SIGNS THAT YOU'RE A VICTIM OF A PREDATORY MORTGAGE LOAN!

By Chris Qualmann (Summarized from the "Center for Responsible Lending")

Predatory mortgage lending involves a wide array of abusive and unethical practices. Here, the “Center for Responsible Lending” (“CRL”) boils it down to eight (8) of the most common signs of a bad home loan.

Your best defense? Shopping. Before accepting a mortgage, it is always a good idea to talk to several lenders to make sure you understand the most competitive options available to you, and be on the lookout for predatory signs. If you encounter any one of the “red flags” described below, say NO and look for a better deal.

• Excessive fees

• Prepayment penalties

• Inflated interest rates from brokers (yield-spread premiums)

• Steering and targeting

• Adjustable interest rates that “explode”

• Promises to fix problems with “future refinancings”

• Not counting taxes and insurance in a monthly payment

• Repeated refinancings that drain your resources

EXCESSIVE FEES

When buying a home or refinancing, you should shop based on interest rate, of course, and you should also make sure you understand all the other costs of the mortgage. “Points” or “discount points” are the lender’s fee for making the loan. On a competitive loan, you will be charged one point, or one percent of the loan amount. You also can expect additional fees, which may include payment to a broker and charges for such necessities as an appraisal and title insurance. High points and fees are the hallmark of a predatory loan. It’s worth your time to get your credit score in advance and research typical fees in your area.

PREPAYMENT PENALTIES

A prepayment penalty—most common on subprime mortgages—means that you will have to pay a steep fee before refinancing. A prepayment penalty can become a trap that locks you into an expensive mortgage even when you could qualify for a more affordable loan. The penalty is typically effective for two or three years and costs more than six months’ interest. Before agreeing to a mortgage, make sure it does not come with a prepayment penalty. If it does, refuse the loan and find a better deal.

INFLATED INTEREST RATES FROM BROKERS (YIELD SPREAD PREMIUMS)

Mortgage brokers receive frequent updates on what kinds of loans lenders are offering and at what price. Watch out for brokers who try to sell you a loan with an inflated interest rate—i.e., higher than the rate acceptable to the lender. Be aware that brokers have plenty of incentive to increase interest rates unnecessarily, since lenders often reward them by paying a “yield spread premium.” This compensation is essentially a kickback for making the loan more costly than necessary. To make sure your transaction doesn’t include a yield spread premium, ask for a good faith estimate in advance, and make sure you understand all items that represent compensation to the broker.

STEERING AND TARGETING

Predatory lenders may try to steer you into a more expensive loan, such as a subprime mortgage, even when you could qualify for a mainstream loan. If you are a senior citizen or a minority, be on the lookout for predatory lenders who target vulnerable groups. Fannie Mae has estimated that up to half of borrowers with subprime mortgages could have qualified for loans with better terms. Remember that you don’t need to give in to aggressive sales tactics. Don’t respond to ads that say bad credit doesn’t matter, and be especially wary of lenders or brokers who contact you or those who try to rush you into decisions. An ethical lender will answer your questions and encourage you to make an informed decision based on your own best interests.

ADJUSTABLE INTEREST RATES THAT “EXPLODE”

During the height of the reckless boom in subprime lending, the most common type of subprime mortgage was an “exploding ARM”—a home loan with an adjustable interest rate that can increase sharply after a short time, usually two or three years. If you are a person of modest income, this type of loan is not appropriate for you. Beware of adjustable-rate loans that can rise significantly, especially if the interest rate can never go down. Make sure you understand the worst-case scenario before agreeing to this type of loan. And don’t count on a future refinance to get out of trouble in the future (see next item

PROMISES TO FIX PROBLEMS WITH FUTURE REFINANCING

Predatory lenders are notorious for selling bad deals by promising that they will refinance the loan within a short time, or if it becomes unmanageable for you. It is important to remember that the lender is not bound by that promise, and it is best to refuse a loan if it stretches you too much financially, now or in the foreseeable future. Also, avoid any mortgage that comes with a “balloon” payment, meaning that you will be obligated to pay the loan in full after a relatively short period of time.

NOT COUNTING TAXES AND INSURANCE IN A MONTHLY PAYMENT

Home buyers should find out up front whether their monthly mortgage payment will include the costs of property taxes and insurance (i.e., whether the lender has established an escrow account for these costs). If not, the homeowner will be responsible for paying these costs separately, usually in a lump sum each year. Unscrupulous lenders make monthly payments seem artificially low by excluding taxes and insurance, and many families have been pushed into foreclosure because they couldn’t afford to pay these costs.

REPEATED REFINANCINGS THAT DRAIN THE BORROWER’S RESOURCES (LOAN FLIPPING)

Beware of lenders who aggressively approach you to refinance your home loan. They may try to entice you with cash, but these loans typically increase the amount you owe on your home and can also increase your monthly payment. It is important to consider all that you are likely to lose valuable equity that you have already acquired on your home—equity that could help send a child to college or fund retirement. Flipping can quickly drain borrower equity and increase monthly payments—sometimes on homes that had previously been owned free of debt. In too many cases, predatory lenders have refinanced families repeatedly until there is nothing left and the family is forced into foreclosure.

FOR "PROBLEM" SHORT SALES OR LOAN MODS - USE ESCALATION!

By Chris Qualmann

Those of us in the business of negotiating short sales and loan modifications encounter situations on a frequent (if not daily) basis where we’ve “done everything” and “submitted everything” that a lender’s loss mitigation rep has asked of us, only to then be stonewalled for weeks and months with generic updates like “it’s under review” … “it’s in the underwriter’s hands” … “sorry, we’re backlogged” and “any day now”.

There’s an excellent tool for moving those files that seem forever “stuck in the mud” – and it’s called ESCALATION. As shown on the attached graphic, there are resources within the U.S. Department of Treasury (specifically the “HAMP Administration” Office) for escalating files serviced by lenders who are contracted participants under the “Making Home Affordable Program”. And, there are specific, designated escalation contacts for those loans underwritten by Government Supported Enterprises (“GSE’s”), such as Fannie Mae, Freddie Mac, FHA and VA.

Twice in recent months I’ve had success utilizing the tool of “escalation” – once with the HAMP Office, and most recently with a lender’s in-house escalation division. The first case involved a borrower who had successfully completed her “trial modification” with a HAMP participating servicer on a loan underwritten by Freddie Mac. After making her final trial payment, she received a letter from the servicer stating that the modification would now be permanent, and that her payments would continue on the same, highly-reduced basis for the life of the loan. No mention was made in this letter of the borrower needing to do anything other than counter-sign and return the letter (which she did), and continue making payments at the reduced rate.

Then, a couple of days later, the borrower received a follow up letter … NOW telling her that she needed to make a substantial, multi-thousand dollar “cash contribution” to the arrears that had accumulated over the course of many months of missed payments … or her permanent modification would be denied. Despite my citing “chapter and verse” of the specific, printed Freddie Mac servicing guidelines stating that a servicer could NOT charge a single dollar toward arrears (or for any other reason) as a condition to approving a HAMP modification, this servicer stood it’s ground and wouldn’t budge. And amazingly, the first Freddie Mac rep I contacted feigned “ignorance” as to the verbage of the company’s own regs … refusing to say whether I was “wrong” or “right” … and just kept saying “Uh, I think they (the servicer) can do that”.

But thankfully, by using the specific procedure and forms on the HAMP Admin website for demanding escalation (and, obviously, following up promptly with the designated Treasury Department representative) … the problem was solved in less than a week, and the borrower received a NEW letter reassuring her that her permanent mod was approved, and that it wouldn’t cost her a penny other than the new monthly payment.

My latest use of “escalation” involved a Short Sale on a loan serviced by a well-known lender whose name I’ll gladly name – Chase. Without going through the “whole gory details” … I’ll simply say that after delivering documents over and over and over again (sound familiar?), not only by fax and email but also through Equator (after Chase “switched” to the system), I was getting nothing but bland, generic, stonewall, and ultimately highly conflicting information as to the actual status of where the file stood in the approval process.

Fortunately, I learned that Chase has an EXCELLENT Short Sale “Escalation Division” whose sole purpose is troubleshoot, intervene, monitor, and simply “push the train forward” on files that for one reason or another can’t seem to be brought to conclusion. It takes more than a “simple call” to the “Escalation Division”, though … it’s critical to get an actual escalation number from the lender representative, because once a file is formally escalated (and an “escalation file” created), the file falls under the eyes of not only the lender’s in-house problem solvers, but also the U.S. Office of the Comptroller of the Currency (“OCC”).

BOTTOM LINE – As long as it's used properly, ESCALATION is more than just a “word” when it comes to pushing a loan mod or short sale forward. It’s a critical element of the loss mitigation process that needs to be used sparingly and judiciously, but has “teeth” and real muscle for bringing problem files to conclusion. And, as is the case with any loss mitigation file, whether formally escalated or not, a successful result depends on the negotiator understanding the “Four (4) P’s” – Persistence, Process (meaning: following the rules), Patience (a little, anyway) … and more Persistence!

FLORIDA COURT - BB&T MUST DISCLOSE & CREDIT PAYMENTS FROM FDIC BEFORE IT CAN COLLECT FORMER COLONIAL BANK DEBT

By Chris Qualmann

A recent debt negotiation of mine involved a large commercial loan originally issued by Colonial Bank, and later serviced by BB&T following Colonial's collapse (and BB&T's assumption of its debts and assets) in 2009.

Despite the fact that BB&T purchased the loan at a deep discount - and that it's acquisition was protected, if not fully guaranteed through a "Loss Sharing Agreement" (as well as a separate "Assumption Agreement") with the FDIC - BB&T initially took the position it could (and would) "collect 100% of the indebtedness anyway." 

But the GOOD news is that this position changed significantly in light of a May, 2012 published ruling from the Circuit Court of Hillsborough County, Florida.  In the case of Branch Banking and Trust Company, Successor in interest to Colonial Bank vs. KRAZ, LLC, et al (No. 2010-CA-000304), BB&T filed suit to collect an unpaid $5.2 million debt from a commercial loan originally issued by Colonial.  In it's ruling, the Court made it abundantly clear that before it could collect a penny ... BB&T had an inescapable legal obligation to disclose (and credit the Defendants) with any discounts, payments and reimbursements received by the FDIC. 

Specifically, the Court stated (as shown on Page 5 of the ruling, a copy of which is linked below):

"It is further ORDER AND ADJUDGED that Plaintiff (BB&T) shall, within thirty (30) days of the entry of this Final Judgment, credit the principal of the Note with all payments received by the FDIC concerning this loan ... No payments shall be due from Defendants until Plaintiff credits all such payments it has received against the principal."

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BOTTOM LINE - Anytime a "successor bank" demands payment on a defaulted loan acquired from a failed institution ... it's a certainty that there are many credits, discounts and set-offs to be taken into consideration as a settlement is negotiated.  Many of these set-offs can be determined from review of the websites of the FDIC, SEC, and/or the successor bank itself.

The full text of the 2012 Hillsborough County opinion can be found here:  https://workspaces.acrobat.com/?d=oEfW16KF1Iamkz5N17M2LQ 

MOST FORGIVEN MORTGAGE DEBT (THROUGH SHORT SALE, DEED IN LIEU OR PRINCIPAL REDUCTION) REMAINS NON-TAXABLE

By Chris Qualmann

Homeowners whose mortgage debt was partly or entirely forgiven in calendar years 2007 through 2012 (and who received a “1099” from their lender) may be able to claim special tax relief by filling out Form 982 and attaching it to their federal income tax return, according to the Internal Revenue Service.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007 (modified in 2008 and EXTENDED through 2013) taxpayers may exclude debt forgiven on their principal residence if their loan balance was $2 million or less. 

The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on the IRS website.

“The new law contains important provisions for struggling homeowners,” said Acting IRS Commissioner Linda Stiff. “We urge people with mortgage problems to take full advantage of the valuable tax relief available.”

As noted above, the original law applied to debt forgiven from 2007 through 2012 – but as a result of the "fiscal cliff" settlement in late December, will continue in full force and effect for debt forgiven through the end of calendar year 2013. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief.The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for relief under the “Mortgage Forgiveness Debt Relief Act”. HOWEVER, other kinds of tax relief are still available for debts of this nature, particularly if the taxpayer can claim “insolvency” during the year in which the particular debt was forgiven. (See IRS Form 982 for details).

Borrowers whose debt is reduced or eliminated typically receive a year-end statement (Form 1099-C) from their lender. For debt cancelled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home (Box 7).