HAMP Loan Modifications - The Truth be Told

Everyone has had the experience of thinking that something just is not right.  Ok, we know that something is wrong.  We know it is rotten.  It may have been the time your teenager was going to a study group on Saturday night or maybe you got passed over for a job even after your boss tells you that everyone is being treated equitably.   We have all been there.

We knew that things were rotten with the Home Affordable Modification Program (“HAMP”).  How many times could the Bank lose the paperwork, pay stubs?  How long could a modification be in underwriting?  The Trial Payment Plan (“TPP”) said it was 3 months, but it had been 12 months.  How could the Bank not have received the Trial Payments when they had received all of the regular monthly payments prior to HAMP?  How could a loan modification be approved and then denied 6 months later? 

Well in the case of Bank of America and BAC Home Loan Servicing, the facts are starting to come to light.  In a Second Amended Consolidated Class Action Complaint filed in Massachusetts, the Plaintiffs allege that Bank of America systematically failed to comply with the terms of HAMP.  It alleges that the Bank had financial incentive to avoid modifying home loans and to continue to keep a mortgage in a state of default or distress and to push loans toward foreclosure.  According the Compliant, this was especially true when the loans were owned by a third party investor and the Bank was merely servicing the loan. 

Recently, a declaration filed in the case by a former Bank of America employee alleges that employees were told  “to lie to customers and claim that Bank of America had not received documents it had requested, and that it had not received trial payment(when in fact it had).  We were told that admitting that the Bank received documents would “open a can of worms” since the Bank was required to underwrite the loan modification within 30 days of receiving those documents, and it did not have sufficient underwriting staff to complete the underwriting in that time.”  In addition, the employee alleges “Employees were rewarded by meeting a quota of placing a specific number of accounts into foreclosure, including accounts in which the borrower fulfilled a HAMP Trial Period Plan.”         

If you applied for a loan modification with Bank of America or any other HAMP servicer and you think you should have been approved, you should complain to the Bank, the California Attorney General and you should try to join a class action lawsuit.  If you are still in the house, apply again for a loan modification and put in the hardship letter all evidence you have that you were wrongly denied before.    

Character counts.  At the end of the day, what we do matters.  If your house is a big deal to you, then act like it is a big deal.  If you should have received a loan modification, you need to speak up.  If you don’t, they win.  

This is a complicated area of the law and I recommend you to seek legal counsel prior to taking any action on a loan modification or proceeding with a short sale or foreclosure.  There may be personal and tax liability. I provide a free 30 minute consultation at all of my offices located in Walnut Creek and Brentwood.       

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. © 2013  Joan M. Grimes. (925) 939-1680 Grimesbklaw.com

Bankruptcy & Employment Discrimination

The Law You Should Know

Finding a job has never been harder.  Concerns about employment discrimination can be very important during the job hunt.  If you are looking for a job or have a job and are experiencing financial problems which may cause you to file bankruptcy, here is the law you should know. 

1. A private employer may have the right to discriminated against a prospective employee based on a prior bankruptcy filing.  There is a split on authority on this issue.  The 9^th Circuit which includes California has held that a prospective employer did not violate the Bankruptcy Code Protection against discriminatory treatment as specified in 11 USC 525 unless the Debtor’s bankruptcy status was the sole reason for denial of employment.  Comeaux v. Brown & Williamson Tobacco Co., 915 F.2d 1264 (9^th Cir. 1990) In the Comeaux case, the employer ran a credit check and decided not to hire the employee and thus the bankruptcy file was not the “sole” reason for the decision not to hire.  On the other hand, the 3^rd Circuit and the majority of courts that have considered this issue have held that a private employer has the right to discriminated against a prospective employee based on a bankruptcy filing.  Rea v. Federated Investors, 627 F.3d 937 (3d Cir. 2010).   There is no time limit on asking although it will only show on a credit report for 10 years from the date of the bankruptcy filing.

2. A private employer cannot terminate or discriminate with respect to a  current employee solely because an individual has been a debtor under the Bankruptcy Code.  However, the Bankruptcy Code does not prohibit an employer from terminating a current employee because they default on a loan usually a loan with the employer.  It is an open question of whether a private employer can terminate an employee when the employee was not on notice of a termination provision when the loan was made to the employee.  11 USC 525(b)

3. The government whether a city, county, state or federal government or any unit thereof, may not deny, revoke, suspend or refuse to renew a license, permit, charter or deny employment, terminate the employment of, or discriminate with respect to any prospective employee solely because he/she  is or has been debtor under the Bankruptcy Code.  The governmental provision is much broader than the private employers because 525(a) added the phrases “deny employment to” as a prohibited act. 

In conclusion, the only safe harbor protection against bankruptcy discrimination in employment appears to be working for the government.  Since we can’t all work for the government, a decision to file bankruptcy needs to be made very carefully if you are seeking employment or are currently employed by an employer who routinely runs credit checks on employees or who makes loans to employees.  

If you work for an employer where you have a loan, it may be better to file bankruptcy prior to a default since the Bankruptcy Code provides protection from termination solely because of a bankruptcy filing.  On the other hand, if you know a prospective employer will be asking about your financial situation and any prior bankruptcy filing, it may be better to delay the filing and explain the reason for the financial problems.  This is a complicated area of the law and any decision to file bankruptcy or delay the filing, should not be made without legal advice.  I see people every day for a free 30 minute consultation at my offices located in Walnut Creek, Antioch and Brentwood.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.   GRIMESBK.AW.COM           

© 2011 Joan Grimes

Buy and Bail 2011

There is no question that it is very, very difficult to see people moving into your neighborhood buying your same house with better upgrades for half the price.  It can make your blood boil.  And then you find out that they bought this new home at half the price while they still owned the first house that was completely underwater and now they are letting the first house go into foreclosure.  This is crazy.  This is Buy and Bail.   

Buy and Bail is really just strategic default planning.  The current home no longer makes financial sense and I need a roof of my head.  And, oh by the way, it looks like a good time to buy.  This is absolutely fine. 

Buy and Bail is a problem if you commit loan fraud in the process.   In 2008, the government tried to crack down on Buy and Bail by banning the use of rental income from an existing home to qualify for a new mortgage loan unless the first property had at least 30 percent equity.  Unfortunately, recently, we are seeing many new instances where rental income is being allowed with no equity in the existing home. 

If you tell the new lender or agent of the new lender i.e. mortgage agent that you are going to rent out the old house, but really don’t intend to rent it out, you have a problem.  If you say that rent on the old place will conveniently be the same as the mortgage payment, but you know that rents in the area are only one half of the mortgage, you have a problem.

Buy and Bail is a problem if you have junior lien(s) on the old house that are recourse loans i.e. they were not the original loan or loans used to purchase your primary residence.  If you have recourse debt and don’t qualify for bankruptcy, you will be stuck with the debt.  If you qualify for bankruptcy, the new home loan payment may be so low that you do not qualify for a Chapter 7 and will be stuck in a Chapter 13 for 3-5 years paying back some or all of your creditors.

Buy and Bail is a problem if the foreclosure or short sale of the old home leaves you with tax liability.  Every transfer of real property is a taxable event.  There is no free lunch with the IRS and State Franchise Board.  If there was cash out or accrued interest on the old home, you will need to know whether you will have any tax liability if the property is later foreclosed or short sold.

Buy and Bail is a problem.  It is very tempting, but it can end up very bad.  Remember, if something sounds too good to be true, it is!  A Buy and Bail may put you in the middle of the ocean without a paddle.  Don’t do it.  If you are considering a Buy and Bail, seek legal counsel prior to proceeding. Buy and Bail has serious consequences which should be analyzed by a bankruptcy or real estate attorney prior to commencing the purchase of a new home.  This is a complicated area of the law, but a bankruptcy or real estate attorney should be able to make an analysis of your particular situation fairly quickly.  I see people for a free 30 minute consultation in my offices located in Walnut Creek, Antioch and Brentwood.

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN   MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

In Limbo: The Forever Trial Modification

Every day, at least 1 person comes into my office complaining that they have made all of their payments under a trial loan modification, but there has been no permanent modification.  According to the latest numbers, only 4% of all trial modifications under HAMP have become permanent.  The Treasury indicated in December, 2009 that it would start fining lenders for failing to complete loan modifications, but we have seen little improvement yet. 

Borrowers are told a host of explanations as to why there has been no permanent loan modification on their loan including missing paperwork, the loan is with a negotiator or simply that the loan modification takes time.  While all of these explanations may be true, the result is that borrowers throughout the country are left in limbo not knowing whether they should try to stay or make preparations for leaving the home.  To make matters worse, most borrowers know that the loan modification documentation signed by them warns that foreclosure may be immediately resumed from the point at which it was suspended if this trial modification plan terminates and no new notice of default, notice of intent to accelerate, or similar notice is required. What should they do?

In order to reduce some of their anxiety, I ask them to work through a simple 3 step process to see if any loan modification really makes any sense for them.

        Step 1- What are the terms of the loan modification being offered?  There are many types of loan modification/forbearances being offered by lenders.  However, the one most helpful to borrowers is HAMP which stands for Home Affordable Modification Program.  Lenders are not required to participate in this plan.  However, the biggest lenders including Bank of America, JPMorgan Chase Bank, Wells Fargo Bank, Citibank and American Home Mortgage Servicing are participating.  The program lowers the interest rate to 2% for years 1-5 and increases the interest rate over the next 3 years until it is fixed in year 8 at approximately 4.5% -5.0% for the remaining term of the loan or in some instances extending the loan term to a 40 year loan.  If the trial period is not for a HAMP loan modification, you should immediately contact the lender and apply for HAMP loan modification.

        Step 2-  Can you pay off the principal balance?  A good rule of thumb is that a borrower can payoff 2-2.5 times their gross household income in a home loan over the course of their working life and go on vacation and have a child or two.  Therefore, if a family’s average gross household income is $100,000, they should not have a home loan which exceeds $250,000.  This is assuming a 30 year fixed loan.  If a borrower has less than 30 years remaining work time, the amount should be reduced accordingly.  If you determine that you are never going to “own” this property, is this the best use of your money?  If you didn’t have this huge mortgage payment plus property taxes, insurance and maintenance, could you be putting away more money into retirement or maybe saving for a home you could actually “own.”

        Step 3- Is the loan modification payment less than I would pay in rent?  Assuming, the above calculation shows that you will not be able to pay off the balance of the loan over the course of your remaining work career, is the loan modification payment still less than I would pay in rent?  Depending on where you live, the loan modification payment may still be less than rent you would pay in your immediate area.

Loan Modifications are difficult.  Most of these loans were made with little or no documentation and now the lenders seem to be requiring full loan documentation at the beginning, middle and whenever they feel like it until they decide a loan modification is granted or denied.    If you are in a forever trial modification, I urge to continue a dialogue with the lender seeing if any new programs have become available which may help you.  In 2010, we expect lenders with the assistance of the federal government to roll out additional loan modification programs. I recommend calling the lender at least once a week.  Continue to ask if there is anything new available.  A 4% permanent loan modification rate is not good, but if it improves, you do not want to miss the modification which may allow to retain your home.   

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

© 2011 Joan M. Grimes. Grimesbklaw.com

Should I Stay or Should I Go?

To say that these are difficult times in the real estate market would be an understatement.  The melt down began with an extended boom fueled by cheap money followed by a rapid contraction of the credit supply.  This lethal combination has led to an unprecedented decline in housing values.  I have no doubt that the real estate market will come back and thrive.  However, in the meantime, does it make financial sense to stay in a home that is underwater; where the value may not come back for 10-15 years and you may only be paying interest on the loan?  What is a person to do?

The mortgage industry and government would like us to feel a moral obligation to repay our debts.  The argument goes that we are sending the wrong message to our children and community if we default on a loan where we had the ability to make the payments.  Never mind that Wall Street banks and investors are voluntarily defaulting on office building, hotels and commercial properties across the nation.  Morgan Stanley recently decided to stop paying on five San Francisco office buildings and no one is saying they have a moral obligation.  It was a strategic decision to let the properties go rather than invest more money.

  A decision to voluntarily or strategically default on a loan can be a very emotional decision.  However, if we take the emotional side out of the equation, what does it look like from a purely financial and legal standpoint?  From a legal standpoint, there are three questions when contemplating a default on a home loan.  They are the following: 1) how will default affect my credit? 2) will there be any personal liability from the default? and 3) will there be any tax liability?  In addition, from a financial standpoint, how does the continuing payment of this debt affect other areas of my life?

As a general rule, under California law, a short sale or foreclosure can remain on a person’s credit for up to 7 years.   Personal liability on a home loan is determined by the character of the loan at the time the loan was originated and then by the manner in which the lender chooses to foreclose.  Generally, a loan or loans used to purchase a 1-4 unit property occupied by the borrower will have no personal or tax liability unless it is excluded loan product such as many types of governmental loans such as VA loans.  On the other hand, home loans which were not used to purchase a 1-4 unit property occupied by the borrower such as refinances, lines of credit or loans on investment properties, may have both personal and tax liability.

Even after considering the legal issues, we still need to think about a voluntary default from a financial point of view.  Is being “house poor” causing you to not properly fund your retirement, your children’s college education or preventing you from paying bills as they come due or taking your family on vacation? 

In conclusion, a voluntary default may be the right decision for you just as it was for Morgan Stanley.  It was a business decision for Morgan Stanley and it should be for you too.  This is a complicated area of the law, but a real estate or bankruptcy attorney should be able to make to an analysis of your particular situation fairly quickly which will allow you to decide if a voluntary default is the right decision for you and your family.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.              

 © 2010 Joan Grimes