Default Notices Continue to Rise in 2Q2006

From April to June 2006, the number of new California foreclosures surged 67.2% from the year-earlier period, the fastest increase since 1992, according to a report by Dataquick Information Systems. Despite four consecutive quarterly increases in new California foreclosure activity, the current volume of 20,752 new default notices remains significantly lower than the historically "normal" quarterly average of 32,762 and barely one third of the peak level of 59,897 reached in the first quarter of 1996.

"In Rem" Stay Relief Orders Held Invalid

The United States Bankruptcy Appellate Panel of the U.S. Ninth Circuit Court of Appeals (BAP) issued a published decision on July 7, 2006 which holds that bankruptcy courts have no inherent power under 11 U.S.C. Section 105 to issue so-called "in rem" stay relief orders. Johnson v. TRE Holdings, ___ B.R. ___, 2006 wl 2065565 (9th Cir. BAP 2006). In many jurisdictions, including the Central District of California, mortgage lenders and loan servicers have experienced multiple or serial bankruptcy filings, often by individuals who acquire fractionalized ownership interests in the real property collateral for no consideration for the express purpose of thwarting a pending foreclosure and with no intention of reorganizing under the bankruptcy laws. To curtail these abuses, mortgage lenders and loan servicers frequently request stay relief orders that are binding against the real property (so-called "in rem" relief). This allows the mortgage lender to resume its foreclosure without having to seek additional stay relief orders each time another bankruptcy case is filed. Although some bankruptcy judges have refused to grant "in rem" relief, many other bankruptcy judges routinely grant such relief in proper cases. The recent BAP ruling, written by the Honorable Christopher Klein, United States Bankruptcy Judge in the United States Bankruptcy Court for the Eastern District of California, Sacramento Division, concludes that there is no statutory or other legal basis for the practice, casting doubt on the validity and enforceability of such orders throughout California. Creditors can no longer proceed with foreclosure sales in reliance upon "in rem" stay relief orders when a new bankruptcy petition is filed before the sale date. A new stay relief order must be obtained in each successively-filed bankruptcy case. Any sale held without a new stay relief order will be null, void and of no legal force or effect.

California Foreclosures Surge 19% in 4Q2005

Dataquick reports that new foreclosure starts during the fourth quarter of 2005 rose 19% from the third quarter of 2005 and 15.6% from the fourth quarter of 2004 caused, in part, by declining real property appreciation rates. Over the past several years, default rates have trended lower because home values have been rising, fueling the demand for refinancings and home equity lines of credit. However, the "annual home appreciation rate in the state hit 22.8 percent during the second quarter of 2004. Since then it has come down and in fourth-quarter 2005 it was 14.5 percent. The appreciation rate is expected to fall below 10 percent sometime this summer." Default activity is expected to rise due to slower home appreciation rates, rising interest rates and scheduled resets in option ARMS and interest only loans that became so popular during that last couple of years.

New Foreclosures Rise in California

Dataquick reports that "[f]oreclosure activity in California showed a year-over-year increase during the [third] quarter for the first time in more than three years, the result of lower appreciation rates and riskier loans."

According to the report, "[c]urrent foreclosure levels are extremely low and this increase is a step towards more normal activity. Foreclosures decline when home prices go up. As home appreciation rates come down, we expect the foreclosure numbers to go up. They could double by the end of 2006."

California Homebuyers Pushing The Financial Envelope To “Afford The Unaffordable”

The Public Policy Institute of California (PPIC) has released a twenty page report which examines current trends in housing affordability and mortgage financing in California. Despite rapidly escalating housing prices, sales of single family homes have continued at record levels. So how do California homebuyers afford to purchase homes in this market? According to PPIC, more Californians are paying a larger percentage of their annual incomes on housing costs with as many as 20% of recent homebuyers spending more than 50% of their incomes on housing, leaving them with less disposable income than ever before. At the same time, more new homebuyers are relying upon non-traditional mortgages, including option ARMS and interest only mortgages, to achieve affordable monthly payments as loan balances rise faster than borrowers' incomes. These trends suggest a potential for higher default risk if California's overheated housing markets begin to cool as many economists predict. For a summary of the PPIC report, read the accompanying press release.

Increase in New Foreclosures for June 2005

The Los Angeles Business Journal reports that new foreclosures were up 19% in June 2005. Despite the increase, however, California's default rate still remains below the national average.

Beware "Mortgage Elimination" Scams

Several of our clients have been harmed by "mortgage elimination" scams being promoted nationwide by two Northern California men, D. Scott Heineman and Kurt F. Johnson. The scheme has been marketed through Internet discussion groups, Craigslist.org, e-mail, conference calls, conventions and dozens of web sites which claim that the entire federal banking and monetary systems are illegitimate. For a fee of between $1,000 and $3,000, promoters claim that they can eliminate a mortgage through an elaborate process by which they ultimately prepare and record fraudulent documents that purportedly release the lender's security interest. In some cases, they then obtain new mortgage loans and receive as much as 50% of the loan proceeds. Among the business names associated with scheme are Capital Creation Resource, The Dorean Group, Oxford Trust, Universal Trust and DTE Financial.

Usually, lenders don't discover the fraudulent reconveyance documents until several months later when their borrowers stop making payments and they try to start foreclosure. Litigation is then necessary to cancel the fraudulent reconveyance documents so that lenders can proceed with foreclosure.

State and federal law enforcement investigations led to Heineman's arrest on May 28, 2005 and to Johnson's arrest on July 21, 2005. Both men are facing felony charges in Salt Lake City, UT, and they have also been charged with wire fraud, bank fraud, mail fraud and money laundering in the U.S. District Court for the Northern District of California in San Francisco where U.S. District Court Judge William Alsup has recently issued a preliminary injunction prohibiting the defendants from further violating 18 U.S.C. § 1341 (Mail Fraud), 18 U.S.C. § 1343 (Wire Fraud), and 18 U.S.C. § 1344 (Bank Fraud) through their “mortgage elimination” program, and from alienating or disposing of property obtained as a result of said violations. However, acolytes of Heineman and Johnson are still operating many of the same websites that promote their "mortgage-elimination" scam despite these recent law enforcement actions.

You can obtain more information from the Sacramento Bee which has been following this story since earlier this year and from this story originally published by a reporter for Inman News.

We have experience handling these matters for our mortgage lending clients. Call us today if you believe that you have been scammed.

Links to California Statutes

In California, the statutes goverining the creation and enforcement of mortgages are found at Cal.Civ.Code Secs. 2920 et seq. Other important provisions affecting the rights and obligations of lenders and borrowers are found at Cal.Civ.Code Secs. 2947 et seq.

DQNews - Foreclosures Press Release

Dataquick reports that the nine year drop in foreclosure activity throughout California appears to be leveling off.