Livinglies’s Weblog

TILA RIGHT OF RESCISSION and CONSEQUENCES

TRUTH IN LENDING

FEDERAL CIVIL COURT, FEDERAL BANKRUPTCY, STATE COURT INFORMATION

I have been inundated with TILA questions. So I went out hunting to see if anyone had already written about it in terms that a lay person might be able to understand. What I found is shown below. I believe it to be generally correct and the citations are good citations of law. See this site for the entire write-up. It should give most lay people an idea on how to handle this and it will be valuable to your lawyer if he/she is not totally familiar with the TILA context. http://www.rcxloan.com/Civil_Action__BK__Motion_14.htm. As always, we are available to answer questions and direct you to the proper people to get expert help and advice.

MY ANSWER TO OUR READER’S QUESTIONS:

1. TILA Rescission is self enforcing. It automatically extinguishes the lien and the liability. The time for rescission does not run until you actually knew the full scope of the violation. That is tantamount to it never running out. 
2. YOU CAN ASSERT AND SHOULD ASSERT TILA VIOLATIONS IF YOU CAN BEFORE YOU ARE IN FORECLOSURE OR EVEN IF YOU ARE CURRENT IN YOUR PAYMENTS. 
3. Judge is required to look for authority himself if you are representing yourself without a lawyer (pro se). This provision in effect makes the Judge your lawyer and your Judge. Pretty good combination for you. 
4. Judge has no discretion to deny damages, refunds etc to Borrower once a violation of TILA, no matter how small, is discovered.
5. TILA Rescission is NOT barred before during or after other proceedings unless those other proceedings specifically mention rescission as an issue to be tried.
6. Federal Action for injunction against the players to require them to file documents canceling the documents of record and providing judgment for damages and refunds is probably the best action since that is what is contemplated.
7. If in bankruptcy, it should be pled in an adversary proceeding. But if the bankruptcy is  primarily related to the foreclosure the better practice would be to file in the same Federal Court, Civil Division, a complaint for violation of TILA rescission.
8. A Quiet TItle Action in State Court would probably also be a good idea before, during or after the Federal action. It clears up any doubt whatsoever about the status of title or the lender’s lien or encumbrances. 
9. THIS IS INFORMATION YOU NEED BECAUSE THE LATEST LENDER STRATEGY SEEMS TO BE FOR THE LENDER TO IGNORE THE RESCISSION NOTICE. THE LENDER IS BETTING YOU WON’T KNOW WHAT TO DO. 
10. Suggestion: If you are in Court and you have opted or are ordered to settlement, try to get a paragraph in the mediation order that requires all decision-makers to be present, whether they are parties or not. This would include the holders of securities who are the ultimate owners of the mortgage. (You may get a pleasant surprise. We have reports that the lenders sometimes can’t trace them down, in which case, the foreclosure action or sale is dismissed and you have no mortgage).

TILA & Res Judicata

(Analogous to Mr. Pierre R. Augustin, Pro Se’s situation since he had never litigated fully or raised any TILA claims affirmatively or defensively) – 

A rescission action may not be barred by prior or subsequent TIL litigation which did not involve rescission (Smith v. Wells Fargo Credit Corp., 713 F. Supp.  354 (D. Ariz. 1989) (state court action involving, inter alia TIL disclosure violations did not bar a subsequent action based on rescission notice violations in conjunction with same transaction which were not alleged or litigated in prior action) (See also In re Laubach, 77 B.R. 483 (Bankr. E.D. Pa. 1987) (doctrine of merger bars raising state and federal law claims arising from a transaction on which a previous successful federal TILA action was based; merger does not bar, however, rescission-based on the same transaction)).

IX.  Timely Notified Lenders/Attorneys of TILA Right of Rescission

Mr. Pierre R. Augustin, Pro Se filed a copy of the notice of rescission letter (See Exhibit 5) in the bankruptcy court notifying the attorneys representing DanversBank, Ameriquest Mortgage, Commonwealth Land Title Insurance Company, New Century Mortgage and Chase Home Finance as well as having certified receipt return of proof of delivery to the Lawyers including are proof of notification according to the Official Staff Commentary, 226.2(a)(22)-2 as authorizing service on attorney.  

The Truth-in-Lending law empower Mr. Pierre R. Augustin, Pro Se to exercise his right in writing by notifying creditors of his cancellation by mail to rescind the mortgage loan transactions per (Reg. Z §§ 226.15(a)(2), 226.23(a)(2), Official Staff Commentary § 226.23(a)(2)-1) and 15 U.S.C. § 1635(b).

 Equitable Tolling
The filing of Bankruptcy tolls or extends the rescission time as Mr. Pierre R. Augustin, Pro Se had filed for bankruptcy on September 26, 2005 and obtained a discharge on September 26, 2006. 

Also, the principle of equitable tolling does apply to TILA 3 years period of rescission since despite due diligence, Mr. Pierre R. Augustin, Pro Se could not have reasonably discovered the concealed fact of TILA violations in-depth and explicitly until September 17, 2006 at about 5 a.m. in reading the Truth-in-Lending book by the National Consumer Law Center.

The equitable tolling principles are to be read into every federal statute of limitations unless Congress expressly provides to the contrary in clear and ambiguous language, (See Rotella v. Wood, 528 U.S. 549, 560-61, 120 S. Ct. 1075, 145 L. Ed. 2d 1047 (2000)). Since TILA does not evidence a contrary Congressional intent, its statute of limitations must be read to be subject to equitable tolling, particularly since the act is to be construed liberally in favor of consumers.

 Security Interest is Void
The statute and regulation specify that the security interest, promissory note or lien arising by operation of law on the property becomes automatically void. (15 U.S.C. § 1635(b); Reg. Z §§ 226.15(d)(1), 226.23(d)(1). 

As noted by the Official Staff Commentary, the creditor’s interest in the property is “automatically negated regardless of its status and whether or not it was recorded or perfected.” (Official Staff Commentary §§ 226.15(d)(1)-1, 226.23(d)(1)-1.).  

Also, the security interest is void and of no legal effect irrespective of whether the creditor makes any affirmative response to the notice. Also, strict construction of Regulation Z would dictate that the voiding be considered absolute and not subject to judicial modification. 

This requires DanversBank, Ameriquest Mortgage, Commonwealth Land Title Insurance Company, New Century Mortgage and Chase Home Finance to submit canceling documents creating the security interest and filing release or termination statements in the public record. (Official Staff Commentary §§ 226.15(d)(2)-3, 226.23(d)(2)-3.)

 Extended Right of Rescission
The statute and Regulation Z make it clear that, if Mr. Pierre R. Augustin, Pro Se has the extended right and chooses to exercise it, the security interest and obligation to pay charges are automatically voided. (Cf. Semar v. Platte Valley Fed. Sav. & Loan Ass’n, 791 F.2d 699, 704-05 (9th Cir. 1986) (courts do not have equitable discretion to alter substantive provisions of TILA, so cases on equitable modification are irrelevant). 

The statute, section 1635(b) states: “When an obligor exercises his right to cancel…, any security interest given by the obligor… becomes void upon such rescission”. Also, it is clear from the statutory language that the court’s modification authority extends only to the procedures specified by section 1625(b).

The voiding of the security interest is not a procedure, in the sense of a step to be followed or an action to be taken. 

The statute makes no distinction between the right to rescind in three day or extended in three years for federal and four years under Mass. TILA, as neither cases nor statute give courts equitable discretion to alter TILA’s substantive provisions. 

Since the rescission process was intended to be self-enforcing, failure to comply with the rescission obligations subjects DanversBank, Ameriquest Mortgage, Commonwealth Land Title Insurance Company, New Century Mortgage and Chase Home Finance to potential liability.

XIII.  Non-Compliance

Non-compliance is a violation of the act which gives rise to a claim for actual and statutory damages under 15 USC 1640. TIL rescission does not only cancel a security interest in the property but it also cancels any liability for the Mr. Pierre R. Augustin, Pro Se to pay finance and other charges, including accrued interest, points, broker fees, closing costs and that the lender must refund to Mr. Pierre R. Augustin, Pro Se all finance charges and fees paid.

In case DanversBank, Ameriquest Mortgage, Commonwealth Land Title Insurance Company, New Century Mortgage and Chase Home Finance do not respond to this default letter, Mr. Pierre R. Augustin, Pro Se has the option of enforcing the rescission right in the federal, bankruptcy or state court (See S. Rep. No. 368, 96th Cong. 2 Sess. 28 at 32 reprinted in 1980 U.S.C.A.N. 236, 268 (“The bill also makes explicit that a consumer may institute suit under section 130 [15 U.S.C., 1640] to enforce the right of rescission and recover costs and attorney fees”).  

TIL rescission does not only cancel a security interest in the property but it also cancels any liability for Mr. Pierre R. Augustin, Pro Se to pay finance and other charges, including accrued interest, points, broker fees, closing costs and the lender must refund to Mr. Pierre R. Augustin, Pro Se all finance charges and fees paid.  

Thus, DanversBank, Ameriquest Mortgage, Commonwealth Land Title Insurance Company, New Century Mortgage and Chase Home Finance are obligated to return those charges to Mr. Pierre R. Augustin, Pro Se (Pulphus v. Sullivan, 2003 WL 1964333, at *17 (N.D. Apr. 28, 2003) (citing lender’s duty to return consumer’s money as reason for allowing rescission of refinanced loan); McIntosh v. Irwing Union Bank & Trust Co., 215 F.R.D. 26 (D. Mass. 2003) (citing borrower’s right to be reimbursed for prepayment penalty as reason for allowing rescission of paid-off loan).

XIV.  Sources of Law in Truth in Lending Cases

“These include TILA itself, the Federal Reserve Board’s Regulation Z which implements the Act, the Official Staff Commentary on Regulation Z, and case law.  Except where Congress has explicitly relieved lenders of liability for noncompliance, it is a strict liability statute.  (Truth-In-Lending, 5^th Edition, National Consumer Law Center, 1.4.2.3.2, page 11)

XV.  Synopsis of How Rescission Works

The process starts with the consumer’s notice to the creditor that he or she is rescinding the transaction.  As the bare bones nature of the FRB model notice demonstrates, it is not necessary to explain why the consumer is canceling.  The FRB Model Notice simply says: “I WISH TO CANCEL,” followed by a signature and date line (Arnold v. W.D.L. Invs., Inc., 703 F.2d 848, 850 (5^th cir. 1983) (clear intention of TILA and Reg. Z is to make sure that the creditor gets notice of the consumer’s intention to rescind)). 

The statute and Regulation Z states that if creditor disputes the consumer’s right to rescind, it should file a declaratory judgment action within the twenty days after receiving the rescission notice, before its deadline to return the consumer’s money or property and record the termination of its security interest (15 USC 1625(b)).  Once the lender receives the notice, the statute and Regulation Z mandate 3 steps to be followed. 

XVI. Step One of Rescission

First, by operation of law, the security interest and promissory note automatically becomes void and the consumer is relieved of any obligation to pay any finance or other charges (15 USC 1635(b); Reg. Z-226.15(d)(1),226.23(d)(1).  .  See Official Staff Commentary § 226.23(d)(2)-1. (See Willis v. Friedman, Clearinghouse No. 54,564 (Md. Ct. Spec. App. May 2, 2002) (Once the right to rescind is exercised, the security interest in the Mr. Pierre R. Augustin’s property becomes void ab initio).  

Thus, the security interest is void and of no legal effect irrespective of whether the creditor makes any affirmative response to the notice. (See Family Financial Services v. Spencer, 677 A.2d 479 (Conn. App. 1996) (all that is required is notification of the intent to rescind, and the agreement is automatically rescinded).

It is clear from the statutory language that the court’s modification authority extends only to the procedures specified by section 1635(b).  The voiding of the security interest is not a procedure, in the sense of a step to be followed or an action to be taken.  

The statute makes no distinction between the right to rescind in 3-day or extended as neither cases nor statute give courts equitable discretion to alter TILA’s substantive provisions.  Also, after the security interest is voided, secured creditor becomes unsecured. (See Exhibit #6)

XVII. Step Two of Rescission

Second, since Mr. Pierre R. Augustin has legally rescinded the loans transaction, the mortgage holders (DanversBank, Ameriquest Mortgage, Commonwealth Land Title Insurance Company, New Century Mortgage and Chase Home Finance) must return any money, including that which may have been passed on to a third party, such as a broker or an appraiser and to take any action necessary to reflect the termination of the security interest within 20 calendar days of receiving the rescission notice which has expired.  

The creditor’s other task is to take any necessary or appropriate action to reflect the fact that the security interest was automatically terminated by the rescission within 20 days of the creditor’s receipt of the rescission notice (15 USC 1635(b); Reg. Z-226.15(d)(2),226.23(d)(2).

XIII. Step Three of Rescission 

Mr. Pierre R. Augustin is prepared to discuss a tender obligation, should it arise, and satisfactory ways in which to meet this obligation.  The termination of the security interest is required before tendering and step 1 and 2 have to be respected by DanversBank, Ameriquest Mortgage, Commonwealth Land Title Insurance Company, New Century Mortgage and Chase Home Finance

XIV. Conclusion

I am requesting an itemized statement of my payment record to DanversBank, Ameriquest Mortgage, Commonwealth Land Title Insurance Company, New Century Mortgage and Chase Home Finance.    When Mr. Pierre R. Augustin rescinds within the context of a bankruptcy, courts have held that the rescission effectively voids the security interest, rendering the debt, if any, unsecured (See Exhibit #6).  (See in re Perkins, 106 B.R. 863, 874 (Bankr. E.D.Pa. 1989); In re Brown, 134 B.R. 134 (Bankr. E.D.Pa. 1991); In re Moore, 117 B.R. 135 (Bankr.E.D. Pa. 1990)). 

Once the court finds a violation such as not responding to the TILA rescission letter, no matter how technical, it has no discretion with respect to liability (in re Wright, supra. At 708; In re Porter v. Mid-Penn Consumer Discount Co., 961 F,2d 1066, 1078 (3d. Cir. 1992); Smith v. Fidelity Consumer Discount Co., Supra. At 898.  Any misgivings creditors may have about the technical nature of the requirements should be addressed to Congress or the Federal Reserve Board, not the courts. 

Since DanversBank, Ameriquest Mortgage, Commonwealth Land Title Insurance Company, New Century Mortgage and Chase Home Finance have not cancelled the security interest and return all monies paid by Mr. Pierre R. Augustin within the 20 days of receipt of the letter of rescission of September 21, 2006, the lenders named above are responsible for actual and statutory damages pursuant to 15 U.S.C. § 1640(a).

Once again, please send me a copy of my payment history and other document showing the loan disbursements, loan charges and payment made.  Also, DanversBank, Ameriquest Mortgage, Commonwealth Land Title Insurance Company, New Century Mortgage and Chase Home Finance are to take any necessary or appropriate action to reflect the fact that the security interest was automatically terminated by the rescission (15 USC 1635(b); Reg. Z-226.15(d)(2),226.23(d)(2).  This requires canceling documents creating the security interest and filing release or termination statements in the public record of FREE and CLEAR TITLE to Mr. Pierre R. Augustin.  Thank you (TTTLMG).

May GOD Bless America, 

Pierre Richard Augustin, Pro Se, MPA, MBA

28 Cedar Street, Lowell, MA 01852

Tel: 617-202-8069

TILA Pleading 

Under the Federal Rules of Civil Procedures, it may be sufficient to plead that the TILA has been violated. (Fed.R. Civ. P. 8(a)).  

Specific violations do not necessarily have to be alleged with particularity (Brown v. Mortgagestar, 194 F. Supp. 2d 473 (S.D. W. Va. 2002) (notice pleading is all that is required in TILA case);

Herrara v. North & Kimball Group, Inc., 2002 WL 253019 (N.D. Ill. Feb.. 20, 2002) (notice pleading sufficient; response to motion to dismiss can supplement complaint by alleging facts re specific documents assigned); 

Staley v. Americorp. Credit Corp., 164 F. Supp. 2d 578 (D. Md. 2001) (Mr. Pierre R. Augustin, 

Pro Se need not specify specific statute or regulations that entitle him to relief; court will examine complaint for relief on any possible legal theory); 

Hill v. GFC Loan Co., 2000 U.S. Dist. Lexis 4345 (N.D. Ill. Feb. 15, 2000).  

The consumer’s complaint need not plead an error exceeded the applicable tolerance, since this is an affirmative defense (Inge v. Rock Fin. Corp., 281 F.3d 613 (6th cir. 2002)).  

In page 2 (See Exhibit 1) of Mr. Pierre R. Augustin, Pro Se’s civil complaint, he stated that TILA was in of the Jurisdiction of all the claims against the creditors or defendants in that civil action.  

At #6 of page 14 (See Exhibit 2) of civil complaint, Mr. Pierre R. Augustin, Pro Se explicitly stated that the New Century Mortgage Note which is now assigned to Chase is in violation of TILA and Regulation Z claims.  

In page 17 of the civil complaint, Mr. Pierre R. Augustin, Pro Se did mention rescission and statutory damages (See Exhibit 3). 

Most of my experience is in judicial sale states where the foreclosure is a lawsuit started by the lender. In those cases, when you challenge the Lender or mortgage service provider on its authroity to bring the action and counterclaim on violations of Truth in Lending, fraud etc, you are the counterclaimant.

In states where they use “Trustee” deeds, (a practice which I think waives due process rights that are not waivable) the lender merely gives some kind of notice to the Trustee and the Trustee posts the notice of sale. ANY CHALLENGE YOU WISH TO REGISTER REQUIRES YOU TO START THE JUDICIAL PROCESS AND SO YOU ARE CALLED THE CLAIMANT OR PETITIONER OR PLAINTIFF.

Your best first challenge is to demand copies of documents through a request to produce or whatever it is called in your local jurisdiction. The clerk of the court will assist you my giving you the form or a copy of some request to produce recently filed. 

• You want to demand a copy of that notice because you want to know who sent it, what they said, and whether the information came from yet another third party, which it probably did. 
• So then you want a copy of the documents showing that whoever gave notice to the alleged lender (who is probably not the lender anymore because of some sale or assignment that did not identify your mortgage and note).
• You also want copies of whatever documents they are relying upon, along with copies of any documents showing transfer of the mortgage and note, or assignment of the mortgage servicing rights. In many cases these documents do not exist. In that case, you win they lose and there is no foreclosure. 
• The burden is on THEM to show they own the mortgage and note and how they came to be the owner.
• In states that follow the non-judicial sale practice, as soon as the notice of sale is posted the burden shifts to you the borrower to file something to stop the foreclosure. 
• Remember, if you are asked, that violations of Truth in Lending are NOT waivable. They can’t tell you it is too late to file the claim. 
• If asked what you are trying to accomplish it is this: 

1. vacate the foreclosure sale notice as invalid 
2. challenge authority of Trustee to commence foreclosure sale 
3. challenge authority of whoever reported to Trustee that payments had not been made 
4. assert violations of TILA, RESPA, RICO and trade regulations
5. challenge validity of sale/transfer of mortgage rights to investors 
6. counterclaim or claim against the Trustee, lender and whoever the real party in interest is — the one who actually asserts ownership of the mortgage and note 
7. stop the foreclosure 
8. stop the sale 
9. get copies of the documents given to the Trustee who then started the non-judicial foreclosure sale 
10. get refunds, damages and fees

Mortgage Meltdown: Foreclosure Option — JINGLE MAIL (Send the keys back to lender)

The issue is the stability of our economy, and our ability to recover the value of our homes, salvage the lifestyle of our neighborhoods and deal with the blame issues later through appropriate regulations.

Mortgage Lenders, with full authority from the investment bankers, mortgage aggregators, and investors, MUST take the lead and become proactive, even aggressive in heading off this disaster without regard to who is to blame. 

The plain fact is that if they don’t act NOW the losses will mount for everyone, more jobs will be lost (including at the top of these mortgage enterprises), more houses will go into inventory, more downward pressure on housing prices, more vacant, abandoned, vandalized houses. 

***************************************************************************************************************

It is an obvious option that costs virtually nothing and with the number of people losing their homes skyrocketing, the stigma is virtually gone. You have a $3,000 per month mortgage payment on a house that is currently worth, at best, $200,000 less than the first mortgage and home equity line you used to buy it. The likelihood of full recovery of the price is far outweighed by the interest you’ll pay waiting for prices to recover. 

So you stop paying the mortgage and with a little finesse on the system, you get to stay, payment-free for 6-12 months. If you use the strategies in this blog site you might stay for as much as 12-24 months without payments except utilities. 

When your options run out, you mail the keys (Jingle Mail) to the mortgage lender, take the hit on your credit score, and pocket the unpaid payments by as much as $72,000. 

Whether you could afford to keep making payments or not, the option is there and it is looking more and more attractive to you.

The outlook for neighborhoods where zero down financing, low down payment financing, negative amortization, ARMs etc., are headed for ghost town status. Surrounding houses, neighborhoods and cities are already suffering from declining tax revenues while costs are rising, pulling down the their credit ratings and the attractiveness of living in a particular County, City or development. The effect on States’ economies is thus far incalculable although we know it is negative. 

The mortgage lenders are looking to stop you from doing this using punitive measures like not allowing you to apply to government-backed agencies for mortgages for five years. 

The real answer is, as we have repeatedly stated in these posts, amnesty for everyone. As McCain’s economic adviser has assertively stated, the object here is simple — keep people in their homes at all costs. 

People in homes who have played by the rules will suffer as much or more than everyone else. The “fairness” of helping people who “should have known better” is not at issue here. 

More homeowners mailing keys to lenders instead of payments

Owing more than home is worth, recent buyers walk away

Catherine Reagor
The Arizona Republic
Apr. 21, 2008 12:00 AM

Instead of mailing in their monthly mortgage payment, a growing number of homeowners are sending lenders their keys.

As housing prices fall and rates on some mortgage loans rise, more homeowners are walking away from their homes, according to housing-market watchers.

These typically are people who can afford their mortgage but don’t want to pay on a loan that is more than their house is worth. They’ll live with the stigma or credit ding from a foreclosure just to get out from under their loan.

The growing trend, called “jingle mail,” is pushing up foreclosures and alarming market watchers, particularly in metropolitan Phoenix, where home prices have dropped 18 percent in the past year.

Foreclosures across metropolitan Phoenix climbed to a record 2,365 in March, according to the real-estate data firm Information Market. That is more than quadruple the number from a year ago.

Joan Shaffer is turning in the keys of the north Phoenix Tatum Ranch home she bought with her daughter in late 2005. They put nothing down on the home, took out a loan that let them pay less than they owed each month and now their loan is $200,000 more than the house is worth.

“We paid $585,000. It was the peak of the market, but no one told us,” said Shaffer, a real-estate agent from Colorado. “We would probably have to spend the next 20 years trying to get right on the mortgage. That’s crazy.”

Assessing trend

The mortgage industry is struggling to estimate how many homes are going into foreclosure because of people who don’t want to pay, rather than because of people who can’t afford to pay. 

Industry estimates and anecdotes suggest the figure is climbing in the Valley because so many people who bought during the peak are now upside down in their mortgages.

Real-estate agents are hearing it more often from people who can’t sell. Mortgage lenders are reporting getting more jingle mail, and now there are businesses advising homeowners how to walk away. 

“Even if someone put 5 to 10 percent down but bought in the Valley during ‘05 or ‘06, they are likely upside down now,” said Brett Barry of the north Phoenix office of Realty Executives. “I don’t advise people to walk away, but how do you convince someone to keep paying when they owe so much more than their home is worth? They can’t sell, and their lender isn’t going to forgive $100,000 in principal. It’s not good.” 

Investors started the walk-away trend, but it has spread to the typical homeowner. 

Housing analyst RL Brown said he is hearing about young families who bought during the peak and are now walking away from houses as the interest rates on their loans reset and payments increase. 

“Instead of calling it a foreclosure, these couples are saying, ‘We’re giving it back to the bank,’ and then moving a couple of blocks away and renting a home for half their mortgage payment,” he said. “These people are finding it easier to walk away.”

Businesses are popping up that guide homeowners on the best way to walk away from their mortgage. One firm, Youwalkaway.com, tells unhappy homeowners to ask themselves these questions: Are you stressed out about your mortgage payments? Do you have little or no equity in your home? What if you could live payment-free for up to eight months and walk away without owing a penny?

Avoiding bankruptcy

For the first time, homeowners seem to be more willing to let their houses go into foreclosure to stave off bankruptcy.

In the past, homeowners would file for bankruptcy to keep their houses. Now, mortgage delinquencies have climbed faster and higher than late payments on credit-card and car loans. Economists say that is a sign people are more concerned about their credit than their home.

“Homes have gone from being a place to live to a disposable investment for some,” said Jay Butler, director of realty studies at Arizona State University’s Polytechnic campus. “It used to be that paying the mortgage was the top priority. Now, it’s keeping the credit cards.”

He said one reason is some homeowners think that with all the foreclosures, there will be programs to help them when they buy again. 

It usually takes three years of perfect credit payments after a bankruptcy before someone’s credit score is high enough to buy a home. Recently, people could buy a home again two years after a foreclosure.

Also, the Mortgage Forgiveness Debt Relief Act of 2007 took some of the penalty away from a homeowner filing for foreclosure. Before the act, if a bank sold a foreclosed home for less than the mortgage and forgave the rest of the debt, the borrower had to pay tax on the difference. Now, the Internal Revenue Service is forgiving the difference.

Lenders push back

But now as the number of people walking away is climbing, lenders are working on ways to punish those homeowners.

Earlier this week, mortgage giant Fannie Mae said homeowners who stop making payments and then send their keys back to lenders months later will not be able to get another mortgage through that firm for five years. Freddie Mac also is going after walk-away borrowers, mortgage lenders say.

Neighbors of the people who walk way are already being punished by lower home values due to the foreclosure. 

“People should hang in there as long as they can, ask for help and try to work with their lender,” said Margie O’Campo De Castillo of Arizona Dream Realty. “Foreclosures are dragging down our housing market, and unnecessary foreclosures are selfish and unfair to the homeowners struggling to pay.”

We keep seeing bits and pieces in the media instead of the entire picture. Let’s trace the average mortgage meltdown event:

1. It is 2003. Builder Stan Plans Construction project, goes to 1st National Lender and is surprised to learn that the lender is very flexible. It turns out that the bigger the loan, the more the Lender makes and the lower the risk to the builder who is table to take down money from the loans that largely replenish his investment in the property. This is because Wall Street in its ever increasing creativity is experimenting with moving risk now and not just money through the use of derivatives.
2. Builder submits projections that are very rosy. In many cases, he gets the message to make the picture rosier.  This by the way is called fraud and collusion. The Lender tells him to beef up his projections because the Lender wants to increase the loan to include operating expenses and any other expenses that could reasonably pass the giggle test as being associated with building a project. 
3. The Lender, knowing that it has pre-sold the loan risk or has a ready buyer for the loan risk, doesn’t care anymore about the success of the project. This is the overall dangerous movement away from J Pierpont Morgan’s admonition that risk is a matter of character. Risk has now been converted to abstract numbers unrelated to any particular project and based upon averages that include figures from other real estate projects that bear little similarity to the one at hand. 
4. The Lender is the intermediator between the ultimate source of the amount loaned and the borrower. The Lender is in substance a fee-based operation in which lenders while appearing to loan their own money are in fact merely acting as a conduit. 
5. This is very much like the traditional role of banks — taking deposits from those who want their money protected in a bank and then lending it out in some proportion that allows the bank to keep enough money on hand to meet expected demands for cash. Except that here the Lender is not taking any deposits. But then again it isn’t left with the risk of the loan either so its depositors or capital holders are not at risk, at least for very long — unless it is found that the Lender was a willing, knowing participant, in the creation of fraudulent data for the express purposes of making the figures look appealing (i.e., less appearance of risk than actual risk) to prospective buyers.
6. The reason for this little conspiracy is a conspiracy not unlike the junk bond scandal, but at least they were then called junk bonds which more or less put everyone on notice that they could be worthless  or at the very least were risky. 
7. Investment Banking arms of major brokerage and depository financial institutions put together packages of derivatives called collateralized debt obligations (CDOs) which is an obscure way of saying you are purchasing a note or a bond that is “backed” by a mortgage on land and improved property. Sounds fairly secure, until you go back to the beginning of the story where the value of the land, the projected income, the value of the end product were all grossly overstated with the complete knowledge of everyone but you. 
8. Then the Investment Banking houses obtained ratings for these obligations and even had a class of CDOs that were rated Aaa. Partly in order to convince other institutions to buy these high-rated debt securities with a risk assessment of practically zero, and partly because they were sucking on their own own exhaust, the investment banking houses actually retained portions of these “investments” in their portfolios giving the appearance of a growing amount of portfolio investments that the investment banking house had itself created. This is sort of like printing your own currency. IN fact it IS the creation of money, free money, that made everyone crazy. 
9. Despite the actual high risk of the investment which is known to al everyone, and because they were able to buy investment ratings on these CDOs the managers of mutual funds, pension funds, retail brokerage and other financial institutions around the world were convinced to take on these “investments” to make their portfolios (and thus the manager’s performance rating) LOOK good, even though the disparity between the high rate of return and the “low” risk was apparent and put it simple terms, didn’t make sense — like the adage, if it looks to good to be true, it is.
10. The average Joe Investor who has money in mutual funds, pension funds, retirements accounts, and other holdings, is for the most part not even dimly aware that these transactions have taken place. He has only to look at the newspaper and glowing reports from his fund managers to “know” that his money is safe and growing, just the way it was supposed to be. 
11. Joe Investor is driving along the road, and as it happens, he sees a sign for anew development of residential and commercial buildings exactly where his wife said she wanted to live. It turns out that the builder is none other than the builder who started this ball rolling, and who is in debt up to his eye-balls despite the appearance of being a solid long standing member of the development community and having his shares traded on a national stock exchange.
12. Joe and his wife find just the right house and then are presented with the final price of the house with all the extra’s, options, non-standard options, and custom features they have ordered. What started out as a $275,000 house is not $575,000, when you include the Lot premium for the fantastic view of hawks flying over manmade waters with mountains in the background. 
13. Joe knows he can’t afford the house just like the builder knows that if the project doesn’t sell out quickly, he and any buyer who gave him a deposit will be screwed. Of course the builder won’t be completely screwed because even without the first sale, he will have taken down loan money for general and administrative overhead including his own salary.
14. The salesman refers Joe and his Wife to either an on-site mortgage broker or someone else with whom the builder has a “relationship.” Joe is assured that through flexible financing, if he qualifies, he will be able to afford the house.
15. Joe and his wife are presented by the mortgage broker with a variety of alternatives and they choose the easiest one that will enable them to buy this house. They put no money down or a very small down payment, get a monthly payment that is even lower than what they are now paying on a house that has apparently increased in value (because of “market” conditions), and they figure they are actually coming out ahead because they are getting more equity out of their old house than anything they thought they could get, and they get a brand new house just where they want it. 
16. Because Joe’s actual income is lower than what is needed to justify the loan, the wife is told to say she in self-employed and making enough money to pick up the difference. This is also fraud, but since everyone knows about it doesn’t really seem like fraud. The lender and builder claim plausible deniability, knowing full well that Joe might very well not pay his mortgage payment a few months or years down the line because the mortgage terms will change in ways that were explained but not understood by Joe and his wife. 
17. 17. It turns out, in this case, that Joe and Mary, his wife have signed papers for a $575,000 mortgage, when you include the home equity second mortgage, and that the terms are very easy on Joe and Mary — at first. They start out with only a $1450 monthly payment which is accomplished by starting the loans out at a very low mortgage rate, partial payment of the interest which is added to the mortgage loan,  and an increase in the rate and the payment starting in 2 years. And it increases quickly after that because first, the interest rate must come up to what is normal and second, the “lender” is not going to lend them money to pay the interest forever. 
18. Joe and Mary move in and using their savings and credit cards and the equity of their prior home, they manage to complete the house which came with bare bones fixtures, no window treatments, no landscaping etc. They are now maxed out on credit card debt, acquiring more credit cards, and their savings are depleted to zero. 
19. They don’t have to worry though because prices are going up so fast that they have $300,000 in equity in the new house, or so it appears. They know they can get a larger home equity line if they need it or sell the house at a tidy profit. 
20. Suddenly 2 years have passed and the payment starts rising sharply, particularly on the home equity line of credit that was essential for closing. They are now being presented with a payment of $4,000 per month, which exceeds the actual income of Joe and Mary. 
21. Joe and Mary default on mortgage and the house is sold to the Lender at auction. All the investment they made in additions to the house after closing are lost. 
22. The Lender has assigned the servicing of the mortgage to another company and is now completely out of the picture for intents and purposes. The house sits there unoccupied, perhaps vandalized and declining in value to a point far below the total mortgage. The home equity line was wiped out by the foreclosure of the first mortgage. The actual loss of that goes back through the pipeline to the investment banks, retail brokerage, managed funds and direct investments by individuals. As it turns out Joe’s retirement account was invested heavily in CDOs and is now virtually worthless — zero as to the mortgages that were home equity lines that have now been wiped out and down some 30% on the first mortgage line that was granted.
23. At the moment, Joe has not fully absorbed the fact that his retirement is in jeopardy but he is getting an uneasy feeling.
24. What has happened is that that all of Joe’s hard earned savings, investment and retirement accounts have been wiped out by converting them from investments to fees to middlemen. Joe has lent money to himself without knowing it and crated a feeding frenzy where his safety and well-being were dead last on everyone’s list.