clear42: foreclosure help

Following the maxim that drastic times call for tepid measures, the banking industry continues to pay "lip service" to loan modifications while doing little. On Dec. 15, the Congressional Oversight Committee admitted the government's HAMP loan modification program has failed to help enough homeowners to stem the tide of foreclosures. The vast majority of loan modification requests fail, in part, experts believe, because banks have balked at offering a reduction in mortgage principal, the most effective way to halt costly foreclosures. Trying to revive HAMP, the administration in December announced new regulations designed to push banks into offering more reductions in principal than they have in the past. Fannie Mae and Freddie Mac immediately proclaimed, however, that they remain opposed to making this option available to struggling homeowners. Protecting the interests of the banking industry over the consumer, the Federal Reserve also blocked new foreclosure regulations that would have reined in foreclosure abuses. Although the economic collapse of 2008 has caused the tide to rush in on everyone, there has been no bailout for the "little guy." Left to fend for themselves, increasing numbers of homeowners are turning to a little-known provision in the federal bankruptcy law, which permits the discharge of a second or even third mortgage in its entirety in a Chapter 13 bankruptcy. The American Bankruptcy Institute recently reported that Chapter 13 bankruptcies have risen by 9 percent in 2010 compared to last year.

Flying under the media radar, the right to discharge a second mortgage in a Chapter 13 bankruptcy provides a glimmer of hope to homeowners stuck with a foreclosure because they own a home they can't afford and can't sell. With one in 10 Americans out of work, while others have suffered a pay cut as a condition of keeping their jobs, the amount of disposable income available to pay a mortgage is not what it used to be. Getting rid of a 2nd mortgage payment can sometimes make the difference between keeping a home and losing it to a foreclosure. How then does a homeowner qualify? Quite simply, when a home is worth less than the balance of a first mortgage, federal bankruptcy law -- at least in most states -- permits a homeowner to treat a second mortgage like an unsecured credit card and discharge it in a Chapter 13 bankruptcy.

Housing prices dipped for the third straight month in October, and hope for a recovery in 2011 has started to fade. According to Corelogic, an industry researcher, 11.8 million homes, or more than one out of five mortgages in the United States are "underwater" -- i.e. the total mortgage debt exceeds the value of the home. The U.S. Department of the Treasury estimates eight to 13 million foreclosures will occur from December 2010 through 2012 unless something intervenes. Ironically, the HAMP requirement that a homeowner generally be at least 60 days behind on a mortgage in order to qualify has led to foreclosures on homes where the mortgage payment had been up to date. In fact, a recent National Consumer Law Center's survey of 96 foreclosure attorneys in the US found that mortgage servicers began foreclosure proceedings against 2,500 of their clients even though a loan modification request was pending. Loan servicers do make more in fees from the foreclosure process than from the loan modification process, so this is not surprising.

Bankruptcy is a business decision, no less for a homeowner than it was for General Motors when it filed a Chapter 11 bankruptcy. This economy has sent clients to my door that I seldom used to see -- attorneys, physical therapists, nurses, college professors, and scores of people dependent on the real estate market for their livelihood. A bankruptcy is usually preceded by a loss of income, a divorce or medical issues, sometimes all three. Bankruptcy is not on anyone's list of fun things to do, and clients only consider it when the alternative, like a foreclosure, is worse. Many have tried to do a short sale or loan modification to no avail and have found that the bank would rather foreclose. In New Hampshire, a homeowner will be responsible for a mortgage deficiency for 20 years. These problems will persist until the powers that be decide to offer more than half-measures to address the foreclosure crisis.

For those facing the loss of their home and wondering whether a Chapter 13 bankruptcy may help get rid of a second mortgage, the following information may be helpful:

(1) It is disingenuous of banks to lull homeowners into a false sense of security by scheduling a foreclosure auction when a loan mod request is pending. If this happens to you, don't be too trusting when your bank tells you not to worry about the foreclosure because they'll continue the auction if there's no answer by the auction date. What they are really saying is if you are denied, the foreclosure will happen. One client told me that Bank of America won't even consider continuing a foreclosure auction due to a loan mod request until it was 72 hours before the auction date. I regularly receive panicked calls from homeowners denied a loan mod just before the auction occurs. While a Chapter 13 stops a foreclosure automatically, given how busy most bankruptcy lawyers are these days, finding one who has time to do a court filing at the last minute may be difficult.

(2) If you decide to see if you can get rid of a second mortgage, ask a broker to give you an opinion in writing of what your house is worth. Brokers will usually do this as a courtesy, figuring if you ever do decide to sell your house, you'll go through them. Make sure you ask for the potential sales price rather than a list price, which may be somewhat inflated. If the estimate is less than the balance of your first mortgage, then removing it in a Chapter 13 bankruptcy is possible.

(3) Even if you can get rid of a second mortgage, however, a Chapter 13 is not for everyone. Removing a second mortgage only works if you have enough income to complete the plan successfully. If the real problem is that you don't have enough monthly cash flow to pay your first mortgage and other expenses, Chapter 13 won't solve that problem.

(4) Chapter 13 will permit strapped homeowners to discharge most or all of their credit card debt. It usually won't discharge certain debt like taxes and student loans.

(5) Before making a decision, you want to be sure you can keep all property. Most states have exemptions sufficient to permit a homeowner to keep a house, vehicles, and other assets, however, some states are more generous than others.

The above is not intended as legal advice for your particular situation. Questions should be addressed to attorneys admitted to practice within your state. Richard Gaudreau is a lawyer admitted to practice in New Hampshire and Massachusetts and may be reached by email at: richard@attorneygaudreau.com or by phone at: 603-893-4300.

PR11-01-003

Text version after the jump

$432 BILLION PENSION FUND COALITION DEMANDS

BANK DIRECTORS IMMEDIATELY EXAMINE

FORECLOSURE PRACTICES

PR11-01-003

Contact: Sharon Lee / Matthew Sweeney, (212) 669-3747 January 9, 2011

$432 BILLION PENSION FUND COALITION DEMANDS BANK DIRECTORS IMMEDIATELY EXAMINE FORECLOSURE PRACTICES

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NEW YORK, NY – A coalition of seven major public pension systems called on the boards of directors of Bank of America (NYSE: BAC), Citigroup (NYSE: C), JP Morgan Chase (NYSE: JPM), and Wells Fargo (NYSE: WFC) to immediately undertake independent examinations of the banks’ mortgage and foreclosure practices.

Led by New York City Comptroller John C. Liu on behalf of the five NYC Pension Funds, the coalition also includes the Connecticut Retirement Plans and Trust Funds, the Illinois State Board of Investment, the Illinois State Universities Retirement System, the New York State Common Retirement Fund, the North Carolina Retirement Systems, and the Oregon Public Employees Retirement Fund.

The coalition of pension funds called for the banks’ Audit Committees to launch independent examinations of their loan modification, foreclosure, and securitization policies and procedures.

“This will help to prevent future compliance failures and restore the confidence of shareholders, regulators, legislators and mortgage markets participants,” the coalition advised in its letter.

The coalition members’ insistence on immediate action reflects the urgency of their concerns over mishandled mortgages. In November, the New York City Pension Funds and Comptroller Liu made a similar request for bank boards to conduct independent policy reviews as part of a shareholder proposal to the banks’ annual meetings in the spring.

“The banks’ boards cannot continue to pretend the foreclosure mess is the result of technical glitches and paperwork errors,” Comptroller Liu said. “There is a fundamental problem in their procedures that endangers not just homeowners, but shareholders, and local economies. Given the risks involved, only a swift and unbiased audit can reassure shareholders that the pension funds of 700,000 working and retired New Yorkers are in safe hands. The boards of directors have no time to waste.”

The coalition represents more than $430 billion in pension fund investments, including $5.7 billion invested in the four banks.

“We don’t know exactly what the banks were doing, and we don’t know if they did it right,” New York State Comptroller Thomas P. DiNapoli said. “Millions of families have lost their homes, and the investments of the million members of the Common Retirement System have been put at risk. As investors, we need to understand what happened. A full and open examination of the procedures used to foreclose on millions of families is the only way to make sure our investments are protected and no one is ever wrongfully evicted from their home.”

Federal Reserve Governor Daniel K. Tarullo testified to the Senate Banking Committee on December 1 that the Federal Reserve’s preliminary findings on bank foreclosure procedures suggested “significant weaknesses in risk-management, quality control, audit and compliance practices as underlying factors contributing to the problems associated with mortgage servicing and foreclosure documentation.”

The Congressional Oversight Panel has estimated that banks’ potential mortgage liability could total $52 billion, borne largely by the four banks contacted by the pension funds. The Panel’s November 16 report, “Examining the Consequences of Mortgage Irregularities for Financial Stability and Foreclosure Mitigation,” concluded that banks’ could suffer “disabling damage” if they were found to have misrepresented the quality of loans sold for securitization and forced to reabsorb billions in troubled loans.

“The responsibility for making sure that internal controls and compliance process are in place for mortgage and foreclosure practices rests squarely with these Audit Committees,” said North Carolina State Treasurer Janet Cowell. “The recent testimonies and studies strongly suggest the need for these Audit Committees to act swiftly and objectively in conducting an independent and comprehensive review of these practices.”

The coalition of pension funds called for the banks to report the findings of their independent examinations in their 2011 proxy statements this spring. As of December 31, 2010, the coalition’s combined holdings in each bank included: 97.1 million Bank of America shares valued at $1.3 billion; 226.6 million Citigroup shares valued at $1.1 billion; 40.7 million JPMorgan Chase shares valued at $1.7 billion; and 50.6 million Wells Fargo shares valued at $1.6 billion.

The New York City Comptroller serves as the investment advisor to, custodian and trustee of the New York City Pension Funds. The New York City Pension Funds are comprised of the New York City Employees’ Retirement System, Teachers’ Retirement System, New York City Police Pension Fund, New York City Fire Department Pension Fund and the Board of Education Retirement System. The New York City Pension Funds hold a combined 138,786,887 total shares in Bank of America Corporation (NYSE: BAC), Citigroup Inc. (NYSE: C), JPMorgan Chase & Co. (NYSE: JPM), and Wells Fargo & Company (NYSE: WFC) for a combined asset value of $1,933,160,319 as of 12/31/2010.

The coalition’s letters to each bank are available on Comptroller Liu’s website:

http://comptroller.nyc.gov/press/2011_releases/pr11-01-003.shtm

—

TEXT IN-FULL OF SHAREHOLDER COALITION LETTER:

CONNECTICUT RETIREMENT PLANS AND TRUST FUNDS ● ILLINOIS STATE BOARD OF INVESTMENT ● ILLINOIS STATE UNIVERSITIES RETIREMENT SYSTEMS ● NEW YORK CITY BOARD OF EDUCATION RETIREMENTS SYSTEM ● NEW YORK CITY EMPLOYEES RETIREMENT SYSTEM ● NEW YORK CITY FIRE DEPARTMENT PENSION FUND ● NEW YORK CITY POLICE PENSION FUND ● NEW YORK CITY TEACHERS’ RETIREMENT SYSTEM ● NEW YORK STATE COMMON RETIREMENT FUND ● NORTH CAROLINA RETIREMENT SYSTEMS ● OREGON STATE TREASURY

January 6, 2011

Name

Title

Company

Address

City, State

Dear [audit committee chair]:

Reports in fall 2010 of widespread irregularities in the mortgage and foreclosure processes at the nation’s largest banks have exposed BANKNAME (“the Company”) to intensive legal and regulatory scrutiny. Despite management’s assurance that the concerns are overblown and will be resolved quickly, preliminary findings by top federal regulators suggest that internal control failures at the banks are in fact widespread. Moreover, according to the November report of the Congressional Oversight Panel (COP), exposed banks could suffer severe capital losses.

As major institutional investors collectively holding XX million BANKNAME common shares, with a December 31 market value of $XX billion, we believe it is incumbent upon the Board of Directors to take immediate, independent action to restore confidence in the Company’s internal controls and compliance. Specifically, we call on the Audit Committee you chair to conduct an independent review of Company’s internal controls related to loan modifications, foreclosures and securitizations and to include a report to shareholders with findings and recommendations in the Company’s 2011 proxy statement.

The requested review, the scope of which we further detail below, is already the subject of a shareholder resolution submitted by New York City Pension Funds for the Company’s spring 2011 annual meeting. However, we believe the urgency and seriousness of our concerns require more immediate Board action.

The Congressional Oversight Panel’s November 2010 Report

In its November 2010 oversight report, the COP characterized the view expressed by management at the large banks that “current concerns over foreclosure irregularities are overblown, reflecting mere clerical errors that can and will be resolved quickly” as the best case scenario. In its worst case scenario, the COP said severe capital losses could destabilize exposed banks and potentially threaten overall financial stability.

The largest source of potential instability is the risk of widespread mortgage put-backs due to breaches of representations and warranties to mortgage investors, as well as concerns regarding the proper legal documentation for securitized loans. Using current estimates from investment analysts, the COP calculates industry exposure from mortgage put-backs at $52 billion, which it said would be borne predominantly by Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup.

In addition, banks could be vulnerable to litigation from homeowners who claim to have suffered improper foreclosures. “Even the prospect of such losses,” states the COP report, “could damage a bank’s stock price or its ability to raise capital.” The report also states that, as a result of flawed documentation, borrowers may have been denied modifications.

The Federal Foreclosure Task Force’s Preliminary Findings

On November 23rd, a week after the COP released its report, Assistant Treasury Secretary Michael Barr informed members of the Financial Stability Oversight Council that a federal foreclosure task force investigating some of the nation’s largest mortgage servicers had found “widespread” and “inexcusable breakdowns in basic controls in the foreclosure process.” The task force, which is composed of 11 federal agencies, is expected to report its findings in January to the Council, which will then determine what regulatory actions would rectify the problems.

Federal Reserve Governor Daniel K. Tarullo’s December 1st Congressional Testimony

Most recently, Federal Reserve Governor Daniel K. Tarullo updated the Senate Banking Committee on a related interagency examination by the four federal banking regulators. In his December 1st testimony, Mr. Tarullo said preliminary findings “suggest significant weaknesses in risk-management, quality control, audit, and compliance practices as underlying factors contributing to the problems associated with mortgage servicing and foreclosure documentation.” The agencies have also found “shortcomings in staff training.”

Mr. Tarullo testified that “foreclosures are costly to all parties,” noting their harmful impacts on homeowners, lenders, mortgage investors and local governments, as well as the broader economy. “It just cannot be the case,” he said, “that foreclosure is preferable to modification for a significant proportion of mortgages where the deadweight costs of foreclosure, including a distressed sale discount, are so high.”

Among the possible explanations for the prominence of foreclosures, he cited “lack of servicer capacity to execute modifications, purported financial incentives for servicers to foreclose rather than modify, …and conflicts between primary and secondary lien holders.” Although servicers are required to act in the best interests of the investors who own the mortgages, an October 2010 study provides compelling empirical support for the view that perverse incentives and conflicts of interest lead banks to foreclose upon or deny loan modifications to homeowners improperly.1

Federal Regulators and Congress May Impose Structural Reforms

Given the range of problems associated with mortgage servicing, including the degree to which foreclosure has been preferred to mortgage modification, Mr. Tarullo testified that “structural solutions may be needed.” In addition to possible regulatory actions, recent House and Senate Hearings on the foreclosure crisis raise the prospect of additional legislative remedies.

For example, a bill introduced by Reps. Brad Miller (D-NC) and Keith Ellison (D-MN) in April 2010, before the recent round of hearings, would address one of the conflicts cited by Mr. Tarullo. The Mortgage Servicing Conflict of Interest Elimination Act would bar servicers of first loans they do not own from holding any other mortgages on the same property. Enactment of the legislation would presumably force the Company, which is one of four banks that control more than half the mortgage servicing market and more than half the home equity loan market, to divest its servicing businesses or its interests in home mortgages.

Scope and Timeline for Independent Review

In light of the above, we urge the Audit Committee to immediately retain independent advisors to review the Company’s internal controls related to loan modifications, foreclosures and securitizations. The review should evaluate (a) the Company’s compliance with (i) applicable laws and regulations and (ii) its own policies and procedures; (b) whether management has allocated a sufficient number of trained staff; and (c) policies and procedures to address potential financial incentives to foreclose when other options may be more consistent with the Company’s long-term interests. For the purposes of this review, we do not consider your existing audit firm to be independent since the firm previously signed off on the Company’s internal controls.

The Audit Committee should disclose its findings and recommendations in the Company’s 2011 proxy statement. In the event that the Committee is unable to complete its review prior to the filing of the Company’s 2011 proxy statement, we request that the Committee provide a preliminary report in the proxy statement detailing the scope of the review, the firm(s) retained to perform it, any preliminary findings and remedial steps taken to date, and the expected completion date.

Conclusion

As you know, the Audit Committee is ultimately responsible for the Company’s compliance with legal and regulatory requirements as well as its internal controls over financial reporting. The Committee, however, appears to be relying on management’s internal review and assurance that any foreclosure irregularities are mere clerical errors that will be resolved quickly, while awaiting the outcome of various investigations by federal and state authorities.

It may be too late to protect the Company from the worst consequences of any past compliance failures. It is nonetheless critical that the Audit Committee take immediate, independent action to assess the Company’s mortgage-related internal controls and address any underlying weaknesses. This will help to prevent future compliance failures and restore the confidence of shareholders, regulators, legislators and mortgage market participants.

Thank you for your prompt consideration. We look forward to your response by January 21, which you should address to New York City Comptroller John Liu at 1 Centre Street, New York, NY 10007.

Sincerely,

John C. Liu, New York City Comptroller

New York City Pension Funds

Denise Nappier, Connecticut State Treasurer

Connecticut Retirement Plans and Trust Funds

William R. Atwood, Executive Director

Illinois State Board of Investment

William E. Mabe, Executive Director

Illinois State Universities Retirement System

Thomas D. DiNapoli, New York State Comptroller

New York State Common Retirement Fund

Janet Cowell, North Carolina State Treasurer

North Carolina Retirement Systems

Ted Wheeler, Oregon State Treasurer

Oregon State Treasury

cc: Board of Directors

—

In addition to Comptroller Liu, the New York City Pension Funds trustees are:

New York City Employees’ Retirement System: Ranji Nagaswami, Mayor’s Representative (Chair); New York City Public Advocate Bill de Blasio; Borough Presidents: Scott Stringer (Manhattan), Helen Marshall (Queens), Marty Markowitz (Brooklyn), James Molinaro (Staten Island), and Ruben Diaz, Jr. (Bronx); Lillian Roberts, Executive Director, District Council 37, AFSCME; John Samuelsen, President Transport Workers Union Local 100; Gregory Floyd, President, International Brotherhood of Teamsters, Local 237.

Teachers’ Retirement System: Ranji Nagaswami, Mayor’s Representative; Deputy Chancellor Kathleen Grimm, New York City Department of Education; Mayoral appointee Tino Hernandez; and Sandra March, Melvyn Aaronson and Mona Romain, all of the United Federation of Teachers.

New York City Police Pension Fund: Mayor Michael Bloomberg; New York City Finance Commissioner David Frankel; New York City Police Commissioner Raymond Kelly (Chair); Patrick Lynch, Patrolmen’s Benevolent Association; Michael Palladino, Detectives Endowment Association; Edward D. Mullins, Sergeants Benevolent Association; Thomas Sullivan, Lieutenants Benevolent Association; and, Roy T. Richter, Captain’s Endowment Association.

New York City Fire Department Pension Fund: Mayor Michael Bloomberg; New York City Fire Commissioner Salvatore Cassano (Chair);New York City Finance Commissioner David Frankel; Stephen Cassidy, President, James Slevin, Vice President, Robert Straub, Treasurer, and John Kelly, Brooklyn Representative and Chair, Uniformed Firefighters Association of Greater New York; John Dunne, Captains’ Rep.; James Lemonda , Chiefs’ Rep., and James J. McGowan, Lieutenants’ Rep., Uniformed Fire Officers Association; and, Sean O’Connor, Marine Engineers Association.

Board of Education Retirement System: Schools Chancellor Joel Klein, Mayoral: Philip Berry, Gitte Peng, Robert Reffkin, Tino Hernandez, Joe Chan, Tomas Morales, Linda Laursell Bryant, and Lisette Nieves; Patrick Sullivan (Manhattan BP), Gbubemi Okotieuro (Brooklyn BP), Dmytro Fedkowskyj (Queens BP), and Joan Correale (Staten Island BP); and employee members Joseph D’Amico of the IUOE Local 891 and Milagros Rodriguez of District Council 37, Local 372.

1. Agarwal, Sumit et al, “Market-Based Loss Mitigation Practices for Troubled Mortgages Following the Financial Crisis,” Fisher College of Business, Ohio State University, October 2010. According to the study by researchers from the Federal Reserve Bank of Chicago, Office of the Comptroller of the Currency and Ohio State University, “loans owned by private investors are indeed less likely to become modified than portfolio loans with identical characteristics. …In a similar flavor to this result, we find that loans which are second lien (piggybacks) are less likely to become modified. …We attribute this result to the conflict of interest between lenders.”

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