Foreclosure Buzz

Is the law firm's letter more than smoke?

In response to my posting last week here, Fannie Mae made an effort to investigate the individual case I highlighted and to discuss my overall concerns.  The point of the posting was not to focus on an individual case, but the larger policy at stake.  I have been on many conference calls and listservs involving tenant advocates across the country, and there is undoubtedly a huge problem with lenders ignoring the law, or intentionally misleading tenants about their rights under the law.  Thus far, federal agencies have not stepped in (only the Attorney General of Connecticut has done so to my knowledge, article here).

However, after conversations with Fannie Mae, my conclusions that Fannie was acting like much of the rest of the industry may be in error.

Fannie explained that they do their own investigation of the occupants of a home after they purchase it at a foreclosure sale.  Fannie says they do not involve lawyers at all until they determine that the occupants do not appear to be covered by the Protecting Tenants at Foreclosure Act (PTFA), and that the occupants are unable or unwilling to continue to rent on a month to month basis under their own month-to-month rental program. (I am still concerned that Fannie attempts to encourage tenants to enter month-to-month leases instead of honoring the current ones as can be seen from their description on their website alone here.)   Fannie claims it only has its lawyers get involved to begin eviction in these other rare circumstances.

Of course the problem is the letter highlighted in the posting says nothing of this — it was sent to “Occupant” and plainly states: “If you are a Tenant in the property, please be advised that Fannie Mae also known as Federal National Mortgage Association has chosen not to continue your lease and therefore, you are no longer entitled to possession.” See copy here.  Clearly, a statement like this sent by any lender to a bonafide tenant post-foreclosure would violate the language, meaning and intent of PTFA.  When I inquired, Fannie admitted it did not approve the letter and has since spoken with its lawyers to ask them not use it again because it appears to contradict its policies (but I doubt that the law firm of Barrett Daffin Frappier Turner & Engel LLP drafted this letter just for Fannie Mae).  Also in its defense, Fannie Mae correctly states that the occupant of the property that received the letter I highlighted was the former homeowner, so in this particular case there was no victim.  But the document appears to be a form letter and a question remains whether it has or will be sent to a bonafide tenant on behalf of Fannie or another lender.

Given that Fannie Mae has thousands of loans, thousands of foreclosures, and thousands of people working on them across the country, it might be far better if Fannie Mae would mandate what its lawyers do, as opposed to trust them.

Fannie Mae admits that it has learned of a variety of other problems in California, Utah and Connecticut and that much of the problem was implementation of its tenant policy, not the policy itself.  Alternatively, Fannie Mae might want to consider changing counsel to avoid even the appearance of impropriety.  Fannie is spending our money afterall, and firing Barrett Daffin would get the attention of other foreclosure attorneys and vendors I would imagine.  But there are undoubtedly many factors to be considered before taking such a step (it might not be Barrett Daffin’s fault for example).

Fannie Mae must not merely be able to blame its attorneys for its unwillingness or inability to control them, but I am hopeful Fannie Mae is in fact following the law and any evidence to the contrary disappears well before the law expires December 31, 2012.

Update of 2/8/10: See latest post wherein Fannie Mae blames its lawyers for its post-foreclosure letters and while its letters are problematic, Fannie may not be violating the Act.  See new post here.

Update of 2/3/10: “Tenants Together”, a California tenant organization, operates a hotline for tenants in foreclosure situations, and today issued a press release that it is receiving a growing number of calls from tenants living in Fannie Mae properties who are being “harassed and misinformed by Fannie Mae-contracted [agents] in violation of the [PTFA].”  See story here.

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There have been previous postings regarding lenders who choose to ignore the clear requirements of the Protecting Tenants at Foreclosure Act which is no longer brand new — it became law May 20, 2009.  See posts here, and here.  After a foreclosure occurs, the new owner is supposed to honor a bona fide lease a tenant may have had with the prior owner (unless the new owner plans to occupy the property as his primary residence).  If there is no lease, or the lease is expired, the new owner must still give tenants 90 days notice to vacate.  See more on the law here.  Many lenders have decided to confuse and scare tenants with deceptive and intimidating letters.  What is astounding is that Fannie Mae, which is operated by the federal government, has chosen to completely violate the law.

In a notice to vacate dated January 13, 2010, lawyers for Fannie Mae state its position clearly:

If you are a Tenant in the property, please be advised that Fannie Mae also known as Federal National Mortgage Association has chosen not to continue your lease and therefore, you are no longer entitled to possession.  … If you have paid your rent to your landlord prior to receiving notice of the foreclosure referred to above, you MUST VACATE THE PREMISES WITHIN THIRTY (30) DAYS from the date this notice is delivered.

Letter from Fannie Mae attorneys, dated January 13, 2010 (here).

This is not an isolated problem.  I complained about Fannie Mae in September 2009 about this very problem (here).  How can we expect for profit, for bail out, for big bonus banks to follow the law when Fannie Mae, a Government Sponsored Enterprise and one of the largest lenders in the world, flatly refuses to do so?

I am not confident that an administrative complaint with the appropriate federal agency will resolve anything.  In response to a previous complaint I made regarding a deceptive letter sent on behalf of The Bank of New York Mellon, (here) the Federal Reserve Bank of New York suggested that I contact the lender’s attorneys (Barrett Daffin Frappier Turner & Engel, LLP) and suggest changes (I presume) and not complain about the all powerful lender, and concluded by stating:

The procedures entities must follow when foreclosing on real estate are matters of individual bank policy that are governed by principles of contract and state law.  Therefore, the resolution of disputes about the acceptability of such procedures is not within the supervisory jurisdiction of the Reserve Bank.

Letter from Muriel R. Payne, Federal Reserve Bank of New York, January 19, 2010 (here).

First, I was not complaining about the foreclosure procedure.  I was complaining that a purchaser of property at a foreclosure sale, a lender that is regulated by the Fed, was misleading tenants regarding their rights provided by federal law.  Second, parties are responsible, not attorneys.  I in fact had a face to face meeting with the lawyers for this lender (the same lawyers that sent the Fannie Mae letter above) and they explained that their clients approve these letters and they would have to get permission to change them.  Third, it is disingenuous to suggest that the Fed does not have jurisdiction.

In fact the Fed issued a compliance letter on the subject giving guidance to their examiners:

Given the importance of the protections this law provides to tenants, examiners are instructed, as part of consumer compliance examinations, to evaluate an institution’s awareness of the law, its efforts to comply, and its responsiveness to addressing implementation deficiencies.

Federal Reserve CA 09-5, July 30, 2009, here.

The Fed has even issued specific examination procedures on what to look for and when to give corrective action:

2. Determine that the institution has incorporated its compliance responsibilities under the law into its operations, particularly with respect to its foreclosure notice procedures.      …

7. Summarize findings and supervisory concerns.  Identify actions needed to address any weaknesses and deficiencies in the institution’s compliance management systems. Discuss findings with institution management and obtain any necessary commitment for corrective action.

Fed, Protecting Tenants at Foreclosure, Examination Objectives and Procedures, at 3 here.

Some may complain about the for profit banks.  They should.  It is however disgusting that the federal authorities refuse to do anything to follow the law themselves, much less make anyone else do it.

“We don’t want to mention bankruptcy [in a foreclosure prevention guide] because it is so detrimental to borrowers.”

Fannie Mae representative, Texas Foreclosure Prevention Task Force meeting, September 9, 2009.

Isn’t bankruptcy one of the very few real tools borrowers have to prevent a foreclosure and force a lender to accept a payment plan for the arrearages?  Yeah, pretty sure.  Lenders hate when borrowers file for bankruptcy because it transforms borrowers from beggars, hoping to work out a deal, to debtors with rights, and it provides the supervision of a judge who is ready to enforce those rights (good example here)

So it turns out that the comment made in a state task force meeting quoted above is just the tip of the iceberg.  Lenders are perfectly willing to do anything it takes to prevent borrowers from knowing their rights, including deceiving the public, while many others are at least knowing accomplices.  Omitting the bankruptcy option from any conversation on borrower’s rights is not just an oversight; it is intentional — and it is wrong.

Not one of these guides list bankruptcy even as an option for borrowers (click on agency for its guide):

• HUD (and again here).
• NeighborWorks (NeighborWorks is supposed to be looking after borrowers but issues like this keep surfacing, another example here.)
• FDIC (Federal Deposit Insurance Corporation) has a brand new Foreclosure Prevention Tool Kit (updated 9/16/2009).
• Homeownerhship Preservation Foundation (The Homeownership Preservation Foundation runs the Hope Hotline, article here, but it is close to if not actually a lender front, article here, so this should not be a big surprise.)
• Hope Now Alliance (an alliance of lenders mainly, article describing them more here).
• The Federal Reserve System (the central bank of the US).  Some wonder if they are a little too friendly with the banks — President Obama has proposed a new agency to oversee consumer lending practices called the Consumer Financial Protection Agency, article here.  Of course some worry the new agency will just be another toothless tiger if it is allowed to exist at all, like OSHA, Consumer Product Safety Commission, etc.
• Fannie Mae (and again here), and its sister lender Freddie Mac (these are Government Sponsored Enterprises, or GSEs, currently bailed out and run by the US government).
• Foreclosure Prevention Resource Center (The Center is “powered” by the Mortgage Bankers Association but you would not know it by the name at the top of the site or the link “www.homeloanlearningcenter.com”).  The only time the Center mentions bankruptcy is in this sentence: “The primary causes of delinquency, foreclosure and bankruptcy are not poor planning, but illness, loss of employment or marital problems.”
• National Black Church Initiative (they made the mistake of partnering with Fannie Mae and the Mortgage Bankers Association).  This guide does mention bankruptcy actually – so you know what to do when your lender files bankruptcy.

Some others I saw in passing that also failed to even mention bankruptcy were in Pennsylvania, Ohio, Nevada, Washington State Dept of Financial Institutions, Texas Department of Savings & Mortgage Lending (referencing guide by Texas A&M Real Estate Center and others already mentioned above), Georgia, Virginia, New York City Comptroller, Miami-Dade County Consumer Services Department, Fox News.

One in California references a guide here (by a legal aid organization) that mentions bankruptcy without slamming it, although it certainly does not explore it in any detail — but at least it does not hide it.  I have not seen all the guides from all the federal, state and local entities that have one, but the best guide I saw that describes bankruptcy appropriately is one by Arizona (27-28).

Some Mention Bankruptcy, Negatively

Effect of a bankruptcy on your credit record: Severe.

Nevada Department of Business and Industry

Of course a foreclosure is not so great on your credit record either.

Bankruptcy: Filing for bankruptcy will temporarily halt the foreclosure process and may force the mortgage lender to accept a more borrower-friendly repayment plan.  But a bankruptcy should only be considered as an absolute last resort. A bankruptcy will remain on your credit report for ten years.

State of New York Banking Department (emphasis added).

I like how it says bankruptcy is a temporary fix, like bankruptcy will only prolong the inevitable.  Here is another example:

Bankruptcy: Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, and can make it difficult to get credit, buy another home, get life insurance, or sometimes, get a job.

Federal Trade Commission – Facts for Consumers – August 09 (emphasis added).

So filing bankruptcy will probably just ruin your life according the the Federal Trade Commission (no credit, no home, no job and your children will be homeless when you die).

Others Just Discuss Bankruptcy as a Scam

Bankruptcy scams. You may have heard that filing bankruptcy will stop a foreclosure. This is true — but only temporarily. Filing bankruptcy brings an “automatic stay” into effect that stops any collection and foreclosure while the bankruptcy court administers the case. Eventually, you must start paying your mortgage lender, or the lender will be able to foreclose. Bankruptcy is rarely, if ever, a permanent solution to prevent foreclosure. In addition, bankruptcy will negatively impact your credit score and will remain on your credit report for 10 years.

US Comptroller of the Currency, Consumer Tips for Avoiding Mortgage Modification Scams and Foreclosure Rescue Scams, May 16, 2008, Consumer Advisory CA 2008-1

Not sure where the Comptroller gets its “stats” from — “rarely, if ever” might be an exaggeration.  I also wonder what the statistics are for borrowers who tell lenders their life story and beg for a loan modification.  The phrase “rarely, if ever” also comes to mind (article here), but I sure would mention the loan modification option in a foreclosure prevention guide.  Why does the Comptroller mention one, and not the other?  Surely the US Department of Justice, the lawyers of the US government, would not let lenders’ preferences sway the legal advice it gives the American people.

“Bankruptcy foreclosure scams” target people whose home mortgages are in trouble. Scam operators advertise over the Internet and in local publications, distribute flyers, or contact people whose homes are listed in the foreclosure notices. Sometimes they direct their appeals to specific religious or ethnic groups.  … A bankruptcy filing often stops a home foreclosure, but only temporarily. If a bankruptcy is filed in your name but you don’t participate in the case, the judge will dismiss the case and the foreclosure proceedings will continue. If this happens, you will lose the money you paid to the scam operator — AND YOU COULD LOSE YOUR HOME. You will also have a bankruptcy listed on your credit record for years afterward.

United States Department of Justice

Some Imply Bankruptcy Is Not Legitimate

Bankruptcy

[A] bankruptcy filing often stops a home foreclosure, but only temporarily. What’s more, the bankruptcy process is complicated, expensive, and unforgiving. For example, if you fail to attend the first meeting with the creditors, the bankruptcy judge will dismiss the case and the foreclosure proceedings will continue.

If this happens, you could lose the money you paid to the scam artist as well as your home. Worse yet, a bankruptcy stays on your credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job.

Where to Find Legitimate Help

If you’re having trouble paying your mortgage or you have gotten a foreclosure notice, contact your lender immediately. …

Federal Trade Commission – Facts for Consumers – February 2008 (emphasis added).

Lenders Are Controlling the Conversation at all Levels

The message of these guides are amazingly consistent across all levels (local, state and federal governments, GSEs, local task forces, and even nonprofits allegedly concerned about borrowers).  With few exceptions, these guides omit, mislead, or attempt to frighten everyone from filing a bankruptcy, and they certainly do not provide much if anything about a borrower’s rights.  There is rarely if ever a mention that an attorney or legal aid organization should be consulted (I found exceptions by Freddie Mac here, and in the guide of the National Black Church Initiative here at page 9 where it suggests a borrower get a lawyer through a university [their clinical programs typically take a handful of cases a year] or the state attorney general [who cannot represent a borrower]).

The guides also typically encourage borrowers to see a counselor.  Counselors trained by whom?  I have witnessed trainings done by NeighborWorks first hand and much was left to be desired (article here).  And remember when NeighborWorks was given millions in federal money to funnel to counseling agencies of its choosing (See list of recent grants here; US House Financial Services Committee guide.)?  Why might the lending industry consent to funding NeighborWorks? — maybe they know the advice borrowers will get is consistent with their message, their agenda.  It is entirely consistent that a NeighborWorks representative suggested that their counselors be paid by the lenders directly (article).  After all, the counselors are doing the lenders’ dirty work. But why would the lenders want to pay them, when the government will?  I’m guessing that they would rather keep their bailout money for raises, not counseling when they have already secured the message of the counseling.

Of course bankruptcy is not appropriate in every case, but it could be especially helpful when a lender will not agree to a reasonable payment plan.  Having it out there as a possible tool for borrowers encourages lenders to make reasonable payment plans with other borrowers.  Bankruptcy will adversely affect a credit report, but so will a foreclosure.  There are various requirements needed to file and complete a bankruptcy, such as pre-filing counseling (of course these requirements were solely pushed by the lender lobby), but there are many rules and procedures that must be followed under HAMP (the government’s loan modification program) as well.

The Real Message of these Guides

Bankruptcy is merely a litmus test.  If the lenders can keep this option out of hundreds of guides and websites at all levels, imagine what else they have influenced.  Rather than provide borrowers with unbiased, complete advice, the options given to borrowers in these guides and articles are more accurately described as:

1. Pay up soon, sell everything you have, pay the lender before you pay anything else (presumably even before food or medicine as implied here), and tell the lender everything they want to know about you and your situation.
2. Beg the lender to lower the payments (a counselor can help you with that).  If you are lucky, a lender might cut you a break.
3. If all else fails, get the hell out of the house, and feel lucky you stayed as long as you did.
4. Don’t get help from anyone except a counselor that we approve of; the others are scam artists.

The financial industry will eventually be discovered as no better than big tobacco.  If the tobacco industry can fall, so can these folks.