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.

Everyday we’re meeting with property owners who can’t get a loan modification and are deciding whether to attempt a short sale or just let the property go to foreclosure.  For more than 90%, a short sale is the best solution because it causes less credit damage, provides negotiation of recourse liability (especially important with multiple lenders), and avoids the potential future career damage of having a “foreclosure” on your record. Indeed, having at least attempted a short sale demonstrates a cooperation that may speed up the willingness of future creditors to provide a new loan.  But short sale is not always for everyone.

For the past three years, most people struggling with upside-down loans were those who bought their homes in the early to mid-2000’s with teaser loans such as negative adjustable, or pay-option ARMS which allowed them to qualify for the loans based upon “stated income” and a starting interest rate that virtually guaranteed a loan.  But then, as the teaser rates ended and interest adjusted, borrowers could no longer afford the payments.  For most of these borrowers, short sales work well because they don’t have any substantial assets and, unless they refinanced, they may have no deficiency liability (at least in CA). 

But now the profile of the upside-down owner is changing.  Today’s troubled owner is more likely to have a decent loan but they’ve lost their job or otherwise been impacted by the recession.  These owners may have lots of other assets but they can’t afford to keep paying for the negative cash-flow on the over-encumbered second home or rental property.  In California, these loans generally have deficiency recourse and, if a lender pursued a deficiency judgment, they could reasonably collect some or all of the deficiency from the borrower.  If the borrower attempted a short sale, they would have to disclose their assets as a part of the hardship package and, in doing so, they would be letting the lender know: 1) they have assets to contribute to payoff a short sale deficiency; and 2) if the short sale fails, they would be a good candidate for a “judicial foreclosure” which would allow a lender to get a deficiency judgment.  Even though that process could take over 2 years, the collectability could make it worthwhile for the lender to pursue.

Faced with this reality, it can be better for an otherwise solvent borrower to let the property go to foreclosure and, by not disclosing assets, have a better chance of avoiding the liability. In California, most lenders will foreclose through “non-judicial foreclosure” (also called Trustee Sale) because it is both cheap and fast but they give up any right to deficiency judgment.  Without knowledge that a borrower has other assets, the lender is most likely to take this path instead of the long, expensive, and generally non-productive judicial foreclosure route.  So, strategically, for the solvent but upside-down borrower, it may be better to walk away than short sale.

Of course, everyone’s situation is unique and there is no single best solution. The information presented in this Article is not to be taken as legal advice. Determining what to do involves consideration of judgment risk, tax factors, and credit and career impacts as well as the type of property and number of loans involved.  If you are considering default on your loans, get competent legal advise in your State immediately so that you can determine your best options. 

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

The 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.

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.

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.

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/.

Many people are confused as to what happens if the property in which they live has been foreclosed. Most fear that a Sheriff will come knocking on the door to suddenly kick them out. In California (an likely most other states) that cannot legally occur.  A foreclosure simply creates a change in the ownership of the property. The rights of the occupants in the property are determined by what their status was before the foreclosure and now, Federal and California has made these rights even clearer.  This creates more protection for tenants and a possible trap for unaware foreclosure buyers.

Here are the current rules:

1. FORMER OWNER IS OCCUPANT - If the former owner remains as an occupant of the property after a foreclosure, the new owner must give that person only a 3 DAY NOTICE TO QUIT. The theory is that the former owner knew the foreclosure was coming so they should have made arrangements to move.

2. OCCUPANT IS RELATED TO FORMER OWNER - If the occupant is related to the former owner, ie: child, parent, or spouse, and the former owner is not an occupant, then the new owner must give the occupants a 60 DAY NOTICE TO QUIT. In theory related parties should be aware of what is going on. Even so, this change gives these parties more time than they had before.

3.  UNRELATED OCCUPANTS ON PERIODIC TENANCY - If the occupant is not a former owner or related to the former owner and is on a periodic tenancy such as month-to-month (not a Lease), then the new owner must give the occupants a 90 DAY NOTICE TO QUIT. The thought here is that periodic tenants are innocent victims who may be surprised by the foreclosure and will need more time to find a new place to live.

4.  UNRELATED OCCUPANTS ON LEASES -  If the occupant is not a former owner or related to the former owner and is on a fixed-term Lease (such as 6 months, one year, etc.), then the new owner cannot terminate the occupant’s tenancy UNTIL THE END OF THE LEASE TERM unless the new owner intends to occupy the property themseves in which time the new owner must give the occupants a 90 DAY NOTICE TO QUIT. The thought here is that while Lease tenants are innocent victims who may be surprised by the foreclosure, they contracted for a specific term and had no right to expect a longer tenancy. However, as set forth below, they may have to actually pay rent to get the benefit. Despite this however, since the foreclosure extinguished the Lease, the new owner can treat this resulting tenancy as a periodic month-to-month tenancy if they intend to move-in.

Much of the new requirements arise under President Obama’s “Protecting Tenants at Foreclosure Act of 2009’’ which was contained in the ‘‘Helping Families Save Their Homes Act of 2009’’, which was signed into law by the President on May 20, 2009. California amended its laws effective January 1, 2010 in compliance. While any new law becomes a fertile ground for disputes, this one presents an interesting issue concerning tenants on leases seeking to stay the duration of the lease. The Act defines a “bone fide lease” as being a lease which requires the receipt of rent that is not substantially less than fair market rent for the property. But does this mean that the rent must be paid? That remains unclear. If so, this would seem punitive considering that a tenant without a lease would get a 90 day notice with no obligation to pay. But is it really fair to the new owner to let someone live their longer than 90 days without paying? Perhaps the intent was only to establish that the lease was real…not to provide an ability for the new owner to collect the rent. But with no payment, who would ever want to bid at a foreclosure sale? Of course, it It will be up to the court’s to decide who’s interpretation is correct.

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.

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/.  

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/.  

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.