October News and Events

SHORT SALES

Short Sale Fraud ‘Heating Up’, expert says

By Jeff Collins / The Orange County Register

As short sales become increasingly dominant in today’s market, so has short sale fraud, said short sale expert Kathy Mehringer.

“Fraud is heating up like a wildfire right now,” said Mehringer, risk management director and short sale advisor for Coldwell Banker Residential Brokerage in Sherman Oaks, California. “We’ve got to be aware that this fraud is changing directions, is jumping containment lines.”

Short sales involve the selling of a home for less than is owed on its mortgage.

In the looking-glass world of short sale fraud, real estate agents do their best to get the lowest price they can for a home, Mehringer said.

Instead of staging the home to look its best, they make it look worse. They run pictures and videos highlighting the home’s flaws.

Instead of marketing it to potential buyers, they advertise it in a multiple listing service that’s miles away from the property.

And once they the lender agrees to sell at their artificially low price – often as part of a sweetheart sale to a friend, a relative or an LLC – they quickly flip the house, selling it at its true value and pocketing thousands of dollars in ill-gotten gains.

Mehringer’s message to agents and brokers: Since a lot of Realtors are losing their licenses because of inadvertently representing the wrong guys, agents and brokers have to be on their toes.

“The consequences of fraud are enormous,” she said. “You can’t bury your head in the sand and pretend it’s not happening.”

Among the most common schemes are:

Flopping: Scammers arrange to buy a home at an artificially deflated price intending to flip it immediately at its actual value.
Non-arm’s length transactions: The buyer in a short sale is related to the seller by blood, marriage or some type of business or personal affiliation. This is typically arranged by an underwater borrower to regain ownership of the property free from the mortgage debt.
Side agreements: In addition to payments included in a lender’s “approval letter,” the buyer and seller have side agreements to pay off junior liens, short sale negotiators’ fees or other third-party fees.
False information: The transaction includes phony details in the closing settlement statement, or HUD-1, to hide buried costs and fees.

Mehringer said one problem is agents are targeted by trainers offering seminars on how to make short sales easy. Many of those techniques are sketchy at best, she said.

“You can’t put ‘easy’ and ‘short sale’ in the same sentence. It’s an oxymoron,” she said.

Johanna L. Hladunk, the FBI’s supervisory special agent in San Diego, said the so-called “sovereign citizens movement” has spawned a whole new type of mortgage fraud.

The anti-government adherents believe that they are separate or “sovereign” from the United States even though they live here. Adherents have tried a variety of techniques to shuck their mortgage without paying it off.

One agent told Mehringer her office is losing clients because they refuse to play along with short sale schemes.

“We’re the minority,” the agent said. “The agents who are doing things correctly are having a lot of problems.”

The solution is for agents and brokers to report problems they see and can document, Mehringer said. Complaints about fraud sometimes do fall on deaf ears, but that shouldn’t deter Realtors from doing the right thing.

FORECLOSURE

South Florida foreclosure, delinquency rates down in July

South Florida Business Journal by Oscar Pedro Musibay, Reporter

South Florida saw its foreclosure and mortgage delinquency rates shrink in July.

But the region is still dramatically outpacing the national foreclosure rate of 3.25 percent. Miami-Dade led the way in foreclosure rate decreases: its July rate among outstanding mortgage loans was 16.23 percent, a drop of 2.34 percentage points on a year-over-year basis.

According to CoreLogic, 22.91 percent of mortgage loans were 90 days or more delinquent compared to 25.76 percent for the same period last year, a decrease of 2.85 percentage points.

In Broward County, CoreLogic reports a rate of 12.83 percent for the month of July, which is 1.69 percentage points less than at the same time last year.

Additionally, 18.55 percent of mortgage loans were 90 days or more delinquent in July compared to 20.68 percent for the same period last year, a 2.13 percentage point decrease.

Lastly, the region’s northern most county had a foreclosure rate of 11.54 percent in July, a decrease of 1.43 percentage points from the same time last year.

Palm Beach’s mortgage delinquency rate also decreased: 16.53 percent of mortgage loans were 90 days or more delinquent compared to 18.62 percent for the same period last year, a decrease of 2.09 percentage points.

LOAN MODIFICATION

Loan Modification Programs Help Struggling Homeowners

Until recently, struggling homeowners who are underwater in their mortgage had little choice to dig their way out of their financial crisis. The alternatives were Foreclosure or Short Sale, which results in them losing their home and damaging their credit. The other alternative is a loan modification.

To assist those willing to stay in their home and who are able to pay their mortgage, the Federal Housing Administration passed HARP, the Home Affordable Refinance Program. If the homeowner is current on their Fannie Mae or Freddie Mac mortgage, the borrower could refinance the loan at a lower interest rate under this program.

The new and improved HARP program, which came into effect in March 2012, eliminated the loan-to-value cap in the previous program and extended the program through December 2013. As a result of these changes, refinance applications are at a three-year high. In Florida, 60% of all conforming loans closed in July 2012 were a result of the new HARP program.

Currently, 22% of all mortgages are underwater, where their home value is less than the amount borrowed. In an effort to stimulate the economy, the Feds have agreed to purchase $40 billion in mortgages every month until the labor market improves. By making their mortgage more affordable, there would be a reduction in Foreclosures and Short Sales and the homeowner would have more income to spend on other commodities, further stimulating the economy.

Private lenders are reporting that loan modifications rose 43% in July over June. This may be due in part as a result of the $25 billion mortgage servicing agreement between the Federal government and the five largest private lenders, Chase, Bank of America, Wells Fargo, Citibank and GMAC.

To comply with the $25 billion agreement new regulations were mandated, as a result of wrongful foreclosure investigations, stemmed by a robo-signing scandal. This investigation found that several banks, including GMAC, signed foreclosure documents without reviewing them.

For tens of thousands of homeowners who are underwater in their mortgage, but are not facing a Foreclosure or Short Sale situation, these new federal and private lender programs are proving to offer relief and helping homeowners stay in their home.

REAL ESTATE

Two suits against BoA over flood insurance resurface

Daily Business Review By: Sheri Qualters

The U.S. Court of Appeals for the First Circuit has revived lawsuits brought by two homeowners against Bank of America Corp. for requiring them to buy flood insurance of greater value than their mortgage principal amount.

The First Circuit issued split rulings on September 21 in the two unrelated District of Massachusetts purported class actions: Lass v. Bank of America and Kolbe v. BAC Home Loans Servicing.

Both rulings vacated dismissals of the claims against Bank of America and affiliates ordered by Judge Nathaniel Gorton on August 2011. But in the Kolbe case, the appeals court affirmed the dismissal of claims against Balboa Insurance Co., a company that Bank of America worked with to place the disputed insurance policy.

Susan Lass claimed her $40,000 loan from Residential Mortgage Corp. in February 1994 required her to sign a flood insurance notification document requiring her to carry flood insurance equal to the lesser of her loan amount or the maximum available amount.

Bank of America bought her mortgage in November 2009 and required her to buy flood insurance equal to the lesser of the National Flood Insurance Program maximum, which was $250,000, or the replacement value of the property.

At the time, her principal balance was $28,000 and she had a $100,000 flood insurance policy. She disputed the bank’s directive to buy an extra $145,086 in flood insurance. The bank purchased policies for her property starting in January 2010, which increased her monthly payments.

Lass sued Bank of America and BAC Home Loans Servicing LP in April 2011 for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, breach of fiduciary duty and violation of the Real Estate Settlement Procedures Act.

She also claimed the banks unlawfully profited from “force-placing” flood insurance because they charged too much and accepted kickbacks, commissions, or “other compensations.”

Stanley Kolbe borrowed $197,437 from Taylor Bean & Whitaker Mortgage Corp. in October 2008. In

August 2009, Bank of America subsidiary BAC became the servicer of the mortgage. BAC and its agent, Balboa, demanded that Kolbe buy $46,000 in additional flood insurance coverage to match the amount of his homeowner’s insurance coverage.

Kolbe sued BAC and Balboa in February 2011 for breach of his mortgage contract and breach of the implied covenant of good faith and fair dealing.

He claimed his mortgage requires him to maintain the amount of flood insurance required by the secretary of Housing and Urban Development (HUD). That amount is the lesser of his loan balance or $250,000.

Judges Michael Boudin and O. Rogeriee Thompson and Senior Judge Kermit Lipiz heard oral arguments in both cases on February 9.

Lipiz wrote both opinions, joined by Thompson. Boudin penned a dissent in each case.

In the Lass case, Lipiz wrote that the “Flood Insurance Notification” document that Lass received at her real estate closing “may be read to state that the mandatory amount of flood insurance imposed at that time would remain unchanged for the duration of the mortgage. Given the ambiguity as to the lender’s authority to increase the coverage requirement, Lass is entitled to proceed with her breach of contract and related claims.”

Lipiz noted, “We are…unmoved by the Bank’s assertion that limiting flood insurance coverage to the amount required at Lass’s closing is unreasonable given that FEMA recommends insuring for the full replacement value of the property.”

He concluded, “The mortgage and the Notification are ambiguous as to the lender’s authority to demand increased flood coverage on Lass’s property. The district court therefore erred by rejecting Lass’s proposed construction of the mortgage as unreasonable, and her breach of contract claim must be reinstated.”

Boudin wrote in his dissent that the explicit language of the mortgage allowed the bank to require Lass to buy additional insurance beyond the unpaid balance of the loan. “Under the agreement, Lass had to maintain insurance against ‘loss by fire and any other hazards, including floods or flooding, for which Lender requires insurance,’ and this shall be “in the amounts and for the periods that the Lender requires,” Boudin wrote. “It is hard to imagine how the obligation could be more clearly expressed.”

Boudin argued that the mortgage agreement unambiguously gives the bank “the right to require more flood insurance by empowering it to require insurance in the amount it specifies for ‘any hazards’.”

He concluded that “nothing in the loan agreement says that the bank’s authority to fix the amount of insurance for ‘any hazards’ excludes floods.”

Lipiz also vacated the dismissal of Kolbe’s case: “Having closely examined the mortgage language at issue and the relevant context, we are persuaded that the mortgage is reasonably susceptive to the understanding that supports Kolbe’s breach of contract and implied covenant claims.”

Lass’ lawyer, Kai Richter, an associate at Minneapolis-based Nichols Kaster, said, “We think other courts will find the rulings very persuasive in light of the fact that it’s consistent with the decisions reached to date.”

That’s important to Nichols Kaster because it is litigating more than a dozen so-called force-placed flood insurance class actions against large U.S. banks. “The [First Circuit] opinions are a vindication of all our claims on all of our theories,” Richter said.

Richter said several firms are handling the cases separately but working cooperatively.

Edward Haber, a partner at Boston-based Shapiro Haber & Urmy who argued Kolbe’s case, said, “We believe that Bank of America has been requiring people to maintain far more flood insurance than they are required to under the terms of their mortgages. In light of this decision, we will be able to continue our effort to require Bank of America to cease that practice and compensate the tens of thousands of mortgagors for the excessive insurance premiums they have been forced to pay.”

John Englander, a partner at Boston-based Goodwin Procter, who argued both cases for Bank of America, referred questions to his client.

In an emailed statement, Bank of America spokeswoman Shirley Norton said that the First Circuit’s decisions are procedural rulings that allow the plaintiffs to continue their cases. “We are disappointed with the opinions and are evaluating our next steps in defending against the allegations,” Norton stated.

BANKRUPTCIES

Corporate Bankruptcies Stick Tax Payers With the Bill

In September Digital Domain Media Group, Inc., the movie production company created by James Cameron filed Chapter 11 Bankruptcy, closing the doors of their Port St. Lucie production studio and laying off 300 Florida employees.Chapter 11 Bankruptcy allows businesses to reorganize under the United States’ Bankruptcy Code.

In addition to the loss of several hundred jobs, is the dilemma of millions of state and local government funds given to Digital Domain to lure the company to South Florida. The State Legislature stands to lose $20 million. In addition, Port St. Lucie gave Digital Domain $60 million and West Palm Beach gave $2 million plus a $10 million land deed to open a digital arts school.

Digital Domain, which also has offices in California and Vancouver, British Columbia, is responsible for creating special effects for movies such as Titanic, Transformers and The Curious Case of Benjamin Button. The idea of attracting such a high profile creative company caused the state to dip into their Quick Action Closing Fund. This discretionary fund is used in relocation and retention deals and hands out cash up front to companies who promise to create jobs.

A quick check into Digital Domain’s background would have revealed that the company was doomed from the start, as it had a history of defaults on loans going back to 2008.

But Digital Domain isn’t the only state funded company to close its doors after receiving state funding. In 2011, Savtira Corporation went bankrupt shortly after it was given $2.65 million to keep 265 jobs in Hillsborough County. And Redpine Health Care Technologies received $765,000 in state and local funds to relocate to Panama City and closed its doors just a few months later.

This trend of “Cash for Jobs” isn’t only affecting taxpayers at the state level. Solyndra solar power company received $535 million in federal loans, before going belly up and laying off 1,100 workers. Solyndra is now under FBI investigation for fraud.

There are probably several examples of state and federally funded companies that have been successful in growing the economy and creating jobs. But with nearly 8% of our workforce filing for unemployment, can we afford for the State and Federal governments to be funding companies without doing their due diligence? In each of the examples noted, all of these companies showed signs of trouble before receiving incentives to relocate or expand their operations, thus leaving the taxpayer to foot the bill.

Judicial Activism

Creditor had duty to return repossessed car

Case Name: In re Stephen and Roberta Valichko

Ruling: The bankruptcy court ruled that a credit union willfully violated the automatic stay by refusing to return the debtors’ vehicle, which was lawfully repossessed prepetition.

What it means: The secured creditor had a duty to return the debtors’ car, and violated the automatic stay by not doing so.

LOCAL AND INTERNATIONAL NEWS

Ex-UBS banker to get record $104 million reward from IRS

Daily Business Review

By: John Pacenti

A whistle-blower who helped the federal government uncover UBS AG’s strategy for hiding assets of U.S. account holders was handed $104 million by the Internal Revenue Service in possibly the largest ever award to a tax whistle-blower, his lawyers said Tuesday.

Bradley Birkenfeld, a former UBS private banker, detailed a $20 billion tax evasion scheme by the largest Swiss bank and set the stage for the IRS to dismantle some of the world’s tightest banking secrecy laws. Birkenfeld said UBS bankers even hid diamonds in toothpaste containers to help their American clients.

But prosecutors said the Massachusetts native held back information about a billionaire California developer and part-time Lighthouse Point resident, Igor Olenicoff, who was hiding $200 million.

Olenicoff didn’t serve any prison time. But Birkenfeld was sentenced to more than three years in prison in August 2009. Federal prosecutors said they would have recommended no prison time if he had disclosed all he knew. Birkenfeld is in a halfway house program in Philadelphia with a release date in November, according to the U.S. Bureau of Prisons.

Whistle-blower advocates criticized the sentence, saying it would dissuade other insiders from making disclosures about illegal activity. U.S. District Judge William Zloch in Fort Lauderdale refused to reduce Birkenfeld’s sentence for his cooperation.

“This is the day I thought would never come,” Birkenfeld said Tuesday through his attorneys. “This is a monumental day not only for me, but for every whistleblower worldwide. It is truly gratifying to be recognized for my historic efforts as the very first Swiss private banker to reveal to the outside world the inside secrets behind the illegal practices of UBS and countless other Swiss private banks.”

104 MILLION MESSAGES

Birkenfeld’s attorneys, Stephen M. Kohn and Dean A. Zerbe, announced the award. Kohn is executive director of the nonprofit National Whistleblower Center. Zerbe is a partner with Zerbe, Fingeret, Frank & Jadav in Houston.

“The IRS today sent 104 million messages to whistle-blowers around the world – that there is now a safe and secure way to report tax fraud and that the IRS is now paying awards,” the attorneys said in a joint statement on the Washington-based center’s website. “The IRS also sent 104 million messages to banks around the world – stop enabling tax cheats or you will get caught.”

The attorneys said Birkenfeld provided information on taxpayer crimes that would have been impossible to detect.

“The comprehensive information provided by the whistle-blower was exceptional in both its breadth and depth,” the statement read. “While the IRS was aware of tax compliance issues related to secret bank accounts in Switzerland and elsewhere, the information provided by the whistle-blower formed the basis for unprecedented actions against UBS.

The bank ended up paying a record $780 million fine under a deferred prosecution agreement. More than 35,000 taxpayers also took part in an IRS program to voluntarily repatriate their illegal offshore assets, allowing for the collection of $5 billion in back taxes, fines and penalties.

The Swiss government also altered centuries-old bank secrecy practices, changing its tax treaty with the United States that resulted in UBS surrendering the names of more than 4,900 U.S. taxpayers with offshore accounts. A number of taxpayers who ignored the amnesty offer were investigated and prosecuted.

“I single-handedly transformed centuries of illicit Swiss private banking practices, but I paid a huge price for being the only person to have the courage to come forward,” said Birkenfeld, whose case was portrayed on CBS’s 60 Minutes.

WHISTLE-BLOWER LAW

“My efforts have exposed the trillion-dollar world of secret offshore banking that has enabled and encouraged intelligence agencies, corrupt politicians, drug cartels, arms dealers, tax cheats and terrorist groups to operate their illegal activities and to thrive undetected,” Birkenfeld said.

Congress strengthened whistle-blower rewards in 2006 by passing a law that targets high-income tax dodgers, guaranteeing rewards for qualified whistleblowers if at least $2 million in unpaid taxes, interest and penalties are in play.

Lawmakers have complained the IRS has been slow to pay awards.

“The potential for this program is tremendous, and it’s up to the IRS to continue paying rewards and demonstrating to whistle-blowers that the process will work and that they will be heard and protected,” U.S. Senator Chuck Grassley, R-Iowa, who helped write the law, said in a news release. “An award of $104 million is obviously a great deal of money, but billions of dollars in taxes owed will be collected that otherwise would not have been paid, as a result of the whistle-blower information.”

Miami tax litigator Robert Panoff said he believed Birkenfeld would end up with nothing because of a provision in the law allowing the IRS to deny awards to convicted felons.

“I am surprised, based on Mr. Birkenfeld’s role in the evasive conduct and his conviction, that the IRS did not deny his claim,” he said.

Panoff said he wouldn’t be surprised that Birkenfeld would live the life of the clients he once served at UBS.

“Now he has enough money to buy a nice house in Miami and live the la vida loca.”

Martin Press, a tax specialist and partner at Fort Lauderdale’s Gunster, said the award connotes how the Justice Department and IRS viewed Birkenfeld and his cooperation.

“I see it is just an example of two different arms of the government looking at a case differently,” Press said. ” I was very surprised by the decision. I think the government should award honest whistle-blowers not convicted felon whistle-blowers.”

The IRS looks at cases from a financial perspective, and Birkenfeld’s information paid off, he added. “Through the work of whistle-blowers, through the work of getting publicity on these cases of government going after people, the government has brought in more than $5 billion through the various voluntarily disclosure programs,” Press said.