It’s hard to believe but it has been one year since news of the “robo-signer” scandal broke.  In their rush to foreclose defaulted loans, lenders were filing false foreclosure notices and fraudulent legal actions.  In the immediate aftermath, some lenders stopped foreclosing but the pace soon picked up when lenders realized that Washington wasn’t going to do anything about it.  Since then, the only sanction has been lawsuits by the Attorney Generals of several States against the lenders. Settlement negotiations have been going on for six months with no resolution in sight since lenders are demanding immunity from future prosecution.

Throughout all of this, despite all the hype, there remains no effective help for upside down homeowners who are frustrated and angry at unfulfilled promises such as the HAMP Program which remains mostly ineffective at reducing loan costs to overwhelmed debtors.  Instead, lenders seem to prefer foreclosure even if that results in less of a money recovery for their investors. As reported on foreclosureradar.com, Notice of Default filings in California are up 69.5%. In Sacramento, August NOD’s were up 85% over July.  Much of this increase is Bank of America. Market watcher Dataquick.com reported that BofA foreclosure filings in California increased 200% between July and August!

As I have written before, I have concern with BofA’s survivability as they continue to deal with the incredible losses from their Countrywide purchase. In July BofA reported an $8 billion 2nd quarter loss and there’s billions more of losses yet to go.  A BofA spokesman stated that even this increase may not be enough. BofA appears committed to forcing as much bad debt off their books as they can as quickly as they can.  Meanwhile, lawsuits continue to mount.  Insurance giant, AIG, filed a $10 billion lawsuit against BofA in early September; and FNMA is reportedly about to file a $20 billion plus lawsuita against BofA and others.

What all of this means is that we’re in for more troubling financial times as lenders try to rebound from the deep recession caused by the collapse of the real estate bubble. Added to this is continued economic instability in California, nationally, and in fact world-wide all of which is causing buyers and investors to question whether now is the time to buy.  California Association of Realtors (CAR) is predicting that sales will remain flat through 2011 and that property prices will fall 4%. They further project a small, less than 2%, price growth in 2012.  CAR’s chief economist, Leslie Appleton-Young, stated: “the best decription of what can be expected next year is the market will be bouncing along the bottom.” … “One of the biggest uncertainties in today’s market is what are the negative equity homeowners going to do going forward and how big a percentage will end up in the foreclosure process”.

So the bottom line is insecurity on the economy and continued efforts by lenders to clear defaulted loans off their books.  This means more short sales, more foreclosures and more REO properties.  For some, this will spell an opportunity to acquire good properties at a low price with cheap loans.  For others, it will be wait and see how low the markets go.  None of this is good news for upside down owners hoping to save their homes.  Looking forward to a 2012 Presidential election years, it is not at all likely that any further relief for homeowners can be expected befor2 2013.

If you are an upside down homeowner struggling to hang on, don’t give up all hope.  Keep trying for that Loan Modification. Although most will not get one, many loans are getting modified. Just keep pushing.  If you can’t hold on, then get good legal, finance, and real estate advice on your options.  If you are a California property owner, consider our $200 Attorney Consult program that will help you determine all of your options and choose the best strategy to enable you to move forward as intact as possible.  To learn more, contact me at sjbeede@bpelaw.com or call us at 916 966-2260.

The Treasury Department has released the results of its second-quarter assessment of the 10 largest servicers participating in the government’s Making Home Affordable program.  As resported in DSNews.com, Officials say they will continue to withhold program incentives owed to Bank of America and JPMorgan Chase. The two were determined to need “substantial improvement” in key areas of borrower outreach, borrower evaluations, and program reporting, although Treasury did note that “some improvements have been made” by the companies since its previous assessment.

BofA and JPMorgan received the same score last quarter, as did Wells Fargo, but Wells Fargo has now elevated its grade to needing “moderate improvement” and with the movement has reopened the flow of incentive payments for loss mitigation actions completed under the Making Home Affordable umbrella. American Home Mortgage Servicing, CitiMortgage, Ocwen Loan Servicing, and Select Portfolio Servicing also received the “moderate improvement” rating.  Three servicers have been identified as needing only “minor improvement” – GMAC Mortgage, Litton Loan Servicing, and OneWest Bank. Treasury’s previous quarterly assessment put no servicers in this category, which is the highest on the three-level scale.

As most of you know who follow my Blogs already know, last January the California Legislature passed SB931 which barred first lenders that consent to short sales from having any deficiency recourse against the borrowers. However, they quickly learned that it is junior lenders (seconds, HELOCS, etc.) that control the success of short sales. So on July 15th, the Legislature passed SB458 imposing the same recourse bar on junior lenders plus they barred any lender from requiring a money contribution from the sellers. These law changes created and then amended California Code of Civil Procedure Section 580e.

Reaction to SB458 was immediate. Proponents claimed it a victory for upside down homeowners while we and many Realtors thought it would be a disaster and kill further short sales. Indeed many short sales quickly died and pressure started mounting to undo the damage. But there wasn’t much data to go on as to its actual overall effects. So last week I sent out a Survey amongst our clients and contacts asking for input on what they were actually experiencing in their short sale deals. The responses were clarifying. Of those whose short sales were impacted, just over 50% said it hurt while just under 50% said it helped. Most responders were unclear on what the impact would be. I contacted representatives of the California Association of Realtors and learned that they had been polling hotline calls from their Members statewide. CAR found the numbers more positive than negative but again, like us, too little actual numbers to give a clear picture.

The conclusion at this point is that there is still a lot of uncertainty in the market, particularly amongst lenders trying to understand and respond to SB458. However, here are the main benefits we see emerging:

1. SB458 forces junior lenders to evaluate right now whether or not they could collect from a borrower if they waited for the first lender to foreclose and then sued as a sold-out junior lienholder. Prior to SB458, the junior lender could get some money in the short sale while holding out for recourse on the balance. They could then wait this out for several years and hope the borrower gets solvent. Not any more. Clearly this makes the borrower’s hardship application and particularly their net worth statement even more important in the decision making process;

2. SB458 appears to have brought an additional liability protection for borrowers who agreed to a prior short sale with deficiency recourse. The first Paragraph of the new short sale law begins: “No deficiency shall be owed or collected, and no deficiency judgment shall be requested or rendered…..” Nothing in SB458 states that it only applies to short sales after July 15th.

No doubt there will be a lot more debate and analysis and litigation concerning SB458 and its impacts. As with any law, it will be subject to judicial review in the courts and further change, expansion, and clarification by the Legislature. But for now, CCP580e is the law of the State of California.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you have specific questions about dealing with upside down loans or real estate, be sure to contact a real estate attorney in your State. We provide advice worldwide concerning California property.

If you have further questions about SB458, need assistance convincing junior lenders to consent to a short sale, or are facing collection actions by any lender, please feel free to contact us for knowledgeable advice and experienced guidance. You can reach us by calling our office at (916) 966-2260 or you can e-mail me directly at sjbeede@bpelaw.com.

One of the key issues we always examine with consulting with upside-down sellers is the impact of a short sale or a foreclosure on their credit.  While not as damaging as the risk of a deficiency judgment or debt forgiveness tax, credit damage impacts both the capacity to get another loan and can often adversely impact a borrower’s job and career.  To get  greater clarity on the credit impacts, I contacted Jeff Sipes at Blue Water Credit (www.bluewatercredit.com) which helps people restore their credit standing.  Here’s what Jeff provided:

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By Jeff Sipes, Blue Water Credit:  I am often asked what the impact of a short sale or foreclosure is on a credit score.  Unfortunately, there is no straight-forward answer. This is such a difficult question to answer simply because it depends on a variety of factors. In general, a short sale or foreclosure will affect your credit score 85-160 points. Many mistakenly believe, or are misinformed, that a derogatory credit event such as a foreclosure is somehow worse than a short sale. In the world of credit scores, however, both of these events look the same way; the customer did not pay as agreed.

What Is A Credit Score?

A credit score is the statistical prediction of one’s likelihood to pay late over the next two years.  The higher the score, the less likely one is to have a late payment.  The bank then uses this number to assess the amount of risk involved with lending someone money.  Banks are a lot like a casino in a sense, they like to place bets where they feel they will win.

Be aware that there are multiple credit scoring models.  Some of the credit scores in these models go up to 990.  While there are multiple formulas for calculating credit scores, the formulas introduced by the Fair Isaac Corporation (FICO) are the most widely used.  This score ranges from 300-850. Fair Isaac recently released a report stating that credit scores are affected nearly the same whether you go through a foreclosure or short sale. The report stated that the average points lost on a FICO score are as follows:

• 30 Days Late = 40 to 110 Points
• 90 Days Late = 70 to 135 Points
• Foreclosure = 85-160 Points
• Short Sale = 85-160 Points
• Deed-in-lieu = 85-160 Points
• Bankruptcy =130 to 230 Points

How Are Short Sales Reported To The Credit Bureaus?

FICO does not differentiate between a foreclosure and a short sale. Further complicating matters, lenders don’t have a uniform standard as to how they report a short sale to the credit bureaus. Some lenders report short sales as “settled as agreed” while others may report it as “account legally paid in full for less than the full balance.” In some cases, if the account is more than 120 days past due, the short sale will automatically show up as a “foreclosure” on the credit report.  Both a short sale and a foreclosure will report on your credit for seven years from the date of first delinquency.

How to Maximize Your Credit Score during a Short Sale or Foreclosure

Since the number of delinquent accounts is factored into the score, try not to let any other accounts become late or delinquent (if possible).  The second largest factor of your credit score is your debt ratio (the limit of your credit cards compared to the balances you carry) try not to let your balances exceed 30% of the limit.  Only apply for credit when absolutely necessary.  Do not close your credit cards.  If you are able to do all of these things you will be back into the 700’s before you know it.

Credit scores play a large factor in our lives, but ultimately we have many other priorities that are more important.  Credit, like many other things, will be healed over time.

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The information presented in this Article is not to be taken as legal advice. Every person’s situation is different.  If you have specific questions about dealing with upside down loans or real estate, be sure to contact a real estate attorney in your State.  We provide advice worldwide concerning California property. Please 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A great many of the homes for sale today have more than one loan but there will not be enough sale proceeds to pay them both. That’s a short sale. To bridge this gap, a negotiation takes place whereby the first lender may agree to give some of the sale proceeds to a junior lender, such as a home equity loan, to get them to agree to release their lien. The typical amount given by first lenders to junior lenders is $3,000. But often that is not enough and the junior lenders demand that the Seller contribute more money to them. If they can do this, the seller avoids foreclosure. While this has been a common practice, the rules are now changing with very negative consequences for sellers, lenders, and the real estate community.

Understandably, a first lender wants to get paid in full before any money goes to a junior lender. If the seller has money that they could contribute to share in the loss, the first lender wants that money too. But often, sellers are giving money directly to junior lenders with or without the first lender’s consent or knowledge. And that’s where the problem comes in. Today, nearly 90% of home loans are owned by FNMA, Freddie Mac, and other government sponsored enterprises (GSE’s). These are now demanding that there can be no seller contribution to a junior lender. The only money a junior lender can get in a short sale is what the first lender offers them. Recently, Freddie Mac rejected 3,000 Bank of America short sales where BofA had allowed the sellers to make payments to junior lenders or even to the sale closing costs!

This has now spread throughout the real estate market. Short sales with multiple loans are being killed by first lenders refusing to allow any seller contribution to anyone other than the first lender. And this has led some junior lenders to push sellers to commit mortgage fraud.

A real estate transaction is supposed to be “transparent”. All parts of the deal are to show up on the escrow company’s Closing Statement, the HUD1. However, some junior lenders and some agents have urged sellers to make contributions to junior lenders “outside” of the escrow so they would not show up on the HUD1. While this may get the deal done and avoid foreclosure, participants are committing mortgage fraud by knowingly closing the sale with misrepresentations or omissions on the HUD1. If caught, this is both a Federal and a State crime. While the impacted first lender could invalidate the short sale, the particpants, ie: sellers, buyers, agents, and junior lenders, could all face criminal prosecution.

If you are being pushed to commit mortgage fraud, don’t give in. Contact your lawyer for advice and consider reporting the second lenders to the FBI or your State’s Attorney General. There are alternatives that might still get the deal done. But mortgage fraud is not the solution.

Effective July 15, 2011, California has prohibited Junior Lenders (2nds, HELOCs, etc) from having any deficiency recourse claims against the borrower if the lender agrees to take part in a short sale. Gov. Jerry Brown signed SB 458 (Corbett) into law and it took effect immediately. In January, 2011, SB 931 (2010) was put into effect requiring that any First lender that agrees to a short sale must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans. But unfortunately, the rule did not apply to junior lien holders. SB 458 extends the protections of SB 931 to junior liens. Both laws only apply to one to four unit residential properties.

Whether this is a victory for sellers and the real estate industry remains to be seen.

California Association of Realtors President Beth L. Peerce stated: “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”

But the real question is whether this will in fact make short sales harder to get done.  For any lender being asked to take the loss of the deficiency in a short sale, their only obligation is to determine whether a short sale will get more money back for their investors than a foreclosure. For first lenders on one to four unit residential properties, short sales are almost always better because: 1) Buyers pay more at a short sale than at a foreclosure sale; and 2) almost all foreclosures of these type of properties in California are done using a Trustee Sale from which there is no deficiency recourse. So for the foreclosing first lender, the short sale will generally bring them more money than a foreclosure. That is not necessarily the case with junior lenders.

In most short sale situations, there is not enough value in the sale proceeds to pay anything to junior lenders. Unless the junior lender made a “purchase money loan” (acquire personal residence), the junior lender has recourse against the borrower if not paid in full. However, unlike the first lender, the junior lender will not foreclose. They will wait for the first lender to foreclose which will wipe-out the security for the junior loan. Once that happens the junior lender can file a lawsuit against the borrower for whatever is owed them and, unless the borrower files Bankruptcy, the lender can collect everything owed to them. This is very different from what pre-existed this law when at least borrowers had some legal defenses against junior lender collections after a short sale. There are few if any defenses to post-foreclosure junior lender collection lawsuits.

One of Murphy’s Laws is called “The Doctrine of Unintended Consequences”. We got into this market collapse as a result of a government policy to promote expansion of home ownership. But this required making loans to people who were less qualified to repay them. This noble Policy drove up demand for homes and that drove up prices…. until borrowers could no longer afford to pay their debts. SB 458 is a similarly good sounding Policy. As much as I hope it does not occur, I fear that the unintended consequence of the passage of this law will be that junior lenders will reject short sales, more homes will go into foreclosure, and the real estate industry will further decline (except for those handling post-foreclosure REO properties). Time will tell whether this is a victory or a disaster.

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

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