Spring 2003
A professional publication issued by
Cohn, Goldberg & Deutsch, LLC
Serving the legal needs of lenders and servicers throughout Maryland and the Disctrict of Columbia.
ARE ALL VENDORS CREATED EQUAL?
The other day I was in a
Manager’s office, at a large servicer
when the conversation turned to the
expense of foreclosures. Of course
most servicing shops divide their work
among several foreclosure law firms so
I suggested that he pull his invoices to
compare the expenses being charged
by each vendor. Under the Federal
Constitution “All men are created
equal” and so are the mandated legal
fees promulgated by FNMA, FHLMC,
FHA, and the VA. However, all
expenses are not created equal. Let me
explain.
The first invoice pulled by the
manager was from a firm handling
Maryland foreclosures. Contained on
that invoice was a charge for a title
report equal to approximately
$700.00. Title reports are necessary to
effectuate a foreclosure, but $700.00!
The vendor, of course owned the title
company, which sometimes is helpful
in obtaining expedited time frames,
but again $700.00. Most expedited
title reports can be obtained for
approximately $160-$225 depending
on the jurisdiction so the mark up of
almost $500.00 serves no legitimate
purpose other than to cause the
borrower more difficulty in reinstating,
the lender more subject to a class
action suit and the REO department to
work harder.
The next item, we discussed was
the bond charge. In Maryland, a bond
is required to be filed in every action.
However, most vendors in the interest
of their clients, file a Motion for
Nominal Bond with the Court. These
motions are routinely granted, with the
exception of a time problem in
Baltimore City. Upon the filing of this
Motion, the cost of the bond being
filed will decrease from $300-$500 to
under $100. The insurance companies
issue bonds on a basis of several dollars
per thousand of coverage and also pay
commissions to licensed insurance
agents. Of course the invoice we
reviewed did not reflect the nominal
rates but instead full rates generating
full commissions to the agent
presumably within the vendor’s firm.
Next, we reviewed the advertising
charges. One invoice showed a
vendor, without any thought, routinely
advertising in a newspaper that
charged a per line rate of more than
double certain other newspapers.
Moreover, the vendor did not tailor the
advertisement. As a result, the invoice
was for more than $750.00 when the
job could have been accomplished for
less than $300.00.
We added up just these three items
and concluded that with proper
vendor management, the lender could
save over $1,200 per file. Now mind
you, the fee in Maryland for handling
the foreclosure is $800.00. Clearly the
savings were in excess of the
designated fee. Put another way, the
lender’s servicing department could
have saved hundreds of thousands of
dollars, had they been aware of how
they were being charged.
The manager, then stated, “but
Ron, we are reimbursed for many of
these items”. Yes that may be true, in
part for certain loans, however that
statement ignores uninsured
conventional loans, FHA loans that are
only reimbursed on a percentage basis
and the ethics of forcing the Investor to
pay these unjustified fees and creating
a more difficult situation for the
borrower to cure and subjecting the
servicer to a class action lawsuit. After,
discussing these issues, the manager
then stated, I understand. That
brought a smile to my face!
The post script on this article and
the conversation is that a class action
suit was filed this month in the context
of a Maryland bankruptcy matter,
which may involve numerous lenders
and plaintiffs as well as the law firm
participating in the billing practices.
This suit will be the subject of another
newsletter article when the dust will
have had a chance to settle.
THIRD PARTY RE-SELLS AND THE BANKRUPTCY CODE
There is an old adage,
called the Rule of Holes that reads
“If you are in a hole, stop digging”. That
was the thought that crossed my mind
when reviewing a recently decided
Bankruptcy appeal in the District of
Columbia. In In re Roberta T. Cooper,
273 B.R. 297, a lender moved for a
determination that the automatic stay
did not apply to a post-petition
foreclosure resale of a Chapter 13
debtor’s residence. The court reviewed
the law in the District of Columbia,
Maryland and Virginia and then denied
the Lender’s position. In other words, in
the District of Columbia, the automatic
stay applies to the resale of a property
when the bankruptcy was filed after the
original sale and the property had to be
re-sold due to a defaulting third party
purchaser.
Let us review. After a default, the
Lender caused the trustees to sell a
property under a power of sale. At the
auction a third party purchaser,
Phoenix Holding, Inc. was deemed to
be the successful bidder at the prepetition
foreclosure sale, tendering a
bid in the amount of $119,700.00.
Phoenix, however, failed to settle on its
purchase in accordance with the terms
of the sale. As a result, the substitute
trustees noted a re-sale of the property
at Phoenix’s risk and expense. One
minute before the auctioneer sold the
property for a second time, the original
owner of the property filed her
bankruptcy petition. The substitute
trustees and the auctioneer unaware of
the bankruptcy filing sold the Property
to a new third party purchaser for a
lesser sum of $78,000.00. Rather than
honor the filing the lender’s attorney
filed its pleading asserting that upon
the fall of the hammer at the
conclusion of bidding at the first
foreclosure sale, the debtor was
divested of her equity of redemption
after the first sale, and thus had no
interest in the property. As you know,
11 U.S.C. Section 362(a)(40 prohibits
any act to enforce a lien against
property of the estate.
The court found little merit in the
lender’s argument, noting that their
attorney “reads to much into” a previous
holding of the court and the lender
“would not have filed its motion in the
face of the holding” of various cases.
The court specifically cited Flowers, 94
B.R. 8, which held that a trustees under
a deed of trust violated the automatic
stay by granting a successful bidder a
trustees deed post petition. A debtor is
entitled to all rights in the property,
subject to the lien of the deed of trust, in
the event the purchaser fails to pay the
purchase price and the trustee elects not
to sue for specific performance. In re
Leonard, 63 B.R. 261 (Bankr. D.D.C.
1986).
Although, not binding on the
jurisdictions reviewed, the court
reviewed the adjoining states to the
District of Columbia. Beginning with
Maryland, the court stated, that a resale
of foreclosed property after the original
purchaser defaults on earlier
foreclosure sale ratified by the court, is
at the risk of, and also for the profit of,
that defaulting purchaser. The
proceedings for a resale, after final
ratification treat the first contract as
binding on the original purchaser. The
property is resold as the property of the
defaulting purchaser, and at his risk.
The debtor whose property was
foreclosed had no interest in the
property when it was resold, and
consequently had no standing to object
to the sale.
The court noted that foreclosure
sale in Maryland are non-judicial sales
subject to ratification by a court of
equity: in effect that are quasi-judicial
sale. Legal title does not pass at a
foreclosure until ratified by the equity
court. The sale divests the mortgagor
of all rights of redemption remaining at
the time of sale. Until the sale is
ratified by the court, it is incomplete
and the purchaser’s title is inchoate and
equitable from the day of sale until the
final ratification. Because ratification
retroacts, the purchaser is regarded by
relation-back as the equitable owner
from the time of sale and thus is
entitled to all the rents and profits from
the sale. Consequently, after a
foreclosure sale, both the equity of
redemption and equitable ownership
are extinguished. Additionally, once
the property is sold at a foreclosure
sale, the debtor only holds the right to
object at the ratification proceedings to
irregularities in the conduct of the sale
or validity of the mortgage since the
purchaser holds the equitable title.
Unlike Maryland, the District of
Columbia and Virginia do not require
ratification. Reviewing, Virginia law
next, the Court quoted Virginia law,
which holds, that if a purchaser fails or
refuses to comply with his bid, the
trustee shall have the authority, if he
acts with reasonable promptness after
the breach to resell the property, after
due notice to the purchaser, at the risk
of the purchaser. The court
emphasized that the trustee’s power
was not to retain the property on
default and to sue for damages, but
only to resell the property be a forced
sale at public auction fairly made in
accordance with the provisions of the
deed of trust. Thus, the resale, as
provided by the deed of trust, is of the
debtor’s interest in the property, title
never having passed to the defaulting
vendee because the contract of sale was
not completed due to the default. As
an implied condition of the original
sale, a resale, promptly and fairly made
with due notice to the defaulting
vendee, conclusively fixes the damages
of the vendee’s breach of the contract,
unless it be shown that the sale was
not fairly made, or that it was made
upon less advantageous terms or
under conditions substantially less
favorable than the original sale.
The Court then explained that in
the District of Columbia, the failure of
a purchaser at a foreclosure sale to
perform means that the sale has never
been concluded. The acceptance of a
purchaser’s bid results in a contract for
purchase not a court ratified sale. The
defaulting purchaser is not entitled to
recover the profit a vendor realizes on
a resale. Equitable title remains in the
mortgagor upon a default in the
purchase at a foreclosure sale, if the
trustees under the deed of trust elect
not pursue specific performance. In
the District of Columbia as in Virginia,
the power to resell is limited to a resale
in accordance with the deed of trust,
and, in contrast to Maryland, there is
no intervention in the original sale by
a court. The original sale does not
become a court ratified sale that may
result in a resale to be both for the
profit and at the risk of the defaulting
purchaser.
Thus, upon Phoenix’s continuing
default in the purchase terms, the
equitable title remained with the Debtor.
That interest became property of the
estate and Section 362 acted to bar the
resale. The resale notice, revested the
debtor with the right to redeem the
property from foreclosure so long as she
acted before Phoenix exercised its right,
if any, to cure its default and pay for the
trustees’ added costs.
HUD TAKES FURTHER ACTION TO PREVENT FLIPPING
The Department of Housing
and Urban Development is taking a
significant step toward thwarting the
abusive lending practice known as
“flipping”, a scheme in which
unscrupulous speculators buy a
dilapidated property, often at
foreclosure, make a few cosmetic repairs,
and then resell the property, sometimes
within days, at artificially inflated prices.
Flipping has left countless innocent
home buyers liable for mortgages on
properties worth substantially less than
what is owed on them.
Oftentimes the "flipper" will sell a
house to a fictitious buyer and then
resell it over and over, increasing the
"sales price" each time, until the
property ultimately carries a mortgage
that is considerably greater than its true
value. When the monthly mortgage
payments stop, if they have been made
at all, lenders take over the properties,
usually through foreclosure, and then
file claims with the Federal Housing
Administration, which guarantees to
make lenders whole if borrowers fail to
meet their obligations. It is not unusual
for sellers, lenders and appraisers to
work together in a flipping scam.
In an effort to prevent flipping,
effective June 2, the FHA will no longer
insure mortgages on properties that
have been sold more than once in 90
days. Repeat sales executed within
three months "imply pre-arranged
transactions that often prove to be
among the most egregious examples of
predatory lending practices," HUD
said. Further, if a second sale of the
property occurs between 91 and 180
days, lenders will be required to obtain
a second independent appraisal if the
new purchase price exceeds the old
price by more than 50 percent. This
threshold is high enough not to
adversely affect legitimate
rehabilitation efforts, HUD explained,
but low enough to "still deter
unscrupulous sellers, lenders and
appraisers from attempting to flip
properties and defraud home buyers."
In areas where HUD determines an
unusually high number or "substantial
pattern" of abuses is taking place,
further documentation of value will be
required if the sales price has increased
by 5 percent or more within the
previous 12 months.
Taking out an FHA backed
mortgage is often a last resort for firsttime,
low and moderate-income and
immigrant borrowers who wouldn’t
otherwise meet the requirements set by
conventional lenders. Without the FHA
to insure their loans, the only alternative,
oftentimes, is to either pay higher rates
and fees from subprime lenders or wait
until their credit has improved.
The new policy has been praised
by both lenders and community
activists, although some feel that the
policy should cover not only FHA, but
all loans. Some community activists
feel that while the FHA’s new policy is
an important step in addressing this
particular form of predatory lending,
there are still numerous other ways
homeowners can be victimized that
remain unaddressed at the federal
level. Further, the government has yet
to offer any form of assistance to
buyers who already have been
defrauded and are still paying off
inflated mortgages, even as their
second rate homes are falling apart
around them.
In spite of the new regulations,
FHA-insured mortgages will still be
available on houses taken back by
HUD and then resold, as well as on
properties purchased by an employer
or relocation company. However, in
addition to the aforementioned time
restrictions, buyers will be eligible for
FHA-insured mortgages only when
they purchase their houses from the
owner of record. Transactions
involving any sale or assignment of a
sales contract, which is a common
practice of property flippers, are no
longer allowed.
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