Alabama Consumer Lawyer Blog

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.

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.