As many already know, the California legislature passed SB 401 on April 9th. While Gov. Schwarzenegger originally said he would not sign the Bill due to tax riders, but he signed the Bill yesterday  and it is now law.  California law will now be aligned with the Federal Mortgage Debt Forgiveness Relief Act and will give CA owner-occupant property owners debt forgiveness tax protection through 2012 and retroactively running from 2009 (2007-2008 already protected). To learn more, read today’s article by Jim Wasserman in the Sacramento Bee: http://www.sacbee.com/2010/04/13/2674065/california-wont-tax-forgiven-home.html.

There is some confusion in the Blogging world concerning debt forgiveness relief.  Some believe that the forgiveness automatically exists if the loan or loans were acquisition loans (1 to 4 unit, owner-occupied). This would be correct if the owner never refinanced and stayed owner occupant throughout. But it would not be correct if the owner later moves and rents the propertyout.  If you are in this situation, be sure to check with your accountant to determine how this will apply yo your situation.

If you have any questions concerning your rights and obligations concerning real property, foreclosure, or any related issues, please feel free to contact me at sjbeede@bpelaw.com or contact my office at 916 966-2260 for a confidential appointment by phone or in person.

Last week I posted comments on the Home Affordable Foreclosure Alternatives program which is taking effect on April 5th. I was not very complimentary and in fact was pessimistic as to its impacts on the economy. While those negative sentiments may still prove true, I have since then taken a closer look at the program and spoken extensively with lenders, real estate agents, and upside-down borrowers. From this, I must now admit I see a lot to like in HAFA… if the lenders will cooperate.

HAFA has two parts: First an attempted Short Sale and then, if that fails, a Deed in Lieu of Foreclosure.  Since it was designed as an add-on to the Home Affordable Modification Program (HAMP), the particpation requirements are the same: principal residence, first-lien mortgage, serious delinquency, unpaid balance under $729,750, and a mortgage payment over 31 percent of gross income.  If a borrower fails a modification or is denied a modification under HAMP, then they can enter the HAFA program and their lender must participate. 

Short Sale - There are several benefits to pursuing a Short Sale through HAFA compared with doing so outside of the Program: 1) Lenders will pre-approve what will be an acceptable sale price;  2) The Application must be considered within 30 days; 3) Up to $3,000 is provided to satisfy the liens of junior lenders (juniors must release their liens); 4) Borrowers can get $1,500 in moving assistance; 5) Real Estate Agents get commission protection; and most importantly 6) No Deficiency judgment is allowed against the borrower.  These are all very good benefits that will both speed up short sales and improve the market.  The downside is whether lenders will actually cooperate with the HAFA program. They are only compelled to consider the Short Sale Application, they are not compelled to approve it.  Nevertheless, cooperation may grow as lenders realize that it is in their own best interests to get the Short Sales done and remove upside down properties from the market faster.

Deed In Lieu - This is an important addition as well.  Currently, if a short sale fails, the property goes into foreclosure with  all of the negative consequences of credit damage, job impact, and depending upon the State, potential recourse liability.  The HAFA Deed in Lieu program eliminates this.  The 1st lender will accept a Deed transferring ownership of the property to the lender. Any junior lenders must agree to release their liens and any recourse. if this occurs, foreclosure and all of its impacts are avoided.

Will all of the benefits of HAFA work? We’ll all have to wait and see how the Lenders respond.

If you have any questions concerning your rights and obligations concerning real property, foreclosure, or any related issues, please feel free to contact me at sjbeede@bpelaw.com or contact my office at 916 966-2260 for a confidential appointment by phone or in person.

As readers of my Blog know, there has been very, very little help provided by any government programs that theoretically are to help troubled homeowners keep their homes.  Even less help has been provided by the lenders.  The original Hope For Homeowners program failed to get lender cooperation. This was followed last year with the Home Affordable Mortgage Program (”HAMP”) which also has failed to deliver any substantial help to upside down borrowers.  And now, effective April 5th, the government will open their newest program, the Home Affordable Foreclosure Alternatives Program (”HAFA”).  Significantly, this Program is being introduced as a part of the HAMP program but it has nothing to do with helping people keep their homes. Rather, it is designed to assist lenders in getting the existing owners out through a short sale or deed in lieu of foreclosure. 

The sad reality of HAFA is that it effectively gives the lenders what they wanted… a politically correct reason to deny modifications (which they don’t want to do) and a faster way of getting the existing owners out (which they do want to do). So, for upside-down owners, there’s no help in HAFA.  But for our economy, the results may be even worse.

Today’s real estate market, especially in California, is operating on an artificial economy.  The lenders are holding back putting all of their foreclosed properties on the market. This keeps the supply down and keeps prices up.  The lenders could put more properties on the market but that increase in supply would cause prices to fall since demand by buyers is not growing. The result of this is that the lenders have been slowing down the foreclosure process so they don’t get more properties that they’ll just hold back.  But since all of these must eventually get sold, this means that it will be many years before our real estate economy is not driven by the lender’s inventory of foreclosed homes. And, thanks to HAFA, it may now get much worse.

Under the rules of HAFA, all lenders that participate in the HAMP program must participate in HAFA. This means that if a lender denies a homeowner a modification under HAMP or the modification fails or is not accepted, the lender must offer the homeowner a short sale or a deed in lieu of foreclosure and our government (we the taxpayers) will pay the lenders and borrowers to participate.  This will speed up the change of ownership.  But what will be the effect on the already over-supplied real estate economy?

According to the lending industry information service, Mortgage News Daily, as of the end of 2009, only 4.3% of all HAMP modifications resulted in permanent loan modifications. Over a million trial modifications are in process. Unless the permanent modification numbers increase dramatically, we could be facing an additional 950,000 short sales and foreclosures coming on the market.  This would be a disaster as these get added to the already over-supply driving down the values of property. Existing buyers, investors, and lenders would be scared away from an unstable market and the problems in the economy would become even worse.

Is there any solution?  Well if the objective is to help people keep their homes through loan modification, then there needs to be a way to compel lenders to reduce principal amounts owed. If lenders continue to refuse, then Congress should pass the Chapter 13 Bankruptcy Reform which the Senate shut down last year. Alternatively, compel lenders (particularly BofA) to waive deficiency recourse so that everyone can move on.

Sadly, there remained no Hope for Homeowners in that program and Making Home Affordable has not made homes more affordable. HAFA gives up on the hope of helping owners stay and instead will only help owners go. Unfortunately, this may hurt us all.

If you have any questions concerning your rights and obligations concerning real property, foreclosure, or any related issues, please feel free to contact me at sjbeede@bpelaw.com or contact my office at 916 966-2260 for a confidential appointment by phone or in person.

California law requires that property owners must return the tenant’s security within three weeks from the time the tenant vacates and document any deductions. When ownership is transferred to another, the former owner is required to either transfer the deposits to the new owner or return them to the tenant.  But what happens when the property is foreclosed and the former owner that collected the security deposits is gone or even bankrupt?

Under California Civil Code Section 1950.5, a successor owner is jointly liable with the former owner to retun the deposits once the tenant vacates. The idea is that the innocent tenant’s right to the deposit should be protected and that any disputes over this are between the current and prior owner, not then tenant.  There is an ambiguity being argued by lenders that this obligation is extinguished by the foreclosure just as is the rental agreement itself.  This may be held to be true where the post-foreclosure owner treats the rental agreement as extinguished. In that case, the tenant similarly has no obligation to pay the rent and so the situation may become a wash.  But the result is reasonably different where the new owner treats the rental agreement as continuing and actually collects rent.  There, most likely, the law will protect the tenant.

Despite the above-stated ambiguity, all perties acquiring property through a foreclosure must anticipate that they will likely be liable for the tenat’s security deposit that was collected by the former owner. Further, they should make sure that they have a new rentail agreement signed by the tenant if the rental is to continue.

If you have any questions concerning your rights and obligations concerning real property, foreclosure, or any related issues, please feel free to contact me at sjbeede@bpelaw.com or contact my office at 916 966-2260 for a confidential appointment by phone or in person.

As borrowers continue to grapple with upside-down loans and short sales and foreclosures continue to climb, the risk of debt forgiveness tax becomes more important, especially for investors who do not have the personal residence exclusion from Federal taxes on forgiven debt.  “Debt Forgiveness” occurs when the lender doesn’t get paid all that they are owed and they are not going to pursue you for any unpaid balance.  Although the risk of a judgment on the unpaid balance goes away, you can be taxed on the amount of forgiven debt as if it were income you had earned,. This is often called “Phantom Income” because you never really saw it but you are still affected by it.  As I discussed in prior Blogs, the Federal government has relief from this tax on personal residences through 2012. California has no relief.  Luckily, both have an “insolvency Exclusion” that may apply and which can enable a debtor to otherwise avoid being driven into Bankruptcy. Since Bankruptcy has far greater potential negative consequences than a short sale or even a foreclosure, the possibility of avoiding these taxes without filing Bankruptcy is important. Here’s how the Insolvency exclusion works.

As set forth in full on IRS Publication 4681 “Cancelled Debts, Foreclosures, Repossessions, and Abandonments” http://www.irs.gov/pub/irs-pdf/p4681.pdf, Insolvency is determined by first listing the fair market value of all of your liabilities immediately before the debt forgiveness event (short sale or foreclosure). Next you list the fair market value of all of your assets at the same point in time.  Next, you subtract your assets from your liabilities. If the result is zero or less, ie: your liabilities exceed your assets, then you are insolvent.  Page 6 of Publication 4681 has the actual worksheet you can use to make this calculation.  Once the insolvency is determined, you report this on your tax return through the use of IRS Form 982 http://www.irs.gov/pub/irs-pdf/f982.pdf. 

California appears to draw it’s insolvency determination from the IRS Form 982. California’s taxing agency is the Franchise Tax Board (”FTB”). As stated in the FTB Tax News dated February, 2010 http://www.ftb.ca.gov/professionals/taxnews/2010/February/Article_8.shtml “if the loan is recourse indebtedness and the debtor incurs cancellation of indebtedness income (CODI), IRC Section 108 provides certain exceptions in recognition of that income. One of the exceptions applies where the taxpayer was insolvent (total liabilities exceed total assets) when the CODI was realized. The exclusion only applies up to the amount of insolvency, i.e., to the extent the liabilities exceed the FMV of the assets”. However, California law does not conform to all of the provisions currently available in IRC Section 108.

The key is this:  If you are an upside-down borrower facing a debt forgiveness tax as a result of a short sale or foreclosure, you may be liable for debt forgiveness tax and may queslify for the insolvency exclusion. Be certain to get tax advice from a qualified professional who can look at your specific situation and advise you on how these rules apply to you.  This Article is solely intended to give you an introduction to what might be available for you but you should not rely on it to apply to your financial circumstances.

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/.

Every upside-down property owner is aware of the risk of a lender seeking a deficiency judgment for any amount of the loan that remains unpaid after short sale or foreclosure. Depending upon the laws of the state where the property is located, they may or may have any such right.  This issue of “recourse” is the first thing that I, as a real estate attorney, look at when advising borrowers and is the #1 reason that short sales fail (learn more in previous blogs).  But lately the question has been arising about whether a Mortgage Insurance Company has recourse if they pay-off a deficiency.

Private Mortgage Insurance (generally called PMI) is typically required by a lender anytime you borrow more than 80% of the purchase value of the property being acquired. In essence, you buy an insurance policy to protect the lender from the increased risk of loss with a higher loan-to-value ratio.  So you pay and the lender is the beneficiary. Here’s where it gets tricky.  An insurance policy is a contract between you and the insurance company for the benefit of a beneficiary. Like any agreement, the rights of the parties are governed by the terms of the contract and the laws of the State.  You pay for the policy in order to get the benefit of the lender giving you the loan… not for the benefit of avoiding a deficiency if there is a default (although this may be a reasonable belief if it is even considered at the time of the loan).  Thus, the policy may protect the lender from a deficiency and protect you from the lender’s claims but the policy may also provide that you must reimburse the insurer for any such payouts.  This is similar to your auto insurance which may pay a damaged third party for injuries suffered in an accident which you caused. The policy pays the injured party and you may have to reimburse the insurer for all or a part of what they pay out.  Again, the language of the insurance contract governs the rights of the parties.

But in the upside-down homeowner situation there are additional confusing issues. First, there must be an actual deficiency between the amount owed and the amount the lender receives.  If the lender has no recourse, they’ll generally give you a 1099 from which you may be liable for debt forgiveness tax.  But, if the debt has been forgiven, how can the PMI insurer claim recourse?  Second, since the insurer is communicating with the lender and not you, how can they hold you liable for a claim of which you had no knowledge and no input?  Third, since the only real purpose of the PMI is to insure injury resulting from a default by the borrower, then - unlike the auto accident - it is the default that is being insured, not obtaining the loan and therefore there should not be any recourse right for the insurer.

As of this point is time, we are not aware of any cases in which insurance companies have actually filed lawsuits against borrowers seeking PMI recourse. Such cases may be going on at the local Court level and have not reached the visibility (and legal authority) that only arises from an appeal after a Judgment to a Court of Appeals.  Given that a breach of contract claim such as failing to reimburse an insurer must be brought within a certain period of time after the breach occurs (such as 4 years in California), we may wait a long time before there is any certainty how Courts will treat such claims.  Further, if and when those cases are brought, there may be a great difference in rulings by different courts. It is the appeals process that starts to bring uniformity to decisions.

So the short answer to whether a Mortgage Insurer can get a Deficiency Judgment is “maybe”.  However, as set forth above, if any such suits are brought there many defenses that borrowers can argue to protect themselves. Even more effective may be the reluctance of judges and juries to further punish upside-down borrowers especially when the lenders (that arguably created this problem) get made whole.

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.  We offer a $200 flat fee attorney consultation to enable you to evaluate your judgment and tax risks and to plan a strategy to minimize or even avoid them.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/.  

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/.  

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/. 

The question keeps coming up:  What is the deficiency liability of an individual involved in a short sale?

In the current real estate market, short sales are becoming more prevalent as defaulting borrowers attempt to avoid a foreclosure on their property. The risk is whether a borrower after completing a short sale and receiving approval from the lender(s) would then become liable for any deficiency arising out of the difference between the principal amount owed on the mortgage(s) secured by the property and the amount the sale price agreed to during the short sale.

The short answer (in California at least) is that given the current statutory framework and case law available on this issue it is unclear whether there is any liability. California has three interconnected laws that govern lender recourse:  1) the Security First Rule; 2) the Single Action Rule; and 3) the Acquisition Loan Rule. These all limit the ability of a lender to go after a borrower for a deficiency following a foreclosure.  The language of each statute itself is broad enough that arguable they will preclude deficiency liability after a short sale (ie: the lender cannot simply waive the Security First Rule by releasing their security and then suing on the remaining debt).

Lenders have been scrambling to find a way around these Rules and create some recourse against borrowers following a voluntary short sale.  A short sale is a contract between the lender(s), seller/borrower, and buyer. In the contract, the lender is essentially agreeing to compromise their position in order to avoid a foreclosure. The lender is getting something of value in return for their agreement to the short sale. Likewise, the seller/borrower is getting something by way of release from deficiency debt. If the lender were to attempt to pursue a deficiency, against the borrower/seller then the contract likely fails for lack of consideration. Essentially, the borrower/seller in that situation got nothing of value for their participation in the short sale contract.  Whether less credit damage is consideration enough is very questionable.

Taking this to the last step in the analysis, brings us to the theory of accord and satisfaction. Which is a term of art that simply states that when one settles their rights for value and receives that value, then they have compromised their claim and can not pursue it any longer. By agreeing to contract for the short sale, the lender(s) is essentially stating that they are willing to take less in the short sale process to avoid the foreclosure process. Thereby precluding the lender from asserting additional claims for deficiency after the settlement process.

What has been happening with frequency lately, is that some lenders (such as BofA) are requiring borrowers/sellers to sign a document stating that the borrower will remain liable for the deficiency as a condition to the lender consenting to the short sale. The lender(s) are trying to contract around the anti-deficiency statutes prohibitions. While it is permissible for parties to contract around statutory obligations there is not any known reported case law on this particular issue where there is no real benefit to the seller/borrower… especially when it the contract increases the lender’s benefits. Certainly, it seems that by requiring the borrower/seller to sign such a document, there is a lack of consideration as discussed above. Thereby possibly nullifying the documents effect. However, there is no case law on this topic.

The bottom-line reality is if you are confronted with one of these documents, you should seek legal counsel regarding the terms of the particular agreement before executing the document, as you very well could be contracting away anti-deficiency protection and more than likely exposing yourself to costly litigation.