1.69 million foreclosures estimated for 2008

According to a recent Dow Jones report, Credit Suisse estimates that the United States could see foreclosures hit 1.69 million in 2008, with an additional 1.14 million foreclosures expected for 2009.

That's 2.83 million foreclosures.

When we add the 1.29 million foreclosures from 2007 into the mix, we arrive at a grand total of 4.12 million foreclosures nationwide over a three-year period.

Zillow.com estimates that foreclosures make up about 30% of the current housing for sale nationwide. Closer to home, as much as 72% of Stockton's market may be foreclosures.

These high foreclosure numbers are having a real effect on housing markets across the country. With so many foreclosures coming on the market, this trend is depressing property values. The trend has even started hurting home builders, who are now finding prices for their newly built housing units affected by foreclosures right in their new developments.

Foreclosure sale-leaseback scams

It's tough enough for homeowners who fall behind on loan payments, but it gets more unbearable once the foreclosure clock starts ticking.

Borrowers in default are often inundated with a variety of offers to stop the foreclosure: some from legitimate sources, but many from unscrupulous people intent on getting a steal of a deal, homeowner be damned.

A very common scheme involves a sale-leaseback transaction: the borrower "sells" their home to a foreclosure investor, usually for no or nominal consideration because of the pending foreclosure. The investor leases the property back to the borrower, usually with the promise that the borrower can buy the property back after a specified period of time.

The reality is that many of these investors find some pretext to evict the borrower from the home, leaving the investor free to resell the property.

In many states (including California), there are laws to protect homeowners in default from these schemes. But what if someone has already deeded their property to to an investor?

Under the Truth in Lending Act (TILA), a sale-leaseback can often be treated a a disguised loan, if applicable state law recognizes the legal doctrines of disguised loans and equitable mortgages. If a sale-leaseback can be looked at as a loan under state law, then the foreclosure investor would be considered a lender, and would owe the borrower standard TILA / Reg. Z disclosures. Failure to provide these disclosures would allow the borrower an extended rescission right - up to three years after the transaction.

The TILA audit as a Short Sale expediter

The horror stories are out there - so-called "short sales" are taking forever, because lenders are very slow to approve discounted payoffs.

What if you could get to the front of the line, or out of the Loss Mitigation quagmire altogether? That's exactly what happens when a TILA (Truth in Lending Act) audit uncovers a lender violation that entitles the borrower to rescind their loan.

Anyone considering a short sale should contact a qualified attorney before they accept a buyer's offer. The reason is simple: in many cases, if there's a TILA violation (as there often are), the principal reduction imposed under the rescission rules may be more than enough to allow a sale at current market value without begging the lender to cooperate. Imagine how much easier it would be to sell or refinance a property if the negative equity could be erased by a principal reduction.

Also, the lender must respond within 20 days after receiving a borrower rescission notice. The borrower's file goes from Loss Mitigation to Legal, and the lawyer, agent, and borrower can work together to get lender acceptance very quickly. Compare that to the normal short sale approval timeline, and it's easy to see why rescission can be a good option for many borrowers.

The best part is that TILA requires the lender to reimburse the borrower for attorney fees and costs, and imposes damages when the lender fails to accept a valid rescission in a timely manner. So the borrower can get a significant principal reduction, and their lawyer paid for, all on the lender's dime.

Because there are conditions that apply under the law, anyone interested can contact me for more details.

Important information about TILA and foreclosures

In doing research about a borrower's extended right to rescind after a lender starts foreclosure proceedings, I found conflict among the commentators in publications and online. On the one hand, there are places where a borrower's right to rescind can be asserted as an affirmative defense to foreclosure under state law, even after the TILA extended right to rescind expires. On the other hand, there are places where the borrower cannot ordinarily assert such a right (and prevail). My review of applicable California law indicates that California is likely among the latter group of places.

For California borrowers, current law is such that an actual rescission of the loan, at least in a form that would let a borrower keep their home, is a long shot at best. This is because the federal rescission right absolutely goes away three years after consummation of the loan, and claiming a state right of rescission based upon an expired TILA rescission right would be extremely difficult to do. The borrower would likely have to prove that the lender did something (an affirmative act of wrongdoing) that prevented the borrower from exercising their rescission right in a timely manner.

Rather, a California borrower would probably have to rely on TILA’s damages provisions combined with state law. Specifically, the TILA clause that places a one year statute of limitations on damages claims contains an exception that expressly allows a borrower to bring a damages claim or raise a damages defense under a state law (statute or accepted common law theory), even after the federal statute runs. To prevail, the borrower would have to show (i) that the lender’s TILA violation entitles the borrower to damages under some state law (statute or accepted common law theory), and (ii) that the borrower’s true measure of damages is the amount of principal reduction that would have been required under a timely TILA rescission.

Needless to say, bringing a damages claim or raising a defense is even more complicated than it may seem from the explanation above. Therefore, for borrowers in foreclosure on a TILA loan over three years old, it is imperative to find an attorney experienced in litigating this type of case.

Truth in Lending Act Fact Sheet

For anyone interested, I have this information available as a PDF that I would be happy to email. Please contact me for details.

IMPORTANT NOTICE: This information is provided for general educational purposes only. It is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice about your situation.

The federal Truth in Lending Act, commonly referred to as “TILA,” is a powerful tool for homeowners facing escalating loan payments. TILA, along with Regulation Z, impose strict disclosure requirements on lenders for certain loans secured by a borrower’s principal residence. When a lender violates TILA, a borrower may be entitled to a significant reduction in their loan balance, and attorney fees. As with most statutes, conditions and special rules apply. This fact sheet covers the basics.

1. TILA does not apply to purchase money loans. Only non-purchase money loans are covered by TILA. There is an additional exclusion of purchase money loans refinanced by the same lender that made the purchase money loan. However, this exclusion does not apply if the borrower received additional advances.

2. TILA does not apply to business or investment property loans. By statute, TILA only covers (i) non-purchase money loans, (ii) secured by a borrower’s principal residence, (iii) where the loan proceeds are used primarily for personal family purposes (as opposed to business or investment purposes).

3. TILA violations allow a borrower to cancel their loan. Every TILA loan must provide two kinds of notice to a borrower: the borrower’s three day right to cancel, and accurate calculations of the total cost of credit (APR, finance charge, amount financed, and total of payments). There are statutory requirements about the contents and accuracy of each form of notice. If the notices are incomplete, or inaccurate beyond the statutory allowances, then the borrower has an extended right to cancel the loan. In most cases, the borrower’s right to cancel is extended for three years from the date they signed loan documents. If a lender starts a foreclosure after the three year extension expires, the borrower may have a right to claim damages, under a combination of TILA and state law.

4. TILA rescissions impose severe penalties on lenders. Once a borrower sends their lender a rescission notice under TILA, several important changes happen to the borrower-lender relationship.

First, the lender is no longer entitled to collect any interest, fees or costs associated with the loan, even costs paid to third parties like title insurers. Instead, every penny paid by the borrower over the life of the loan goes towards reducing the principal balance owed to the lender. The borrower is required to make a “tender offer” to pay the lender any remaining principal balance. Payment is usually accomplished by refinancing or selling the property.

Second, once a loan is rescinded, the lender’s security interest in the borrower’s property automatically becomes void under federal law. “Security interest” includes the Promissory Note and any recorded documents (Deed of Trust, Mortgage, etc.) that secure the loan. This feature is particularly helpful for borrowers in foreclosure, because once a lender’s security interest is void, their right to foreclose goes away.

Third, within 20 days of receiving a borrower’s rescission notice, the lender must return to the borrower any money or property that has been given to anyone (including the lender) related to the loan. In addition, the lender must take steps to reflect that their security interest no longer encumbers the property. The practical effect of this rule is that the lender must accept a borrower’s rescission within 20 days of receiving it. Failure to act within the 20 days is an additional TILA violation that exposes the lender to additional damages.

Fourth, the lender must pay the borrower’s reasonable attorney fees, actual damages, and in some cases, statutory damages.

5. There are special rules that apply to TILA rescissions. While there are too many examples to cover in this fact sheet, one noteworthy rule is that a borrower cannot rescind a loan if their home is already sold (on the open market or through foreclosure), or (in some parts of the country, including California) if the borrower is in contract to sell their home.

Because of the special rules that apply, best practices dictate having the borrower’s documents reviewed by qualified counsel with experience in TILA matters.

Truth in Lending Act - info for borrowers

Many Californians are facing escalating loan payments, at a time when home values have retreated and the economy is slowing. For most, the trouble really started a few years back when they refinanced their home. As a result, more borrowers than ever are going delinquent and ending up in foreclosure. While many believe that bankruptcy is their primary or only option, there is an alternative available that most people don't know about.

There is a little-used law that could help many borrowers in this position. The federal Truth in Lending Act, commonly referred to as "TILA," could provide substantial relief for many borrowers (for their principal residence) stuck in the situation described above. The law was originally enacted to ensure that consumers have meaningful access to information about the cost of credit. Under TILA, when a lender violates certain notice requirements related to certain home loans, there are stiff penalties.

First, the borrower is allowed to rescind their loan, and the lender is no longer entitled to any interest, fees, or costs related to the loan, even costs paid to third parties like title insurers and brokers. Instead, every penny paid by the borrower over the life of the loan goes towards reducing the principal balance due on the loan. This is not a typo. Of course, the borrower does have to make arrangements to pay back the remaining principal balance, usually by refinancing or selling the property. But for many owners who currently owe more than their home is worth, this feature can make it much easier to sell or refinance.

Second, once a borrower notifies the lender that they are rescinding the loan, the lender's security interest in the collateral (the property) is voided as a matter of federal law. This means that a TILA violation can stop a foreclosure very quickly.

There are too many special rules that apply to TILA rescissions to cover in this post, but it all starts with the borrower having their loan documents reviewed by an attorney familiar with TILA.

Found current data on default and cure rates

You gotta love the blogosphere...

I found this post from fellow blogger site Calculated Risk, which summarizes information about California's current default and cure rates from DataQuick.

As of Q1 2008, new defaults statewide have more than doubled (up 143%) compared to Q1 2007, while the current cure rate has dropped to less than one-third (32%), down from about half (52%) in Q1 2007.

Recordings of Trustee's Deeds Upon Sale, the title document that records after a borrower loses their property at a Trustee's Sale, are at their highest rates in the 20 years since DataQuick started tracking Trustee's Deeds. In the first three months of 2008, 47,171 Trustee's Deeds recorded statewide.