I Just Got Sued For A Deficiency Judgment, Now What?

Mortgage Debt Relief Act for Short Sellers and Foreclosures Extended Through 2013

Of most interest to real estate, the bill would extend mortgage cancellation relief for home owners or sellers who have a portion of their mortgage debt forgiven by their lender, typically in a short sale or foreclosure sale for sellers and in a modification for owners. Without the extension, any debt forgiven would be taxable, which, for underwater households, represents a financial burden. The extension is for one year and is in Sec. 202 of the bill.

But not everyone can benefit from the debt relief legislation. It covers only forgiven debt on principal residences and amounts up to $2 million, or $1 million if married but filing separately. The act also does not apply to second mortgages where the money was used for non-household expenses.

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Rebuilding credit score after foreclosure or short sale takes ten years or longer

Evidence suggests that the process of regaining creditworthiness is lengthy. Borrowers who terminated their mortgages for reasons other than default returned to the market about two-and-a-half times faster than those who defaulted. This has important implications for the housing recovery. The improvement in the housing market is often assumed to reflect significant pent-up demand. But an estimated 4 million foreclosures have taken place since 2007. The consumers who went through those foreclosures will return to homeownership only gradually, suggesting that mortgage supply will also be a factor in the housing recovery.

Only 15 percent of short sellers take out another mortgage

As the blue line shows, 12 years after a termination, just above 35% of borrowers with no prior defaults have taken out new mortgages. As the red line shows, borrowers with prior defaults return to the mortgage market very slowly or not at all.

Borrowers who default on mortgages return to the mortgage market at extremely slow rates. Only about 10% of borrowers with a prior serious delinquency regain access to the mortgage market within 10 years of their default. Borrowers who terminate mortgages for reasons other than default return to the market about two-and-a-half times faster than those who default. Renewed access to credit takes even longer for subprime borrowers with a serious delinquency on their record.

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United States sues Bank of America for $1 Billion for Doing the Hustle

America filed a civil mortgage fraud lawsuit against Bank of America, accusing it of selling thousands of toxic home loans to Fannie Mae and Freddie Mac that went into default and caused more than $1 billion of losses.

Wednesday’s case, originally brought by a whistleblower, is the U.S. Department of Justice’s first civil fraud lawsuit over mortgage loans sold to Fannie Mae or Freddie Mac.

It also compounds the problems that the Bank of America, second-largest U.S. bank, has faced since its disastrous 2008 purchase of Countrywide Financial Corp, once the nation’s largest mortgage lender.

According to a complaint filed in Manhattan federal court, Countrywide in 2007 invented a scheme known as the “Hustle” designed to speed up processing of residential home loans.

Operating under the motto “Loans Move Forward, Never Backward,” mortgage executives tried to eliminate “toll gates” designed to ensure that loans were sound and not tainted by fraud, the government said.

This resulted in “defect rates” that were roughly nine times the industry norm, but Countrywide concealed this from Fannie Mae and Freddie Mac, and even awarded bonuses to staff to “rebut” the problems being discovered, it added. The scheme ran through 2009 and caused “countless” foreclosures, it added.

“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” U.S. Attorney Preet Bharara in Manhattan said in a statement. “This lawsuit should send another clear message that reckless lending practices will not be tolerated.”

Bank of America did not immediately respond to requests for comment.

Since paying $2.5 billion for Countrywide on July 1, 2008, the Charlotte, North Carolina-based bank has lost nearly $40 billion on mortgage litigation and requests by investors to buy back soured loans, Credit Suisse estimated on October 5.

Some of these costs related to Merrill Lynch & Co, which Bank of America bought at the beginning of 2009.

According to court records, the case had been filed under seal in February by Edward O’Donnell, a Pennsylvania resident and former executive vice president at Countrywide Home Loans who had worked there between 2003 and 2009.

The United States later joined the case. It seeks triple damages under the federal False Claims Act, as well as civil penalties.

It is unclear whether O’Donnell has hired a lawyer. O’Donnell could not immediately be reached for comment.

Federal regulators seized Fannie Mae and Freddie Mac on September 7, 2008 and put them into a conservatorship.

Bharara’s office has in the last 1-1/2 years brought five civil fraud lawsuits against other lenders under the False Claims Act over alleged reckless residential mortgage lending, involving loans insured by the Federal Housing Administration.

In February, Citigroup Inc settled its case for $158.3 million and Flagstar Bancorp Inc settled for $132.8 million, while Deutsche Bank AG settled in May for $202.3 million. Cases are pending against Wells Fargo & Co and Allied Home Mortgage Corp, Bharara said.

On Monday, Congressman Barney Frank, who chaired the House Financial Services Committee in 2008, said Bank of America should probably be shielded from government lawsuits over Merrill, which it bought in part at federal officials’ urging, but he said he knew of no such urging to buy Countrywide.

Bank of America shares were up 2 cents at $9.38 in afternoon trading on the New York Stock Exchange.

The case is U.S. ex rel. O’Donnell v. Bank of America Corp et al, U.S, District Court, Southern District of New York, No. 12-01422.

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Bank of America sues HOAs

In a new twist, Bank of America filed suit in Clark County District Court earlier this week against numerous Homeowner Associations which foreclosed on homes wherein the Bank had secured mortgages. The suit claims that the HOAs are pursuing more than the statutory nine-months worth of assessments allowable under state law, and instead are filing liens that include payment of attorney’s fees and collection costs. These extra costs can really add up.

Information on the case:
Business Court
Date Filed: 10/16/2012
Department 29
Case Number: A670230

The bank filed suit Tuesday in Clark County District Court charging that state law limits the ”super-priority” first-position liens that HOAs can place against homes to an amount equal to nine months of HOA assessments — but that the HOAs are “improperly” filing liens demanding payment of attorney’s fees and collection costs on top of that.

These liens typically cover unpaid HOA assessments that accumulate while homes in foreclosure sit vacant, as well as costs to collect those unpaid bills. Charges that the HOAs and their bill collectors have been inflating the liens are pending in numerous lawsuits, with many attorneys expecting the Nevada Supreme Court or the Legislature to ultimately decide what limits should be placed on the liens.

In one recent example, a homebuyer was forced to pay off a $5,895 lien placed by the Spring Mountain Ranch HOA, but charged in a lawsuit that state law limited the HOA’s lien authority in that instance to $357, with the remainder representing an “unlawful lien amount.”

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