Jan242014
Forget eminent domain, invoke squatter’s rights!
By claiming adverse possession, delinquent mortgage squatters may be able to rescind a lender’s right to foreclose if the borrower made no payments for five years, paid their taxes, and failed to respond to any lender loan modification offers, and the lender issued no Notice of Default.
When Richmond, California, announced a plan to seize underwater mortgages, the parties holding those mortgages not surprisingly freaked out. Five years ago, enabled by mark-to-model accounting, lenders embarked on a strategy of loan modification can-kicking to delay or avoid recognizing losses on bad loans. Lenders planned to remove the distressed inventory from the market, allow house prices to rebound to improve their capital recovery, then resolve their bad bubble-era loans. Their plan works well, but if the City of Richmond is successful in forcing them to sell the mortgage for a price less than the fair-market value of the underlying collateral – which is the eminent domain plan — then lenders will be forced to recognize billions in losses they hoped to avoid. This is a life or death struggle for lenders; losing could even force them into bankruptcy.
The eminent domain strategy has many legal hurdles to overcome: first, lenders will obviously fight this to the bitter end, so attorney’s fees will be very high; second, the City must obtain these loans at a value less than the fair-market value of the underlying collateral, while lenders carry these loans on their books at the value determined by their mark-to-fantasy accounting. Determining the value of these loans will be the most contentious issue of the eminent domain proceeding, and if the City does not get the loans for the value they want — which I believe unlikely — the entire scheme falls apart. Despite the obstacles to success, the lending industry worries about the prospect, and lenders resort to emotional rhetoric to make their case.
Eminent domain is ‘stealing’
Richmond plan impacts pensions, not fat cats on Wall Street
Trey Garrison — January 22, 2014 1:42PM
The Richmond, Calif., city council is pursuing a plan to use the city’s power of eminent domain to force bondholders to sell underwater loans, allowing homeowners to restructure their mortgages. And it’s not surprising that investor groups continue to be fundamentally opposed to such actions and continued to speak out against the practice at the ABS Vegas conference currently underway in Las Vegas.
Mayor Gayle McLaughlin has led the charge toward a partnership with San Francisco investment firm Mortgage Resolution Partners to buy 624 city residents’ mortgages that are underwater, or that owe more money than the home is currently worth.
Other cities in areas still suffering through this housing recovery have considered it, as well. North Las Vegas, for example, rejected the notion.
Will eminent domain be an issue in other regions?
Scott Simon, a former partner with PIMCO, says despite the good-sounding intentions, this is theft, plain and simple, and it hurts the very middle class that it supposedly helps.
“MRP and Richmond are stealing,” Simon said. “It’s their 401ks and pension plans, firemen and teachers retirements, not some fatcat Wall Street investor that they’re going after. And it will hurt investment and lenders. Why would you lend money in a place where government can come in and take it?”
While I imagine this rhetoric went over well in the conference for lenders, his emotional reaction overlooks a number of reasons why this form of “stealing” would be a good thing.
Lenders should be concerned about lending money under circumstances where they may have difficulty recovering their capital if the borrower defaults; that’s prudent lending practice. If any municipality is successful in bringing an eminent domain case, lenders will consider blackballing that municipality, but such a gambit will fail; once the precedent is set, any municipality anywhere will be able to use this tool, so the problem won’t be contained — and that wouldn’t be a bad thing.[dfads params=’groups=165&limit=1′]
If lenders knew they could potentially be forced to recognize losses on underwater mortgages, something they don’t fear now due to the moral hazard spawned by the various bailout measures enacted to save them from their own incompetence, if lenders knew the threat was real, they would be far more concerned about creating conditions where borrowers end up underwater. Lenders have no need to fear eminent domain if borrowers are never underwater.
So how do lenders avoid holding notes over underwater borrowers? Primarily, lenders would force borrowers to use substantial down payments to give lenders a cushion against the borrower ever being underwater. This in turn would help prevent future housing bubbles and busts which also helps prevent borrowers from ever falling underwater.
In my opinion, lenders need to fear the ramifications of inflating housing bubbles and dealing with the problems of legions of underwater borrowers. I wrote about this effect in Strategic default is moral imperative to prevent future housing bubbles. But there is one other way this can be accomplished.
Squatter’s Rights
Attorneys constantly search for new legal grounds to help clients, irrespective of the morality of the defense. The idea of using eminent domain to obtain mortgages was one such creative idea, taking an existing law and set of procedures and applying it to a new area. I have a similar idea I freely offer to any attorney who wants to pursue it: invoke squatter’s rights through adverse possession to extinguish a lender’s right to call an auction under a mortgage agreement.
California law allows a person to claim adverse possession after continuously occupying a property and paying all property taxes for five years. Many, if not most, delinquent mortgage squatters occupied the property for five years and paid property taxes, so they meet this requirement; however, here’s where the application of an old law and procedure gets applied in a new way: the borrower needs to argue that despite already being on title that by not paying the promissory note, the owner is in fact adversely possessing the property in an open and notorious manner against the lender who has claim against title. Since the lender has not exercised their right to call an auction per the terms of the mortgage agreement, and five years has passed since the borrower quit making payments, the lender forfeits all rights to call an auction in the future.
In cases of long-term squatting (five years or more) where the borrower has completely ignored any lender communications and offers of loan modifications, and the lender has not filed any notices, a borrower should be able to argue they meet the conditions of adverse possession and thereby extinguish the lender’s right to call a foreclosure auction.
Lenders thought they were afraid of eminent domain, but if one of these cases were successful, tens of thousands of delinquent mortgage squatters will suddenly have free homes, and lenders will be forced to recognize 100% losses on those mortgages.
For as appalling as I would find seeing those delinquent mortgage squatters enriched that way, I would enjoy an inner glee over the destruction of the banks such an action would cause.
[dfads params=’groups=164&limit=1′]
[idx-listing mlsnumber=”IG14010524″]
1268 North KENNYMEAD St Orange Park Acres, CA 92869
$1,100,000 …….. Asking Price
$1,200,000 ………. Purchase Price
7/29/2010 ………. Purchase Date
($100,000) ………. Gross Gain (Loss)
($88,000) ………… Commissions and Costs at 8%
============================================
($188,000) ………. Net Gain (Loss)
============================================
-8.3% ………. Gross Percent Change
-15.7% ………. Net Percent Change
-2.5% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$1,100,000 …….. Asking Price
$220,000 ………… 20% Down Conventional
4.92% …………. Mortgage Interest Rate
30 ……………… Number of Years
$880,000 …….. Mortgage
$228,720 ………. Income Requirement
$4,681 ………… Monthly Mortgage Payment
$953 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$229 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$45 ………… Homeowners Association Fees
============================================
$5,909 ………. Monthly Cash Outlays
($1,534) ………. Tax Savings
($1,073) ………. Principal Amortization
$418 ………….. Opportunity Cost of Down Payment
$158 ………….. Maintenance and Replacement Reserves
============================================
$3,877 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$12,500 ………… Furnishing and Move-In Costs at 1% + $1,500
$12,500 ………… Closing Costs at 1% + $1,500
$8,800 ………… Interest Points at 1%
$220,000 ………… Down Payment
============================================
$253,800 ………. Total Cash Costs
$59,400 ………. Emergency Cash Reserves
============================================
$313,200 ………. Total Savings Needed
[raw_html_snippet id=”property”]
Wow! What a brilliant post.
We’re all looking for a way to make the market work again and make the banks face their real losses.
This kills two birds with one stone. Either they foreclose and write down the losses or forfeit the property altogether.
Sounds like a good way to clear the backlog and return to a normal “working” market to me!
Bravo, OC Housing!
I didn’t explore the angle about getting more properties to the market, but you’re correct, such a move would have that effect. That would serve to clear the market and remove some of the manipulations currently distorting real estate prices.
“…Either they foreclose and write down the losses…”
Irvine Renter: What a great idea! One of the best!
At a very bare minimum, just the threat of a squatter getting his day in court would most certainly scare most lenders into foreclosing well prior to the 5 year adverse possession deadline.
Imagine the legal precedent if in fact a squatter actually succeeded obtaining full title [via adverse possession] in court. A whole new legal industry!
More government solutions? When are folks going to realize that it is government involvement which allows kick the can to prosper? Get the government out of the mortgage industry and let the banks go bankrupt. Legislation sounds like a quick fix, but in the end, the unintended consequences will be worse than the original supposed problem.
Part of the function of government is to make and enforce laws that facilitate commerce. Imagine a world in which there are no contracts and no recourse if someone breaks a promise. We’d be living in a world dominated by violence and chaos.
Prior to the housing bubble and bust, we had rules on contracts, mortgages, foreclosure, bank accounting, and others designed to create a safe and reliable framework within which people could conduct business. The laws pertaining to real estate in particular are very old, nearly unchanged in over 500 years.
The housing bust caused legislators to bend, and even break, some of these very old laws, and we will see the unintended consequences soon enough.
The government must and will be part of the solution, even if that solution is merely to retreat to the laws that worked well for hundreds of years.
“Part of the function of government is to make and enforce laws that facilitate commerce.”
Not to the extent that you are thinking. It is not Congresses function to make and enforce more laws that facilitate commerce. It is Congresses function and sworn duty to uphold The Constitution, especially when that means keeping the federal governments nose out of commerce’s business. Federal law usurped state real estate and mortgage law you refer to by LEGISLATING a central bank, fiat currency, fractional reserve banking, and quasi-government mortgage buying corporations. The 500 year old laws you are refering to are now close to irrelevant. In order for commerce to function freely, it must be free to fail.
I think you should reread the Constitution, particularly the Commerce Clause.
Even if you study the Constitution in law school, you can’t escape the fact that it’s a set of rigid guidelines subject to change. It’s really not much more than that. It’s not sacred. It’s not to be worshiped. It’s a living breathing document.
I have read it, but I also understand it, in the context in which it was written. It is not a living breathing document. That is a bunch of horse puckey fed to the herd to keep them in their pens. Keep thinking like that and you will end up with a Patriot Act, a central bank which creates money which is directly prohibited by the Constituion, a law forcing people to buy health insurance, ad nauseum. Oh wait! That has already happened!
Yes, The Constitution is subject to change; BY AMMENDMENT, not by executive order or congressional legislation. We have raised a generation of sheep.
Your understanding of the Constitution sounds a lot like a right-wing radio show host’s rant. You can believe it should be something, but it is what it is. The words in the Constitution must be interpreted. That does not come by way of amendment. It’s done in federal courts over decades and changes with the times.
The “right to privacy” wasn’t established by amendment. The prohibition against declining service to non-whites did not come by way of amendment. These are interpretations of sections and clauses.
A living breathing document…
Here’s a fun exercise many second year law students experience in Con Law class regarding the “sanctity” of the Constitution.
2nd Amendment: “…the right of the people to keep and bear arms shall not be infringed.”
If the Constitution is to be taken literally, without interpretation, then “arms” could mean the arms on your body. The term is not defined in the Constitution. In the absence of a definition, many legal principles apply, but one is the literal meaning of the term. What if it has two meanings? Are the intentions of the drafters relevant? If the drafters’ intentions are conclusive, and we determine they meant muskets, knives, and swords, then does the term “arms” always and solely mean those items?
I could keep going, but you get the idea. It’s a living breathing document subject to interpretation.
I think you both have good points. However, the power to regulate commerce between states is explicitly enumerated, so I’m not sure why awgee believes what he does, namely that the Federal government’s job is to keep its nose out of commerce’s business.
Solution by government decree, also known as legislation, puts the country and it’s people further in debt. Neither legislation nor further spending can get a country or a family out of debt.
Just wondering; how many of you are aware that the Affordable Care Act legislates mandatory recovery of certain, (certain in this case means most), Medicaid benefits paid on behalf of a Medicaid enrollee? And recovery in this case means from the enrollee and the enrollee’s estate including real property, (that is your parents home). But hey, that is what the commerce clause was meant for, right?
Sorry, I had my facts wrong. It was law before the Affordable Healthcare Act. The Affordable healthcare Act just expanded drastically the number of people who would be affected by this. either way, it is the law of your federal governement as justified by the commerce clause. By the way, as long as someone brought that up, of you have any idea of just how much federal government legislation is justified by the courts “interpretation” of the commerce clause?
Unemployment is declining because the government is classifying fewer people as job seekers, not because people are finding jobs, yet GSE economists are suggesting housing will do well in 2014 due to a declining unemployment rate: foolishness and wishful thinking.
Economists Believe Falling Unemployment Will Boost Housing in 2014
Experts at Freddie Mac and Equifax expect falling unemployment and economic growth to keep the housing market steady in 2014. This, despite climbing interest rates and anticipated growth in housing prices nationwide.
Unemployment dipped to 6.7 percent nationally in December, and the Federal Reserve is expecting that figure to drop below 6.5 percent later this year. If the Fed is right, it will be the first time since the Great Recession began in 2008 that unemployment will be so low.
What this spells for the housing market is greater buying power and an upswing in new-home construction, according to Ilyce Glink, managing editor of the Equifax Finance Blog. “The housing market may not return to its pre-recession ‘normal’ in 2014 or even 2015,” Glink said, “but with more Americans employed and able to buy homes, we should see the real estate market, especially new construction housing, continue to pick up steam.”
This rise in the number of employed Americans dovetails with expected growth in the U.S. economy. Frank Nothaft, chief economist at Freddie Mac, says the economy should increase by 2.5 percent to 3 percent in 2014, which should empower more Americans to buy homes.
Experts feel this double-edged uptick will be enough to overcome a 3.7 percent increase in home sale prices nationally (as predicted by the National Association of Realtors) and an increase in mortgage interest rates.
Interest rates hit historic lows in 2013 and then gradually rose a full percentage point by year’s end. Freddie Mac reported that as of mid-January, rates on fixed 30-year mortgages averaged 4.41 percent; rates on fixed 15-year mortgages averaged 3.45 percent.
Economists such as Glink welcome the idea of a steady, slowly recovering housing market. “A cooling off in some of the hot markets isn’t a bad thing,” she said. “There were new bubbles forming and threatening to burst in some markets, and a slow-down could bring appreciation back to a more moderate rate.”
What remains to be seen is just how fast market prices will rise. Equifax warns that if prices climb faster than income, the trend could push some buyers out of the market.
Another factor to consider is the number of new households created by such events as divorce, death, or young people moving out of their parents’ homes after graduating college. According to Amy Crews Cutts, chief economist at Equifax, the Great Recession greatly reduced the number of new households created annually—and she doesn’t expect much change in 2014, particularly among young people.
Slim job prospects and financial insecurity among recent college graduates, combined with high student loan debt, may create a void of buyers that could eventually trigger pent-up demand for homes, said Crews Cutts. While this scenario is not likely to play out this year, it’s worth keeping an eye on.
Have you noticed that the NAr magically creates positive numbers by downwardly revising the previous month’s data?
NAr Feverishly Spins December Data
Existing-home sales finished 2013 with a slight increase, closing the book on the strongest year for sales since 2006, the National Association of Realtors (NAR) reported Thursday.
Total existing-home sales–including all completed transactions of single-family homes, townhomes, condominiums, and co-ops–increased 1.0 percent month-over-month to a seasonally adjusted annualized rate of 4.87 million last month. November’s sales rate was revised down to 4.82 million.
December’s sales were down year-over-year, coming up 0.6 percent short of December 2012’s pace of 4.90 million.
Removing all other types of sales, sales of existing single-family homes rose 1.9 percent from November to an adjusted annual rate of 4.30 million. Compared to the prior year, single-family sales were down 0.7 percent.
For all of last year, NAR estimates there were 5.09 million existing-home sales, a 9.1 percent improvement from 2012.
“Existing-home sales have risen nearly 20 percent since 2011, with job growth, record low mortgage interest rates and a large pent-up demand driving the market,” said NAR chief economist Lawrence Yun. “We lost some momentum toward the end of 2013 from disappointing job growth and limited inventory, but we ended with a year that was close to normal given the size of our population.”
While sales were up from November, it wasn’t new homeowners driving the increase: First-time buyers accounted for 27 percent of purchases in December, down from 28 percent in November and 30 percent in December 2012. All-cash sales–often reflective of investor activity–made up 32 percent of December transactions, unchanged from November and up from the previous year.
Even with prices and mortgage rates slated to rise, NAR president Steve Brown says sales should hold strong in 2014 as job numbers improve. That doesn’t mean the year won’t be without challenges, though.
“The only factors holding us back from a stronger recovery are the ongoing issues of restrictive mortgage credit and constrained inventory,” Brown said. “With strict new mortgage rules in place, we will be monitoring the lending environment to ensure that financially qualified buyers can access the credit they need to purchase a home.”
The national median existing-home price for all housing types in December was $198,000, up 9.9 percent year-over-year. A comparatively smaller share of distressed sales (14 percent compared with December 2012’s 24 percent) accounted for some of the price growth, NAR reported.
The median existing single-family home price was $197,900, up 9.8 percent from the year prior.
Congressmen Foolishly Fears More Rentals Will Increase Rents
Bonds backed by rental payments may be gaining investor attention, but they’ve also caught the eyes of a few critics along the way.
Some lawmakers are beginning to fear this new asset class, with one even asking the House Financial Services Committee to investigate.
Rep. Mark Takano, D-Calif., sent a letter to House Financial Services Committee Chairman Jeb Hensarling and Rep. Maxine Waters, D-Calif., asking for an investigation into rental-backed securities deals.
His fear: rental prices are going up, and a surplus of investors in rentals — along with new rental-backed securities deals — could have the effect of artificially raising rental prices, making housing even more costly in parts of California.
Takano cites a Federal Reserve report, which claims if unchecked, investor activity in local housing markets may lower the quality of neighborhoods, while pushing up prices.
Takano is simply asking for an investigation into the overall concept, but does say the deals he’s interested in closely mirror the single-family rental securitization concept set up by the Blackstone Group. The private equity firm spent years building a supply of single-family rentals with the intent of selling bonds backed by lease payments. Of course, such bond represent a tiny portion of the rental market, but still there are concerns.
Takano worries the market and regulators are not yet sure how these structured deals would perform in a real housing downturn.
“If vacancy rates rise or renters are unable to pay their rent, Blackstone and others may be forced to sell off vast amounts of property to make their investors whole,” he explained. “Selling a large amount of properties quickly would not only deprive renters of their home, but destabilize the market for homebuyers and send housing prices into a freefall.”
His other worry: rising rental prices. The representative noted that residents in Riverside County, Calif., are already paying more than half of their incomes on rent. With purchasing a home becoming much more difficult, a lack of balance spurred by investors could make the lives of lifetime renters and those unable to buy homes much more difficult in his opinion.
“These new products deserve thorough review before they become common place,” Rep. Takano said. “Ratings agencies are at odds over how to assess the risk of these new bonds. Moody’s Analytics gave the bonds in the highest traunch a Triple-A rating, but Fitch has refused to rate the bonds citing their limited track record and vulnerability due to the intricacy of maintenance expenses, capital expenditures, property tax fluctuation, and the potential for local municipality involvement.”
With these questions unanswered, Takano wants the House Financial Services Committee to jump in and be the first to ask questions.
Rep. Mark Takano, D-California.
So let me get the gist of Mark Takano’s argument: He thinks investors (especially big ones) are a bad thing because they might actually expect a return on their investment?
Well, that’s downright unAmerican!
So what does he want? A law to outlaw investing in real estate?
Did this guy ever pass 8th grade math?
I’m still trying to figure out how adding rental supply makes rent go up.
Would he prefer fewer rentals, perhaps hoping that will make rents go down?
Obviously; I mean that is why we have rent control right? Fewer rentals and lower rents all around.
I hadn’t thought about rent control. Perhaps that’s where he’s going with this. Get all the REO-to-rental houses in place, then institute rent control over all of them. They could easily do it. Of course, we all know what happens to the quality of rentals subject to rent control, so if enacted, it would ruin the neighborhoods where these houses are located.
Lenders Surpassed Peak Can-Kicking
Loan modification activity subsided in November 2013, with only 44,000 mods completed during the month.
That figure is down 12% from 50,000 modifications in October, according to data from HOPE NOW – a private alliance for mortgage servicers, insurers and housing counselors.
HOPE NOW says foreclosure sales also fell 20%, while foreclosure starts declined 17% between the months of October and November.
Since 2007, HOPE NOW has completed 6.8 million loan modifications. About 5.5 million are proprietary mods, while roughly 1.3 million received mods through the government’s Home Affordable Modification Program.
The number of loan delinquencies more than 60 days past due came in at 2.02 million in November, down 1% from 2.04 million in October.
Question is, how many of those 6.8mil mods were converted from non-recourse to recourse?
In California, all of them.
If I had to venture a guess… none.
The modification of a mortgage on owner-occupied dwellings does not change the purchase character, in California at least (but likely in every other state too). Further, since 2013 in California, the portion of a refinance that is subject to recourse, is only the portion unrelated to the remaining principal (the cash-out amount).
The challenge of the ability-to-repay rule in 2014
How far does a lender have to go to determine if a borrower has an ability-to-repay his or her mortgage? Yes, while the ability-to-repay rule of Dodd-Frank has standards, there’s no telling what sort of allegations will be brought up against a lender if a borrower happens to default.
But as we learned at the ABS Vegas 2014 conference this week, when you ask how far lenders have to go to verify a borrower’s veracity on documents, the hypothetical answers thrown around are amusing.
At a panel on non-traditional mortgage investments, where normally the focus is on nonperforming loans, servicing performance, and the like, an interesting question about the ability-to-repay rule came up.
“How far does it go?” asked Anthony Sepci, partner at KPMG. “Do lenders have to go and interview the HR manager to ensure the applicant is doing well at his job, or follow someone through their rehab for their drug habit? How far do they have to dig and what’s the legal aspect?”
Charles Gelinas, a partner with Dentons, said the potential for litigation is great because there’s no way of knowing what precedents the courts could set and there’s a lot open for interpretation.
Luke Scolastico, a director with Credit Suisse, said, “I don’t think there’s anyone here who likes the new rule. Unless there are regulators in here, in which case we do. The fact is there is a rule in place now and we have to work with it and recognize the positive aspects where it benefits the consumers and the lenders.”
Meanwhile, credit ratings agency Standard & Poor’s released its revised methodology for mitigating the risks in ability-to-repay and qualified mortgage rules. This will only be applied to new residential mortgage backed securities.
This article gets to the heart of the issue. The bottom line is, that every borrower who:
1) runs into financial trouble within the first three years of obtaining a mortgage, or
2) finds themselves in a foreclosure,
is going to make an ATR claim against the lender/assignee/servicer. At that point, the lender’s ability to quickly and accurately identify the mortgage loan as a QM may result in just $10k+ in legal fees. If the borrower’s attorney can attack the QM status, more time and money will be spent defending the QM. Beyond that, a general ATR claim will be very fact sensitive resulting in much more time and money spent.
Bundesbank successfully wraps up run-up phase of gold repatriation
http://www.bundesbank.de/Redaktion/EN/Pressemitteilungen/BBK/2014/2014_01_21_gold_en.html