Yearly Archives: 2010

Do you need foreclosure defense?

I laughed  when I read about the woman who was able to stretch out her foreclosure for 25 years and continued to live in her home the whole time making no payments. She appealed the case seven times and the bank’s foreclosure attorney is terrified of her. She’s the Alonzo Mourning of foreclosure defense.

She deserves the litigant of the year award (not intended as a compliment), but she’s also  learned to be a more-than-competent foreclosure defense attorney.  Many attorneys have jumped into the new sub-specialty called foreclosure defense. Very few homeowners in foreclosure hire attorneys to defend them. Most cases, probably more than 90%, proceed unopposed.  Basically, a foreclosure defense attorney will file an “appearance,” that costs about $200.00, on your behalf and will act as your attorney against the bank. At a minimum, the attorney should file an answer and affirmative defenses for you.

There are a number of defenses that can be raised, the most common of which is “show me the note.”  Many lenders are not the actual owners of the foreclosed mortgage because an assignment of mortgage was not filed correctly by the bank. I have seen quite a few foreclosures dismissed because the wrong mortgage company filed the foreclosure suit.

Does everyone in foreclosure need an attorney? No, most don’t.

If you want to delay the process (which already takes over one year as it is) then it is wise to hire a foreclosure defense attorney. I spoke with a Chicago condo owner recently who hired a foreclosure defense attorney. She did this because she did not understand the process. However, the attorney was charging her almost $1000.00 per month, even if no work was done. That’s a pretty heavy, monthly price tag. Reviewing the case online, I saw that the attorney had filed an appearance, but done nothing else. And the poor client was left in the dark and didn’t know what was going on.

Most times you will not need a foreclosure defense attorney. If you do, expect to pay $250-$350/hour. The attorney should be able to explain how a 1099 works after a foreclosure, if a bankruptcy will help you, how the foreclosure process works and many other issues.

Time to protest Palatine taxes is now

I live in Palatine. Yesterday, in the mail (and about as welcome as a jury summons to 26th and Cal, an IRS love note or a bounced check) came the reassessment notice for my real estate taxes.

My tax assessment went up 5%, which I don’t consider too bad.

This is the triennial reassessment, meaning that I will be stuck with this assessment for 2010, 2011 and 2012.

Rather than being afraid of this paper bullet, I look at is as an opportunity to reduce my real estate taxes and so should you.

I will file a protest of the assessment.  I have no idea how to do this and I always hire someone to do it for me. I wrote here about how to file a tax protest and who to hire.

This is a good opportunity to keep your real estate tax down if you live in Palatine Township, but remember you only have 30 days to file a protest. So don’t fear your reassessment notice and take some action.  Trust me, no one wants to listen to you complain about real estate taxes for the next three years.

Getting a mortgage after bk, short sale or foreclosure

It is possible to get a new mortgage after a short sale, bankruptcy or foreclosure, but it takes awhile.

The chart above tells how long it takes, after each of these events occurs, to get a new mortgage.

The first column labeled FNMA is a standard Fannie Mae, conventional mortgage, and this generally requires a 10% downpayment. The second column labeled FNMA 20% is a mortgage with 20% down. The third column is an FHA mortgage, which requires only 3.5% down, and is the current favorite these days with first-time buyers, because it requires credit of about 610 FICO and is otherwise easier to qualify for compared to conventional financing.

Most clients get FHA mortgages after a bankruptcy, which is only a 2 year wait.

The waiting periods are one thing to consider when deciding how to handle a underwater real estate and whether a strategic default is worth it or not.

Cook Co. tax bills mailed yesterday

The Cook County second installment of 2009 tax bills were mailed yesterday and are due 12/13/10 (a nice pre-Christmas present).

You can check the amount of your tax bill here.

Please double check that your homeowner’s exemption is on the tax bill. If not, you can apply for a certificate of error at the Cook County Assessor’s office or your township assessor’s office. If the homeowner’s exemption is missed, you can still pay the lower amount (with the homeowner’s exemption subtracted) if you act quickly and file for the certificate of error immediately.

Strategic default in the news

Strategic default is not funny.

But the video below from “The Daily Show” talks about how the Mortgage Bankers Association strategically defaulted on its own building, yet instructs everyone else to stay put.

Also interesting in today’s Wall Street Journal is “The Great Mortgage Mystery” that starts with this rather eye-opening lead:

The big question from the mortgage meltdown isn’t why so many distressed homeowners are defaulting on their loans. It’s why any of them are still making payments.”

The story also uses the term “zombie homeowners,” that is  borrowed from the Japanese “zombie banks,” to define underwater homeowners.

Read or browse the 150 plus comments to the WSJ story.  Because strategic default is such a volatile topic, the comments are as good, if not better than than story.

The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
Mortgage Bankers Association Strategic Default
Daily Show Full Episodes Political Humor Rally to Restore Sanity

Monster in the closet: Collection agency or deficiency judgment?

When it comes to foreclosures and strategic default,  clients are very afraid of deficiency judgments. Deficiency judgments are like the monster in the closet — unseen, but scary as hell. Homeowners in or near foreclosure are terrified of these things, but there is no reason to be afraid because in the cold light of day deficiency judgments shouldn’t be feared  since they are so rare. I have yet to talk with a client against whom a deficiency judgment was entered in Illinois.

In reality, it may be that collection agencies are a much bigger threat to those thinking about strategic default or in foreclosure now. Channel  5 reported on this last summer, but it seems to be increasing since then.

I have had two cases recently in which lenders assigned their foreclosed mortgages to collection agencies. The collection agency starts calling and sending letters and finally files a lawsuit for “Breach of Contract” against the owner. A breach of contract case can be filed because the owner signed a promissory note at closing. The liability on the note survives the foreclosure. The statute of limitations on cases like these is a hefty 10 years.

Mostly this is happening on second mortgages, not first mortgages, but it is still possible on a first mortgage. Citibank seems to be very active in sending its delinquent second mortgages to collection.

Case 1: In the first case, the client had been foreclosed 5 years ago.  Then, suddenly the client started getting letters and calls from a collection agency. This agency specializes in “seriously delinquent and defaulted loan portfolios.”  I don’t know for sure, but most likely they agree to a contingent fee based on whatever they can collect from the foreclosed loans a lender assigns to them.  Most likely the client will have to put up with a series of calls and letters and then a lawsuit will be filed. When a judgment is entered the client will have to file bankruptcy to get rid of the judgment.

Case 2: The client owns a Chicago condo that is currently in foreclosure and, before the foreclosure was even completed, Citibank filed a breach of contract case against the owner based on the client signing the note for a second mortgage.  When this happens a whole separate lawsuit is filed. This is not part of the foreclosure case and it is not a deficiency judgment. A local law firm that is a well-known debt collector filed the case. The client will have no alternative except to file bankruptcy after the judgment is entered.

(Update 10/20/10: Wells Fargo is also filing collection actions on second mortgages. A McHenry County client was served with a $40,000.00 breach of contract case.)

I think that it’s very likely that lenders will continue to hand over their foreclosed loans to collection agencies in the hope of at least getting something back on delinquent loans. This is another reason to carefully weigh whether a strategic default is worth the cost, since you will have to look over your shoulder for 10 years until the statute of limitations expires. Ultimately, a chapter 7 bankruptcy will be the only way to eliminate the collection agency from the picture.

FHA mortgages get more expensive

On October 4, FHA mortgages get a little less expensive upfront, but a lot more expensive in the long-run.

FHA mortgages are the only game in town for first-time buyers. Most first-time buyers obtain FHA mortgages.

Until now the FHA premium (called MIP) paid by the buyer at closing was 2.25% of the loan amount. From here forward, it will be reduced to 1%. That’s good and will reduce initial closing costs.

With an FHA mortgage, in addition to the upfront MIP payment, the buyer also pays a monthly MIP premium that’s included in the monthly payment. This payment will increase.

It used to be .55% of the loan amount (this is the yearly amount, divide by 12 for the monthly payment).  Now it will be .9%, almost twice as much.

Buyers should not automatically assume an FHA is best. This increased FHA expense means that buyers should carefully examine FHA vs. conventional mortgages because a 5% down conventional mortgage will be much cheaper than an FHA.

The best way to protect inheritances

If you leave money outright to your children or heirs, the inheritance can be lost by your heirs in several ways: Divorce, creditors or bankruptcy are the main culprits.

There’s a simple way to avoid this and to protect the heir from him or herself.

In the trusts that I prepare, most clients choose to leave the inheritance in a “flexible protective trust.” This is  fancy name for a “spendthrift trust.” Usually, a flexible protective trust leaves it up to the child/heir to decide whether to withdraw the funds ( if the coast is clear) or leave the funds in the trust where the inheritance is protected.

Inherited money that the child leaves in a flexible protective trust cannot be taken in the child’s divorce, cannot be attached by child’s creditor and it is exempt is bankruptcy, meaning the child will not lose the inherited money if he files bankruptcy.

A recent bankruptcy court case, In re Lunkes,  illustrates that there is really no reason to leave an inheritance directly to a child or heir. It is always better to play it safe and at least set up a flexible protective trust and let the heir decide if it should be protected within the trust or not.

In the Lunkes case, a parent died and left money to the children, but the funds were left outright, not in a flexible protective trust. One of the kids filed a chapter 7 bankruptcy and claimed that the inheritance was exempt, and that he should be able to keep the inheritance. The kid’s argument was that, hey… the funds are still being administered in the trust (there was a lot of real estate that now takes an eternity to liquidate) so since I don’t have the inheritance yet, it can’t be taken away in the bankruptcy. The court said, sorry, the funds were left outright to the child, not in a flexible protective trust, so the inheritance goes to the bankruptcy trustee. This could have easily been avoided by using a flexible protective trust. Inherited money left in a flexible protective trust is exempt in bankruptcy (meaning the child/heir gets to keep the inheritance).

There are only three rules to for setting up a flexible protective trust:

1. The funds have to be held in trust, not left outright.
2. The child/heir cannot be the trustee.
3. The trust has to contain a spendthrift clause. Most trusts contain these.  An Illinois spendthrift clause reads like this:  “No interest under this instrument shall be assignable by any beneficiary, or be subject to the claims of his or her creditors, including claims for alimony or separate maintenance. The preceding sentence shall not be construed as restricting in any way the exercise of any right of withdrawal or power of appointment or the ability of any beneficiary to release his or her interest.”

The truth is that very few heirs are going to actually leave the inherited money in the trust. But it’s best to give them the option, right?  I don’t charge any extra fees for drafting a flexible protective trust provision. It’s very easy to do. It’s my default, go-to way to distribute to the heirs in 99% of trusts that I draft.

So, do your heirs a favor and at least give them the option of protecting their inheritance in a flexible protective trust.

Real estate.. there’s an app for that

The internet is changing (for the better) the way people shop for and view real estate.

There is an new Iphone app that allows you to search listings from your Iphone. The nice thing about this app is that the GPS in the phone senses were you are located and will automatically map listings near you. Or you can search specific addresses. Then it shows you detailed listing with plenty of pics.

I have been playing around with it and it works very well.

Can student loans be discharged in bankruptcy?

Just this week, I’ve talked with three prospective clients who want to try to discharge student loans in bankruptcy.

I don’t like delivering bad news, but it’s close to impossible to get rid of student loans by filing a bankruptcy.

Before 2005, private student loans were dischargeable in bankruptcy. Since then, very few federal, state or private student loans were able to be cleared with a bankruptcy.

Here’s an example of how hard it is to discharge a student loan: In 2008, there were 72,000 student loan borrowers in bankruptcy. A whopping 29 of those had their student loans discharged. Those are not great odds.

The bankruptcy courts require you to show “undue hardship” to get rid of a student loan. This means that a separate motion has to be brought before the judge and you have to show you made an effort to pay the loan and that continuing to pay it would mean that you couldn’t afford basic living expenses.

Nationally, the amount of student loan debt now surpasses credit card debt!

There is a proposed law in Congress that would allow private student loans to be discharged in bankruptcy. Here’s an interesting discussion of that proposal. I would not hold my breath waiting for this to pass.

The only remedy available for those in trouble on student loans is to file a chapter 13 bankruptcy. This will consolidate the loans and will stop interest and penalties. To do this, you need an income. Beyond income, you need what is called discretionary income, that is some money left to pay creditors after your basic expenses, to file a chapter 13.

For now, if you take out a student loan you are pretty much stuck with it, unless you qualify to file a chapter 13 bankruptcy.