) is an alternative to foreclosure. Generally it is only used if a loan modification is not possible. It is used much less often than Short Sales as a method to end the foreclosure and settle the remaining debt on the home.

More literally, a Deed in Lieu of Foreclosure is a legal instrument whereby a homeowner voluntarily surrenders their home to the Servicer/Lender. In return the Servicer/Lender stops the foreclosure process and cancels the mortgage debt.

This process used to be referred to as “dangle mail” because it was akin to homeowners mailing their keys back to the bank in an envelope. Despite what you may have heard, banks will not simply accept the keys to cancel the note and mortgage. You must apply for a Deed In Lieu. The Servicer/Lender will want to see all of your financial information and you will be required to fill out a number of forms.

If your application is approved the bank will inform you and/or your attorney. The process will take a few months and it is important to stay in constant contact with the Servicer/Lender and the law firm handling the foreclosure.

Short Sale Basics

You may have heard the phrase “the property is underwater”. Properties that are “underwater” are worth less than the mortgage on the home. Therefore, if the property is sold at its current market value the homeowner would need to use some of his or her own funds to pay off the mortgage. In today’s poor economic climate many homes are underwater and their owners are generally unable to make up the difference. One possible solution to this problem is a short sale.

A Short Sale is conducted when the outstanding obligations owed by a homeowner on a property exceed the current market value of the property. The homeowner sells the property at it’s reduced market value and the lender agrees to accept a reduce figure. There are a few other things you should consider when agreeing to do a Short Sale. The sale will impact your credit and the difference between what the property is sold for and what is owed may be considered income on your tax returns.

To conduct a Short Sale you will need to fill out a packet for your Servicer/Lender to review. The bank will instruct you on how they want the property listed and for how long. You will need a broker to list the property and possibly an attorney to assist with paperwork and applications.