Having trouble paying your mortgage? What if you got an ad in the mail asking you to join in a lawsuit against your lender? The ad looks like a government form and claims you can get large principal reductions or other monetary relief by joining the suit.
Bad news: Idaho State Attorney General Lawrence Wasden is warning consumers that .
“The scam is a pretext to collect an unlawful $5,000 upfront fee from homeowners,” Wasden says. “The representations in the solicitations are false and are designed to prey on vulnerable homeowners. My office is currently investigating this company.”
The company named in the AG’s press release is Corvus Law Group.
Here’s a copy of the letter.
The ads, which appear to be “notices,” may be mailed to homeowners or posted on their doors. Typically, the business asks for a “retainer fee” and may ask homeowners for their credit card numbers or offer to set up a weekly payment plan.
State and federal laws prohibit companies from charging upfront fees for foreclosure rescue or mortgage modification services.
Beginning September 1, .
“I encourage homeowners who have lost money to this business or other mortgage rescue companies to file complaints with my Consumer Protection Division,” Wasden said. Complaint forms are available at
or by calling (208) 334-2424.
The Attorney General’s Office recently updated its consumer education manuals regarding home buying and foreclosure prevention. The manuals are available at.
Homeowners who are having difficulties paying their mortgage loans may qualify for a mortgage modification and can visit the federal government’s website at www.makinghomeaffordable.gov for an application packet. Idaho homeowners who are having difficulties communicating with their mortgage loan servicers about their loans can call the Idaho Attorney General’s housing specialist at (208) 334-4536 for assistance.
The US Department of Housing and Urban Development (HUD) also offers help to people having trouble paying their mortgage. For an office nearest you, go to www.hud.gov. Menu options at this time are placed on the left side of the page and include Avoid Foreclosure, Learn about Reverse Mortgages for Seniors, and Talk to a Housing Counselor.
With housing prices and mortgage rates still near historic lows, now could be a great time to become a homeowner. I recently talked to a caller on our Financial Helpline who had a great credit score and could afford the mortgage payment for the home value she wanted since it would be about the same as her current rent. (In many parts of the country, it’s actually cheaper to buy than to rent right now.)
There was one problem though. The traditional down payment is 20% of the home value but she only had enough to put down about 10% and was worried about missing years of building equity if she tried to save up the rest over time. If you’re in a similar situation, here are some thing to consider:
You Need More Than the Down Payment
Keep in mind that you’ll also probably have to pay at least some closing costs, which are generally about 2% of the price of the home. You’ll also want to have an emergency fund with at least 3-6 months and ideally 6-12 months of necessary expenses. That’s because the last thing you want is to lose your home to a foreclosure if an unexpected emergency makes it difficult to pay the mortgage.
An Insured Mortgage
You might be able to put down less than 20% by having your mortgage insured against default. One way to do that is with a government guaranteed mortgage. For example, the FHA loan program uses more lenient credit criteria than traditional mortgages, requires only a 3.5% down payment, and has the seller pay most of the closing costs.
Sounds pretty good, huh? Of course, there are costs to this. First, to qualify you typically need 2 years of steady employment with a stable or increasing income, a minimum credit score of 620 with no more than 2 30-day late payments over the last 2 years, no bankruptcies in the last 2 years, no foreclosures in the last 3 years, and a mortgage payment no more than about 30% of your gross pre-tax income. Second, there are limits on how much you can borrow based on where you live. Finally, you have to pay a premium of up to 1% of the loan amount at closing (it can be rolled into your mortgage but that would increase your monthly payments) and a monthly premium of up to .9% of the loan amount each year.
VA loans are another type of government guaranteed mortgage but only veterans on active duty in World War II and later periods are eligible. The loan limits are determined by the lender but generally max out at $417k except in certain high-cost counties. No down payment is usually required at all and there are no monthly premiums. However, there is a one-time funding fee of up to 2.4% that is reduced based on the size of your down payment.
Alternatively, you can get private mortgage insurance. The premiums can vary but are reduced the more you put down. The best part is that unlike with the government programs, the premiums can disappear altogether once you have 20% equity in your home, whether by you paying down the loan, the property rising in value, or (hopefully) both.
Confused? Don’t worry about it. Your mortgage lender can help you decide which programs you qualify for and which one might be most beneficial for your situation.
In this scenario, you would get 2 loans. One would cover 80% of the home value and the other “piggyback loan” would cover the rest minus your down payment. The advantage is that you can avoid paying for mortgage insurance with less than 20% down. The disadvantage is that the piggyback loan has a higher interest rate and often has a “balloon payment” at the end. This is a final payment that’s considerably larger than your normal payments so be sure to save up for it if you’re going to keep the loan that long.
Using Your Retirement Accounts
Finally, there are several ways you can use retirement funds for a down payment. If you have an IRA, you can withdraw up to $10k penalty-free to purchase a home if you haven’t owned one in the last 2 years. This is a lifetime limit for the total of all your IRAs so only use it if you must. If it’s a Roth IRA, the earnings can also be withdrawn tax-free if the account has been open for at least 5 years (the contributions can always be withdrawn tax and penalty free). Otherwise, the withdrawals could be taxable.
If you have a retirement plan at work, you may be able to take a hardship withdrawal or a loan. A hardship withdrawal doesn’t have to be paid back but it’s taxable and subject to a 10% penalty if you’re under age 59 1/2. A loan isn’t taxable but must be paid back with interest. The good news is that the interest goes back into your account and the payments for a loan used to buy a home can often be spread over a longer time period than a regular loan.
The real cost of using your retirement accounts isn’t the taxes or interest you pay but that those funds aren’t growing for your retirement. The more aggressively you’re invested, the greater that opportunity cost is likely to be. On the other hand, you have to weigh that against the value that owning a home can add as an asset that you can later sell or borrow against to help provide for your retirement.
The Bottom Line
If you want to take advantage of today’s real estate market and record low interest rates but don’t yet have the full 20% down payment, be sure to explore all of your available options. Figure out how much each option would cost you in mortgage premiums, interest rates, taxes, and lost investment earnings. Of course, you could always decide to stick with the tried and true old-fashioned method: save for it.
Government efforts to make lenders pay for soured mortgages may be keeping potential borrowers from record-low interest rates, slowing home sales and refinancing as banks tighten standards to avoid more demands for refunds.
Lenders are insisting on higher credit scores and more documents than required by the Federal Housing Administration and government-backed Fannie Mae and Freddie Mac. Quicken Loans Inc. and Vision Mortgage Capital are among firms saying they are increasing scrutiny of would-be borrowers in response to pressure to cover losses incurred on U.S.-backed housing debt.
[pullquote_right]Lenders are insisting on higher credit scores and more documents than required by the Federal Housing Administration and government-backed Fannie Mae and Freddie Mac.[/pullquote_right]“You’ve got to take measures now to protect yourself,” John B. Johnson, chief executive officer of Birmingham, Alabama- based MortgageAmerica Inc., said during a panel discussion this month. Demands that lenders repurchase bad mortgages from Fannie Mae and Freddie Mac are “casting a pall over the market. I fear that it will face a much longer recovery because of this.”
Mortgage rates as low as 3.94 percent are proving insufficient to revive housing. Sales of existing homes fell 3 percent last month, National Association of Realtors data show, and 18 percent of the group’s members reported contract cancellations, at least twice as high as in normal circumstances. Among the reasons were refusals of loan applications after appraisals came in below sales prices.
Faulty mortgage lending and foreclosure practices have cost the five biggest U.S. home lenders more than $68 billion since 2007, according to data compiled by Bloomberg News. Much of the amount has stemmed from losses tied to Fannie Mae, Freddie Mac and the FHA, which together buy or insure more than 90 percent of new mortgages.
Fannie Mae and Freddie Mac have drawn $170 billion of U.S. aid since being seized 2008. The companies are under orders from their regulator to recover as much as they can for taxpayers.
Lenders’ contracts with Fannie Mae and Freddie Mac allow them to force buybacks of mortgages if the loan originators fail to properly vet debt, such as by accepting inflated borrower incomes or appraisals. Flawed paperwork can lead to pressure from Fannie Mae and Freddie Mac even on performing mortgages.
“Documentation standards are getting more and more onerous because no one wants to manufacture an imperfect loan, even if the imperfection is really insignificant,” said Quicken Loans CEO Bill Emerson, who leads the eighth-largest U.S. home lender and No. 1 online mortgage originator.
The response by his Detroit-based company includes having each of its loans reviewed by a second underwriter to ensure the quality isn’t later questioned, Emerson said in an Oct. 11 interview during the Mortgage Bankers Association’s annual conference in Chicago.
MortgageAmerica has had to deal with repurchase demands for seemingly minor issues or ones outside a lenders’ expertise, according to Johnson. In one case, the septic tank for a home was located slightly beyond the mortgaged property. The natural response, he said, is to limit lending.
The Justice Department sued
in May for more than $1 billion for alleged failures by the company’s shuttered lending unit to meet FHA standards. The U.S. sued under the False Claims Act, which allows damages three times the size of loss. Deutsche Bank has said the case targets conduct that occurred before it bought the unit and a spokeswoman for the company called the allegations “unreasonable and unfair.”
Lenders are probably “overcompensating” for the risk they face from soured mortgages, said Robert C. Ryan, a senior adviser to the head of U.S. Department of Housing and Urban Development, which oversees the FHA. “We’re not in the business of trying to scare lenders.”
‘The Right Balance’
The government must “strike the right balance between providing financing and access to borrowers and, at the same time, making sure the loans originated are fair and sustainable for the borrowers,” Ryan said in an interview.
Freddie Mac is doing what it should to protect itself and taxpayers, and is being reasonable in its demands, said Brad German, a spokesman for the McLean, Virginia-based firm.
[pullquote_left]Lenders “feel like they’re being held accountable for things beyond their control,” he said. “The only thing the industry can do is tighten up on the front end.”[/pullquote_left]“We don’t want to pay for mortgages that should never have been sold to us,” German said in an interview. “When minor defects in a loan file are found, it does not necessarily trigger a repurchase; it triggers a request to the lender to remedy the defect, either by finding a missing document or taking similar corrective actions.” Andrew Wilson, a spokesman for Washington-based Fannie Mae, declined to comment.
“Mortgage originators are more closely adhering to underwriting guidelines resulting in fewer of the mortgage defects of prior years,” said Corinne Russell, spokeswoman for the Federal Housing Finance Agency, which regulates so-called government sponsored enterprises Fannie Mae and Freddie Mac. “This lowers default risk to the GSEs.”
President Barack Obama’s latest push to help more borrowers refinance into cheaper rates may hinge on the effectiveness of changes to Fannie Mae and Freddie Mac repurchase rights. FHFA acting Director Edward DeMarco told reporters yesterday that the companies would offer “substantial” relief from buyback demands without providing “blanket or absolute” protection as they expand the federal Home Affordable Refinance Program for borrowers with little or no equity in their houses.
While the average rate on a 30-year fixed loan was 4.11 percent in the week ended Oct. 20, the historically low costs don’t capture the “very, very harsh underwriting standards” that potential home buyers face, said Ron Peltier, CEO of HomeServices of America, the property brokerage owned by billionaire Warren Buffett’s Berkshire Hathaway Inc. The process is “the most embarrassing, difficult thing you can imagine,” Peltier said in an Oct. 13 interview at Bloomberg headquarters in New York.
‘Gone too Far’
The average time between mortgage application and closing rose to about 52 days last year, three weeks longer than in 2008, according to J.D. Power and Associates surveys.
[pullquote_right]The average time between mortgage application and closing rose to about 52 days last year, three weeks longer than in 2008, according to J.D. Power and Associates surveys.[/pullquote_right]Pressure from the GSEs has “definitely stanched the flow of credit to the mortgage market, but we had clearly gone too far,” said Richard Eckert, an analyst in San Francisco at securities firm B. Riley & Co. who wrote re on subprime lenders during the housing boom and then joined a hedge fund betting against property loans during the collapse. “We’ve got to return to some kind of happy balance.”
has scaled back mortgage lending as CEO Brian T. Moynihan prepares for new capital requirements and grapples with demands that it compensate investors including Fannie Mae and Freddie for losses.
“Our repurchase experience with the GSEs continues to evolve and their repurchase requests and resolution processes has become increasingly inconsistent with our interpretation of our contractual obligations,” the Charlotte, North Carolina- based bank said in a slide presentation last week.
Terry Francisco, a spokesman for Bank of America, had no immediate comment. , the largest U.S home lender, had no comment, according to Vickee Adams, a spokeswoman.
The prospect of reimbursement demands has hurt home sales, said Brian Chappelle, a partner at consulting firm Potomac Partners LLC, during a panel at the mortgage conference. While the FHA allows down payments as low as 3.5 percent from borrowers whose credit scores are at least 580, lenders are setting the bar higher, such as at 620, he said.
Lenders “feel like they’re being held accountable for things beyond their control,” he said. “The only thing the industry can do is tighten up on the front end.”
Vision Mortgage Capital President Regina Lowrie has her staff conduct extra quality-control reviews on all of its loans before closings, up from 10 percent before housing slumped. “That adds cost to the process,” hurting consumers who ultimately must pay for the work, she said at the conference.
The unit of Plymouth Meeting, Pennsylvania-based Continental Bank also started taking additional looks at consumers’ credit files shortly before completing loans, based on Fannie Mae and Freddie Mac guidance, Lowrie said. It finds more situations like the potential borrower who took out a new car lease while waiting for the application to clear, “and now that loan’s going back to underwriting again,” she said.
LEHIGH ACRES, Fla.—Joseph Reilly lost his vacation home here last year when he was out of work and stopped paying his mortgage. The bank took the house and sold it. Mr. Reilly thought that was the end of it.
In June, he learned otherwise. A phone call informed him of a court judgment against him for $192,576.71.
Most states allow up to 20 years to try to collect the debts
It turned out that at a foreclosure sale, his former house fetched less than a quarter of what Mr. Reilly owed on it. His bank sued him for the rest.
The result was a foreclosure hangover that homeowners rarely anticipate but increasingly face: a “deficiency judgment.”
[pullquote_right]Forty-one states and the District of Columbia permit lenders to sue borrowers for mortgage debt still left after a foreclosure sale.[/pullquote_right]Forty-one states and the District of Columbia permit lenders to sue borrowers for mortgage debt still left after a foreclosure sale. The economics of today’s battered housing market mean that lenders are doing so more and more.
Foreclosed homes seldom fetch enough to cover the outstanding loan amount, both because buyers financed so much of the purchase price—up to 100% of it during the housing boom—and because today’s foreclosures take place following a four-year decline in values.
“Now there are foreclosures that leave banks holding the bag on more than $100,000 in debt,” says Michael Cramer, president and chief executive of Dyck O’Neal Inc., an Arlington, Texas, firm that invests in debt. “Before, it didn’t make sense [for banks] to expend the resources to go after borrowers; now it doesn’t make sense not to.”
Indeed, $100,000 was roughly the average amount by which foreclosure sales fell short of loan balances in hundreds of foreclosures in seven states reviewed by The Wall Street Journal. And 64% of the 4.5 million foreclosures since the start of 2007 have taken place in states that allow deficiency judgments.
Lenders still sue for loan shortfalls in only a small minority of cases where they legally could. Public relations is a limiting factor, some debt-buyers believe. Banks are reluctant to discuss their strategies, but some lenders say they are more likely to seek a deficiency judgment if they perceive the borrower to be a “strategic defaulter” who chose to stop paying because the property lost so much value.
In Lee County, Fla., where Mr. Reilly’s vacation home was, court records show that 172 deficiency judgments were entered in the first seven months of 2011. That was up 34% from a year earlier. The increase was especially striking because total foreclosures were down sharply in the county, as banks continued to wrestle with paperwork problems that slowed the process.
One Florida lawyer who defends troubled homeowners, Matt Englett of Orlando, says his clients have faced 20 deficiency-judgment suits this year, up from seven during all of last year.
Until recently, “there was a false sense of calm” among borrowers who went through foreclosure, Mr. Englett says. “That’s changing,” he adds, as borrowers learn they may be financially on the hook even after the house is gone.
In Mr. Reilly’s case, “there’s not a snowball’s chance in hell that we can pay” the deficiency judgment, says the 39-year-old man, who remains unemployed. He says he is going to speak to a lawyer about declaring bankruptcy next week, in an effort to escape the debt. The lender that obtained the judgment against him, Great Western Bank Corp. of Sioux Falls, S.D., declined to comment.
Some close observers of the housing scene are convinced this is just the beginning of a surge in deficiency judgments. Sharon Bock, clerk and comptroller of Palm Beach County, Fla., expects “a massive wave of these cases as banks start selling the judgments to debt collectors.”
In a paradox of the battered housing industry, trying to squeeze more money out of distressed borrowers contrasts with other initiatives that aim instead to help struggling homeowners, including by reducing what they owe.
The increase in deficiency judgments has sparked a growing secondary market. Sophisticated investors are “ravenous for this debt and ramping up their purchases,” says Jeffrey Shachat, a managing director at Arca Capital Partners LLC, a Palo Alto, Calif., firm that finances distressed-debt deals. He says deficiency judgments will eventually be bundled into packages that resemble mortgage-backed securities.
Because most targets have scant savings, the judgments sell for only about two cents on the dollar, versus seven cents for credit-card debt, according to debt-industry brokers.
Silverleaf Advisors LLC, a Miami private-equity firm, is one investor in battered mortgage debt. Instead of buying ready-made deficiency judgments, it buys banks’ soured mortgages and goes to court itself to get judgments for debt that remains after foreclosure sales.
Silverleaf says its collection efforts are limited. “We are waiting for the economy to somewhat heal so that it’s a better time to go after people,” says Douglas Hannah, managing director of Silverleaf.
Investors know that , ample time for the borrowers to get back on their feet. Meanwhile, the debts grow at about an 8% interest rate, depending on the state.
Some close observers of the housing scene are convinced this is just the beginning of a surge in deficiency judgments. Sharon Bock, clerk and comptroller of Palm Beach County, Fla., expects “a massive wave of these cases as banks start selling the judgments to debt collectors.”
Mr. Hannah expects the market to expand as banks “aggressively unload” their distressed mortgages in the next year, driving up the number of deficiency judgments being sought.
They are pretty easy to get. “If the house sold for less than you owe, the lender wins, plain and simple,” says Roy Foxall, a real-estate lawyer in Fort Myers on Florida’s west coast.
Mr. Foxall says five deficiency suits were filed against his clients this year, and he couldn’t poke any holes in any of them. Lenders typically have five years following a foreclosure sale to sue for remaining mortgage debt.
Mr. Englett, the Orlando lawyer who has handled 27 such suits for homeowners in the past 21 months, says he didn’t get the bank to waive the deficiency in any of the cases, but did reach six settlements in which the plaintiff accepted less.
[pullquote_left]One Florida lawyer who defends troubled homeowners, Matt Englett of Orlando, says his clients have faced 20 deficiency-judgment suits this year, up from seven during all of last year. [/pullquote_left]Florida is among the biggest deficiency-judgment states. Since the start of 2007, it has had more foreclosures than any other state that allows deficiency judgments—more than 9% of the U.S. total, according to re firm Lender Processing Services Inc.
A loan-deficiency suit can yank borrowers back to a nightmare they thought was over.
Ray Falero, a truck driver whose Orlando home was foreclosed on and sold in August 2010, says he thought he was hallucinating when, months later, he opened the door and saw a sheriff’s deputy. The visitor handed him a notice saying he was being sued for $78,500 by the lender on the home purchase, EverBank Financial Corp., of Jacksonville, Fla.
“I thought I was done with this whole mess,” he says.
Mr. Falero, 37, says he was about nine months behind on his loan when the bank foreclosed. Before it did, he bought another home in Minneola, Fla., where he now lives and where he says he is up to date on mortgage payments. Like Mr. Reilly, Mr. Falero says he didn’t swell the foreclosed-on loan through refinancing or home-equity borrowing.
EverBank won a deficiency judgment on Mr. Falero’s Orlando loan. Mr. Falero and his lawyer are fighting to reduce the amount owed. EverBank declined to comment on his case.
Credit unions and smaller banks are the most aggressive pursuers of deficiency judgments, a review of court records in several states shows.
At Suncoast Schools Federal Credit Union in Tampa, Jim Simon, manager of loss and risk mitigation, says the institution has a responsibility to its members, and that means trying to recoup losses by going after loan deficiencies. He calls such legal action the credit union’s “last arrow in the quiver.”
The biggest banks appear to have stayed largely on the sidelines as they deal with the foreclosure-paperwork mess. One big bank, J.P. Morgan Chase & Co., “may obtain a deficiency” judgment in foreclosure cases but will “often waive” the leftover debt when a homeowner agrees to a so-called short sale of a house for less than is owed on it, a bank spokesman says.
Among the hardest-hit spots in Florida is Lehigh Acres, a 95-square-mile unincorporated sprawl of narrow, cracked-pavement streets about 15 miles inland from Fort Myers.
Lehigh Acres was carved out of scrub land and cattle farms in the 1950s by a Chicago businessman, Lee Ratner, who had made a fortune on d-CON rat poison, says Gary Mormino, a history professor at the University of South Florida in St. Petersburg. Before he died, Mr. Ratner sold prefabricated houses to families hungry for a slice of paradise.
Decades later, Lehigh Acres (population 68,265) attracted people eager to cash in on the housing boom, even though it is distant from the sugary white beaches on the Gulf of Mexico. Speculative investors bought more than half of homes sold in Lehigh Acres in 2005 and 2006, Bob Peterson, a real-estate agent, estimates.
Many of those stucco homes now stand empty, priced at about a third of the value they had at the peak of the housing boom, which was often around $300,000.
In the first seven months of this year, courts entered 42 deficiency judgments in Lehigh Acres, for a total of $7 million, up from 26 judgments for $4.6 million in the same period of 2010, according to a Wall Street Journal analysis of state-court records.
Fifth Third Bancorp, of Cincinnati, filed for the largest share of deficiency judgments in Lehigh Acres last year. The bank declined to comment.
“It’s eerily quiet around here,” says Jon Divencenzo, who bought a house in Lehigh Acres at a May foreclosure sale for $50,000. Some nights, he says, the only sounds are rustling pine trees and the idling car engines of former homeowners circling the block to glimpse what they lost.
The hard-hit area reveals a sharp contrast in homeowners’ attitudes toward deficiency judgments.
Julia Ingham invested in four Lehigh Acres properties in June 2005, hoping to “drum up some real money for retirement.”
All have since been foreclosed on by lenders, says the 62-year-old retired programmer for International Business Machines Corp.
A credit union, after selling one of the foreclosed houses for less than the debt on it, obtained a deficiency judgment against Ms. Ingham for $181,059.54. She worries she could face such judgments on the other properties, too.
Ms. Ingham says when she bought them, she misunderstood how much her investments put her on the hook for. Her builder, she says, promised she could invest $10,000 in four properties and then flip them for a profit. Ms. Ingham says deficiency judgments punish borrowers who were taken advantage of by lenders and builders.
Catherine Ortega, who owns a Lehigh Acres home around the corner from one of Ms. Ingham’s foreclosed homes, says banks should leave people like her former neighbor alone. “Those people have suffered enough,” she says.
In July 2005, Mr. Reilly took out a $223,000 mortgage to build a vacation home here, about 160 miles from his primary home in Odessa, Fla. He was laid off just as construction was being completed.
Mr. Reilly says he is current on the loan on his primary residence but couldn’t afford the vacation home’s $1,200-a-month loan payment. Great Western Bank, which is owned by National Australia Bank Ltd., foreclosed on his house in Lehigh Acres in July 2010.
Mr. Reilly, who was a mortgage broker before his layoff, says he knew that deficiency judgments were possible after a foreclosure but didn’t expect to face one because he doesn’t have any financial assets, and you can’t get “blood from a stone.”
Alfredo Callado, who lives next door to Mr. Reilly’s former house, is unsympathetic. Like Ms. Ortega, Mr. Callado is troubled by the crime that a neighborhood full of empty houses attracts. He started watching over Mr. Reilly’s former house to ward off thieves who steal air conditioners from vacant properties.
Mr. Callado, sitting on a lawn chair in his driveway, says lenders should use deficiency suits to punish defaulting homeowners for the damage they do to neighborhoods, including driving down property values.
“You have to make them pay for what they do to those of us left behind,” he says.
SOURCE: Wall Street Journal
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