The Florida Foreclosure Fraud Weblog

President Bush this morning signed into law new federal legislation aimed at addressing the nation’s current foreclosure crisis. Some of the provisions of this new law, which takes effect October 1, 2008, may offer relief to certain homeowners in foreclosure. Here’s how.

FHA-backed Refinancing

The Federal Housing Authority now has the ability to insure up to $300 billion dollars in loans to allow troubled homeowners to refinance their home loans. Banks would be more willing to extend loans to qualified homeowners because the loans are backed by the federal government.

Who Qualifies

In order to qualify for a new FHA-backed loan, the homeowners must meet certain criteria.

• They must live in the home - no landlords allowed.
• They must currently have home loans issued between January 2005 and June 2007.
• They must be spending at least 31% of their gross monthly income on mortgage debt.
• A borrower may either be current or behind on their existing loans, but they will have to prove that they cannot continue to make their current payments.
• Borrowers must first pay off any other debt on the home (such as home equity loans) and may not get a new one for five years, except to pay for maintaining the home.
• The new loans are subject to FHA approval.
• The original lender would have to agree to take a substantial loss on the original loan, but gets to avoid filing foreclosure - which might cost them more in the long run.

(Source: CNNMoney )

Depending on each homeowner’s particular circumstances, this might be a viable way to get out of a bad loan and into a more affordable one - after October 1. Officials in the Bush administration, though, are already bad-mouthing the new law, saying that other laws already in place will help more homeowners than this one, and noting that Congress failed to provide funding for the new loan guarantees. Steve Preston, Secretary of Housing and Urban Development, said: “I think it may be helpful on the margin but ultimately what we need is new homebuyers to come into this market and buy up the inventory of homes.”

UPDATE: The New York Times thinks the new law is better than Santa Claus.

The Florida Bar News reports on Florida AG Bill McCollum’s action exempting Florida attorneys from portions of the Foreclosure Rescue Act. Florida Bar News editor Gary Blankenship has been following this story for some time, and has written a nice piece explaining both the problem and the solution. As an added bonus, he quotes me at some length on the AG’s action.

In the wake of last week’s Miami Herald investigation on this state’s willingness to let convicted fraudsters work as mortgage brokers, the state’s top mortgage lending regulator Don Saxon meets today with the Governor’s Cabinet who will consider, among other things, whether Saxon should keep his job.

State Chief Financial Officer Alex Sink last week called for Saxon’s resignation. On Monday, Sink said she was not ready to make such a motion at today’s meeting - though she continued to talk tough about Saxon, saying she had not changed her mind about replacing him.

Sink is one of four members of Florida’s Cabinet.

The St. Pete Times thinks Saxon ought to go:

If the Herald’s findings are not enough to take action, Crist and the Cabinet should read a scathing report issued in March by the statewide grand jury about the office’s regulation of check cashers. Here’s a snippet: “We conclude that the agency most responsible for insuring compliance by check cashers has failed to aggressively root out fraud and money laundering from the check cashing industry.”

Well, and there’s more. in the course of representing victims of foreclosure fraud, I have learned that high-level officials in Saxon’s office directly interfered with active investigations, modifying final reports and watering down actions against obvious foreclosure rescue scam - even when the main perpetrators were already convicted of felony fraud. I can’t quote sources, and I can’t name specifics, but when it breaks, I’ll confirm what I know to you.

After the recent Miami Herald exposé on Florida’s mortgage broker industry, you’re probably wondering how in the world you can find a mortgage broker who won’t rob you blind. I’ve put together a list of steps that any prospective borrower can take that will be highly effective in weeding out the con artists and the fee-padders.

Look for a broker before you start looking for a house.

If you’ve already got your heart set on a house and need to put in a bid, then you’re setting yourself up for a huge time-pressure crunch that can lead you to make some very bad decisions. Pick your broker and get your loan before you start shopping for a house, so you have time to fix any problems that might come up or even back out of the deal if you have to.

Look for someone who’s been in business for a while.

Whenever the market booms, all kinds of shady operators come out of the woodwork and set up shop as mortgage brokers. When the market tanks, the brokers of ill repute will be the first ones to fold up their tents and walk away. Look for someone who’s been around a while - someone who has ridden the ups and downs of the market, and has survived tough times because they have a good reputation in the community.

Look for someone who’s not trying to push the latest fad loan on you.

Mortgage brokers push fad loans for a reason - they make more money on them because you pay more money over the life of the loan. Certain types of adjustable-rate mortgages, interest-only loans, and other creative arrangements are popular with lenders because they’re popular with brokers, but they end up costing more in the long run. Do your research before picking a broker, know what type of loan you’re looking for, and reject any broker who tried to push the latest thing on you just because it’s popular or looks like a great deal - at first.

Get references from people who know the good ones from the bad.

People find mortgage brokers in many different ways. But with a transaction this size - for most people, the largest deal they’ll ever sign - it makes sense to be extremely careful about who you pick. It’s not enough to use the guy your next-door neighbor used, unless your neighbor has the relevant knowledge to be able to judge what kind of job the broker did for him. Who might know good, honest brokers with a long and proven track record? Anyone who’s in the financial field or handles those types of deals for a living is a good choice. But make sure that the referral is coming from someone you know well enough to trust, and someone who doesn’t have anything to gain from the recommendation. A banker, a lawyer, a real estate agent who’s not part of the deal - all those people in your community might have good names for you to check out.

Check the broker out with the state licensing board.

In Florida, the Office of Financial Regulation is responsible for overseeing the licensing and regulation of mortgage brokers. Certainly, they’re not foolproof, but if a mortgage broker has some pending disciplinary action or a criminal record, you’ll want to know. It sure can’t hurt to ask.

These steps aren’t foolproof, but they will go a long way to making sure you don’t get ripped off by an unscrupulous broker next time you get a home loan.

About to enter foreclosure and not sure what to do?  The Florida Bar has announced a new program designed to divert people homeowners from foreclosure and help them negotiate a work-out with their lenders.

The Statewide effort called FLASH (Florida Attorneys Saving Homes) has launched a toll-free hot line (866-607-2187) and will take calls from 8 a.m. through 4 p.m. Monday through Friday. Callers who fear that they soon won’t be able to make their mortgage payments or who have already missed payments but are not yet in foreclosure are urged to call. Hot line callers will answer a few initial questions to ensure accurate placement with pro bono attorneys, who will then negotiate with lenders on behalf of homeowners.

The full announcement can be found on the Florida Bar website.

Bill McCollum, Florida’s attorney general, as been very active lately, going after a number of companies he has accused of foreclosure rescue scams and unfair mortgage-related practices, according to the Tampa Bay Business Journal.

…McCollum has filed five cases against companies he believes have conducted questionable, if not illegal, acts in regard to mortgage and foreclosure fraud since assembling his Mortgage Fraud Task Force last September.

The defendants include:

• the highly-publicized Countrywide Financial;
• A Realty Rx LLC;
• Florida Housing Council LLP;
• Equity Investment Capital Management Inc.;
• Star Enterprises LLC.

Countrywide stands accused of defrauding its investors by making asset-based loans to individuals who couldn’t possibly support those payments, but telling investors that all borrowers were thoroughly vetted for ability to pay.  A Realty RX has been sued for selling realty without a license and other fraudulent practices - including possible foreclosure rescue fraud.

The others? Foreclosure rescue scammers.

Willie Sutton, one of the FBI’s most-wanted bank robbers back in the 30’s, once answered the question of why he robbed banks by saying, “That’s where the money is.”

Over the last several years in this state, as home prices surged and the family home became the single largest asset most Florida families owned, more and more modern-day Willie Suttons took notice.  Where was the money?  In homes and home loans.  And so that’s where the criminals went.

Mortgage brokers - the people who introduce borrowers and lenders to each other - must be licensed by the state of Florida.  In theory, felons should not to be able to get mortgage broker licenses.  But as the Miami Herald found out, in far too many cases, they do.

When Scott Almeida walked out of federal prison and into the mortgage business, he took a gamble. He admitted on his license application that he had been convicted of cocaine trafficking.

Florida regulators — responsible for protecting borrowers from predatory brokers — could have rejected him on the spot.

Instead, they asked for a character reference: He gave them a note from his mom. They said he needed a reputable supervisor for his practice: He chose a guy he met in the prison visitor room.

…Over the next three years, in a crime spree that stretched from Tampa to Miami, Almeida arranged nearly $3 million in fraudulent loans and fleeced 30 people — many of them elderly and disabled.

Mortgage brokers with history of criminal activity are a serious threat to borrowers because of the size on the complexity of most home loan transactions.  It is far too easy for an unscupulous mortage broker to slip in unfair or illegal fees and kickbacks, or use bait-and-switch tactics that unsophistcated borrowers have trouble detecting.  The character of a mortgage broker is probably the greatest safegaurd against consumer rip-offs, and it may be difficult to police, but when people with proven character flaws get licenses on the flimsiest of character investigations, the state just isn’t trying hard enough.

The lesson for consumers?  Choose very carefully when picking a mortgage broker.  Make sure their background checks out, and make sure it’s someone you can trust completely.  If you don’t, you could lose everything.  I’ll give some specific tips in a future post on how to pick a mortgage broker.

I have just learned that the Attorney General’s office has taken action today to fix one of the largest flaws in the Foreclosure Rescue Act.  I don’t have the exact language, from from what I’ve been told, it uses the “express authority” provision in 501.1377 (2)(b) 2. to authorize certain Florida attorneys to provide foreclosure-related rescue services… thereby excepting those attorneys from the definition of “foreclosure resuce consultants.”

More on this as I get details.

UPDATE: Here’s the Letter from Attorney General Bill McCollum to Florida Bar President Jay White.

Dear Mr. White:

It has come to the attention of the Department of Legal Affairs that there is some question about whether attorneys providing legal counsel to homeowners facing foreclosure, most particularly when such persons are in bankruptcy, are subject to the provisions of the Foreclosure Rescue Act, Section 501.1377, Florida Statutes (2008) effective October 1, 2008. In order to ensure that the attorney/client relationship is not adversely affected by this new provision, the Office of the Florida Attorney General, Department of Legal Affairs, provides as follows:

Pursuant to its authority under Section 501.1377(2)(b)2, Florida Statutes (2008), the Office of the Florida Attorney General, Department of Legal Affairs, hereby approves for exclusion from the definition in this provision of a foreclosure rescue consultant, a person licensed to practice law in this state, when such person provides legal representation to a client with respect to a foreclosure.

Please disseminate this information to members of the Florida Bar by any method you deem appropriate.

Sincerely,
Bill McCollum

This solution is so simple, elegant, and effective I’m a bit chagrined I didn’t think of it myself.

Tomorrow night I’ll be speaking to the North Tampa chapter of the Tampa Bay Real Estate Investors Association on “Defending Foreclosures.” Anyone who’s in the North Tampa area (near Carrollwood) and is curious about the topic should come and hear the presentation. Admission, I believe, is free.

The details:

Wed. July 9, 2008, 7:00 p.m.

At Beef O’Brady’s

8810 N Himes Ave Tampa, FL 33614

You can get more information about the North Tampa Chapter here.

Because this is an investor-focused group, I’ll be talking primarily about the foreclosure process and the universal defenses that any borrower could raise, without touching on any of the consumer-oriented defenses such as the Truth In Lending Act.

Ever since word got out about Florida’s new foreclosure rescue fraud law, I’ve gotten feedback from lawyers all over the state. Many agree with me that the new law is a serious problem for homeowners and their attorneys. Others are not so sure.

Here are some of the responses I’ve gotten from the “I’m not worried” crowd, along with my replies.

This new bill doesn’t apply to lawyers because we’re officers of the court / exempt from Chapter 501 / not the intended targets of the bill.

This is the way it should be, but it’s not. I contacted some members of the state legislature to discuss my concerns about the bill. In turn, they contacted the state Attorney General’s office. Asked whether lawyers were exempt from the bill, AG staff responded:

There is no Florida case law on point regarding the issue of whether Section 501.212, Florida Statutes, would exempt an attorney engaging in the practice of law. However, an attorney general opinion and other related cases suggest that the practice of law is not entirely exempt from the definition of “trade or commerce” in the state unfair and deceptive and antitrust acts.

In other words, the law applies to lawyers, at least sometimes.

The legislature cannot regulate the lawyer-client relationship because only the Florida Bar (the judicial branch) can do that.

Tell that to the lawyers who used to represent workers’ compensation claimants in Florida. They raised the same argument when state capped their fees a few years back. The cap is still in place, and most of those lawyers have moved on to personal injury practice. Workers’ compensation claimants now have a much harder time finding lawyers - just like homeowners soon will unless the law changes.

The state can’t regulate attorneys practicing in federal areas like bankruptcy, Truth In Lending Act, and RESPA.

I think this is a strong argument, and I hope it prevails. But until then, the new state law, on its face, applies to us. The federal preemption argument, endorsed by many respected attorneys and even discussed in this context by some federal judges, at this time serves only as a hypothetical defense if someone happens to get sued under the law.

The Attorney General isn’t going to come after lawyers who represent their clients in court.

Again, a strong argument, and I hope it’s true. But the way this new law is written, even a single disgruntled client - perhaps acting pro se - could decide to come after his former lawyer. Even though the lawyer is likely to successfully defend such a case, that takes time and money away from the lawyer’s practice that could be spent helping people.

Let them come after me. I’ve got some great argument why this law doesn’t apply.

I hope your malpractice premiums are paid up. That lawsuit will cost you more than you ever collected from that client.

Many lawyers, with whom I agree, believe that it is wrong for this new law to apply to them. But even so, every indication I have says that the law poses a real danger to any lawyer who represents a foreclosure homeowner. That danger will not be dispelled until we get clear guidance from the legislature or from the courts.

ADDENDUM: Rob Arnold adds a Realtor’s perspective.