Jim Eckley joins us again for another podcast episode. You’ll find the time-stamped show notes below. If you’d like to ask Jim a question for a future episode you can leave a comment below or call our answer hotline (615.SHORT.IT) and record your spoken question there. Big thanks to Jim for taking the time to speak with us. Jim can be reached via his web site EckleyLaw.com.
Sean: Jim, welcome back. Thank you for being on our second episode.
Jim: Thanks for asking me, [Sean]. I’m glad to be back, and I hope that we can be as productive this time as we were last time.
Sean: Good deal. I figured we’d dive right in. You had sent me something about the Federal False Claims Act. What is that, and what’s the relevance for homeowners?
Jim: Well, before I answer that question, I should start out again by saying that what we talk about today is general and educational. When we speak about these claims and statute of limitations and facts that might generate liability or not, those are general and not specific to a given case.
They’re no substitute for someone, if they find themselves in one of these predicaments, contact a lawyer and have them look specifically at their case, the facts and documents. Then make a judgment call there.
I always like to say that, just so everybody knows where they’re standing and how far they can use these kinds of sessions. Of course, these sessions are really good because they get us down to what the law really is.
Also, one other thing. When we talk about federal matters, those apply to all states. When we talk about state level matters, like statute of limitations and other things, those are typically state level. Today we’re talking about just Arizona.
If I’m going to add any other state, I’ll mention that I’m saying if it’s in California or Colorado if we happen to get to that.
Talking about your first question, which is, what is the False Claims Act, and how might that actually fit into any of these claims that homeowners and others have, and how they’re treated by lenders?
Let’s start out by telling what the False Claims Act is. Actually, the Federal False Claims Act first came around in the early part of the Civil War, passed during the Lincoln administration. It was to prevent war profiteering.
At that point in time, it was typical for the government to go to private vendors to buy all of their things. We’re still doing that today. They needed weapons, musket balls, powder. They needed clothing, they needed wagons. All these things had to be made by private vendors.
The government contracting section would go out and make contracts with private vendors. The idea was that the vendors sometimes were padding their bills. The feds wanted to of course make that unlawful, because it was public money that was being misspent by padded bills. It was a fraud on the public.
Since the feds then hadn’t really been in a war recently as of 1861, never had that kind of experience, there was nothing on the books that prohibited that or gave the feds any cause of action.
The feds passed that, and essentially what it said is this. If you’re getting federal money under some false pretense, no matter who you are, then you can be liable to the federal government for that recovery. If a whistleblower comes in and knows of someone misusing federal funds, and the whistleblower informs the feds, if the feds do something about it, the whistleblower gets a percentage of it.
If the feds don’t do anything, the whistleblower can actually sue in the name of the federal government the party to whom all those ill-gotten gains went and recovery in some cases as high as 40 to 50% of what was overpaid them.
This can be very, very large amounts of money. You’ll see these kind of claims typically used against, of course, government vendors, but as the years went on it turned out there was other possible uses. It seemed that it applied to government officials that were misspending.
It seemed that it applied to people like Boeing. It applied to people that took money for the government in any ways, like people who vended food stamps, people who provided healthcare services that were sending padded bills to ERISA, to the Social Security Administration, Medicare and Medicaid.
In a sense, they were profiteering from the federal government by padding bills. They wanted to encourage whistleblowers, so this was dusted off in the 1960s and suddenly they started using the False Claims Act and making these kinds of applications.
The courts were surprised to see that in use, an ancient bill like that, but all proved that it really did apply.
Again, taking the essence of the False Claims Act, here’s what it says. If the government is paying money because of padded bills or misinformation being given to it by some vendor to the government, or somebody regulated by the government, then anybody can blow the whistle and get a percentage of those by having blown the whistle if they’re ever collected.
If the government forces themselves will not prosecute, then they can prosecute themselves in the name of the United States of America.
How would this apply to homeowners and lenders? Well, here’s how it would apply. Remember, lenders are insured by FDIC, FSLIC. They are insured by the federal government through indemnities behind the scenes that pay them for shortfalls in their mortgage lending and any kinds of short sales, foreclosures or modifications.
In other words, they’re getting money from the federal government, and they’re getting it by providing the federal government with information about what their losses are and what caused their losses. The point though is, many times, we’re seeing it on the receiving end for the consumer, and we know that the lender is generating their own losses.
They’re generating by refusal to modify, by a refusal to do an entirely reasonable short sale, by an election to go to foreclosure on certain properties that could have been rescued and solved under existing guidelines.
By making demands that homeowners do things they don’t have to do, and one of the typical things in Arizona might be that the homeowner comes up and pays additional cash, or writes an additional promissory note for the shortfall on a short sale to the lender, because the lender demands it on pain of denying the short sale.
That, on a loan that calls for no deficiency. In other words, there is no personal liability. The lender couldn’t possibly ask for that money. The very act of asking for it and the borrower declining to do it, and having it go into foreclosure, the lender then turns that whole loss over to the government and gets compensated for most of it.
The idea is, that’s false information. The lender has a duty to do their best to follow the rules to try to mitigate that loss. In that case, the lender generated the loss in order to turn it over to the federal government to get coverage for it, which it did.
There went federal money, our money, to a needless rat hole, a needless loss that didn’t have to be generated. That means the lender arguably is making false claims on the government. The question would be, would we have standing as homeowners out here, or homeowners in a group, or someone, anyone, doesn’t even have to be homeowners, to go in and say . . . We don’t even have to be a victim, remember, of it. We just have to know of it.
Say, "The lenders are doing this," make a demand on the U.S. government that they do something about it. If they don’t actually file a false claims act in our own regard against Bank of America or JP Morgan or Chase or whomever we can say is engaging in this kind of activity with truth.
That of course is a matter that would always have to be determined. That would be a tremendous type of claim. It would be one which they have to take seriously, because it isn’t on a single case basis.
It would mean if they were found to have done that, they would have disgorged all those monies back to the government. The person that brought this up would get a significant percentage. That means clear across the United States. That’s a lot of money.
Sean: Has anyone brought this . . .
Jim: There are claims out there that have been, as classes, brought these kinds of claims. There has not been as yet an award that I know of, because most of this activity has only started in probably the last two years.
When the borrowers of the world have finally decided they’re not going to have fairness generated for them, and there’s little risk coming down the pipe for them unless they act on their own and start hiring the lawyers.
Then of course you need a group of class action lawyers that are familiar with these kinds of claims and are willing, since they take them on a contingency basis, which means they only get paid if they collect. They’re going to have to put out all the money that it takes to finance these, and it’s an incredible sum of money to finance these all the way up to resolution.
My guess is that many of them are going to be successful in this regard. No lender can afford to be in court on a False Claims Act type of claim. I suspect those are all going to get settled before they ever get to that point.
Now remember, False Claims Act also has a criminal edge to it, which means if they ever were found civilly liable for having padded their bills, that terminology I’m using, or padded the information it gave the government in order to get money, then that would also be criminally actionable because it means that they’ve essentially extorted or stolen money from the government with false information.
That’s always a crime. I’d say that most of these are going to end up getting settled, and most of them are in their infancy, but it’s an entirely legitimate claim.
I wouldn’t be surprised to see it being used very effectively over the next couple of years.
Sean: Good deal. It sounds like a really useful stick.
Jim: It is a big one. It’s probably the biggest one in the quiver. As we all know, just fighting a bank on a deal by deal basis, if it’s engaging in inappropriate activity, it’s a hardship on that poor, independent borrower that usually is unbearable.
The bank has a lobby of lawyers that get paid to do nothing but fight these kinds of issues. The poor borrower’s just caught in a bad moment in his life, usually at his financially weakest. That’s why he’s there, doing a short sale or modification, or even involved in a foreclosure.
He’s hardly in a position to get a group of lawyers together to fight for him on that issue. Although fortunately there are some that will do that.
Sean: Before we dig into questions from our users submitted from our site, what are you seeing lately? Is there any new developments that homeowners should be aware of other than this act that we just talked about?
Jim: An interesting part about the guidelines that have been prescribed out there for purposes of rewriting loans, modifications, short sales and so on, these seem to change almost daily. Interpretations of them seem to change almost daily.
There’s been a great deal of disarray, I think we’ll all agree, coming out of Congress, federal government, and coming from the new financial communities that have been formed by the federal government to look out for us.
Like the Federal Trade Commission, which had prescribed some rules protecting consumers against untrue information coming down about modifications and loans, and modification companies from misrepresenting to them what they were capable of doing, and taking upfront fees that were large and then doing nothing.
There were some rules that came down, and then suddenly part of them were suspended. In other words, it looked like we were heading down the right trail, and then they get suspended.
Then there was another set of rules that seems to have come out that really isn’t particularly relevant to the moment. Seems like they’re more relevant to a couple of years ago. I guess what I’m saying is that when they say "Washington DC, the DC must stand for Darkness and Confusion," because that’s all we’ve seen coming out. No real leadership.
Now, you do see a couple of movements out there generally that are encouraging about the lenders, but is not going to bring the cavalry to you and me very fast, or to most of the people that are listening to this tape today.
The changes for instance are that the federal government now has come back and asked for recourse on some loans that were improperly underwritten by the lender. In other words, they had paid the lenders large amounts of TARP funds, and they’ve paid them from Fannie Mae, Freddie Mac and Ginnie Mae funds to insure mortgages.
It’s turned out that the mortgages that were sold to them which, now they’re taking losses on, were not in compliance with the rules on how you underwrite mortgages. That’s why they’re defaulting.
Rather than the U.S. government’s taking our tax funds to pay for all those shortfalls, they’ve now decided to sue the big lenders. All five of them have been sued to recourse all these loans back to them, and make them write checks back to the U.S. government, because these were non-conforming loans.
An example. If you were going to put a loan into Freddie Mac for instance, it may be that the portfolio that you put in was supposed to be that every borrower in there only had an 80% loan, and at 20% equity.
The banks were writing these with no equity. They’re writing 100% loans, in two different mortgages, and they’re booking them with Fannie as though it was only one loan.
There’s a good example of a false claim. They’re asking for money from a federally insured entity, a GSE, to buy a loan at the face value as presented as an 80%, in which the borrower probably had 20%, so it would be a good, solid loan, when in fact it was 100% and the borrower had nothing into it, so it ultimately failed, was doomed to fail to begin with.
They’ve been collecting on those.
Now the feds are saying we’re not going to take those anymore. You’re going to buy them back for every nickel that we’ve lost.
That’s a big development. That’s going to certainly encourage these lenders to be a bit more careful.
On the state level now, we’re talking about Arizona, the developments for the borrower have been progressively fairly good on the very fact that most borrowers for what they call qualifying purchase money loans, residential type loans, will have no shortfall that they’re going to have to worry about after a foreclosure or a modification.
There’s a lot of information out there that has suggested that if I buy a home and I can’t pay the loan, and I go into a short sale or a modification or even a foreclosure, that somehow there’ll be a deficiency after that if the property was short sold or sold into foreclosure for less than what I owed.
That argument is false. There’s case law directly on point, and I would lead people to my website, which is eckleylaw.com, and look under "Articles." Type in such things as short sale, or anti-deficiency rules.
You’ll find there the real rules, which are in Arizona, anything of two and a half acres or less, a duplex or less, where all or substantially all loan money was used to buy the property and is primarily for residential use, even though you don’t live in it, there is no deficiency. The lender has no way to ask for more money.
That’s intact so far. Now, there has been some legislative attempt to change that by what I refer to as the "dark forces." The organized lenders of course have just been furious about this in this state, because they want to be able to get the property back and get their money. They want to double dip on this.
Even though they knew at the time they executed these instruments that was entitled to them. They’re trying to go back and change the rules retroactively, and make it able for them to go back and collect on short sales they did years ago, to insist that you pay more money, and to make these instruments generally deficiency-oriented instruments that were not to begin with.
They’re essentially trying to change the law.
Now, our office and a couple of others that are consumer-oriented offices have been taking a stand against that. At this point, and today we’re talking about January 19th of 2012, that has not passed. It has been dropped into the hopper with the Arizona legislature, and it needs to be watched closely.
Consumers need to make sure that people know that we don’t want any changes to that statute. Not as consumers. Now, of course if you’re a commercial borrower, you of course could still owe that money because you’re not a residential borrower.
Or if it’s a fourplex you’re talking about, it could be that you would be liable on that loan, both for foreclosure and for an action against you for money.
Also, I should mention if it’s a pure second, if you took a second out and took the money and bought a Hummer or something like that, a second mortgage, that isn’t covered, never has been. That means if you took money out of the property, then you’ve got a benefit.
In the event they ever foreclose, they’ll still have an action on that note. Those however are a great minority. The greater majority is that the only reason there’s two mortgages on is because the lender decided to do two of them, an 80/20, so they could get you the money to make 100% finance.
In that case, the second was used to buy the property, it meets all the other criteria. There’s absolutely no deficiency on that one either.
The big point here locally is that we’ve been able to hold the line, and that the lenders have not advanced in their ongoing movement to try to change the law after the fact to make borrowers liable on things they were not liable on before. Other than to potentially just plain lose the property.
Sean: This bill that you’re referring to that’s in the hopper right now, if someone listening wanted to look that up and read it themselves, what would they search for to find it?
Jim: I actually have a website address for that, and I don’t really have that in hand. What I will do is after we speak today, I’ll provide it to you and you can publish that.
Sean: Okay. We’ll put it in the show notes.
Let’s dive into some questions here submitted from our users. The first one we have is actually asked by a realtor, but it will be relevant to any homeowners listening.
It says, "If divorce is a hardship, does one actually have to file papers to prove his or her hardship?"
Jim: We’re talking about, obviously, the federal and bank guidelines to either do a modification, a short sale, a deed back, or just to agree that the property ought to be foreclosed. These are the work out programs we’re talking about.
Those are covered by HAMP, 2MP, HAFA, and there’s another program out there now called HARP, which is actually a refinancing program, and I would qualify that also as one of the modification programs. All of these are on my website that I mentioned a minute ago.
I’m going to assume that when he’s talking about hardship, that’s one of the magic terms under these modification and short sale programs. What that means essentially, for those that aren’t aware, in order to qualify for one of these programs, the borrower is required to demonstrate hardship.
Hardship can be shown in one of two ways. One, if they are completely unable, without the use of all or pretty much more than 30 to 33% of their income, to service their debt on the home, that would be a hardship.
It could be because of divorce, death, the loss of a job, sickness, many things could produce their inability then on the basis of what percentage of their income services their underlying debt that sometimes, when it gets past 33, some of these people are paying 65, 70% of their whole disposable income just to service the mortgage.
That’s obviously a hardship. Some of them of course don’t have any money at all, and obviously that’s a hardship.
The other type of hardship is what they call imminent default. One of them is called "current default," the other one’s called "imminent default." Imminent default means I’m still current, I’m still making my payment, but I just got, for instance, the notice from my employer that he’s closing the shop down, he’s going bankrupt. I won’t have a job after next month.
That means I can be current today, but I’m in imminent default next month. Under the programs, they’re supposed to talk to you now rather than waiting for the imminent default.
The reality is, many of the lenders just wait until you’ve stopped making payments and are completely upside down before they even consider it a hardship. They consider the [indicia] of hardship. That’s too bad, because that’s not what the programs say, but that’s how the lenders have tended to interpret it.
Now, divorce is considered a hardship. It’s one of the enumerated hardships. If it has a financial effect that, going back to those criteria, reduce you below the criteria that they consider stable.
Now the question that this reader has asked about was, well, do you actually have to file the divorce papers to be considered in the divorce hardship?
That actually really ranges between lenders and how they apply it. Let me give you an example of one that wouldn’t work. Let’s say husband and wife both signed the mortgage. Now, they decide they want a divorce.
When they were both together, they had enough. They had enough to pay that mortgage, they’re in good shape. They’re not necessarily getting rich, but they’re doing okay. They’re stable.
The only thing that’s going to make them unstable is if they get a divorce, but in the divorce they’re just talking about dividing up the debts and dividing up the assets. Collectively, between the two of them, they still make enough to qualify as being within that 33 or less percentage debt service.
In other words, they can still pay the debt under the guidelines. They haven’t got to the hardship level collectively.
The way the banks would look at it is since you’re both on the note, and you’re both obligated, that means you can’t just take one of them off by a divorce. The bank has to agree to that. They’re saying you’re not going to agree, you’re both on the debt.
Then they add your incomes together, and unless it meets the hardship level, you’re still on that note.
Now, it’s true that some of them will say that well, we do see that if you’re going to divide households, and each household is going to have its own maintenance expenses which it didn’t have before, now it’s two maintenance expenses not one, they will look at that.
If that brings you down below that collective percentage, then that could be a hardship. I wanted to clarify that, because a lot of people think that mere divorce alone is the difference. Or divorce, the lender has to recognize it.
A divorce decree says the husband will take all the debt and the wife will take all the property, the fact is the wife is still on any note she signed. The lender still has the right to go after wife because they didn’t get joined in the divorce. They still have the right to stick with the paperwork they’ve got signed.
That’s the main point. Now let’s get to the actual filing.
Most lenders want to see you at least maintaining separate households at the time, so they’re not dealing with a hypothetical about whether you’re going to be underwater after this divorce. They’re dealing with the reality that you’re currently underwater because of the situation.
Such as you both split, now one’s living in another household. They’re paying each other to help each other support. That would be one.
The other thing is, about divorce, we recently ran across a lender in the Hope for Homeowners program, which is the proprietorial one owned by the lenders, it’s not really a government program, in which they said we don’t believe you unless we see the papers.
In that case, it was important because a substantial IRA and 401 was likely to be lost, making the person who stayed with the home, who in that case was the wife, probably incapable of being able to maintain that home. The status of the husband, who was going into retirement, was going to change.
That dynamic was one in which they really didn’t even have to wait for a decree. They knew that was going to happen, and so the lender worked with us.
Absent that, a lot of lenders say, "Show me." Because they get all kinds of stories, and they don’t know if they’re correct or not. Lots of time a lender will say you’re going to get a divorce, and you want to know hypothetically. Sorry, no banana on that one.
If you’re getting a divorce, let me see the decree and we’ll work with the realities of where you are now.
Sean: This isn’t so much it sounds like a legal question as it is just a business question.
Jim: I think you’re right. That’s the name of that. It really is a business question, and that’s a matter of them believing you, and wanting proof merely of what it is you’re saying.
They ask for proof of other things, like for instance, if you’re going to lose your job, they want to see the termination certificate. If you’re going to have to move to keep your job, then they want to see the directive from your employer that says you have to move.
Or if you just got into a car crash and you’re getting sued and you can’t pay your bills anymore, they’d like to see a copy of the lawsuit. I can see those things, in that respect, I don’t think the lenders are being hardnosed by saying, "Just show us . . ."
Sean: Substantiate it.
Jim: Substantiate this. We have to, because we’re talking real money here as the lender, and we have to know that when we make a change, we’ve made it on the basis of sound data.
Sean: I think what’s a key thing that I just recognized about what you said when you said it, there’s nothing sacred about the divorce itself. It’s what results from it, your incapability to afford something, right?
Jim: It is. The other thing too to remember is usually when parties are married, of course they both sign that note. The lender can hold both of them accountable.
A lot of people think that just because a judge says that is between the two spouses that they’re going to allocate the debt, that somehow that’s binding on the creditors to whom they owe the money. That’s not.
It’s not binding on those creditors. They have the right to say, "I’m sorry you got a divorce, I’m sorry you reallocated your income because it’s made a hardship for you, but the fact is you’re still liable on the note, and we have the right to go by that." Now, what are we going to do about that?
I see that point completely, and that’s missed.
Now, here’s a typical trap in divorce that I need to mention. I see this again and again. Husband and wife get a divorce, and it says on the decree that, for instance, husband will take all the household debt and hold wife harmless. Then they go into a short sale.
Here you’ve got a problem. Now, as between the two parties, the husband is under a duty to keep the wife completely out of this, even though she’s on the note. The wife says absolutely, I’m going to stick to that decree. That’s what we agreed to, that’s what the judge ordered. I’m out of this, you will hold me harmless.
Which means when he stops paying that debt, remember the lender’s going to adversely report the credit of both parties. Both of them are going to get stink on their record.
She would have every right in the world to call up and say you’re in contempt of court. You’ve got a direct court order that says I’m out of this, you’re going to satisfy that debt, you’re going to pay it according to this [tenor], you’re not going to do something where they’re coming after me, or making bad credit reports on my credit.
Now they’re starting to do it, so you are not obeying the decree of the court’s bearing at least on you, and you’re in contempt.
Those are really spooky deals, and usually I say shame on the divorce lawyer that did that, not thinking ahead to say something like, "But if the parties’ financial status changes such that they’re incapable of making that payment by their collective resources, and it makes better sense to engage in one of the work out programs on some of their debt, both parties agree to work together to solve that problem."
Then that way, nobody’s in contempt, and we’re more realistically being capable of dealing with things as they come up. The reality is, that creditor is going to take all their remedies against all the signatories. That’s just a fact.
Husband can’t hold them off in my scenario. Husband doesn’t have any more money to pay them in my scenario. What’s he to do? How realistic is it for the wife in my scenario to make demands that can’t be done?
They are going to have to cooperate. Rather than suing each other, going back to the divorce and trying to say they’re in contempt, then fight this whole thing out again, they should work together.
Sean: Got you.
All right, let’s move onto the next question. Is there a statute of limitations after which banks can’t pursue you for the deficiency?
Jim: That’s actually a two part question. That’s okay. It’s why people like me need to answer things like this.
Sean: Yeah. It just seems that there can be a deficiency, I guess.
Jim: It does. It assumes there can be a deficiency, and let’s just, right off the bat, go back to the earlier comments on what generates a deficiency and what doesn’t.
If you’re in other states, there may not be deficiencies there either, or they may not be qualified. If you’re in California, there’s some anti-deficiency statutes there. Some of these are on my website. If you go to FAQs on my website, you’ll find some other states.
First we have to assume there is one. If there isn’t one, they shouldn’t be making any claims against you at all.
If you ever hear from a collector or anybody even making a written demand or calling and harassing you about a shortfall on a modification or a foreclosure where there was no deficiency by law, then you should contact a lawyer, because that’s an unlawful debt collection practice. Start sending nasty email or write back to them when they do that. You can actually claim against them for that kind of activity.
Let’s assume that maybe it was an instrument where maybe there was a deficiency. The first question is, did they file a lawsuit?
Remember, there’s two kinds of statutes here that we’re talking about. One is the statute that covers the time after a breach of contract, such as you were supposed to pay me money and you didn’t, before you file a lawsuit. That’s one.
The other is, after you get a judgment, how long does the judgment last? Because that’s another issue. Let’s say that they file. How long do they have? In most states it’s between four to six years.
Why do I say four to six in a range like that? Because sometimes it differs based up on what they’re filing for, and how they’re filing for it. If they’re filing for action for instance on a promissory note, note actions can be up to four years in some states.
If they’re filing an action for foreclosure and a judgment after foreclosure because of a shortfall after a property went to auction, then in that case, they would typically have up to six years. That’s usually an action on lien, and many states will give them six.
It ranges from state to state, and it’s usually pretty easy to find that out by checking right on the website, going and typing in your state and saying "statute of limitations contract" or "real estate contract." It’ll tell you, but that’s pretty much the range.
Now, let’s assume that they do take a judgment. They file a lawsuit, take a judgment with or without your participation, because it’s possible they could take it by default. In Arizona, when they file that judgment, it only lasts for five years before it dies. They have to re-docket it every five years to keep it alive.
In a hypothetical basis, you could have a deficiency taken against you in which the lender does nothing, files the judgment, sits on the judgment, five years go by, they don’t refresh a docket by the method that’s provided by the Arizona revised statutes. That judgment pretty much falls away. It’s gone.
You can have people that have virtually out-waited the time limit not just only on the note or land sale, action that could even produce a judgment on a deficiency. Also, even if there was one, sometimes they outlast execution on the judgment and it dies under its own power.
Some states it’s longer. Oregon is an example, it can be as long as ten years. It does vary state by state.
The long and short answer of it is, first be sure that it’s one that even has a deficiency. It may not have one, so you really aren’t under the gun. Secondly even if it does, it’s four years inside, six years outside.
You may even have some defenses by them sitting on it so long, such as what they call latches or waiver. These kinds of things. You may get more defenses because it sat there so long that you didn’t have the first time, before they took action.
Even if they take it, then they have to start execution on it. They have to find you and do something about it, within five years in Arizona, sometimes longer in other states. Or else it can waived if it isn’t continuously re-docketed, and they very often forget to do that.
There are several escape routes there.
Sean: Yeah. Sounds like a lot of variables. Maybe on this one it’s definitely best for people to consult a local . . .
Jim: Yeah, that one really counts. You really need to know, because one of the big questions on this is when did the breach occur? If you’re under a modification or a moratorium, and let’s say it was an instrument that could have a deficiency, and you’re under one for a year.
Then finally they say, "Well, you didn’t comply." Is your breach then, or is your breach at the time you went into the modification? Technically, most of those modification agreements say you are in breach, but we’re giving you a waiver or a forbearance for a period of time.
Technically you are in technically in breach. Sometimes you end up with really specific questions to a specific deal like that one.
You’re absolutely right. On issues like this, it’s always best to go to your lawyer and get some specific data in front of them so they can make a judgment call on it.
Sean: Great. Good deal.
Next one. Is it possible to hedge your bets by simultaneously pursuing a loan modification and a short sale?
Jim: In a sense that may be what you’re doing anyway, let’s say, is it provided by the guidelines? Again, I’m referring to those ones I mentioned earlier in this interview.
The ability to dual-track you, both loan modification and short sale, isn’t really there. It’s an option. It’s really a sliding scale, like HAMP and HAFA. They want you to try first a loan modification. Then if that doesn’t work, go to a short sale or a deed back or some other remedy.
In other words, they want it in sequence. They don’t want it simultaneously, and that’s what the plans anticipate. It’s going to be sequential.
Why do they do that?
Here’s why. The federal government and the lenders are required to first try to modify it so that the party will stay in the house, and will somehow rehabilitate themselves by a modification program that works out for them and their circumstances.
The idea is, let’s make a shot at that before we ever get to a short sale that removes the borrower entirely from the house and finally ends up in a resulting loss, where he walks out on the loan. The way that they indemnify that, and the way that they ensure it from behind and fund these banks, and the way it’s supposed to work, is they want it in that sequence.
In reality, so that you know, most modifications fail. They fail because they were never intended to succeed by the lenders. They just had to go through that process as a mitigation before they got into the bigger money, which was to take you to a short sale or a foreclosure, where they’re actually going to get some money on the back side to cover their losses in addition to whatever they got out of the deal.
Sean: Sorry to interrupt, but from what we were talking about earlier about the False Claims Act, it seems like if it was never intended to work in the beginning, then isn’t that almost grounds to say hey, you basically defrauded the federal government out of whatever they gave you in the short sale?
Jim: I think that would be one of the areas that would be the most volatile. Because the modifications have not worked. Nationally, there’s about 15 million applications for modification that were granted. Interim ones were granted, not full term ones. There’s very great limits.
What’s interesting is the original bill that’s still out there that allows for these modifications, also allows for modifications of a principal. In other words, you owe $400,000 on your house. It’s now worth $250,000.
The lender has the option, they have the full ability, to not just change interest rate, and not just change the length of the loan, but also to go down and knock principal off.
In reality, in all those 15 million claims, they’ve done that in less than 2% of the deals. What the borrower really ends up with is just a longer term, lower interest loan that is way, way over the value of the property. Sooner or later, he’s still going to get to that nut to crack. He either sells it or he wants to buy it.
He’s still going to be paying $400,000 for a $250,000 house. He still suffers an enormous loss.
The reality of it is, after you get past all these low interest and the other gimmicks and stretch the loan out longer, to 40 years. It can go as high as 40 years you owe money on that house.
The reality is that that’s no solution at all, because you have to assume that all the homes are going to re-inflate. Like in my example, they’re going to re-inflate $150,000 back up again, to even be worth what the note is. Then to be worth staying there it should even inflate some more, so you made some money out of it.
The government’s already taken the position, they’re not going to allow a housing bubble like that to ever grow again. It’s a complete contradiction in terms.
What benefit is it to just suspend payments, but still leave a 200% loan in place? Saying also, we’re going to make darn sure that bubble never happens again. It means we’re guaranteed failure on that analysis.
That’s why only 2% of them do they grant it, because in reality they know, even the lenders know that isn’t going to work. They’re ultimately going to end up with the property. They’d much rather go through the motions of trying to modify for you, knowing you’re going to fail.
Most of them do, 65 to 70%, for the very reasons I’m talking about. They can then kick you into a short sale or foreclosure, where for them, the big money is at. Counting what they get on the front end and what they get on the government back.
Yeah, that sort of smells like a scam. It is. The terrible part about it, it’s taxpayer’s money. Remember, the borrower’s not getting off on anything when he walks out that door. He’s lost everything he had. He’s walking out with a bad credit rating, he might even walk out with a tax effect under section 108.
He’s been completely stripped of his credit reputation for many, many years, and as a taxpayer, he’s going to pay all that back. All through his taxes forever and ever, back to the lenders anyway. Nobody’s getting off on anything on these deals.
These things are really, I think, I hate to say it, but for most borrowers, they just plain don’t work. We know nationally it hasn’t worked, because we were trying to get this market back up off the ground and it’s just plain not happening. This is after $4 trillion being dumped into it of our tax money, and it’s still not working.
That’s got to tell you something. That is, there’s got to be another way that’s got to be thought out.
I’ll tell you the way it should have been is, we should have been capable of giving reductions of principal so folks can stay in their homes. Communities can stay intact, kids can stay at their school, they can stay at the same job because they don’t have to move 25 miles away.
They remain in the neighborhood to keep it stable and cohesive, and we take our one time hit, swallow it, and move on in our marketplace and in our country.
That’s not happening. In fact, the only new bill that’s come out, the new one that the President’s just unveiled for what he called the brand new, brilliant rescue. It’s not so brand new and it’s not so brilliant.
That’s the HARP program, and that’s the one that says this. You know what? You’re right, Mr. Homeowner. If you’ve been current in all your payments, you have a Fannie or a Freddie type mortgage, and if your house is worth far less than the mortgage, here’s what we’re going to do for you.
We’ll refinance you at the full amount of the existing mortgage. What that means is, the solution is, on my example, the $400,000 house that’s now worth $250,000, we’ll just give you a brand new $400,000 loan on your $250,000 house.
Where does that get us? That’s not a solution. That would be an enormous problem. That means, now we have a brand new loan pushing down the stream that we still owe all that money on.
By the way, since it’s a new type of government loan, who even knows what rules might apply to that. It might be a deficiency type instrument where there wasn’t one before.
I see trouble in those clouds. I don’t think it’s an answer at all.
Again, looking back on hedging your bets, the reality is they’re going to do it in sequence because they are required to by the program. The reality is a lot of those sequences are phony. A lot of those modifications don’t typically work.
They only give a principal reduction in 2% or less of 15 million applications. You’re probably going to be in a short sale scenario.
Here’s what I usually suggest. I suggest that at the same time you’re talking modification, list the property. In the end, that may be where you’re at. At least by listing the property, it is hedging your bets, because you might get an offer.
Which you then turn to the lender and say you know what? I’ve got a deal that really works for me.
That’s how you hedge it. Not with the lender’s permission or not part of the program, because it’s not part of the program and you don’t need the lender’s permission. You just list the property with a good, reliable real estate person that knows what they’re doing in short sales and modification and all these scenarios we’re talking about. See if you get a bite that you’d like to take.
If you do, now you’ve got an option. Now you have hedged your bets, and you can make your decision then.
Sean: Yeah. But you’re being proactive about it, versus sitting back and just waiting for the loan modification process to just run its course. It sounds like in 99% of the cases it’s just a stalling tactic.
Jim: It is a stalling tactic until they’re ready to put you in a pipeline, because you’re going to protect that home. You’re going to water the grass, pay the electricity, keep the vandals out of it, probably pay the insurance on it and the HOA dues or something, that whole period.
You become a caretaker of the property for them, which otherwise would cost them thousands and thousands and thousands if they took that house over and held it until they were ready to foreclose.
I’m sorry. I know I sound like a real negative situation here, but you know what? It is the experience people are having. I can’t place a lot of faith in modifications as they have been applied by the lenders.
Sean: Good to know.
We’ve got two more left. Are there any legal methods available to keep a short sale from foreclosing?
Then just a real quick, because this was a long one that was submitted from a guy in Colorado. This was a situation where it said I felt like I got some bad advice, was told to stop making payments, deal fell through, etc. etc. It sounds like it’s now going to foreclosure, and he just feels like he’s left out in the cold.
Jim: Okay. That’s happening all over the place, whoever it was that asked that question, not just in Colorado. That’s almost the protocol virtually clear across the company.
By the way, in Colorado, you can get some deficiency, so it’s important for this gentleman in Colorado. Again, the Colorado law is up on our eckleylaw.com website. Look under Colorado under FAQs and it will tell you what the current rules are.
To everyone out there, there are legal methods to keep a short sale from foreclosing. First let’s go to the non-deficiency states.
You might ask what you would have to gain either way. In other words, if you’re in a non-deficiency state where they can’t get any money judgment against you anyway, it doesn’t really matter. A short sale or a foreclosure is both going to remove you from the home.
You may feel better about doing the short sale. Maybe that makes you feel better, help the lender mitigate their damages. It keeps you in the house a little longer. That’s good, there may be some value to that.
However, in the end you’re still out of there. Now, some short sale programs will also say currently that you will be rehabilitated in your credit capability in the future.
For instance, Fannie and Freddie and Ginnie have said that if you cooperate with a short sale and don’t just walk on the house, that if you are otherwise credit worthy, within three years they’ll be inclined to make another loan to you.
Whereas they’ve said, and FHA has recently said, within one year they’d be willing to make a loan to you. Really, FHA loans are the best loan in town right now.
That’s a good thing, but that means you have to have cooperated and gone through the short sale process. Sometimes they’ll even still agree to make you a loan in that process if you cooperated, no short sale was ever offered, and in the end the lender asked for the deed.
Under the HAMP and HAFA programs, if you do that, they will give you a loan sooner.
Whereas the rule is if you didn’t cooperate, you walked, you just sent the keys in or you just abandoned the property and didn’t cooperate with them at all. Then in that case, they can deny you in some cases five years, and as long as seven.
That’s just those lenders. There’s others, conventionals and so on that may not. There might be some value in staying there as far as future credit potential. Other than that, in a non-deficiency state, there’s no value to be derived particularly, no leg up, that you would have by either short sale or a modification.
Now let’s talk about those in deficiency states. Obviously there would be a value. In other words, let’s say we think we have a really great prospect on short sale. By the way, short sales do get more money than foreclosures.
Foreclosures are fire sale. They go to an auction, they’re the luck of the draw, and you don’t have any opportunity to vote there and somehow try to work that value up. You don’t have any control over what it sold at.
However, up until that point in a short sale, you do. Because you have a right to decide, your realtor and you go out and work with the marketplace of buyers and try to get somebody to make a top pitch.
In you come with a higher value that you think is good. You present it to the lender. If they take it, you’ve actually reduced any potential deficiency by that act.
In some cases, some of the lenders will even say we will even waive pursuing a deficiency after this. Not all of them. This is talking about deficiency states. Not all of them, but many of them will. There can be some value there.
If you want to stop the short sale, stop the process to foreclosure. Let’s say you’re in the middle of this and it looks like it’s just not working out with the bank. Well, I’m going to tell you first of all that there has been some consent orders entered with Wells Fargo, Bank of America and several others.
Those are where the government approaches them and says you’re doing something we don’t like. Will you consent to stop doing it? They sign after they can see that the government’s going to pursue them, they sign an order and they say sure. These things get filed where they all agree.
One of them, there’s even one in Arizona right now from the Attorney General’s office. An agreement that they can’t dual-track you. By dual-track, what that means, some of these lenders do it. They start the foreclosure, it’s going on, they’ve got a sale date, and they say sure, try to get a modification in the mean time.
They put you under terrible pressure. There’s a tremendous threat. It puts them in a top position on the modification, because they’ve got you in a sense double whammied. They told you you’d better get a modification. If you don’t get it by the sale date, too bad.
That kind of pressure would tend to make you maybe go out and get less offer on a short sale than what you otherwise could get, because you have no time. Also, when buyers come in and see that it’s also likely to go to a sale at any time, that chases buyers away.
They realize they don’t have time to do their due diligence and make offers back and forth, because you’re on the verge of a foreclosure.
Since they know that they go to foreclosure cheaper than they do on a modification, or cheaper than a short sale, typically it’ll encourage buyers to wait at that auction, and they’ll go bid at the auction and get it for thousands of dollars cheaper than what they would have, for instance, on your short sale.
Knowing that that tends to dampen short sales, they entered in consent orders and said look, it’s got to be one track or the other. You’re either in a foreclosure track, you’ve got a foreclosure date and that’s the end of it, and you don’t give a darn if they come in with a modification or a request for a short sale.
If they come in, you might listen to them, but you’re not giving them that option.
Or you’re putting them in a program where they’re now working through it, and they need to have time to do that. If they’re in a short sale situation, don’t have a foreclosure that has a certain foreclosure date because it’s going to kill that deal. It’s inappropriate to do that.
They need peace and quiet to get that property sold, not to have the Sword of Damocles holding over their head at that time.
That is inside the program. That’s one way that it’s supposed to stop it, those consent orders.
The other way, if the lender won’t do it any other way, is really a litigative way. Let’s say that the lender just is not going to bite. They’ve got you under that, and they’re heading to foreclosure. You think you even have a short sale possibility, but the lender just isn’t going to bite.
Two potential options. Of course, this really only makes sense, I think, in a deficiency state.
One of them is you can certainly file a bankruptcy. Bankruptcy’s going to stop them. Soon as bankruptcies are filed, stays are issued by the court, and that’s a federal court, the bankruptcy court, that tell all the lenders and all the creditors to leave you alone until this is sorted out in bankruptcy.
That stops them right then and there, and now everything goes to the bankruptcy court to be sorted out there. That’s one way.
The other way is, you could actually file a lawsuit against the lender. Let’s say the lender has misbehaved. Let’s say that this loan was originally procured in fraud. They did an 80/20 and they couched it as an 80.
Let’s say they did a false appraisal. Let’s go back to my example, they valuated it at $400,000 in 2008 when it probably was only worth $300,000, but their appraisal said $400,000 because they just wanted to make that loan.
That would be a defense. Over-appraisal is a defense in all the states. In other words, they did fibs in their own underwriting, and that would be a defense.
In most states, when you file a lawsuit and you say "hold the horses," you have to move for a temporary restraining order against the trustee, in a trust, deed, or any other sale, shared for anybody, going to the auction and finally selling the house out from underneath you.
In most cases, if they grant you that, you also need to post a bond. In the event you’re wrong and you don’t win the case, and they had every right to go to foreclosure, their costs in being held up that long are capable of being recovered.
That’s not a very preferable route. That can be very expensive. Unless you have some really, really good claims, that’s not the way to go.
Bankruptcy, it’s no harm no fault. If you are eligible for it, you file it, that stops and now you can start dealing. One of the first things you might tell the bankruptcy court is, hey, I’ve got a short sale offer that will make them at least 80%. I don’t understand why they won’t take it.
Now, do remember this. All of the programs, with the exception of Hope for Homeowners, have a proviso. Some banks even say this under Hope for Homeowners, remember, that’s the one that’s owned by the banks. Hope is run by them, not by the feds.
In most of these programs, they say this. If you file bankruptcy, or if you file a lawsuit, all bets are off. We’re not going to deal with you under these programs anymore, you’re outside the program.
If you did that, you probably would not be under what you call the official modification, short sale or foreclosure program. You’d be out essentially trying to do a deal by mutual bargaining, because you have filed a suit or you are in bankruptcy. Maybe they should talk to you.
It has kicked you out of the official program in most cases by doing that.
Those are really the limitations. I would say to those in deficiency states, here’s what we do when we handle one of those, if somebody comes with this as a defense. We take a look, we fly speck.
We look at everything, through all that material and paper from the time they first generated the loan to how they’ve been treated since then. We look for places where the bank didn’t do it according to [Hoyle 51:22]. Remember, the banks are supposed to remember how to do it right. There’s not much patience for when they do it wrong, because they’re supposed to be the experts on this.
Usually, since the bank is the one that draws the paperwork up, failures or ambiguities in the paperwork are construed against the bank as a matter of law.
The one element we’ve found again and again and again on these is either that the bank qualified them for a loan which, with a truthful application they were not qualified, or the bank went out and appraised it, or hired an appraiser to go out, and came back with a fictitious or imaginary number, so they could loan them all that money.
They wanted to book that loan, they wanted to get all those commissions, they wanted to get that points up front. That’s what they were looking for.
Now with market collapsed, probably wasn’t even that good when they made the appraisal. They’re now coming after you for the shortfall that’s only a shortfall because they misappraised it in the first place.
Typically, the courts have said well, they’re getting everything that they bargained for back, because they thought it was worth $400,000. Their appraiser said it was. It wasn’t worth that at the time. The guy that should take the hit on that is the guy who generated the fiction in the first place.
Routinely, the borrower is getting off owing nothing, even in a deficiency state if we can find those facts. We look for those facts, we apply them, we start talking to the lender about defenses, counter-claims, things like that.
It becomes a bargaining process.
Sean: Good deal.
Jim: Let me talk about agents. You had a question, do I feel like I’ve been ripped off by my agent? I want to talk about that a little bit.
It says in the question that came into your very fine website, I might add, I think it’s a tremendous help to everybody. It says my agent told me I had to stop making payments in order to get into one of these programs.
It’s not the agent that has misstated that. In fact, the agent is right, but not because the programs even call for that. It’s because that’s the way the lenders are enforcing them.
For instance, if you go to Bank of America, typical example, and say I’m in trouble. I don’t think I’ll be able to make the payments anymore. They’d say, even the bank will say, we can’t talk to you as long as you’re making the payments.
Remember, we’re only here for the money. If you’re still making them, you’re getting them somehow, and we’re going to use that as the proof is in the pudding. We’re still getting them. We’re still getting our money. You’re not in default, why are we talking hardship?
The bank has even counseled people, stop making your payments. Then we can talk to you.
When the real estate agents have been relaying that on, they’re actually relaying what the banks are saying. Now, they should probably be saying at the same time, however, even though they’re telling you to do that, that is going to corrupt your credit right now. It’s going to get you in a terrible mess.
That is what you’re demanding. Maybe you should go see a lawyer, because the programs mostly don’t say you have to do that, especially for imminent default. In other words, they’re supposed to be able to work with you today, when you just got your pink slip from your employer and he’s giving you six more months and that’s it.
They’re supposed to deal with you today. They’re not supposed to wait until you’re so terrible, when you’ve run out of money, you’ve used up all your money and you’re about ready to sit on a park bench before they start helping you.
You’re supposed to get ahead of that injury, not always insist that you have to injure yourself and then they’ll come to the rescue.
That’s what the agent probably should say, but I will tell you, agents are saying they’re going to insist that you default before you pay. By golly, I want to tell you, the agents are telling you like it is.
You do have some defenses, but it’s not for the agent really to do that. He can’t help you. Only a lawyer can help you at that point.
Now, one other thing I was going to mention. Under an act that was passed by the FTC called the MARS Rule, in MARS, it is considered inappropriate for the work out specialist to tell you to stop making payments. What they’re supposed to do is tell you the risks of stopping payments and let you make your own decision.
Now, that application of that rule was suspended as to real estate licensees in July of 2011. It has not been reinstated. It would currently be acceptable in most states for the agents to tell you that reality.
It’s never right for the agent to demand that you stop making payments. They should say they’re not going to talk to you until you stop making payments. That is their current policy. You should see a lawyer.
Now, what can you do if you think your real estate licensee has not handled your case correctly, or giving you disinformation or misinformation? I always say the first thing out of all honesty is to go back to the agent and say hey, this is wrong. What are you going to do about it?
Or to the agent’s broker. In all states there’s usually a designated or managing broker, the licensee’s licenses. He’s not the designated broker that’s in charge of the office. You need to find out who that is and go them next, and say, what are you going to do about it?
In other words, I always say if somebody’s stepping on your toe, give them a chance first to try to fix it. That’s only fair.
Then let’s just assume that maybe they don’t. What are your recourses after that? Well, you could file a complaint. In all states, real estates licensees are regulated. You can file with their regulator. Typically called the commission of real estate. California commission of real estate, Arizona department of real estate.
You can file there a complaint. If they are a realtor, and remember, not all real estate licensees are realtors
By the way, that’s not "real-a-tor" as people say. There is no "a" in it. It’s realtor.
A realtor is one who joined a professional association after getting a real estate license that tries to establish itself as a cut above the average licensee, because they’re more concerned about education. They use a series of forms that are better written and things like that.
That’s what that group says, that’s why a lot of people become members, and they’re typically the ones who run the [Molto 57:21] list. If you’re in an area where there’s a multiple list, obviously to get into the marketplace you’re going to typically be dealing with a realtor.
What I’m talking now, I’m not just talking about realtors. I’m talking about real estate licensees. All of them are licensees, all of them you can go to the licensing organization.
In most cases, the licensing organization, even as a recovery fund, if a licensee won’t pay you can make a claim against the recovery fund. The opportunity to make that claim is usually short.
Many states are limited, like two years or four years or five years past the time that it happened. If you don’t say anything to them, they can’t help you very much.
The next place is you can go to the realtor organization, for people who are actually realtors. They do have a committee, which tries to supervise their professional ethics to be a realtor. It’s serious to them, because that’s their license to market.
By being a realtor, it allows them into the multi-list and gives them access to all those benefits. You can, as a customer or client, go in and make a complaint there.
You have to contact either your state or local association of realtors, ask for the forms, they’ll give them to you, you can file there. Hearing will be had. You can pretty much be assured of that. Many times that will bring that licensee back when they see how serious you are, and that can solve it there.
Then of course if none of that works, you can actually file a lawsuit. Lawsuit goes to the civil court.
You have to be careful about statute of limitations. In many cases it can be as low as two years. Quite often it’s three years, it’s considered a form of negligence, let’s say, and typically negligence is determined between two to three years, depending on what state you’re in. That’s state by state by state.
Those are the three remedies. Hopefully one of those will typically solve it.
Sean: Great. Cool.
That’s the last question. I think we’ve probably eaten into enough of your work day. I know you’re a busy guy, but I can say on behalf of all the listeners, thank you so much. We can’t thank you enough for your time on this. I know it’s really valuable.
Jim: Thanks, Sean. I think the time is always well-devoted. This goes without saying that you’ve certainly devoted ten times more time than I have for the same pay, zero, because we care about what happens out here.
This site is one that is all too much needed to be able to get the truth out, and also to be a site where people can go and get some information from those who are really in the trenches and just tell it like it is.
Thanks for asking me again today.
Sean: Absolutely. Just last thing, if someone listening wants to get in touch with you and engage you for their services, how do they best go about doing that?
Jim: The better way I think is to maybe give us a call. Although you can also reach me directly by writing to firstname.lastname@example.org. Our national number is 1-800-999-4LAW. LAW on the keypad. 1-800-999-4LAW.
A cute little idea that one of our secretaries came up with. I’ve been happy with it. It’s even one I can remember when I’m trying to call the office and I can’t remember the local number.
We’ll talk about it, and we’ll see it’s something we can help you with.
Sean: Great. I should just say this as an aside. We’ve set up a hotline for people that have questions too now, so you can call 615-SHORT-IT. That’s 615-746-7848, and leave a question. Jim has graciously agreed to help answer questions as we go.
Thanks for listening, and we look forward to chatting with you guys soon.