Foreclosures and Modifications William T Tanner Patrick Ulibarri

Foreclosures and Modifications William T. Tanner Patrick Ulibarri 1

How did we get here? Loan Origination 2

Payment Options Option #1 30 yr fixed 5. 875% P/I: $2, 366 Option #2 30 yr fixed 10 yr I/O 6. 125% I/O $2, 041 Option #3 12 -MTA Option Arm 1% Minimum $1, 286 Index 3. 58 / Margin 3. 25 6. 83% Fully Indexed/ I/O Payment $2, 273 (Neg Payment - $987) 3

Index 3. 58 Index +3. 25 Margin 6. 83 Fully Indexed Index Margin Treasury + 3. 25 = rate LIBOR + 3. 25 = rate Prime Rate + Margin = rate (Fed funds rate + 3%) 4

Different loan programs by documentation Full Documentation “Full Doc” Limited Stated “SIVA” Stated Income Stated Assets “SISA” No Income No Assets “NINA” 5

6

7

8

What can a borrower do? 9

Questions to Borrower • • Do you wan to stay & should you stay? Can you afford to stay? (DTI 31%) Value of property v. encumberances-BPO Notice of Default or sale – If same postponed lender does not give another notice • Current or late payments 10

11

What it used to be • Skip a few payments (re-capitalize) • Forbearance (increase payment to make up past due payments) 12

What it is now • • Still forbearance & missing payment Rate reduction / step rate Increasing amortization term Reducing the principle balance Real or window dressing? 13

Write downs will be necessary • “Servicers should also be more aggressive about writing down principal amounts when necessary to make the loan affordable. ” Sheila Bair FDIC Chairman 2/26/08 14

Fixing a mess… "Our goal is to get the greatest recovery possible on loans in default or in danger of default, while helping troubled borrowers remain in their homes. ” Sheila Bair FDIC / Indy. Mac 8/20/08 15

Who owns the loan? • Probably not who you are making the payment to - they are the Servicing Co • In most cases some entity on Wall Street 16

17

HAMP Home Affordable Modification Program Making Home Affordable (MHA) If a servicer took TARPII funds from Treasury they are required to actively pursue modifications under the terms of HAMP/MHA in coordination with the investor who owned the loan. If the loans are owned by Fannie/Freddie they automatically eligible. If the homeowner does not qualify for HAMP/MHA the servicer must try to qualify the homeowner for the servicers own in-house modification programs. (FHA/VA must be first turned down for in-house modification before they can be considered eligible for HAMP/MHA) 18

The Obama Plan Making Home Affordable Modification Plan • Gross Wages • 31% - 38% Housing Ratio (PITIA) • Drop rate. 125% to a floor of 2% • Extend Amortization (up to 480 mos) • Forebear Principle to end of loan @ 0% 19

Who Qualifies • • Primary Residence No more than $729, 750 Loan Amount Have a Hardship 1 st TD PITIA More Than 31% of Gross Income • Loan was finalized before 01/01/2009 20

21

22

23

24

Who is the investor? • 15 U. S. C. § 1641(f)(2) request • Sup. Dir. 10 -02, after June 1, 2010, servicers must provide Fannie Mae with a list of investors who are not participating • Fannie, Freddie, VA or FHA loan 25

Who is the investor? (part 2) • 1641 does not provide a timeline and no cases yet. • TILA 1641 g …notice to borrower if owner changes • Fannie may then know who owns the loan • Fannie freddie check on line FHA VA too 26

Reasonable Efforts? • Ask servicer what reasonable efforts they’ve taken to get the investor to waive restrictions • Reasonable efforts are required by Sup. Dir. 09 -01, p. 1 • Under Sup. Dir. 10 -02, effective 6/1/2010, server must write to investor requiring waiver at east once 27

Inadequate Response? • Servicer’s in-house escalation team • E-mail escalations@hmpadmin. com • Ask for Ken Hannold if escalations are satisfactory 28

29

HAMP second lien program • Wells, B of A, Chase and Citigroup have signed onto this program • Just recently • We don’t know the specifics yet 30

HAMP Second Lien Program • • Resolutions Dismissal of foreclosure NPV test not require Required standard modification steps or extinguishment 31

HAMP 2 nd Lien Program • 09 -05 r revised directive • Requires resubordination by second • If first mods then second must dismiss foreclosure • No NPV on second • Standard mod steps-capitalization, Rate red (step increases), increase payback, forbear (if first forbear then second must in same amount) • Waive late fees and other fees 32

Short Sales • • What is a short sale? Why would someone want to short sale their house? Credit issues – Short Sale vs. Foreclosure? 33

HAFA Short Sale Program Home Affordable Finance Program • • $3 K relocation $1. 5 K to servicer for admin costs $6 k (max. ) to junior lienholder Up to $2, 000 for investors who allow a total of up to $6, 000 in short sale proceeds to be distributed to subordinate lien holders, on a one-for-three matching basis. 34

Foreclosure • Judicial – Breach of Contract 1. 2. 3. 4. • File lawsuit Wait for Trial Sheriff’s Sale Not very popular 35

Foreclosure • Non judicial – Deed of Trust 1. 2. 3. 4. Record Notice of Default Wait Statutory Period Publish Notice of Sale 36

Civil Code Sec. 2923. 5 (2008) • • Loans 1/03 -12/31/08 Lender must contact borrower Must wait 30 days to file NOD HO has right to meeting within 14 days and HUD counselling • Statute has special methods of contact • NOD must state lender has complied • Also owner must maintain property 37

California Civil Code 2923. 6 (2008) • Appeared to create an obligation of servicers to offer modification • The terms basically mirrored the Obama plan. • Cases on appeal-only one case where Judge found a right to stay foreclosure 38

Income Taxes - Fed • • The Mortgage Forgiveness Debt Relief Act and Debt Cancellation If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition. 39

Income Taxes - CA • Mortgage Forgiveness Debt Relief Extended - Updated 04/13/10 • On April 12, 2010, SB 401, the Conformity Act of 2010 was enacted. It allows taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from California gross income. The new law applies to discharges of qualified principal residence indebtedness on or after January 1, 2009, and before January 1, 2013. http: //www. ftb. ca. gov/about. FTB/Newsroom/Mortgage_Debt_Relief_Law. shtml 40

William T. Tanner Legal Aid Society of Orange County 714 -571 -5204 btanner@legal-aid. com Patrick Ulibarri Law Offices of Sanford Parke 714 -740 -8009 patu@parkelawgroup. com 41

• The following slides were intentionally provided. They include graphs that help show the dire circumstances of the current housing market. 42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58