My question is, where’s the outrage?

Well, there is outrage but it’s all misplaced. Do not believe that the fault lay solely with your former neighbors who leveraged their homes to dimensions henceforth unparalleled so they could purchase a snowmobile for every member of the family. Yes, they were idiots. But those idiots are gone, homes foreclosed; they’re now living in the mountainless Oklahoma plains.

Direct your outrage where it rightfully belongs: at the banking institutions which were hungry for mortgages to bundle into garbage securities to sell all over the world to uninformed investors. Purported to be “Triple A” grade investments, mind you.

The housing bubble was a function of banks’ willingness to give home loans to any potential borrower who could draw breath. As the originating lenders anticipated they would sell off those mortgages rather than keep them in their own portfolios, they took on no risk and couldn’t have cared less whether those loans would later default. Underwriting became a good joke.

Close to five million borrowers have thus far been kicked out of their homes, another four million probably will be.  In September 2010 the banks foreclosed on 100,000 homes, a record month.  During the past quarter, foreclosure filings were reported on more than 930,000 properties.  HAMP has resulted in only, barely, a half a million permanent loan modifications.

Fannie Mae and Freddie Mac -- you and me, folks; we own ’em -- ultimately will be on the hook for a trillion dollars of debt. And eight trillion dollars worth of homeowner equity -- again, yours and mine -- have been “disappeared,” as they say. Actually, poached.

In Nevada, roughly two-thirds of us or more are underwater, meaning we have negative equity. In fact, the entire state is underwater: if you aggregate all Nevada real estate, the debt against it exceeds its value. Think about that.

In fact Nevada homeowners, chances are you may never have equity in your home again. You’ve been reduced to lifetime renters and your landlord is your bank.

You know the rest: the banks got bailed out with TARP funds, forgiven for their reckless stupidity. Distressed homeowners got HAMP, which, if you’ll read the following post, is an abject, colossal failure. The banks are doing great now, reaping record profits. How are you doing?

Over a year ago the Nevada legislature enacted AB 149 to help distressed borrowers hold on to their homes. I was genuinely, pleasantly surprised, thought it was actually propitious. In essence, it would require a bank to sit down with a borrower to negotiate a modification of the loan in pursuit of attempting to stave off foreclosure of the home.  The problem being addressed was the banks’ theretofore wildly incompetent servicing of the distressed loans.  If you haven’t had to deal with a bank in that context, as all my clients have, let me tell you, the frustration of the ordeal will make you cry. It’s utterly humiliating.

Unfortunately, the mediations, at least every one I’ve attended with a client, have produced far less than whelming results -- much in part to the fact that the banks still can’t get their act together so they don’t come to the mediation prepared to meaningfully negotiate. Banks use incompetence to their advantage in every instance they can and it works -- impressively.

The first at least half-hour of a mediation is comprised of faxing documents (the homeowner’s financial statements, primarily)  to the bank representative in South Carolina who has been provided them according to law serially and well within the time frame prescribed by the Nevada Foreclosure Mediation Rules. But come meeting time, the lady in South Carolina doesn’t have them. The warm bodied bench warmer who actually attends in person on behalf of the bank, many times even a lawyer, has no authority whatever but to dial a phone number and fax documents. The lady in South Carolina, then, has to crunch all the numbers rapid-fire, her ten-minutes of calculation affecting profoundly the life of the homeowner desperate for help.

Many more times than not, the proposal of the bank to modify the loan is so far short of consequential, and take it or leave it at that, that the meeting ends pretty quickly. There is no negotiation in any sense of the word. And that’s it.

The law (AB 149, statutorily NRS Chapter 107) further allows the homeowner to petition the district court for judicial review if she believes the bank did not negotiate at the mediation in good faith. One of the first cases that has been judicially reviewed is synopsized as follows. (For the record, I represented the Petitioner/Homeowner; the Respondent was Wells Fargo though it might have been any of the five big banks that service loans because they all work from the same play book.)

Facts: a mediation was had last March and the bank came to it without bothering to comply with virtually any Foreclosure Mediation Rule. (The Rules were promulgated by the Nevada Supreme Court pursuant to the statute.) One inconsequential proposal to modify the loan was made at the mediation but it was for a temporary period -- that is, it was not a proposal for a permanent modification -- and it had to be approved subsequently by investors who were not present at the mediation. In other words, the representative of the beneficiary did not have the actual authority to negotiate a modification of the loan.

The court held, in sum, that violating the Foreclosure Mediation Rules is never sanctionable, alone. Essentially, ill intent must be proved, as well, for a meaningful sanction to be imposed under the Statute/Rules. If the mediation is only “impaired” by the bank’s failure to comply with the Rules, it gets a slap on the hand and the homeowner gets a slap in the face. In this case the court held that Wells Fargo’s actions impaired the mediation but they did not rise to a level warranting a serious sanction such as a judicially imposed loan modification. The judge merely ordered a second mediation to be held and sanctioned Wells Fargo only $500.00 for the “wasted time” devoted to the first mediation. It also ordered Wells to pay for the statutory fee of the second mediation, $400.00.

Importantly, Wells was not ordered to pay anywhere close to the costs and actual fees the Petitioner incurred for the time and expense to file the petition, attend a status conference and the hearing on the petition (in essence, a mini-trial) or for submitting a post hearing brief pursuant to instruction from the court.

Though the judge found, and the Petitioner proved, that the first mediation was a waste of time insofar as Wells Fargo impaired the process, to get that finding the petition for judicial review had to be filed. After well over a year of uncertainty, which continues, the court awarded a token sanction of $500 to the Petitioner to basically get back to square one. This will most certainly discourage lawyers from helping homeowners henceforth -- no attorney can afford to represent a client for what amounts to tens of dollars per hour -- and will do nothing to deter banks from treating homeowners reprehensively.

One: let’s face it, Wells Fargo ignored every requirement of the Rules and it did so with impunity -- because these are only “technical” “shortcomings.” It doesn’t matter that the banks have flouted the Rules from the get-go and that they rarely ever abide them. (Not once have I participated in a mediation in which a bank complied with virtually any of the requisites.)  So, as made plain by the court, ignoring the Rules that require that mortgage documentation be adequately authenticated; that methodologies used by the bank to determine what an offer for a loan modification was based on or why a bank determined that a borrower didn’t qualify under HAMP; providing a confidential proposal to the mediator prior to the mediation, etc., doesn’t equate to bad faith or, necessarily, the lack of good faith. These violations are not sanctionable, or at least not meaningfully so, and only considered when other evidence showing ill intent is present. Flouting the law doesn’t matter; ill intent must be shown, a high order particularly in this context where there is no opportunity to conduct significant discovery to evidence that intent. It’s on par with proving fraud, virtually impossible.

Is not the intent of a bank to defeat borrowers by calculated ineptitude bad faith, which can be defined as “a neglect or refusal to fulfill some duty . . . , not prompted by an honest mistake as to one’s rights or duties, but by some interested or sinister motive?”  Black’s Law Dictionary

The banks have used ineptitude and neglect up and down the chain to excuse themselves of responsibility:

(1) in originating loans, by gutting underwriting and rendering supporting documentation unnecessary (e.g., “stated income” loans) so banks could lend to manifestly under-qualified borrowers in order to feed the mongers of mortgage-backed securities and collateral debt obligations;

(2) in servicing loans and playing the game of appearing to negotiate offers for loan modifications under HAMP or under their own unknowable, internal equations and throwing away or misplacing original documentation;

(3) in providing such profoundly incompetent loan servicing that borrowers are left humiliated, heart-broken and at their wit’s end;

(4) and now, in playing dumb and unable to comply with state Statute/Rules because, they claim, they don’t have the capacity to keep up with the numbers of distressed borrowers who are distressed because banks’ greed cratered the housing market in the first place.

The only process the banks have streamlined is foreclosing on distressed borrowers who should be able to keep their homes; it helps if there’s no accountability whatsoever.

To the court’s credit, Wells Fargo was sent a message: “Because Wells Fargo’s conduct resulted in a mediation that cannot be held to be in good faith, this Court finds a second mediation to be prudent. With Wells Fargo admonished as to the importance of comporting with the technical requirements, this Court is confident that the next mediation will be conducted in the best of faith and that whatever result occurs, such result will be sufficient to resolve this action.”

Wells Fargo did not get the message. At the second mediation, not only did the bank fail to comply with any of the technical requirements, it offered no modification proposal whatsoever.

Let's go back to outrage.  Had we -- taxpayers and homeowners -- not provided billions of dollars to keep these banks afloat, they would have been, in a sense, foreclosed.  Now, where's the reciprocity?  You know why distressed borrowers don't get meaningful loan modifications?  Because, in abject bank hypocrisy, they constitute a "moral hazard."   Moral hazard occurs when a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk. 

            Who says irony is dead? 

            I'm outraged and you should be.  A dead-on observation from a recent Rolling Stone article (Matt Taibbi) explains this irony: "[I]n America, it's far more shameful to owe money than it is to steal it."  The head of the Nevada Bankers’ Association sociopathically believes the Foreclosure Mediation Program is doing its job by merely giving borrowers a forum to tell their “tales of woe.”  My concern is that that’s precisely what the Program has been reduced to and that the banks have won -- or nearly killed AB 149 -– they can as a practical matter do what they please without the fear of sanctions.  When AB 149 was enacted, there was hope that the legislation would finally push banks to take loan modifications seriously.   The fact of the matter is, banks make more money foreclosing on homeowners. Period. They have no incentive to modify loans that actually make economic sense.  As is it, banks will continue dumping inventory on the market; market value will continue to free-fall indefinitely; and anyone who owns a home, whether they be a distressed borrower or not, will continue to bleed.  Far into the future.

            I own a home which is worth just about what I paid for it in 1998, down 60% in value since 2006.  Where did my roughly $100,000 in equity go?  It bought many, many snowmobiles.

...[W]e are going to focus the bulk of the financial force on bringing interest rates and mortgage rates down to cushion the fall in housing prices and help stabilize home values, which will feed into people’s basic sense of financial stability.

     That’s it?  Not that low interest didn’t create the bubble in the first place, how is it going to help with the crisis now when banks are hoarding cash?  Cushion the fall?  You’ve got to be kidding me.  Feed. . . sense. . .of stability?  The cynicism and condescension of that boggles the mind.

     At any rate, that’s been the tenor of the policy from the Treasury Department which has attempted, poorly and nonchalantly, to cobble together a strategy to help homeowners, the second wave of which are not subprime borrowers but rather took out affordable loans and are now in trouble as a result of unemployment and lost income

     In sum, homeowners, you’re on your own.  Of course, this has been painfully apparent for some time.  The president’s HAMP program (Home Affordable Modification Program) has been a colossal failure.  This one is the latest in a string of government sponsored programs to induce banks to modify borrowers’ awry loans, none of which have been at all efficacious.  You see, when Geithner was shoveling hundreds of billions of dollars into the Wall Street trough, no one bothered to think maybe a string to attach to the bailout, say a requirement that would have forced banks to modify a certain number of home loans, would be a good idea.  Instead we got, “Be nice to the borrowers, banks.”  But they haven’t been, by the longest shot; they are in fact merciless because they can be and because they make money off of foreclosures, not loan modifications.

     The only difference between Obama’s plan and his predecessor’s was the set aside of 75 billion dollars to bribe the banks to help borrowers.  Unfortunately, the payments aren’t nearly enough to humor the banks and they are not accepting the bribes -- in droves.  There are constantly roughly two million homes in the maw of foreclosure.  It’s estimated that total foreclosures since the market imploded have hit five million.  Since HAMP was enacted the number of permanent modifications that have been approved is, maybe, 200,000. 

     Most recently, in recognition of HAMP’s uselessness, the government shifted its effort from attempting to help distressed borrowers avoid foreclosure to steering them towards giving up the fight: HAFA encourages them to short sell their homes, paying them three thousand dollars to do so.  What it lacks in originality it should make up for in inevitable failure. 

     For one, short sales have proved to be unwieldy and difficult to close.  For another, banks have been paying borrowers to move from their homes in exchange for leaving the toilets intact and the drywall on the studs for quite some time already.  What’s more, in many cases to date, a homeowner is better off being foreclosed than electing an alternative, i.e., a short sale or a deed in lieu of foreclosure.  Why?  IRS reform exempts the borrower on her principal residence (not an investment property, say a rental) from tax liability on the debt “forgiven” by the bank (which previously was considered ordinary income and taxed as such).  On the other hand, the deficiency amount forgiven in the context of a short sale or deed in lieu is not necessarily exempt (this is an intricate question for a CPA, keep in mind, and I’m not a CPA).  Which could lead to an iniquitous turn of events: you lose your home AND owe the IRS $28,000.00 on the hundred thousand dollars that was written off to close the sale.

     Then too, as the banks have been reserving their right to sue for the deficiency resulting from a short sale or deed in lieu of foreclosure, you’ve just extended its period of time to recover the loss from six months (in the case of foreclosure) to six years (for breach of a written contract).  HAFA does require the bank to fully release the borrower from future liability, which is helpful, but my sense is that this program is more of the same and the banks, servicers and investors aren’t going to jump on board. 

     Now, what of the Treasury Department’s new push for reduction of principal loan balances?  First, it should have been done long ago.  It’s a flat fact known to anybody who’s been keeping up that the only way to stem the historic rate of foreclosures is through principal reductions.  Homeowners who are severely under water are many times more likely to surrender to foreclosure than otherwise, and why not?  If equity is never accrued, or there is little chance it will in your lifetime, what’s the point of owning a home that you will be renting from the bank until you die? 

     Interestingly, Geithner, until now, discouraged principal reductions, only supporting the lowering of interest rates, which has been in abject vain.  His interest in helping borrowers on main street conspicuously pales in comparison to his affinity for Wall Street.

     The tweaking of HAMP was announced a day or two after Bank of America announced its plan to help some 45,000 distressed homeowners by way of principal reductions.  You know, the media have been doing a really feeble job of reporting on the real estate mess; the B of A stories are perfect examples of laziness and credulity.  First of all, Bank of America’s latest move is not a function of altruism, it’s a response to the settlement of a lawsuit by way of which it was forced to take the measure.  Second, Bank of America is the largest servicer in the country, administering millions and millions of home loans, yet to date it has the worst record for doing meaningful loan modifications, barely in the tens of thousands. 

     So it’s quizzical why the B of A announcement was written of as some sort of triumph.  We’re talking 45,000 borrowers out of millions who are in peril of being foreclosed. 

     Remember, though tweaked, this is still the HAMP program (only expanded) which, since its inception, has only modified a couple of hundred thousand loans.  Why anybody would believe that the banks are all of a sudden going to become alacritous and help enough distressed borrowers to make any difference at all rather escapes me.  I don’t think it all unfair to suggest that they’re doing just enough to look like they’re making, or are going to make, progress, thereby assuaging the Obama administration and relieving some pressure.

     At any rate, the new wrinkle in HAMP purportedly will give a temporary break to borrowers who’ve lost their job: their payments could be reduced to 31% of their monthly unemployment benefits for three to six months.  This would be done in contemplation that the borrower will find work in that brief period.  The other twig of the program aims to give borrowers who are underwater in the range of 115% a write down of the balance of some or all of the amount in excess of 100%.  If the borrower keeps the loan current for three years, the principal reduction could stand permanently.

     The HAMP program hasn’t worked so far and probably won’t work well enough in the future to help turn around the real estate market because, again, not one bank has to modify one loan: it’s all purely voluntary. 

     So, don’t expect the market to improve any time soon.  In fact, you can anticipate it worsening before it gets better.  The tax breaks that the feds have been conferring on first time homeowners and some existing homeowners who are trading up ends at the end of this month.  Then too, there’s the impending pall of the so-called “shadow inventory” yet to deal with. 

     Standard & Poor’s posits that the current glut of foreclosed homes on the market will only worsen when banks begin unloading the shadow inventory, that is, the homes that have already been foreclosed and taken back by the banks, as well as all distressed homes that have not yet been taken back, which have yet to reach the market.  It’s estimated that there are almost three years worth of this inventory, the backlog being caused by servicers’ disorganization which has constrained foreclosures.  S&P also conjectures that this will impel the lenders to ramp up liquidation and shift emphasis away from loan modifications.

     Oh, and one more thing.  Since I began writing this article, the newspapers are reporting that the government’s appetite for keeping interest rates low has been abandoned and they are going back up.  Doin’ a heckuva a job, Timmy.

     On the bright side, if you’re an advocate for slow growth here in the Truckee Meadows, you’re kicking ass.

     Michael Radmilovich has been a practitioner of real estate law here in Reno since 1990.  Contact him at michael@radmilovich.com or 775.771.4958.



You see, the notes have been assigned, sliced up and bundled into securities and collateralized debt obligations so many times that it’s difficult to locate the note or even determine who actually owns the debt.  Until recently, banks just rolled over borrowers without following the rules.

The defense is most easily raised in states that require foreclosures to be done judicially; in other words, a court administrates the process.  Here in the West by contrast, foreclosures are carried out non-judicially.  That is, banks simply use the “power of sale” provision in the deed of trust which, after serving the notice of default, notice of trustee’s sale, etc., allows them to auction the home on the courthouse steps.  (I should clarify that in these states a lender may file a judicial foreclosure, but I’ve yet to see one.)

Why is it easier to raise the defense in the judicial foreclosure context?  In a pending foreclosure action, the borrower is already in court and she may fairly readily file a motion to force the bank to comply with the requirement.  (It cuts both ways, though: the bank is already in court, too, and can easily file a motion for a deficiency judgment against the borrower after the foreclosure, whereas in a non-judicial foreclosure state, the bank has to file a brand new lawsuit to obtain such a judgment, which is rare.)

The hurdle for borrowers in non-judicial foreclosure states, Nevada, California, Arizona, among them, is that generally a borrower must file a lawsuit to force the issue.  Of course, if you’re financially strapped to the point where you’re facing foreclosure, you’re just not able to do it. 

Banks are acutely aware of that.  They count on it.

I’ve written previously about Nevada’s new law, AB 149.  (Please see the following article.)  A wonderfully equitable requirement of the statute is that the lender must bring the original promissory note to the mandated mediation.  This gives the borrower substantial leverage that he previously could not easily bring to bear.

Where before, without filing an injunction in the brief window of time it takes the foreclosure process to run its course, the borrower had absolutely no way of knowing whether the lender could produce the note.

By virtue of AB 149, if the representative of the bank doesn’t show up at the mediation with the original note in hand, the borrower has his answer.  This alone should bring the bank to the realization that it has a major problem, which will alone give the borrower a powerful negotiation tool which he heretofore did not possess. 

If, then, the bank remains obstreperous, at least the borrower goes into court knowing she has a very promising shot at a favorable outcome.
 

The hyped programs engendered by the federal government and the big banks that have been rolled out to help distressed borrowers stave off foreclosure have thus far been all but impotent. Shamefully so. 

So the Nevada Legislature’s enactment of Assembly Bill 149 is remarkable for its logic and teeth -- namely the requirement that the beneficiary of a deed of trust (lender) participate in mediation before the trustee of the deed of trust may exercise the power of sale and the borrower’s home is foreclosed.

Why remarkable? Because, at a minimum, it should prevent the detestable propensity of these financial institutions to foreclose on homeowners while the parties are ostensibly in loan modification negotiations. You see, this happens all the time. Once foreclosure proceedings have begun the distressed borrowers have -- generally -- roughly four months to save their homes, depending on the alacrity of the given lender or loan servicer. Now, while the institution is demanding documentation from the borrower and then losing it on account of its own abject negligence or willful intransigence, the clock is ticking. Typically, as the trustee’s sale date is looming, the bank will offer a modification which will not fundamentally help the homeowner -- but take it or leave it, the foreclosure date is two days away. (Why? Banks make more money foreclosing on homes than they do modifying loans.) Or the foreclosure agent, a separate entity entirely, simply may not have been instructed by the lender that negotiations are pending and the sale date should be postponed but, because one hand knows not what the other is doing, it forecloses anyway. 

Banks know that the only way a borrower can stop the exercise of the power of sale is by way of a court-ordered injunction, but what borrower on the brink of losing her home has the wherewithal to retain an attorney, file a complaint, obtain a temporary restraining order then bankroll the hearing at which time the judge will or won’t enter a preliminary injunction? Then too, because the borrower has been strung along during the process, even if she could afford to go to court, it’s simply too late.

Assembly Bill 149, by virtue of mandatory participation imposed upon the lender, accords a de facto temporary restraining order in favor of the borrower.

To be sure, it cannot be denied that to date loan modifications, a thrown bone, have had abysmal success rates. Lenders’ concessions on principal balances are extremely rare, arrearages may simply be rolled in to the modified loan and one out of two borrowers is in trouble again six months down the line. The close-fisted banks’ and mortgage backed security holders’ unwillingness to meaningfully compromise is a big factor. Ironic since the only reason these exotic investments still live is a result of charitable taxpayers, you and me, who bailed out the financial industry in the first place. (Thanks very much Countrywide, Wall Street, investment bankers, et al.) And at bottom, the borrowers most likely to benefit from a loan modification program are the least likely to be foreclosed in the first place.

But this legislation seems propitious.

It’s administrated by the Nevada Supreme Court, Justice Hardesty being its overseer. When a homeowner receives a notice of default from the trustee vested with the power of sale after July 1st -- unfortunately for those in the maw of the process already, the legislation is not retroactive -- he or she may request a mediation with his or her lender which will be overseen by a senior judge, Supreme Court settlement conference judge or a designee.

Importantly, the default notice must include contact information from the lender or servicer for the person with authority to negotiate a loan modification on behalf of the beneficiary of the deed of trust, which is critical: If you can’t get through to someone with authority, all effort is futile. If you haven’t had the pleasure of experiencing the loan modification process, you couldn’t possibly fathom the intentionally impenetrable layers the loan servicers and banks put between you and those with decision-making authority who determine the fate of homeowners.

The homeowner must notify the trustee of the deed of trust of her intent to mediate within 30 days of service of the notice of default. The mediation must occur within 90 days after the notice of default is recorded. Also of note, the representative of the lender must bring to the mediation the original, or certified copy, of the deed of trust, the promissory note and each assignment of either. Either party may seek a determination that the other participated in bad faith and sanctions may be imposed by the district court.

The costs are reasonable: the compensation of the mediator is $400, split equally by the parties to the mediation.

The legislation appears to be the most equitable that’s come down thus far in this implacable housing crisis. But if it does only one thing, curb the all too common and abominable custom of banks that actually foreclose on borrowers’ homes while negotiating a loan modification, it’s a victory.

If say a corporation or limited liability company borrows money to purchase real property, a lender will typically insist that an individual or individuals (or another well capitalized company with a solid credit history) guarantee that the debt will be repaid. Not all lenders, mind you, will require this but certainly the ones who aren’t fool hardy enough to rely on an entity that may be under-capitalized or an entity that initially had sufficient assets but became insolvent. (You’d be surprised however how many creditors fail to seek to back-stop their risk. Then again, we advise our debtor clients to avoid guarantee agreements at all costs and advise our creditor clients they would be wildly remiss not to have one.)

If you’ve signed a guarantee, the question you have to consider is whether there are defenses to invoke if the primary debtor is in default and the creditor looks to you.

The fact of the matter is, anti-deficiency judgment statutes which preclude a lender from seeking to recover from a borrower the difference between the loan balance and the amount recouped at foreclosure, extant in some states, don’t necessarily apply to guarantors. (Typically, a lender has a limited period of time after the foreclosure sale to initiate a deficiency action; after that, it’s barred.) The point being, if the underlying security, i.e., the real property, is worth substantially less than the loan balance -- exceedingly common these days -- a creditor could forego the right to foreclose and simply file suit on the guarantee for the full amount of debt or, more likely, foreclose and sue you concurrently.

What’s more, while the “one-action rule” applies in the context of a guarantee, it’s common for the rule to be waived by the guarantor in the written agreement. In some states though, for instance Nevada, by virtue of statutory law, the provision may not be waived by a guarantor if the lien secures an indebtedness for which the principal balance of the obligation was never greater than $500,000. NRS 40.495.

The rule stands for the proposition that “but one action” may be had for the recovery of debt or for the enforcement of any right secured by real estate. Notwithstanding what it implies -- it’s not actually an either/or design -- the one-action rule requires a lender to exhaust the security before recovering from the debtor personally. If the rule is violated, the lender could lose its right to foreclose on the real estate. A guarantor, however, without the protection of the one-action rule, is not afforded the benefit of time it takes to foreclose before the creditor may file suit against him.

The crux of a compelling defense to enforcement of a guarantee is establishing that it was required simply to avoid application of the one-action rule or anti-deficiency limitations which are statutory and generally cannot be waived by a borrower. For example, if a lender requires the sole shareholder of an S corporation or the sole member of an LLC to execute a guarantee, it could very well be deemed an ill-conceived hedge. Which makes sense: if an individual does business through an entity merely to shield himself from personal liability and doesn’t follow corporate formalities or comingles personal and company accounts, under the “alter ego” theory the corporate veil may be pierced resulting in personal, unlimited liability. If, then, an entity is truly autonomous, sufficiently capitalized and adheres to corporate conventions, why should a creditor be allowed to hold shareholders or LLC members personally accountable by way of pretext?

Historically, there were other bases to attempt to defeat enforcement of a guarantee but they’ve gradually been worn away. The tried and true defenses of failure of consideration, unconscionability, mistake, etc., will invariably have to be waived by the guarantor, as will the requirement that the creditor exhaust its remedies against the “primary” debtor and foreclose on the property first.

When the terms of the underlying obligation are changed without the knowledge and consent of the guarantor, certainly leverage against the creditor may be brought to bear. Then too, a guarantor should not be held liable for a greater amount than the underlying obligation of the primary debtor. Although a well-drawn guarantee can dispel some defenses, they are certainly arguments a guarantor should pursue.

You may be at this point contemplating what, then, is the difference between a guarantor and a co-signer and, at bottom, your suspicion that there’s not much anymore is correct. Just as with a co-signor, a guarantor’s credit record will reflect the obligation and affect credit worthiness.

“A mortgage casts a shadow on the sunniest field,” so be smart.

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So here we are: several million homeowners across the country are living with the distinct prospect of losing their homes through foreclosure, thousands of them right here in Nevada where nearly one out of two homes is under water -- that is, the amount of the mortgage balance exceeds the fair market value of the home.

I’m peculiarly aware of borrowers in extremis because a portion of my firm’s practice is committed to assisting, or attempting to assist, them in avoiding foreclosure. Our experience is this: The hyped government sponsored homeowner assistance programs are impotent and the taxpayer funded bank bailouts seem designed to ensure that the moribund real estate market collapses utterly. Of the billions of dollars spent in the effort to rescue the financial institutions responsible for digging the hole in the first place, none of it is trickling down to distressed homeowners.

Each bank has a loss mitigation department that’s presumably supposed to benefit both lender and borrower. I’ve worked with many clients whose loans are owned by various banks, for instance let’s call one Wells Fargo, and the process typically goes like this: getting through to speak to a live person is the first hurdle; prepare for quarters of an hour of recordings and waiting. If you are working on behalf of a borrower, you are directed to send an authorization letter to the bank by fax only -- no e-mails. After faxing one letter half a dozen times to three different numbers provided by several different live persons, it probably won’t get into the banks “system” in due time, if at all.

Now mind you, the foreclosure sale may be impending because the homeowner has already wasted a lot of time and $1,500 to $3,000 she gave to an unregulated loan modification “expert” who did absolutely nothing that she couldn’t have done herself. By the time she gets to us, she only has a week or ten days before the sale and the employees of the bank or the loan servicer are so poorly trained and indifferent, a borrower can lose a home simply by virtue of the bank’s own abject disorganization. I do not believe this is inadvertent; I believe a decision was made at the top to resurrect Rube Goldberg and implement methods designed to not only not help the homeowner but to humiliate her in the process. You’ll speak with Shawntee, who will transfer you to Nsgu, then on to Ny Lynn and, if you’re indignant enough, to the supervisor, Denise. None of them respond substantively because the letter has been secreted in a hard drive in the bank’s catacombs. Moreover, the phone answerers have virtually no authority to make any decision -- they are phone answerers and that’s about it. They also suffer a lot of verbal abuse from near hysterical homeowners on the brink of losing their homes.

Make no mistake, contrary to logic and everything you’ve heard or read, the bank wants your home; after foreclosure, it will profit by way of originating a new loan regardless of the purchase price.

It boils down to this: taxpayers have contributed billions upon billions to the financial sector which has run the economy in general and particularly the housing market into the ground. As a result, trillions of dollars worth of homeowner equity has evaporated and foreclosed homes all over the country sit unoccupied, saturating the real estate market and driving down property values. Homeowners whose properties are under water and have little hope of building up equity in the foreseeable future are asking, Why not just walk away? And the banks are answering, Why don’t you just walk away? And the same people who brought us the crisis and whom each and every one of us are giving hard-earned money to, are the same ones who are mercilessly giving homeowners the boot.

It looks a lot like a death spiral -- an iniquitous, sickening one.

By Michael Radmilovich

Part 1: How We Got Here

“ May you live in interesting times” is a subtle but trenchant Chinese curse. These are , to say the least, interesting times for the real estate industry as home foreclosures are at record levels, the highest in a generation. Then again, prior to the great swoon of aught six, for generations housing was the best long term investment going.

And there is a school of thought which espouses that real estate remains an excellent long term investment. The question is, will the market turn around any time soon? To be sure, it’s anybody’s guess at this point; but there is cause for optimism. There better be: without it the economy is in an ineluctable downward spiral that could reverberate for decades, rivaling the Great Depression which many argue could never be repeated.

The bubble was incipient in 2001 but that was the year, roughly, when it began. Not coincidentally, it was just about the time that the dot.com bubble burst. As with all monumental economic debacles, the real estate crash was a function of irrationality -– banks making unsafe loans, borrowers acquiring mortgages with very little money down, adjustable rate mortgages and interest only loans. In more parts of the country than not, speculation was rampant, with people buying second homes as investments. Then too, of course, Bear Stearns, among others, was bundling home loans into so-called mortgage backed securities. With the same lack of regulation which gave us the savings and loan implosion, the Countrywides of the lending world were allowed to make “stated income” loans -– loans based on no verification of a borrower’s financial state whatsoever.

Mortgage brokers who played fast and loose in arranging loans between borrowers and lenders are now fiercely opposing the push for new regulation, which of course is peculiarly disingenuous: The same people who brought us the crisis are now contending that any new regulation would hinder their ability to continue making loans – and commissions -- which they urge will help the market recover.

While the result was almost unthinkable, the causes were commonsensical: With the technology stocks crash people who still had money to invest -– a lot; the dot.commers who had amassed illusory fortunes were a relatively limited group -– were looking for some place to put it. And there were few places: two or three percent returns on CDs were unsatisfactory, the stock market in general was frightening and bonds weren’t appealing, which didn’t leave much choice.

Real estate seemed like a safe harbor -– which it was in the first instance -– until everybody got on board the boat.