For the past three years, I’ve been regularly advising upside-down property owners on the challenges, risks, and strategies of dealing with their lenders and upside down loans.  Over 2,000 borrowers and their Realtors have consulted with us to determine what they should do.  As our nation’s economy slowly recovers, some solutions have improved such as lender’s willingness to do short sales while others have gotten worse such as the failure of loan modification programs.  And we’re now defending more and more clients from lender and collection company lawsuits seeking deficiency judgments.

At the request of several clients, we’re providing the following informational links to Outlines that can help owners and Realtors know which questions to ask and learn which way to proceed.

Guide for Upside-Down Property Owners

Outline for Property Owners Seminar

Outline for Realtors Seminar

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 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 advice in your State immediately so that you can determine your best options.

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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.

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We awake this November 3rd to a changed political climate nationwide as well as here in California.  Will this bring meaninful change to ease the housing crisis? That is not likely.  What is likely is that this election signals a return to the housing expectations we held before the real estate bubble arose. Hopefully this time either common sense or regualtory control will stop the Wall Street excesses that fueled that bubble. First a little history lesson.

The roots of the housing crisis actually started back in the 1970′s with the evolution of real estate investment gurus such as Robert Allen who’s book Nothing Down started a frenzy for buying real estate that continued to grow. The only constraint was qualifying for loans.  By the 1990′s, a push was on to open the “American Dream” of home ownership to everyone. But, if they couldn’t qualify for a loan, how were they going to buy a home? That was answered in the late 1990′s by Federal deregulation of the financial markets, opening up Fannie Mae and Freddie Mac to buy the loans, and the creation of supposed insurance programs called “credit default swaps”.  Banks now were happy to lend because they could get the high-risk, “subprime loans” off their books and they had a ready supply of money through Wall Street investment firms which packaged these loans as securities and passed them off as safe investments. The problem was hat they were never safe. But, as long as there was a buyer, no-one cared.  So we ended up with the perversity of lenders offering nothing down, no payment required loans, to unemployed people who were destined to fail.  But the loans drove the demand higher and the prices higher and the sales and loan commissions higher, inflating the bubble.  Then came the crash.

By late 2006, loan defaults were increasing as original “teaser” interest rates reset to full payments that buyers could not afford. The bubble was cracking. By 2007, as defaults and foreclosures started skyrocketing, the housing bubble began cracking but this was still lost on Wall Street which did not realize (or had ignored) that these sub-prime loans now made up the majority of their investments. By 2008 however, Wall Street was in a panic as they realized that hundreds of billions of dollars of investments they had sold the American public was backed by worthless loans.  They had no money to operate and no more money to loan to banks to make more loans. The market collapsed and the entire economy was threatened.  In came the U.S. Treasury in 2008 with a series of bailouts and buy-ups to stop the damage. When the dust cleared, many Wall Street investment firms were gone, banks went under, and the American taxpayers were on the hook for 80% of the sub-prime loans which by now were held by Fannie Mae and Freddie Mac.  The only thing left was to clear out the bad loans and that led to the housing and foreclosure mess that we’re still going through today.

So what should we expect going forward?  Here’s my thoughts on this:

1.   Don’t expect help from the Government - preserving bad loans is not on anyone’s agenda and with the increased Republican control nationwide, the push will be to strengthen the economy and provide incentives to create more jobs.

2.  Expect the pace of loan resolutions to increase – While loan modification success has been dismal, Government financial incentives for principal reduction kicked in October 1st and may improve these numbers. But again, preserving bad loans is not on the agenda.  I do expect short sale success to improve as lenders finally seem to be getting it that a sale yeilds a better return for their investors than a foreclosure.  But all those HELOC second loans may get in the way as they demand full recourse or substantial payoffs.  The most likely scenario is that foreclosures will increase as lenders seek to get what they can and move on.  We’re already seeing a faster recording of Default Notices, even by BofA.  Expect this to continue.

3.  Prices are not likely to rise soon - According to the US Census Bureau, in 1900 les than half of people owned their homes. By the start of the housing bubble in 1999, that number had increased to 66.9% and, at it’s bubble peak, the rate reached 69.2% nationwide and much higher in some States.  Today, that ownership number has returned to pre-bubble levels.  Over 18 million homes stand vacant or are in default.  This supply, plus harder-to-get loans, will keep a lid on any upward price pressure for many years. 

4.  Being a Tenant will no longer be a negative – For many of us, our adult lives have been directly influenced by housing promoters and cheap money that made us feel somehow inferior if we rented rather than owned. That is now changing.  As reported by Carrie Bay of DSNews.com,  The housing market is over-subsidized. Homeownership isn’t for everyone…. For decades, America has been “over-housed” and “over-consumed.” Not only is renting gaining ground as the most practical means of housing for a larger number of consumers, but some say it could also be the answer to keeping millions of struggling borrowers in their homes and stabilizing foreclosure-ridden communities.  Stephane Fitch of Forbes claims that the fading American Dream of home ownership is cause to rejoice: “Fact is, when you look at how much it costs to rent versus how much it costs to own housing in big cities across the U.S., you discover that the cost of renting is likely to be lower. Throw in the fact that rental leases only last a year and that in most places they can be broken if the the tenants move to another city in search for a job, and I see a very good case that America is stronger if more of us decline to own homes.”  So as we look forward, perhaps a re-defining of what the American Dream really means will be in order.

We still will have problems to deal with over the next several years as this housing crisis continues. So, if you or your clients are upside down on a loan and facing foreclosure, this is a time to act to seek that modification or complete that short sale.  If you are facing a lender lawsuit, get representation and put up a challenge.

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. 

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.

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For many months, we’ve been hearing of Courts throwing out lender lawsuits for judicial foreclosure based upon falsified declarations.  Now many States are jumping in and suspending certain foreclosures.  Here’s the background in what is going on and what to expect in the future.

Each State has its own laws for handling defaulted home loans. For example, California allows both Judicial foreclosures (lawsuit in the courts) and non-judicial foreclosures (non-court Trustee Sale).  Each method has its pros and cons for lenders, but because of the speed and lower cost of Trustee Sales, that is generally used for home foreclosures. However, in California if a lender does do a Trustee Sale, they give up any right to recover a deficiency judgment on the unpaid balance.  It’s different in other States.  23 States only allow Judicial Foreclosure so their foreclosures are always Court supervised. The remaining States allow a choice of either method but only a few bar deficiency judgments after Trustee Sale.  So there are two issues arising in a foreclosure: 1) loss of home; and 2) deficiency judgment risk.

The problem for lenders first arose in the judicial foreclosure States.  As part of their legal filing, the lenders were required to provide a sworn statement as to the truth of the facts claimed in their lawsuit such as that they owned the loan and that the procedures for foreclosure were properly followed.  However, it was discovered that attorneys for the lenders were falsifying the sworn statements and in many cases simply having someone sign the form without any actual knowledge of the facts, so called “robo-signers”.  Presumably the lenders and their attorneys filing thousands of such lawsuits believed that no one would pick up on this and they hoped they could get quick results. They were wrong.  Attorneys for some defendants challenged the lawsuits and the false statements and the Courts have responded by throwing out the lawsuits.

While lawsuits get challenged all the time and typically are corrected, the extent of these falsified Complaints indicated a systemic policy of lenders committing this fraud.  Faced with potentially damning publicity and possible legal sanctions, lenders stated damage control. Last month, GMAC admitted that their employees had falsified foreclosure documents.  Recently, Chase and BofA admitted the same.  Each has stated that they are suspending foreclosures until the problem is fixed. Meanwhile, the States have started to act. on Friday, Connecticut suspended all foreclosures for 60 days.  California’s attorney general has ordered Chase to stop foreclosures or prove the validity of its process.  More are expected to follow as further evidence comes out showing the corruption in the foreclosure process.  However, other lenders such as Wells Fargo have not made any suspension and have recently indicated its intent to increase the pace of foeclosures. This is surprising given indications that Wells Fargo has also filed lawsuits against borrowers without legal merit.

These foreclosure suspensions will give affected upside-down owners some more time but they will not result in loan foregiveness.  The lenders will fix the problem and defaulted loans will eventually be foreclosed unless an alternate resolution is reached.  This means that impacted lenders will likely be much more receptive to a loan modification or short sale without deficiency recourse.  The one step that we do not expect to see is Congress or State legislatures coming to the rescue of homeowners.  They have shown no willingness to date to do anything other than bailout lenders without recourse for the terrible lending practices that drove us into this Recession.

So, if you or your clients are upside down on a loan and facing foreclosure, this is a time to act to seek that modification or complete that short sale.  If you are facing a lender lawsuit, get representation and put up a challenge. The lenders’ hope with these fraudulent lawsuits was that they would win without challenge. I’s up to you to stop them and the Courts may be willing to help.

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. 

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.

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This economic recession has brought little hope for homeowners. Despite numerous government sponsored programs such as HAMP and HAFA, very few borrowers get loan modifications and thus upside-down owners are left facing either short-sale or foreclosure.  But there may be a more effective approach… fighting back.

Part of what created this economic collapse was the willingness of lenders to make loans virtually to anyone without any real checking to see if they could really afford the loan. But with this drop of standards also came a drop in diligence in handling the loan paperwork properly. The reality is that millions of loans are legally defective and, in some cases, may not be collectible.  This has given rise to a new wave of scams by so called “forensic auditors” who, for a large up-front fee,  promise to search the loan documents for defects but more often would take the money and run.  As readers of my Blog know, I’ve opposed such approaches because, even if they found defects in the loan, the legal remedy for Truth in Lending (TILA) violations was rescission: the lender gives you back what you paid but you have to give back the loan proceeds.  This simply didn’t work.  But now, there may be new strategies available through this process that can potentially stop foreclosure, stop judgments, and maybe even force a loan modification.

I recently attended a seminar put on by a Florida company called AmStar which is in the forefront nationally of assisting lawyers in challenging lenders.  The critical issue is not TILA but rather the underlying changes in ownership of the loan and security: 1) Who really owns the loan?  2) Who really can foreclose (it’s not MERS); 3) Do the Loan Agreements conflict with HAMP and HAFA and specific State laws requiring good faith efforts to resolve loan disputes?  Courts throughout the Country are starting to rule that lenders cannot foreclose if their loan documents or handling are defective.  If the lender can’t foreclose, they’ll want to settle and that could mean a principal reduction modification enabling the borrower to keep their home.

Determining whether a borrower’s loan is defective requires several steps: 

First, a Qualified Written Request (QWR) should be sent to the loan servicer to obtain their loan documents and payment and handling history. Recent law changes require a lender to acknowledge receipt of the Request in 5 days and actually send the responsive documents within 30 days (15 day extension possible). 

Second, have the loan documents reviewed by a qualified and certified auditor to determine if defects exist and whether they are minor or fatal to enforcement of the loan.  Beware of “auditors” charging upwards of $5,000 for this service. A good residential home audit will cost approximately $2,000.

Third, if the loan documents and audit results indicate that the loan is not enforceable, then you may have good cause to get a legal injunction to stop a pending foreclosure and possibly even beat the lenders in Court. Of course, most homeowners can’t afford the legal cost of a protracted litigation. But most lenders also don’t want a Court to dig in to the validity of their loan practices. The result is a greatly increased interest in settlement which can be a win-win for everyone, especially for the homeowner that gets to keep their home at an affordable payment rate.

Are these strategies for you?  Every person’s situation is different. The information presented in this Article is not to be taken as legal advice.  If you are upside-down on your loan(s), 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.

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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.

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The feared tidal wave of post-foreclosure lawsuits has begun across the United States as lenders or their collection agencies try to collect unpaid loan balances. This Article will help you understand how to respond if you become subject to such a lawsuit.

1.  What to Expect – a lawsuit is simply a claim by one party (the Plaintiff) against another (the Defendant), which is filed in a court, asking a Judge to Order the Defendant to do something. For example, the lender sues the debtor seeking a Judgment ordering the debtor to pay the remaining debt. In many cases, the Plaintiff will not be the actual lender who made the loan. Collection companies are buying loans from lenders for pennies on the dollar then suing the borrowers for the full amount.  One company, Cohen & Slamowitz in New York, has actually automated the process and is filing 80,000 lawsuits a year!  The lawsuit has two parts: the Summons and the Complaint.  The Complaint states the facts as to why the Plaintiff claims they are entitled to a Judgment against the Defendant. The Summons is the Order for the Defendant to respond to the Complaint within a certain amount of time which varies from State to State. In California it is 30 days.

2.  How to Respond – Plaintiffs hope that Defendants will ignore the Summons and fail to file a response, usually an Answer, within the allowed time. If so, the Plaintiff will quickly get a Default Judgment and can start pursuing the collection by attaching the Defendant’s property and garnishing their wages. This is the worst possible result for a Defendant because it is giving up without a fight.  Instead, upon being served with a Summons and Complaint, the debtor should get together with an Attorney and determine how best to respond.  Often, the first response is attacking the Complaint through a legal process called a Demurrer. There are many grounds for this such as:  (a)  the Plaintiff doesn’t own the loan and therefore has no right to file the lawsuit;  (b) the lawsuit is barred by various laws of the State (in California we have several related “anti-deficiency” laws);  and (c) the Complaint is defective.  At the same time, the attorney will start the Discovery process of compelling the Plaintiff to produce copies of every document they are relying on in filing the lawsuit. While the Demurrer could actually make the lawsuit go away, it generally won’t. What it will do is force the Plaintiff to spend time and money responding which is the last thing they really want to do. So it starts the negotiation for Settlement.  

3.  Settlement Negotiations - At the start of a lawsuit, the Plaintiff wants to collect everything and the Defendant wants to pay nothing. While both sides want to win at trial, only one side will. Settlement eliminates that risk and avoids the heavy financial and emotional costs of lengthy litigation, usually well over a year.  In Sacramento, CA where we are based, 98% of lawsuits will settle before trial. The hard part is reaching an agreement. Inevitably the Plaintiff will feel they got too little and the Defendant will feel they paid too much, but both will agree that the settlement is better than the alternative of continuing in litigation. There is no standard percentage that determines settlement. Rather, it is a complex evaluation of the Plaintiff’s evidence, the Defendant’s defenses and financial capacity, and the likely outcomes. For example, earlier this year a lender sued our client for $280,000 owed on an equity loan after a foreclosure. The Lender settled for $16,000. In several others, Plaintiffs have dismissed the lawsuits when faced with our defenses. And still others go forward.

4.  Going to Trial – If Settlement fails, then at some point the Complaint will go to trial at which time the Judge and/or jury will hear all the testimony and see all the evidence and then determine who wins and who loses. The winner gets a Judgment and can try to collect from the loser.  In lawsuits relating to loans, the biggest risk is the award of attorney fees. Most loan documents allow the winner to be awarded what they spent on attorney fees and legal costs. This can be bigger than the loan amount and it generally is far more than an upside-down debtor could ever afford to pay.

5.  The Role of Bankruptcy – The Bankruptcy laws of the United States are designed to give an insolvent debtor a “fresh start” if there is no way they can pay their debts. While some attorneys would recommend filing Bankruptcy if faced with a lender lawsuit, this is not necessarily the best solution for everyone. For example: First, other than this bad debt, the defendant may have other assets they want to keep; Second, by responding to the lawsuit, the defendant may be able to settle the debt  or avoid it entirely; Third, Bankruptcy will stay on the debtor’s credit for 7-10 years; and Fourth, the defendant may not even qualify for Bankruptcy. So, while it is one solution, Bankruptcy is not always the best solution.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different.  If you are facing a lender lawsuit, do not ignore it. 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.

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There’s been a lot of cheering lately for the news that on June 3rd, the California Senate passed SB 1178 that would extend deficiency judgment protection to include refinances. Under existing California law, a homeowner generally has no liability to repay the lender for any deficiency between the value of a foreclosed property and the amount owed to the lender. This “anti-deficiency” law only applies to owner-occupant loans obtained to purchase a 1-4 unit property.  SB 1178 extends this anti-deficiency protection to any refinance of the original purchase money debt.  Whether this protection will include “cash-out refinances” is questionable although I understand that the Bill’s proponent, California Association of Realtors, is seeking that result.

What has gotten lost in all the cheering is the reality that SB 1178 will not go into effect until June 11, 2011. It is intended to stop lenders from bringing deficiency lawsuits against borrowers after that date. Nothing stops lenders from bringing deficiency actions before that date where they would have such a right under current law. In most circumstances, these would be lawsuits brought by “junior” lenders whose security gets wiped out by a senior lender’s foreclosure.  A lot of these are being filed right now.

A lot could change before the final form of this measure gets through the Legislature and is signed by the Governor. Presently the Bill is in House committees and the next hearing will be late this month.  Various challenges and clarifications are being discussed and there is no certainty at this point when or if this Bill will get passed or what a final form will look like.  We’ll keep you informed as it progresses.

Meanwhile, if you are facing a lender lawsuit or if you have specific questions about your liability, 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.

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The rights and responsibilities of lenders in dealing with upside-down loans are governed by State as well as Federal law.  In all cases, lenders must act “in good faith and with fair dealing” and comply with the law. However, in at least two recent actions in California, Wells Fargo appears to indicate that they consider themselves above the law and can do whatever they choose:

1)  A Buyer and Seller entered a Short Sale Agreement to which Wells Fargo consented as long as they completed the sale by May 31st.  Everything went well and the Buyer obtained his financing by mid-May and was ready to close escrow. However, on May 11th, Wells Fargo breached their own short sale consent and foreclosed.  They admitted this was a mistake and, even though a fix was easy because they ended up with the property, they have refused. Their only suggestion was that the Buyer could attempt to buy it when Wells Fargo puts it back on the market.  It apparently doesn’t matter to Wells Fargo that the Buyer loses the money he spent pursuing the purchase; the Agent loses the sale commission they earned; and the Seller suffers greater credit damage with a foreclosure on their record. And of course, Wells Fargo’s own investors will likely lose more in an REO re-sale. The Buyer, Seller, and Agent have now filed suit against Wells Fargo to force them to rescind the foreclosure and honor the Short Sale Agreement and the title to the property has been clouded with a Notice of Pending Action (“Lis Pendens”) stopping any re-sale.  We’ll keep you informed as this progresses.

2.   In another more incredible action, Wells Fargo has actually filed a lawsuit against a Borrower without even foreclosing!  In California (and most States), a lender who makes a loan which is secured by a lien against the real estate must foreclose first before they have any right to pursue any claim against a borrower for a deficiency. This is called the “Security First Rule”. In this case, Wells Fargo made a home equity loan to a property owner which was secured with a Deed of Trust against the property. The owner subsequently defaulted on the loan. But, instead of foreclosing, Wells Fargo filed a lawsuit against the borrower, failed to identify in the suit that the loan was secured with the real estate, and instead have treated this like an unsecured personal loan. When confronted with this breach of California’s real estate laws, Wells Fargo (through their attorney) has refused to dismiss the lawsuit and comply with the law.  While this reaction demonstrates a very troubling arrogance, it is equally troubling that their attorneys would knowingly violate California law.  Sadly, in this case, the property owner cannot afford to challenge Wells Fargo’s actions in Court.

There is no question that these are tough times for lenders as well as borrowers. The lenders created a house of cards by making loans that should never have been made to borrowers who could never have afforded them if they were priced according to economic reality. It could only have worked if real estate prices continued to climb forever. But the real estate economy never works that way. Booms are always followed by busts usually every 6-10 years. The lenders knew this even if the gullible borrowers did not. 

This reality doesn’t excuse borrowers from defaulting even if it was foreseeable. The laws on breach of contract are clear… don’t pay and you’ll be foreclosed. But the borrowers distress certainly doesn’t give the lenders such as Wells Fargo any legal right to disregard the law simply because they think the borrower can’t afford to stop them.  It is exactly this arrogance that has caused Americans to attack Wall Street for its greed and lack of concern for the damage caused to its investors.  In the lending industry, Countrywide paved the way for the economy’s collapse by promoting subprime loans.  Wells Fargo in contrast acted responsibly and maintained their reputation for sound lending. Now however, Wells Fargo’s apparent lack of concern for the law may undermine not only its reputation and further damage its borrowers, but may also promote a broader distrust of the lending industry at a time when trust and credibility are needed most. 

We’ll keep you posted as these and other similar cases move forward. Meanwhile, if you’ve been challenged with a wrongful foreclosure or if you have specific questions about your liability, 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.

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One of the most critical and least known questions facing sellers, agents and lenders is whether the lender can really come after a borrower for a deficiency after a Short Sale. While the answers may vary according to the laws of your State, here in California the answer is a solid “maybe”.  Meanwhile, lenders will continue to seek to put deficiency recourse language in their Short Sale Consent Agreements and the borrowers and their agents will continue to seek the removal of that language.  While the presence or absence of recourse language may be enough for the Courts, that remains unclear for the reasons set forth below. This lack of certainty causes many short sales to fail and, until this issue winds its way through the legal system, no-one can know for sure whether a lender has any rights to collect a deficiency . But there are good arguments for both sides. 

A.  LENDER ARGUMENTS IN FAVOR OF RECOURSE:

1)   It is a Modification not a Release – A short sale is in effect a modification of the terms of the loan.  The lender has agreed to release their lien on the borrowers property so the property can be sold.  The lender agrees to do this without getting paid in full.  Arguably, the Short Sale agreement only modifies the terms referenced in the agreement. Unless the short sale agreement expressly waives recourse against the borrower for the unpaid balance, the lender may argue that they still possess the right to collect on the deficiency after the short sale is completed. 

2.  Unfair to penalize lender if Borrower is otherwise liable – In California, some loans are non-recourse such as a loan obtained to buy the home you live in. However, these “anti-deficiency” protections kick in when there is a foreclosure. These rules might not apply in a voluntary transfer such as a short sale. When there are no such protections, ie: non-purchase money or refinance or investor loan, the lender could have recourse against the borrower through the foreclosure method used. So, lenders would argue it is not fair to deny them the recourse that the borrower already agreed to in the loan.

B.    BORROWER ARGUMENTS AGAINST RECOURSE

1.   Short Sale is an “Accord and Satisfaction” – The short sale is inherently an agreement for resolution of a dispute between the borrower and the lender as to how much must the borrower pay.  In completing the short sale and receiving money they otherwise would not have received, they have arguable settled all claims. The “Accord” is the agreement; the “Satisfaction” is the money the lender received.

2.  Seeking Deficiency Violates the “Single Action Rule” – California only allows a lender one shot at collecting a debt. Arguably, the negotiation of the short sale and the lender’s acceptance of money from the Buyer is a collection action. If so, then the lender would be legally barred from filing a lawsuit against the borrower to collect anything else.

3.  Seeking Deficiency Violates the “Anti-Waiver Rule” – California real estate law provides that, if there is a default, the lender must take the security first (foreclose on the property) before going after the borrower for anything else.  There are only a few exceptions to this Rule which could allow a lender to “waive” the security and sue the buyer, ie: such as bringing hazardous waste onto the property; or destroying the property’s value by stripping out the plumbing or electrical systems.  These conditions do not exist in a short sale. Yet arguably what the lenders are doing is waiving the security to allow the short sale to be completed. If that is in fact a legal “waiver”, then the lender may be legally barred from coming after the borrower for a deficiency.

4.  No “Consideration” for waiving or modifying – Any contract or any modification requires that there be an equal trade of benefits and burdens. The borrower gets the benefit of the loans to buy the property but also gets the burden of having to repay what they received.  The value of what is exchanged by each of the parties is called the “legal consideration”. When only one side gets a benefit, there is what is called a “failure of consideration” and the contract may not be enforceable.  Arguably, this same requirement exists in a short sale:  the lender is getting money now and that’s a benefit but what is the benefit to the borrower?  They’re losing their property: that’s not a benefit;  they’re getting no money out of the deal: that’s not a benefit; they’re going to get taxed on any debt forgiveness: that’s not a benefit;  If the lender does have a right to pursue deficiency recourse against them, that’s definately not a benefit.  So, what benefit does the borrower get out of a short sale that would be sufficient consideration fore remaining liable for a deficiency?  Not much, if anything at all.  Arguably then, if the consideration is insufficient, then the lender’s right to waive the security and pursue a deficiency should fail for lack of consideration.

5.  Additional Arguments – Creative attorneys will find a fertile field of additional legal arguments to be raised in defending borrowers against lender deficiency claims. These can include a) the loan should never have been made; and b) the lenders caused the crash, why should they profit from it.

Who’s arguments prevail will be determined in the Courtrooms across our Country in the next few years to come. Initially rulings will be made by Judges in the local courts and they could vary greatly. In time, these inconsistent rulings will be challenged in the Courts of Appeal until a clear legal answer becomes apparent. Of course, Congress could pass a law and give us an answer now but I wouldn’t hold my breath waiting for that to happen.  Meanwhile Lenders will seek to put language in their Short Sale Consent Agreements requiring the borrower to agree to deficiency liability

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/

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