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Jingle Mail
by Robert Franco | 2009/01/25 |

In the movie Broken Arrow (1996), starring John Travolta and Christian Slater, a government aide is told that they have a "broken arrow" situation - nuclear weapons have been stolen.  The aide, played by Frank Whaley, says "I don't know what's scarier, losing nuclear weapons, or that it happens so often there's actually a term for it." We have a similar term in the mortgage industry, now - "jingle mail" - when a homeowner walks away from their mortgage and mails the keys back to their lender.

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One some level, walking away just makes sense, especially in jurisdiction where mortgage financing is non-recourse - meaning the lender cannot go after the homeowner for the deficiency.  Even in jurisdictions where lenders can pursue collections against the homeowner for the balance due after foreclosure, I don't believe it is routinely done.  Perhaps that is because the deficiency judgment is too cumbersome or expensive to obtain, or maybe it just isn't worth it if the homeowner has few other assets to make collections practical.  So what is the consequence of giving up on repaying a mortgage and allowing the home to go in to foreclosure?

At this point, the consequences remain serious. For someone with pristine credit, a foreclosure could mean a drop of 200 points overnight, said Craig Watts, a spokesman for Fair Isaac Corp., which developed the nation's most widely used scoring formula, FICO.

. . .

"A foreclosure is a serious delinquency, and it is in the same category — as far as a credit scores go — as a bankruptcy or a tax lien," Watts said.

Many of those walking away are already delinquent and the additional hit they may take on their credit score isn't considered a major deterrent.  Even some who could afford to make their payments are dropping keys in the mail because they have very little invested in their home.  And, the value has fallen so much that they no longer see their home as a good investment. 

This is the biggest problem with the creative financing options we have had for the past decade.  No money down or very high loan-to-value mortgages have allowed many people to become homeowners.  But the reality is that these people don't fee as much like they own their home as they feel they are renting from the bank.  Frankly, if you have no equity, what exactly do you own?

With the record number of foreclosure, we will see many people with plummeting credit scores.  That may mean that they will have trouble obtaining credit cards and car loans, which will have an impact on our economy generally.  In addition, potential landlords and some employers routinely run credit checks to determine the level of applicants' responsibility.  So, these people may also find it harder to rent a home or obtain meaningful employment. 

It has been suggested that a foreclosure may not be such a serious problem in the future because it will be somewhat common.  Sure it will impact the credit score, but in a few years when the person reviewing the credit report sees a foreclosure in 2008 or 2009, they may just say "oh, that was in the midst of the mortgage and credit crisis... everyone was having problems."

"The more the house is underwater, the more people are likely to walk away from a house and go rent rather than keep money tied up in it," said Todd Zywicki, a professor who specializes in bankruptcy, contracts and commercial law at the George Mason University School of Law.

"The traditional restraint on this has been that people have been concerned about the impact on their credit reports ... but with the large number of foreclosures that we have been going through, my guess is that in a couple of years, a foreclosure is not going to look quite as menacing as it does now."

A generation ago, this would not have been such a phenomenon.  When lenders required a meaningful down-payment to purchase a home, people worked hard and saved to obtain the American Dream.... they earned it.  They had a vested interest and they actually owned something. 

Here is something to think about - the banking industry and Republicans in Congress vehemently oppose changing the bankruptcy laws to allow for mortgage relief in bankruptcy court.  The most common reason they cite is that everyone will pay higher interest rates and down-payments because of the losses that lenders will suffer. 

Most congressional Democrats say the quickest way to save homeowners like Troy Butler of Saginaw, Mich., is to let them declare bankruptcy and allow judges to dictate new mortgage terms.

[T]he lenders that would absorb the pain — and lose control of any deals to ease the terms — do not want to get dragged into bankruptcy court by millions of overextended borrowers.

. . .

The chief lobbyist for the Mortgage Bankers Association, Steve O'Connor, said new homebuyers would end up paying higher interest and bigger down payments if lenders are saddled with the risk that a judge could change mortgage terms.

But, what does it do to mortgage rates when homeowners are willing to simply walk away from their mortgages because they don't have anything personally invested?

Losses in foreclosure are around 40% - if the bankruptcy changes were to pass we are only talking about modifying the interest rate by a couple of points to make the payments more affordable.  It would seem that we are seeing larger losses from jingle mail that we would face if the bankruptcy laws were modified.  And, the homeowner is taking about the same drop in their credit score whether they choose to mail their keys back to the bank, or file for bankruptcy. 

It seems that most Democrats in Congress and President Obama support bankruptcy reform as a part of the solution to our current crisis.

A bill to give judges authority to alter loan terms for primary residences may be the quickest way to arrest the housing market's collapse. Most Democrats in the House and Senate support that plan. President Barack Obama told Democratic leaders Friday he also backs it, according to a Senate aide who was not authorized to be quoted by name.

However, President Obama has asked that it be removed from the economic recovery package to ensure that it doesn't delay its passage.

Sen. Dick Durbin, D-Ill., the chief Senate sponsor of the bill, said Obama persuaded him in a White House meeting Friday to remove the bankruptcy proposal from an economic recovery package — to ensure it doesn't jeopardize the stimulus bill. But Obama pledged his support for the bankruptcy solution, Durbin said.

Obama said he would work with Durbin to attach the proposal to other "must pass" legislation — with the hope that supporters of the overall bill would not vote against it because of the bankruptcy provisions.

We might see bankruptcy changes in the future, but how many borrowers will lose their homes in the mean time?  I hope this isn't one of those things that finally passes when its no longer needed.  Perhaps instead of mailing keys back to the lenders, those facing imminent foreclosure should send a little jingle mail to their congressmen.  Let them know that they could have kept their family in their homes if they were able to get a little relief in bankruptcy.  If only Congress would force lenders to take a loss of a couple of points on the interest rate rather than let them choose to lose 40% in foreclosure.

Robert A. Franco


Categories: Foreclosures, Legislation, Mortgage Industry

1735 words | 7155 views | 6 comments | log in or register to post a comment

Deficiency Judgments

In Connecticut we have two types of foreclosures...strict foreclosure and a foreclosure by sale.

Connecticut is a title theory state. As such the title is split when the mortgagor places a mortgage on the property. The legal title is conveyed to the lender and the mortgagor retains equitable title (The Equity of Redemption).

In a strict foreclosure the equitable title is conveyed to the lender which then combines with the legal title to result in a fee simple absolute title.

In a foreclosure by sale the property is auctioned off by a court appointed committee to the highest bidder.

There are very few defenses to a foreclosure action. Consequently, the mortgagor is usually defaulted for failure to appear, failure to disclose a defense or failure to plead, and judgment enters after default with a hearing in damages to establish the appraised value of the property. In those rare instances in which the mortgagor does disclose and plead a defense the case is often resolved in a hearing on a motion for summary judgment. There is rarely a trial.

If the mortgagor has equity in the house the court will usually offer him/her two alternate resolutions. He/she is offered the choice of a foreclosure by sale in the hope that the auction price of the property may exceed the appraised value, plaintiff's attorney's fee and committee expenses, resulting in some cash return to the mortgagor. This is usually not a good choice for the mortgagor because all of the vultures show up at the auction, and try to obtain title for the lowest bid possible.

The wiser choice is often asking for a long law date (redemption date by the mortgagor) in a strict foreclosure. During that time the mortgagor can either sell the property himself for a better price, or refinance the property. There are also no committee expenses to repay because there is no committee in a strict foreclosure. It is not unusual to get a date of redemption of one year later. In some cases in which the mortgagor has considerable equity it may even be possible to get two years. The only problem with this is that the mortgagor is known to be a motivated seller.

Connecticut is a deficiency judgment state. This means that if the property has a depressed appraised value... the difference between the established appraised value of the property and the outstanding balance of the mortgage, plaintiff's attorney 's fees and committee costs can be regained by the lender from other assets of the mortgagor's ( bank account garnishment, wage garnishment and attachment of other real estate). The judgment is good for 20 years, and can follow the mortgagor even after he recovers financially.

Connecticut has recently revised its foreclosure procedures to assist mortgagors. Since July, 2008 the new requirement in a foreclosure action is to require the lender to engage in mediation if the mortgagor requests it. During mediation a number of options can be explored including restructuring the existing mortgage or refinancing (possibly through one of the new state or federal programs). To the extent that funds are available the Connecticut Housing Finance Authority also makes low interest loans available to mortgagors in hardship cases (death, illness, job loss) for 36 consecutive or non consecutive monthly mortgage payments. 

I currently offer foreclosure counseling through my practice, and I would never recommend "Jingle Mail" as a viable alternative to a client. There are too many other positive alternatives for the mortgagor. If the bankruptcy laws are to be changed to allow judges to restructure mortgages ...the options may tilt even more favorably in the direction of the mortgagor.

by Kevin Ahern | 2009/01/25 | log in or register to post a reply

20 Year Deficiency Judgment Statute of Limitations?

20 year statute of limitations on deficiency judgments?  In many states, those judgments expire after one or two years-which makes it more palatable, I'm sure, to walk away and try to get a fresh start after a few years. I am curious about the term "established appraised value".  Is that the value established at the time of foreclosure, or the value established at the time the mortgage is originated?  If it is the former, then it still gives the borrower a benefit to walking away.  The courts will cram down the outstanding debt to correspond to the depressed value of the house.  Sounds similar to portions of the bankruptcy reform proposal.

by J. H. | 2009/01/25 | log in or register to post a reply

It is always better to protect your interests

In a foreclosure which does not end in a trial there is a motion for judgment following the defendant's default. At that hearing the value of the property at the time of foreclosure is established through the testimony of an appraiser and his appraisal report entered into evidence. At that point the value of the property is established, and compared to the debt. If the debt, plaintiff's attorney's fee and expenses exceeds the appraised value a motion for deficiency judgment is almost certain to follow. If the matter goes to trial the appraiser's testimony and appraisal are entered into evidence during the plaintiff's case in chief.

I have to disagree with you about walking away from a property. It does not guaranty that the lender would not still foreclose on the property in order to get the deficiency judgment.

The bank would also have the right to sue for money damages on the note in a regular collection case as an alternative to foreclosure

I am in the process now of trying to collect a debt for a client (Not a foreclosure) against a defendant that refused to appear at an arbitration and has totally ignored all civil process duly served upon him. Once the award was confirmed by the court that gave me the right to examine all of his financial records, tax records, client's lists, bookkeeping records, accounting records  and business records. So far he has failed to comply with my subpoena. He has been given another week to comply, or he may be held in contempt. The worst thing you can do is not respond to litigation to protect your interests. It would give the plaintiff the ability to do pretty much whatever he wanted unopposed within the rules of evidence, civil procedure and ethics code.

It is much better to take advantage of the options recently made available to mortgagors in Connecticut. You hang on to your house with a more affordably restructured or refinanced mortgage. The property will appreciate in value some time. The mortgagor may even be able to refi at a better rate when his/her credit score improves. It is an investment worth protecting.

by Kevin Ahern | 2009/01/25 | log in or register to post a reply

I agree

I agree with you-I would never advocate inaction in cases of debt repayment or compliance with civil procedures. As you correctly stated, lenders are more willing to work with borrowers now after sustaining large losses in the mortgage market. From a legal perspective, there is no "benefit to walking away, " and I would never advise it.   My comment was not based on legality but rather reality.

In my current position we represent the county auditor in every mortgage foreclosure action filed in our county. In reality, I see very few lenders actually file for deficiency judgments or take any further action on the promissory note after the foreclosure is complete.  I presume that in a majority of cases, the borrowers are insolvent or have insufficient assets to make the recovery effort financially beneficial to the lender.

This may sound presumptive, but I think alot of these borrowers in foreclosure took out mortgage loans for "today" and didn't concern themselves with the repercussions of repayment. Some were duped by unscrupulous brokers and lenders, don't get me wrong.  However, if a borrower is willing to borrow money s/he can't repay, then I doubt s/he will concern her/himself with a deficiency judgment (with a one or two year expiration date) that will probably not be filed anyway. A twenty year SOL on a deficiency judgment, on the other hand, might change that reality-both from a lender perspective and a borrower perspective.

by J. H. | 2009/01/25 | log in or register to post a reply

How does the mediation work?

Hey Kevin,

I like the idea of forced mediation, but it seems like that is prone to the same problems as the Hope for Homeowners program.  You can obviously require the lender to show up to mediation, but if the loan has been packaged and sold to investors, do the lenders really have any authority to renegotiate the terms of the note? 

It seems that would be a significant hurdle to a successful modification.  That is why I like the idea of allowing modification in bankruptcy. 

Robert A. Franco

by Robert Franco | 2009/01/26 | log in or register to post a reply


The mediation process is new in the foreclosure procedure of Connecticut. It has been in effect since July, 2008, and apparently there have been some revisions to forms and/or procedures effective 12/1/08.

When the defendant, mortgagor, is served with a summons and complaint in a foreclosure action he/she is served with a notice of right to mediation. If the defendant wishes to exercise his/her right to mediation ...he/she must file a written request for mediation within 15 days after the return date shown on the summons. ..25 days following that date if a request for an extension of time has been filed by the defendant.

The court will then appoint a mediator who will try to assist the plaintiff and defendant to reach agreement upon resolution of the case. During mediation such items that may be explored include, but are not limited to 1. reinstatement of the mortgage, 2. assignment of law days (redemption dates), 3. Sale date, 4. Restructuring the debt. The program leaves the door open for the parties to explore other resolutions. If the mediation is not successful the case moves forward in the usual foreclosure procedure.

If mediation is successful the appropriate action will follow. I have not yet worked with the program, but I would assume that if reinstatement, restructuring or refinance is agreeable the mediation report would become part of the court record, and the case would probably be withdrawn when the restructuring, reinstatement or refinance had been completed. In the case of assignment of law days or sale days I assume that a judgment of foreclosure would enter with the dates upon which the parties agree.

Only the holder of the note and mortgage is an aggrieved party. As such he is the only party who has standing to sue. If the note and mortgage had been packaged, sold or assigned to another party..only that party is the proper party plaintiff. Generally when you draft a foreclosure complaint you plead that the plaintiff is the current holder of the note and mortgage.

Generally the plaintiff orders three title searches during a foreclosure...1. a search before the action begins to determine mortgages, liens and encumbrances and assignments thereof,  2. a search just prior to entry of judgment to determine if there had been any intervening liens that need to be foreclosed such as mechanic's liens which were not on file at the time of the first search, but whose claim may relate back to a date before the first search or whose interest may not be foreclosed by recording of the lis pendens, 3. A search performed after entry of judgment, but before recording the certificate of foreclosure (Strict foreclosure case) or the committee deed (Foreclosure by sale case).



by Kevin Ahern | 2009/01/26 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco



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