Being broke has all kinds of negative consequences.

When your mortgage insurance is cancelled for non-payment, your bank or loan servicer may obtain insurance to protect the property and charge you for it. That right is in your mortgage and deed of trust and is called “force-placed” or “lender-placed” insurance. Let’s explore why it’s no good for you.

First, you will receive a bill. Most lenders increase your monthly payment to pay the negative escrow balance caused by purchasing the insurance policy. Force-placed insurance is usually more expensive than homeowner’s insurance. This can raise your monthly payment several hundred dollars. If you fail to pay the insurance, the lender can foreclose on your property.

Second, force-placed insurance is designed to cover the mortgage company, not the homeowner. For example, should a fire burn down your house, most force-placed insurance policies will cover the lender up to the amount of the loan. It does not pay you for your equity in the home, and it does not cover your personal property, such as clothing or household items. Likewise, force-placed insurance does not provide liability coverage for instances where the homeowner is responsible for damage or injuries to others.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that notice must be given to the homeowner before force-place insurance can be ordered. The notice must provide:

  • there is an obligation to maintain hazard insurance
  • that the servicer does not have proof of insurance coverage
  • the procedures for providing evidence of existing coverage, and
  • if the borrower does not prove coverage, the servicer may force place the insurance.

A second written notice to the homeowner is required 30 days after mailing the first notice. If the homeowner does not provide proof of insurance coverage within 15 days after the second notice, the servicer can force-place the insurance coverage. Force-placed insurance may be cancelled when the homeowner provides evidence of insurance coverage.

During the mortgage crisis, many renters were evicted from their homes when landlords lost property to foreclosure. Often renters were given just a few days to leave, even though all rents were paid current. Renters are generally given little or no warning when landlords are in default on mortgage loans. Under the “first in time, first in right” property rule, a lease signed after a mortgage was obtained is voided once that mortgage is foreclosed.

In 2009, President Obama signed the Protecting Tenants at Foreclosure Act (PTFA) into law that gave tenants the right to stay for the term of the lease if the property was purchased by an investor at a foreclosure sale, or 90 days if the house was purchased by an owner with the intention to occupy it as a residence. This law is set to expire December 31, 2014. If PTFA is allowed to expire, renters will again be subject to state law which leaves tenants in over half the country without protection or recourse during a landlord’s foreclosure.

The National Housing Law Project, a nonprofit national housing and legal advocacy center, reports that “nationwide as many as 40% of the families that face eviction due to foreclosure are renters.” Several bills have been proposed in Congress to extend the PTFA deadline. Recently, Representative Keith Ellison (D-MN) proposed a bill to make PTFA permanent. Representative Ellison has urges other Representatives to join him so that renters are “protected irrespective of where a foreclosure takes place.” Senator Richard Blumenthal (D-CT) also introduced a bill in November 2013 to make the PTFA permanent, S. 1761.

Under the Home Affordable Modification Program (“HAMP”), an underwater homeowner may request that a lender modify his or her home mortgage. Typically, a request is made after the homeowner has missed payments and needs the modification to eliminate negative equity, reduce monthly payments (and interest in some cases), and bring the mortgage current. If the homeowner meets certain eligibility requirements, the lender will offer a trial period plan that requires the homeowner to make three modified payments. After the trial period plan payments are made on time, the homeowner is supposed to receive a permanent loan modification agreement.

Unfortunately, lenders do not interpret the HAMP rules the same as the rest of the world. Many lenders and mortgage servicers are denying home loan modification after the trial plan period is successfully completed by the homeowner. The lenders categorically state that even though homeowners are enticed into paying the trial period plan payments, there is no contractual obligation to permanently modify loans. They point out that even if a lender promises to modify a loan (in writing), the lender never signs a contract and is not legally obligated. Lenders have also argued that HAMP laws do not provide a homeowner with a private right to sue the lender for failure to provide a loan modification. Consequently, even if a lender did something wrong, the homeowner cannot do anything about it.

Some courts are now allowing lawsuits against lenders and/or servicers for breach of contract when homeowners are denied loan modifications after successfully completing trial plan periods. In the recent case of Topchain v JPMorgan Chase, No. 13-2128 (8th Cir. 2014), the Eighth Circuit Court of Appeals held that a homeowner has a private right to sue a mortgage lender when it fails to properly process a modification.  Other courts have likewise ruled that homeowners can sue under HAMP when lenders refuse loan modifications for eligible borrowers. See Wigod v Wells Fargo Bank, N.A. 673 F.3d 547 (7th Cir. 2012); Corvello v. Wells Fargo Bank, N.A., 728 F.3d 878 (9th Cir. 2013); Young v. Wells Fargo Bank N.A., 717 F.3d 224 (1st Cir 2013).

Naturally, lawsuits are expensive and time-consuming. In many cases Chapter 13 bankruptcy is a cost-effective alternative when a homeowner is unfairly denied a loan modification. A bankruptcy debtor may litigate a HAMP lawsuit in federal court while under the protection of the bankruptcy laws prohibiting foreclosure. Chapter 13 bankruptcy may also allow the debtor to “catch-up” missed payments or “strip-off” wholly unsecured junior mortgages.

The Consumer Financial Protection Bureau (CFPB) announced that it has reached a consent agreement with Flagstar Bank to settle accusations that the bank delayed or prevented thousands of homeowners from obtaining mortgage relief and avoid foreclosure. The agreement calls for Flagstar to pay $27.5 million to the roughly 6,500 consumers whose loans were serviced by the bank. The bank will also pay a $10 million fine to the agency. Flagstar is one of the nation’s largest mortgage servicers.

What makes this penalty unique is that the CFPB halted Flagstar’s mortgage servicing operation until it can show that it is in compliance with federal laws.

The consent agreement outlined many of Flagstar’s wrongful acts, including assigning only 25 full-time employees and a third-party vendor in India to review nearly 13,000 active loss mitigation applications. During 2011, it took Flagstar up to nine months to review a single application. When consumers called Flagstar for information, the average call wait time was 25 minutes and the average call abandonment rate was almost 50 percent. In many cases loan modification applicants were wrongfully denied, often without explanation.

Pursuant to the consent order with the CFPB, Flagstar is prohibited from acquiring any servicing rights for defaulted loans. If a loan it services goes into default, Flagstar must transfer the servicing of that loan to another mortgage servicer. These prohibitions continue until Flagstar has demonstrated compliance with the consent order’s operational reform provisions.

The CFPB, like the rest of the country, has figured out that mortgage servicers benefit from non-compliance with the law, and that it is more profitable to simply pay fines without change. Halting Flagstar’s operations changes the character of the penalty and may ultimately provide incentive for the industry to reform itself. 

As one court put it, “Neither knaves nor fools should be representing debtors who need legal assistance.” Bankruptcy law is not for the inexperienced, imprudent, or unprepared. Take, for example, a very common situation: divorce after bankruptcy.

It is an unfortunate reality that some debtors divorce after Chapter 7 bankruptcy. In fact, some clients show up for an initial attorney consultation already determined to file divorce “right after the bankruptcy.” For the most part, eliminating financial obligations and obtaining a financial fresh start is a good first step, and alleviating the financial pressures can sometimes even save a marriage.

There are traps along the way for debtors who are intent on divorce after bankruptcy. The most significant is found in Section 541(a)(5) of the Bankruptcy Code which states that property acquired by the debtor within 180 days as a result of a marital property settlement agreement or divorce decree becomes property of the debtor’s bankruptcy estate. Under this statute, a bankruptcy debtor who receives property during a dissolution case will lose it unless the property is already protected with available exemptions.

Cases where a debtor has lost property under this section include a home owned by a husband and wife. The family court awarded the wife full interest in the marital home which was protected during bankruptcy by a tenants by the entireties exemption. Upon divorce within 180 days of the bankruptcy filing, the tenants by the entireties protection was extinguished and the bankruptcy trustee was able to take and sell the home to pay creditors. See In re Cordova, 73 F.3d 38 (4th Cir. 1996).

Other courts have broadly construed Section 541(b)(5) and found that property acquired ”as a result of a property settlement agreement … or of an interlocutory or final divorce decree” includes alimony and spousal support received within six months after the bankruptcy is filed. If these payments cannot be exempted, which is the case in some states, the result is that all payments due in the six months after the bankruptcy filing must be turned over to the trustee. Some courts, including the Court of Appeals for the Tenth Circuit in Peters v. Wise (In re Wise), 346 F.3d 1239 (10th Cir. 2003), and the Bankruptcy Appellate Panel for the Eighth Circuit in In re Jeter, 257 B.R. 907 (B.A.P. 8th Cir. 2001), have held that section 541(a)(5)(B) does not apply to alimony, maintenance or support payments.

Avoiding these traps is fairly simple. First, a debtor who expects to receive property in a dissolution proceeding should avoid commencing a bankruptcy case, unless it is clear that all property that may be awarded in an after bankruptcy dissolution is protected by exemptions. Second, the debtor may delay the award of property beyond the 180 day claw back period. While these tips appear simple and direct, competent legal assistance from an experienced bankruptcy attorney is needed to ensure that the debtor’s actions cannot be construed as efforts to conceal property and otherwise run afoul of the bankruptcy process.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Various government programs are available to assist individuals in purchasing real estate. Naturally, wherever there is government, there are rules—many rules. But on a positive note, a history of bankruptcy is not a death blow to home ownership. Below are general guidelines for purchasing a home after bankruptcy.

 

2013 FHA Guidelines –You may apply for a FHA insured loan as early as one (1) year after bankruptcy if you experienced an economic hardship that caused more than a 20% drop in household income. Otherwise, you must wait two (2) years after a Chapter 7 bankruptcy discharge and one (1) year after a Chapter 13 bankruptcy has been discharged or dismissed. The minimum down payment is 3.5% and credit must be re-established with a 640 minimum credit score.

 

A Chapter 13 debtor who has made twelve (12) timely payments on a confirmed plan can qualify for a FHA loan if there are no other credit delinquencies and if they receive bankruptcy court permission.

 

2013 VA Guidelines – The VA Lender Handbook spells out guidelines for a veteran to qualify between one (1) and two (2) years after a bankruptcy discharge:

  1. The borrower and/or co-borrower must reestablish satisfactory credit, and
  2. The bankruptcy must have been caused by circumstances beyond the borrower or co-borrower’s control (such as unemployment, medical bills, etc.)

 

If you have finished making all payments in a Chapter 13 bankruptcy case, the lender may conclude that you have reestablished satisfactory credit. If you have satisfactorily made at least 12 months worth of the payments and the Trustee or the Bankruptcy Judge approves of the new credit, the lender may give favorable consideration. In this situation 100% financing is available and credit must be re-established with a minimum 620 credit score

 

2013 USDA Guidelines – You may apply for a USDA rural loan three (3) years after the discharge of a Chapter 7, or one (1) year after a Chapter 13 bankruptcy (with evidence of twelve months of timely plan payments). In this case 100% financing is available. The USDA does not enforce a credit score minimum, but generally at least a 640-660 score is required.

 

2013 Conventional (Fannie Mae) – You may apply for a Conventional Fannie Mae loan after your Chapter 7 bankruptcy has been discharged or dismissed for four (4) years, two (2) years from the discharge of a Chapter 13.  A two (2) year waiting period for Chapter 7 debtors is allowed if certain “extenuating circumstances” can be documented.  The time is extended to sixty (60) months if there are multiple bankruptcies within the last seven (7) yrs. There is a minimum down payment is 5% and credit must be re-established with a minimum 680 credit score.

 

2013 Conventional (Fannie Mac) – This loan guarantee generally requires a borrower to wait eighty-four (84) months (that’s 7 years!) after bankruptcy unless either “extenuating circumstances” are met (then the waiting period is 24 months) or when “financial mismanagement” is present (then the waiting period is 48 months). The minimum down payment is 5% and a 680 credit score with a perfect rental history are required.

 

2013 Jumbo Mortgage Guidelines – You may apply for a Jumbo mortgage loan once any chapter of bankruptcy has been discharged for four (4) years. That waiting period is extended to five (5) years if multiple bankruptcies are present on the credit profile.

According to the Austin Business Journal, Lehman Brothers Holdings, Inc., the investment company that recently filed for Chapter 11 bankruptcy was a primary equity partner in a joint venture one year ago to buy most of Austin’s premier office space. Lehman Brothers put up 75 percent of the equity and provided debt financing on the deal. They purchased 10 properties totaling over 3.5 million square feet. Their purchases included the Frost Bank Tower, One Congress Plaza and 300 West Sixth – some of the most “coveted assets” in Austin. It is now predicted that as Lehman proceeds through bankruptcy it is likely that its Austin properties will come up for sale at a significant discount. Austin Business Journal states that, “. . . analysts and industry insiders have blamed Lehman’s demise partly on its position as the one-time biggest U.S. underwriter of commercial mortgage-backed securities.” Dan Fasulo, managing director of New York-based research group Real Capital Analytics Inc., states, “If there is a deal under the Lehman umbrella that may be in trouble, it’s the Austin deal” . . . “Everything has flipped upside down . . . If you had to sell such a portfolio now, you would probably have to sell at a significant discount.” Keep your eye on Austin’s premier office space to see what effect Lehman Brother’s bankruptcy will have on the local real estate economy.

New home sales tumbled in August to the slowest pace in 17 years, while the average sales price fell by the largest amount on record, demonstrating the depth of the problem that Washington is trying to solve.

The Commerce Department said Thursday that new homes sales fell by 11.5 percent in August to a seasonally adjusted annual sales rate of 460,000 units, the slowest sales pace since January 1991.

The Dallas Morning News reported, it was a much bigger sales decline than the small 1 percent drop that economists had been expecting. The average price of a new home sold in August dropped by a record amount of 11.8 percent to $263,900, compared to the July average of $299,100. The median price was also down, falling 5.5 percent to $221,900.

The big drop in new home sales followed news Wednesday that sales of existing homes were down 2.2 percent in August to a seasonally adjusted annual rate of 4.91 million units. Both segments of the market remain under pressure from the steepest housing downturn in decades.

That housing slump has contributed to a record surge in mortgage defaults, leading to billions of dollars in losses by financial firms and spawning a severe credit crisis that is threatening to send the country into a steep recession.

In a nationally televised speech Wednesday night, President Bush said the credit crisis could trigger a “long and painful recession” unless Congress acts quickly to pass a $700 billion bailout plan for the nation’s financial system. Negotiations on that plan were continuing Thursday with expectations that an agreement would be reached soon.

Besides the weak housing report, the government said Thursday that new claims for unemployment benefits shot up last week to the highest level in seven years. Orders to factories for big-ticket manufactured goods fell by a much-bigger-amount than expected amount of 4.5 percent in August. Both indicate the rising pressures facing the economy.

The report on new home sales showed that business was off in every region of the country except the Midwest, which posted a 7.2 percent increase. Sales plunged by 36.1 percent in the West and were down 31.9 percent in the Northeast. Sales fell a more modest 2.1 percent in the South.

 

A new study on home prices shows that the Dallas area still has a big edge in providing affordable housing for relocating corporate 5c7e490cemployees.

The Dallas Morning News reported, Coldwell Banker Real Estate’s annual home price comparison index tracks the cost of homes in more than 300 U.S. markets in areas that would appeal to "typical corporate middle-management transferees."

But that’s substantially below the nationwide average of $403,738 in the survey, which compares the cost of a typical single-family dwelling with about 2,200 square feet, four bedrooms, 2 ½ baths, a family room and a two-car garage. The real estate sales firm said all the houses used in the comparison were in neighborhoods popular with corporate transferees.

Nationwide, the average price in Coldwell Banker’s report was down about 4 percent from last year, which reflects the softer housing market.

The most expensive markets on the real estate firm’s annual price list are La Jolla, Calif., at $1.84 million, and Greenwich, Conn., at $1.79 million.

At the other end of the spectrum, the cheapest U.S. markets include Sioux City, Iowa, at $133,459 and Jackson, Mich., at $134,325.

In Texas, the cheapest markets, according to Coldwell Banker, include Arlington at $143,775 and Killeen at $145,812.

A similar house would cost $209,557 in Plano and $149,108 in Fort Worth.

Coldwell Banker has been issuing the report since the 1980s.

 

No sign yet of a housing turnaround in North Texas.

The Dallas Morning News reported, Pre-owned home sales slumped 18 percent in August compared with a year ago.

And median sales prices slid 3 percent to $150,000, according to the latest statistics from the North Texas Real Estate Information System and Texas A&M University’s Real Estate Center.

The fall-off in condo sales was even steeper – 31 percent last month.

The only good news in the monthly report is that the number of houses on the market continues to fall, dropping 14 percent at the end of August. But that may be because some sellers have taken their homes off the market.

Just over 42,000 pre-owned single-family homes were listed for sale in the Realtors’ multiple listing service at the start of this month.

August’s drop in home sales was one of the largest in North Texas in the current housing sector slowdown. Monthly pre-owned home sales volumes are now down more than 30 percent from the peak in mid-2006.

So far in 2008, local pre-owned home sales have fallen 15 percent from the first eight months of 2007. And overall prices are down 1 percent.

Real estate agents say that buyers are taking longer to make a decision and sometimes have trouble lining up financing.

"I’ve never seen a market like this where we have people sometimes looking at 30 to 40 homes before they pull the trigger," said agent Scott Schueler with Keller Williams Realty. "When they do pull the trigger, there is a 30 percent fallout rate. They are not making quick decisions, even when they find good deals."

On average it takes 77 days to sell a house in North Texas – 10 percent longer than in August 2007.

There is a 6.5-month inventory of houses on the market. That compares with a national inventory of more than 10 months.

Mortgage market problems are definitely adding to the home sales slowdown.