Archive for August 27th, 2011

Oregon Shifting to Judicial Foreclosures

My blogs generally focus on events in Florida, as that’s where I’m licensed to practice law (and help homeowners facing foreclosure), but this article about the foreclosure process in Oregon has caught my attention. 

Apparently, Oregon has been a non-judicial state for many years, meaning that banks wishing to foreclose on homeowners did not need to prevail in court to do so.  In recent months, though, Oregon judges have realized that banks were foreclosing when they lacked the right to do so (shocking, I know), prompting those judges to halt the non-judicial foreclosure process so much that the banks actually want judicial foreclosures. 

This is absolutely awesome.  Kudos to these Oregon judges for standing up for the rule of law, allowing foreclosures only when banks have the requisite proof to obtain them. 

Here’s the article. …

Their preferred method in legal limbo, lenders are gearing up to move Oregon foreclosure sales from the courthouse steps into the courtroom itself, with significant implications for both homeowners and the housing market.

For half a century, the vast majority of the state’s residential foreclosures have occurred without a judge’s involvement. Oregon is one of 24 states that allow nonjudicial foreclosures, provided lenders give borrowers proper notice, publicize the sale and abide by other requirements.

But late last year, federal judges began blocking them, ruling that lenders had failed to follow one of those requirements: filing the mortgage’s ownership history in county records.

No one can say how many of the estimated 26,000 foreclosures pending in Oregon will ultimately land in front of a judge. But attorneys and trustees involved in both processes say hundreds of files are being reviewed.

“It could be thousands, ultimately,” said Lance Olsen, attorney with Routh Crabtree Olsen in Bellevue, Wash., whose affiliate, Northwest Trustee Services Inc., is the largest nonjudicial service provider in the West.

Judicial foreclosure
Original method: Around since the 1800s.
More costly: Court filing and attorney fees increase the costs for the lender and possibly the borrower.
Court oversight: Borrowers get a hearing before a judge where they could challenge the foreclosure.
Sheriff’s involvement: Local sheriff actually sells property after the court rules.
Right of redemption: Up to 180 days after sheriff’s sale, borrower has right to reclaim the property by matching the winning bid.
Length: Entire process could take close to a year.

The move is just one of the hurdles lenders face this year in both Oregon and Washington as they try to work through a backlog of foreclosures and delinquent loans. It’s a shift for distressed homeowners, who will lose some rights but gain a public hearing where they can plead their case.

It also threatens to throw another wrench into the state’s broader housing market, where data suggest prices still have not bottomed out. In the first half of this year, foreclosures and short sales made up nearly half of all home sales in the state, much higher than the national rate of 28.5 percent, said Selma Hepp, an economist with the National Association of Realtors.

The foreclosure process in Oregon already had slowed, possibly because of the legal uncertainties. Between June 2010 and June 2011, the state’s foreclosure inventory increased 1 percent, the third-largest increase among nonjudicial states. Experts estimate it would take at least a year to work through the 26,000 properties that make up Oregon’s shadow inventory — properties nearing or already in foreclosure but not yet listed for sale.

If foreclosures go to court, the process will take considerably longer, on average. In the 26 states where judicial foreclosures are the only option, loans sit delinquent for an average of 728 days before a foreclosure sale, compared with 550 days in the 24 nonjudicial states, according to Lender Processing Services.

Lender security

Not all judges agree that out-of-court foreclosures have run afoul of Oregon law. But lenders have concluded they can’t wait for the Oregon Supreme Court to resolve the issue, which might not happen for a year.

“There’s now, for a lender, less certainty and probably more expense with the nonjudicial route,” said William Larkins, an attorney with Larkins Vacura in Portland who represents lenders. “The process that was considered more cumbersome and longer is starting to look shorter and more predictable.”

In two cases since March, Larkins has filed judicial foreclosures in Multnomah and Jackson counties on behalf of Deutsche Bank National Trust Co. He expects to file a third soon on behalf of OneWest Bank.

Fannie Mae, in at least one case, also appears to be heading to court. In July, the mortgage giant and Northwest Trustee Services halted a foreclosure in Medford to avoid “the cost and uncertainty of litigation associated with the nonjudicial foreclosure,” said John Thomas, Fannie Mae’s attorney, in a court filing.

Nonjudicial foreclosure
Newer: Available since 1959.
Less costly: No requirement to go before a judge or hire a lawyer.
Quicker: Set up to take 120 days, though it rarely does.
Public recording: The trust deed, any assignments of trust and any appointment of a successor trustee must be recorded in county recorder’s office where property is located. Several courts in Oregon say lenders have failed to meet this requirement.
Proper notice: Notice of default must be filed in county recorder’s office and sent to borrower by certified mail. Notice of sale must be given to both borrower and tenants at least 120 days before a foreclosure sale. It also must be published in a newspaper of general circulation once a week for 4 weeks, at least 20 days before sale.
Right to cure: Borrower has right to pay all missed payments and lenders’ fees up to five days before sale to cancel foreclosure.
Auction sale: Trustee auctions off property on courthouse steps to highest bidder.
Sources: The Oregonian research; William Larkins

The lender’s decision came a month after U.S. District Judge Owen Panner issued a temporary restraining order preventing Fannie Mae and Northwest from selling Jack and Laura Burns’ Medford home in foreclosure.

Two Portland-area borrowers say they’ve been told by their trustee or servicer that Wells Fargo Home Mortgage had suspended their sale date and forwarded their file to attorneys.

Pam Laxson, a real estate agent whose home in Sandy is in foreclosure, said a Fidelity National Title Insurance Co. representative said her file was among 600 being transferred to attorneys for judicial foreclosure. She later received notice that Shapiro & Sutherland, a Vancouver firm specializing in foreclosures, was now handling her file.

A Fidelity employee in California referred questions to Wells Fargo, whose spokespeople declined to comment. Kelly D. Sutherland, the law firm’s managing partner, also declined comment.

Laxson, 50, bought her three-bedroom home for $206,000 in 2005. Her husband, Lindsay, died in 2007 after a 10-year bout with multiple sclerosis. She was laid off in 2008 and went to school to retrain as a certified nursing assistant. She now works as a certified medication aid at a rehab center in Clackamas while still trying to sell homes.

Laxson estimates her household income is now one-third what it was when she bought her home. She said Wells Fargo has repeatedly denied her requests for loan modifications, a short sale and a deed in lieu of foreclosure.

“Sometimes I try to hate my house,” Laxson said. “I need to hate it because I might have to leave. But I can’t find very much I hate.”

A homeowner defense

Each side gains different advantages and disadvantages in a judicial foreclosure, attorneys say.

If homeowners don’t challenge the filing, the lender could get to a sale date more quickly, attorneys said. The law also requires the foreclosing lender to produce only the original note, not a history of all subsequent owners.

“My lender clients have the original notes, and they’re providing them to me,” lender representative Larkins said.

But if borrowers challenge the filing, a judge will hear their complaints, a right unavailable in a nonjudicial foreclosure unless a lawsuit is filed.

“If you have a real defense to the foreclosure, you’re clearly better off in the judicial system,” said Phil Querin, a real estate attorney in Portland. “You get to play defense and the court has to make a decision before the foreclosure happens, assuming you can afford a lawyer.”

Borrowers face other risks, too.

Oregon law protects homeowners from being pursued by lenders for their losses should the home sell for less than the balance on the loan. But that protection could disappear if borrowers move out of the home before a foreclosure complaint has been filed in court, attorneys said.

That concerned Laxson, who said she only knew of her foreclosure’s changed status because she happened to call Fidelity to ask a question about her sale date. She immediately stopped packing and, for now, plans to stay put.

“It would be horrible to move out and then potentially be held liable for a deficiency you were completely unaware you could incur,” Laxson said.

In a judicial foreclosure, borrowers also lose their right to cure, which gives them up to five days before the sale to pay their missed payments plus lender fees and end the foreclosure.

But borrowers gain what’s called a right of redemption, which gives them up to six months to repurchase the home for what it sold for at the foreclosure sale.

That redemption right will make properties bought out of foreclosure difficult to immediately resell, attorneys say, and possibly leave them vacant for longer periods. Querin speculates it could even lead to a black market for redemption rights in which borrowers sell to investors the right to repurchase the property.

It’s also unclear how county law enforcement will handle the increased caseload. Law requires judicial foreclosure sales to be conducted by local sheriff’s offices.

Mark Stopa

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Explaining Wall Street Fraud

This article does a fine job of explaining how Wall Street committed fraud in the housing market – not inadvertent oversights or negligent misconduct … fraud.

Here’s the article …  

A central question in the financial crisis is whether Wall Street simply made errors of judgment that led to a housing bubble or whether it knowingly broke the law. Did the gun go off accidentally, in other words, or did the shooter aim at the victim’s head? That’s critical to find out because it informs our approach both to fixing the banking industry and to deterring such conduct in future.

New evidence increasingly points to murder, rather than manslaughter. D. Keith Johnson, former president of Clayton Holdings, a company that assessed the quality of mortgages for banks and credit rating agencies, recently told the Financial Crisis Inquiry Commission that he warned these firms that nearly half the loans were duds. Investment banks used them anyway:

Mr. Johnson said he took this data to officials at Standard & Poor’s, Fitch Ratings and to the executive team at Moody’s Investors Service (MCO).

“We went to the ratings agencies and said, ‘Wouldn’t this information be great for you to have as you assign tranche levels of risk?’ ” Mr. Johnson testified last week. But none of the agencies took him up on his offer, he said, indicating that it was against their business interests to be too critical of Wall Street.

Among investment firms, some of the biggest offenders in deliberately using dodgy loans were Deutsche Bank (DB), Morgan Stanley (MS) and Freddie Mac (FMCC). Clayton found that roughly 37 percent of the mortgages Morgan wanted to buy in 2006-07 failed to meet their own underwriting standards. Nevertheless, the New York bank used more than half of those loans in building mortgage-backed securities, apparently without disclosing that to investors. Freddie, which is unlikely ever to repay the billions of dollars it was forced to borrow from taxpayers, used 60 percent of the defective loans.

Wall Street firms didn’t merely ignore such information; they also used it as intel to negotiate better prices on the loans they bought from originators for packaging into CDOs and other mortgage-backed securities, said another Clayton employee.

Such disclosures go beyond undermining financial executives’ claims that they didn’t see the crash coming. They illustrate a pattern of intent by big banks to sell financial products they knew were defective. That’s not a misjudgment — it’s fraud. As a former white-collar prosecutor recently told me:

If you lie to somebody to get them to give you money, you have stolen money from them.

Johnson’s testimony supports other evidence suggesting Wall Street defrauded investors. Banks like Citigroup (C), Goldman Sachs (GS) and Merrill Lynch faked demand for CDOs, or mortgage pools, by creating yet other CDOs to buy up the securities. They also colluded with ratings agencies to misrepresent the creditworthiness of these investments. On the back end of this chain of deception, JPMorgan Chase (JPM) and other industry players appear to be rushing to seize people’s homes by illegally rubber-stamping foreclosure documents.

If it’s hard to accept that fraud was central to the crisis, it’s largely because the monumental scale of the deception is hard to process. See those trees over there? That’s a forest, and it’s burning like cordwood. It’s also because, during the boom, some of the key operating principles underlying the financial system itself were inverted.

Ordinarily, growing demand for mortgages is what creates demand for mortgage-backed securities. During the housing boom, however, that dynamic got reversed — surging demand for securities by Wall Street and investors led to an orgy of bad lending. The cart took the horse on a merry old gallop.

That pattern became hardwired into a financial system, encouraging bad behavior. Laws are broken, ethics (if they exist) smashed to bits. Here’s how the anonymous financial exec who writes over at The Fourteenth Banker put it:

The profits that were generated by this activity dwarf the potential cost. Executives’ incentives are to produce gains today and they do not pay for the risks that are left for tomorrow. The decision to have individual employees sit and sign affidavits that are false was made consciously. Someone decided to save the expense of doing it right. Or someone figured out that the chain of title had already been broken and it is better to whistle past the graveyard and defraud a court, a debtor, an investor, or a shareholder, than it is to do the right thing.

[T]he truth is that decisions to cut corners, commit fraud, abuse clients or mislead investors are generally cognitively rational given the position in which the individual employee is put.

In short, guilty.

Mark Stopa

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