How To Buy A Foreclosed Home

photo by Taber Andrew Bain

US News & World Report quoted me in  How to Buy a Foreclosed Home. It opens,

As home prices soar in many cities, buyers might look to foreclosures as an affordable option for landing their dream home. Typically, a foreclosure occurs when a homeowner no longer can make the mortgage payments and the lender seizes the property. The lender then requires the former owner to vacate the property before offering it for sale, usually at a discounted price. In some cases, the home is auctioned off to the highest bidder.

Foreclosures offer home shoppers the potential to score a great deal, says Elizabeth Mendenhall, a Realtor in Columbia, Missouri, who is president of the National Association of Realtors.

“Sometimes people think a foreclosure only happens to the lower end of the market, but you can definitely find foreclosures at any price range,” she says.

But while buying a foreclosure can save you a lot of cash, it does come with risks. If you pursue a foreclosure, it helps to have a “stomach of steel,” says David Reiss, law professor and academic programs director of the Center for Urban Business Entrepreneurship at Brooklyn Law School.
“There’s going to be a lot more ups and downs” than in a typical homebuying process, says Reiss, whose work focuses on real estate finance and community development.

Why Buy a Foreclosure?

In recent years, foreclosure sales have been trending downward, according to national property data curating company Attom Data Solutions. That is largely because a strengthening U.S. economy has reduced the number of borrowers who lose their homes as a result of failing to pay the mortgage. In 2017, distressed home sales – including foreclosures and short sales – made up 14 percent of all U.S. single family home and condo sales, according to Attom Data Solutions. That number was down from 15.5 percent in 2016 and a recent high of 38.6 percent in 2011.

Still, some buyers look to foreclosures to get the best possible deal. Homes may be for sale in various states of foreclosure. For example, pre-foreclosure is a period when the owner has fallen behind on payments, but the lender has not actually taken the home from the owner. Homes sold at this point often go through the short sale process, where the lender agrees to accept an amount of money from the buyer that is less than what the current owner owes on the mortgage.

Properties that are already in foreclosure are sold at an online or offline auction, or by a real estate agent. The biggest lure of buying a foreclosure is the potential savings you get compared with buying a similar nondistressed property.

“It can be like a 15 percent discount on your neighboring houses,” Reiss says. “So, it can be significant.”

But Mendenhall says how much you will save depends on the local real estate market and the stage of foreclosure of the property.

The Risks of Buying a Foreclosure

Purchasing a foreclosure involves several substantial risks, so buyers must enter the process with their eyes wide open. In many cases, if you buy a foreclosure at auction, you must purchase the property sight unseen. Reiss says this is the biggest potential danger of buying a foreclosure.

“The big, scary thing is that with a number of foreclosures, you can’t actually inspect the property before you actually bid,” he says. “That’s in part why the prices are below the market.”

Even if you can get a professional inspection on a foreclosure, you typically have to buy the house “as is.” Once you purchase the home, any problems that pop up are yours – as is the responsibility for finding and paying for a remedy. Such problems are more likely in a foreclosure than in a nondistressed property. For example, in some cases, a frustrated family might strip the home of valuable elements before vacating the house.

“Or they kind of just beat it up because they were angry about having to go through the foreclosure,” Reiss says.

The mere fact that the home is vacant also can lead to problems. Reiss says a home is like a plant – if you don’t tend to it regularly, it can wither and die. “If you happen to leave it alone on its own for too long, water leaks in, pipes can burst, rodents can get in, just the elements can do damage,” he says.

Mendenhall adds that people who lose their homes to foreclosure typically have major financial troubles. That can trigger other troubles for the new owner. “If the previous owner was in financial distress, there’s a chance that there’s more maintenance and work maybe that they haven’t completed,” she says.

Reducing the Dangers of Buying a Foreclosure

There are a few things you can do to mitigate the risks associated with buying a foreclosure. For starters, see if you can get a professional inspection of the property. Although buyers often cannot inspect a foreclosure property, that is not always the case. So, be sure to ask a real estate agent or the seller about hiring a home inspector.

“Even though it may extend the process, if you can have a qualified inspector come in, you can know a little bit more about what you’re getting into,” Mendenhall says.

If you can’t inspect the property, Reiss recommends researching its history. Look at publicly available records to find out when the property was last sold and how long the current owner had possession. Also, check whether building permits were drawn and what type of work was done. “Maybe you’ll see some good news, like a boiler was replaced two years ago,” Reiss says. “Or maybe you’ll see some scary news, like there’s all these permits and you don’t know if the work was completed.”

Also, visit the house and perform a “curbside inspection” of your own, Reiss says. “Even if you can’t go inside the house, you want to look at the property,” he says. “If you can peek in the windows, you probably want to peek in the windows.”

Knock on the doors of nearby neighbors. Tell them you want to bid on the property but need to learn all that you can about the previous owners, including how long they lived in the home and whether they took care of it. And ask if there have been any signs of squatters or recent break-ins.

“Try to get all that information,” Reiss says. “Neighbors are probably going to have a good sense of a lot of that, and I think that kind of informal due diligence can be helpful.”

Working with a real estate agent experienced in selling distressed property may help you avoid some of the potential pitfalls of buying foreclosures, Mendenhall says. Some agents have earned the National Association of Realtors’ Short Sales and Foreclosure Resource Certification, or SFR. Such Realtors can help guide you through processes unique to purchasing distressed properties, Mendenhall says.

How to Find a Foreclosure

You can find foreclosures by searching the listings at bank websites, including those of giants such as Wells Fargo and Bank of America. The government-sponsored companies Fannie Mae and Freddie Mac also have listings on their websites.

The federal government’s Department of Housing and Urban Development owns and sells foreclosed homes. You can find listings on the website.

Private companies such as RealtyTrac offer foreclosure listings online, typically for a fee. Finally, you can contact a real estate agent who will find foreclosures for you. These agents may help you find foreclosures before others snatch them up.

Is a Foreclosure Right for You?

Before you pursue a foreclosure, Reiss encourages you to ask yourself whether you are in a good position to take on the risk – and, hopefully, to reap the reward – of buying a foreclosure. It is possible to use conventional financing, or even a loan from the Federal Housing Administration or Department of Veterans Affairs, to buy a foreclosure. However, people with deeper pockets are often better candidates for buying a foreclosure.

Because the process can be highly competitive, buyers with access to large amounts of cash can swoop in and land the best deals. “You can get financing, but you need to get it quickly,” Reiss says. “I think a lot of people who go into purchasing foreclosure(s) want to have the cash to just kind of act.”

Sellers of distressed properties love cash-only buyers, because the home can be sold without a lender requiring either a home appraisal or a home inspection. “So, the more cash you have on hand, the more likely you’re playing in those sandboxes,” Reiss says.

In addition, buyers of foreclosures often need to spend money to bring a property up to code or to make it competitive with other homes in the neighborhood. “Have a big cushion in case the building is in much worse condition than you expected,” Reiss says.

He cites the example of someone who buys a foreclosure, only to discover that the piping has been stripped out of the basement and will cost $10,000 to repair and replace. “You need to know that you can handle that one way or the other,” Reiss says.

People with solid home maintenance and repair skills also are good candidates for buying a foreclosure. “I think if you’re a handy person, you might be able to address a lot of the issues yourself,” Reiss says. He describes such buyers as anyone who has “a can-do attitude and is looking to trade sweat equity for home equity.”

Reiss and Mendenhall agree that flexibility is crucial to successfully shopping for and purchasing a foreclosure. Mendenhall notes that a foreclosure sale can take a long time to complete. “It can be a long process, or a frustrating one,” she says. “It can depend upon where they are in the foreclosure process. It can take a much longer time to go from contract to close.”

For that reason, a foreclosure might not make sense for buyers who need to move into a property quickly, she says. Also, think hard about how you really feel about buying a house that needs extensive renovation work that might take a long time to complete.

“It can be hard for some people to live in a property and do repairs at the same time,” Mendenhall says.

Holding Servicers Accountable

image by Rizkyharis

I submitted my comment to the Consumer Financial Protection Bureau regarding the 2013 RESPA Servicing Rule Assessment. It reads, substantively, as follows:

The Consumer Financial Protection Bureau issued a Request for Information Regarding 2013 Real Estate Settlement Procedures Act Servicing Rule Assessment. The Bureau

is conducting an assessment of the Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), as amended prior to January 10, 2014, in accordance with section 1022(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Bureau is requesting public comment on its plans for assessing this rule as well as certain recommendations and information that may be useful in conducting the planned assessment. (82 F.R. 21952)

Before the RESPA Servicing Rule was adopted in 2013, homeowners had had to deal with unresponsive servicers who acted in ways that can only be described as arbitrary and capricious or worse.  Numerous judges have used terms such as “Kafka-esque” to describe homeowner’s dealings with servicers.  See, e.g., Sundquist v. Bank of Am., N.A., 566 B.R. 563 (Bankr. E.D. Cal. Mar. 23, 2017).  Others have found that servicers failed to act in “good faith,” even when courts were closely monitoring their actions.  See, e,g., United States Bank v. Sawyer, 95 A.3d 608  (Me. 2014). And yet others have found that servicers made multiple misrepresentations to homeowners.  See, e.g., Federal Natl. Mtge. Assn. v. Singer, 48 Misc. 3d 1211(A), 20 N.Y.S.3d 291 (N.Y. Sup. Ct. July 15, 2015).  The good news is that in those three cases, judges punished the servicers and lenders for their patterns of abuse of the homeowners. Indeed, the Sundquist judge fined Bank of America a whopping $45 million to send it a message about its horrible treatment of borrowers.

But a fairy tale ending for a handful of borrowers who are lucky enough to have a good lawyer with the resources to fully litigate one of these crazy cases is not a solution for the thousands upon thousands of borrowers who had to give up because they did not have the resources, patience, or mental fortitude to take on big lenders and servicers who were happy to drag these matters on for years and years through court proceeding after court proceeding.

The RESPA Servicing Rule goes a long way to help all of those other homeowners who find themselves caught up in trials imposed by their servicers that it would take a Franz Kafka to adequately describe.  The Rule has addressed intentional and unintentional abuses in the use of force-placed insurance and other servicer actions.

The RESPA Servicing Rule Assessment should evaluate whether the Rule is sufficiently evaluating servicers’ compliance with the Rule and implementing remediation plans for those which fail to comply with the vast majority of loans in their portfolios.  Servicers should not be evaluated just on substantive outcomes but also on their processes.  Are avoidable foreclosures avoided?  Are homeowners treated with basic good faith when it comes to interactions with servicers relating to defaults, loss mitigation and transfers of servicing rights?  The Assessment should evaluate whether the Rule adequately measures such things.  One measure the Bureau could look at would be court cases involving servicers and homeowners.  While perhaps difficult to do, the Bureau should attempt to measure the Rule’s impact on court filings alleging servicer abuses.

The occasional win in court won’t save the vast majority of homeowners from abusive lending practices.  The RESPA Servicing Rule, properly applied and evaluated, could.

 

Running The CFPB out of Town

photo by Gabriel Villena Fernández

My latest column for The Hill is America’s Consumer Financial Sheriff and The Horse it Rides Are under Fire. It reads,

Notwithstanding its name, the Financial Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act, or Financial Choice Act, will be terrible for consumers. It will gut the Consumer Financial Protection Bureau and return us to the Wild West days of the early 2000s where predatory lenders could prey on the elderly and the uneducated, knowing that there was no sheriff in town to stop ‘em.

The subprime boom of the early 2000s has receded in memory the past 15 years, but a recent Supreme Court decision reminds us of what that kind of predatory behavior could look like. In Bank of America Corp. v. Miami this year, the court ruled that a municipality could sue financial institutions for violations of the Fair Housing Act arising from predatory lending.

Miami alleged that the banks’ predatory lending led to a disproportionate increase in foreclosures and vacancies which decreased property tax revenues and increased the demand for municipal services. Miami alleged that those “‘predatory’ practices included, among others, excessively high interest rates, unjustified fees, teaser low-rate loans that overstated refinancing opportunities, large prepayment penalties, and — when default loomed — unjustified refusals to refinance or modify the loans.”

The Dodd-Frank Act was intended to address just those types of abusive practices. Dodd-Frank barred many of them from much of the mortgage market through its qualified mortgage and ability-to-repay rules. More importantly, Dodd-Frank created the Consumer Financial Protection Bureau. The CFPB was designed to be an independent regulator with broad authority to police financial institutions that engaged in all sorts of consumer credit transactions. The CFPB was the new sheriff in town. And like Wyatt Earp, it has been very effective at driving the bad guys out of Dodge.

The Financial Choice Act would bring the abusive practices of the subprime boom back to life. The act would gut the CFPB. Among other things, it would make the Director removable at will, unlike other financial institution regulators. It would take away the CFPB’s supervisory function of large banks, credit unions and other consumer finance institutions. It would take away the CFPB’s power to address unfair, deceptive, and abusive acts and practices. It would restrict the CFPB from monitoring the mortgage market and thereby responding to rapidly developing abusive practices.

The impacts on consumers will be immediate and harmful. The bad guys will know that the sheriff has been undercut by its masters, its guns loaded with blanks. The bad guys will re-enter the credit market with the sorts of products that brought about the subprime crisis: teaser rates that quickly morph into unaffordable payments, high costs and fees packed into credit products, and all sorts of terms that will result in exorbitant and unsustainable credit.

Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, is the chief proponent of the Financial Choice Act. Hensarling claims that Dodd-Frank and the CFPB place massive burdens on consumer credit providers. That is not the case. Interest rates remain near all-time lows. Consumer credit markets have many providers. Credit availability has eased up significantly since the financial crisis

One only needs to look at his top donors to see how the Financial Choice Act lines up with the interests of those consumer credit companies that are paying for his re-election campaign. These top donors include people affiliated to Wells Fargo, Bank of America, JPMorgan Chase, Capital One Financial, Discover Financial Services, and the American Bankers Association, among many others.

Dodd-Frank implemented regulations that work very well in the consumer credit markets. It created a regulator, the CFPB, that has been very effective at keeping the bad guys out of those markets. The Financial Choice Act will seriously weaken the CFPB. When vulnerable consumers cry out for help, Hensarling would heave the CFPB over its saddle and let its horse slowly trot it out of town.

Banks v. Cities

The Supreme Court issued a decision in Bank of America Corp. v. Miami, 581 U.S. __ (2017). The decision was a mixed result for the parties.  On the one hand, the Court ruled that a municipality could sue financial institutions for violations of the Fair Housing Act arising from predatory lending. Miami alleged that the banks’ predatory lending led to a disproportionate increase in foreclosures and vacancies which decreased property tax revenues and increased the demand for municipal services. On the other hand, the Court held that Miami had not shown that the banks’ actions were directly related to injuries asserted by Miami. As a result, the Court remanded the case to the Eleventh Circuit to determine whether that in fact was the case. This case could have big consequences for how lenders and others and other big players in the housing industry develop their business plans.

For the purposes of this post, I want to focus on the banks’ activities of the banks that Miami alleged they engaged in during the early 2000s. It is important to remember the kinds of problems that communities faced before the financial crisis and before the Dodd-Frank Act authorized the creation of the Consumer Financial Protection Bureau. As President Trump and Chairman Hensarling (R-TX) of the House Financial Services Committee continue their assault on consumer protection regulation, we should understand the Wild West environment that preceded our current regulatory environment. Miami’s complaints charge that

the Banks discriminatorily imposed more onerous, and indeed “predatory,” conditions on loans made to minority borrowers than to similarly situated nonminority borrowers. Those “predatory” practices included, among others, excessively high interest rates, unjustified fees, teaser low-rate loans that overstated refinancing opportunities, large prepayment penalties, and—when default loomed—unjustified refusals to refinance or modify the loans. Due to the discriminatory nature of the Banks’ practices, default and foreclosure rates among minority borrowers were higher than among otherwise similar white borrowers and were concentrated in minority neighborhoods. Higher foreclosure rates lowered property values and diminished property-tax revenue. Higher foreclosure rates—especially when accompanied by vacancies—also increased demand for municipal services, such as police, fire, and building and code enforcement services, all needed “to remedy blight and unsafe and dangerous conditions” that the foreclosures and vacancies generate. The complaints describe statistical analyses that trace the City’s financial losses to the Banks’ discriminatory practices. (3-4, citations omitted)

Excessively high interest rates, unjustified fees, teaser interest rates and large prepayment penalties were all hallmarks of the subprime mortgage market in the early 2000s. The Supreme Court has ruled that such activities may arise to violations of the Fair Housing Act when they are targeted at minority communities.

Dodd-Frank has barred many such loan terms from a large swath of the mortgage market through its Qualified Mortgage and Ability-to-Repay rules. Trump and Hensarling want to bring those loan terms back to the mortgage market in the name of lifting regulatory burdens from financial institutions.

What’s worse, the  burden of regulation on the banks or the burden of predatory lending on the borrowers? I’d go with the latter.

Kafka and the CFPB

photo by Ferran Cornellà

Statue of Franz Kafka by Jaroslav Rona

The Hill published my latest column, The CFPB Is a Champion for Americans Across The Country. It opens,

Republicans like Sen. Ted Cruz (R-Texas) have been arguing that consumers should be freed from the Consumer Financial Protection Bureau’s “regulatory blockades and financial activism.” House Financial Services Committee Chairman Jeb Hensarling (R-Texas) accuses the CFPB of engaging in “financial shakedowns” of lenders. These accusations are weighty.

But let’s take a look at the types of behaviors consumers are facing from those put-upon lenders. A recent decision in federal bankruptcy court, Sundquist v. Bank of America, shows how consumers can be treated by them. You can tell from the first two sentences of the judge’s opinion that it goes poorly for the consumers: “Franz Kafka lives. This automatic stay violation case reveals that he works at Bank of America.”

The judge continues, “The mirage of promised mortgage modification lured the plaintiff debtors into a Kafka-esque nightmare of stay-violating foreclosure and unlawful detainer, tardy foreclosure rescission kept secret for months, home looted while the debtors were dispossessed, emotional distress, lost income, apparent heart attack, suicide attempt, and post-traumatic stress disorder, for all of which Bank of America disclaims responsibility.”

Homeowners who reads this opinion will feel a pit in their stomachs, knowing that if they were in the Sundquists’ shoes they would also tremble with rage and fear from the way Bank of America treated them: 20 or so loan modification requests or supplements were “lost;” declared insufficient, incomplete or stale; or denied with no clear explanation.

Over the years, I have documented similar cases on REFinBlog.com. In U.S. Bank, N.A. v. David Sawyer et al., the Maine Supreme Judicial Court documented how loan servicers demanded various documents which were provided numerous times over the course of four court-ordered mediations and how the servicers made numerous promises about modifications that they did not keep. In Federal National Mortgage Assoc. v. Singer, the court documents the multiple delays and misrepresentations that the lender’s agents made to the homeowners.

The good news is that in those three cases, judges punished the servicers and lenders for their pattern of Kafka-esque abuse of the homeowners. Indeed, the Sundquist judge fined Bank of America a whopping $45 million to send it a message about its horrible treatment of borrowers.

But a fairy tale ending for a handful of borrowers who are lucky enough to have a good lawyer with the resources to fully litigate one of these crazy cases is not a solution for the thousands upon thousands of borrowers who had to give up because they did not have the resources, patience, or mental fortitude to take on big lenders who were happy to drag these matters on for years and years through court proceeding after court proceeding.

What homeowners need is a champion that will stand up for all of them, one that will create fair procedures that govern the origination and servicing of mortgages, one that will enforce those procedures, and one that will study and monitor the mortgage market to ensure that new forms of predatory behavior do not have the opportunity to take root. This is just what the Consumer Financial Protection Bureau has done. It has promulgated the qualified mortgage and ability-to-repay rules and has worked to ensure that lenders comply with them.

Kafka himself said that it was “the blend of absurd, surreal and mundane which gave rise to the adjective ‘kafkaesque.’” Most certainly that is the experience of borrowers like the Sundquists as they jump through hoop after hoop only to be told to jump once again, higher this time.

When we read a book like Kafka’s The Trial, we are left with a sense of dislocation. What if the world was the way Kafka described it to be? But if we go through an experience like the Sundquists’, it is so much worse. It turns out that an actor in the real world is insidiously working to destroy us, bit by bit.

The occasional win in court won’t save the vast majority of homeowners from abusive lending practices. A regulator like the Consumer Financial Protection Bureau can. And in fact it does.

Blockchain and Real Estate

CoinDesk.com quoted me in Land Registry: A Big Blockchain Use Case Explored. It opens,

With distributed ledger technology being promoted as a benefit to everything from farming to Fair Trade coffee, use case investigation has emerged as a full-time fascination for many.

In this light, one popular blockchain use case that has remained generally outside scrutiny has been land title projects started in countries including in Georgia, Sweden and the Ukraine.

One could argue land registries seemed to become newsworthy only after work on the use case had begun. However, those working on projects disagree, asserting that land registries could prove one of the first viable beachheads for blockchain.

Elliot Hedman, chief operating officer of Bitland Global, the technology partner for a real estate title registration program in Ghana, for example, said that issues with land rights make it a logical fit.

Hedman told CoinDesk: “As for the benefit of a blockchain-based land registry, look to Haiti. There are still people fighting over whose land is whose. When disaster struck, all of their records were on paper, that being if they were written down at all.”

Hedman argued that, with a blockchain-based registry employing a network of distributed databases as a way to facilitate data exchange, the “monumental headache” associated with a recovery effort would cease.

Modern real estate

To understand the potential of a blockchain land registry system, analysts argue one must first understand how property changes hands.

When a purchaser seeks to buy property today, he or she must find and secure the title and have the lawful owner sign it over.

This seems simple on the surface, but the devil is in the details. For a large number of residential mortgage holders, flawed paperwork, forged signatures and defects in foreclosure and mortgage documents have marred proper documentation of property ownership.

The problem is so acute that Bank of America attempted foreclosure on properties for which it did not have mortgages in the wake of the financial crisis.

Readers may also recall the proliferation of NINJA (No Income, No Job or Assets) subprime loans during the Great Recession and how this practice created a flood of distressed assets that banks were simply unable to handle.

The resulting situation means that the property no longer has a ‘good title’ attached to it and is no longer legally sellable, leaving the prospective buyer in many cases with no remedies.

Economic booster

Land registry blockchains seek to fix these problems.

By using hashes to identify every real estate transaction (thus making it publicly available and searchable), proponents argue issues such as who is the legal owner of a property can be remedied.

“Land registry records are pretty reliable methods for maintaining land records, but they are expensive and inefficient,” David Reiss, professor of law and academic program director at the Center for Urban Business Entrepreneurship, told CoinDesk.

He explained:  “There is good reason to think that blockchain technology could serve as the basis for a more reliable, cheaper and more efficient land registry.”