In my last Blog article, I wrote about how lenders and collection agencies are falsely claiming that modifying an acquisition loan makes it recourse. Under California Civil Code Sec. 580b, loans made to enable a borrower to acquire (purchase) a 1-4 unit property in which the borrower resides are non-recourse. This means if the lender forecloses, they cannot get a money judgment against the borrower for any deficiency between the amount owed and the foreclosure sale price.  Several lenders are now similarly claiming that a Home Equity Line of Credit (”HELOC”) is recourse even if it was used to purchase the home.  This is a trickier question?

By its nature, a HELOC is a cross between a home loan and a credit card secured by the property. You get the funds up fron to purchase the property like any acquisition home loan. Then, as the HELOC gets paid down, you can draw out money again up to the original amount of the HELOC like you would with a credit card.  On one hand, if it is used to purchase the property, it certainly would appear to have all the characteristics of a purchase money acquisition loan and therefore should be non-recourse. However, since additional credit draws would be in effect new loan amounts not purchase money, these would reasonably be recourse loans.  Lenders would have us believe that this additional loan ability makes the entire HELOC a recourse loan. 

I disagree.

For most home purchasers using two loans, the reason was that the first loan would be 80% and thus mortgage insurance would not be required. The 2nd loan filled in the gap between the 1st loan and the Buyer’s down payment, typically 10-15% of the purchase price.  Since these are both necessary for the Buyer to purchase the home, these are purchase money acquisition debt and would be non-recourse (assuming 1-4 unit, owner-occupied).  For the Buyer, the title of the 2nd loan would not seemingly matter. Whether the lender called it a Home Loan, Home Equity Loan, or Home Equity Line of Credit would not make a difference to a Buyer who needed the loan to purchase the home.

As stated in the 1976 case of Union Bank v Wendland, “The antideficiency statutes indicate a legislative intent to limit strictly the right to recover deficiency judgments….the purpose of that antideficiency statute is to discourage the overvaluing of the security, and the risk of inadequate security because of overvaluation is placed on the purchase money mortgagee.“  Since the lender is placing a value on the property at the time of acquisition and is making a loan secured by the value of the property at that time, the anti-deficiency protection of Sec. 580b should apply to the HELOC just as it would apply to any other acquisition loan. The only difference between the HELOC and any other loan is that the lender allows the borrower to take money back out up to the original secured amount.  And unlike a credit card, the debt is secured. So arguably, even further draws back to the original amount could be non-recourse as well. As the court said in the Union Bank case, “…. the protections of the anti-deficiency statutes can not be avoided because of some clever paper shuffling on the part of the lender. To allow such is a circumvention of the anti-deficiency statutes.”

Can a lender get around this by having a provision in the loan documents stating that the loan will always be recourse?  That is unclear.  Court’s do not excuse a borrower from not reading and understanding their loan documents before they sign.  But, given the very unequal bargaining position of the parties, I expect that the Court’s would lean in favor of application of 580b.  We’ll have to wait and see how these cases turn out, if indeed any such cases are actually filed.

Of course, none of the above is going to stop unethical lenders and collection agencies from threatening and scaring borrowers into paying money on non-recourse debt. 

If you have specific questions about your loans, liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com or call us at (916) 966-2260 for a phone or personal appointment.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/.  

As regular readers to my Blog should know, under California law (Civil Code Section 580b), if a lender makes a loan to enable a borrower to buy a 1-4 unit property which they live in, the lender has no recourse against the borrower. They can only take (foreclose) the property. They cannot get a judgment against the borrower if the property is not worth the amount owed on the loan. This is called an “acquisition loan”.  If the borrower later refinances this loan by getting a new loan, this protection is generally lost because the new loan was not obtained to acquire the property.  That makes sense.  But what about a loan modification?

Recently, several clients have had lenders (or collection companies) tell them that their loans became recourse because they got a loan modification.  From what I can see, this appears to be false and is no doubt said in an attempt to collect some money even when there is no recourse.

The First reason that this is false is that the loan and security (deed of trust) have not changed. It is still the acquisition loan and the same date of purchase recorded security.  Second, there is a rule in law called “substitution”.  The substitution doctrine applies when an acquisition loan is refinanced by the lender holding the original acquisition debt. The acquisition portion refinanced retains its purchase money character and the anti-deficiency protections of CCP §580(b) apply. (Union Bank v. Wendland, 1976).  Further there is legal authority that the protection extends to situations where the “beneficiary of the purchase-money loan ‘refinances’ the loan, ie: same lender, borrower, and security, but different loan amount.  From these sources, it appears fairly clear that a modification will not alone convert a non-recourse acquisition loan into a recourse loan.  As the court said in the Union Bank case, “…. the protections of the anti-deficiency statutes can not be avoided because of some clever paper shuffling on the part of the lender. To allow such is a circumvention of the anti-deficiency statutes.”

 We recently had a case in which our client had bought a home using 1st and 2nd acquisition loans. When she later sought a $6,000 education loan from the same lender, the lender replaced her 2nd loan with a Home Equity Line of Credit (HELOC) which included the original 2nd loan amount of $76,000 plus the additional $6,000. When the market later crashed and our client was losing her home, the lender claimed that the new 2nd loan was a refinance and thus they had recourse. They then sued the borrower for the entire $82,000.  Clearly the Substitution Doctrine should apply here at least to the $76,000. Unfortunately,  other financial issues have forced our client into Bankruptcy so this will not get resolved, but based upon the Union Bank holding and other cases, we are confident that our client would prevail on her claim that the $76,000 is non-recourse.

Of course, none of the above is going to stop unethical lenders and collection agencies from threatening and scaring borrowers into paying money on non-recourse debt.

If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com or call us at (916) 966-2260 for a phone or personal appointment.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/.  

On Monday, October 12, 2009, Gov. Schwarzenegger signed Assembly Bill 260 which, effective January 1, 2010, will ban negative amortization loans and preclude mortgage brokers from earning special fees on these high risk loans. According to the Bill’s author, Assemblyman Ted Lieu, the intent is to ban the practices that led to the foreclosure crisis that eventually triggered the recession which we now suffer. This will be good news for some but offers no assistance for the millions who remain at risk of losing their homes under their existing negative amortizing loan contracts. Although lenders will stop making such loans, they have been extremely resistant to cleaning up (modifying) such loans.

As those of you who have followed my Blogs know, the negative-amortization loan was a program offered by lenders to make loans to people who couldn’t qualify for normal fixed rate loans. Because they were marketed on a very low teaser start-rate, a great many gullible borrowers signed up believing the promises that they could later convert to fixed rate or “flip the home” for a profit. Both of these incentives were the unintended consequences of our Government’s desire in the late 1990s to expend home ownership and the American Dream.  The result was that millions of people got loans to buy homes they could not really otherwise afford. When the adjustments started happening and the homes couldn’t be flipped, this expansion of the American Dream quickly became a worldwide nightmare that we’re still dealing with.

The sad reality in all of this is that the lenders were very familiar with the dangers of adjustable rate loans from the problems in the 1980’s but it didn’t stop them from taking the fees up front and setting up this house of cards which had to collapse.  Hopefully this new law will stop such risky practices in the future and compel the lenders to be trustee stewards of their investors’ monies and their borrowers’ expectations.

Possibly this new law will add additional fuel to the legal arguments raised by attorneys seeking to stop foreclosures of these high-risk and now illegal loans. Since it is not retroactive, it does not have any legal effect on existing loans but certainly may influence a judge or jury in determining whether a loan was predatory.

If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com or call us at (916) 966-2260 for a phone or personal appointment.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/. 

With the stroke of a pen, Gov. Schwarzenegger signed Senate Bill 94 and put an end to loan modifiers who charge up front fees.  As reported in the Sacramento Bee today, the action comes following massive complaints to the Dept. of Real Estate comcerning loan modifiers who took borrower’s money - up to $4,000 - and then abandoned them. While not condemning all modifiers, the new law applies to every such company that collects up-front fees. 

Earlier this year, State and Federal crackdowns on loan modifiers limited such services to real estate licensees and mandated DRE approved contracts for any up-front fees. However, many simply ignored the restrictions. More significantly, the earlier law excluded attorneys. As a result, law firms quickly filled the gap by collecting up-front fees and then partnering with loan modifiers to do the actual work. The new law puts an end to this.

While protecting the victims of these scams, the intent of the law is to stop abuse of borrowers in trouble. Legitimate loan modifiers can still operate but they cannot get paid until they have performed all of the services promised in their contract with the borrower.  This does not require that payment only be made if the modification is successful.  Borrowers must pay the loan modification firm for the services they provided, even if the firm cannot get the loan modified. 

Furthermore, the modification firms must tell potential clients that they may be able to get the same services for free from government-approved nonprofit mortgage counsellors. You can find these by Googling under such names as “nonprofit mortgage counsellors” or “debt management consultants”. I would expect that with this latest crackdown, getting access to this free help will become much more competitive so don’t wait. Act now and be persistent.

The new law will expire on January 1, 2013 which coincidentally is the expiration date for the Federal Debt Forgiveness Relief Act.  Apparently the concensus in Washington D.C. and in California is that this real estate mess will be cleared up by the end of 2012 so loan modification protection will no longer be an issue.  We’ll hope that they are right.

If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com or call us at (916) 966-2260 for a phone or personal appointment.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/. 

As readers of my Blog are aware, the Federal Government passed a law in December, 2007 allowing debtors to avoid the tax on debt forgiveness which typically occurs through a foreclosure or short sale. Debt forgiveness is considered taxable income by the IRS even though the debtor never had the actual income. The federal Debt Forgiveness Relief Act enables most people who lose their homes between 2007 through-going budget c 2012 to avoid the tax.  Most states including California followed suit although California’s relief expired in December, 2008.

In January 2009, Assemblyman Roger Niello introduced AB 111 to extend California’s law to match the Feds. Unfortunately, in late May the Assembly voted down his Bill… most likely in response to the ongoing Budget crisis. No new Bill appears to be in the works to replace this.  “AB 111 was based on fairness and common sense. The tax revenues from mortgage foreclosures are windfall gains to the state at the expense of California’s most desperate families. The tax revenue exempted by AB 111 would not have been realized if California weren’t at the very epicenter of the mortgage crisis,” said Assemblyman Niello.

If you are burdened by an over-encumbered property that you no longer can afford, be sure to get competent legal advice on your rights and strategies to minimalize or possible eliminate your exposure to a financial judgment and debt forgiveness taxes.  If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/

As you know, a key point of President Obama’s Real Estate Recovery Plan unveiled last February was the proposal to allow Bankruptcy Court judges to reduced the principal balance on home mortgages (ie: cram-down”) to current market value.  To the cheers of upside-down homeowners and the jeers of the banking industry, the proposal was quickly brought up in the House of Representatives and was passed in mid-March with a close vote along party lines. Then it was off to the Senate where a vote was expected by Easter. It was not to be.

The banking industry found a much more receptive ear in the Senate.  The Bill’s sponsor, Sen. Richard Durbin (D-IL) fought hard for passage arguing that this was necessary to avoid a wave of future foreclosures. The banking industry countered that allowing the courts to interfere with a mortgage contract would create greater risk in the economy, deter investors, make loans harder to get, and ultimately hurt future homeowners.  The bankers bolstered their lobbying with 12,450 letters to Senators from its members and flooding their inboxed with e-mails.  In the end, pressure swayed enough moderate Democrats to join with the Republicans and defeat the Bill 51-45.  Sentator Durbin plans to continue advocating a cram-down bill in the Senate but for now it is dead. Meanwhile, the hundreds of thousands of foreclosures that have been holding off for this Bill will now likely go forward.

If you are burdened by an over-encumbered property that you no longer can afford, be sure to get competent legal advice on your rights and strategies to minimalize or possible eliminate your exposure to a financial judgment and debt forgiveness taxes.  If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/

Much has been written since President Obama proposed giving Chapter 13 Bankrupcty Judges the power to “cram-down” home loans to current market value. Leglislation to do this passed the House of Representatives in March and is now stalled in the Senate.  The general impression in the marketplace has been that, other than for consumer debt such as boats and cars, cram-down was not available.  That might not be true.

Yesterday we wrote about how a little known legal filing under Bankruptcy Code 11 USC Section 506(a) may result in a cram-down of investment property valuation. This “506(a) Motion” as it has come to be called is used as part of a Chapter 13 Repayment Plan to do the consumer debt cram-down but most recently has found favor in reducing certain loans, particularly junior deeds of trust on investment property. See yesterday’s article for more.

An additional Code Section governing Chapter 13 Bankruptcies appears to also open the door for personal residence cram-downs when the loan must be paid off in a short time, such as a 5 year balloon loan. Under 11 USC Section 1322(c)(2), when the last payment of a loan’s original payment schedule for a loan secured only by the debtor’s principle residence is due before the date on which the final payment of the Ch 13 Plan is due, the Plan may provide for modification of the amount the lender claims is owed.  While this will not apply to everyone, anyone with a short term (ie: 5 years or less) payoff date on their loan needs to know about this.

If you or anyone you know is facing loss of their investment property or personal residence, make sure that they are getting competent and comprehensive legal advice that enables them to know where they stand and to formulate strategies to minimalize their risks and hopefully keep their property.

If you think that these cram-down Motions will benefit you in coping with your upside down properties, seek the advice of competent legal counsel as soon as possible to determine if you - and your property - qualify for this treatment.  If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/

Much talk has been made recently about President Obama’s proposed “cram down” provision that would allow bankruptcy judges in Chapter 13 case reduce the principal owed on mortgage loan secured by a debtors principal residence. While the bill seems to have stalled in the Senate, another provision of the bankruptcy code may be particularly interesting to individuals finding themselves struggling to make their payments on vacation or investment properties. Under 11 USC 506, a person filing for bankruptcy under Chapter 13 can in fact “cram down” the amount owed on certain types of property to the current market value. This of course depends on the nature of the property we are dealing with.

While the provision is most commonly linked to consumer purchases, for example, an automobile, household appliances or even furniture that are bought on credit and those goods in turn secure the repayment of the credit extended, the provision also applies to mortgages other than acquisition loans on a principal residence.

Essentially the way this provision works is that the debtor can file a 506(a) motion to revalue the collateral (secured by in most cases a Deed of Trust) and seek to reduce the security to the market value at the time of the filing of the petition so as to prevent the property from being oversecured, ie, securing more debt than the value of the property. What this motion seeks to do is to bifurcate the security (split it into two parts). If the court grants the revaluation of the property, the Creditor retains a secured interests in the property only to the extent of the value of the collateral. In the situation where the value is less than the amount owed on the mortgage, that portion of the mortgage that exceeds the value of the property then becomes an unsecured debt and leaves the creditor standing in line with the rest of the unsecured creditors, seeking a pro rata share of the monthly trustee payments.

In essence the way this plays out most frequently is when a debtor purchases a second property, they can not secure financing for the entire balance of the unpaid purchase price. So the either entice a second bank to give them a smaller loan in second position (which during the housing boom, banks were entirely to eager to accommodate) or the seller would carry back a note and deed of trust in second position securing the balance of the purchase price. The debtor then finds themselves upside down on the property and struggling to make payments. So they file a Chapter 13 bankruptcy petition to reorganize their debt. At the time they file their repayment plan they also file a 506 motion to revalue the collateral. The property they bought two years ago for $400,000 which is secured by a First Deed of Trust in the amount of $340,000 and a Second Deed of Trust in the amount $60,000 is now valued at $350,000. The Court can under the bankruptcy code bifurcate the status of the Second Deed of Trust, by treating $10,000 as secured (value of the collateral = to amounts owed 340,000 on first deed of trust plus $10,000 owed on the second deed of trust) and the remaining $50,000 owed on the Second Deed of Trust then becomes unsecured.

While the provision has historically been utilized to cram down payments on personal property, most commonly automobiles, the courts are allowing qualified debtors to cram down certain mortgages. See generally In Re: Latimer, 395 B.R. 304 (Bankr.W.D.N.Y. 2008) (cram down of a second mortgage held by State Farm Bank); In re: Paschen, 296 F.3d 1203, (11^th Cir. 2002) and In Re: Eubanks, 219 B.R. 468 (6^th Cir. BAP 1998). All of these cases also involve other sections of the bankruptcy code that deal with cram down provisions currently contained in the code. But that is a whole different article.

If you think that a Section 506 Motion will benefit you in coping with your upside down investment or second home properties, seek the advice of competent bankruptcy counsel as soon as possible to determine if you - and your property - qualify for this treatment.

If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/

Many Upside Down property owners seek to sell their property and avoid foreclosure through a “Short-Sale”. It’s called this because the amount a Buyer is willing to pay is “short” of enough money to pay off the existing debt. If the sale is to close, the shortage has to be dealt with to get the lender(s) to release their lien on the title.  The whole issue is about who should take the hit on covering the shortage. Typically the Seller/borrower submits a “Hardship Package” to the lender to convince them that the Seller cannot afford to pay the difference. The lender could accept the hardship and agree to eat the difference but more and more, they’re trying to preserve a right to collect the difference from the borrower later.

A year ago, lenders often submitted a “Promissory Note” into the short sale escrow demanding that the borrower agree to repay the difference at a later time. However, in many states (such as California), the lender might be barred from seeking a deficiency if they foreclosed so most borrowers refused to sign. Short sale success rates were running 4-12%.  About 6 months ago, lenders started dropping the Promissory Note demand and instead began putting language in their short sale consent documents stating that they were merely releasing their lien and “reserving their rights” to go after the borrower for any deficiency. Again, depending upon the laws of the particular State, such a reservation may have been unenforceable and meaningless.

Recently, lenders have begun using a consent form that goes beyond the reservation of rights and actually has the borrower sign a document confirming that only the lien is released and that the deficiency will be collectable against the borrower.  This is much closer to the original Promissory Note and may equal an enforceable re-affirmation of the debt. Understandably Seller/borrowers are refusing to sign.  The result is a stand-off. Does the lender really want to foreclose? Agents and Buyers are caught in the middle. 

How should a short sale seller/borrower respond to such a situation?  First, get advice on what recourse the lender realistically has against the borrower if it goes to foreclosure. If there is none, then the borrower has much more leverage in getting the recourse provision dropped. If the lender has recourse or if their are junior lenders that would get recourse from a senior lender’s foreclosure, then the short sale is an excellent forum to negotiate a resolution of all liability.  Remember, just because the lender says they want it all, does not mean they won’t settle for less. 10% of the shortage is not an unusual settlement amount.  If you need help with this analysis, we have a $200 flat fee consultation program that can be done in person or by phone that goes through the analysis and leads to a strategy for the borrower and their real estate broker to use in the negotiation. Call us at 916-966-2260 for more information. If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/

In February, President Obama’s Homeowners Affordability and Stability Plan proposed altering the Bankruptcy Rules to allow Chapter 13 Judges to reduce (”cram-down”) the amount of debt owed as part of a repayment plan. By March 5th, the House of Representatives passed a Bill giving Ch 13BK Judges the authority to modify loans to “affordable” levels by lengthening terms, cutting interest rates and reducing mortgage balances of bankrupt homeowners. It also would permanently increase the FDIC’s coverage of bank deposits to $250,000. The measure passed the House 234-191 and went to the Senate (SB 61) where passage was expected by Easter.

Easter has now come and gone and passage is no closer. Lobbying from the banking industry has met a receptive audience in the Senate and the Bill’s sponsor, Richard Durbin, has backed off from his early strong support. Current negotiations propose limiting such authority to “subprime” loans but even that may go nowhere since Durbin has been unable to gather enough support to pass any such bill. Senator Charles Schumer suggested last week that he might seek to “tack-on” this bill to someother pending legislation to try to get a faster vote. However, many think that even if this watered down bill got through the Senate, the House would then reject it.

As it stands now, action is not likely to occur until after Memorial Day. Public comment remains split between consumer advocates who want relief now and those who say the correction must sun its course to fix the economy. Strong voices are being heard on both sides but not strong enough to put Bankruptcy cram down relief into law.

Stay tuned for further information. If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/