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”.

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.

While  most lenders will not approve a short sale if the mortgage is current, selling a property by way of short may be accomplished between the period after missing that first payment and before the lender files a foreclosure suit.

Historically, a lender does not file a foreclosure suit until the borrower is 90 days delinquent.  However, in this market, some lenders are waiting 120 days or more before filing and serving a foreclosure suit.  Quite often, if a short sale is pending, the lender refrains from filing suit while awaiting a short sale.

It is during this period, from one month delinquent to four months delinquent that it is possible to short sell a property prior to the lender filing and serving the foreclosure suit.

The short sale process starts with (1) engaging a realtor and getting an offer to purchase, (2) a short sale application. However, there are important items to take care of prior to accomplishing these two seemingly simple tasks.

The real first step is meeting with attorney familiar with foreclosure defense and lending /banking.

A foreclosure defense attorney is necessary to look out for your interests when engaging a realtor to list and sell a property by short sale.  Many real estate brokerage agreements contain provisions that may be adverse to you in your attempt to short sell a property.

Things you may want to consider,

include: (1) make the real estate broker commission contingent upon actual closing, (2) provide that the Seller has discretion concerning the type and nature of the documents to be provided to the Lender for the Lender to evaluate whether or not to approve the short sale, and (3) that the Seller is not obligated to sell/close unless the Seller is satisfied with the terms of the Lender’s approval letter, contract or settlement with the Lender.

A foreclosure defense attorney may also be necessary to advise the borrower on how best to fill out a short sale application.   An attorney may help determine what things to include in the short sale application, and what things to omit and/or tell the lender that your attorney has advised you not to provide certain information because this matter may wind up in litigation.

After engaging a realtor, for a quick short sale, the goal is to list the property at a price that will get noticed.

A lender is often willing to accept an amount less than what the lender believes is the true value because the lender typically evaluates loan resolution scenarios based on the time value of money.  In other words, a lender may be better off receiving $175,000 today as proceeds from a short sale, than $225,000 in 12 months after paying a foreclosure attorney thousands of dollars in fees and costs to conduct the foreclosure suit plus real estate broker commissions, carrying costs, property maintenance costs, and the costs of maintaining the lender’s loss reserve accounts.

After getting an offer and completing all or a portion of the short sale package, it is in the lender’s hands.

However, if an offer to purchase can be acquired and short sale package completed prior to the lender filing a foreclosure, chances are that the lender will not file the foreclosure suit while closing is pending.

Hiring the right realtor or real estate broker to conduct a short sale may be one of the largest challenges facing short sellers today.  Messing this step up could devastate your chances of avoiding a deficiency judgment.

Your Realtor or real estate broker may not have your best interest in mind. Your goal is to avoid the potential for the lender to seek a deficiency judgment.  The Realtor or real estate broker’s goal is to sell the property and collect a commission, regardless of whether the Lender agrees to refrain from pursuing a deficiency judgment.  This is one of the most important reasons to be represented by an attorney.  Be certain that your interests are being protected throughout the short sale process.

Many Realtors only look out for the commission and do not care whether or not the homeowner avoids a deficiency judgment, and their brokerage agreements read accordingly.  In fact, it has become prevalent for real estate brokers to include a short sale addendum in the real estate brokerage agreement that could have a negative impact on your best interest. For example, many short sale addenda to real estate brokerage agreements require that the client provide “ALL” information the Lender may request to evaluate whether on not the Lender with “approve” the short sale.  The problem is that the Lender’s request for financial information is a fishing expedition to determine whether or not the Lender will pursue a deficiency judgment.  You don’t want your agreement with your real estate broker to have a negative impact on your end goal of avoiding a deficiency judgment.

Therefore, it is important to have an attorney review the agreement between you and your real estate agent or broker before you sign a real estate brokerage agreement.

Likewise, it is also important to have an attorney review the offer to purchase or real estate purchase and sale agreement prior to signing.  Many real estate brokers include a short sale addendum that doesn’t include a provision that makes “closing” contingent upon the Lender’s agreement to refrain from pursuing a deficiency judgment and cancel the promissory note.  This is important because without such a provision, the short sale buyer/purchaser could sue to force the short sale seller to “close” where the Lender approves the short sale, but will not agree to refrain from pursuing a deficiency judgment and canceling the promissory note, the ultimate goal of many of our clients.

Every short sale situation is different.  Therefore, you need advice that is specifically tailored to your individual situation. Because real estate brokerage agreements come in as many shapes and sizes as there are brokers, a thorough review of the proposed brokerage agreement is mandatory to ensure a consistent strategy to avoid a deficiency judgment.  Castle Law Group typically recommends the use of one of our addendums to the brokerage agreement, and one of our addendums to the purchase and sale contract.

The advantage in having Castle Law Represent ONLY YOUR BEST INTERESTS in a Short Sale:

Our addendums typically include the following: (1) make the real estate broker commission contingent upon actual closing, (2) provide that the Seller has discretion concerning the type and nature of the documents to be provided to the Lender for the Lender to evaluate whether or not to approve the short sale, and (3) that the Seller is not obligated to sell/close unless the Seller is satisfied with the terms of the Lender’s approval letter, contract or settlement with the Lender.

Thanks  to a settlement with Bank of America, resulting from their takeover of Countrywide Financial, the State of Florida will be releasing $4 million dollars to provide Foreclosure Defense services.  The funds will be distributed to non-profit agencies beginning October 1, 2009 through September 30, 2011.

Read more about it here in a story posted by the Tampa Bay Business Journal.

A study done in September, 2008 by AARP indicates that, at that time, Americans 50+ years old represented 28% of those who were delinquent, in foreclosure or who had been foreclosed.  The study titled “A First Look at Older Americans and the Mortgage Crisis” is available by clicking HERE.

The assumption that they are in good shape during this crisis,  based on equity and low fixed interest rates,  has not proven true.  Unlike younger homeowners, who may eventually be able to recover from such a loss, homeowners in this age group may never recover, and may suffer significant financial reprecussions into older age.

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.