As the year winds down, it is time to take a look at the market and get some ideas what to expect going forward.

IT’S NOT A PRETTY PICTURE FOR UPSIDE-DOWN PROPERTY OWNERS

At the start of 2011, I believed that we would get through most of the residential foreclosures by the end of the year and that the market would focus on commercial foreclosures and loan workouts. That turned out to be way too optimistic. Ongoing troubles in financial markets in Europe, the United States, and particularly California coupled with confusion and instability amongst lenders have kept the possible buyers wary of committing. As a result, the “shadow inventory” of distressed home mortgages remains at an all-time high, even though over-all numbers are slowly dropping. Lender Processing Services (www.lps.com) reports that currently there are 6,298,000 mortgages going unpaid in the US. Standard & Poor’s estimates that at current rates, it will take at least 45 months for all of these properties to clear the system either through sales or foreclosure. A deteriorating housing picture, coupled with an increase in expenses and a drop in consumer confidence, led to a sharp decline in consumers’ financial health during the third quarter. The nonprofit credit counseling agency CredAbility puts out a regular quarterly index measuring consumer distress. Between July and September, the gauge recorded its largest drop since the third quarter of 2008. CredAbility’s data show the average consumer has been in distress for 12 straight quarters now.  As reported on my earlier Blog on November 1st, the government’s various programs to help upside-down owners have remained ineffective. Loan Modifications remain as hard to get as ever and short sales are facing resistance from junior lienholders who may find better recourse by forcing a foreclosure.
The bottom line: we cannot expect the market to truly get back on its feet until 2014 or later.

IT’S A GREAT TIME FOR BUYERS AND INVESTORS
While any market turndown means disaster for some, it also means opportunity for others. Given the extreme depth of this economic recession, the result is unprecedented opportunities for those who can act:

1) Property Prices are Down – Prices in California continue to fall. DataQuick (www.dqnews.com) reports that home prices in Sacramento County are down 9.68% from 2010 with California overall down 6.8%. REO’s and short sales make up more than ½ of all sales. Expect further declines in the short run as BofA and other distressed lenders seek to offload the high number of bad loans on their books. Their dramatic increase in foreclosure starts over the summer will skew the numbers further downward but only until they catch up with other lenders who didn’t stall foreclosures after the robo-signer debacle of Fall 2010.

2) Loan Costs are Down - On November 1st, the government raised FHA loan limits through 2013 to 125 percent of local area median home prices, up to a maximum of $729,750 in the highest cost markets. The loan limits for Fannie Mae- and Freddie Mac-backed mortgages, however, will remain at 115 percent of local area median home prices, up to $625,500. That means loans as low as 3.5% down payment for a 30 year fixed rate at 4.0% interest rate.

3) Rents are Steady & Rising – a study by www.ApartmentRatings.com indicates that rents in Sacramento have been climbing in 2011. Our experience was that there has never been much decline throughout this recession. The high number of foreclosed homes has meant a large increase in prospective renters, typically people that know how to care for a home and who will work hard to rebuild their credit so they can buy in again two to three years later.
The bottom line: Get your hands on property now – not for quick flipping but as a steady and stable investment in your future at prices and loan costs we have not seen in a great many years.

Having been a real estate investor, manager, broker, and developer for over 30 years, I’ve survived multiple economic crashes… scarred but with more knowledge to move forward. If you’re upside-down or ready to move forward with property acquisition, we can help.  To learn more, contact me at sjbeede@bpelaw.com or call us at 916 966-2260. In addition to handling all legal needs you may have, our attorneys are skilled in real estate purchase and sales, lending, property management, and negotiation.  Let BPE be your resource for real estate and business opportunity.

The information presented in this Article is not to be taken as legal advice. Every persons situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.

by Steve Beede, Robert Enos, Alexander Munn, and Keith Dunnagan

As readers of this Blog are aware, California recently enacted SB458 dramatically changing the rights of lenders who participate in a short sale. Although as we expected, this new law has made short sales much more difficult, recent experience has shown us an unexpected benefit, a ray of hope for all borrowers who previously completed a short sale and may have junior lender deficiency risk. 

Background on Deficiency Liability: California Code of Civil Procedure Section 580 contains the law governing rights of plaintiffs to obtain a judgment against a defendant. It’s principal Sections, 580a, b, c, and d, govern the rights of lenders to obtain a deficiency judgment against a borrower following a real estate foreclosure. For example, CCP 580b prohibits deficiency judgment for purchase money loans on 1-4 unit owner-occupied property. Until 2011 however there was no clear law defining liability in “short sales”. That changed last January with the passage of SB951 which added Section 580e, commonly called the Short Sale Anti-Deficiency Statute, which bars first lenders who consent to a short sale from getting any deficiency judgment against the borrower. While this was helpful, the change left unclear the rights of junior lenders who would regularly demand recourse and/or money in order to get their consent to do the short sale. This has now changed. 

Passage of SB 458 - On July 15, 2011, California enacted SB 458 which revised Section 580e and drastically changes how short sales are handled in California. The revised CCP580e now provides that:

     1) all lenders are prohibited from seeking or obtaining a deficiency judgment following a voluntary short sale (including junior lenders);  and

     2) no lender can require that the borrower make any monetary contribution to the sale proceeds.

The impact of these two provisions are tremendous for bad or good and since it’s passage we’re seeing both.

First the Bad: As we wrote immediately following the law’s passage (see Will New Law Help or Hurt Short Sales), our fear was that junior lenders would simply kill short sales and seek a better result through post-foreclosure deficiency lawsuits. That certainly has happened and currently short sale participants are scrambling to save sales through first lender, buyer, and agent contributions to junior lenders. There’s even instances of sellers supposedly “volunteering” contributions to junior lenders since under the new law such lenders cannot require them to do so. In other cases, sellers that have access to some cash are negotiating “discounted pay-offs” of junior loans removing them entirely from the short sale. But without question. SB458 made short sales much harder to complete and foreclosures are climbing.

Now the Good: Over the past four years, hundreds of thousands of short sales have been completed in California and in a great many cases sellers agreed to junior lender demands that they remain liable for any deficiency. While we are certain that SB458 bars all attempts at collection of deficiencies for short sales which close on or after July 15, 2011, the legal question is whether the new law will apply retroactively to protect sellers in already closed short sales. We have been arguing that it does and gaining great results from our clients who had been facing lender lawsuits. Here’s a sample of what we’re experiencing since the law was revised:

     (1)   A major credit union in our area unilaterally dismissed a lawsuit against a borrower who had signed a short sale approval letter in 2010 which contained a deficiency clause requiring her to pay nearly $100,000. The credit union dismissed the case because it had yet to obtain a judgment against the borrower, and believed that because the revised statute prohibits any judgment for any deficiency, it’s case no longer was valid;

     (2)    In another instance, a national lender well known for its aggressive deficiency collections settled a borrowers pre-SB458 deficiency for only 10 cents on the dollar due to the uncertainty surrounding the revised CCP580e. What is uncertain is whether the revised statute prohibits collection of pre-July 15, 2011 deficiencies. As with the nationally-known lender, the ambiguities in the statute forced the lender to accept a mere 10 cents on the dollar. Our expectation is that this will compel many lenders may make the same type of settlements.

Most importantly, if the lender has not as yet sued the borrower on a pre-SB458 deficiency, or has sued the borrower and has yet to obtain a judgment, CCP580e can be read as creating an absolute bar to any such actions. In summary, while the revised CCP580e will likely kill many short sales that would have, under the old statute, been approved, it is a ray of hope to those borrowers saddled with a deficiency obligation.

So, if you completed a short sale before July 15, 2011, or know of a past client who did so, and it contained a deficiency clause, contact one of our attorneys immediately to discuss possible defenses under the new statute.  If you’re in the middle of a short sale and having difficulty with junior lender demands, we can possibly help convince the junior lender that doing the short sale is their best option.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are a real estate professional involved with short sales or in anyway providing communication or advice to upside-down owners, be sure to get competent legal advice in your State immediately before giving any advice.

If you have specific questions about dealing with upside down loans or real estate, feel free to contact us at sjbeede@bpelaw.com. We offer a $200 flat fee attorney consultation to review your situation and help you evaluate and choose the best opportunities. This can be done in person or by phone. If interested, please call us at 916-966-2260.

While we have all looked hopefully to an improving real estate market as 2011 progressed, it is now fairly clear that we’re in for continued uncertainty as financial concerns continue to rock the economy.

On the International level, the downgrade last week of the United States’ credit rating by Standard & Poor’s has triggered a dramatic sell-off in the stock market and raising the borrowing costs for the government. This means the cost of US Treasury bonds will climb and can be expected to push up real estate interest rates for new loans. Those borrowers with adjustable loans tied to Treasury rates can expect similar increases. The biggest fear is that this, combined with instability with European financial markets, will cause businesses to continue holding onto cash instead of investing in new jobs. Business confidence and job growth is needed to lift us out of this recession and avoid further declines.

On the National level, real estate foreclosure rates continue to climb. Lender Processing Servcice reports that 217,000 new foreclosures were started in June and that 4.1 million loans are now either in foreclosure or 90+ days delinquent. This is a 13% increase from last year. What this indicates is that efforts to assist upside-down borrowers continue to fail. Plus, we’re seeing an increase of defaults among borrowers who have interest-only loans which will convert to full-pay in 2012. Without an option to modify, refinance, or sell, many such borrowers are deciding to take the hit now. The key to making such a decision is knowing whether the borrower will be at risk of a lender lawsuit for recourse after a foreclosure or shaort-sale. BPE Law’s consult services for upside-down borrowers can answer these questions for California property owners.

California remains in disarray as borrowers, lenders, and agents still try to make sense of the recently passed SB458 which amended California Civil Code Section 580e. By barring junior lenders from either deficiancy recourse or contribution, the legislature suddenly made short sales an all or nothing situation. All lenders owe their investors a fiduciary duty to try to recover as much as reasonably possible. First lenders generally make more money from a short sale than they would from a foreclosure so, this change has not substantially affected them. But junior lenders now must weigh the nominal amount offered them by a first lender (typically $3,000) against what they might recover by suing the borrower for deficiency after the first lender forecloses. Unless the borrower is clearly a Bankruptcy candidate, junior lenders will increasingly find foreclosure more attractive than short sale. For Realtors, this means further declines in short sale closing rates, more REO properties, and continued market decline.

We have a long way to go and many hurdles to cross before we reach any kind of certainty. Huge lawsuits are being filed against lenders by their investors, most recdently AIG’s $10 billion suit last week against BofA. Meanwhile, the proposed Settlement of the Attorneys General lawsuits against lenders arising from the “robo-signer” scam remains in limbo. The battle-ground there is demands that lenders modify loans and cut principal balances. The lenders refuse… or at least refuse to agree to government-imposed loan changes. For upside-down borrowers, there is no indication that anything transpiring in the economy or in the courts will bring any more hope for homeowners nor will there be any government bailout.

In the long run, as with past recessions, it will take inspiring and effective political leadership to move us forward. Today’s political infighting in Washington and in the States - especially California - has not produced any sense of confidence in the US or the World that we have the political will to make the hard decisions necessary to put our economy on a path to recovery. Any path will be painful. How that pain is balanced will remain the battle-ground.

While the real estate recession lingers on, one segment of the market is hot and competitive: buyers seeking to snap up great deals. This has led to a situation we haven’t seen since the height of the real estate bubble: multiple buyers going after the same property.  While the winner is generally determined by whose purchase offer is accepted first, sellers and their agents are finding themselves in lawsuits by angry buyers who lost out yet who claim their offer was “accepted”.  To clear some of the confusion, the following analyzes the law in California on when is a purchase offer actually accepted and enforceable.

WHAT MAKES A VALID OFFER? - Real Estate law, indeed all contract law, is based upon a relationship of “Offer” and “Acceptance”.  To be effective, a real estate Purchase Offer must at a minimum identify: 1) the Subject of the offer, ie: the Property; 2) the Consideration, ie: the purchase price to be paid; 3) the Time for performance, ie: the closing date; 4) it must be in writing; and 5) it must be delivered to the Seller or their authorized agent.  Once a Purchase Offer is delivered, the Seller then has a “Power of Acceptance”. They can accept it as is; they can reject it totally; or they can respond with different terms, ie: a counter-offer.  In most instances of residential purchase in California, prospective Buyers use forms created by the California Association of Realtors (CAR) which provides for these terms as well as many other terms that generally must be agreed upon by Sellers and Buyers to reach a clear and unambiguos agreement and to comply with California laws.

AN ACCEPTANCE MUST BE UNQUALIFIED - To be effective, an acceptance must meet the terms proposed by the offer exactly, precisely, and unequivocally. It must be unconditional, and it cannot add new terms or conditions. A qualified acceptance is a counteroffer. An offer is not accepted if the acceptance adds a new condition. An offer qualified by new terms or conditions becomes a counteroffer and accomplishes a rejection of the offer. After a counteroffer, the original offer may not be accepted by the offeree.

A COUNTEROFFER MUST BE ACCEPTED IN FULL TO BE ENFORCEABLE - The counteroffer is a new proposal that must be accepted by the original offeror. A counteroffer that is not accepted by the original offeror-counterofferee has no further legal significance, and no legal relationship is created. However, on acceptance of the counteroffer by the counterofferee, a contract is formed that is binding on and enforceable against the counterofferor.  A counteroffer includes the terms and conditions of the original offer. When an offeree makes a counteroffer, all of the terms of the original offer are incorporated into the counteroffer, except as modified by the counteroffer. Effect of a counteroffer to two offerees - When a counteroffer is made to two or more persons, each has the capacity to accept the offer. A counteroffer to two or more offerees that provides for an acceptance by the highest bid is binding on the counterofferor.

METHOD OF ACCEPTANCE IS GOVERNED BY THE TERMS OF THE OFFER - When the method of communication is permitted by the terms of an offer and is reasonable under the circumstances, an acceptance, on being placed in the course of transmission, is legally effective to create a contract. To be considered “in the course of transmission,” the acceptance must be placed beyond the control of the offeree. However, an offeror can prescribe the method of acceptance to be used. Real estate purchase contracts, including the CAR contracts, generally specify a method of acceptance that must be followed.  When the method of acceptance is specified by the offeror, no other method is sufficient.  When an offer does not require a specific mode of acceptance, any reasonable and usual method is acceptable. If an offer merely suggests a permissive method of acceptance, any reasonable manner of acceptance is effective. The offeror can specify that an acceptance is not effective until received by the offeror. When an offeror does not want to be bound to a contract without knowledge and does not want to assume the risk of actual receipt, the offer can provide that the acceptance will not become effective until it is actually received by the offeror or the offeror’s agent. With such a provision, no contract is formed unless the acceptance is actually received by the offeror or the agent prior to the termination of the offer.

THE CAR RESIDENTIAL PURCHASE AGREEMENT (5/10) contains the following terms:

1) “Acceptance” means the time the offer or final counter offer is accepted in writing by a party and is delivered to and personally received by the other party or that party’s authorized agent in accordance with the terms of this offer or a final counter offer. 

2) “Delivery” means the personal receipt by Buyer or Seller or the Individual Real Estate Licensee for that principal (unless other terms are stated).  The means of that delivery can be by messenger, mail, e-mail, fax, etc.

3) “Terms and Conditions of Offer” includes the language: “Seller has the right to continue to offer the Property for sale and to accept any other offer at any time prior to notification of Acceptance”. 

BOTTOM LINE:  To create a binding and enforceable real estate purchase contract: 1) the Purchase Offer must be clear in its terms; 2) the Acceptance must be in writing and agreeing to the exact same terms; and 3) the Acceptance must be delivered to the offeror using the method stated in the offer.

WHAT IS NOT AN ACCEPTANCE:  The simple answer is any response to the offer that does not meet the above definition. For example:

1)  An oral acceptance does not create a contract for the sale of real estate (Statute of Frauds - must have a writing).  However, other types of contracts including rental agreements can be created orally;

2)  A phone call “I’m coming to your office to accept” - it’s just an oral acceptance;

3)  When there is no real meeting of the minds: the writing says it’s accepted but the communication conveying it states that there are other terms.

AVOIDING LAWSUITS - There is no realistic ability to assure that no-one will sue another to enforce what they believe is an acceptance.  Winning that battle is another thing.  Often the filing of a lawsuit can be strategic to scare the Seller and competing Buyers.  If there is some reasonable grounds, this can be effective especially since such lawsuits tie up the property’s title (Lis Pendens).  Such grounds can include:

1)  The terms of the offer state one method of acceptance but the Seller or their agent states another - this is not uncommon with REO sales where the terms require written acceptance of the offer by the Seller but requires communication to be e-mailed through Seller’s agent;

2)  Written acceptance was delivered to agent’s office but agent didn’t personally know of it.  Is the acceptance enforceable? Possibly, but not if the terms of the offer require delivery to Seller, ie: agent is not authorized to bind the Seller so acceptance is not valid until received by Seller (unless Seller has withdrawn prior counter-offer or accepted other offer first.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. The key here is that if you are a party or agent involved in a dispute over a real estate contract, get competent legal advice in your State immediately so that you can determine your best options.. If you’re an agent, be sure to check your E&O coverage for when you must report possible claims. You could get sued by both sides. 

Here at BPE Law, we have over 50 years experience assisting and representing brokers, agents, buyers, and sellers in real estate transactions and disputes of all kinds. We know what we’re doing and we can work seemlessly with your insurors if needed.  If you have specific questions about your transaction, feel free to contact me at sjbeede@bpelaw.com. Or give us a call at (916) 966-2260.

Last Fall, controversy erupted nationwide when it was disclosed that lenders were falsifying Declarations legally required to foreclosure on defaulted property owners. The law requires that someone with personal knowledge of the facts declare under oath that the facts were true and that they justified the foreclosure.  In reality, banks were having staff members sign thousands and thousands of these Declarations without even reading them and with no personal knowledge of the facts they were swearing to.

Although the furor quickly died when banks promised to clean-up their acts, the Attorneys General of many States brought legal charges against the lenders. Last week, they unveiled a draft Settlement which contains a great many provisions which, if adopted, would end the abuses and inefficiencies which have plagued the loan modification process and led to the foreclosure of millions of homes.  Most controversial however is the requirement II.M. of the draft Settlement which would require lenders to consider and apply Principal Reductions as part of the loan modification process.  Opposition has been swift.

As reported in DSNews.com, almost as soon as the draft Settlement was released, Bank of America’s CEO, Brian Moynihan, spoke out against the principal reduction requirement saying “it would not be fair to underwater homeowners who have struggled to remain current”.  Senator Richard Shelby of Alabama stated: “This proposed settlement appears to be an attempt to advance the administration’s political agenda, rather than an effort to help homeowners who were harmed by a servicer’s actual conduct”.  And Iowa Attorney General, Tom Miller, acknowledged that “too generous a program might encourage homeowners to walk away from properties…”.  This was followed by the Chairman of the House Financial Services Committee, Spencer Bachus, who called the draft an effort to “transform the mortgage servicing industry and fundamentally change the rules that have historically governed relationships among borrowers, servicers, and investors”. He asked: “Will forcing servicers to fund principal reductions for underwater loans they service affect the incentive of mortgagors to stay current on their loans?”

Obviously the proposed Settlement is just a draft at this point and the final terms may vary greatly from the initial proposal.  But judging from the initial media reports, there is a widespread opposition to intervening in the lender-borrower relationship by compelling principal write-downs.  If the investors who provide their moneys to lenders to make loans cannot rely on their right to enforce the loan terms when there has been a default, those investors may decide to invest elsewhere. If so, the availablity of loans, especially for the riskier borrowers, will become much more difficult to obtain.  No matter what else happens, the political discussion created as a result of the Robo-Signer scam could potentially change the entire financial system for both the better and for the worse.

Please take the time to review the draft Settlement and let your Attorney General and House and Senate representatives know how you feel on this issue. Watch this Blog and others as the revisions occur.

Meanwhile, if you have specific questions about your upside down loans or real estate, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee attorney consultation to review your situation and help you evaluate and choose the best opportunities. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every persons situation is different. If you are upside-down on your loan(s), especially if youre facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.

As any observer of the real estate market knows, property pricing remains in the dumps with most sales being either short sales or foreclosures and REO’s. While the economy in general appears to be recovering, real estate has been lagging behind. 2011 is projected to see increasing foreclosures as lenders clean-out their backlog of defaulted loans. Meanwhile, we’re just starting into dealing with upside down commercial properties. For this reason, many economists project we won’t really turn the corner on real estate recovery until 2014 at the earliest.  So why might this be the best time to buy?  

1.   Properties are Undervalued - As reported in DSNews.com,  based on the latest Case-Shiller home price index, a study by Capital Economics shows that in the fourth quarter of 2010, housing was 21 percent undervalued when compared with disposable income per capital. Looking at data included in the index published by the Federal Housing Finance Agency (FHFA), the firm found that housing in Q4 was 15 percent undervalued as measured against individuals’ disposable income. Capital Economics says its results illustrate “housing is exceptionally undervalued,” and the gap is getting bigger. In its third quarter 2010 report, the research firm pegged the Case-Shiller index readings as 19 percent undervalued and the FHFA index as 14 percent below what would constitute a balanced housing value in relation to income.  This downward pressure on prices will continue as the foreclosures clear out, opening the gap even further.

2.  Financing Remains Very Affordable - On top of low prices, mortgage rates have fallen back a bit in recent weeks, leaving them even further below the 20-year average of 7 percent. Last week marked the third consecutive week that rates have continued to decline. A national survey conducted by Freddie Mac shows that the average 30-year fixed-rate has dropped to 4.87 percent, while the 15-year fixed-rate has slipped to 4.15 percent. When you wrap declining home prices and historically low mortgage rates together, Capital Economics says, “The incredibly favorable affordability and valuation environment is the housing market’s one big positive.”

3.   Government Financial Support May be Ending - As my readers know, the future of FNMA and Freddie Mac is in jeopardy. These Government Sponsored Enterprises (GSE’s) were originally created to provide a funding source for socially desireable but higher risk loans. When started, GSE’s provided funds for 30% of all loans. Today, that number is 90% and steps are being taken in Congress to get government out of the lending business or at least scale it back.  Last week, Freddie Mac published a Memo that starting June 1st, they will no longer purchase loans with loan-to-value ratios of less than 5%.  As these GSE’s retract from the marketplace, interest rates and down-payment requirements are likely to rise making home ownership less achievable.

4.  Buy to Own or Invest, not to Flip - While there will always be opportunities for the knowledgeable and dilligent to make money flipping properties, declining prices and increasing loan costs will shrink the profit margins available as flippers find it harder to re-sell.  In contrast, those who buy for their home or for rental investment will benefit from 1) locking in the profit margin between current prices and actual value; and 2) potentially higher rental values as the ranks of renters swell with people who cannot obtain a loan to buy their own home. 

All of the above factors indicate that right now may be the ideal time to buy real estate, not for quick profit but for the long-term stability and financial growth that real estate has historically provided as a part of your overall financial plans.

If you have specific questions about real estate, investments, or any other legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee attorney consultation to review your situation and help you evaluate and choose the best opportunities. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every persons situation is different. If you are upside-down on your loan(s), especially if youre facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.

As we enter this New Year, our economy remains in serious condition and millions remain in default and uncertain about their housing futures.  Yet in the midst of this mess, there is both Good News and Bad News.

First the Good News - 2011 should see some improvement in the general economy as the damage from the real estate and financial market collapse begins to resolve.  We’re already witnessing climbing values in the stock market and record prices for commodities such as gold and silver.  This may not mean confidence but at least people with money to invest aren’t keeping their money under their pillow.  Interest rates are edging up but are still historically low. Retailers have reported strong sales during the Christmas season and, in general, despite all of the political battles between Republicans and Democrats, consumers are feeling somewhat upbeat.  They’re still in pain but most can feel the healing taking place.

Now the Bad News -  This recession will not be over in 2011, particularly as it affects real estate.  While the economy may be slowly improving, businesses are being slow to expand and so unemployment remains very high.  Without greater certainty of stable employment, people are hesitant about making major purchases such as homes.  This uncertainty is causing economists to predict that California could be looking at another 10-11% drop in housing prices during this year fueled both by high unemployment and enormous State budget deficits. Millions of homeowners still face possible foreclosure as loan modifications remain unavailable to most. Further, the impact of the real estate bubble collapse is expanding:

1) Subprime Loan Borrowers - This was the first phase of damage from the recession. Although most of these sub-prime loans have by now been foreclosed or short-sold, 2011 will see another wave of defaults on those 2006-7 loans with 5 year adjustments.  As these move from interest-only to fully amortized, borrowers could see their loan payments double removing any capacity to pay;

2) Economy Impacted Borrowers - This is the second phase of the recession and it’s where we are today and will likely be for at least another year.  The tough part about a collapsing bubble is that it also causes “collateral damage” to those with good loans.  Millions have lost their jobs, or had cut backs or government furloughs that leave them unable to pay their loans. And with California’s record budget deficits, no-one has any confidence that State spending will improve.  Significantly, many economy-impacted borrowers may have other assets that they could spend to cover their loan deficiencies, but with no end in sight and further value losses predicted, many are finding it wise to “strategically default” rather than disclose their other assets to their lenders as part of a loan modification or short sale application.  For these borrowers, letting a foreclosure occur may make more financial sense.

3) Commercial Borrowers - This is the third phase and the one with the largest economic consequences.  One doesn’t have to look far to see empty store fronts of businesses that have closed terminating their jobs in the process.  Each of these also means a loss of income for the owner of the property and, added together, can cause the property owner to default resulting in a possible loss of all businesses. 2010 saw foreclosures nationwide of shopping centers and office complexes and large manufacturing companies.  Unlike home foreclosures, the failure of commercial loans often involves tens of millions of dollars in debt, loss of hundred or even thousands of jobs, and the loss of tax dollars for communities.  These problems together could bankrupt the lenders and even the communities where the businesses are located.  As a result, we’re now seeing commercial loan workout programs coming together with owners, lenders, accountants, community leaders, and others seeking to find a way to prevent the wide-spread losses that failure would bring.  We’ll likely be working on this area through 2014 and this will be the key in finally turning the corner from recession to real recovery in the real estate market.

Meanwhile, lenders are picking up the pace of foreclosures and filing lawsuits to recover loan deficiencies. In response, borrowers and governments are fighting back.  I’ll cover this in more depth in my next posting along with how you can protect yourself.

If you have specific questions about your liability in California or about short sales, foreclosure, or any legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.

As the recession has deepened and lengthened, many people who are fully able to afford the payments on their real estate loans on over-encumbered property have decided to walk-away and let the property go to foreclosure. For these people, the long time it would take to reach break-even simply doesn’t make financial sense. This practice has come to be called “Strategic Default”.   While the rights of the affected lenders will still be solely governed by the loan documents, as expected the lending industry is pushing for stronger penalties to curtail Strategic Defaults.

As reported widely on the web, Fannie Mae (”FNMA”), the government-sponsored enterprise that creates the “secondary market” by buying up mortgages, has stated that: “Defaulting borrowers who walk away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure”.  We had previously reported that both FHA and FNMA were talking 5 years for this practice so we are not surprised at this announcement.

More worrisome is the FHA Reform Act (HR 5072) which was passed by the House of Representatives with nearly unanimous consent and is now being debated in the Senate. The proposed Act contains a provision that would bar strategic defaulters from getting an FHA loan any time in the future!  This Bill was supported of course by the lending lobby, but also by the National Association of Realtors and even by that  champion of the common man, Barney Frank.  Will it pass through the Senate? Almost certainly although it’s final form remains to be seen. While the overall objective of the Act is to save the financially-damaged FHA through raising the costs of mortgage insurance, this provision is obviously targeted at stopping the practice of strategic default. 

What remains unclear despite all the hype is how to define who exactly is a Strategic Defaulter.  While obviously a person with plenty of assets and financial capacity who defaults as a business decision would seem to fit the description, that may be more the exception than the norm. More common is the person, as reported in the Washington Independent http://washingtonindependent.com/88445/strategic-default-penalties-threaten-struggling-homeowners, that suddenly realizes that they have been sinking steadily and if they don’t stop now they’ll lose everything.  Should that person be barred forever?  Of course not. What will most likely come out of this is a recommended process that upside down owners should always follow: First seek modification; then seek short sale; and only last let it go to foreclosure. For the borrower with financial capacity, the outcome may be the same but the process may infuence future borrowing ability.  Of course, if there is actual deficiency liability on the loan, the financially solvent borrower may not want to disclose their assets to the lender through a modification or short sale since this would certainly invite a demand for contribution or even for a judicial foreclosure (in California).

Lastly, there is the very real question of whether targeting strategic defaulters is fair and equitable. The loan being defaulted is a contract between the borrower and the lender that already provides remedies that the lender can take if a borrower defaults.  Both borrower and lender take on the known risks of what will happen on default. Why should government intervene in this contract to give the lenders even more remedies by effectively increasing the borrower’s risks?  Certainly the government has refused to effectively intervene to protect borrowers from the extraordinary risks in the sub-prime loans promoted by the lenders through 2007.  Meanwhile, the HAMP modification program hyped to help homeowners limps along with only 4.5% getting permanent modifications and virtually no-one getting principal reductions. 

Millions have lost their homes with no realistic assistance from the government and now this Act will not only further hurt future borrowers but will once again send a very clear message that as far as Congress is concerned, what’s good for the lenders is good for the country.  If you believe that this provision of the proposed Act should be dropped or changed, be sure to write your State Senator and make your concerns known.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are considering default on your loans, get competent legal advise in your State immediately so that you can determine your best options. 

If you have specific questions about your liability in California or about short sales, foreclosure, or any legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The wave of possible lender lawsuits against borrowers has started, primarily by junior lenders whose seconds (often HELOCS) were wiped out when a senior lender foreclosed.  We presently are representing borrowers in a number of these lawsuits and have already settled several. The most important points to remember if you are served with a lawsuit are: 1) don’t panic and ignore it. Get competent legal counsel in your State to advise you how and when to respond; and 2) almost all such lawsuits will resolve without going to trial.

There are several defenses that can be raised in defense to any lender lawsuit that may reduce or even eliminate their claim. These include:

1. Lender does not own the loan - In order to file a lawsuit against you, the lender must actually “own” the loan, that is they own and have possession of the Promissory Note.  Loans change ownership all the time and it is possible that the lawsuit has been brought by a loan “servicer” or collection company, not the actual owner. If they cannot prove ownership, they do not have “legal standing” to file the lawsuit and they should lose.

2. Loan was predatory - One of the key reasons why we had this market collapse was that from 2000 through 2006, lenders made loans to borrowers who in reality could not afford the loan.  Sometime this was done by misstating income on “stated income” or “no document” loans and often this misstatement was done by the lender, not the borrower. Other times the loan was unrealistic, such as a 1% interest rate on which the borrower qualified for the loan but which jumped up much higher after the first month.  So the buyer only qualified on month one but would never qualify on month two.  Failure was inevitable unless the buyer could quickly flip the property.  If the lender should never have made the loan, they likely will not recover against the borrower in court.

3. Loan was result of fraud - Similar to predatory loans, many borrowers obtained loans through actual fraud where the loan agent altered information supplied by the borrower or made false representations to the borrower such as:  “take this adjustable rate now and we’ll convert it to a fixed rate within a year”. For most borrowers, that loan agent was never to be found within the year, the fixed rate was not obtainable, and the increasing adjustable rate forced the borrower into default.   If the lender’s loan agent defrauded the borrower into getting the loan, they likely will not recover against the borrower in court.

4. Lender failed to do diligence - One of the biggest causes of the market collapse was that the lenders failed to exercise any diligence in checking to make sure the information on the loan application was true, such as checking tax returns and confirming the borrowers employment and income.  The banking deregulation in the late 1990’s created a flood of money in the market for new loans to be made and lenders accepted virtually any application without checking whether the loan was good. The result was billions of dollars of bad loans secured with property that was not worth the debt.   If the lender should never have made the loan, they likely will not recover against the borrower in court.

5. Lender knew the market was inflated in a bubble - The combination of banking deregulation and easy money created a huge increase in demand by possible homeowners and investors which drove up the prices on available properties, often increasing by $10,000 or more in a single month.  Developers rushed in with new subdivisions everywhere trying to fill the demand as competition for homes kept driving prices upwards.  This inflationary bubble was almost entirely fueled by high-risk loans, speculative appraisals, and the lack of real underwriting and diligence by the lenders. It was completely foreseeable to lenders that this bubble would burst but they made the loans anyway because they earned commissions and could sell the loans in the secondary mortgage market.  It was no real surprise to lenders when the borrowers started defaulting in 2005 on the increasingly expensive loans which led to the collapse starting in 2006.  If the lender should never have made the loan, they likely will not recover against the borrower in court.

6. Lender has insurance for the loss - Many of the loans made were 100% of purchase price and even more. Generally, if the loan was for more than 80% of the property value, mortgage insurance (PMI) was required. Although paid for by the borrower, this insurance paid the lender for any loss on a default. The lawsuit may be an attempt by the lender to collect on a loss that they have already recovered on through the insurance. If the lender has already been compensated for any loss, they likely will not recover against the borrower in court.

7.  Lender has been bailed out by the taxpayers - Between 2008 and 2009, Federal bailout monies paid by taxpayers (including the borrower) provided protection for lenders damaged because of loan losses.  Our government guaranteed billions of dollars in lender bad debt, guarantees that we and our children will be paying for years to come. Many consider these bailouts to be a reward for bad business practices instead of the punishment that might be deserved. If the lender has already been compensated for any loss, they likely will not recover against the borrower in court.

How Should You Prepare? - In California, the deadline for a lender to bring a claim against a borrower is four years from the date the borrower defaulted. With hundreds of thousands of borrowers just now in default, these lawsuits will be a constant threat for many years to come.  These may be joined by deficiency lawsuits following short sales to which the same defenses can be raised in addition to several other defenses unique to short sales which I’ll cover in subsequent Blogs.

Before you make any decision concerning your upside-down home or investment property, be certain to get tax and legal advice from qualified professionals in your State who can look at your specific situation and advise you on how these rules apply to you, particularly on how to identify and minimize the risks of a lender lawsuit.  This Article is solely intended to give you an introduction to key legal concerns affecting borrowers today but you should not rely on it to apply to your financial circumstances.

If you have specific questions about your liability, short sales, foreclosure, or any legal issues, feel free to contact me at sjbeede@bpelaw.com.  We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260. Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/.