Archive for August, 2012

Do Presidential Candidates Care about Foreclosure?

Are you watching the Republican National Convention, right here in Tampa?  I’m not.  I tried, honest, I did.  But all I heard were cliches and talking points with no effort to delve into the real issues.  Do you disagree?  Listen closely, and you tell me …

Do you hear anyone talking about foreclosures, or the housing crisis … or, more importantly, a solution to the mess?

Middle class America is getting foreclosed by the tens of thousands – with no better illustration of it than right here in Tampa – and the RNC is meeting right here in Tampa – yet nobody will talk about this.  How infuriating!

Make no mistake, I’m not picking on Republicans here. I’ve heard nothing from the Obama camp, either, in terms of a solution to the housing crisis that has plagued Florida and the rest of our country for many years now.  Plus, if Obama was going to do something, he’d have already done it.

So do you know what that tells me?  That neither side – Obama or Romney – intends to do a damn thing about the foreclosure crisis, in Florida or elsewhere.  How terribly ironic, because, as Bloomberg explains, that’s the issue Floridians care about, particularly in the counties like Hillsborough and Pinellas which could swing the entire presidential election.

So you can watch the RNC and the DNC if you choose.  I can’t.  When I watch, all I see is a bunch of talking-heads who don’t care enough to address the issues affecting Americans every day.  For instance … Romney’s taxes?  Who cares!?!?  He’s rich, we get it.  Can we please talk about something important – the issue Floridians wan to talk about?  Apparently not.  Sigh.

Mark Stopa

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Want Mediation? Better Save Your Money.

I had several hearings in Tampa this morning, so I had a chance to watch Senior Judge Padgett at work.  My hearings were fun, as always, but concerned issues I’ve discussed previously.  What I found interesting was what happened on the hearings I got to watch.

On a few occasions, homeowners who were defending themselves without a lawyer asked the judge to require mediation.  How did Judge Padgett adjudicate those motions?  On each occasion, the judge took a look at the file, assessed the age of the case, and asked the homeowner what he/she was trying to accomplish.  On the older cases, the judge asked the homeowner if they had saved money while the case was pending.  Where the homeowner clearly hadn’t saved money, yet was three years in default, the judge was not about to require mediation.  On newer cases, or cases where the homeowner had money saved, the judge was far more inclined to grant mediation.

I found this very ironic, as I just recently posted this blog, titled Want a Loan Modification?  Better Save Money.

Clearly, at least one Florida judge agrees that the concept of mediation (and, hence, a loan modification) makes little sense for homeowners who haven’t saved money.

Mark Stopa

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My Love Letter to the Banks

Dear Banks,

Roses are red, violets are blue … You Lose!

Love, Stopa

Mark Stopa

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Expiration of the Mortgage Debt Relief Act … Is it a Problem?

In recent weeks, many clients have asked that I share my views about the impending expiration of the Mortgage Debt Relief Act of 2007.  It’s probably past time that I do so.

To understand how this works, one has to first understand what a deficiency is.  The best way to explain that is to give an example.  Suppose the total amount you owe your bank is $300,000, but the house is worth only $125,000 when the bank forecloses.  (Unfortunately, that type of ratio is common nowadays.)  Many homeowners are willing to “walk away” from that house, and understandably so.  Unfortunately, however, the law, at least in Florida, generally entitles the bank to pursue collection of the entire $300,000 that is owed to it, even though the house is worth just $125,000.  The extra $175,000 – the difference between what is owed ($300,000) and what the house is worth ($125,000) – is called a deficiency.

Many homeowners can accept that a foreclosure may happen at some point, but they don’t want to get foreclosed and still owe the bank money.  They want the deficiency to be waived.  Sometimes, banks are willing to do so, particularly if the homeowner consents to a foreclosure.  That sounds great – the $175,000 owed is no longer owed!  But here’s the problem.  Even if the bank agrees that the homeowner doesn’t owe that $175,000, the Internal Revenue Service may treat that $175,000 as income.  In the IRS’s eyes, forgiving $175,000 of debt is the same as that homeowner earning $175,000 in income, so that homeowner has to pay taxes on the $175,000.  Depending on your tax bracket, that could necessitate a payment of $45,000 or more – a prohibitive amount for anyone, especially homeowners in foreclosure.

To help the economy, our government passed a law (one of the few that has actually helped middle class America during foreclosure-gate) called the Mortgage Debt Relief Act of 2007.  Basically, it says that when a bank forgives a deficiency on a homeowner’s primary residence, the debt forgiveness is not taxable.  Hence, in my example above, if the bank is willing to waive the $175,000 deficiency, the homeowner doesn’t have to pay the $45,000 in taxes to the IRS.

Sounds good, right?  Well, here’s the problem there.  The Act is set to expire at the end of 2012, and it’s unclear whether it will be extended.  This has caused many homeowners to openly wonder:

Should I try to get a deficiency waiver now, while the Mortgage Debt Relief Act is still in effect?

I certainly see the logic in this.  However, I generally think that concerns of these types are overplayed – not the sort of thing that should be driving a homeowner’s decision-making process with respect to his/her residence (generally speaking).  Here’s why.

First, the Act has been extended before, and I’d be surprised if it’s not extended again.  Remember, this is an election year.

Second, the Act only applies if we’re talking about a homeowner’s primary residence.  So if we’re not talking about debt on your primary residence, the expiration of the Act does not affect you.

Third, even if we’re talking about your primary residence and even if the Act is not extended, there’s another significant exception to a homeowner’s obligation to pay taxes upon a deficiency waiver – insolvency.  If you’re insolvent, as defined by IRS Code, then you have no tax liability on any deficiency waiver.  What does it mean to be “insolvent”?  I’m no tax expert (and anyone in this situation should seek advice from an accountant).  However, it’s simpler than it sounds – you’re insolvent when your total debts exceed the total fair market value of all of your assets.  Yes, “assets” includes everything you own, but if we’re talking about someone facing foreclosure on their primary residence (which, by definition, we are) then many homeowners don’t have many assets, so they’ll fit the bill.  Just think about it.  Using my example, above, if your house is worth $125,000 and you owe $300,000 and you’re getting foreclosed on that house, you’d have to have at least $175,000 in other assets – without any other debts – not to be insolvent.

For example, suppose you have no other debts and have $25,000 in the bank, $100,000 in IRAs and 401(k)s, two vehicles worth $20,000, and your furniture and all other personal property is worth $25,000.  That would be far better than most homeowners I’ve encountered in this type of situation – most have many other debts (e.g. credit card debts) and not nearly that much in the way of assets.  (Bear in mind, your personal property may be worth a lot to you, but the fair market value of the used possessions in your house is probably much less than you think.)  Anyway, using those numbers, that’s $170,000 in assets, plus the $125,000 house, for a total of $295,000 – still less than the $300,000 in debts, so you’d still be insolvent, so you’d have no tax liability.  Think about that – someone with no debt except the house and $170,000 in other assets is still deemed insolvent for purposes of owing taxes on the deficiency waiver.

If you’re trying to figure out if you are insolvent, but aren’t sure because you don’t know how much you owe or what your house is worth, bear this in mind … the amount you owe is almost always greater than what you think.  By the time the bank includes the bogus charges, costs, and fees they always include, plus 18% default interest, the amount owed is invariably higher than most homeowners realize.  (Fortunately, this is one time where it pays to owe more, and the banks’ crooked inclusion of bogus charges actually helps.)  As for what the house is worth, just go to – it typically provides a decent estimate.

So if you’re insolvent, whether the Act is extended is irrelevant – you won’t owe taxes.

Fourth, I’m going to share the way I’ve handled this situation on many occasions.

Under the IRS Code, tax liability flows from a deficiency waiver because of debt forgiveness.  The term “waiver” says it all – the bank is “waiving” its right to collect the deficiency, and by waiving the homeowner’s obligation to pay, the bank is forgiving the debt.  That debt forgiveness is what creates tax liability under IRS Code.  Deficiency waiver = debt forgiveness = tax liability.

But what if there was no obligation to pay the deficiency in the first place?  What if there was no entitlement to a deficiency at all?  As I see it, if there’s no entitlement to a deficiency, then there’s no “waiver,” no debt forgiveness, and, hence, no tax liability.  No deficiency waiver = no debt forgiveness = no tax liability.

How is that possible?  How could that be?  It’s actually quite simple.  Mortgage foreclosure cases – at least the ones in my office – are contested.  We contest the amount of the debt and we challenge the bank’s entitlement to anything at all, much less the full amount sought.  When we’re making these challenges, this can easily create a situation where the parties are willing to compromise – by entering a Final Judgment of Foreclosure, one which waives the deficiency.  We consent to a foreclosure, and the bank agrees to waive the deficiency … everyone wins.  Except I don’t call it a ”waiver,” as it’s not a “waiver.”  Instead, I want that Final Judgment to say “Plaintiff is not entitled to a deficiency against any defendants.”

The distinction may appear subtle, but I think it makes all the difference in the world.  Think about it.  If a Final Judgment says Plaintiff is “not entitled to a deficiency against any defendants,” then how could there be any tax liability?  No entitlement to a deficiency = no debt forgiveness = no tax liability.

How can this argument possibly fly?  For me, it’s a compilation of factors.  First, we are challenging the debt – both the amount owed and that creditor’s right to collect.  The Final Judgment represents a compromise of that settlement.  We don’t think we owed that bank anything, but to resolve the dispute, we’ll agree we owe the bank the house – but nothing else.  When both sides agree that is all that was owed, and there was no deficiency, how can the IRS possibly disagree?  In that same vein, if the court which presided over the dispute rules that the bank is not owed a deficiency, and the parties so agreed, how can the IRS possibly disagree?

I suppose the IRS might disagree, and might try to pursue a claim for taxes.  But guess what that means?  In my view, that means they’d have to prove that XYZ Bank, as Trustee for the ABC Trust (or whatever alphabet soup trust was suing for foreclosure) was actually entitled to more money than the house was worth.  After all, for the IRS to be owed anything, they’d have to prove debt forgiveness, which would require proof that the homeowner owed more to that plaintiff than the house was actually worth.   Now, think about that for a minute … the banks themselves are having a miserable enough time as it is proving what they are owed.  Do we really think the IRS is going to try to start proving what these banks were/are owed?  I don’t.  I’m certainly skeptical, anyway.

If this sounds like a cheap lawyer trick, think about it like this … there are many, many instances (not just in foreclosure cases) where parties disagree about the amount owed.  Reaching a compromise of that dispute is routinely encouraged … in many walks of life.  I suppose it’s possible, but it’s hard for me to imagine that the IRS will start going behind an agreement of the parties, and a Final Judgment of a court, and take the position “even though the parties agreed and even though the court ruled there was no debt forgiveness, there actually was debt forgiveness, so you owe taxes.”

Is this foolproof?  Probably not.  But do I like it?  Absolutely.

Fifth … if somehow all of that doesn’t work, there’s always bankruptcy.

So there you have it, folks.  Do I hope the Mortgage Debt Relief Act is extended another year (or more)?  Yes.  But even if it’s not extended, should everyone be petrified that they’ll owe a bunch of money to the IRS?  I’d say no.  Chances are, you’re either insolvent, can file bankruptcy, or can settle the dispute in a way that won’t create any tax consequences.

Might I be wrong?  Sure, maybe.  Can this work out for 100% of the people reading this?  Probably not.  But what’s the alternative?  In case you didn’t realize, it’s not exactly easy to get a bank on the phone to try to agree to a short sale (with a deficiency waiver), especially quickly.  So don’t fret.  There are ways around a deficiency short of owing the IRS a bunch of money.

Mark Stopa

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Sued for Foreclosure on Home Don’t Own

I was part of this story, which appeared on today’s 6pm news on Tampa’s NBC affiliate.

Mark Stopa

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Are Tampa/St. Pete Judges a Different Breed?

Throughout the two-plus years I’ve been writing this blog, I’ve encountered many homeowners who have expressed rampant frustration with the legal system in Florida.  “The judge won’t listen to my arguments.”  “The judge is a robo-judge and is only interested in clearing his/her docket.”  Even when I’ve articulated some bona-fide defenses to foreclosure, and illustrated how such defenses have worked in some of my cases, some such homeowners have responded with words to the effect of:

Yeah, but that’s in Tampa/St. Pete. 

Judges where I live, in my part of Florida, don’t rule that way.

For example, in response to my post explaining how it’s possible for homeowners to obtain a summary judgment in their favor, one homeowner wrote, and I quote:

I am fighting my foreclosure in the 18th Circuit, Seminole County, and my judge like most judges in Seminole County is not the least bit interested in the semantics of an intelligent legal defense.  This is a robo foreclosure county.  Judges here are interested in clearing their docket, spending approximately three minutes in a hearing and nothing else.  Due process is right out the window.

I understand these sorts of frustrations, I do.  However, I can’t help but wonder … is there something inherently different about the judges in the Tampa/St. Pete area than the judges in other parts of Florida, as this homeowner seems to believe?  Are the judges in the Tampa/St. Pete area somehow more inclined to rule in favor of homeowners than other judges in other parts of the state?  Or have foreclosure defense attorneys such as myself worked so tirelessly on behalf of homeowners that we’ve convinced these judges that the law often requires them to rule in favor of homeowners?

I’m sorry, but I refuse to believe that judges in the Orlando area, South Florida, or anywhere else in Florida are just inherently anti-homeowner.  I refuse to believe there’s anything inherently different about the judges in Orlando, Ft. Lauderdale, or Ft. Myers than the judges in St. Petersburg, Dade City, or Tampa.  They’re all judges.  They’re all equally qualified to hold the position.  Does it seem like the judges in the Tampa/St. Pete area tend to rule more favorably for homeowners?  Sometimes, perhaps.  But why is that?  Is it really because these judges are somehow a different breed?

I’m sorry, but I just don’t buy it.  I firmly believe the judges in my area have issued some favorable rulings for homeowners because the Tampa/St. Pete area is filled with foreclosure defense lawyers, such as myself, who have steadfastly and consistently advocated for homeowners.  I believe that by repeatedly presenting well-taken arguments, with case law, we have created these favorable rulings.  I also believe that if this happened more often, in other parts of the state, that other judges in Florida would do the same thing.

For example, I had a hearing today in Seminole County (the very county that the homeowner, above, was complaining about) before Judge Marlene Alva.  The bank was asking that a receiver be appointed so as to enable the bank to collect rents during the pendency of the lawsuit.  Frankly, this was the sort of thing that a “robo-judge” (to use that homeowner’s term) could have easily granted, almost as a formality, with a simple explanation.  (“Mortgage is in default, bank should collect rents while the case is pending.”).   That wouldn’t have been correct, but I could have seen it happen.  However, when the bank’s lawyer tried to make the argument for a receiver without evidence (i.e. without a live witness to testify), Judge Alva sustained my objections and denied the motion.  It didn’t matter that the mortgage was in default and my client was collecting rents – the bank didn’t prove its entitlement to a receiver, so the judge denied the motion.

What’s my point?  Obviously, I have more hearings in the Tampa/St. Pete area than I do in Seminole County.  However, I don’t think there is anything inherently different about the judges in this area.  I think all judges will listen to bona-fide, well-taken arguments supported by case law, especially if lawyers develop a reputation for always making such arguments.

For instance, is it a coincidence that Matt Weidner (to name just one other) and I work in St. Pete and many plaintiffs’ lawyers consider St. Pete the most defense-friendly place in Florida?  Or is it that we’ve consistently shown these judges why the law requires rulings in favor of homeowners, and they’ve responded accordingly?  Call me biased, but I don’t think it’s a coincidence.

Another example … I recently had a hearing in Miami, which is probably as “bank-friendly” as it gets in Florida.  I cited Feltus and the judge had never heard of the Feltus case previously, so he stopped the hearing to read it.  Now … if the judge hadn’t been following the principle of law set forth in Feltus (prior to my hearing), then whose fault is that, exactly?  Yes, the judges in the Tampa/St. Pete area are typically aware of Feltus and typically follow it, but that’s because lawyers such as myself routinely cite it in hearings.  If none of the lawyers before that Miami judge had ever cited Feltus in a hearing, then how can anyone expect that judge to follow that principle of law?  In my view, it’s up to us to present the arguments, with case law, so as to make the judges understand the bona-fide defenses to foreclosure.

So for anyone who laments that they don’t reside in the Tampa/St Pete area … don’t give up.  Personally, I refuse to accept that judges in other parts of Florida are somehow different, or less inclined to rule for homeowners.  In my view, if these judges aren’t ruling in homeowners’ favor more often, then that’s because homeowners and their attorneys aren’t doing a good enough job presenting viable defenses, with case law.  So don’t give up, folks.  Keep hammering away.  Keep presenting your arguments.  Keep bringing case law.  And, I hate to say it, but keep hiring competent counsel, as good attorneys know what arguments to present and when to present them, maximizing the chances that the judge will do what you want him/her to do.

Mark Stopa

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Want a Loan Modification? Better Save Your Money

Whenever a homeowner facing foreclosure tells me that he/she wants to obtain a loan modification, what’s the first thing I discuss?  No, it’s not that loan modifications are hard to come by, especially those with principal reductions (even though that’s true).  And no, it’s not that banks have all sorts of perverse financial incentives to foreclose rather than work out a mortgage modification (even though, sadly, that’s true as well).

The first thing I ask my clients is how much money they’ve been able to save while the foreclosure lawsuit has been pending.

Look … I’m not judgmental.  I get that the economy sucks and that a lot of good people are unemployed or underemployed.  I understand that, for many people, saving money just isn’t possible.  And I understand that nobody wants to lose their home.  That said, if you haven’t made a mortgage payment in two years, have been unemployed for 18 months, and have no savings, how do you think you’re ever going to get a loan modification?  I think I’m pretty adept at defending foreclosure lawsuits, but if this is your financial situation, there’s nothing I can do to make a bank give you a loan modification.  Can I fight the foreclosure lawsuit?  Absolutely?  But can I somehow force a bank to give you a modification (when you basically have no money)?  Sorry, no.

Here’s the cold, hard reality, as I see it (not intended to be harsh but to help homeowners realize the situation they face) … why would a bank modify your loan if you can’t afford to pay, even at a reduced rate?  Even if we can get past the other hurdles to obtaining a modification (the perverse financial incentives to foreclose, the infrequency with which modifications are offered, and the perception that offering principal reductions would induce everyone to default), if you can’t afford to pay, then what’s the point?  Ultimately, the best way you can prove your ability to pay is to save money.  Saying you can pay is one thing – pulling out cash is another.

This is why my first discussion with clients who say they want a loan modification is to inquire about the amount of money they’ve saved.  In my view, if you haven’t been able to save any money while the foreclosure case has been pending, then you probably can’t afford to pay, even if a loan modification were offered.  After all, if you were able to pay on a monthly basis, then you’d have some money saved.

Sometimes, this advice creates some understandable anger.  “You don’t know what you’re talking about, Stopa.  I just chose to spend my money in other ways.  I paid other debts.  I have a job now.  I can afford a modification.”

OK.  But here’s the problem.  On the rare instances where I’ve seen modifications offered, they often look like this.

At first glance, this loan modification offer looks appealing, and in some ways, it is.  The monthly payments are reduced, and it even has a principal reduction!  For some homeowners, this sort of offer is a godsend, creating the ability to keep ones home and avoid foreclosure.

However, look closer.

Do you see how the agreement requires that monthly payments begin immediately?  There’s no “wait 60 days until I get a job” – the monthly payments start now.

Do you see how the agreement is predicated on proof of insurance?  For the homeowner to get this modification, he/she will have to immediately obtain homeowners’ insurance – and pay for it.  For anyone whose insurance lapsed, getting insurance right away will not be easy, or cheap.

Do you see how “any payments for taxes and insurance will be [the homeowner’s] responsibility in addition to the payments of principal and interest”?  Hence, the homeowner not only has to pay the monthly payment, he/she has to pay property taxes, too.  Does that include delinquent taxes?  The agreement is not entirely clear, but I’d say so.  Of course, these taxes could be many thousands of dollars.

Do you see how “fees and charges that were not included in [the new] principal balance will be [the homeowner’s] responsibility”?  What does this mean, exactly?  Frankly, your guess is as good as mine – this agreement, as written, is clear as mud.  Does it mean that the fees and costs the bank incurred in the foreclosure case have to be paid by the homeowner?  If so, when?  And how much are these fees and costs?  We really don’t know, but that’s the problem – arguably, the bank could simply hand you a bill and say “pay this.”  Sure, you could fight that.  But if you signed, and those are the terms on which the bank is giving the modification, you may have no choice but to pay.

Do you see how “any expenses incurred in connection with the servicing of [the] loan, but not yet charged to [the] account as of the date of this Agreement, may be charged to [the] account after the date of this Agreement.”  What does this mean, exactly?  How much are these charges?  When are they due to be paid?  Again, you may get stuck paying this bill in order to get your modification.

There are other problems with this modification as well, including (1) there is no representation from the lender that it is the owner/holder of the Note and Mortgage; (2) the foreclosure case proceeds unless/until the homeowner has done everything the agreement requires, including obtain Ocwen’s signature; and (3) nothing in the agreement requires the foreclosure case to be dismissed even if all of the terms are complied with.

The point here, though, is that even if the homeowner wanted to do this modification, it requires immediate, out-of-pocket payments – monthly payments, starting immediately, but also payments for insurance, property taxes (including back due taxes), and, arguably, some unspecified amounts for fees, costs, and service charges.

This is a good illustration why I encourage homeowners who want a loan modification to save their money.  As you can see, if you don’t have cash on hand to pay these expenses, then even if a loan modification does come your way, you won’t be able to take advantage.  So when you hear me asking about whether you’ve saved your money, please realize – I’m not being judgmental.  I’m trying to assess whether you can comply with the terms of a loan modification even if you’re one of the lucky homeowners to whom such a modification is offered.

Mark Stopa

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