Consumers in Foreclosure: Kick’em when they're Down!

On July 23, 2014, the Consumer Financial Protection Bureau (“Bureau”) and the Federal Trade Commission (“FTC”) jointly issued an announcement, entitled “CFPB, FTC and States Announce Sweep Against Foreclosure Relief Scammers” (“Announcement”).[i]

It seems that the perps (aka “perpetrators”) are out in full force, using deception and false promises to “collect more than $25 million in illegal fees from distressed homeowners.”[ii]

The Bureau and the FTC were joined, as well, by 15 states (collectively, the “agencies”), letting the world know about their collective “sweep against foreclosure relief scammers that used deceptive marketing tactics to rip off distressed homeowners across the country.” The Bureau is filing three lawsuits against the perps, those companies and individuals that allegedly collected more than $25 million in illegal advance fees for services that falsely promised to prevent foreclosures or renegotiate troubled mortgages. The CFPB seeks compensation for victims, civil fines, and injunctions against the scammers. The FTC is filing 6 lawsuits of their own, and the states are taking 32 actions.

The first lawsuit names Clausen & Cobb Management Company and its owners Alfred Clausen and Joshua Cobb, as well as Stephen Siringoringo and his Siringoringo Law Firm. The second lawsuit is against The Mortgage Law Group, LLP, the Consumer First Legal Group, LLC, and attorneys Thomas Macey, Jeffrey Aleman, Jason Searns, and Harold Stafford. The third lawsuit is against the Hoffman Law Group, its operators, Michael Harper, Benn Wilcox, and attorney Marc Hoffman, and its affiliated companies, Nationwide Management Solutions, Legal Intake Solutions, File Intake Solutions, and BM Marketing Group.

Here’s the allegation, in brief: the scammers used deceptive marketing to persuade thousands of consumers to pay millions in illegal, upfront fees for promised mortgage modifications. Each of the scammers was a law firm or was associated with one. It is further alleged that the defendants disguised their “false promises of foreclosure relief for struggling homeowners with claims that they were performing legal work.”[iii] The plaintiffs assert that these tactics are used by foreclosure relief scams to attract victims, add credibility to their schemes, or exploit certain legal exemptions for the practice of law.

The applicable Regulation that is cited is Regulation O, previously known as the Mortgage Assistance Relief Services (MARS) Rule. The FTC actually provides a guide on this rule, called “Mortgage Assistance Relief Services Rule: A Compliance Guide for Business” (“Guide”).[iv] Generally, this Regulation bans mortgage assistance relief service providers from requesting or receiving payment from consumers for mortgage modifications before a consumer has signed a mortgage modification agreement from their lender. The Regulation also prohibits deceptive statements and requires certain disclosures when companies market mortgage assistance relief services.

Some highlights of the Guide are worth noting:

·         It's illegal to charge upfront fees.

The foreclosure relief firm can't collect money from a customer unless it delivers – and the customer agrees to – a written offer of mortgage relief from the customer's lender or servicer.

·      The foreclosure relief firm must clearly and prominently disclose certain information before it signs people up for your services.

It must tell customers upfront key information about its services, including:

o   the total cost,

o   that they can stop using the firm’s services at any time,

o   that the firm is not associated with the government or their lender, and

o   that their lender may not agree to change the terms of their mortgage.

·    If the firm advises someone not to pay his or her mortgage, it must clearly and prominently disclose the negative consequences that could result.

It must warn customers that failure to pay could result in the loss of their home or damage to their credit rating.

·    The firm must not advise customers to stop communicating with their lender or servicer.

Under the Rule, it's illegal to tell people they shouldn't communicate with their lender or servicer.

·    The firm must disclose key information to its customers if it forwards an offer of mortgage relief from a lender or servicer.

It must give the customer a written notice from the lender or servicer describing all material differences between the terms of the offer and the customer's current loan.

The firm must also tell its customers that if the lender or servicer's offer isn't acceptable to them, they don't have to pay the firm’s fee.

·       The firm must not misrepresent its services.

Under the Rule, it's illegal to make claims that are false, misleading, or unsubstantiated.

Pertinently, the Bureau also alleges that some of the defendants violated the Dodd-Frank Wall Street Reform and Consumer Protection Act, which generally prohibits deceptive practices in the consumer financial market.

Now compare the foregoing requirements under the Rule with the illegal practices alleged in the complaints:

·       Collecting fees before obtaining a loan modification: Companies cannot legally accept payment for helping to obtain a mortgage modification for a consumer before the consumer has a modification agreement in place with their lender. All of these companies charged consumers advance fees without having first obtained modifications for them, which was not only illegal but also caused significant harm to consumers who often paid thousands of dollars without ever receiving a modification. The Bureau alleges that, after pocketing illegal fees from one distressed homeowner after another, defendants typically stopped returning consumers’ phone calls and emails.

·       Inflating success rates and likelihood of obtaining a modification: The firms’ marketing materials misrepresented the likelihood that they would help consumers save substantial sums in mortgage payments. Ultimately, many consumers who paid these companies advance fees did not receive a mortgage modification and ended up worse off than they began.

·       Duping consumers into thinking they would receive legal representation: All of these companies engaged in a particularly egregious scam where the perpetrators used their status as attorneys to dupe consumers into thinking they would receive legal representation when many consumers never spoke with an attorney or had their case reviewed by one.

·       Making false promises about loan modifications to consumers: During meetings, some consumers were misled into believing that they were eligible for a loan modification. Other consumers were promised that they would receive relief within a few months. In the end, many consumers learned that the defendants had not contacted their lenders or obtained any meaningful relief for them. Ultimately, homeowners across the country lost thousands of dollars and suffered significant economic injury, including losing their homes.

Just to break this down a little further. Let’s see what each of these defendants are alleged to have done, starting with the same order stated in the agencies’ announcement.

First up is Clausen & Cobb Management Company, Inc. and Siringoringo Law Firm. The Bureau’s complaint is against three individuals, Stephen Siringoringo, Alfred Clausen, Joshua Cobb, and a corporation, Clausen & Cobb Management Company, Inc. (CCMC), for allegedly charging homeowners illegal advance fees for mortgage loan modifications. Their operation charged initial fees ranging from $1,995 to $3,500, in addition to monthly fees of $495, to thousands of California homeowners in distress. The complaint alleges that Clausen, Cobb, and CCMC managed, staffed, and supported the deceptive loan modification operations of Stephen Siringoringo’s southern California law firm. The State Bar of California initially referred the misconduct to the Bureau.[v]

CFPB: Re-Opening "Ability-to-Repay"

On June 5, 2012, the Consumer Financial Protection Bureau (Bureau) announced that it is "reopening the comment period" for the proposed rule, issued on May 11, 2011 by the Federal Reserve Board (Board), addressing the new ability-to-repay requirements that generally will apply to consumer credit transactions secured by a dwelling and the definition of a "qualified mortgage."

The ability-to-repay requirements were set forth in the May 11, 2011 proposal to amend Regulation Z (the implementing regulation of the Truth in Lending Act (TILA) to implement amendments to TILA made by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Since then, pursuant to Dodd-Frank, the Board's rulemaking authority for TILA was transferred to the Bureau as of July 21, 2011. The original comment period to the proposed rule closed on July 22, 2011.

The Bureau is reopening the comment period until July 9, 2012 to seek comment specifically on certain new data and information submitted during or obtained after the close of the original comment period.

I have written extensively about the ability-to-repay. And I would urge you to read some of these articles to become familiar with these important requirements:*

Ability-to-Repay: Regulating or Underwriting? Part I
Ability-to-Repay: Regulating or Underwriting? Part II
Ability-to-Repay: The Basics and a Chart
Ability-to-Repay: The Chart
Ability-to-Repay: Additional Analysis
FRB: Proposes Rule - Ability-to-Repay

__________________________________

IN THIS ARTICLE

History

New Data

Questions and Comments

Litigation and Liability

Foreclosure

Litigants and Complaints

Outcomes from Litigation

Factors or Costs

__________________________________

History

Sections 1411, 1412, and 1414 of the Dodd-Frank created new TILA section 129C, which, among other things, established new ability-to-pay requirements. If a mortgage is a so-called "qualified mortgage," the compliance with the ability-to-repay rule would offer a presumption of compliance.

The word 'presumption' is a dispositive word in this proposal. Please keep the phrase "presumption of compliance" in mind as you read through this brief outline.

On May 11, 2011, the Board published for notice and comment a proposed ability-to-repay rule, amending Regulation Z to implement new TILA section 129C. The comment period for this initial proposal closed on July 22, 2011.

Then, on July 21, 2011 Dodd-Frank transferred the Board's rulemaking authority for TILA, among other consumer financial protection laws, to the Bureau. Accordingly, all comment letters on the proposed rule were also transferred to the Bureau. According to the Bureau, in response to the proposed rule approximately 1800 comment letters were received from numerous commenters, including members of Congress, lenders, consumer groups, trade associations, mortgage and real estate market participants, and individual consumers.

Even after the comment period closed, various interested parties, including industry and consumer group commenters, submitted to the Bureau oral and written ex parte presentations on the proposed rule.

Through various comment letters, ex parte communications, and the Bureau's own collection of data, the Bureau has received additional information and new data pertaining to the proposed rule.

The Bureau is now interested in providing opportunity for additional public comment on these materials. Thus, it is reopening the comment period until July 9, 2012, in order to request comments specifically on certain additional information or new data, but not other aspects of the proposed rule already submitted previously.

So, what are the new data?

New Data

The Bureau now seeks comment on mortgage loan data that the Bureau has received from the Federal Housing Finance Agency (FHFA). To date, the Bureau has received a sample drawn from the FHFA's Historical Loan Performance (HLP) data along with tabulations from the entire file.

The data include a one percent random sample of all mortgage loans in the HLP data from 1997 through 2011. Tabulations of the HLP data by the FHFA show the number of loans and performance of those loans by year and debt-to-income (DTI) range.

The HLP data consists of all mortgage loans purchased or guaranteed by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (jointly, the GSEs), but does not include loans backing private-label mortgage-backed securities (MBS) bought by the GSEs.

The data contains loan-level information on characteristics and performance of all single-family mortgages purchased or guaranteed by the GSEs. FHFA updates the HLP data quarterly with information from each GSE.

Among other elements, the data includes product type; payment-to-income and debt-to-income (PTI/DTI) ratios at origination; initial loan-to-value (LTV) ratios based on the purchase price or appraised property value and the first-lien balance; and credit scores.

The Bureau proposes to use these data to tabulate volumes and performance of loans with varying characteristics and to perform other statistical analyses that may assist the Bureau in defining loans with characteristics that make it appropriate to presume that the lender complied with the ability-to-pay requirements or assist the Bureau in assessing the benefits and costs to consumers, including access to credit, and covered persons of, as well as the market share covered by, alternative definitions of a "qualified mortgage."

OCC Issues Foreclosure Guidance - Part II

In yesterday's newsletter, Part I of this two-part series, I outlined the role of the bank as owner and servicer of foreclosed property, as described in the recent guidance issued by the Office of the Comptroller of the Currency (OCC) with respect to a bank's obligations and risks related to foreclosed property. (See OCC 2011-49)

A bank's obligations with respect to foreclosed residential properties may differ depending upon the bank's role in the foreclosure. For instance, a bank may be (1) an owner of the foreclosed property, or (2) a servicer and/or property manager, or (3) a securitization trustee.

Additionally, there are specific obligations when lenders release a lien securing a defaulted loan rather than foreclose on a residential property.

In today's newsletter, Part II or this two-part series, I outline the role of the bank as trustee of a securitization trust, and also releasing a lien rather than foreclosing.

For detailed information and guidance, please consult with us or a regulatory compliance professional.

In this Newsletter
Safety and Soundness
Bank as Trustee of Securitization Trust
Releasing a Lien Rather Than Foreclosing
Library

Safety and Soundness

As a matter of safety and soundness banking practices, banks should have robust policies and procedures in place to address risks associated with foreclosed (or soon to be foreclosed) properties.

Acquiring title to properties through foreclosure - either for the bank or as servicer for another mortgagee - results in new or expanded risks, including operating risk (which may include market valuation issues), compliance risk, and reputation risk.

Banks should be sure they have identified all the risks, and have policies and procedures for monitoring and controlling these risks. In each risk management consideration, it is critical to establish and implement policies and procedures, and bank management and the Board of Directors should consider, at a minimum, the role of the bank in foreclosure procedures and obligations.

Bank as Trustee of Securitization Trust

The securitization trustee is primarily responsible for holding a lien on the trust assets for the benefit of the investors who purchase securities issued pursuant to the securitization and administering the trust in conformance with requisite agreements.

The trustee's duties and responsibilities are established by a PSA, trust agreement, or indenture. These agreements direct a securitization trustee to perform various complex administrative functions. Such functions usually include ensuring the timely receipt of payments from the servicer, calculating payments, remitting payments to the investors, circulating information to investors, monitoring compliance, and determining if an event of default is triggered.

As permitted by the PSA, the trustee should work with the servicer to ensure the performance of its responsibilities. The securitization agreements may require a trustee to appoint a successor servicer or to take over servicing in the event the original servicer fails to perform its duties or defaults. These agreements generally do not grant the trustee any powers or duties with respect to the foreclosure or with the maintenance, sale, or disposition of foreclosed properties. Instead, these responsibilities typically reside with the servicer.

Nevertheless, to the extent a servicer undertakes foreclosure actions in the trustee's name as the secured party, a bank trustee should be aware of potential reputation and litigation risks. (See my comments in Part I, relating to reputation risk.)

Additionally, if the securitization agreements require a bank trustee to act as a replacement servicer until a successor servicer is appointed, the bank trustee would also be exposed to credit risk.

Releasing a Lien Rather Than Foreclosing

At times, lenders may release a lien securing a defaulted loan rather than foreclose on the residential property.

This decision is often based on financial considerations when the bank or servicer and/or investor determines that the costs to foreclose, rehabilitate, and sell a property exceed its current fair-market value. When this decision is made after a bank or servicer has initiated foreclosure, the borrower may have already abandoned the property or discontinued the care and maintenance of the property, increasing the chance of a blighted property in the community.

Because the decision to release a lien is typically a financial decision, banks and servicers should ensure that their valuation of the property provides the best information practicable, while complying with investor requirements, before initiating foreclosure and subsequently deciding to release the lien. While the financial risk must be considered, banks and servicers should also consider the potential for reputation and litigation risk arising from their position as a prior mortgagee or servicer of a now-abandoned property.

If the decision is made to forego foreclosure and release the lien, the bank or servicer should notify, or attempt to notify, the borrower of the decision. Borrowers should be notified that (1) the mortgage holder is not pursuing foreclosure and has released the mortgage lien, (2) the borrower may continue to occupy the property, and (3) the borrower is obligated to maintain the property consistent with all local codes and ordinances and to pay property taxes and the debt owed. The bank or servicer should also make appropriate notifications to the local jurisdiction when it makes the decision to release a lien in lieu of foreclosure.

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Office of the Comptroller of the Currency (OCC)
Foreclosed Properties
Guidance on Potential Issues
With Foreclosed Residential Properties
OCC 2011-49
December 14, 2011

* Jonathan Foxx is the President and Managing Director of Lenders Compliance Group

OCC Issues Foreclosure Guidance - Part I

The Office of the Comptroller of the Currency (OCC) is providing guidance to banks on obligations and risks related to foreclosed property. Issued on December 14, 2011, this guidance highlights legal, safety and soundness, and community impact considerations. It primarily focuses on residential foreclosed properties. (See OCC 2011-49)

A bank's obligations with respect to foreclosed residential properties may differ depending upon the bank's role in the foreclosure. For instance, a bank may be (1) an owner of the foreclosed property, or (2) a servicer and/or property manager, or (3) a securitization trustee.

Additionally, there are specific obligations when lenders release a lien securing a defaulted loan rather than foreclose on a residential property.

Furthermore, understanding the requirements imposed by Fannie Mae and Freddie Mac (GSEs) or the U.S. Department of Housing and Urban Development (HUD) on servicers is particularly important.

I will analyze the OCC's guidance as it relates to the aforementioned three roles of the bank in foreclosing on residential properties.

This is a two-part newsletter. I will offer a brief overview of the OCC 2011-49 bulletin pertaining to guidance on potential issues with foreclosed residential properties. Today, in this first part, I will outline the role of the bank as owner and servicer of foreclosed property. Tomorrow, in the second part, I will outline the role of the bank as trustee of a securitization trust, and also releasing a lien rather than foreclosing.

For detailed information and guidance, please consult with us or a regulatory compliance professional.

In this Newsletter
Safety and Soundness
Bank as Owner of Foreclosed Property
Bank as Servicer of Foreclosed Property
Library

Safety and Soundness

As a matter of safety and soundness banking practices, banks should have robust policies and procedures in place to address risks associated with foreclosed (or soon to be foreclosed) properties.

Acquiring title to properties through foreclosure - either for the bank or as servicer for another mortgagee - results in new or expanded risks, including operating risk (which may include market valuation issues), compliance risk, and reputation risk.

Banks should be sure they have identified all the risks, and have policies and procedures for monitoring and controlling these risks. In each risk management consideration, it is critical to establish and implement policies and procedures, and bank management and the Board of Directors should consider, at a minimum, the role of the bank in foreclosure procedures and obligations.

Bank as Owner of Foreclosed Property

Obligations and Actions

• In acquiring title to foreclosed properties, banks assume the primary responsibilities of an owner, including providing maintenance and security, paying taxes and insurance, and serving as landlord for rental properties.
  • Banks should communicate with localities, including homeowner associations, about specific requirements with respect to foreclosed residential properties (i.e., localities may have requirements about certain aspects of upkeep, such as lawn mowing, property maintenance, and security, et cetera).
  • In the absence of these actions, banks should be aware of potential nuisance actions or the exercise of local receivership powers to seize properties.

• For FHA-insured mortgages, the bank must ensure compliance with property and preservation guidance issued by HUD to preserve the insurance claim and obtain reimbursements for allowable expenses.

• Following foreclosure, the bank must record its ownership interest in local land records.

• Banks must comply with the other real estate owned (OREO) appraisal and accounting requirements.

• Banks should maintain appropriate insurance on the property.

• Some localities may require registration of foreclosed properties, properties in foreclosure, or vacant properties. Banks should be aware of and comply with such requirements.

• The Protecting Tenants at Foreclosure Act of 2009 (PTFA) provides tenants with protections from eviction as a result of foreclosure on the properties they are renting.

• When a bank takes title to a house after foreclosure, it must honor any existing rental agreement with a bona fide tenant and must provide 90 days' notice to the tenant prior to eviction whether or not the tenant has a rental agreement.

• State laws may impose additional requirements that are not preempted by the PTFA.

• Additional potential requirements with respect to rental properties include:

• reviewing the lease to determine if the property can be shown to prospective purchasers; and

• returning any security deposit upon termination of the rental agreement.
  

OCC: Fixing Deficient Foreclosure Practices

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

The Office of the Comptroller of the Currency (OCC) issued a report on November 22, 2011 on the actions by 12 national bank and federal savings association mortgage servicers to comply with consent orders issued in April 2011 to correct deficient and unsafe or unsound foreclosure practices.

The report, entitled Interim Status Report: Foreclosure-Related Consent Orders, summarizes progress on activities related to the independent foreclosure review announced November 1, 2011, as well as other activities to enhance mortgage servicing operations, strengthen oversight of third-party service providers and activities related to Mortgage Electronic Registration Systems (MERS), improve management information systems, assess and manage risk, and ensure compliance with applicable laws and regulations.

Based on information in the relevant OCC issuances, much of the work to correct identified weaknesses in policies, operating procedures, various control functions, and audit processes would be substantially complete in the first part of 2012, but other, longer term initiatives will continue through the balance of 2012.

In addition to the interim report, please note that the OCC also released engagement letters that describe how the independent consultants, retained by the servicers, will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of deficiencies identified in the OCC's consent orders.

For those of you who have not had to respond to and implement a consent order, I would say that the engagement letters are generally pro forma and consistent with similar terms and conditions we require in our own commitments and proposals for such audits and due diligence reviews. As a general proposition, the review process being implemented at some companies may differ from that described in the engagement letters because of subsequent coordination with the OCC to ensure a consistent process among the servicers.   

The engagement letters identify the names of the independent consultants conducting the reviews and include language stipulating that consultants would take direction from the OCC throughout the reviews. In fact, the terms of engagement specifically prohibit servicers from overseeing, directing, or supervising any of the reviews. Limited proprietary and personal information has been redacted.

Newsletter Sections
Interim Report
Engagement Letters
Correcting Foreclosure Deficiencies
Professional Assistance
Library

Interim Report

The interim report summarizes actions taken by national banks and federal savings associations to correct deficiencies in mortgage servicing and foreclosure processing identified in consent orders issued on April 13, 2011, by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) against 12 mortgage servicers.

The OCC took action against eight national bank servicers: Bank of America, Citibank, HSBC, JPMorgan Chase, MetLife Bank, PNC, U.S. Bank, and Wells Fargo. The OTS took action against four federal savings association servicers and two holding companies: Aurora Bank, FSB; EverBank (and the thrift holding company, EverBank Financial Corp.); OneWest Bank, FSB (and its holding company IMB HoldCo LLC); and Sovereign Bank.

The consent orders were based on examiner findings during an interagency review of major residential mortgage servicers conducted in the fourth quarter of 2010.

A summary of the findings of the interagency review is available in the "Interagency Review of Foreclosure Policies and Practices," produced by the OCC, Board of Governors of the Federal Reserve Board (FRB), and OTS.

Engagement Letters
Pursuant to 12 C.F.R. § 4.12(c), the listing order of the engagement letters at the OCC's election has no precedential significance.

The engagement letters were submitted by the independent consultants that were retained by servicers regulated by the OCC. These independent consultants will be conducting foreclosure reviews pursuant to the requirements of the April 13, 2011 consent orders. 

The engagement letters describe how the independent consultants will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of servicer deficiencies identified in the OCC's consent orders.  
Limited proprietary and personal information has been redacted from the engagement letters.

Since the acceptance of the engagement letters in September of this year, the independent consultants have further refined and made adjustments to the processes, procedures, and methodologies outlined in the engagement letters in consultation with OCC supervision staff.

For instance, there were a number of changes made to integrated claims processes to ensure a single, uniform process among the servicers.

Correcting Foreclosure Deficiencies

Independent Foreclosure Review

As part of those consent orders, federal regulators required servicers to engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010.

Under the orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers. Where a borrower suffered financial injury as a result of such practices, the agencies' orders require financial remediation to be provided.

As part of that program, 14 mortgage servicers covered by the enforcement actions will begin mailings November 1, 2011 that will continue through the end of the year. The mailings are intended to provide information to potentially eligible borrowers on how to request a review of their case if they believe they suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure proceedings related to their primary residence between January 1, 2009 and December 31, 2010. The mailings will include a request for review form.

Borrowers may also visit the Independent Foreclosure Review for more information about the review and claim process. Furthermore, assistance with the form and answers to questions about the process are available at 1-888-952-9105, Monday through Friday from 8 a.m. to 10 p.m. (ET) and Saturday from 8 a.m. to 5 p.m. (ET).
Requests for review must be received by April 30, 2012.

The third-party consultant will assess whether any errors, misrepresentations, or other deficiencies resulted in financial injury to borrowers. Where a borrower suffered financial injury as a result of such practices, the consent orders require remediation to be provided. 

During the review, customers may be contacted by mortgage servicers for additional information at the direction of the independent consultant.

Professional Assistance

Library

Interim Status Report: Foreclosure-Related Consent Orders
November 2011

Interagency Review of Foreclosure Policies and Practices
April 2011

Trial Payment Plans for Loan Modifications and Partial Claims

On August 15, 2011, the U. S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter (2011-28), entitled Trial Payment Plan for Loan Modifications and Partial Claims under Federal Housing Administration's Loss Mitigation Program.

The purpose of the trial payment plan is to confirm a borrower's readiness and ability to make regular monthly mortgage payments and avoid re-default.

This Mortgagee Letter (ML) identifies circumstances under which borrowers must successfully complete a trial payment plan, prior to the lender executing a loan modification or a partial claim action under the Federal Housing Administration's (FHA) Loss Mitigation Program.

In addition, the ML announced the time requirements for lenders to complete permanent loan modification and partial claim documents in order to receive an incentive fee.

• Additionally, the ML provides Appendix A: Reporting Requirements for Type II Special Forbearance / Trial Payment Plans.

• This ML supersedes Mortgagee Letters 2000-05 and 2002-17 with respect to guidance pertaining to trial payment plans.

• Relevant Mortgagee Letters: 2000-05, 2002-17, 2003-19, 2006-15, 2008-21, and 2009-35.

Effective: October 1, 2011

PREREQUISITES

The ML requires successful completion of a trial payment plan as a prerequisite for a lender executing a permanent standard modification and/or partial claim in the following situations:

• If a borrower has been delinquent (30 or more days) twice or more in the preceding 12 months;
• If a borrower has been delinquent for 90 days or more (three or more consecutive payments past due) in the preceding 36 months;
• If a borrower has defaulted within 90 days of a previous loss mitigation retention option (special forbearance, loan modification, and partial claim) executed in the past 12 months;
• If the financial analysis reflects a borrower has a net surplus income of less than 20 percent of total net income;
• If less than 14 months have elapsed since the origination of the loan;
• If the amount added to the loan balance in a loan modification or the amount of the partial claim exceeds 10 percent of the unpaid principal balance;
• If the borrower failed a trial payment plan for FHA's Making Home Affordable Program (FHA-HAMP); or
• If the borrower determines that a trial payment plan is necessary to demonstrate the borrower's ability to sustain the modified payment.

TRIAL PAYMENT PLAN GUIDELINES

The trial payment plan should be for a minimum period of three (3) months and the borrower should make at least three (3) full, consecutive monthly payments prior to final execution of the loan modification or the partial claim.

Reporting requirements are outlined in Appendix A of the ML.

In addition, under no circumstances may a lender include language in any loss mitigation documents which requires borrowers to waive their rights to be considered or approved for a loss mitigation option.

Loan Modifications

The rate for the trial payment plan and the permanent modified mortgage must be in compliance with Mortgagee Letter 2009-35, which defines the Market Rate to be "no more than 50 basis points greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey Rate for 30-year fixed-rate conforming mortgages (US average), rounded to the nearest one-eighth of one percent (0.125%), as of the date the permanent modification is executed. The weekly survey results are published on the Freddie Mac website. The Federal Reserve Board includes the average 30-year survey rate in the list of Selected Interest Rates that it publishes weekly in its Statistical Release H.15 (See Here).

The final payment under the permanent modification must be the same or less than the trial mortgage payment.

Accordingly, this ML amends the aforementioned Mortgagee Letter 2009-35 by requiring the permanent rate to be established when the trial payment plan is approved by the servicer.

The approval date is the date the servicer offers the trial payment plan to the borrower.
In addition, mortgages in Ginnie Mae's Mortgage Backed Securities (MBS) must meet Ginnie Mae's repurchase requirement(s), prior to executing final modification documents. See Here.

Partial Claims

For partial claims, the monthly payment during the trial period must be the same as the regularly scheduled payment.

The lender must service the mortgage during the trial period in the same manner as it would service a mortgage in forbearance.

TRIAL PAYMENT PLAN FAILURE

Foreclosure action must be suspended during trial payment plans.

In the event a trial payment plan fails, an additional 90-day extension is provided in which the mortgagee must commence or recommence foreclosure or initiate another loss mitigation option.

If the trial payment plan fails, before commencing or continuing a foreclosure, the lender must re-evaluate the borrower's eligibility for other appropriate loss mitigation actions.
A trial payment plan is considered to have failed and is deemed broken when any of the following occurs:

• The mortgagor vacates or abandons the property; or
• The mortgagor does not make the scheduled trial plan payment within 15 days of the trial payment plan due date.

AUTOMATIC EXTENSIONS

If a borrower is unable to complete a trial payment plan within the initial six-month time limit from the date of default (see 24 CFR § 203.355), the lender is allowed a 90-day extension of the foreclosure deadline provided the initiation of a loss mitigation option (including a trial payment plan) was begun prior to the expiration of the initial six month period.

Therefore, if there have been no other intervening delays (such as bankruptcy) this "automatic" extension will extend the six (6) month deadline to initiate foreclosure by 90 days.

To qualify for the automatic extension, the lender must have completed the loss mitigation evaluation required by 24 CFR § 203.605 and approved the appropriate loss mitigation action.

Documentation of this analysis must be maintained in the claim review file.

In addition, the loss mitigation initiative must be reported via the Single Family Default Monitoring System (SFDMS).

HUD: Reinstates Emergency Relief

HUD is implementing an interim rule that reinstates, with certain modifications, regulations that it formerly published to serve as the framework by which emergency relief may be provided to homeowners experiencing temporary involuntary loss of employment or underemployment resulting in a substantial reduction in income due to adverse economic conditions, and who consequently are financially unable to make full mortgage payments. 

These regulations were promulgated following enactment of the Emergency Homeowners' Relief Act of 1975. This 1975 statute provided standby authority to the Secretary to insure or make loans to homeowners to defray mortgage expenses, so as to prevent widespread mortgage foreclosures and distress sales of homes resulting from a homeowner's substantial reduction income. 

Although the 1975 regulations were quickly put in place, they were not utilized, and HUD eventually removed the regulations from the Code of Federal Regulations in 1995.

Dodd-Frank reauthorized the 1975 statute, with certain amendments, and made $1 billion available for this 1975 program during Fiscal Year (FY) 2011. Accordingly, HUD is reinstating the regulations for the program, under the title of "Emergency Homeowners' Loan Program" (EHLP) with such modifications as necessary to mirror the statutory changes to the Emergency Homeowners' Relief Act of 1975 made by Dodd-Frank.

Effective: April 4, 2011.
Comment Deadline: May 3, 2011.

Outline

1) Clarifies that the principal residence of the homeowner for which the homeowner seeks relief to prevent foreclosure may be a condominium, a cooperative, or a manufactured home.

2) Includes the list of eligible institutions for which HUD is authorized to provide insurance for emergency mortgage relief loans and advances of credit as provided in section 105 of the Emergency Homeowners' Relief Act. (The list of these institutions was not revised by the Dodd-Frank Act but was omitted from the 1975 regulations.

3) Provides that an eligible homeowner must have a total annual income (as defined in these regulations, and hereafter referred to as "income") that is equal to, or less than, 120 percent the area median income (AMI), as determined by HUD and adjusted for household size. (HUD defines AMI in Sec. 2700.5 of the rule.)

4) Provides that an eligible homeowner must have incurred a substantial reduction of income, as a result of involuntary loss of employment or underemployment, that is at least 15 percent lower than the income the homeowner had prior to loss of employment or underemployment.

5) Requires, consistent with the statute, that the aggregate amount of assistance to an eligible homeowner cannot exceed $50,000.

6) Provides that eligible homeowners may receive assistance for up to 12 months, in accordance with criteria established by HUD, and that such assistance may be extended once for up to 12 additional months, or may receive assistance in an amount up to the statutory ceiling of $50,000, whichever occurs first. (NOTE: the Federal Register, which reactivates the program for FY 2011, provides for eligible homeowners to receive assistance for up to 24 months, or up to the statutory ceiling amount of $50,000. Given the duration of high unemployment, HUD has determined that so long as eligibility requirements are maintained, HUD will provide the maximum period of 24 months of homeowner assistance at the outset.)

7) Provides, as did the 1975 regulations, that emergency assistance may be provided only if the homeowner has a back-end ratio or debt-to-income (DTI) below 55 percent (principal, interest, taxes, insurance, revolving and fixed installment debt divided by total monthly income). (For this calculation, the homeowner's income will be measured at the pre-Event level.) Homeowners with second mortgage debt or equity lines of credit may qualify for emergency assistance if the homeowner's DTI is within the program's 55 percent limit.

8) Includes monitoring requirements to ensure that the homeowner remains eligible for the emergency assistance after such assistance has commenced, and also specifies the conditions under which emergency assistance to the homeowner will be terminated.    

9) Adds a declining balance, nonrecourse, zero interest, subordinate secured loan, with a term of up to 7 years, as a type of repayment mechanism for emergency mortgage relief payments.

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Emergency Homeowners' Loan Program (EHLP)
Interim rule, HUD, FR 76/43
March 4, 2011

OCC: "Foreclosure Irregularities"

In his testimony today to the Senate Committee on Banking, Housing, and Urban Affairs, Acting Comptroller of the Currency John Walsh discussed implementation of initiatives required by the Dodd-Frank Wall Street Reform and Consumer Protection Act before.

There are several areas of interest to the residential mortgage originations community. However, Mr. Walsh's statement about the "Foreclosure Processing Irregularities" merits attention. 

The following is a brief outline of the Acting Comptroller's testimony on Dodd-Frank Initiatives.

DUE DILIGENCE REVIEW

Policies and Procedures

Examiners determined if the policies and procedures in place ensured adequate controls over the foreclosure process and that affidavits, assignments, and other legal documents were properly executed and notarized in accordance with applicable laws, regulations, and contractual requirements.

Organizational Structure and Staffing

Examiners reviewed the functional unit(s) responsible for foreclosure processes, including staffing levels, qualifications, and training programs.

Management of Third-Party Service Providers

Examiners reviewed the financial institutions' governance of key third parties used throughout the foreclosure process.

Quality Control and Internal Audits

Examiners assessed foreclosure quality control processes. Examiners also reviewed internal and external audit reports, including government-sponsored enterprise (GSE) and investor audits and reviews of foreclosure activities, and institutions' self-assessments to determine the adequacy of these compliance and risk management functions.

Compliance with Applicable Laws

Examiners checked compliance with applicable state and local requirements as well as internal controls intended to ensure compliance.

Loss Mitigation

Examiners determined if servicers were in direct communication with borrowers and whether loss mitigation actions, including loan modifications, were considered as alternatives to foreclosure.

Critical Documents

Examiners determined whether servicers had control over the critical documents in the foreclosure process, including appropriately endorsed notes, assigned mortgages, and safeguarding of original loan documentation.

Risk Management

Examiners determined whether institutions appropriately identified financial, reputation, and legal risks, and whether these risks were communicated to the board of directors and senior management.

FINDINGS

In general, the examinations found critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third party law firms and vendors.

These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse affect on the functioning of the mortgage markets and the U.S. economy as a whole.

By emphasizing timeliness and cost efficiency over quality and accuracy, examined institutions fostered an operational environment that is not consistent with conducting foreclosure processes in a safe and sound manner.

Despite these deficiencies, the examination of specific cases and a review of servicers' custodial activities found that loans were:

-seriously delinquent
-servicers maintained documentation of ownership
-servicers had perfected interest, thus legal standing to foreclose.

Case reviews evidenced that servicers were in contact with troubled borrowers and had considered loss mitigation alternatives, including loan modifications.

A small number of foreclosure sales should not have proceeded because of an intervening event or condition, such as the borrower:

(a) being covered by the Servicemembers Civil Relief Act;

(b) filing bankruptcy shortly before the foreclosure action; or

(c) being approved for a trial period modification.

While all servicers exhibited some deficiencies, the nature of the deficiencies and the severity of issues varied by servicer.

STANDARDS AND CORRECTIVE ACTIONS

Handling borrower payments, including applying payments to principal and interest and taxes and insurance before they are applied to fees, and avoiding payment allocation processes designed primarily to increase fee income.

Providing adequate borrower notices about their accounts and payment records, including a schedule of fees, periodic and annual statements, and notices of payment history, payoff amount, late payment, delinquency, and loss mitigation.

Responding promptly to borrower inquiries and complaints, and promptly resolving disputes.

Providing an avenue for escalation and appeal of unresolved disputes.

Effective incentives to work with troubled borrowers, including early outreach and counseling.

Making good faith efforts to engage in loss mitigation and foreclosure prevention for delinquent loans, including modifying loans to provide affordable and sustainable payments for eligible troubled borrowers.

Implementing procedures to ensure that documents provided by borrowers and third parties are maintained and tracked so that borrowers generally will not be required to resubmit the same documented information.

Providing an easily accessible single point of contact for borrower inquiries about loss mitigation and loan modifications.

Notifying borrowers of the reasons for denial of a loan modification, including information on the NPV calculation.

Implementing strong foreclosure governance processes that ensure compliance with all applicable legal standards and documentation requirements, and oversight and audit of third party vendors.

Not taking steps to foreclose on a property or conduct a foreclosure sale when the borrower is in a trial or permanent modification and is not in default on the modification agreement.

Ensuring appropriate levels of trained staff to meet current and projected workloads.

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Testimony of John Walsh, Acting Comptroller of the Currency,
before the Committee on Banking, Housing and Urban Affairs, U. S. Senate
February 17, 2011

The Principal Reduction Alternative

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions. He is the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

About a half million permanent modifications have gone through HAMP, and 1.7 million trial modifications have been offered, even though the Obama Administration promised HAMP would assist three to four million homeowners. Anecdotally and statistically HAMP has failed.

RealtyTrac reports 2.9 million homes were in foreclosure in 2010, and 2.8 million in 2009, and 2.3 million in 2008. Furthermore, 2011 will see a 20% increase in foreclosure filings - that's above the 3 million mark! As to repossessions: approximately 2,800,000 since 2008, and still growing.

Is there a more effective way to prevent foreclosures?

HAMP - Problem or Solution?

Those who have been following our Newsletters already know that I have been highly critical of the boondoggle known as the Home Affordable Modification Program (HAMP).

Here's just a few selections from our Archive:

• HAMP: "Continues to Struggle"
• HAMP: Continues Downward Trend
• April Loan Modification Report: Is HAMP Failing?

Verdict of SIGTARP

Contrasting the RealtyTrac data with HAMP statistics, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) states in a report issued on January 26, 2011:

"The number of permanent mortgage modifications under HAMP remains anemic - there were just 522,000 ongoing permanent modifications as of December 31, 2010, with approximately 238,000 of those funded by and attributable to TARP. The remaining were funded outside of TARP by the GSEs. A combined total of more than 792,000 trial and permanent modifications have been canceled, with more than 152,000 trial modification still in limbo. These permanent modification numbers pale in comparison not only to foreclosure filings, but also to Treasury's initial prediction that HAMP would 'help up to 3 to 4 million at-risk homeowners avoid foreclosure' by reducing monthly payments to sustainable levels." (My Emphasis)

An Alternative

In a brief, but very concisely worded White Paper, entitled Principal Reduction Modification Math - A Report by Rick Rogers, JD/MBA, a compelling case is made for the fact that lenders will receive far more value from principal reduction modifications than from other mortgage modifications. The paper is fairly technical, but well worth reading. Rick's practice is devoted to foreclosure, mortgage default, and related matters, and he is an expert in Net Present Value (NPV) comparative analysis. Rick has kindly supported my wish to inform you of his insights.

You can download Rick's White Paper from the HAMP section of our Library.

First just a word about the HAMP program itself. There are several moving parts to the HAMP eligibility program.  

I will name a few significant aspects.

• NPV - the acronym for Net Present Value, when we've extricated the math and algorithm basics - is simply a calculation to decide if the lender is in a better profit position by approving a modification or would have a higher profit margin by foreclosing. It is part of HAMP procedures.
• Plus, the so-called waterfall process, which is really just a step-by-step analytical tool used for HAMP loan workouts. It consists of a series of calculations; however, in this case using such parameters as the gross monthly income, percentage of that gross income used to generate a target monthly payment, and so forth.
• Servicers evaluating HAMP modifications derive a mark to market loan to value (MTM-LTV) ratio on any loan greater than 115%. If so, a principal reduction then becomes available to reducing monthly payments to the eligible 31% of the borrower's gross income.
• Some generic rules: to get to the eligible 31% of gross income servicers reduce the interest rate, extend the loan term, even provide principal forbearance, but only use principal reduction as a last resort.

Nevertheless, these and certain other criteria are supposed to lead to successful permanent modifications based, among other things, on lowering the interest rate, extending the loan term, and/or reducing the loan balance until the eligible target payment is reached.

This White Paper asserts that the the re-default rate - the rate during the 12 months immediately following the modification - is the "single most important factor" when comparing the NPV of a standard Home Affordable Modification Program (HAMP) with the   Principal Reduction Alternative HAMP (PRA HAMP) modifications.

The comparative analysis offered indicates that the more effectual means to preventing foreclosure is not through the standard HAMP but through the PRA HAMP program, because PRA HAMP not only includes the above-outlined HAMP criteria but also specifically permits the reduction of principal. However, PRA HAMP is optional and lenders determine whether or not to implement its principal reduction feature.

As the White Paper affirmatively states:

"Lenders will receive far more value from Principal Reduction modifications than from other mortgage modifications."

FRB Report

Rick cites a recent Federal Reserve Bank of New York Staff Report (FRB Report), entitled Second Chances: Subprime Mortgage Modification and Re-Default , that serves to support the findings that "principal reduction modifications were included in a sufficient number for the authors [of the FRB Report] to state the following conclusion in the Abstract:  '... the re-default rate declines relatively more when the payment reduction is achieved through principal forgiveness as opposed to lower interest rates.'" 

Furthermore, Rick culls the following conclusion from page 30 of the FRB Report:

"Restoring the borrower's incentive to pay in this way [referring to principal reduction] nearly quadruples the reduction in re-default rates achieved by payment reductions through interest rate modifications and term extensions alone."

Put another way: in many instances, principal reduction through PRA HAMP modalities is a more effective foreclosure prevention solution than just reducing the mortgage interest rate along with the other standard HAMP modalities.

And by what ratio? The White Paper points out that "the FRB Report suggests 4 of every 10 standard HAMP modifications will fail, while only about 1 in 10 PRA HAMP modifications will fail."

Here is one of several suggestions offered in this White Paper:

"Consistent with the HAMP concept, a PRA HAMP modification should be mandatory for participating Lenders whenever its NPV exceeds that of both the standard HAMP modification and the "No Modification" alternatives."

Principal Reduction Alternative

Principal reduction is surely a viable means to preventing foreclosure through the PRA HAMP procedures, so it is hard to fathom why the Obama Administration continues to advance dubious claims of success relating to the HAMP program, without further encouraging lenders and servicers to make more use of PRA HAMP.
As the aforementioned SIGTARP report states:

"Treasury's central foreclosure prevention effort designed to preserve that goal [of 'preserving homeownership'] - the Home Affordable Modification Program (HAMP) - has been beset by problems from the outset and, despite frequent retooling, continues to fall dramatically short of any meaningful standard of success." (My emphasis)

The Treasury's most recent Press Release about the HAMP "Scorecard" has this rosy and promising subtitle: "New Making Home Affordable data reveals mortgage help reaching struggling middle class, underwater and minority homeowners."

Political temporizing and vapid Press Releases are not helpful. The HAMP program is a failure, plain and simple.

Dressing HAMP up with fancy statistics and glowing pronouncements can't be convincing to those homeowners who would be better served by more aggressive and effective foreclosure prevention methodologies. Facts are stubborn things, and can't be wished away by the Obama Administration claiming that HAMP works for the "middle class, underwater and minority homeowners" - when, all the while, this government program clearly does no such thing for most of them. HAMP may be "reaching" these mortgagors, but it's really not helping them very much!

It seems to me that principal reduction through PRA HAMP should be more fully implemented and supported.

I'll give Rick Rogers the last word on the potential results of the principal reduction alternative:

"Lenders will achieve far greater financial benefits than with any current modification program, and borrowers will have a fighting chance to regain equity and security in their home."

What do you think?

I would welcome your comments. Please feel free to email me at any time.