Fundamentals of Business Law

Business

Quiz 20 :

Mortgages and Foreclosures After the Recession

Quiz 20 :

Mortgages and Foreclosures After the Recession

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Case Problem with Sample Answer After the debtors experienced a series of bankruptcies and foreclosures, Wells Fargo Home Mortgage, the mortgagee, foreclosed on the debtors' home and purchased it for $33,500. The debtors then filed a complaint against Wells Fargo and certain related entities, claiming wrongful foreclosure and breach of contract. The debtors sought damages, specific performance, and other remedies. The dispute grew out of a loan note for $51,300 that the debtors had executed with Southern Atlantic Financial Services, Inc. In exchange for that loan, the debtors gave Southern Atlantic a security interest in their home. Southern Atlantic transferred its interest in the property and the note to GE Capital Mortgage Services, Inc. On September 30, 2000, Wells Fargo Home Mortgage started servicing this loan for GE. Wells Fargo acquired the loan from GE on December 1, 2004. When the debtors did not make all of the required payments, Wells Fargo sought relief from a stay to file a foreclosure because the debtors were in arrears on the mortgage. The parties agreed that Wells Fargo could have relief from the stay if the debtors failed to make all future payments. Claiming default, Wells Fargo then filed a foreclosure and bought the property at the sale. The debtors filed a complaint alleging that the price paid was shockingly insufficient and constituted wrongful foreclosure and a breach of fiduciary duty. Under what circumstances is a foreclosure sale unfair? Does a foreclosure sale have to realize the market price for the property? The amount owed on the note? Discuss. [ In re Sharpe, 425 Bankr. 620 (N.D.Ala. 2010)]
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Foreclosure:
Foreclosure is a process in which the creditor will be trying to recover the debts when the debtor fails to clear the loan in time. The Creditor can recover the loan amount by selling away the secured property. Foreclosure sale of the assets will be treated as a valid one only if the sale price is a valid one.
Facts:
The bank WF sought to recover the unpaid debts from creditors and decided to foreclose on the loans. The debtors claimed that the foreclosing by the WF Bank is invalid because the debtors issued a credit note to financial services SA of worth $51,300 and created a security interest for SA in the property. The interest was transferred to Company GE by Financial services SA.The bank WF bought the loan from GE and WF sought a relief from foreclosure because debtors failed to pay the required payments. On failure to make payments bank WF declared a foreclosure and bought the property, defendants claim that the price paid for the foreclosure is very low.
Outcome:
A foreclosure will be treated as an unfair under the following circumstances:
1. Foreclosure will be treated as an unfair in case the information is never sent to the debtor and the creditor presses with the foreclosure option.
2. Intimation regarding the foreclosure is made public.
3. The bidding is conducted in a biased manner and the price paid for the sale is extremely low when compared with the fair market price.
Thus, the aforementioned reflect the conditions where foreclosure can be treated as an unfair.
The foreclosure process is expected to realize the amount required for the debt to be paid off. However, it is not necessary that the sale price need not match the fair market value or the debt amount. The chances of getting the fair market value for the foreclosed property will be better in case when the competition in the bidding is high and the appraiser's valuation of the property meets the fair market value. Thus, it can be concluded that foreclosure sale have to realize market price.
In case the amount obtained through the note is less than the amount owed on the note then the lender can file a suit in the court to obtain a deficiency judgment. Then the court issues a deficiency judgment which enables the lender to collect the balance amount in phases from the debtor.

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Home Ownership and Equity Protection Act. Michael and Edith Jones owned a home that went into foreclosure. During this time, they were contacted by a representative of Rees-Max, whose notice read: "There are only a few months to go in your redemption period! Your options to save the equity in your home are fading. Call me immediately for a no-bull, no-obligation assessment of your situation. Even if you have been ?promised? by a mortgage broker or investor that they will help, CALL ME.... " The Joneses contacted Rees-Max, and they entered into a sale and leaseback transaction. Rees-Max would purchase the property from the Joneses, the Joneses would lease the property for a few months, and then the Joneses would purchase the property back from Rees-Max on a contract. The property was appraised at $278,000 and purchased by Rees- Max for $214,000, with more than $30,000 in fees. The Joneses disputed these fees, and Rees-Max moved to evict them. The agreement did not use the terms debt, security, or mortgage, and the documents stated that no security interest was granted. Does this transaction constitute a mortgage that would receive protection under the Truth-in-Lending Act and the Home Ownership and Equity Protection Act? Why or why not? [ Jones v. Rees-Max, LLC, 514 F.Supp.2d 1139 (D.Minn. 2007)]
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The Home Ownership Equity Protection Act (HOEPA), 1994:
HOEPA is a continuation of the TILA Act and issued in order to create home loan products which can be rated as high interest and higher end home loan products. HOEPA rules are applicable to loan products which bear high interest rates and contain high fees for processing.
HOEPA bans any balloon payments on the loan products and prohibits short term loans containing balloon payments. In case the lender fails to disclose any of the details as required, the borrower can sue and obtain damages.
Facts:
A couple, MJ and EJ were the owner of a home. Their home went into foreclosure when they defaulted in making the payments. At that time they received a letter from the representative of RM. In the letter, RM offered a repurchase plan and based on the plan Js sold the house to RM. RM collected fees of $30,000 for the transaction towards processing fees. When Js declined to pay, RM tried to evict them out of the house. The agreement did not mention the words 'mortgage' or 'lease'.
Outcome:
Yes, this transaction will receive protection under TILA and HOEPA. Js can file a suit for breach of TILA and HOEPA requirements against RM because the agreement did not make mention of any processing charges. In order to fall under the TILA and HOEPA requirements it is not necessary for the agreement to mention the words such as mortgage, lease or equity.
The agreement between RM and Js concealed the processing fee and thus becomes eligible for the HOEPA or TILA violations.

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Al and Betty Smith's home is valued at $200,000. They have paid off their mortgage and own the house outright-that is, they have 100 percent home equity. They lost most of their savings when the stock market declined during the Great Recession. Now they want to start a new business and need funds, so they decide to obtain a home equity loan. They borrow $150,000 for ten years at an interest rate of 12 percent. On the date they take out the loan, a ten-year Treasury bond is yielding 3 percent. The Smiths pay a total of $10,000 in fees to Alpha Bank. The Smiths are not given any notice that they can lose their home if they do not meet their obligations under the loan. Two weeks after completing the loan, the Smiths change their minds and want to rescind the loan. Is the Smiths' loan covered by the Truth-in-Lending Act as amended by the Home Ownership and Equity Protection Act? Why or why not?
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Facts:
Person A and Person B owns a house worth $200,000 and had 100 percent home loan equity. At the time of recession, A and B lost most of their savings. They entered into home loan mortgage with Bank A for $150,000 for starting a new business. The loan agreement came with a period of ten years.
However, the agreement did not mentioned that if the fails to pay make the payment, they would lose the house. A and B wanted to rescind the loan two weeks after entering into the agreement.
Truth in Lending Act (TILA):
 Truth in Lending Act, 1968 was enforced to regularize the lending market in US. It restricts the credit making companies by asking them to make all the information pertaining to the credits to be disclosed to customers. TILA requires disclosures such as the principal amount, the interest rate charged by the creditor, the loan duration. 
  HOEPA: 
 The Home Ownership and Equity Protection Act, 1994 is offered as an extension to TILA by enhancing its protective mechanisms.  Any borrower can find protection under HOEPA, if the loan taken by him:
1. Contain the Annual percentage rate which is greater than 8% (in case of first mortgage) and greater than 10% (in case of second mortgage).
2. Contains total fees which is greater than 8% of the total loan amount or set dollar amount, whichever is larger.
1.
The loan taken by A and B is covered under the TILA provisions. The interest rate on the loan was 12% which exceed the limit provided in HOEPA. Thus, the loan qualify to protect the borrower under the provisions of HOEPA.
Thus, it can be concluded that the home equity loan falls under the provisions of HOEPA.
2.
A mortgage agreement is not finalized until all the TILA related paper work has been received by the borrower within a week. The borrower can rescind the contract even after a period of three years if proper documents are not provided to the borrower.
In this case, the borrowers can rescind the loan because they were not offered information regarding the chances of losing the house if payment was delayed or defaulted. As the proper information was not provided to the borrowers, the borrowers can rescind the contract within a period of three years.
Thus, it can be concluded that the borrowers can rescind the loan with the bank.
3.
If the bank would have provided all the information to the borrower before the loan was completed and all the other facts would have been same, the borrowers could not rescind the contract.
Thus, it can be concluded that if the bank provides all the required information to the borrowers, the borrowers cannot rescind the loan.
4.
If the contract is not rescinded by the borrower and the payment is defaulted after 4 years. The bank can auction the house and recover the balance payment from the borrower.
Thus, it can be concluded that bank can recover the remaining amount of loan the borrower.

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Mortgage Foreclosure. In January 2003, Gary Ryder and Washington Mutual Bank, F.A., executed a note in which Ryder promised to pay $2,450,000, plus interest at a rate that could vary from month to month. The amount of the first payment was $10,933. The note was to be paid in full by February 1, 2033. A mortgage on Ryder's real property at 345 Round Hill Road in Greenwich, Connecticut, in favor of the bank secured his obligations under the note. The note and mortgage required that he pay the taxes on the property, which he did not do in 2004 and 2005. The bank notified him that he was in default and, when he failed to act, paid $50,095.92 in taxes, penalties, interest, and fees. Other disputes arose between the parties, and Ryder filed a suit in a federal district court against the bank, alleging, in part, breach of contract. He charged, among other things, that some of his timely payments were not processed and were subjected to incorrect late fees, forcing him to make excessive payments and ultimately resulting in "non-payment by Ryder." The bank filed a counterclaim, seeking to foreclose on the mortgage. What should a creditor be required to prove to foreclose on mortgaged property? What would be a debtor's most effective defense? Which party in this case is likely to prevail on the bank's counterclaim? Why? [ Ryder v. Washington Mutual Bank, F.A., 501 F.Supp.2d 311 (D.Conn. 2007)]
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Check your answers to these questions against the answers provided in Appendix G. Ruth Ann borrows $175,000 from Sunny Valley Bank to buy a home. Federal law regulates primarily the terms of the mortgage that must be disclosed in writing in clear, readily understandable language. What are the major terms that must be disclosed under the Truth-in-Lending Act?
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In a mortgage foreclosure, what legal rights do mortgage holders have if the sale proceeds are insufficient to pay the underlying debt?
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Lender's Options. In 2008, Frank relocated and purchased a home in a beautiful mountain town. The home was five years old, and Frank purchased it for $450,000. He paid $90,000 as a down payment and financed the remaining $360,000 of the purchase price with a loan from Bank of Town. Frank signed mortgage documents that gave Bank of Town a mortgage interest in the home. Frank made payments on the loan for three years. But the housing market declined significantly, and Frank's home is now valued at only $265,000. The balance due on his loan is $354,000. In addition to the decline in housing prices, the economy has slowed, and the booming business that Frank started when he bought the home has experienced a decrease in revenues. It seems inevitable that Frank will not be able to make his mortgage payments. Discuss Bank of Town's options in this situation.
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In a mortgage foreclosure, what legal rights do mortgage holders have if the sale proceeds are insufficient to pay the underlying debt?
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Right of Rescission. George and Mona Antanuos obtained a mortgage loan secured with rental property from the First National Bank of Arizona. At the closing, they received from the bank a "Notice of Right to Cancel," informing them of their three-day rescission period under the Truth-in-Lending Act (TILA). The following day, according to the Antanuoses, they informed the lender via fax that they wished to exercise their right to rescind. The lender refused to rescind the agreement. George and Mona sued the bank. In federal court, the Antanuoses did not dispute that a consumer's right to rescind under the TILA applies only to the consumer's original dwelling and that they had used their commercial property as a security interest. Instead, the Antanuoses argued that the bank was prohibited from denying them the rescission right because they relied to their detriment on the bank's disclosure, which would have been required under the TILA. Would the court be convinced? Explain. [ Antanuos v. First National Bank of Arizona, 508 F.Supp.2d 466 (E.D.Va. 2007)]
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Disclosure Requirements. Rancho Mortgage, Inc., is planning a new advertising campaign designed to attract homebuyers in a difficult economic environment. Rancho wants to promote its new loan product, which offers a fixed interest rate for the first five years and then switches to a variable rate of interest. Rancho believes that Spanish-speaking homebuyers have been underserved in recent years, and it wants to direct its ads to that market. What must Rancho say (and not say) in its advertising campaigns about the structure of the loan product, and in what language? What language should Rancho use in its Truth-in-Lending disclosures? Why?
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Does the Truth-in-Lending Act (TILA) apply to all mortgages? How do the TILA provisions protect borrowers and curb abusive practices by mortgage lenders?
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Does the Truth-in-Lending Act (TILA) apply to all mortgages? How do the TILA provisions protect borrowers and curb abusive practices by mortgage lenders?
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When is private mortgage insurance required, and which party does it protect?
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What is a subprime mortgage? How does it differ from a standard fixed-rate mortgage?
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The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions: When is private mortgage insurance required, and which party does it protect?
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What is a short sale?
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Real Estate Financing. Jane Lane refinanced her mortgage with Central Equity, Inc. Central Equity split the transaction into two separate loan documents with separate Truth-in-Lending disclosure statements and settlement statements. Two years later, Lane sought to exercise her right to rescission under the Home Ownership and Equity Protection Act (HOEPA), but Central Equity refused. Central Equity responded that the original transactions comprised two separate loan transactions and because neither loan imposed sufficient fees and costs to trigger HOEPA, its protections did not apply. Lane claims that if the costs and fees were combined into a single transaction (which Lane expected the loan to be), they would surpass the HOEPA threshold and trigger its protections. In turn, because Central Equity did not provide the necessary disclosures under HOEPA, Lane argues that she can properly rescind under its provisions. Is Lane correct? Does loan splitting allow the lender to count each loan transaction with a borrower separately for HOEPA purposes? Why or why not?
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What is a short sale?
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Check your answers to these questions against the answers provided in Appendix G. Tanner borrows $150,000 from Southeast Credit Union to buy a home, which secures the loan. Two years into the term, Tanner stops making payments on the loan. After six months without payments, Southeast informs Tanner that he is in default and that it will proceed to foreclosure. What is foreclosure, and what is the usual procedure?
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What is a subprime mortgage? How does it differ from a standard fixed-rate mortgage?
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