How RESPA Applies To You
May 13th, 2008
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 Relief Act Does Not Give Much Relief
March 25th, 2008
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.
Will The Bush Administrations Mortgage Relief Help?
January 21st, 2008
Due to the continuing decline of the real estate market, many people are beginning to ask whether the mortgage relief plan outlined by the Bush administration to alleviate a portion of the subprime adjustable-rate mortgage crisis will benefit them.
In short, no. The optimism surrounding the plan centers on the promise of an interest rate freeze for existing at-risk borrowers for five years. The plan is merely window dressing, however, because it applies only to a narrow group of borrowers and mortgage types.
Specifically, the plan will impact only subprime adjustable rate mortgages (ARMs) that originated between January 1, 2005, and July 31, 2007, and whose interest rates will reset for the first time between January 1, 2008, and July 31, 2010. Critically, it applies only to loans that were packaged into securities and not those that are held by banks on their own books. In other words, if you have a loan held by Countrywide, Wells Fargo, Washington Mutual, Bank of America, Citimortgage, to name just a few, the Bush plan will not apply to you.
Simply put, the plan is unclear, insufficient and misplaced. Indeed, the Bush plan does not even explain which loans qualify because it does not identify what is meant by subprime ARMs. Generally, these loans carry a fixed interest rate for the first two or three years, and then adjust upward annually. Absent some clear explanation by the White House as to what constitutes a subprime loan, many people who may qualify for a rate freeze will find themselves in the dark.
Perhaps most importantly, the lenders are tasked with the responsibility of creating the guidelines for borrower eligibility to obtain an interest rate freeze. In other words, not only does the Bush administration have to identify what subprime means, but the related lenders then have to explain who qualifies. Current statements of the government claim that to qualify for the rate freeze, each borrower must live in the home and face a payment increase of more than 10% of their current loan payments when the interest rate on their ARM resets for the first time. To qualify for the fast-track program, borrowers must have a credit score of less than 660 and each borrowers credit score cannot improve by more than 10% since the mortgage was originated. Finally, borrowers can have only one 60 day late payment during the last 12 months leading up to the rate freeze. Although the Bush administrations attempted bailout of the housing freefall may appear to be in good faith, it punishes those that worked diligently to buy a home and improve their credit scores.
The government stated this program will help approximately 1.2 million people. Commentators, however, have expressed doubt and analysts at Barclay Capital estimate that only 240,000 borrowers can expect any relief under this plan. Clearly the housing recession is far from over and the Bush plan is no panacea
US Mortgage Rates
December 10th, 2007
CNBC recently reported that over the next 12 months, approximately 2 million US mortgages will reset to higher interest rates. Included in these changes will be negative amortization loans, mortgages with teaser rates that were below market, and interest only loans. The anticipated sharp upward movement of the payments related to these loans will likely cause the US housing recession to deepen. CNN Money reported in August of this year that some homeowners may see their monthly payments increase by 35% or more. Similarly, the Mortgage Bankers Association estimates that 600,000 home owners will fall behind in their mortgage payments, with nearly 50% of them losing their homes to foreclosure. Another study performed by First American CoreLogic, a real estate and mortgage tracking company, estimates at as many as 1.1 million homes may enter foreclosure over the next 6 to 7 years. These additional homes coming onto the market will be a further drag on the housing market throughout 2008 and beyond.
Unfortunately, most individuals facing increasing payments, foreclosure and even bankruptcy, do not understand their rights. As a consumer, every individual has rights under the federal Truth and Lending Act, which may entitle each to monetary damages and possibly the right to rescind, or unwind, a mortgage loan. Through rescission, a consumer may have the legal right to set aside a mortgage for violations of the Truth and Lending Act, collect damages and stop a foreclosure. A consumer may also have rights under their respective states Unfair and Deceptive Practices Laws. Most states have laws that protect consumers if they were victims of fraud or deception in consumer transactions and a real estate loan is a common consumer transaction. Nevertheless, many individuals will fall victim to foreclosure for their failure to educate themselves about their rights.
In addition, individuals facing difficult financial times may have the opportunity to renegotiate or modify their mortgage debt obligations through forbearance agreements, refinancing or loan modifications. In more difficult situations, lenders may accept a deed-in-lieu of foreclosure, thereby sparing a significant hit to an individual credit rating, or even a short sale which involves the sale of the property for less than the amount of its debt. Finally, individuals with poor credit may be good candidates for a bankruptcy filing to obtain a fresh financial start. In other words, individuals have several options available to them when facing difficult credit choices, and The Schwartz Law Firm specializes in researching, describing and pursuing those legal strategies. For a free consultation, please call us at (702)-385-5544.
The Nevada Foreclosure Process
November 15th, 2007
In the 1950s, the State of Nevada amended its statutory law to allow lenders to sell a property once an owner defaults without having to file a lawsuit. This process was created by allowing lenders to hold a pproperties deed in trust. As a result, in the event of a default on the part of the borrower, the lender can pull the deed from the trust and sell it to another buyer. A lender begins this foreclosure process by recording a notice of default with the appropriate Nevada county recorder and mailing the notice of default to the borrower. Pursuant to Nevada law, a borrower or any secondary lender then has 35 days from the date the default notice is recorded to cure the default or pay off the loan, and stop the foreclosure.
Nevada law creates a second clock which runs at the same time as the 35 day cure period, which states that 3 months after the notice of default is recorded, the lender can schedule a foreclosure sale if the borrower has not paid off default amount under the loan. In other words, once 90 days has expired, the third party named in the deed of trust, commonly referred to as the trustee, can carry out a public sale of the property. In order to comply with Nevada law, notice of the sale is posted at least 20 days before the trustee sale date in 3 public places and published in a local newspaper once a week for 3 weeks. The notice of sale is also mailed to those parties who will be impacted by the sale, including the borrower, any second lenders and the appropriate taxing authorities.
The sale may take place be at the trustees office or any other appropriate venue and any qualified buyer may bid. Lenders may credit bid the amount of their loan, however, a winning bidder must pay the full winning bid amount in cash or cashiers check to the trustee. If the sale is postponed for any reason, a public announcement is made at the time and place of the sale. After the sale, the trustee transfers ownership to the winning bidder.
Trustee sales of foreclosed property are performed out-of-court and the winning bidder is given clear title to the property. Importantly, borrowers do not have a right to redeem their property once the out-of-court foreclosure sale is complete. Nevada does have a process for court mandated foreclosures, but they are uncommon. Court mandated sales in Nevada do include a one-year redemption period for borrowers to recover their properties.
The Schwartz Law Firm specializes in representing borrowers facing foreclosure or difficult credit situations. For a free consultation and analysis of your loan documents, please contact us at (702)-385-5544.
The Truth In Lending Act
October 15th, 2007
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:
- the annual percentage rate;
- the total amount financed under the loan;
- the total amount of the finance charges, expressed in a dollar amount;
- the projected number and amount of payments; and
- 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.
