Schwartz Lawyer’s Blog

            Today’s economic climate has created a class of residential property owners that cannot sell their properties.  Briefly, if you are not aware, a short sale is a sale of property at a price less than the amount owed on the mortgage; it cannot be completed without the lender’s agreement.  Property owners contemplating a short sale often find themselves in need of help navigating their lender’s bureaucracy.  Most often the decision comes down to either an attorney or a self-proclaimed real estate “specialist.”  Most often these “specialists” are realtors.

There are numerous differences between the help attorneys can provide versus a real estate “specialist.”  First, attorneys are subject to ethical rules that prohibit them from making promises to potential clients.  Other professionals offering short sale services do not have the same limitations.  Second, attorneys have a wider array of options available for people suffering financially, such as litigation and bankruptcy.  Third, it appears lenders treat offers presented by attorneys more seriously than those presented by specialists.  Fourth, the primary concern for some specialists, realtors for example, is to arrange a sale, because they are only compensated if a sale is approved.  Attorneys are compensated differently and therefore represent the homeowner’s best interests.

            Unlike specialists claiming to help property owners during this financial crisis, attorneys are ethically prohibited from making guarantees and unsubstantiated promises to potential clients.  This is especially true in the area of short sales.  Short sales are a function of negotiations between the property owner and the lender, however, there is no law governing the process.  This has two important consequences for the property owner.  First, each client’s property is treated individually.  Second, it means attorneys are not operating as sales men trying to sell you a product.  Specialists have no such ethical limitations, therefore, as a rule, be weary of guarantees because it is impossible to predict how each short sale offer will be resolved.  The process is not controlled by law, but by financial considerations.

            Another important benefit of employing an attorney is that he or she is not limited to resolving your issues with a short sale.  Attorneys have the ability to enter into litigation and other legal means to represent your interests and prevent a foreclosure.  Unlike specialists, attorneys have the knowledge and expertise to examine your particular situation and suggest alternatives for addressing your concerns.  This results in a more comprehensive analysis of your situation.  Indeed, more options lead to more solutions.  It is a regular occurrence for a potential client to walk into an attorney’s office looking for a particular service only to discover that another option would better serve his interests.  Specialists are limited to the short sale option, which is not the best solution for everyone.

These differences are further highlighted by the different way realtors and other specialists are compensated.  The specialists are only compensated if the sale goes through.  There is nothing wrong with that, but it has limits, including potentially pitting the homeowners interests against the specialists.  Attorneys are hired for their ability to provide comprehensive representation.  That means if a short sale is not in the client’s best interest, then it is not recommended.  Specialists do not have this attitude, because without a sale, they cannot earn a fee.

            Unfortunately, some unqualified people have seen an opportunity to take advantage of people’s misfortune in these economic times.  Fortunately, most property owners have the ability to recognize an offer that is too good to be true.  An attorney’s refusal to engage in guarantees and promises is a strength of the profession that benefits clients.  A further strength is the variety of services that an attorney may provide.  Attorneys recognize that solutions for financial hardships are not “one size fits all” propositions.  Lenders understand attorneys are retained to represent their clients’ best interests and are not limited to the short sale option.  Lenders also understand attorneys have other forms of recourse available if the short sale does not work.  That is why offers submitted by attorneys are more seriously regarded.  If you are making a decision about who to hire to represent your interests, make sure you put a lot of thought into your decision.

Chapter 11 is the secret banks do not want you to know

            Those that own multiple real estate properties have been hit by this current financial crisis particularly hard.  Those in the real estate business know more than most how bad the economy is because property in the Las Vegas Valley has dropped more than fifty percent (50%) from its highs during the real estate boom.  This has resulted in the unabated destruction of investments and businesses built over several decades at work in this city.  Fortunately, a Chapter 11 bankruptcy is the way to adjust the value of your assets to today’s market and rebuild your business before everything is lost.

            The television news programs and newspapers give us daily reports of how the far the real estate market has dropped.  Everywhere you go in Las Vegas, people are full of stories of friends and acquaintances losing the property they worked so hard to obtain.  Most of these people found themselves in this situation because of bad loans they should have never received.  Not to say that we as consumers are without blame, but the truth is, in today’s environment only the lenders are in a position to put consumers in loans that reflect current market values.  Loans that are affordable and realistic.  Unfortunately, the banks are not working with people in good faith.  In fact, prices continue to drop as banks continue to foreclose without regard for the city of Las Vegas.  Further, it is reported that approximately one third (1/3) of all foreclosed properties are on the market.  The lenders are holding the rest of the property they foreclosed hoping to have the prices go up.  At that point they will release the properties they hold slowly.  The lenders are essentially trying to manipulate the market once again to the detriment of the borrowers.

            As an owner of one or multiple real estate properties, this continues to affect your bottom line and destroy your business.  For those of you trying to be responsible consumers, your real estate investments have either bled you dry already or have placed you in a position where you are “throwing good money after bad.”  Either way, you and your business are in peril.  Unfortunately, instead of working with you, your lender’s actions are pushing you to a position where you will run out of resources soon and lose all of your assets (including the amounts you invested when you began this venture).  Despite your best efforts, you are now sitting on investments whose values may never come back despite your best efforts and through no fault of your own.

This is not a simple process.  It involves work and commitment, it could take six to nine months before completing the initial and most difficult phase of the process.  During this time you and your assets are protected.  Further, unlike the ineffective loan modification programs advertised and promised by the lenders, your banks must get involved in the bankruptcy process or the Bankruptcy Court may unilaterally change your loan terms.  Most importantly, lenders cannot foreclose on any property without approval from the Court.  Before this approval is granted, the lender must demonstrate that foreclosure is the best option available.  If your property can be profitable if it has a loan based on its current value, then foreclosure is not the best option.  Chapter 11 is a tool for owners of multiple real estate properties to protect themselves from their lenders and loans. 

             If you are tired of being turned down for a loan modification, if the only answer for you is a principle reduction of your loan to today’s current value, and if you want to force your lender to work with you instead of ignoring your problems, then Chapter 11 may be the answer for you.

             Chapter 11 is not a panacea, therefore, contact our office for a FREE consultation and see whether a Chapter 11 bankruptcy may be right for you.

The steep real estate market decline has led many condominium buyers to be upside-down in their investment even before the construction is complete.  If you have found yourself in a catch-22, between letting go of a substantial deposit or proceeding with a bad investment, we may be able to help.  The Interstate Land Sales Act (ILSA) requires developers to file certain property documents before construction and to give certain notices during its course. ILSA also allows buyers to cancel contracts when “material and/or adverse changes” have been made to condo or documents.  At the Schwartz Law Firm we will review your purchase contract, follow-up letters, amendments and notices that may indicate changes were made to the design or specified time of completion.  We will also look for any misleading information and for outright fraud.  Armed with the results of our review we may be able to help you recover your condominium deposit.

A loan modification is a change to one or more of the terms of an existing loan. Loan modifications typically result in interest rate reductions, term extensions, a complete loan program change, or a combination thereof. These options usually exist for borrowers who have become insolvent due to hardship and can no longer afford their mortgage payments. Many opt to contact their lenders on their own but with borrowers defaulting at record highs, lenders are very busy and do not have the capacity to respond to everyone in a timely manner. Attempting to attain an agreement on your own may result in losing time, money, and risk being lost in the system. At the Schwartz Law Firm we will conduct a comprehensive review of your loan documents and if violations occurred, we will use these as leverage to negotiate suitable terms.

In a nutshell, a credit crunch is an economic condition in which banks lose liquidity, which in turn makes them reluctant to lend, resulting in higher interest rates and tighter credit standards. At the individual level, it becomes difficult to obtain a home loan. As a result of the shrinking credit supply, prolonged recessions often occur. As fear of borrowers defaulting increases, lenders become afraid to make loans of any type because they became concerned that no matter what interest rate they set, it will be inadequate to cover the actual risk. Therein lays the mortgage market mess we are struggling to digest.

If we look back and examine the chronology of events, we may be able to gain a better understanding of the crisis and how it affects the prospective borrower. About six years ago, families were moving to Las Vegas, Phoenix, and Miami, not to mention greater Florida, at unprecedented rates. A wide range of job opportunities coupled with relatively low home prices were a striking incentive for those seeking to improve their quality of life. As demand for houses surmounted availability, prices climbed steeply. Disillusioned with the reality of not obtaining the American dream, borrowers were more inclined to accept teaser rates and sign-up for loans they simply could not afford. Many programs allowed applicants with good credit to obtain loans on stated income, with little or no documentation. This made it easy for both individuals and loan officers to “inflate” an applicant’s income and show assets without stating the source. For example, the applicant would borrow money from friends and family, deposit it into their savings or checking account, and then return it after closing. In other words, mortgage lenders allowed the banking system to turn into a hassle-free prop for home buyers, which in turn, facilitated both the rise and fall of the real estate market.

As the introductory interest rates adjusted, and negative amortization balances continued to accumulate, homeowners began to default on their mortgage payments and foreclosures followed. As foreclosures increased across the nation - estimated at 2.6 million in the next two years - lenders’ and builders’ inventory of homes also grew. Desperate to sell houses, lenders have begun dumping their inventory. As a result, appraisal values have dropped drastically, making refinancing unattainable and forcing many owners to walk away from their homes with zero or negative equity.

Standard & Poor’s said 2007 was the worst-performing year on record in terms of cumulative losses due to mortgage delinquencies, and 2008 is looking worse. The credit crunch and the related fall in liquidity have caused immediate effects. First, lenders are now very conservative with their loan policies and many programs such as stated-income loans are gone. Countrywide, for example, will no longer issue home equity lines of credit or second mortgages in Las Vegas. Additional examples of the credit crunch include the collapse of Bear Sterns and the refusal of many lenders to lend in high risk areas, such as Las Vegas, Miami or Phoenix, known as blacklisting. Indeed, the current credit crunch is proving to be far reaching and damaging.

Specifically, the credit crunch has begun to trickle into many areas of the U.S. economy. Depressed consumer spending coupled with conservative lending means retailers cannot refinance their way out of trouble. Rising oil prices threaten many businesses in the transportation industry and are pushing up the cost of goods everywhere. Airliners, such as ATA, Eos and Frontier, have already filed for bankruptcy protection this year. Compared to last year, 2008’s first quarter has brought in a 39% increase in commercial bankruptcy filings. Furthermore, major banks, such as Bank of America, have completely eliminated their student loan programs. Unfortunately, the credit crunch that attempted to redeem the mortgage crisis is causing a domino effect that is far from over.

As a result, consumers need to act aggressively to protect their assets or rebuild their credit. At the Schwartz Law Firm, we fight to help individuals protect their homes, their assets, and their investments.

As a result of the real estate boom, some well qualified borrowers were taken advantage of and paid fees and costs well in excess of what they understood or approved. Indeed, many lenders were pushing adjustable-rate loans as a way for borrowers to keep their monthly payments down and stretch their budgets to afford bigger homes. In turn, many lenders treated homes with significant equity as piggy banks from which they could extract exorbitant fees.

If you are facing foreclosure, or feel your debts are insurmountable and you may soon face severe financial consequences, you need to understand your legal options. Some of the most important protections are based on a federal law called the Truth in Lending Act (TILA). TILA specifies that lenders must show you an accurate picture of the true cost of your money over the life of your home loan. Within TILA, there is an amendment called the Home Ownership and Equity Protection Act (HOEPA). This law imposes more stringent requirements on lenders if a loan is at an excessively high interest rate. If lenders fail to provide accurate and understandable disclosures, individuals likely have claims. As a result, TILA violations may enable for recoveries of actual damages, statutory damages and punitive damages.

Additional claims may be found under the Real Estate Settlement Procedures Act (RESPA). Congress enacted RESPA to control and limit unethical practices that allow real estate service providers to generate unearned fees. RESPA focuses on information you must receive in documents such as good faith estimates (GFEs), HUD disclosures and escrow statements. RESPA violations are common. They may take the form of duplicate fees for loan origination and administration, for example. One of the most common nondisclosure violations involves fees “paid outside of closing,” which often indicate a deceptive practice known as yield spread premiums (YSP).

YSPs are fees mortgage lenders pay brokers for selling an interest rate which exceeds the rate the borrower qualifies for normally. Generally, borrowers are offered home loan interest rates based on their assets, income and credit score, which is known as the “par rate.” Lenders in turn, pay brokers a YSP for selling borrowers interest rates that are higher than their individual par rate. Most borrowers have no idea that a YSP was paid at closing to their broker. More importantly, borrowers are not told that their interest rate could have been negotiated down if they had paid their broker directly. Few people know that lenders set the fees paid in connection with YSPs and borrowers rarely sign any contracts agreeing to pay them. As a result, borrowers are deceived into believing that they were given the best interest rate available to them at the time, which is often not the case.

Similarly, lenders and brokers will charge borrowers a discount or buy-down fee to reduce their interest rates. If these fees are not agreed to in writing prior to closing, a RESPA violation likely occurred. Often, borrowers are charged a discount fee and never actually receive an interest rate discount, in which case, the borrower is a victim of fraud. Additional examples of RESPA violations include fee markups of the costs paid to any party providing a service in connection with funding the home loan. For example, if an appraisal invoice totals $350.00, but the borrower is charged $450.00, the fee markup of $100.00 is a violation of RESPA.

In addition to protections provided by federal statutes, U.S. state laws may create claims for bad loan disclosures. These predatory lending practices include: unjust enrichment; bait-and-switch tactics; the use of coercion to get you to accept a high-interest loan; and unfulfilled promises to refinance a high-interest loan. Similarly, some borrowers can stop foreclosures based on the law of negotiable instruments. With all the “selling of paper” that has occurred in the mortgage industry, defending cases based on the inability of lenders to prove they have standing to foreclose is becoming common place.

Borrowers also need to understand that they have options in any negotiation with their lender. One option is a forbearance agreement which generally provides that the lender will refrain from pursuing remedies under a loan agreement due to the borrower’s default for failure to pay, in exchange for restructuring the loan. Additional options include a refinancing agreement or mortgage modification, resulting in an alternative payment plan that avoids foreclosure. Another option is a deed-in-lieu of foreclosure which will allow borrowers to escape from a mortgage with little or no damage to his or her credit rating. Finally, a preforeclosure or “short sale” to a willing buyer for a property may be a feasible alternative.

Whether finding a way to affordably stay in your home or finding an exit strategy that protects your credit rating, understanding your rights under the consumer protection laws is a necessary first step in protecting assets or gaining a fresh start.

An additional example of the cost of homeownership regulated by law comes in the form of hazard insurance. Hazard insurance is typically charged by lenders to protect against the loss of a home from fire, storm, act of god or some other catastrophic event which results in the home being uninhabitable and unsalable. Similar to the types of excessive fees prohibited by RESPA, Nevada statutes prohibit lenders from charging for hazard insurance at rates which exceed the reasonable replacement value of the home as a condition of obtaining a loan. For example, a new, standard, 2000 square foot home could be insured at $100 a square foot (depending on zip code), totaling $200,000 for the dwelling coverage. This number is generally determined by estimating the cost of construction of a similarly modeled home in the same community. The sales price for this same home may reach $350,000, depending upon the size of the lot and the value of the land. The sales price will normally be above the replacement value because hazard insurance does not cover land (it does not burn, it cannot be stolen). Therefore, Nevada state law limits hazard insurance to $200,000, the amount necessary to replace the home. Your lender, however, will most likely require the mortgage broker to increase the hazard coverage so that it protects the entire amount of the loan, not just the home. If you refuse, the lender will simply deny your loan. Essentially, the lender is requiring that the property be over-insured. As a result of this practice, many homeowners pay far more for insurance then they need or that Nevada law allows.

Few people are aware that they may have claims against their mortgage lenders for predatory practices, including violations of the Truth In Lending Act (TILA). Specifically, TILA requires lenders to provide consumers with several, specific disclosures in connection with the costs paid pursuant to a mortgage loan. Examples of those disclosures include:

1. the annual percentage rate;
2. the total amount financed under the loan;
3. the total amount of the finance charges, expressed in a dollar amount;
4. the projected number and amount of payments; and
5. notice of the borrowers right to rescind, or cancel the loan.

Many borrowers are not provided with the proper disclosures when their mortgage loans close, and as a result, may be able to rescind, or unwind their loan transaction for a period of 3 years following the date of the loan. In addition, any borrower facing a foreclosure has all of his or her TILA claims available as defenses to a foreclosure action, regardless of when the loan was signed. If you have significant TILA claims, a foreclosure action can be stopped as a result. In addition, successful TILA claims require that lenders pay for any actual damages, statutory penalties and attorneys fees. Such amounts can become significant.

Moreover, TILA provides for damage awards both in the event that disclosures were not properly made at the time the loan closed, but also in the event that a lender does not properly recognize a borrowers right to rescind his or her home loan. Damages are recoverable for disclosure violations, provided claims are filed within one year of the date the loan closed, or for rescission claims if they are exercised within three years of the date of the loan. Finally, damages are mandatory for even a technical violation of TILA, regardless of whether borrowers suffer no actual damages.

The Schwartz Law Firm specializes in defending individuals from foreclosure. If you believe you may have claims against your lender, we will provide a free review and assessment of your loan documents. For more information, please contact us at (702)-385-5544.

In 1974, Congress enacted the Real Estate Settlement Procedures Act (RESPA) to control and limit unethical practices that allowed real estate service providers to generate unearned fees. RESPA specifically prohibits fees charged in real estate transactions which are not equal to the amount of work required to earn them or actual work performed. RESPA, and the federal regulations enforcing it, identify 3 areas of practice where real estate brokers can collect unearned fees: (i) yield spread premiums (YSP); (ii) fee markups; (iii) affiliated business relationships; and (iv) insurance.

YSPs are the fees mortgage lenders pay mortgage brokers for selling borrowers an interest rate on their home loans which exceeds the rate the borrower qualifies for. Generally, borrowers are offered home loan interest rates based on their assets, income and credit score. This is a borrowers personal par rate of interest. Lenders in turn, pay mortgage brokers a fee, or yield spread premium, for selling borrowers interest rates that are higher than their par rate. These fees are paid to brokers outside of closing and they do not come from the borrowers funds. Most borrowers have no idea that a YSP was paid at the closing of their home loan or that they could have negotiated down their interest rate. Importantly, lenders set the fees paid in connection with YSPs and borrowers rarely sign any agreements or contracts agreeing to pay them. As result, borrowers are often deceived at their closing into believing that the loan they were given contained the best interest rate available to them at the time.

Similarly, lenders and brokers will charge borrowers a discount or buy-down fee to reduce their interest rates. These fees are typically agreed to in writing prior to closing. If not, a RESPA violation likely occurred. Additional examples of RESPA violations include fee markups of the costs paid to mortgage brokers, lenders, title companies or any party providing a service in connection with the funding of a home loan. For example, if an appraisal invoice totals $350.00, but the borrower is charged $450.00 for the appraisal at closing, the fee markup of $100.00 is a violation of RESPA. In other words, mortgage brokers, lenders and service providers are precluded from charging fees for services they did not perform or from padding fees and costs. These fees can take the form of closing, processing, origination, document or administrative fees, among others, such as email or notary fees, each of which may relate to the same service, or no service whatsoever, and each of which is illegal. Indeed, a rose by any other name is still a rose and a phantom fee is nothing more than a RESPA violation, no matter what it is labeled.

At the time of RESPAs enactment by Congress, mortgage brokers commonly received referral fees from service providers they introduced to the borrower, but without the borrowers knowledge or consent. Therefore, RESPA prohibited those kick-backs without full disclosure to the borrower. Specifically, RESPA requires that brokers disclose to the borrower in writing (i) the relationship between the mortgage broker and the service provider, and (ii) the referral fee to be paid. After disclosure, borrowers must pre-approve the referral fee. If these elements are not present, the payment of a referral fee, or kick-back, is prohibited by RESPA.

A final example of homeownership regulated by law comes in the form of hazard insurance. Hazard insurance has elements which are typical to the types of excessive fees prohibited by RESPA. Many states prohibit lenders from charging for hazard insurance at rates which exceed the reasonable replacement value of the home as a condition of obtaining a loan. For example, a new, standard, 2000 square foot home could be insured at $100 per square foot (depending on zip code), totaling $200,000 for the dwelling coverage. This number is generally determined by estimating the cost of construction of a similarly appointed home in the same community. The sales price for this same home may reach $350,000, depending upon the size of the lot and the value of the land. The sales price will normally be above the replacement value because hazard insurance does not cover land (it does not burn, it cannot be stolen). Therefore, state law generally limits hazard insurance to $200,000, the amount necessary to replace the home. Your lender, however, will most likely require the mortgage broker to increase the hazard coverage so that it protects the entire amount of the loan, not just the home. If you refuse, the lender will simply deny your loan. Essentially, the lender is requiring that the property be over-insured. As a result of this practice, many homeowners pay far more for insurance then they need or that state law allows. This may also be a RESPA violation.

As a result of the real estate boom, some well qualified borrowers were taken advantage of and paid fees and costs well in excess of what they understood or approved. Indeed, many lenders were pushing adjustable-rate loans as a way for borrowers to keep their monthly payments down and stretch their budgets to afford bigger homes. In turn, many lenders treated homes with significant equity as piggy banks from which they could extract significant fees. At the Schwartz Law Firm, we review loan packages from top to bottom, dissecting the fees and charges paid by borrowers against the disclosures required, and limitations set by RESPA. If violations occurred, we prosecute them in order to help homeowners preserve their assets and protect their credit.

The Mortgage Forgiveness Debt Relief Act of 2007 (the Act) was written to protect families from income taxes which arise under the Tax Code any time debt is forgiven. The policy behind the rule is based on the Internal Revenue Services presumption that any debt borrowed by a consumer will be repaid with after-tax dollars. When a taxpayer fails to repay a debt, which is then forgiven, that taxpayer receives a windfall, which the Internal Revenue Service treats as ordinary income.

For example, if you owned a home with a $500,000 mortgage, which then sold through foreclosure for $400,000, your lender would have a $100,000 loss on the foreclosure sale. If your lender decides to forgive, or walk away from, the $100,000 shortfall, the IRS deemed that taxable income to you, because you never paid off the balance with your after tax income. Therefore, in the example, and based on a 30% tax rate, you would lose your home and still receive a $30,000 tax bill from the IRS.

With the nations housing market in a steep decline and many homeowners facing increases in their monthly mortgage payments, the Act seeks to help alleviate the pain of renegotiating your mortgage or simply walking away from your home. At the time of its passage, President Bush stated: Im pleased to sign a bill that will help homeowners who are struggling with rising mortgage payments.

Specifically, the Act creates a three-year window for homeowners to modify the loans on their principal residences and reduce the balance of the related mortgage debt. The goal is to allow American families to secure lower mortgage payments without facing higher taxes. No taxes would be owed on the value of any debt forgiven or written off under the Act.

The Act, however, is not without significant limitations. Specifically, the modified or reduced debt must have been incurred to buy, build or improve the home. That is, loans refinanced for other purposes, such as credit card or small business debt, will not be excused. The loan must also relate to a primary residence. Moreover, the debt excused cannot be more than two million dollars for married couples, or one million dollars for taxpayers filing individually. Finally, the debt cannot be discharged or forgiven in exchange for services to the lender.

Unfortunately, these limitations mean that the Act is really only window dressing, as second home owners and real estate investors need not apply. Similarly, if you are seeking relief under the Act, but refinanced your home to pay off consumer debt, the amount relating to the consumer debt is not protected by the Act. In other words, if your lender agrees to forgive debt that relates to consolidated credit card purchases, that debt forgiveness will be taxable as ordinary income. When home values were skyrocketing and sub-prime lenders were handing out money to every borrower that could spell his or her name, it was quite popular for the debt burdened middle class consumer to take out a second mortgage or home equity line of credit to consolidate high interest rate credit card debt. Few will have refinanced without paying off outstanding consumer debt. In many cases it was required by the lender. That debt is not dischargeable under the Act.

In addition, refinancing carried out on second homes, vacation homes, business or investment property is not protected by the Act. If a borrower has 2 homes, only the home used the majority of the time will qualify.

It is estimated that the bill will reduce the taxes of some strapped homeowners by $650 million. It is estimated, however, that more than 2,000,000 adjustable rate mortgages, worth some $600 billion, will jump from low initial teaser or promotional rates to higher rates by the end of 2008. Alleviating taxes equal to 1% of the value of those mortgages is not likely to have any appreciable effect. The Act may sound like it is going to ease the pain of some borrowers, but in its current form, the Act is helpful to too few to stop the housing free fall or aid the economy in general.