Bank of America headed for Trouble ... or are they???

Dear Readers:  

 

       I have a client who works at Bank of America who saw a memo posted around the loan modification department that while loan modifications continue to be processed, they will no longer be continuing foreclosure sales in California.  Now it is uncertain if that applies to all of Bank of America or not but take a look at this downward spiral that Bank of America is facing:

 

Oct. 19, 2010 - Because of the Credit Card and Debit Card rules sponsored by Senator Durbin, Bank of America Corp. reported today a loss of $7.6 billion in the third quarter, as it took a writedown of more than $10 billion to prepare for new legislation that it says could virtually wipe out its debit card revenue. 
Bank of America currently makes about $2.9 billion annually in debit-card revenue, and says it expects to have to shed up to 80 percent, or about $2.3 billion. The $10.4 billion writedown is an accounting charge that reduces the goodwill value of the card services unit. BUT keep in mind, the Merchant's Payments Coalition pointed the finger at BofA stating that it was only trying to divert attention away from its foreclosure problems.  Interestingly, the mortgage unit lost $344 million this year, as opposed to the $1.6 BILLION that it lost last year. 

But what's putting some pressure here at home to not provide loan modifications in my opinion is the new capital requirements that banks are having to meet wherein they must maintain higher liquidity and capital levels under the Basel III international regulations.  So in order to meet those requirements. . . FORECLOSURE FORECLOSURE FORECOSURE!  Makes more capital available and increased liquidity!

But tell me something readers. . . .  Bloomberg Business Week writers Dawn Kopecki and Michael J. Moore writing on October 28, 2010 that it's going to be the worst decade for banks since the Great Depression....

YET:  On November 5, 2010, David Frank from Forex said that Bank of America's stocks are UP almost 2 percentage points since the Federal Reserve Board announced that the banks could increase dividend payments. 

HOW is it possible that Bank of America on one hand is posting devastating losses and on the brink of needing bail out funds from the federal government. . . yet there is a plan to pay dividends to its investors.  Someone had to lobby for that change with the Federal Reserve Board. 

If I were a betting lawyer, I would say that with the foreclosures that Bank of America have been snatching up in a race to beat congress from taking action to stop their foreclosure frenzy.  The properties they seize for themselves end up building a portfolio that when sold create liquidity for the bank.  But if you ever have attended a foreclosure auction, there are plenty of cash rich investors coming in and creating bidding wars.  They are not getting "DEALS" on these homes as much as you would expect.

My advice, if you have money, hold on to it.  The roller coaster ride is not over yet, we have not hit bottom.  From an investment point of view, Bank of America attracts more investors as it gets troubled assets off the books.  The losses posted in the mortgage department that I referenced in this article, reflect, that Bank of America took its losses up front.  Took it's tax deductions for the losses up front.  Now that they show fewer losses this year, sadly wealthy investors will flock to Bank of America seeing the dramatic drop in losses.

Like my good friend Melody always says. . . I'm just saying. . . .

Theoretically speaking. . . has anyone tried this yet?

California Civil Code Section 2923.5 and 2923.6 creates a duty by a loan servicer to protect the rights of all members in a security pool:

California Civil Code
Section 2923.6

(a) The Legislature finds and declares that any duty servicers may have to maximize net present value under their pooling and servicing agreements is owed to all parties in a loan pool, not to any particular parties, and that a servicer acts in the best interests of all parties if it agrees to or implements a loan modification or workout plan for which both of the following apply:

(1) The loan is in payment default, or payment default is reasonably foreseeable.

(2) Anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis.

(b) It is the intent of the Legislature that the mortgagee, beneficiary, or authorized agent offer the borrower a loan modification or workout plan if such a modification or plan is consistent with its contractual or other authority.

(c) This section shall remain in effect only until January 1, 2013, and as of that date is repealed, unless a later enacted statute, that is enacted before January 1, 2013, deletes or extends that date."

So let's say a borrower gets foreclosed on in California. Despite the fact that the borrower had been actively engaged in loan modification discussions with their lender. Over the telephone representatives continued to reassure the borrower that their file is in review. However, they don't mention that the sale of their home is still going forward. (This is not an uncommon occurrence as many of you know dealing with Countrywide and Aurora).

Why couldn't you file for chapter 13 bankruptcy. Indicate the equitable interest in the home based on the lender's failure to comply with CC, Section 2923.6 & 2923.5 and that due to their violation they should restore title to the borrower. File an adversary complaint in the bankruptcy court alleging the violation. the damages are huge because now the borrower lost their home and are emotionally distraught over the loss of their home. AND the code provides for attorneys fees.

By doing it this way you have one Judge decide the value of the home for purposes of lien stripping any junior liens against the home, AND the same judge determines the cost of damages and reduces principle on the first mortgage after restoring the debtor's interest in the home?

Of course this would only apply to a borrower who has lost their home and are just now coming to consult you. I wouldn't want to take the risk of someone choosing to let the home go to foreclosure and then chancing it in bankuptcy court. But for the borrower who already lost the house, they could pursue this remedy. Would give them more time in their home and a shot to get the house back.

Note however, my idea of doing this also includes plan payments to the Trustee of the first mortgage based upon a reduced principle to fair market value, paying a reasonable percent interest each month.

I think there is a mistake bringing this sort of action in state court because of the risk that the second will foreclose on the property or take some action on the property. At least in bankruptcy the courts have more power to use equity in a legal sense to work out a fair adjudication regarding the home. You can get both the benefits of lien stripping of the junior liens and set the fair market value of the home.

Just a thought. Feel free to give some input on this idea.