Alabama Consumer Lawyer Blog

Borrowers Who Are Current on Their Mortgage Are Asking:

1. What help is available for borrowers who stay current on their mortgage payments but have seen their homes decrease in value?

Under the Homeowner Affordability and Stability Plan, eligible borrowers who stay current on their mortgages but have been unable to refinance to lower their interest rates because their homes have decreased in value, may now have the opportunity to refinance into a 30 or 15 year, fixed rate loan. Through the program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they hold in their portfolios or that they placed in mortgage backed securities.

2. I owe more than my property is worth, do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.

3. How do I know if I am eligible?

Complete eligibility details will be announced on March 4th when the program starts. The criteria for eligibility will include having sufficient income to make the new payment and an acceptable mortgage payment history. The program is limited to loans held or securitized by Fannie Mae or Freddie Mac.

4. I have both a first and a second mortgage. Do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible to refinance under the Homeowner Affordability and Stability Plan. Your eligibility will depend, in part, on agreement by the lender that has your second mortgage to remain in a second position, and on your ability to meet the new payment terms on the first mortgage.

5. Will refinancing lower my payments?

The objective of the Homeowner Affordability and Stability Plan is to provide creditworthy borrowers who have shown a commitment to paying their mortgage with affordable
payments that are sustainable for the life of the loan. Borrowers whose mortgage interest rates are much higher than the current market rate should see an immediate reduction in their payments. Borrowers who are paying interest only, or who have a low introductory rate that will increase in the future, may not see their current payment go down if they refinance to a fixed rate. These borrowers, however, could save a great deal over the life of the loan. When you submit a loan application, your lender will give you a "Good Faith Estimate" that includes your new interest rate, mortgage payment and the amount that you will pay over the life of the loan. Compare this to your current loan terms. If it is not an improvement, a refinancing may not be right for you.

Continue reading "Frequently asked Questions for Borrowers about the Homeowner Affordability and Stability Plan" »

Alabama Consumer Lawyers will soon have another avenue to help embattled homeowners fight and avoid foreclosure. On Wednesday, February 18, 2009, the White House announced President Obama’s “Homeowner Affordability and Stability Plan” earlier this week. The plan presents a comprehensive program designed to help families stay in their homes. The Administration estimates that the plan will assist as many as 9 million homeowners whose homes are now worth less than the amount of their mortgages.

The plan will assist two main groups of homeowners: (1) those whose homes are financed with Fannie Mae or Freddie Mac and who owe up to 105% of the fair market value of their home, and (2) homeowners with other lenders who are at risk. Complete eligibility guidelines will not be issued until March 4, 2009.

The program will help both homeowners who are current on their payments but find that their homes are worth less than their mortgage balance and homeowners in default and behind on their payments.

Many homeowners who are not behind in their payments find that the current mortgage crisis and high foreclosure rate has lowered their home's fair market value and they are "upside-down" in their mortgage. The president's program will assist these people.

The plan changes Fannie Mae and Freddie Mac eligibility guidelines so that as many as 5 million homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac may refinance their mortgages at lower rates. Under current rules, refinancing is not an option for most homeowners who owe more than 80 percent of the value of their homes.

Removing this restriction “will allow millions of families struck with loans at a higher rate to refinance,” Obama said. “And the estimated cost to taxpayers would be roughly zero; while Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures.”

An additional 3 million to 4 million homeowners will be able to avoid foreclosure through a new $75 billion mortgage modification program. The Homeowner Stability Initiative will be available to homeowners who are at imminent risk of default, even if they are now current on their payments.

Lenders will be responsible for reducing interest rates on these loans so the monthly payment would be no more than 38 percent of the homeowner’s income. Government funds would match further reductions in interest rates to bring the payment down to 31 percent of income.

“If lenders and homebuyers work together, and the lender agrees to offer rates that the borrower can afford, we’ll make up part of the gap between what the old payments were and what the new payments will be,” Obama said in a speech to be delivered Wednesday in Phoenix.

Mortgage servicers would receive an upfront fee of $1,000 for each loan modification that meets the program’s guidelines and would continue to receive up to $1,000 a year in fees for three years as long as the borrower remains current on the loan.

As an additional incentive to boost the program, mortgage servicers also will receive a $500 bonus if they modify at-risk loans before they fall behind. Mortgage holders will receive a $1,500 bonus to do this.

The administration’s goal is to stabilize the housing market saying “the Homeowner Affordability and Stability Plan will support a recovery in the housing market and ensure that these workers can continue paying off their mortgages.” This is good for everyone. Even homeowners who are not in distress will benefit from fewer foreclosures in their neighborhoods.

Additionally, this is only one part of the Administration plan. The foreclosure relief bill or bankruptcy "cramdown" bill I discussed in my January 27, 2009 posting is working its way through Congress.

Help may be on the way for Alabama consumers facing foreclosure. On Tuesday, January 27, 2009, the House Judiciary Committee voted 21-15 to send a bill designed to help consumers save their homes to the full House.

The bankruptcy reform bill will allow bankruptcy judges to cram-down residential home mortgages. The term "cram-down" in bankruptcy law means the power of a judge to reduce the amount of a mortgage to the value of the property. In the current real estate climate in which many consumers' homes are worth less now than when purchased (and mortgaged), a cram-down is the only thing that makes sense.

Republicans in Congress oppose the Democrats' cram-down mortgage proposal. They disingenuously argue that it will raise interest rates. What they fail to acknowledge is that without a cram-down law, millions of Americans will walk away from their homes leaving the banks to deal with the abandoned property which will still be worth less than the bank loaned the homeowner. The bank's losses are locked in either way.

Understanding that it is better to keep homeowners in their homes, Citigroup, one of the nations largest mortgage lenders, has split with the rest of the mortgage industry and supports the cram-down proposal for all mortgages entered into before the passage of the bill.

I am dismayed that Alabama officials have failed to take any substantive action in response to the foreclosure crisis. The economic and emotional toll that foreclosure is taking on our citizens is enormous. Imagine the emotional scars inflicted on children who lose their homes. We are fortunate that wiser leaders in Washington are now prevailing. Let us hope they act before too many more suffer.

The Truth in Lending Act mandates additional disclosures at closing for ARMs. A list of the required disclosures may be found at 12 C.F.R. § 226.19. In my clients’ case, there were a number of disclosures that were not made. For example, my clients did not receive a copy of the HUD handbook titled “Consumer Handbook on Adjustable Rate Mortgages.” Additionally, my clients were not given a historical example of how interest rate changes could affect their mortgage payments. Most importantly, in my opinion, the lender (and broker) failed to inform my clients that the initial rate of their mortgage was actually higher than the Index rate called for by the adjustable rate note.

In other words, my clients did not receive a “teaser rate” or an interest rate that is lower at the beginning of the loan. Quite the opposite, they received an interest rate that was higher than their rate would have been if it had been set by the Index.

I believe that these failures to disclose, and others too numerous to list, are material failures to disclose and therefore extend the period during which my clients may rescind their loan to three years.

Rescission is a four-step process. First the consumer must give notice that he or she is electing to cancel or rescind their mortgage loan and state the TILA violations they allege to have occurred during the loan process.

Step Two: The lender’s security interest is automatically void and the consumer is relieved of any obligation to pay any finance charges, closing costs or other costs associated with the loan.

Step Three: The Creditor has twenty days from receipt of the notice to return any money and to take actions necessary to reflect the termination of its security interest.

Step Four: Following step-three, the consumer is obligated to tender back to the lender any money given the consumer at the consummation of the loan.

As a practical matter, lenders almost always oppose a consumer’s attempt to rescind a loan. It is at this juncture that the consumer lawyer must be ready to present positive evidence that material disclosures were not made. The better prepared the lawyer, the more likely he will be able to either rescind the loan or extract loan concessions from the lender.

It is important for consumer lawyers to be creative and resourceful during these difficult times. Foreclosures are taking a serious toll on millions of Americans. I will keep you posted on the progress of this rescission action.

The right of rescission is an under utilized and little understood but powerful weapon in the consumer lawyer’s arsenal. Nothing will stop a foreclosure faster than a consumer giving notice of rescission to a mortgage company.

Most lawyers and many consumers are aware of the normal three day "cooling off" period or right to rescind a mortgage. Every consumer receives a notice of the three day right to rescind at the closing of his or her mortgage. But few lawyers know that if the lender (or the lender’s broker) fails to give all the disclosures mandated by the Truth in Lending Act, 15 U.S.C.§ 1635(a), then the right of rescission is extended to three years after the date of the loan.

The power to cancel a mortgage, at the sole option of the consumer, anytime up to three years into a mortgage loan is the “nuclear option” for an embattled consumer. Counsel for mortgage lenders have candidly told me that nothing keeps mortgage lenders up at night more than the prospect of thousands of borrowers attempting to rescind their loans.

I recently filed a rescission action for a couple in Mobile, Alabama. My clients are good people with solid work histories and no prior problems paying their debts but they were victimized by an unscrupulous mortgage broker. The broker convinced them to enter into a high interest Adjustable Rate Mortgage (“ARM”) with the promise that he would refinance them into a fixed rate mortgage in one year. However, he failed to disclose that he was receiving outrageously high fees for brokering the ARM including a “yield spread premium” in the amount of $10,800.

A yield spread premium is a commission paid by the lender to the broker for having obtained a mortgage at an interest rate that is actually higher than the lender would have otherwise offered the loan to that borrower. A lender that pays a yield spread premium of $10,800 has no incentive to refinance a loan a year later at a lower rate.