Castle Law Group

September 27th, 2009

Cutting Deals with the Bank

Undercapitalized or Upside Down Lenders Provide Greater Opportunities

for Borrowers Facing Foreclosure to Cut Deals

According to an article in the South Florida Business Journal, Florida is tied with Georgia and Illinois for having the most banks in the nation with major capital shortfalls according to a study by The Street.com ratings and SNL Financial.

Where lenders and banks are under capitalized, borrowers have greater opportunities to cut deals with lenders on upside down properties.  There are many reasons why undercapitalized banks and lenders present better opportunities for borrowers to cut deals.

First, undercapitalized lenders often do not have sufficient staff or resources to participate in highly structured loan workout programs.  In other words, undercapitalized lenders often have more flexibility to consider a wider range of loan workout proposals.

Second, because there is often less formal internal structure, undercapitalized lenders may be more likely to take the borrowers individual circumstances into account when making loan resolution decisions.

Third, Florida foreclosure defense attorneys have an easier time defending foreclosure suits by lenders or banks that have been taken over by the Federal Deposit Insurance Corporation (“FDIC”), the Office of Thrift Supervision (“OTS”), or by another bank in lieu of government takeover.  Initially, after a loan is transferred to a new owner/entity, it often takes several months for the new owner/entity to get up to speed on the loan or foreclosure status.  Secondarily, after such an acquisition, the risk profile of the assets [loans] should shift in the direction of market value.  In other words, if a new entity owns the loan, it should have acquired the loan at a significant discount, giving the new/current owner of the loan more flexibility to cut a deal with the borrower to resolve a contested foreclosure.  Finally, Florida foreclosure defense attorneys have an easier time defending foreclosure suits where the loan has changed hands one or more times.  Where a loan has changed hands several times, discovery becomes more complex, assignments may be missing, original documents could be lost, authority to foreclose may become unclear.

Therefore, the banks pain becomes the borrower’s gain.

June 30th, 2009

WHY THE BANK DOES NOT WANT YOUR PROPERTY

If you have been served with a foreclosure suit or foreclosure complaint, it is important to know that you have options,  and that your lender doesn’t want your property.

The information below is for demonstrative purposes only and does not reflect the actual percentages, values or numbers concerning any particular bank.

Lending Guidelines & Regulation:  What happens when you are 45 days late

While bank or lenders have different capital structures, banks that are regulated by the FDIC have certain guidelines they must adhere to.  For example, XYZ Bank makes a $200,000 loan for an investor to purchase a residential property in 2005.  In 2007, the borrower goes 45-days delinquent.  The FDIC knocks on the bank’s door and says, “I see this loan is 45-days delinquent, please put $2,000 of your equity capital into a loss reserve account.  This $2,000 of equity capital actually represents $20,000 of XYZ Bank’s lending power.

Leverage:

Most bank use LEVERAGE when making loans.  When XYZ Bank makes a loan, it puts 10% of its equity capital into the loan, and uses other peoples money to fund the remaining 90% of the loan.   The borrowed money could be your own deposits, certificates of deposit (”CDs”), or money borrowed from other banks.

Lending Guidelines & Regulation:  What happens when you are 90 days late

When the loan goes 90-days delinquent, XYZ Bank puts the loan into foreclosure.  The FDIC knocks on the door again and asks XYZ Bank if it has an appraisal or Brokers Price Opinion (”BPO”) more recent than 12-months.  If the bank doesn’t have a recent BPO or appraisal, the FDIC says, “go get one”.  If the BPO comes back at $180,000, the FDIC instructs XYZ Bank to put another $18,000 of its equity capital into the loss reserve account because the bank is likely facing a $20,000 loss.

Why/When the Bank takes action:

This doesn’t have to happen too often before the bank is out of equity capital.

Banks have historically put loans into foreclosure after the loan goes 90-days delinquent.  However, in this market, many banks cannot afford the FDIC knock on the door and are therefore delaying putting loans into foreclosure.

Why a Deed-in-Lieu of Foreclosure is not a great option for the bank:

Historically, banks would also accept a deed-in-lieu of foreclosure.  In other words, an investor could say to XYZ Bank, don’t file a foreclosure suit against me.  I will simply deed the property to you, the bank, then the bank would sell the property to repay the loan.  However, under such a scenario, if the property value doesn’t significantly exceed the loan amount, the FDIC also  requires the bank to set aside reserves because it has an asset that is not generating a return, and more particularly,  in case it experiences a loss.

Today, many banks cannot afford to maintain a large portfolio of Real Estate Owned by the bank (”REO”).

Why Banks prefer a “Short Sale”

Therefore, often the best solution is for the owner to list the sell the property, for a loss, with the permission and blessing of the bank … a “short sale”.   This puts cash back into the hands of the bank.

Castle Law Group specializes in actively defending mortgage foreclosure lawsuits with the litigation goals of preventing deficiency judgments and 1099’s.