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Thread: how to get another year's worth of 'free rent' ...

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    Default how to get another year's worth of 'free rent' ...

    The gist of this court case is that the banks / owners of Mortgage Backed Securities are likely to take another round of losses, while businesses and homeowners who are delinquent on their mortgage payments will now be able to remain in their properties / houses 'rent free' until lengthy and expensive ( for the bank / MBS owner ) litigation is completed ...




    (snip)"CMBS default rates ballooned by almost 500% in 2009, up from 1.21% in the beginning of 2009 to over 6% by the end of the year. According to Trepp, this is highest default rate since CMBS deals were first marketed. Jefferies & Co estimates that the CMBS default rate could reach 9-14% by the end of 2010.

    So the last thing a special servicer would want to hear is that a Federal District Court in California has opened the door to a novel new foreclosure defense related to constitutional law. While this case deals specifically with single family residential loans, the RMBS market is much larger than the CMBS market, and at least one far-reaching rule change - the IRS's 2009 modification of the REMIC provisions - can be traced to controversy that first arose in the RMBS market.

    The case involves non-judicial foreclosure proceedings on a single family home in Ramona, California. The borrower defaulted on the mortgage in November 2007. In February 2008, a notice of default was recorded and served. And in December 2008, a notice of sale was recorded and served, setting a date for the public auction of borrower's home. The borrower has alleged that their Fifth Ammendment rights to due process have been violated, and a federal court has refused to dismiss the case.

    California is a non-judicial foreclosure state, which means that Newport Beach property flippers are generally not entitled to their day in court in the event of a mortgage default. However, this case challenges that notion (although it is limited in scope), and the court has agreed to postpone the sale of the lender's collateral until the case is resolved. Translation: the defaulting borrower gets to live in their 2 bedroom, 1.5 bath bungalow with carport until whenever forever the case is decided.

    The most interesting aspect of the case is that the borrower alleges that the lender violated their Fifth Amendment procedural due process rights, even though the Fifth Amendment only applies to governmental actions, not those of private corporations. The court, in refusing to dismiss the complaint, agreed that in some circumstances the Fifth Amendment does apply to private entities, so long as there is sufficient nexus between the government and the private entity.

    There are four different tests used to determine whether private action can be attributed to the state: (1) public function; (2) joint action; (3) governmental compulsion or coercion; and (4) governmental nexus. The court said that "satisfaction of any one test is sufficient to find state action, so long as no countervailing factor exists."

    The court also said that the mere fact that a business is subject to extensive regulation is not sufficient to find joint action, but that because the case involves the Home Affordable Modification Program ("HAMP"), which is a federally funded program, there could be a nexus over and above just extensive regulation."(snip)


    deeper analysis of the issues comes from

    (snip)"The plaintiffs filed suit in federal court to stop the foreclosure, naming as defendants Timothy Geithner, the FHFA the lender and the servicer. The plaintiffs were allegedly denied a HAMP modification, and they claim the government and the bank violated the plaintiffs' right to "due process under the Fifth Amendment for failing to create rules implementing HAMP that comport with due process."(snip)

    (snip)"The judge refused to dismiss the case because the plaintiffs might be able to prove the government has "insinuated itself into a position of interdependence" with the bank. The phrase seems apt, felicitous even, and perchance in the fulness of time may prove to be widely applicable. But this is only a very preliminary decision, and the court will need to take a look at the relationship between this particular bank and the government.

    The court may also need to consider whether the plaintiffs have any constitutionally protectable interest. The Fifth Amendment says, among other things, that no person may be "deprived of life, liberty, or property, without due process of law." A deeply underwater homedebtor facing a lawful non-judicial foreclosure process may not have much property interest in the home. It is possible to have a property interest in certain types of government benefits if the benefits are an entitlement explicitly created by law. It is not clear whether HAMP creates such an entitlement, and that may end up being the main issue in the case."(snip)



    Depending on how quickly this legal issue is resolved, the implication is that would-be lenders now have an even stronger reason to deny new loans to any individual or business whose future ability to service the loan is the least bit 'shaky'. The problem for the would-be lenders is that, in a worst case scenario, rather than being able to 'quickly' recover 40-60-80 cents on their loaned dollars via foreclosure and auction sale ( with 'quickly' now meaning a year), or rather than being able to generate some sort of alternative cash flow ( via property rental for example ) the lender may now be looking at ZERO cents on the dollar recovery and zero cash flow for years while every foreclosure attempt can be contested such that the case must now wind its way through the US court system before the delinquent homeowner can be displaced and the property 'recovered'. And this of course doesn't count the vastly higher litigation costs eating into whatever eventual recovery is actually possible once the foreclosure cases are concluded and the delinquent homeowners are displaced.

    The other possibility of course is that the lender will be forced to offer the delinquent homeowner a significant reduction in outstanding loan principal / interest rate ( i.e. taking an immediate loss of loan principal and an ongoing loss of cash flow ) via a HAMP modification, with the possibility / probability that the homeowner will again default on on the HAMP modified mortgage the future ... which will again start another cycle of attempted foreclosure / litigation, providing the delinquent homeowner with yet more months / years worth of 'free rent' at the expense of the lender !

    This is very likely to depress real estate prices even further, since would-be lenders are going to be extremely reluctant to expose themselves to making new loans that potentially mean having to provide 'free rent' for additional home buyers who could have the legal option of ceasing mortgage payments while continuing to occupy the property for 2-3-5 years beyond the point where their mortgage payments stop being made.

    And while not dealt with specifically in this court case, a possible eventual decision that HAMP based mortgage principal foregiveness / below market mortgage interest rates constitute an ENTITLEMENT right for certain US residents could open a proverbial Pandora's Box full of new economic / tax issues ! The possible situation is actually summed up pretty well by a popular bumper sticker ...



    ~
    Last edited by Melonie; 01-10-2010 at 07:25 AM.

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    Default Re: how to get another year's worth of 'free rent' ...

    The bankers forgot basic math, and now there is an inventory glut in the housing market.* An occupied home is better for the banks than a vacant one. Vacant homes are quickly rendered valueless due to crime and weather and wildlife/pests infestations. If the banks can't sell the homes, then the homes are basically valueless anyway.

    Greed and lack of oversight/regulation got us to this place. Everyone is responsible. No point in trying to re-write history, it is just best to move forward with the current reality and deal with it. I hope that once everything has come out in the wash through this court battle, that we will be wiser and better for it.




    *6% inventory increase, >1% population growth, 5% drop in middle class wages over 10 years (pre-resession), 100%+ price increase since 2003 in some regions = Big time housing market crash.


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    Default Re: how to get another year's worth of 'free rent' ...

    The bankers forgot basic math, and now there is an inventory glut in the housing market.* An occupied home is better for the banks than a vacant one. Vacant homes are quickly rendered valueless due to crime and weather and wildlife/pests infestations. If the banks can't sell the homes, then the homes are basically valueless anyway
    The counter-argument is that any delinquent homeowner who continues to live in a house without making mortgage payments, and who is destined to be 'evicted' sooner or later, is NOT going to continue financing home maintenance out of their own pocket.

    Another counter-argument where banker math is concerned is based on the 'time value of money' i.e. the ability to foreclose and recover 50% or more of the loan principal within a year of the delinquent homeowner stopping mortgage payments ( and thus providing the bank with the ability to write off the bad loan and make a new loan using the recovered principal) ... is far better than NOT being able to foreclose, having their principal tied up in the house for years on end while court cases progress, NOT being able to write off the bad loan year after year ( thus requiring even more cash to be held in reserve by the bank rather than loaned out / invested at a profit ), incurring much higher legal fees, and not having any positive cash flow whatsoever for the duration of the court proceedings.


    *6% inventory increase, >1% population growth, 5% drop in middle class wages over 10 years (pre-resession), 100%+ price increase since 2003 in some regions = Big time housing market crash.
    Oh absolutely. But the larger question of course is whether or not the gov't has already created a new entitlement right that homeowners already occupying a mortgaged property are entitled to be able to stay in that house forever while only paying 31% of their current incomes ( the HAMP yardstick) toward the mortgage. If this turns out to be the case, then the resulting 'losses' are going to fall somewhere. If those losses fall on the bankers, then get ready for a replay of the Lehman Brothers triggered financial meltdown and another round of TARP bailouts. If those losses are to be covered by US taxpayers, then get ready for massive income tax increases on anyone earning more than say $75k per year ! There is no such thing as a free lunch ... except apparently for those delinquent homeowners with potential HAMP eligibility and smart attorneys !

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    Default Re: how to get another year's worth of 'free rent' ...

    ^^Agreed. Unfortunately, housing has seen a disaster that is going to last a generation or longer before there is any recovery in that sector.

    I think a good percentage of people are going to maintain their foreclosed yet occupied properties anyway. I have a friend whose parents were foreclosed upon 6 months ago, but they still maintain the property out of simple pride: they don't want their neighbors to know they are in financial trouble. The bank is allowing them to stay in the house until it sells. This isn't surprising since they are in SoCal, and there are so many houses already vacant in their neighborhood.

    Sure, there are going to be a percentage that will ignore maintenance issues, but some issues just can't be ignored such as burst pipes or similarly important repair issues. Most folks aren't going to replace carpet or roofing, but they won't let the place fall down either since they are still living there.


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    Default Re: how to get another year's worth of 'free rent' ...

    First of all this law suit is not even closed. They still have a long way to go. Even the bloggers say that it is a long shot at best. It does bring up a point that is being missed. Many banks are not completley processing "government program" modifications of these mortgages because they dont have the man power. They would rather forclose.
    http://www.calculatedriskblog.com/20...fications.html

    Here is an exchange between Meredith Whitney and Jamie Dimon on the JPMorgan conference call

    Whitney: [W]e're reaching a critical point in terms of all of the loan modification efforts and this is an industry question but then how it specifically affects your Company, given the fact that the industry feedback and statistics on the loan modification efforts are not good, so you question what's the next initiative and the issue of principal forbearance. How much momentum do you think that has, can you comment on what stage we are in terms of obviously the extension ends [soon] with the last slug is over in February, so where do you think we are in terms of the government’s efforts to influence banks to do certain things?

    Dimon: Well remember we do modifications of our own and we do the government modifications and I do think they're kind of new, it was complex, and I think people will get better at it over time, Meredith. We have not thought of a better way to do it than loan by loan, which is does the person want to live there, can they afford to live there, and we really think that the payment, how much you're paying is more important than principal. Even if you are going to do something on principal, to do it right you have to do it loan by loan and it effectively comes a similar kind of thing.
    The difficulty is the loan by loan part and we've asked the government and I think they tried to streamline a little bit to have programs because there's too much paperwork involved in it so a lot of the reasons we're not getting to final modifications half the time we don't finish the paperwork, so they need the lower payments but they weren't finishing the paperwork so we're trying to get better at it, honestly, we rack our brains to figure out if there's a better way to do it and you can do it more macro than loan by loan but once you start talking about macro, you're going to get involved in a lot of issues about whether the people live there, whether they have the ability to pay, whether they were honest when they first told people how much their incomes were, so we're working through it.
    Whitney: Okay, do you get a sense that there's something right behind HAMP, that there’s another solution for the government or is it more your efforts?

    Dimon: We're trying to do this, look, we're trying to have ideas and they are trying to have ideas but if we had a brilliant one we would be very supportive of doing it. We want to do the right thing for the people.

    Whitney: Okay, so a point of clarification on your answer, issue of principal forbearance is not something that people should be overly concerned about with respect to reserves and capital for the bank?

    Dimon: No, I think if there's a macro government force on something like that you could have a fairly significant effect on loan loss reserves and losses, etc.

    Whitney: But is that a real, any momentum?

    Dimon: Honestly Meredith you probably know as well as we do.


    This is directly from the largest banks mouth on how they see these modifications.

    The law suit is like the ones in Ohio at the beginning of the collapse. The idea was because it was a sub prime loan no one could prove true ownership. It didnt go very far.

    Banks are already shakey about lending to small business and on mortgages. Mortgage regulation under banks have increased dramatically this past year. There still is no regulation or oversight of subprime lenders that are not under a bank holding company. They still exist. 60% of all subprime loans were done by these lenders. So the real hole hasnt been plugged at all.
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    Default Re: how to get another year's worth of 'free rent' ...

    ^^^ agreed that the entire issue of gov't subsidized mortgage payments for qualifying homeowners is in total disarray where private lenders are concerned. But in the final analysis, current gov't policy is still pushing for it, and gov't agencies FHA / Fannie / Freddie ultimately hold the vast majority of actual mortgages / titles to the properties.

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