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In order for you to understand what may have happened to you in the origination of your loan, the causes of action that you may raise as a defense and/or counterclaim, we have created the following history of the unlawful practices employed by many lenders and mortgage brokers. These practices might give you not only a defense, but a legal claim for damages or even (unwinding) rescission of the mortgage. Although we are not acting as attorneys, we use the facts that we discover from our interview with you and our analysis of your closing documents to exhibit to the current servicer and holder of your loan that, if your foreclosure is contested, it will likely be tied up in court for a lengthy period. We use the cost of this contested foreclosure, contrasted with the cost of a mortgage modification, short sale or deed in lieu of foreclosure, in order to prove to the holder why everyone wins with the latter versus the contested foreclosure. It is simply turned into a matter of dollars and sense! |
In 1989, Congress, following the savings and loan disaster which put many lenders into bankruptcy, enacted a law known as FIRREA, which, among other things, created the rules by which appraisals should be handled by lenders. The savings and loan disaster, Congress felt, occurred, in part, as a result of inflated appraisals. In short, FIRREA demands that appraisals need to be totally independent of anyone that has an interest in either the property or the transaction. In 1994 the five federal regulators of financial institutions enacted regulations for FIRREA. These guidelines support the rule that appraisals must be totally independent. No one who has an interest in the property or the transaction can pick the appraiser or, in any way influence his valuation.
As an example, a homeowner, buyer, realtor or mortgage broker is an interested party and cannot have anything to do with the appraisal. But what about the lender itself? It wants to make the loan and would seem to be an interested party. The regulators, recognizing this, made it clear that only those employees who were responsible for protecting the bank from bad loans-credit quality employees-could deal with the appraisals. No one from the sales (production) side was to be involved in the choice, assignment or management of the valuation process.
But, after 1994 a lot changed in the lending industry. Computerization meant that credit scores could be obtained in seconds and the loan completely underwritten in minutes. This all occurred while the salesperson was with the customer. The only thing holding back the loan was the appraisal.
As a result, lenders were enticed to remove the "wall" they were supposed to erect between credit and production. It was much more efficient to allow salespeople to retain, influence and manage the appraisal process. Mortgage brokers, who were needed for loan volume, were allowed to choose or influence the choice of appraisers.
At the same time the mighty run up in property values had begun and no one was concerned about inflated appraisals driven by interested parties. Further, lenders rely on realty agents to bring them business. Those agents only brought business to lenders who made sure that deals "got done" by inflating values. Mortgage brokers did the same. All of this occurred, as well, in refinancing of mortgages and home equity loans.
At end, production staffs controlled the appraisal process or had covertly set up systems to insure that they did. Lenders often had "vendor management" personnel who ultimately reported to senior executives who were responsible for production. Others allowed credit people to choose the slate of appraisers; however those appraisers were promoted by production personnel who knew that these appraisers would cooperate with inflating values. Most common was to allow production staff to choose these appraisers from the available slate of appraisers.
Again, salespeople chose appraisers who would cooperate with inflated values. In almost all instances, salespeople ended up pressuring appraisers to inflate values. In a 2005 study, well over 50% of appraisers admitted that they were pressured and often gave in. In that same year over 8000 appraisers sent petitions to the federal regulators asking them to step in and stop these practices.
In 2003 the federal regulators realized that their guidelines had broken down and sent out a number of memoranda demanding that lenders comply with regulations on independence. A follow up memo answered questions about the regulations which, again, demanded strict adherence to the guidelines concerning appraisal independence. Some lenders then switched tactics and covertly created systems and procedures by which appraisal inflation could continue. It appeared that credit personnel were responsible for appraisals but, at end, pressure and influence from production staffs continued.
Worse, the regulators were content to simply put out these memoranda without enforcing them. Even by 2006, the regulators' audit personnel did not realize that FIRREA even applied to consumer loans, as they believed it only applied to commercial mortgages. Meanwhile the press began to write articles on this situation and how it could blow up into another financial disaster if values stopped rising or there was a recession. And still, these practices continued.
Lenders, with no foresight, believed that the strong real estate markets would continue into the future and created mortgage products that were unsafe. In order to make loans, they used "teaser" interest rates that were low enough to put consumers into homes that they could not really afford, simply in order to create loan revenues. Later, the rise in interest rates to levels that were above those for conventional mortgages, made it impossible for consumers to afford their mortgages.
Why would a lender jeopardize itself with poor quality loans? The answer is twofold. First, lenders like many other corporations are concerned with short term profits. Stock price determines executive compensation and stock price is largely based on today's profit.
Secondly, lenders most often sold loans into what is called the secondary market. They no longer held onto them and, unless some glaring irregularity showed itself in a foreclosed loan, they no longer experienced losses from bad loans. Lenders simply became fee based originators with almost no responsibility for these unsafe and unsound mortgage loans.
The problem of inflated appraisals and loans with unsafe interest terms were particularly applied to their business known as "subprime" lending. Subprime loans apply to consumers with credit scores below the norm and limited income. Here enormous profits were to be made by, after a relative short period, charging the borrower much higher interest rates than conventional loans along with mortgage insurance premiums. This, the lenders felt, was payment for the greater risk of people who lacked the creditworthiness or income to qualify for a traditional loan.
In order to sell these loans, however, the lender normally had to show that there was sufficient equity in the home that would be a "cushion" if the loan went into foreclosure. At this point the two problems of appraisal inflation and poor quality loans became one. Lenders had even more interest in inflating values in order to make subprime loans which they sold into the secondary market.
Although FIRREA does not have remedies that the consumer can use, if it can be proven that the lender or broker allowed obviously interested people to influence a valuation, the consumer has been the victim of an unfair business practice under consumer protection laws in almost every state. The lender has also breached its duty of fairness that is implied under the loan agreement. Finally, it might even be guilty of fraud where it can be shown that it had knowledge that what it was doing was illegal.
As to the unfair terms of many loans, particularly variable rate mortgages, the federal or state Truth in Lending and Real estate settlement rules come into play. Lenders are under an obligation to disclose credit terms in very specific ways that insure that consumers can understand them. When interest rates or payment terms change the burden is much greater. Many loans are made in ways that these laws.
When the appraisal process is flawed and the lender misleads the consumer there often exist grounds to sue for damages and to "unwind" (rescind) the loan. Included in the packet we give to our customers is a "White Paper" written by one of our founders to explain the crises to legislators, regulators and industry insiders. This was published and was the basis of many appearances before the regulators and purchasers of loans in the secondary market. In it you will find a much more detailed description of what has been described here.
Today the nation and its consumers are experiencing the effect of this improper behavior. The economy has been badly beaten by the collapse of the real estate market and consumers are being foreclosed upon in numbers not seen since the Great Depression. States and the federal government are looking at regulation that may help, but that help is not and may never be effective. In truth, the crisis is not as much about foreclosures as it is about servicing. Your loan is administered by a servicer who is paid about a quarter of a percent yearly to provide this function. When a foreclosure is done without defense, the cost is much less than a modification that takes a lot of work to underwrite and change paperwork. Thus, servicers lose money in a modification versus an easy foreclosure. They are staffed largely with untrained personnel, even located offshore, and who would have no knowledge of how to modify a loan. This is why they foreclose when to modify would cost the holder of the loan less.
Holders are largely trustees of pools of mortgages that have been packaged as securities and sold to institutional investors such as the now infamous Bear Stearns securities that the government was forced to bail them out of. The trustees also have little to lose financially in a foreclosure. That loss is borne by the institutional investors. The institutional investors have not demanded modifications until recently (if even now). The trustees are slow to respond as they have no "skin in the game" and the servicers lose money in a modification. Is it any wonder the country is suffering under the tidal wave of foreclosures!
We battle through the servicers to the holders and present them with the costs of loan modification versus foreclosure. When this occurs, most holders do the economically sensible thing and modify or give a deed in lieu or allow a short sale.
We are not giving legal advice and are not acting as attorneys. Our job is to attempt to negotiate with the lender and often use the cost of a contested foreclosure based on the facts that attorneys may find violate laws. We also supply consumers and their attorneys with educational materials including legal analysis, samples of answers and counterclaims utilizing the improper conduct of lenders as a defense to foreclosure actions. This information is purely educational and may be used by our customers as they wish. Consumers are always best served to utilize attorneys to defend themselves in any lawsuit. However, for those who cannot afford a lawyer or who wish to give their lawyer a sample of what may be done, we have included this information as well.
At end, we hope to successfully negotiate with your mortgage holder to obtain terms that you can live with and which are much fairer than those you presently have. Foreclosure is very expensive for the lender, generally costing them losses of 40% to 50. Modification is usually much less expensive, and the same is true for a deed in lieu of foreclosure or short sale. Our mission is to help rid the nation of the improper conduct of lenders which have led consumers like you to face unfair and improper foreclosures. Our founders are deeply involved in supporting legislation and litigation to end the plight of consumers and to rid the U.S of unsafe and unsound loans.
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