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In Federal Court in Albany this morning an attorney for a major bank admitted that thousands of improperly documented loans exist due to the failures in the mortgage banking industry the took place after 2007. Many homeowners are paying on mortgages that were never assigned to the servicer who is now claiming the right to collect based on the premise that possession is equivalant to ownership, but the bank in question refused to produce the original document because it would be too risky.

In the last several months cases have begun to emerge of Banks collecting on and even trying to foreclose on mortgages they have no legal title to. I am not talking about the legal standing issue that has been the subject of much litigation. I am referring to the practice of attempting to collect on the mortgage held and never transferred by mortgage banking corporations that failed in the first rounds of the mortgage melt down. Many of those mortgages were listed on exchanges but never properly sold to anyone nevertheless so called servicing lenders are attempting to collect on their own behalf. Isn’t that fraud?

The precipitous decline in real estate values has hurt every homeowner, but as the saying goes every black cloud has a silver lining and this dark cloud may have left a pond on your home. Think I’m talking nonsense. Well the decision issued by Justice Clarence Thomas in the case of Nobelman v. American Savings Bank, 508 U.S. 324 (1993) where he came to the odd conclusion that a mortgage is secured except when it is not secured became the basis of the decision that Judge Jose A. Cabranes reached for the Second Circuit Court of Appeals. The Circuit decision in the case of Pond v. Farm Specialist Realty, 252 F.3d 122 (2nd Cir., 2000) was that if the first mortgage exceeds the value of the home the second mortgage becomes just another unsecured debt no longer needing to be treated as a mortgage.

Current estimates are that there are many thousands of New York homeowners whose second mortgage is voidable pursuant to the Pond decision. They just don’t know it. They know their house is under water they just have not been informed of what they might do to partly resolve the weight of the debt on their house. They don’t realize that in bankruptcy slang they have a Pond on their home.

First they do not own the mortgage. As odd as it seems in the United States today the party trying to foreclose a mortgage rarely has any stake in the outcome being either a representative or some totally third party to the transaction.

Second the bank is not very likely to have the necessary records. This is a recent development as for hundreds of years mortgages were recorded as were the various notices that the mortgage had been sold to a new lender. Not so anymore like as not the current holder cannot show the needed assignments between the original lender and itself. In other words no proof of ownership

Press release received today from the US Treasury

“In the face of the deepest economic recession and housing crisis in decades, the Obama Administration has taken unprecedented action to promote stability in the market – keeping millions of families in their homes and helping millions more to save money by refinancing. But the data clearly show that the market remains extremely fragile,” said HUD Assistant Secretary Raphael Bostic. “While we cannot stop every foreclosure, we know that many responsible homeowners are still fighting to make ends meet. Through the broad range of programs this Administration has put in place, we can put help in reach to those homeowners as early as possible.”

The making home affordable program works for virtually no home owner. The HAMP applications are lost, ignored and virtually without exception denied by the lenders

Many people including most lawyers are confused about the relationship of chapter 7 and chapter 13 of the bankruptcy code. They both provide for and discharge of debts. Unsecured debts are rare paid in full in either chapter. The principal difference resides in how secured debts are treated. This usually means how the house and/or the car creditor are paid.

A chapter 7 filing technically involves a liquidation of the filing individual’s assets; however every individual is entitled to what are called exemptions. Congress granted the individual States the right to set exemptions with some restrictions where you live determines what property is exempt form the claims of your creditors. In New York the Bankruptcy exemptions are set forth in sections 282 and 283 of the Debtor and Creditor Law.

Every state has a homestead exemption in New York this is $50,000 (or $100,000 per married couple). In Florida it is 100% of the homestead value. The way you apply the homestead exemption is to deduct the amount from the home equity. For example if a home is worth $200,000 and has a $150,000 mortgage then the home is fully exempt because the equity is the same as the $50,000 exemption.

The true difference between chapter 7 and chapter 13 arises when the mortgage is in default ( mortgage payments are over due). Technically the chapter 7 filing cannot be used to cure the default. The chapter 13 filing allows the back mortgage payments to be paid over a period of time up to 60 months. So a $6,000 default would be paid in sixty $100 payments. This is how the law was meant to work, but many courts allow the home owner a brief period to cure the default in chapter 7. The only way to determine what the court will do is to look at what has gone before. Accordingly, experience counts in picking attorneys and particularly when the default is a serious one. Fortunately the Bankruptcy Court sets the fee which often results in a standard flat fee arrangement in all cases.

Recently I have been getting asked how long the foreclosure process takes. There is no standard answer to that question. I work in New York which has what is referred to as a judicial foreclosure process. To foreclose the bank must commence a law suit. The cases often take a year or more. Right now the Courts are imposing mandatory conferences which delay the process and bankruptcy will delay the process further. It is not always necessary to win if you can simply not lose.

Just had my first success today in a post modification foreclosure action. Client had a temporary modification of his mortgage made all the payments and at the end got a summons for foreclosure. I filed an answer saying there was no actual default and today the attorney for the mortgage bank withdrew the action.

I will be on Channel 13 tomorrow morning May 22, 2010 sometime after 7:30 am to talk about foreclosures.
As a preview foreclosures are up this year in New York State about 11% and they are up in the Capital Region, but still well below the national average. The problem is that default rates are not running so far below the national figures. So expect foreclosure to go up locally even if they come down on a national basis.