CALIFORNIA FORECLOSURES:  "Lenders must accept Loan Modifications!"
A new law enacted on July 8, 2008, now requires Lenders of residential loans in the State of California to accept loan modifications in most foreclosure situations.  California Civil Code 2923.6 went into effect on July, 2008, and applies to all residential loans made from January 1, 2003, to December 31, 2007, inclusive, that are secured by residential real property and are for owner-occupied residences.
Practically all residential mortgages have Pooling and Servicing Agreements (“PSA”) since they were transferred to various Mortgage Backed Security Trusts after origination.  These vehicles likewise almost always contain a duty to maximize net present value to its investors and related parties.  Under the new laws, California Civil Code 2823.6 broadens and extends this PSA duty by requiring servicers to accept loan modifications with borrowers.

Essentially, California Civil Code 2823.6(a) states that “a servicer acts in the best interest of all parties if it agrees to or implements a loan modification where the (1) loan is in payment default, and (2) anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis.”

Likewise, California Civil Code 2823.6(b) now provides “that the mortgagee, beneficiary, or authorized agent offer the borrower a loan modification or workout plan if such a modification or plan is consistent with its contractual or other authority.”

So what does all this mean?  Well, lets take an example:
John Martin’s loan is presently in default, or reasonably foreseeable of near default.  The house he previously bought 2 years ago for $800,000 with a $640,000 first and $140,000 second, has now plummeted to $375,000.  While Mr. Martin can no longer afford the $9,000 per month mortgage payment, he is willing, able, and ready to execute a modification of his loan on the following terms:
a) New Loan Amount:$330,000.00
b) New Interest Rate:6% fixed
c) New Loan Length:30 years
d) New Payment:$1978.52
While this new loan amount of $330,000 is less than the current fair market value, the costs of foreclosure need to be taken into account.  Foreclosures typically cost the lender $50,000 per foreclosure.  For example, the Joint Economic Committee of Congress estimated in June, 2007, that the average foreclosure results in $77.935.00 in costs to the homeowner, lender, local government, and neighbors.Of the $77,935.00 in foreclosure costs, the Joint Economic Committee of Congress estimates that the lender will suffer $50,000.00 in costs in conducting a non-judicial foreclosure on the property, maintaining, rehabilitating, insuring, and reselling the property to a third party. Freddie Mac places this loss higher at $58,759.00.

Accordingly, the anticipated recovery through foreclosure on a net present value basis is $325,000.00 or less and the recovery under the proposed loan modification at $330,000.00 exceeds the net present recovery through foreclosure of $325,000.00 by over $5,000.00.  Thus California Civil Code 2823.6 would mandate a loan modification to the new terms.

The homeowner just got a new arrow to add to his foreclosure defense quiver.  Pursuant to California Civil Code 2823.6, the lender is now contractually bound to accept the loan modification as provided above.  Failure to do so should allow the borrower to sue for specific performance or wrongful foreclosure in State Court.

Mortgage Industry

Forensic loan audits are gaining traction as analyses of how loans potentially went sour (By Stephen Hoshida)

Loan audits have been around in some form since the beginning of federally regulated loans. It was not until recently, however, that they evolved into what we now call forensic loan audits.

At its heart, a forensic loan audit is a process that breaks down and analyzes a set of loan documents to determine if all parties completed proper procedures and complied with regulations during the origination of the loan.

Today, the forensic loan audit represents a powerful tool to help clean up the mess left behind by the mortgage meltdown, as well as to safeguard against a future disaster. Here’s how.

With courts recently gaining power to demand loan modifications in some instances, forensic loan audits likely will change how the lending business operates. The system will be more tightly regulated and focused on loan quality, rather than loan quantity. Lenders will seek brokers who consistently produce loans that perform.
In turn, forensic loan audits could make it easier for lenders to highlight lending patterns connected to a single broker. They also could help brokers improve their own work and build a reputation based on quality.

Soon, lenders may perform an exit audit on each loan to ensure that the file is in order. Every loan a broker brings in also is likely to face closer scrutiny to ensure that all compliance regulations were met. These exit audits could prevent errors from slipping through the cracks.

As the use of forensic loan audits becomes more widespread, mortgage brokers must know what a forensic loan audit is and how it can be used.

What is it?

A forensic loan audit looks at loan documents for miscalculations, and it requires performing thorough investigations to determine if the loan terms are accurate, truthful and meet requirements of the applicable federal statutes. These regulations include the Truth in Lending Act, the Home Ownership and Equity Protection Act, and the Real Estate Settlement Procedures Act.

The federal statutes determine which federal requirements need to be met by the lender in issuing the loan. These include mandatory disclosures, how and when such disclosures are made, limits on annual percentage rate, and a number of other requirements.

Forensic loan audits also should analyze a loan to determine if it meets state and local requirements. Every state has some form of lending regulation. Some states choose to implement statutes that have language almost identical to that of the federal statutes, while others go well beyond the federal statutes and put even more restrictions on the lending industry.

States also may create their own causes of action for additional requirements. For example, California requires that a consumer who negotiated any sort of contract in a language other than English be provided with a translated copy of the contract.
In California, Nevada and Michigan, the lender must be able to prove that it had a structured internal policy to ensure the accuracy of the stated income on all stated-income loans. According to these states’ laws, this policy must be accurate and reliable.

When is an audit useful?

An audit can be useful in any situation in which it’s important to know if a loan was within compliance and properly originated. The forensic loan audit itself is a neutral tool that seeks errors regardless of who made the error or for what reason. With this in mind, it has numerous applications. Users include:

• Brokers: You can use the audits to double-check files to ensure that they are in line with applicable regulations. This can help you catch any inadvertent mistakes and correct them quickly. In addition to improving business practices with this use, brokers can sell these audit results to clients to provide extra peace of mind that their recently originated loan adhered to all regulations.

• Consumers: Borrowers who have received a loan often will want to know that their loan met all relevant compliance codes upon origination. If there are violations, consumers could have a cause of action against the lender. Although brokers typically are not liable for actual fraud on the part of a lender, they could face issues if fraud is found on their side or if they have stipulations in their contracts with lenders that could implicate them.

• Lenders: Your lenders can audit loans of borrowers who have claimed violations. The lenders can order an independent review of the file to determine if these violations did in fact occur during the origination process. This allows lenders the ability to value that loan for what it is truly worth, including the likelihood of going to litigation and the chances of actually winning in court. If lenders find that a loan has violations based on the forensic loan audit, they can attempt to settle or modify the loan rather than go through court proceedings.

• Hedge funds: Many of these clients buy a large portfolio of loans at once to get a bulk price. They could use audits to weed out loans that may cause problems down the road. If a forensic loan audit shows that a loan has several violations, then there is a greater chance that the loan will be rescinded and losses will occur. By identifying the loans that contain violations before purchasing, overall profitability can increase on the portfolio.

Mortgage-insurance companies: These companies want to insure good loans, and they can use the audits as hedge funds do. If the insurance companies can identify loans that have violations in them, they can refuse to insure those loans.
In addition, when courts certify a class-action suit, forensic loan audits have another application. Attorneys and judges can use them to audit large classes, usually 300 files or more, to expose violations and highlight lending patterns of the lender in question. In other words, they could aid a subject lender’s defense in court.

Audit characteristics
With the mortgage industry facing huge challenges, there likely are many loans needing forensic loan audits. But all audits aren’t created equal, and brokers seeking to use them should consider numerous factors:

• Quality: This refers to how detailed the actual audit is and how many different compliance regulations it tests against. An audit could include a compliance-analysis report based on data from the actual file as well as a post-closing review and analysis of the underwriting.

• Legal weight: Attorneys do not complete most audits. But for lenders or courts to take forensic loan audits seriously, they often should accompany a legal opinion that states that the findings in the audit are true and correct.

• Reliability: First, the audit must be accurate. If the documents are misinterpreted or the compliance rules are not understood fully, the audit can provide inaccurate results. This can result in wasted time, resources and legal fees. Second, the company issuing the audit must be reliable. It’s often wise to seek an audit sample and a company with a strong industry reputation.

• Quantity: Some audits are nothing more than a 90-page glossary of lending terms. A true forensic audit includes much more than just a compliance report.
When seeking a forensic-loan-audit company, watch out for those trying to sell basic audits for more than they are. In some cases, companies offer what amounts to little more than a cursory glance at the loan documents, confirming simply that the fields were completed properly. Others can include a summary and breakdown of the actual audit findings translated into simpler terms. These findings usually will include supporting statutes and possibly case law that the audit relies upon to reach its conclusions.

Other components in forensic loan audits include possible courses of legal action, steps on how to use the audit to seek a loan modification, and sample documents for modification services or litigation.

Forensic loan audits’ usefulness likely will continue to grow. As new legislation alters the mortgage industry, these audits could play a key role in determining which loans should be eligible for modification -- and which brokers and lenders are doing the best work.