Foreclosure Buzz

“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.

Filed under: Advice for Borrowers, National Foreclosure News | 10 Comments »

Update: 2/26/10: Fannie Mae continues to violate PTFA here, blames its lawyers here, fails to certify compliance here.

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It is no surprise that private lenders and their lawyers are attempting to push tenants out of a property after they foreclose so they will not have to comply with the federal act called the Protecting Tenants at Foreclosure Act (PTFA) passed in May 2009 (article here), however, it is a little surprising that the bailed out Fannie Mae and Freddie Mac, the GSEs (government sponsored, and currently run, enterprises) that are two of the largest lenders in the country, are misleading tenants too.  But they are not unlike most every other task force or other state effort out there we checked on.

Fannie Mae is not merely silent; their site misinforms:

A renter who wants to stay in a home that has been foreclosed can now sign a month-to-month lease if the property is owned by Fannie Mae.

Fannie Mae website “Support for Renters” here.

Of  course the new law that has been in place almost four months requires Fannie Mae to honor the lease in place, or give the tenants at least 90 days notice if the lease expired.  Mandating that tenants sign new month-to-month leases for a new rent amount totally violates the law (and Fannie Mae only allows this in certain circumstances they say).

I was at a foreclosure task force meeting yesterday and one of the spokepersons for Freddie Mac mentioned their new renter program for both homeowners and tenants.  I was curious about a “program” for tenants given the new law.  Sure enough, same kinda thing on their site:

Is my previous lease still valid?

No. Freddie Mac will enter into a new lease with all occupants. If your prior lease was a Section 8 lease, you will continue to pay the same monthly rent that you paid under your Section 8 lease.

“2009 Freddie Mac Rental Initiative FAQs” here.

Fannie estimates that 20 percent of all properties facing foreclosure are occupied by renters.  I wonder have many of these are misled by the GSEs?  I wonder how many just leave, take the loss, and suffer hardship to avoid dealing with a GSE, living on a month-to-month lease?  I wonder how many fear they will not qualify for these “programs” and think they will just be evicted?

What about all these other foreclosure task forces scattered throughout the country?  No better.

Ohio and Nevada have similar bad information as the GSEs on their sites.  But four months is just not enough time to make such a change obviously.  If the GSEs cannot get it right just yet, why should a state task force?

Another method out there is just to keep it a secret like the task forces in Texas, Washington, Georgia, Pennsylvania, Colorado, Hawaii, and Wisconsin.  After all, this issue has nothing to do with preventing foreclosures and that is all these states care about.  Who cares about tenants who may not have moving expenses, or security deposits saved?  Who cares that they may have to move to a new school district in the middle of a year, or find a different bus line to get to work, etc.?  I mean really, who cares about these families?

Michigan does not mention the new law on their foreclosure site, and their tenant site is wrong too here.  Florida’s various sites miss it as well: Lee County, Collier County, Office of Financial Regulation, and the Florida Housing Finance Corporation.

Virginia is good here, but they reference Fannie Mae’s site with the misinformation, and then on the same page as the new law they say:

• If you have to move before your lease expires, you may be able to sue your landlord for monetary damages. However, this can be costly, time consuming, and it may be difficult to collect money from a landlord who is in foreclosure.
• If the bank or new owners contact you directly, negotiate with them for a move out date that suits both of your needs.
• The new owner may also offer you “cash for keys” if you leave the property voluntarily without going to court.
• Do not pay rent to the new owner unless you have reached a written agreement concerning your right to remain in the property.

Virginia Foreclosure Prevention Task Force “Renter’s Rights” here.  (The advice not to pay rent is especially helpful.)

Same with Arizona.  They are good  in mentioning the new law here, but on same page and another page on their site it says tenants are out (“If a landlord rents out a home or other property and is facing foreclosure, the tenant may not be allowed to stay on the property. Also neither the landlord nor the bank is legally obligated to let the tenant know about the foreclosure. Most of the time, the renter is told about the foreclosure when the party is being told to leave the property.”) Arizona Foreclosure Prevention Task Force “Renters Information” here.  These two states knew about the change in the law, felt it important enough to mention, but not really enough to make sure things were done right.

California’s (here) is the only one I can find that did it right (but I have not checked every state, nor every site in every state).  The best source of information about the new law I have found is the Renters in Foreclosure Toolkit on the website of the National Low Income Housing Coalition.

Maybe somebody could suggest a change.  I did that for NeighborWorks.  The renter area of their site used to be confused on the issue at best (previous version of their site here).  After several emails and help from an insider, instead of fixing it, NeighborWorks simply removed any reference to it from the renter area of their site (here) which might be where a renter would go for information.  But after I searched awhile I found it in the “Foreclosure Solutions” part of their site here.  See, taking the diplomatic approach worked wonders.  It makes little sense to polarize folks since we are all in this together helping families.

Just because these websites are wrong and have been for months getting collectively thousands of hits a day is no big deal.  I am sure all the lenders, including the GSEs, will look out for these families and have their law firms send them notices to vacate that make their rights to continue to rent are crystal clear (it is working really well so far, article).

As these links above hopefully go bad or are changed I will try to take note and update the post.

Filed under: Advice for Borrowers, National Foreclosure News | 8 Comments »