FDIC Shared Loss Agreements Did NOT Pay Off Your Loan (No Matter What AZ Court Seems to Think)
Some urban myths just will not die.Â Remember Stella Liebeck?Â Â She won $2.7 million from suing McDonaldâ€™s in 1994, after spilling a cup of coffee in her lap and suffering third-degree burns.
Itâ€™s a story that became the rallying cry for tort reform and led to an HBO documentary, â€śHot Coffee,â€ť which featured politicians and celebritiesâ€¦ and in October of 2013, a â€śRetro Reportâ€ť video published by the New York Times about the story and how it changed drinking coffee over the years.Â The video received over one million views, and reignited the debate all over the Internet.
The only problem with the story is that itâ€™s not really trueâ€¦ itâ€™s what you’d call an “urban myth.”
Stella didnâ€™t actually win millions of dollars.Â First of all, a judge reduced the amount of the judgment to $640,000 and then McDonaldâ€™s ended up settling for â€śan undisclosed amount,â€ť which meanâ€™s something less than that.Â Her medical bills were $160,000, so you can make your own assumptionsâ€¦ maybe she walked away with a hundred grand, would be my guess.
And yetâ€¦ most people still think some woman won millions of dollars from a cup of hot coffee at McDonaldâ€™s.
Well, last Friday I came across a story on ForeclosureDefenseNationwide.com about a recent decision by the Arizona Court of Appealâ€¦ Steinberger v. IndyMac that was issued on January 30, 2014.Â Among other things, the decision apparently will allow homeowners fighting foreclosure to claim that an FDICâ€™s Shared Loss Agreement (SLA), or other third party, paid off 80 percent or more of their mortgage.
I recognized the issue immediately because it had come up beforeâ€¦ like, four or five years ago, when I was one of the first to write about the SLA in place at One West Bank as a result of taking over failed IndyMac.Â But, I never said that SLAs paid off 80 percent of anyoneâ€™s securitized loan, or that it was a way to fight a foreclosure.Â That part is an urban myth.
â€śIn a 33-page decision, the Arizona Court of Appeals reversed the trial courtâ€™s dismissal of a homeownerâ€™s Complaint challenging a foreclosure instituted by Deutsche Bank as Trustee of an IndyMac securitization.Â The decision in Steinberger v. IndyMac was issued on January 30, 2014.â€ť
It was a couple of paragraphs later that everything went completely off the rails.
â€śHowever, perhaps the most significant portion of the holding is toward the end, where the Court permitted the claim for payment/discharge of a debt on the homeownerâ€™s allegation that One West had been paid all or at least 80% of the amounts claimed due under the loan due to an FDIC Shared Loss Agreement which was attached to the Complaint.
The Court found that â€śthe agreement does appear to provide that, in exchange for One Westâ€™s assumption of IndyMac Federalâ€™s loans, the FDIC would reimburse One West at 80% for any default in payments on these loans.â€ť Â
The homeowner alleged that this agreement, â€ścombined with insurance coverage and/or other sources of reimbursement, â€ť has resulted in One Westâ€™s either being paid in full on the Note or having received 80% of the payments due on the Note.â€ť
Â Okay, so hereâ€™s the problemâ€¦ the FDIC Loss Sharing Agreements DID NOT pay 80 percent of this loan.Â How can I be so sure? Â Itâ€™s simple, really.Â There are two reasons:
- FDIC Loss Sharing Agreements DO NOT apply to securitized loans, only portfolio loans. Â Thereâ€™d be no reason for a loss sharing agreement to apply to a securitized loanâ€¦ because the bank doesnâ€™t own a securitized loan, remember?Â When it comes to securitized loans, banks donâ€™t have any “skin in the game,” right? Â So, why would you need a loss sharing agreement to cover losses on a loan that you canâ€™t lose on, because youâ€™ve already been paid?Â Answer: You wouldnâ€™t.Â FDIC Loss Sharing Agreements donâ€™t have anything to do with securitized loans.
- FDIC Loss Sharing Agreements ONLY pay covered losses after homes have been repossessed and sold as an REO. Â Â Why am I so sure?Â Because until a repossessed home is sold as an REO, no one could possibly know the extent of the loss because no one knows how much the home will sell forâ€¦ until it sells.Â Makes sense, doesnâ€™t it? Â So, as long as the homeowner is still in the home, thereâ€™s no chance the FDI Loss Sharing Agreement paid anything to anyone.
Loss Sharing Agreements are not complicated in the least.
The FDIC first introduced â€śshared loss agreements,â€ť or SLAs in 1991, and as of June 30, 2013, FDIC had entered into 302 SLAs.Â According to the FDICâ€¦
â€śFor single-family loans, the assuming bank is paid when the loan is modified or the property is sold. For commercial loans, the assuming bank is paid when the assets are written down according to established regulatory guidelines or when the assets are sold.â€ť
SLAs are not taxpayer fundedâ€¦ they were created to save the Deposit Insurance Fund money and they do that because in today’s market, asset prices are low, and selling them means offering â€śsteep liquidity and risk discounts.â€ťÂ So, SLAs allow the FDIC to sell the assets of a bank theyâ€™ve taken over without having to accept today’s low prices for those assets.
Also, because the assuming bank is only paid under an SLA when the loan is modified or the home is sold as an REO, thereâ€™s an incentive to modify, because you can modify a loan in a lot less time than it takes to take back the property and re-sell it.
The FDIC requires that the banks assuming the assets of a failed financial institution modify loans using the Home Affordable Modification Program (HAMP), assuming theyâ€™re an approved HAMP servicer, and if not a HAMP approved servicer, the SLA requires them to modify using the FDIC’s â€śstandard modification program for failed bank single-family, owner-occupied loans.â€ť
Both HAMP and the FDICâ€™s program â€śadjust the current loan terms to achieve an affordable payment by first reducing the loan interest rate, then extending the loan term, and, where necessary, offering forbearance of principal,â€ť with the goal of creating an affordable monthly payment based on a debt to income ratio of 31 percent of the borrower’s gross monthly income.
SLAs also allow banks to propose alternative loan modification programs to the FDIC for approval.
According to the FDIC, as of June 30, 2013, theyâ€™ve entered into 302 SLAs and the estimated savings are more than $41.1 billion to-date.Â (You can find a list of the SLAs in place today HERE.)
If you want to learn more about the FDICâ€™s SLAs, check out the video below, â€śLoss Sharing Explained,â€ť which was produced by the FDIC, and can be found on FDIC.gov, on the â€śLoss Share Questions and Answersâ€ť page, where youâ€™ll find lots more information about SLAs, as well.Â
The Related Urban Mythâ€¦
The other urban myth that goes hand in hand with the one about FDICâ€™s SLAs paying 80 percent of your loan, says that some kind of insurance or even credit default swap paid off your loan. Itâ€™s remarkable, if you think about it, how many people are trying to pay off your underwater mortgage once youâ€™ve stopped making your mortgage payments. Itâ€™s like thereâ€™s a rush to pay off your mortgage once you default on it.
Itâ€™s ridiculous, you should realize, if for no other reason than the fact that you didnâ€™t have to take a physical or even answer any health questions before getting approved for your loan.Â If an insurance company was willing to pay off your $500,000 loan when you defaulted, wouldnâ€™t it want to make sure that you werenâ€™t dying next month?
â€śOh sure, weâ€™d be happy to pay off Mandelmanâ€™s mortgage.Â Nah, we donâ€™t even want to ask him if heâ€™s got terminal cancer or AIDSâ€¦ weâ€™ll just cover itâ€¦ no problem.â€ť
My car insurance company wouldnâ€™t even insure my car without knowing where I park it at night, how many miles I drive to work every day, and only after pulling my driving record from the DMV.Â But you think thereâ€™s an insurance company offering to pay off my mortgage without knowing whether Iâ€™m going to live for another 30 days?
Not a chance in the world.
If thatâ€™s not enough of an explanation for you, then thank the Lord Iâ€™ve already covered this topic before, and you can read it here: Did Some Type of Insurance or Credit Default Swap Pay Off Your Mortgage?
And if you want to hear the topic explained by someone who has securitized $60 billion in mortgages, click the link below to hear a Mandelman Matters Podcast with Bill Ashmore, president of Impac Mortgage.Â (By the wayâ€¦ If youâ€™re involved in the foreclosure crisis in any way and you donâ€™t take advantage of the opportunity to listen to Billâ€™s interview, then you obviously donâ€™t want to learn anything about what youâ€™re doing.)
And seriously… every time I post something like this, there seem to be people that get angry with me for having done so.Â I donâ€™t understand it, but they do.
Well, I just want you to know that it took me around eight hours to write this article, and it takes me about the same amount of time to produce a podcastâ€¦ if Iâ€™m lucky.Â I donâ€™t do it to make anyone mad, I do it because I donâ€™t want to see homeowners pursuing a path that has no chance of accomplishing anything.
If youâ€™re unicorn hunting, itâ€™s better to find out as soon as possible, because if you get all the way to the end before you discover there are no unicorns, it may be too late to do anything else and you could lose your home.Â But if you find out earlier that unicorns donâ€™t really exist, then you can still switchâ€¦ and go shoot a deer or a moose or something.Â Get it?
Lastly, as to why the Arizona Court of Appeals got it WRONG? Â I have no idea, but they did.
Why not subscribe to Mandelman Matters and never miss an important post like this one again? Â It’s not like you’re going to find this kind of valuable information anywhere else. Â Everyone else just posted a link to the AZ decision like it was simply wonderful news… think about that for a minute. It’s free so just CLICK HERE TO SUBSCRIBE already. Â (Sheesh. Â What does a guy have to do around here… )