“Teaser” Payments: Trick or Treat?

For more information on foreclosure offense, expert witness consultations and foreclosure defense please call 954-495-9867 or 520-405-1688. We offer litigation support in all 50 states to attorneys. We refer new clients without a referral fee or co-counsel fee unless we are retained for litigation support. Bankruptcy lawyers take note: Don’t be too quick admit the loan exists nor that a default occurred and especially don’t admit the loan is secured. FREE INFORMATION, ARTICLES AND FORMS CAN BE FOUND ON LEFT SIDE OF THE BLOG. Consultations available by appointment in person, by Skype and by phone.

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In the final analysis, I think a reverse amortization loan is a way of hiding the true amount of the debt. —- Neil F Garfield, livinglies.me

As an introduction, let me remind you that the viability and affordability of the loan, the loan to value ratios and all the other facts and ratios and computations are the responsibility of the lender, who must faithfully disclose the results to the borrower. It is a myth that these bad loans were in any way related to the bad intent of borrowers.

I have been examining and analyzing loans that are referred to as “reverse amortization loans”. They are, in every case, “teaser payments” that trap homeowners into a deal that guarantees they will not keep their home — even if it has been in their family for generations. And they are loans, in my opinion, that contain secret balloon payments. Nothing in this article should be construed as abandoning the fact that the “lender” never actually made the loan, nor that the actual lenders (investors) would never have approved the loan. The point of this article is that the borrower would not have approved the deal either if they had been informed of the real nature of the sham loan (even if it was real).

Teaser payments are neither illegal nor unfair (if they don’t involve reverse amortization). They have been used all over the world with great success. The deal is that they pay a lower payment before they get to the real payment. Nothing is owed on the lower interest or even lower escrow that results from such a loan product devised and prepared for signature by the Banks or agents for the Banks.

And remember again that when I refer to the Banks, I am talking about intermediary banks that in the “securitization” era were not making loans but were approving paperwork that nobody in their right might would have have approved under any interpretation of national underwriting standards. These banks diverted money and title from the actual transaction in which money from strangers and title of the homeowners was diverted from the real transaction — giving a problem to both. This left “investors” without an investment and the borrowers with corrupt title.

In my opinion the way the teaser payment option was handled in the era of securitization, the borrower ended up with an unaffordable loan with terms that he or she would not have approved and which no bank was permitted to approve under State and Federal lending laws. The result was a hidden balloon and hidden payments of principal and interest payments far higher than the apparent interest rate on the face of the note. In most cases, the requirement that the documents and good faith estimate were never provided to the borrower, to make sure that the sophisticated borrower would not have an opportunity to think about it.

In one case that is representative of many others I have seen, the interest rate was stated as 8.75%, but that was not true. The principal was fixed at $700,000, but that wasn’t true either. The principal was definitely going higher each month for about 26 months, at which point, the principal would have been 115% of the original principal on the note. THAT is because each teaser payment of a fraction of the amount due for interest alone, was being added to the principal due. That is reverse amortization. But that is only part of the story.

When the principal has risen to 115% of the stated principal due in the closing documents, the loan reverts from a teaser payment — promised for several years — to a full amortized payments. So the original teaser payments was $2300 per month, while the amount added to principal was around $3000 PER MONTH. Thus after her first payment, the borrower owed $703,000. While the note and disclosure documents referred to a teaser payment that would continue for five years, that was impossible — because deep in the riders to the note there was a provision that stated the teaser payment would stop when the accrued payment exceed 115% of the original principal stated on the promissory note.

With the original principal at $700,000, the interest due was around $5100 per month on the original principal. 115% of $700,000 is $805,000, which represents a hidden increase of principal built into the payment schedule. That is an increase of $105,000 for as long as it takes with the hidden accrued interest computed in the background and not disclosed to the borrower before, during or after the “loan closing.” For a loan requiring “20% down payment” this is lost money. The 20% vanishes at the loan closing while the borrower thinks they have equity in their property. They don’t — even if property prices had been maintained.

The hidden increase of $105,000 happens a lot sooner than you think. It is called “reverse amortization” for a reason. But the unsophisticated borrower, this computation is unknown and impossible to run. In the first month the interest rate of 8.875% is now applied against a “principal” due of $703,000. This raises the hidden interest due from around $3000 per month to $3025. Each month the hidden accrued interest being added to “principal” rises by $25 per month. At the end of the first year, the payment due and unpaid principal is rising by $3300 per month. At the end of the second year it is more than $3600 per month. And at the end of the third year, if you get that far the actual computation makes the accrued interest (and therefore the principal due) rise by over $4,000 per month.

Using the above figures which are rounded and “smoothed” for purposes of this article (they are actually higher), principal has gone up by around $20,000 in the first year, $56,000 in the second year, and $76,000 in the third year. So by the end of the third year, the principal due has changed from the original $700,000 to over $850,000. But this passes the threshold of $105,000 beyond which interest will no longer accrue and will be payable in full. And THAT means that during the third year, the payment changes from $2300 to the full interest payment of $5900 per month plus amortized principal plus taxes plus insurance. Hence the payment has changed to over $6500 per month plus taxes and insurance.

For a household that qualified for the $2300 payment, the rise in payment means a guaranteed loss of their home if the loan was real and the documents were enforceable. This is a hidden balloon. The company calling itself the “lender” or “servicer” is obviously not going to get many payments at the new rate. So you call up and they tell you that in order to get a loan modification, which was probably promised to you at your original “loan closing” you must be three months behind in your payments.

Relieved that you don’t need to pay an amount you can’t pay anyway, and afraid you are going to lose everything if you don’t follow the advice of the “customer service representative, you stop paying and find yourself looking at a notice of default. The company tells you don’t worry you are in process for modification when i fact they are preparing to foreclose. There are probably a few million families that have been through this process of “lost paperwork” redoing it several times, “incomplete” etc. only to be told that you don’t “qualify” or the “investor has turned down your offer (which is a lie because the investor has not even seen your file much less considered any offer for modification).

Next comes the notice of acceleration either in a letter or in a lawsuit for foreclosure and suddenly the borrower knows they are screwed but feels it is their own fault. They feel ashamed and they feel like a deadbeat but they really don’t understand how they got to this point. THAT is the hidden balloon — an acceleration in about 26 months that is virtually guaranteed. The entire balance becomes due which of course you cannot pay. If you could have paid the full balance you would not have have taken a loan. You never had a chance. But that is only the first balloon payment that is not revealed to the borrower at his or her “loan closing.”

The second one comes at the end of 36 months. And that is because the computation of the amortized payment has been based upon the original principal and the original interest rate, both of which has changed. So even if you made it to 36 months, you would be told that you will be in foreclosure unless you pay the unpaid principal balance as the “bank” has computed it, which will probably be around $50,000-$70,000.

Florida law requires balloon payments to be disclosed in very prominent fashion. In these cases it not only was not disclosed, it was hidden from the borrower.

It is unfair and illegal to force this idiotic loan upon either the investor whose money was used to fund it without their knowledge or consent, or the borrower who obviously would not have signed a loan that he or she had no chance of paying. This is why forensic reviewers are necessary and expert witnesses are necessary. But for those of you who are entering into trial without benefit of forensic reviews and experts, you can still do this computation yourself and see what happens. Or any accountant can compute the final figures for you.

It is simple and simply wrong. And while you are at it, ask any lender of any kind anywhere if they put THEIR OWN MONEY at risk making a loan like that. Notice that I have not even bothered to mentioned the inflated appraisal.

FYI. Failure to Disclose in capital letters with the statutory language in Florida extends the maturity date indefinitely untinl interest and principal are paid in full. For Florida law see

Florida Balloon Payments

But in addition, the failure to disclose this also violates the Federal Truth in Lending Act. And the failure to provide a good faith estimate three days prior to closing is also a violation — all leading to rescission. The 9th Circuit, which had said that rescission requires tender or ability to tender the money back, reversed itself and said that is no longer necessary. But there is a three day right of rescission and a three year statute of limitations on rescission. In my opinion, both time limits would probably be applied BUT I also think that the legislation can be used defensively as corroboration for your argument that the borrower had no way of knowing what he or she was signing. AND the hidden nature of the balloon payments can arguably be said to be a scheme to trick the borrower, which MIGHT extend the running of the statute.

See Reg Z in full, but here is the part that I think is important:

(e) Prohibition on steering.

Prohibits a loan originator from “steering” a consumer to a lender offering less favorable terms in order to increase the loan originator’s compensation.

Provides a safe harbor to facilitate compliance. The safe harbor is met if the consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage); and the loan options presented to the consumer include:

  • (A) the loan with the lowest interest rate for which the consumer qualifies;
  • (B) the loan with the lowest total dollar amount for origination points or fees, and discount points, and
  • (C) the loan with the lowest rate for which the consumer qualifies for a loan without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation.

To be within the safe harbor, the loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business. The loan originator can present fewer than three loans and satisfy the safe harbor, if the loan(s) presented to the consumer otherwise meet the criteria in the rule.

The loan originator must have a good faith belief that the options presented to the consumer are loans for which the consumer likely qualifies. For each type of transaction, if the originator presents to the consumer more than three loans, the originator must highlight the loans that satisfy the criteria specified in the rule.

< Back to Regulation Z

 

Florida Law Changes

PDF Baker Donelson Mortgage Newsletter – Summer 2013

I recommend following the articles at http://www.jdsupra.com. From what I have read so far, these people are knowledgeable and they write well. The latest is the changes in Florida law, and while the tactics to deal with these changes are not revealed (for good reason), the changes are explained very well. Here is part o their latest article:

“The most substantial change for lenders is the creation of Florida Statutes § 702.015, which was created to speed up the foreclosure process, but in actuality, requires more paperwork for lenders. A lender who fails to comply with this statute may be subject to sanctions.3 The statute applies to a plaintiff filing a complaint, on or after July 1, 2013, seeking to foreclose upon residential real property (one to four family dwellings), and requires the following:4

  • Affirmative allegations that the plaintiff is the holder of the original note secured by the mortgage OR specific allegations of the factual basis by which the plaintiff is entitled to enforce the note.5
  • When a party, such as a loan servicer, has been delegated authority to file a mortgage foreclosure action on behalf of the note holder, the complaint must describe the authority and identify with specificity the document that grants the party to act on behalf of the note holder, such as a power of attorney.6
  • When the plaintiff possesses the original note, as a condition precedent to and contemporaneously with filing the complaint, the plaintiff must attach copies of the note and all allonges, and certify, under penalty of perjury, that it possesses the original note and provide specific details regarding its physical location and plaintiff’s verification of same.7
  • When the plaintiff seeks to enforce a lost, destroyed or stolen note, it must execute an affidavit under penalty of perjury, and attach it to the complaint. The affidavit must include the following: (1) a chain of all endorsements, assignments or transfers of the note; (2) facts showing plaintiff is entitled to enforce the note; and (3) exhibits including copies of the note and allonges, audit reports showing physical receipt of the original note, or other evidence of acquisition, ownership and possession of the note. The plaintiff must also provide adequate protection as required under Florida Statutes § 673.3091(2) before final judgment.”

See also Eighth Circuit TILA rescission decision rejects CFPB position
http://www.jdsupra.com/legalnews/eighth-circuit-tila-rescission-decision-72968/

Banks shiver as UBS swallows $885 million U.S. fine
http://www.reuters.com/article/2013/07/26/us-usa-ubs-settlement-idUSBRE96O1FH20130726

Setting Aside A Judicial Foreclosure Sale
http://www.jdsupra.com/legalnews/setting-aside-a-judicial-foreclosure-sal-79798/

Re-Default: Up To 46% Of Bailed Out Homeowners Can’t Pay Their Mortgage (Again)
http://dprogram.net/2013/07/25/re-default-up-to-46-of-bailed-out-homeowners-cant-pay-their-mortgage-again/

Bad Derivatives Trades Added to Detroit’s Woes
http://www.nakedcapitalism.com/2013/07/bad-derivatives-trades-added-to-detroits-woes.html

 

The Notice Letters and Legal Strategies

Now that I am actively practicing law I see the reasons for the anger and recriminations regarding the conduct of proceedings involving foreclosure. But whether the judge likes it or not the law is very clear regarding a condition precedent to the filing of foreclosure action. The borrower must receive notice. The notice must state that the borrower is in default and must also state the conditions for reinstatement to cure the default. The law is very clear that failure to give proper notice is reason enough to deny the foreclosure. It doesn’t stop the bank from coming back later after giving proper notice, but it does stop the current foreclosure proceeding.

Generally speaking you’ll find the required language in the mortgage in paragraph 22. There are other paragraphs that speak to default have the right to reinstatement —  usually in the preceding paragraphs to the paragraph 22.

Notwithstanding the law, I am finding that there are many judges who consider it to be their political mandate to push the foreclosures through to sale. They may be right as to the political mandate but they are wrong to use it in a court of law. Failure to give proper notice or any other material fact that might be in issue is sufficient to defeat a motion for summary judgment as long as it is clearly in the record at the time the order on summary judgment is entered. In Florida at least I detect an attitude from the bench which disregards the facts of the case in favor of entering judgment for the banks.

Having the facts and law on your side does not mean that you will be able to stop the foreclosure. This does not stop judges from blaming borrowers for delays in the proceedings despite the fact that it is the obligation of the foreclosing party to prosecute the action. And yesterday I saw a judge enter an order granting summary judgment despite the fact that there were dozens of facts in dispute. His reason appeared to be that the case had been hanging around for four or five years —  during which time the homeowner could have filed a motion to dismiss for failure to prosecute the action at least twice.

Of course homeowners do not know the Rules of Civil Procedure which is why I have stated so strongly and so often why they should retain counsel if they really want to keep their home.

In the course of my research on a related topic I uncovered the information shown below. It is obvious that under federal and Florida law the notice must contain information concerning the right to reinstate the loan and a demand for a specific amount of money required for reinstatement. Some banks have chosen to ignore the right to reinstatement because of their enthusiasm for obtaining a foreclosure judgment. And there are judges that will ignore the issue of notice and enter judgment for the bank. But on appeal there seems to be little doubt that the judges order will be reversed, the sale will be reversed, and the foreclosure action will be dismissed (without prejudice to refile).

Most judges appeared to approach a foreclosure case as a fairly simple matter that is very annoying to them. Instead of asking the attorney for the bank to present his/her case there are several judges who are announcing that everything seems to be in order and so judgment will be entered. While this is wrong I would caution the reader not to draw the  further conclusion that the judge is corrupt or has an agenda designed to hurt homeowners. In the eyes of the judge, based upon actual experience for several years, most defenses that have been presented to judges have been for the purposes of delay. In part this was allowed and even encouraged by the banks who were unready to fully prosecute the foreclosure action because of the potential liability for taxes, insurance and maintenance.

In my firm we generally refer clients who are simply looking for delays to other attorneys whose down payment and monthly payment is far less than what we charge. After years of writing about it I have reentered the practice of law and I am attempting to set a standard of vigorous and aggressive prosecution of the case against the bank. This of course is only possible if the bank has done something wrong. But you are not going to know that without someone going through the entire process starting with the application for mortgage and going through the present time. It also requires discovery in the form of interrogatories, requests for admission, requests to produce, and subpoenas issued to appropriate witnesses requiring them to bring documents with them.

In my opinion the more lawyers that aggressively pursue the case, the more judges will start questioning why the bank is backpedaling. Once you get a judge thinking that you are the aggressor, you have succeeded in taking control of the narrative. Once you have taken control of the narrative you can raise questions in the judge’s mind as to whether or not there might actually be something wrong with this particular foreclosure action.

I don’t deny that there is a value to any homeowner in getting free rent or no mortgage payment and that an attorney might be useful in maximizing the length of time in which the homeowner is not required to pay anything. It might be the only way that the homeowner can recover part of his or her investment. But delay tactics seem to dominate the litigation landscape. So it should come as no surprise that any judge would approach a foreclosure case with the assumption that the debt is valid and that the documents are in order; the only question left is when will the sale take place.

My mission, as I conceive it, is to make some changes in the litigation landscape. Specifically, I think that with proper pleading and discovery, it may be revealed that the party seeking the foreclosure lacks any ownership interest in the loan and lacks any authority to represent anyone with an ownership interest in the loan. I also think that the amount demanded for reinstatement or redemption is also misstated in that the borrower is not getting the benefit of offset from third-party payments that should be credited to the account in which the loan receivable is held. In short, I still believe what I said six years ago, to wit: as crazy as it might seem, the loan was prepaid at the time of origination and then repaid several times over after which it was then sold to the Federal Reserve probably multiple times  and sold two government-sponsored entities multiple times. If the loan is paid (several times over, no less) then there can be action to collect on it, least of all foreclosure.

While the presumption is on preventing a homeowner from getting a free ride, courts have been giving the financial industry the equivalent of corporate welfare with each  foreclosure sale. And in doing so they have actually stripped the true creditor from any collateralized claim and further stripped the true creditor from making any claim at all. The beneficiaries of this idiotic system are obviously the banks. The victims include everyone else including the investors, insurers, taxpayers, borrowers, and the Federal Reserve. Of course in the case of the Federal Reserve, it knows that it is a victim and that it is buying completely worthless paper from the banks who have previously sold the same paper to others. That doesn’t seem to matter to the federal reserve and so far it doesn’t seem to matter to any of the judges sitting on the bench.

http://www.credit.com/credit_information/credit_law/Understanding-Your-Foreclosure-Rights.jsp

http://floridaforeclosurefraud.com/2010/03/notice-of-default-prior-to-acceleration-whats-in-your-mortgage/

http://stopforeclosurefraud.com/2011/06/09/fl-2dca-reverses-sj-acceleration-letter-failed-to-state-the-default-as-required-by-the-mortgage-terms-konsulian-v-busey-bank-na/

New Florida Law: Hurry Up and Wait?

As most lawyers will probably tell you, the new Florida law changes the procedure and frankly contradicts the Rules of Civil Procedure issued by the Florida Supreme Court. In all events foreclosure defense attorneys should move quickly to issue discovery requests and subpoenas in anticipation of the application of this law. The good news is that you have a powerful argument for requiring expedited discovery in view of the fact that the judge can issue a final judgment as early as 20 days after the filing of the lawsuit for foreclosure. The bad news is that the new law seems to eliminate or at least infringe on your right to file a motion to dismiss as set forth in the Florida Rules of Civil Procedure.

The new law contains elements that are difficult to decipher.  The new law puts a burden on the borrower to show a genuine issue of material fact that would eliminate the possibility of a summary judgment in favor of the party who filed the lawsuit. In essence, the new law is in conflict with the Florida Rules of Civil Procedure in that an answer and affirmative defenses is only due after disposition of a motion to dismiss, which is a matter of right under the rules in Florida and every other state. I would imagine the Florida Supreme Court will, as it has done before, jealously guarded its right to issue rules of procedure and that this law will eventually be struck down. Meanwhile we have to treat it as the law of the state.

On the flip-side, the law requires proof of ownership of the loan  before the burden shifts to the borrower. But the proof of ownership is in the form of copies of documents which the banks have already shown they are very willing to fabricate and forge. In essence, the new procedure passed by the legislature turns the law on its head, to wit: at this stage in litigation the allegations of the plaintiff are taken as true only for procedural purposes and not for the purpose of entering final judgment without a hearing and without an opportunity to conduct discovery and otherwise cross-examine witnesses and challenge documents. it is a not-so-clever way of abridging the due process rights of everyone in the state and as a precedent in other matters would undoubtedly lead to disaster, but for my supreme confidence that the Florida Supreme Court will treat this as a no-brainer and strike down the law.

Thus the new law is as close to changing Florida to a nonjudicial state as you can get without actually doing it. I would suggest that in order to preserve your procedural and constitutional rights for your clients that you file an immediate motion to dismiss to be heard on an emergency basis where a motion to dismiss is appropriate or proper (which appears to be in nearly all cases).

I would further suggest that in addition to issuing requests for discovery (which under normal rules would be due after the hearing where the judge rules on whether the borrower has raised any material issues of fact, which is a further conflict with the Florida Rules of Civil Procedure as promulgated by the Florida Supreme Court) that you file an emergency motion to expedite discovery.

And lastly I would insist that the hearing on whether the borrower can raise issues of material fact (keeping in mind that the borrower is not even been given a chance to raise those issues without waiving the borrowers right to file a motion to dismiss) must be an evidentiary hearing conforming with the rules of evidence.

As a final note to my remarks on this law, I believe it is incumbent upon the attorney for any client that has been actually affected by this law to bring the matter up directly to Florida Supreme Court. It is difficult for me to imagine any scenario under which the court would uphold this law — simply on the grounds of who has authority to enact rules of civil procedure. The Florida Constitution gives that power to the Florida Supreme Court — not the legislator or the governor. Speaking personally, I intend to follow the rules of appellate procedure on behalf of clients instead of making them up to suit me or my client. That at least is a good starting point.

As a general remark on many of the issues of our day, I think it would be a good  idea to start with the contents of the state Constitution and the United States Constitution before passing any laws pretending as though the Constitution did not exist. The Constitution is the supreme law of the land. If you don’t like what it says, there is a provision for amendment. Without the amendment, the law is whatever the Constitution says it is. That is what is meant by a nation of laws as opposed to a nation of men. This latest law from the legislature signed by Gov. Scott is an example of mindless pandering to the banks who are contributing to the campaigns of the legislators and officers of government. But in addition to this particular law I find myself listening to debates that do not make any sense. As a result both sides of the debate on social issues and foreign policy, financial issues and the economy, are wrongly starting with the premise that the issue is even up for debate. Both sides seem to ignore the supreme law of the land as their starting point.  Neither side seems to stake out a defensible position on which we can have a reasonable debate.

Revisions To Mortgage Foreclosure Procedures In Florida
http://www.jdsupra.com/legalnews/revisions-to-mortgage-foreclosure-proced-31636/

Florida tops the U.S. in May foreclosures
http://www.naplesnews.com/news/2013/jun/14/florida-tops-the-us-in-may-foreclosures/

Bank of America Lied to Homeowners and Rewarded Foreclosures, Former Employees Say
http://www.propublica.org/article/bank-of-america-lied-to-homeowners-and-rewarded-foreclosures

New law to speed foreclosures draws criticism and praise
http://www.heraldtribune.com/article/20130618/article/306189993

 

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