Florida Asset Protection : Asset Protection Law & Planning in Florida - Florida Homestead Exemption

Sometimes a debtor’s family wants to help out by paying off one or more of the debtor’s obligations. One of my clients stated that he owns a relatively small home subject to two mortgages. The first mortgage is payable to a private party from whom he purchased the home. The second mortgage is payable to a bank. The client cannot afford both mortgages because his business has been generating less income. The client’s brother wants to help him by paying off the first mortgage to the private seller.

I told him that he would be in better position legally if his brother bought the first mortgage note rather than paying it off. His brother would have the ability to foreclose the acquired first mortgage and strip off the junior second mortgage. Although the client would still be personally liable to the second mortgage, he would be in a much better negotiating position with the second lender to modify or discount the second mortgage.  Mortgage lenders are more likely to discount the payoff amount if they believe the purchaser is a third party investor not related to the debtor. Set up a legal entity, such as an LLC or corporation, to serve as the prospective debt purchaser.

In general, people who want to assist family member debtors with their mortgage debt should consider buying debt and mortgage rather than paying off the  debt. The purchased security interest can be used to shield the debtor against junior or future incurred debts.
 

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I have advised many people over the past three years to walk away from their upside down mortgages- the “strategic default.” My clients typically are worried about foreclosure’s effect on their professional lives and their credit. Today I received a phone call from a client who consulted me over a year ago about mortgage foreclosure on his primary residence. After speaking with me initially the client decided to stop paying his mortgage. He lost his home to foreclosure in July. He called for some additional legal advice. After answering his legal questions I asked him how the foreclosure affected him and whether he had made the right decisions to walk away. Here is what he said.

The client told me that after the foreclosure his life can be described as “business as usual.” He recently got a new and better job. The job application asked him about prior foreclosures, and he answered truthfully. The foreclosure was not an issue during his job interview for his new job, nor had any other prospective employer raised the issue during his job search. He said that people with foreclosure on their credit report were no longer “outliers.” Its common.

The client has been getting credit card solicitations continually. He recently purchased a new car and got a car loan. Not 0 % interest, but 8% interest. High, but not impossible to deal with. His point was that he qualified for a new car loan four months after the foreclosure. Overall, the client stated that the “psychological and social stigma of foreclosure” was much less than he expected.

 

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People with problem mortgages ask me frequently what the mortgage lender and their attorneys will do if they walk away from their upside down home mortgage. What can they do to get a release of liability and what are the chances the lender will pursue a deficiency judgment? These are common questions. This past weekend I got a glimpse into mortgage lender strategies by speaking with an attorney friend named Norman Farquhar who has worked for a large mortgage foreclosure firm in Tampa for two years. He recently left the firm. Norm Farquhar is an experienced real estate litigator. He says he is typically assigned the most contentious and heavily defended foreclosure cases. Over the past two years he said his firm took in about 1,500 new foreclosures each and every month.

I asked Norm how many first mortgage deficiency judgments he or his firm pursued in the past two years. Zero. Not one. None of his clients have ever asked his firm to file for a deficiency. He also said he was unaware of any of his client banks selling deficiency claims to investors. His firm never received any inquiries from investors about purchasing their clients’ deficiency claims. Asked why there has seen no deficiency claims to date, Norm speculates the reasons are first, that the banks and the law firms are still swamped with work(he said his firm is farther under water than the homeowners mortgages) and second, because it is much more difficult and expensive to pursue and collect a mortgage deficiency judgment than it is to foreclose and take back title. Norm says he hopes some banks will pursue more deficiency claims when the market settles down because it would mean more work for attorneys who do what he does.

Next, I asked Mr. Farquhar what determines whether or not a mortgage lender will release homeowners from personal liability to settle a contested foreclosure. He said it depends mostly on the policy of the bank and the investor. He says that some of his larger bank clients never releases homeowners to settle foreclosures (with few exceptions) while smaller banks are more flexible. That does not mean the non-releasing lender will sue for a deficiency judgment; they just do not want to give up their right to do so. The skill of the homeowner attorney defending the foreclosure has some impact on liability releases but the foreclosure defense is not as important as the overall policy of the mortgage lender in determining whether a homeowner will still have personal liability after a foreclosure.

I expect additional conversations with friend Norman and will pass on useful insights into lender foreclosures as they are offered.

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The Wall Street Journal published an article this past Tuesday by James R. Hagerty on "strategic mortgage defaults." Aa "strategic default" occurs when a homeowner who can afford to make mortgage payments decides to stop paying and allowing the bank to foreclose. The article states that strategic defaults are often motivated by "anger, fear or despair." Mr. Hagerty states that strategic defaults may be rational response by underwater homeowners. In any event, the percentage of mortgage defaults by people who could afford payments has risen substantially in the past two years. The article suggest ways to reduce strategic defaults.

In my asset protection practice I have consulted with many, many people about the consequences of voluntary mortgage defaults. In most, but not all cases, I have advised my clients whose homes are substantially upside down in value to let the bank foreclose rather than deplete retirement funds and savings accounts. Up to now, this advice has turned out well for most, if not all, of my clients facing foreclosure. I and my clients have found that most large banks are not aggressively pursuing either deficiency claims or the collection of deficiency judgments.

One change that would deter "strategic defaults" is the mortgage lenders getting much tougher pursuing deficiency judgments. People believe that if they default on a credit card or car payment the creditor is likely to sue them for the money; people are not as afraid of mortgage lenders. I know, from speaking with people in the banking industry, that mortgage banks have good reasons for not aggressively pursuing collections of homeowners’ personal liability on mortgages.

When mortgage lenders have had enough strategic defaults; when they want people to exhaust all their money and assets before they walk away from their mortgages, I think one of the first things the lenders should do is get tough and get mean. People act rationally when they voluntarily withhold payments to lenders whom they do not fear.

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The Florida Bar is trying to do something to help relieve the foreclosure logjam in Florida courts. The Florida Bar News reports that the Bar’s foreclosure task form is urging the Florida legislature to adopt the Bar’s “managed mediation program.” The mediation program administers foreclosure cases under a separate case management program and which requires mediation between homeowner and lender in contested foreclosure cases. The program calls for the lender to pay the $750 mediation fee.

The managed mediation procedure makes it possible for courts to handle foreclosure cases more efficiently. The Bar article states that foreclosures constitute about 75% of civil court dockets. More importantly, mediation procedure mandates participation by a lender representative with authority to settle foreclosure cases.

I have found that one of biggest problems my own clients  have experienced dealing with troubled real estate is their inability to communicate with a lender employee who has the authority to make decisions on mortgage modification, short sale, deeds in lieu, and other settlements. When mediation is required, the homeowner is assured his opportunity to communicate with a lender agent with authority to make a decision. Mediation, I think, helps upside down homeowners negotiate release from liability or a meaningful mortgage modification.
 

 

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

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I receive several emails and calls daily from people with problem home mortgages. This week several people have asked me whether they qualify for help under the government's new mortgage assistance program. I read an article in the Wall Street Journal that described the two mortgage assistance programs implemented this past week. The Journal article included a chart that helped explain the program benefits and qualifications. I have reproduced the Wall Street Journal chart to assist Blog readers. WHO WOULD QUALIFY

I know nothing other about the new mortgage program other than what is in the Journal's chart. I am following the proposed Chapter 13 bankruptcy amendments which would allow people with upside-down primary residences to reduce mortgage principal to current market value with conditions. A Chapter 13 law has been passed by the house and a similar law is awaiting Senate consideration.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

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