Monthly Archives: April 2007

Parties to a mortgage

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Several days ago I wrote about a lawsuit filed in Federal Court in Dallas brought by an investor against the mortgage servicer, default servicer and Trustee behind mortgage backed investments owned by the Plaintiff. Super Future Equities, Inc. v. Wells Fargo National Bank, et al.

The lawsuit is still at the initial pleading stage and the latest amended complaint is a mere 95 pages long. I have yet to read all of it. Early in the complaint is a description of the parties to a modern-day mortgage. Even fairly sophisticated people when they think of a mortgage think of two parties: the homeowner/borrower and the mortgage company/bank. Well, to borrow from popular culture — not exactly.

Now, this lawsuit is still at the unanswered complaint stage. Certainly nothing in it has been proven. However, the description of the players in a modern-day mortgage made everything I have read and seen about the mortgage industry over the last few years make sense.

Here is the picture. There are originally at least seven parties to a mortgage, but two of them, the depository bank and the underwriter, drop out early enough that for my purposes there are five. Those five are:

  1. The homeowner/borrower — self-explantory;
  2. The mortgage servicer — whose job it is to accept and apply payments, manage the escrow account, do the accounting work, most homeowner/borrowers think the servicer owns their note and mortgage;
  3. The default servicer — whose job it is to service the mortgage when something goes wrong and who is supposed to try to get the loan back in good standing or foreclosed;
  4. The Trustee of the investment trust that actually owns the note and mortgage which has been pooled with hundreds or thousands of others and used as collateral for mortgage backed securities, usually bonds; and
  5. The investors who own the mortgage backed securities, usually bonds, for which the note and mortgage serve as collateral.

One point made in the complaint which is consistent with what I have seen but I had never thought to generalize it like this is that default servicing fees are higher than regular servicing fees. That makes sense, I just hadn’t thought of it before. Therefore, if there is any connection between the servicer and the default servicer (and I have a number of files in my office where the two are the same company); the servicer makes more money if the loan is in default.

In fact, if you look at that list of five parties, only two of them, the homeowner and the investor, have a real interest in the notes and mortgages upon which the mortgage backed securities are built performing as expected. The other three can all make fees off of the note and mortgage not performing as expected — or as one of my clients put it last week, “Why is it that everybody wants my money?”

I have just filed a response to a Motion for Relief from Stay in a Chapter 7 Bankruptcy that really snapped into focus for me after reading the first 30 pages or so of this Dallas-based Complaint. That Motion is set for hearing this Thursday. I am reluctant to say too much about that case in a public forum until after it has been heard, but my response goes further than just defending against the motion. I make two affirmative requests. The first is an Order prohibiting the moving party from assessing any fees against the mortgage account for having brought this motion. The second is a request that the moving party be required to pay my attorneys fees on behalf of the Debtor.

The case is set in front of WV this coming Thursday morning. I am looking forward to seeing what he does with it.

Elaine

Tax Traps

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Under the old act there was a cool, little loophole for unfiled tax returns in a Chapter 13. Pretty close to the top of the IRS’ wish list for BAPCPA was closing that loophole. They got it — and a brand new headache.

How taxes are handled in a Chapter 13 Reorganization is governed by two different concepts. First, you have the familiar issue of dischargeability. Section 523 (as limited by Section 1328) sets out the debts that may not be discharged in a bankruptcy, and it provides the familiar 3-year rule, 2-year rule and 240-day rule for dischargeability. So, speaking in the most general terms, income taxes incurred within three years are not dischargeable. This hasn’t changed.

The new oops (one of many in the new Code) is in the Section that establishes priority for taxes. In most Chapter 13’s priority, unsecured debt gets paid (and in most cases must get paid); and general, unsecured debt doesn’t. It gets discharged.

There has long been a third class of unsecured debt — student loans. Since they are not entitled to statutory priority, they generally don’t get paid (there are two exceptions); but they also are not discharged. What is worse is that they continue to accrue interest during the course of the Bankruptcy, so if someone files for bankruptcy and is behind on their student loans; they are going to be in worse shape when they are done. (If they are current and the payment plan extends more than five years, in most districts the debt can be treated as current, long-term debt and provided for outside the plan. Also, they get paid the same percentage other general, unsecured debt does; so, they do get paid in full in 100% plans.)

Now, we have a class of taxes that gets the same treatment as student loans. Why? I’m so glad you asked, because Congress tinkered with Section 507 without having a clue what they were doing.

Now, Section 507 requires that for taxes to receive priority treatment, they must have been assessed before the Petition date.

I just got an e-mail from a client who is about to file a Chapter 13 and is going to owe taxes for 2006 — that she can’t pay.  Not a problem, include them in the 13 plan.  WAIT JUST A MINUTE.  First of all, she hasn’t filed her returns yet.  Ok, GET THEM FILED; but that isn’t enough.  Next, those taxes have to be assessed before the petition date in order to receive priority treatment.  If they aren’t assessed before the petition date, they will be general, unsecured debts and if the plan doesn’t pay 100% — they won’t be discharged and penalties and interest may continue to accrue over the life of the plan.

Ok, take a deep breath and call Special Procedures or the IRS General Counsel’s office.  Request an expedited assessment.   We can do this — but wait!  The Oklahoma Tax Commission doesn’t formally assess taxes.  So, now what?  They aren’t sure yet.  The tax geeks say that when the taxes become final, meaning they can no longer be challenged or appealed, then they have been assessed for purposes of this Statute.  Are they right?  Who knows?  So, what do you do if the client has a Motion to Confirm his Sheriff’s Sale in January, can’t file his taxes until he gets his W-2’s and is sure that he is going to owe for the preceding year?  Pick your poison.

You gotta love this act.

Elaine

More on 1099C’s

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It has been a really full week with way too much life interrupting my legal work.  So, this is going to be short.

I was just checking the stats on this blog, and noticed a search query that led someone here.  It was, “1099 c and still paying the debt”.  I would love to know who that was, I would be very interested in the supporting facts.

Sure, insolvency is a defense — if you raise it.  If you don’t and an assessment becomes final, then what?  What if the 1099 issues, and the debtor is still paying on the debt?  What then?  Somebody came here looking for the answer, unfortunately, whoever it was didn’t find it.

Elaine

Why Forecloure Numbers Matter

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About two weeks ago I blogged about the financial problems of New Century Mortgage, which incidentally just filed for Bankruptcy. Most of the news around New Century and the whole sub-prime loan mess center on the sub-prime loan mess, as if this is an isolated financial area — except that nothing is an isolated financial area anymore.

In December Super Future Equities, Inc. filed its Third Amended Complaint in Super Future Equities, Inc. v. Wells Fargo National Bank, et al. with the U.S. District Court fot the Northern District of Texas, Dallas Division. This Complaint is 95 pages long. The Defendants are Wells Fargo Bank, as Trustee of certain mortgage backed certificates and a number of related corporations and their principals. Those corporations provide mortgage servicing and default servicing for commercial mortgages.

Like all Complaints this one is just a set of unproven allegations. However, this particular 95-page Complaint includes quotes from Pooling and Servicing Agreements, flow charts, and other detailed information that makes it look like whoever wrote it knew what he was talking about.  It appears from info available on the web that the Plaintiffs are a pair of young adults who may — or may not– have an ax to grind.

I don’t know if any of the allegations in this Complaint are true.  Although it certainly appears to describe the extent to which it may be possible for mortgage servicers, default servicers, and in this case the trustee, to serve their own best interests and not the interests of the actual mortage holders or the borrowers. In fact, the gist of this Complaint is to allege that the Defendants have conspired to effectively steal millions of dollars from the investors in the mortgage pool. The complaint makes it clear that this is actually stealing from the mortgage borrowers as well as from the investors, but the borrowers aren’t parties to the litigation.

This strikes home for me, because I was trying to explain to a client last week why a mortgage servicer would want to essentially manufacture an event of default — which is happening with her consumer mortgage controlled by completely different parties than those in this lawsuit. However, intentionally manufacturing events of default is one of the allegations raised against the servicers in the Super Future Equities case, only it is being raised by the underlying investor, not the borrower.

The really scary part of this Complaint is that some part of it might be true.  If that turns out to be the case, the events involving New Century and its recent Bankruptcy filing may become as much a symbol of needed change as the failure of Penn Square Bank. The real question will then be what is the extent of the needed change, how great will the repurcussions be and who will wind up holding the bag. I am afraid that the answer to the first part of that question is going to require analysis of what the financial markets now consider to constitute basic business ethics.  (That does not mean to imply that New Century had anything to do with the loans involved inthe Super Future Equities lawsuit. )

I have linked to the Complaint if anyone wants to read it. I am only about half way through it myself, but I will be back with more on this lawsuit later. Mortgage backed securities and their servicing is a many hundreds of $billions a year business. It warrants more attention than it has been getting, especially for those of us who deal with credit issues, mortgages and foreclosures — consumer or commercial.

Elaine