Jason Hartman talks with Chris Cabanillas, a foreclosure defense attorney. Chris opened his own law firm, Cabanillas Law, in 2006 and his office represents homeowners in the states of New York, New Jersey, and Connecticut. He gives Jason and his listeners some great advise about what to do when you’re facing foreclosure and more on today’s AIPIS show.
Key Takeaways
3:50 – Chris explains why foreclosure cases take so long to process.
7:50 – Only 5% of homeowners getting sued for foreclosure actually fight the case.
12:40 – These old-fashioned foreclosures laws are inhibiting the economy.
14:50 – If you’re facing foreclosure, check if you can modify the loan terms.
20:00 – What is the payment structure for a foreclosure defense attorney? It all depends on the situation.
26:10 – Remember, Chris specializes in more high-priced markets and some of this advise may not accurately reflect other regions throughout the US.
28:30 – There’s a lot of foreign investment happening in Manhattan right now.
Mentioned in this episode
Tweetables
“The foreclosure activity might not seem like it’s very high, but somebody could be in default for thousands of days.”
“Only 5% of home-owners who are getting sued for foreclosure actually go to court to fight the case.”
“The average foreclosure in Florida takes like 960 days. That is insanity!”
Transcript
Jason Hartman:
It’s my pleasure to welcome Chris Cabanillas to the show, he is an expert on foreclosure law and he is the owner of Cabanillas Law Firm. Chris, welcome, how are you?
Chris Cabanillas:
Good thank you, thank you for having me on the show.
Jason:
Good. Well, just in our pre-show quick discussion that we had, you had some very interesting thoughts about foreclosures and shadow inventory and so forth, and the shadow inventory issue has long been debated. I think I’ve been talking about this for 7 years easily, maybe even longer. The problem is that nobody really knows, except maybe the Federal Reserve, I guess Janet Yellen probably has a number, maybe Fannie Mae does, and Freddie Mac too. What are your thoughts on this?
Chris:
Well, this is just through our experiences – we have offices in three states, and they’re all judicial foreclosure states – but what I’m seeing is the length of time it takes to get through judicial foreclosure is very, very long, taking several years on average here. I think even the larger problem or the larger reason, if you will, that the shadow inventory is so big, is that so many people haven’t even been sued. I’m seeing a ton of people that maybe haven’t paid their mortgage in 3-5 years, maybe they’ve given up hope on getting a loan modification. Yet the entity that owns the loan (even though we always call that entity a bank, it’s typically not a bank, it’s usually a secured entity that was created to buy up all the loans) is not proceeding with a foreclosure action against them. When you look at this, you have a situation where the foreclosure activity might not seem like it’s very high, but somebody could be in default for thousands of days.
Jason:
Oh no, it’s really insane. Do you have a list, or maybe you can just name off a few of the major states that are judicial foreclosure states?
Chris:
Sure, the big ones are Florida, New York, New Jersey and Connecticut.
Jason:
Judicial foreclosure, to me, seems like an absolute disaster – right or wrong? Do you have an opinion as to why that law hasn’t changed in those states?
Chris:
Well, yeah, I think that first off, it’s just the set-up off how they have it. I think, frankly, that what’s happened is two things. In judicial foreclosure, someone has to be taken to court and obtain a judgement of foreclosure in sale. As we all heard about, there was a huge problem with Robo-Signing and a lot of the documentation not being in order when these cases were brought – and these cases were primarily brought by these large, mill factory kind of law firms that were just printing out these foreclosure actions and not really doing the proper due diligence. In judicial foreclosure, when these cases started getting defended, there were a lot of holes that got exposed in the system of how they did it. One of the big problems along the way was that with these mortgages, since they were packaged up and sold to these securitized entities, there were certain transfers that needed to take place, but they weren’t taking place during the mania to get these mortgages packaged into the securities. Now they’re trying to enforce these mortgages and a lot of the deficiencies of the judicial foreclosure process are being exposed. Because of all this, they were having difficulty moving those cases forward.
On the one hand, that’s really one of the big reasons why it got delayed. A lot of these judicial foreclosure states responded with requirements – in New York, for example, the plaintiff attorneys have to sign out and certify that an attorney has really looked at the documentation, and they have to sign their name stating that everything is in order for us to be able to proceed with this foreclosure action. That’s just going to take time for them to get the documentation together and for somebody to look at it and actually sign their name to it – it’s all held up the process a bit.
Secondly, what’s happened is that these states, in their response to seeing these problems with the documentation and the Robo-Signing etc., have all created these procedures in their court systems to say ‘Look, if it’s a foreclosure case, before we’re going to allow this thing to really get litigated on the particulars or on the substantive nature of the case, we’re going to make both sides go to mandatory foreclosure mediation’. It’s been great for home-owners who have maybe had a lot of frustration dealing directly with the banks or with lost paperwork etc. This puts the bank and their bank’s lawyers on the hook to actually have to give these people a fair shot to try and get it modified. That’s a process and that can probably take anywhere from 3 months to a year in many cases. I’ve seen some of those mediations go on for a year and a half.
I think those two things together have really dragged out the process of foreclosure. That’s if the foreclosure has even started, but again I think that the bigger reason is simply that I think there is some sort of conscious effort on behalf of these entities, and maybe the government is encouraging this, to really put on the breaks of bringing so many actions at once.
Jason:
Yeah, it just seems to unfair. Listen, the list of sins of the banks is so long that we don’t have enough time to talk about them, but by the same token, it seems really unfair to lenders. It’s not necessarily the banks; it’s the investors, of course, because these are all secure ties as we’ve discussed. It just seems really unfair that people should be able to live in their house for free for 3 years, doesn’t it?
Chris:
Yeah, on the one hand you would think it sounds like they’re being allowed to, but again, it’s not even so much that they’re allowed to. Again, I stand firmly behind the belief that the majority of these people – if the banks or the entities that owned them really wanted to move the foreclosure actions forward, they could. The statistics that I’ve seen in New York, for example, show that only 5% of home-owners who are getting sued for foreclosure actually go to court to fight the case. This means that 95% of these cases could be won on just simply a default judgement. Again, though, they’re not moving it forward and I don’t know why. I think it’s got to be a conscious effort that maybe they don’t want to overwhelm the market with all this new inventory, but I think it makes for a difficult understanding of what the landscape is. Are we really through the foreclosure process and all the bad times and everybody was really talking about back in 2009 and 2010, or is it still there and it’s just not really being exposed? Are we really just kicking the can down the road? That’s what I think is going on.
Jason:
Well, America is very good at kicking the can down the road in so many ways!
Chris:
[Laughs] That’s right.
Jason:
We never want to take our medicine in this country, do we? We just say ‘Well, we’ll do it tomorrow.’ But then that’s another issue. So what are your thoughts on shadow inventory?
Chris:
I think that there is just still a huge market that’s out there. Since we didn’t want to take our medicine right away, I think what’s happened is that it’s become more politically acceptable for people to allow this situation to go on and it allowed for the market to stabilize a little bit. I think the hope is that if the economy starts to improve, the anger against the investment bank etc. after the financial crisis would go away and we can all go back to business as usual. I think it’s really allowing for that to happen, but frankly, I think that at the end of the day, it’s really going to hold up a true recovery for quite some time because those properties are still going to slowly come out and hit the market. I think if we look back in 20 years, we’ll probably end up saying that it was the right call because it didn’t allow for the market to be overwhelmed with all the foreclosure properties. Time is going to have to tell.
Jason:
Okay, and I want to get some context for this discussion, Chris. In what states do you practice law?
Chris:
Our office represents homeowners in New York, New Jersey and Connecticut.
Jason:
Okay, so New York, New Jersey and Connecticut; all fairly high-flying states, certainly New York is. When I say high-flying, I mean cyclical, non-linear markets like California, like South Floria, Miami, Fort Lauderdale. They’re fairly expensive markets, for sure, right?
Chris:
Yeah, absolutely.
Jason:
When you talk about shadow inventory, I just want to try and make a distinction here. In these states with judicial foreclosures, that’s where the shadow inventory problem would seem larger, wouldn’t it?
Chris:
I would think so because in the other markets, they can more quickly take over the property. Again, we don’t know if they are. I don’t know if they have the ability to take over the trust deeds in non-judicial foreclosure states. I know that they have the ability to do it more quickly, but I don’t know if they’re executing it. From what I’ve seen and heard, it was a faster transition there and they did take it over more quickly, but I’ve got to think that there’s probably still shadow inventory there as well. We’re in these situations where they can execute and take over the property more quickly, but they don’t.
Jason:
Right, and I agree with you that there may well be that situation, but it’s so much easier for the lenders to foreclose in those non-judicial states, right?
Chris:
Oh, absolutely, 100%.
Jason:
In California, if you wanted to, you could foreclose in 111 days, right?
Chris:
That’s right. In New York, it could never be that fast.
Jason:
I remember quoting stats on prior episodes a long time ago, saying that the average foreclosure in Florida took like 960 days. That is insanity!
Chris:
That’s right. It can take that long to process it, but again, I’ve seen foreclosures in New York that have been handled by these larger, more mill firms, and they should have more of a process for it. I think that those take longer than the guy down the street who might be holding on to one mortgage – with that one it’s more personal and he’ll act more quickly. There are steps you can take to move it faster, I just think that they have so many files that they’re dealing with that they’re just sort of slowly getting through it.
Jason:
With that in mind, what you really see here is once again, the government with its old laws – I’m going to call these judicial foreclosures laws old-fashioned laws – they’re really inhibiting what’s known as price discovery. If they would let this inventory clear the market and re-sell and be re-used by someone who’ll actually pay for it, then you’d have price discovery and you would have this healing much, much faster. Gosh, it’s very frustrating.
Chris:
Yeah. I can see it, and I think also, you have issues related to the title of these properties, which is causing a lot of problems. I’ve seen cases where the properties have been foreclosed on, yet these asset managers haven’t moved forward to take the property over or to try to resell it. It doesn’t make sense to me, but I see it happening.
Jason:
Yeah, no question about it. Okay, so talk to us about some of the things people can do if they’re facing foreclosure, whether it be on a home in which they live or an investment property.
Chris:
The first thing you have to figure out is who the mortgage servicer is and who the investor is. You need to know if these mortgage servicers and investors are modification-friendly. I’d say that the far majority of them are receptive and open to modifications, especially if those loans have been taken out pre-January 1, 2009 because then, for the most part, you’ll have the Making Home Affordable Program applied to these types of mortgages. That’s where they’re trying to push to get the payments for principal interests, taxes and insurance down to around the 31% of gross income number. If it is, you can modify that. It used to be the case that only principal residences could be modified under this program, but that’s been switched as of, I’d say, about 18 months ago to a program where even if it’s an investment property, it can also be considered for the Making Home Affordable Program.
The first question is: Do you want to try to modify? If you modify, there are a lot of banks out there that have these programs. Aside from that, one way to try to get out from the situation as undamaged as you can would be to consider a short sale. I say short sale because the majority of these properties are what you call ‘upside-down’, meaning that the amount owed on the mortgage is greater than the property value. Unless you’re going to come up with the difference in money, when you go to sell that property for its current market rate and you owe more than it, you’re going to have to ask the bank to forgive that amount to allow you to sell for that lesser amount. That’s called a short sale.
A lot of people take the short sale route to get out of the situation. There are certain consequences involved with doing that, and I think anybody who’s going to consider these different approaches or avenues really needs to consider that and speak to their tax advisers regarding how to handle that. It could be an unwelcome surprise if you have a cancellation of debt and don’t treat it correctly for tax purposes. Other than that, what’s very interesting and something that was one of the biggest surprises to me along the way is that you hear a lot of people talk about a deed in lieu, or basically where they want to just hand the property over to the bank.
Jason:
Yeah, deed in lieu of foreclosure, sure. So what’s going on there?
Chris:
There I’ve seen that it is very difficult. That’s probably the most difficult out of the three options.
Jason:
Yeah, I agree.
Chris:
The banks simply don’t want to take the properties over that quickly and they’ll often make sure that you have the property completely vacant before they’ll do that, or they’ll want to see you attempt to have the property sold via short sale before they’re willing to entertain it. I’ve had a lot of situations where people have moved out of the property and they want to move on with their lives and they can’t because the deed still remains in their name.
Jason:
I wonder why deed in lieu is the hardest. Isn’t it weird? One thing I also want to ask you is: When you talk about loan modification, speak to the concept of modifying the rate or the terms, versus the actual principle balance of the loan. First, the deed in lieu question.
Chris:
Yeah, with the deed in lieu, it’s an excellent point. I’ve read some statistics that say when a property is sold via short sale, it’s likely going to be sold for an amount greater than if the bank takes it over and tries to sell it as an REO. I’ve seen that statistic a number of times. In fact, I’ve seen statistics say that a property sold at REO is likely to be sold for 25% lower than that same property if it were to be sold at short sale. On the one hand, that could be one reason. I think that realistically, on the other hand, they simply don’t want to take on the liability of having to deal with this property. You have to maintain the property or a lot of the municipalities are going to get upset when they see that banks have taken over properties and the property then goes into disrepair, or perhaps there are squatters sitting in there..
Jason:
There’s one other high-touch human aspect that I think happens a lot of times in the practice of a short sale, and that’s the fact that the people are usually living in the property and as they’re doing their short sale, the sellers who are in default are seeing these people come through. Many times they get to meet them and they don’t want to rip the pipes out of the wall and steal the microwave because they met these people.
Chris:
That’s true, it’s a good point.
Jason:
They’ll usually leave the property in a reasonably decent condition because they may have looked them in the eye and shaken their hand. They know it’s a real person taking over the property, rather than some big, faceless institution. I think that’s another reason why short sales sell for more.
Chris:
Correct, I would agree with that. They don’t want to take these properties over and oftentimes, the municipalities are holding them liable if the property’s not nicely maintained and I’m just supposing that that’s got to be one of the reasons that they’re not really in the business of trying to take titles of these properties. If you have somebody that’s willing to hand you the keys and they’re not paying in the mortgage and you have the ability to take the keys back, it’s common sense that we would want to go ahead and do that for whatever reason. I think that a large part of this shadow inventory is not just a function of a judicial system that’s preventing this from happening; I think it’s by design that the owners of these mortgages and properties simply don’t want to take it over for whatever business reason that might be.
Jason:
Talk to us for just a moment, if you would, about how someone should engage with a foreclosure defense attorney. Should they be expected to pay an up-front fee, is it the typical to sign a retainer agreement for an hourly fee attorney relationship, is it a flat fee? How does it work?
Chris:
That’s a great question. I think that each situation is different. Also, which jurisdiction you’re in and how they do it is very important. In the New York, New Jersey, Connecticut area where we practice, we’re governed by strict rules as to the retainer agreement and the attorney-client relationship and how we do that, but yeah, we have flexibility in how we can design how we’re going to get paid. I think most people probably aren’t open to doing it hourly because they want to be able to limit their expectation of what their investment is going to be and to try to produce a particular result. Some people do it differently, and the way that we do it sometimes is that we do it by action or activity. If we have to go to court, there’s going to be a certain fee; if we have to do a certain type of pleading in court, there’s going to be a certain type of fee. There may be some blend for hourly and how you’re going to do that on the transactional part of trying to work out a deal.
There are different ways to do it but I think what’s important is to make sure that you are going with somebody that’s licensed in the area of law that you’re dealing with, and certainly somebody that has an office so you’re going to be seeing them face to face. I’ve heard so many horror stories about people who were enlisting people from out of state and from across the country to help them with a modification or something, and that was bound to be a problem later on. At the end of the day, if you can’t sit down and look your attorney in the eye and look over the file together, you’re really not knowing what they’re going to do because they’re just on the other end of a telephone. That’s not good enough. I would say certainly do your due diligence in meeting with them and sitting down.
Jason:
I just want to speak to that for a moment, and I hate to sound like such a skeptic, but that isn’t foolproof by any means. I’ve met many attorneys who have not done very good work for me over the years, and certainly, Mr Bernie Madoff met a lot of people in his physical networkings! He was hanging out at country clubs and charity events and met all those people and scammed them just the same.
Chris:
I think the reality is that if it’s an in-person attorney that you’re meeting with, the likelihood of being scammed is one thing. I think you have to be realistic as to the result that you’re looking to get, and you’ve got to be upfront with the people that you’re meeting with. Certainly, we work tirelessly to explain to everyone that we’re sitting down with how important knowing their expectations is. We don’t take every case that walks in the door; that’s our experience. Are there people out there that are fraudsters? Sure. I think that you’ve got to be careful in anything that you do.
Jason:
Yeah, of course. OKay, go ahead with what you were saying.
Chris:
Yeah, so I think that’s the best way. There’s also local Bar Associations within most people’s jurisdictions. In New York, pretty much every county has its own Bar Association. Certainly there they have referral networks where, perhaps if you’re looking for help, you can look for some there, so that’s another way to find help.
Jason:
Interesting stuff. What would you say the average – I guess you think of it in loan amounts and I doubt that as a lawyer you’re thinking too much on the numbers, but anecdotally, do you have an idea as to the average loan amount that you’re negotiating? Or the average mortgage size?
Chris:
Yeah, the average mortgage size really depends on whether it’s New York, New Jersey or Connecticut. I would say that in New York, in the areas that we work, it’s probably about half a million. I would say in Connecticut, depending on which part, you’re probably closer to around $300,000 and in New Jersey, I would say it’s probably somewhere around the $250,000 range.
Jason:
Okay, and we should note that that’s the loan amount, which may or may not be close to the property value.
Chris:
Oh yeah, it’s almost never close to the property value because that’s just the loan amount. You also have the back payment, so when you add up all that stuff it could be 50-100% higher. Then you have to look at the property value, and oftentimes these properties were purchased during the boom times of 2004 or 2006-07 and so a lot of these properties have dropped in value from those highs at least 25-50% in some cases. You have a situation where there’s a lot of people that owe a lot more money on their property and on their home than it’s worth and what happens is that a lot that the government has done has put Fannie and Freddie Mac, who are the majority owners of most of these loans, to try to give relief in terms of modifications, but that’s primarily only been to give modifications in terms of reducing the interest rates that are being applied. Expanding the terms out, that can allow somebody to have a lower payment, but I think that if you’re really going to look at it, sooner or later a lot of these people who are getting those types of modifications remain significantly underwater. Sooner or later, they’re going to make the business decision that it’s just not worth putting in the money anymore and they’re going to want to walk. The problem has been that Fannie and Freddie have not been granting principal reductions and I think what needs to happen, if we really want to see encouragement for getting through this problem, is that the modifications of Fannie and Freddie should be allowed to give principal reductions. I think that would go a long way.
Jason:
Good points. Well, thank you so much, and I just want to stress the distinction that the markets you’re dealing in are these high-priced markets. This is not the mid-west, this is not the south, so of course, that market varies pretty dramatically around the country. I love it when these people – and Chris, I’m sure you’ll appreciate this too! – go on CNBC and they talk about the ‘housing market’, as if there’s some single, national housing market in a country as large and diverse as the United States, with about 400 metropolitan statistical areas. Good points and boy, judicial foreclosure – I tell you, if I had my own state and I ran it, I wouldn’t have judicial foreclosure because that’s just too crazy.
We’ll see how this works itself out and gosh, I wonder if these multi-million dollar New York little tiny condos are going to see a drop in value. They may.
Chris:
Well no, I think you hit it on the head when you said that. Each market is a different market. In the markets that we’re talking about, Manhattan is probably completely excluded from the conversation and that’s a market all on its own. That one hasn’t suffered a bit.
Jason:
Yeah. But I still think it’s way too expensive. I don’t know, I just think the world is changing a lot. I used to say the three cardinal rules of real estate were location, location, location, right? Everybody’s heard that, and I think that’s becoming.. It’s still certainly important – everybody wants to be in a well-located area, but that’s becoming less important as we see these digital nomads and people running pretty good businesses from all over the planet. They can live in these lifestyle destinations now and you don’t need to be in Silicon Valley to have a tech company – although it’s cool if you are! I get it, there are benefits, but it’s just that geography is a little less meaningful than it’s been, for sure. That’s my point.
Chris:
Yeah, I would agree with that. I think what’s interesting to note about Manhattan, though, and with what’s happening there is that so much of the property prices and everything is shooting up.
Jason:
And all foreign.
Chris:
Yeah, so much foreign investment. There’s people who are just parking money and they may never live there or even sleep a night in the apartments that they’re buying!
Jason:
Let me tell you what’s really interesting about that too. We have lots of investors from all over the world that contact us to invest in American real estate, and America has always been known as the Brink’s truck; wealthy or upper middle class, if there are any – there aren’t that many! – foreigners, whether they be Chinese, Russian, Ukrainian, South American, whatever. They always want to park some money in America, and even now, even as mismanaged as the US is, we’ve still got that. I think that bodes really well for the US, I really do.
Good stuff. Hey, it’s been really fascinating talking to you. Give out your website, tell people where they can find out more.
Chris:
Absolutely, thank you. You can reach me at www.CabanillasLaw.com
Jason:
Chris Cabanillas, thank you so much for joining us today.
Chris:
My pleasure, thank you.
Announcer:
This show is produced by the Hartman Media Company, all rights reserved. For distribution or publication rights and media interviews, please visit www.hartmanmedia.com or email media@hartmanmedia.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network Inc. exclusively.