Benjamin “Ben” Hillard, Esq., JD/MBA
I have spent most of my career as an investment banker and consultant conducting residential and commercial loan acquisitions due diligence; essentially buying loans from other banks. I’ve conducted loan purchase due diligence on literally billions of dollars of loans and have worked for Ocwen, Lehman Brothers, Goldman Sachs, Countrywide and many other institutional lenders conducting loan-level acquisitions due diligence. I have first-hand knowledge of: how Bank “A” buys loans from Bank “B”; individual loan analysis and portfolio pricing strategies; and put-back or repurchase provisions of loan purchase contracts. I have also been through Countrywide’s forensic loan fraud training. Finally, I maintain a Florida real estate broker’s license and I am a former Florida licensed real estate appraiser and title agent. I can’t imagine there is anyone better prepared to render advice and litigate mortgage loan issues.
Our average client is probably $150,000.00 upside-down in a primary residence or an investment property. Our client base includes lawyers, banking executives, mortgage brokers, investment managers, real estate brokers and other business executives. The litigation goal of the vast majority of our clients is to get the lender to refrain from pursuing a deficiency judgment (cancel the promissory note) in exchange for surrendering the property or its equivalent value via final judgment, deed-in-lieu or short sale.
I also accept speaking engagements, and, over the past twelve months, have spoken at the Greater Tampa Association of Realtors (“GTAR”), the Mid-Pinellas Chamber, RBC Bank, and The Board Tampa Bay. Topics included: “The Financial and Banking Crisis”, “How Banks Make Decisions Concerning Upside-Down Loans”, and “The Statistical Correlation between Average Incomes and Average Home Prices”.
The LA Times recently reported that Frannie Mae and Freddie Mac are going after more strategic defaulters.
- From January 2010 through June 2012, Fannie Mae had 595,128 foreclosures of which 293,134 (49%) were sent to its vendors to pursue post judgement collections. The other 301,994 foreclosures were not sent for various reasons, including state laws that prohibit pursuit and borrowers who did not meet Fannie Mae’s strategic default criteria.
- From January 2010 through June 2012, Freddie Mac had 220,000 foreclosures of which 117,000 (53%) could have been sent to vendors to pursue post judgement collections but only 59,000 were sent. The other 103,000 foreclosures could not be pursued due to state laws.
While the LA Times article points out that there were 102,652 foreclosures Frannie Mae and Freddie Mac did not refer or collect the deficiency, the bigger story is that half of all foreclosures were sent to vendors, or should have been, to pursue post foreclosure collections and/or deficiency judgments.
The reports also point out the fact that Fannie Mae and Freddie Mac want to focus more on strategic defaulters for the following reasons:
- Achieve greater deficiency recoveries
- Avoid reputational risk associated with going after people who could not pay the deficiency
- Deter other borrowers from walking away from their mortgages if they can afford to pay
What Does Strategic Default Mean?
For the purpose of the LA Times article, strategic default is defined as when someone who can pay for their mortgage walks away, especially when the home has become an upside-down property.
However, I like to say that all defaults are strategic defaults. Being upside-down in a property is a financial hardship, especially for clients that are getting close to retirement. Even if you can pay your mortgage today, an upside-down property may put your financial future at risk.
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Ben Hillard and the team at Castle Law Group are featured in the latest issue of the Attorney At Law Magazine – Great Tampa Bay Edition.
In the article (which starts on page 15) Ben describes the politics, economics, and personalities behind the 2008 economic crisis. Which include:
- Higher insurance rates in Florida after the 2006 hurricane season
- Lenders deviating from historical lending standards
- “Stated” income loans
- Banks moving from a model of originating loans and holding them, to a model of originating loans and selling, or securitizing, them
- Government policies were also in place that incentivized subprime lending – which created competition in the market to see who could adopt the lowest lending standards
- Borrowers being instructed by the lender to stop making mortgage payments to qualify for a loan modification
This had lead to people who could not realistically pay back their mortgages. When the financial crisis hit, many people were faced with foreclosures, and also the risk of deficiency judgements.
While Ben realizes that the thought of loosing your home is emotionally draining, it is important not to ignore the foreclosure lawsuit. “Your best opportunity to avoid a deficiency comes through aggressively defending the lawsuit.”
Ben’s background in banking gives him a unique to do this since he understands loss-reserves, lending capital, underwriting guidelines, and the lender’s role in creating the real estate bubble.
All of these factors have helped Castle Law Group wipe away more than $60 million in total debt since 2008.
But the work is not done. Ben expects an upswing in banks going after people for deficiencies.
Freddie Mac is accusing the big banks of rigging lending rates. While this news broke last year, now Freddie has filed suit against 15 big international banks.
What Do the Lawsuit and LIBOR Mean?
This new lawsuit is just more evidence of bad conduct on the part of the lenders. Ironically though, it likely helped individual borrowers with adjustable-rate loans tied to LIBOR.
LIBOR, or the London InterBank Offered Rate, is the average interest rate charged when banks in the London interbank market borrow unsecured funds from each other. The LIBOR rates are internationally recognized indices used for pricing many types of consumer, home, and business loans – including a large percentage of the adjustable-rate home loans in the United States.
My Experience with LIBOR
As an analyst at Ocwen in the 1990′s, I helped run the historical numbers to compare and statistically correlate the US Federal Funds rate [the rate set by the Fed] to other rates like LIBOR. Our analysis showed LIBOR led Fed rates up and followed Fed rates down. In other words, the LIBOR rate usually increased before the Fed increased rates, and when the Fed decreased rates, LIBOR would delay a month or two before decreasing.
This meant Ocwen should lend on LIBOR [make loans and charge interest based on LIBOR] – but finance those loans [barrow money] on a derivative of Fed rates. It was brilliant.
I suspect that many other lenders came to this same conclusion as about 80% of the subprime and about 45% of the prime mortgages in the United States are based on LIBOR.
What Do the Lawsuit and LIBOR Mean For You?
Since the financial crisis, LIBOR was kept at artificially low rates. What this lawsuit means to you is that you may have lost a small amount of money on bonds in your 401k over the past few years, but benefited by paying a lower interest rate on your home mortgage or even student loans if they were tied to LIBOR.
It also demonstrates the antagonistic relationship and adverse interest between the large mortgage lenders who manage the mortgage securities owned by Freddie and Fannie (who helped keep the LIBOR rates artificially low) and Freddie and Fannie themselves (who missed out on the interest they should have received from these investments).
Most people who are considering strategic default, think about it from their perspective. However, it is helpful to also understand how lenders view strategic default.
First: Understand Loss Reserves & the Bank’s Pain
Because deposit accounts in banks and thrifts are partially guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) or the Office of Thrift Supervision (“OTS”), the minimum capital requirements of banks and thrifts are strictly regulated by the FDIC or OTS. Minimum capital requirements are used by FDIC and OTS regulators to reduce the risk of bank failure as a result of becoming over-leveraged. Therefore, where the lender is a bank, or where the bank is the “owner” of the loan, the bank is typically required to set aside a portion of its equity capital to account for, or to make up for, losses the bank expects to occur is association with upside-down property or a non-performing loans. The equity capital that is set aside is commonly known as loss reserves. Minimum loss reserves are dictated by the FDIC or the OTS.
For banks and thrifts, when a borrower stops making payments on a mortgage loan, the bank or thrift must set aside some of its equity capital to account for the additional risk that the bank or thrift will not recover the full loan amount. For banks and thrifts, setting aside capital is a financially painful operation. This is also the reason that lenders are unwilling to work with most borrowers unless or until the borrower ceases making payments. Having loss reserves set aside is also a reason why lenders typically will not work with you until you’re delinquent. Following a payment default, the bank usually becomes more willing to work with you to resolve the account.
From the bank’s perspective, they don’t care that you may be struggling to make the payments. They do care about their balance sheet and having to set aside their equity capital into a loss reserve account.
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Definitions of Strategic Default
Wikipedia defines strategic default as:
the “decision by a borrower to stop making payments (i.e., to default) on a debt despite having the financial ability to make the payments.” It goes on to say that strategic default is typically associated with a “substantial drop in home price”, where the home’s price is significantly below the amount owed on the home’s mortgage, and such situation is expected to remain for the foreseeable future.
I would argue that a better definition of strategic default is:
the “decision by a borrower to stop making payments, despite the present financial ability to make the payments, because future default appears to be inevitable”. I would also argue that nearly every default is strategic.
The Situations Leading to Strategic Default
Nearly every person who defaults on a series of mortgage payments could probably continue to pay if they stop paying everything else; or more specifically, had stopped paying everything else months or years earlier. If all one had to secure is a place to live, one could reasonably stop paying for food, utilities, clothing, fuel, medical and dental, right?
Being more realistic, what happens when the basics exceed one’s present income? Or, if one can scrape by with just the basics, what happens when emergencies or unplanned expenses arise: unexpected medical bills, roof damage, A/C unit goes kaput? This is the reality that many Florida residents are facing (or even worse, ignoring) while clinging to the hope that property values recover.
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Analysis Concerning Tampa Bay Real Estate
The chart below represents the relationship between average incomes and average home prices in the Tampa Bay area. Historically, average home prices hovered at nearly three times average income. In other words, if average income was $33,000.00, the average home price was approximately $99,000.00.
The raw data concerning average income shows $23,819.00 in 1996 and $37,406.00 for 2010, with steady growth throughout the period with the exception of a slight decline in 2009. The raw data concerning average home prices in comparison to average incomes peaked near December 2005 at six times average income. This was slightly more than double the average relationship of average home prices to average incomes.
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Ben Hillard of Castle Law Group to Speak at the September 27, 2011 Pinellas Realtor Organization Meeting
Former banker turned foreclosure defense attorney, Ben Hillard, will be the featured speaker at the Pinellas Realtor Organization (“PRO”) September 27, 2011 meeting. The event runs from 10:00 am to noon. Ben is a foreclosure defense attorney with Castle Law Group, P.A. Ben has conducted loan acquisitions work for Ocwen, Lehman Brothers, Countrywide, Goldman Sachs and other lenders. Ben Hillard’s topic is “How Lenders Make Decisions Concerning Short Sales, Foreclosure, and other Loan Workout Options”. The format for the presentation will be lecture, follow by a question and answer period.
The Greater Tampa Association of Realtors (“GTAR”) is featuring Benjamin “Ben” Hillard at their June 28, 2011 meeting. Ben is a former banker turned foreclosure defense attorney with Castle Law Group, P.A. Ben has conducted loan acquisitions work for Ocwen, Goldman Sachs, Lehman Brothers, Countrywide and a number of other lenders. Mr. Hillard’s topic is “How Lenders Make Decisions Concerning Short Sales, Foreclosure, and other Loan Workout Options”. The format for the presentation will be lecture, follow by a question and answer period. More than 100 people are registered so far.
How long will it take to resolve a foreclosure suit? How long will it take to attempt to accomplish reasonable foreclosure defense litigation objectives? On average, our office has historically seen the process take around 18 months from the filing of a suit to resolution of the same. A side effect of defending a foreclosure suit is time. Time is often your friend. The longer the foreclosure suit takes, the more pain the lender suffers, and the more likely the lender will realize that it should cut a deal. We are also seeing increases in the time involved in attempting to resolve a foreclosure suit by short sale in that the lender appears to believe that it can get more for the property by taking it back and selling it themselves, than what short sale purchasers are willing to pay. On top of this, the lender’s decision-making is greatly dependent upon or primarily driven by what works out best for the lender’s balance sheet. Such factors often include, how the loan was financed by the lender, what the lender paid for the loan, whether there is mortgage insurance, what triggers the mortgage insurance to take effect, etc. These internal lender factors often change so that what works one month or one quarter, does not work next month, and vice versa. In all of this, don’t lose sight of the primary goal, the reason to defend a foreclosure suit is to get an agreement with the lender to refrain from pursuing a deficiency judgment / to cancel the promissory note in exchange for the property or its equivalent value through a short sale, assuming the borrower is upside-down in the property.
Another set of factors that contribute to the length of time involved in resolving a foreclosure suit is that court system is clogged and that the plaintiff, “the lender” in a foreclosure suit, is largely responsible for the pace of the litigation. When the attorney for the lender, or the in-house attorney for the lender is ready to deal with a file or has recently reviewed a file, that is the time that deals are struck.
A recent development that concerns the time involved in resolving a foreclosure suit is the implosion of several firms that represent the lenders; David Stern’s office and now Ben-Ezra & Katz. This not only causes problems for those cases that are no longer going to be handled by those firms, but the foreclosure cases pulled from these firms must be sent elsewhere. We have a number of files that have sat for six or eight months awaiting new counsel to appear on behalf of the lender. It also takes time for the remaining foreclosure plaintiffs firms to ramp up, hire attorneys and staff, and to figure out the status of the cases recently transferred to the new firm. All these factors will certainly contribute to longer timelines in the foreclosure defense arena going forward.