As we enter this New Year, our economy remains in serious condition and millions remain in default and uncertain about their housing futures.  Yet in the midst of this mess, there is both Good News and Bad News.

First the Good News – 2011 should see some improvement in the general economy as the damage from the real estate and financial market collapse begins to resolve.  We’re already witnessing climbing values in the stock market and record prices for commodities such as gold and silver.  This may not mean confidence but at least people with money to invest aren’t keeping their money under their pillow.  Interest rates are edging up but are still historically low. Retailers have reported strong sales during the Christmas season and, in general, despite all of the political battles between Republicans and Democrats, consumers are feeling somewhat upbeat.  They’re still in pain but most can feel the healing taking place.

Now the Bad News -  This recession will not be over in 2011, particularly as it affects real estate.  While the economy may be slowly improving, businesses are being slow to expand and so unemployment remains very high.  Without greater certainty of stable employment, people are hesitant about making major purchases such as homes.  This uncertainty is causing economists to predict that California could be looking at another 10-11% drop in housing prices during this year fueled both by high unemployment and enormous State budget deficits. Millions of homeowners still face possible foreclosure as loan modifications remain unavailable to most. Further, the impact of the real estate bubble collapse is expanding:

1) Subprime Loan Borrowers - This was the first phase of damage from the recession. Although most of these sub-prime loans have by now been foreclosed or short-sold, 2011 will see another wave of defaults on those 2006-7 loans with 5 year adjustments.  As these move from interest-only to fully amortized, borrowers could see their loan payments double removing any capacity to pay;

2) Economy Impacted Borrowers - This is the second phase of the recession and it’s where we are today and will likely be for at least another year.  The tough part about a collapsing bubble is that it also causes “collateral damage” to those with good loans.  Millions have lost their jobs, or had cut backs or government furloughs that leave them unable to pay their loans. And with California’s record budget deficits, no-one has any confidence that State spending will improve.  Significantly, many economy-impacted borrowers may have other assets that they could spend to cover their loan deficiencies, but with no end in sight and further value losses predicted, many are finding it wise to “strategically default” rather than disclose their other assets to their lenders as part of a loan modification or short sale application.  For these borrowers, letting a foreclosure occur may make more financial sense.

3) Commercial Borrowers – This is the third phase and the one with the largest economic consequences.  One doesn’t have to look far to see empty store fronts of businesses that have closed terminating their jobs in the process.  Each of these also means a loss of income for the owner of the property and, added together, can cause the property owner to default resulting in a possible loss of all businesses. 2010 saw foreclosures nationwide of shopping centers and office complexes and large manufacturing companies.  Unlike home foreclosures, the failure of commercial loans often involves tens of millions of dollars in debt, loss of hundred or even thousands of jobs, and the loss of tax dollars for communities.  These problems together could bankrupt the lenders and even the communities where the businesses are located.  As a result, we’re now seeing commercial loan workout programs coming together with owners, lenders, accountants, community leaders, and others seeking to find a way to prevent the wide-spread losses that failure would bring.  We’ll likely be working on this area through 2014 and this will be the key in finally turning the corner from recession to real recovery in the real estate market.

Meanwhile, lenders are picking up the pace of foreclosures and filing lawsuits to recover loan deficiencies. In response, borrowers and governments are fighting back.  I’ll cover this in more depth in my next posting along with how you can protect yourself.

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

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.

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As we approach 2011, we look back on three years of economic disaster following the collapse of the real estate bubble. Clearly this bubble was the result of lenders making loans to unqualified borrowers. This increased competition among home buyers drove prices up… until buyers couldn’t afford the payments and the house of cards collapsed.  By 2008, programs such as Hope for Homeowners were calling on lenders to cut principal balances owed on upside-down loans to enable people to keep their homes. But the lenders wouldn’t cut, even after newly elected President Obama offered government help to pay for the cuts. So today we have a woefully unsuccessful loan modification program and foreclosures continue.

As reported in DSNews, foreclosures by Fannie Mae and Freddie Mac are exceeding modifications by more than 2 to 1 and by now we all know about lenders’ rush through foreclosure processing by using “robo-signers”.  Now, some help may be on the way.  The New York Times reported that in October, the Attorneys General from all 50 States signed onto an agreement for an investigation of lender practices. The AGs say that there is an opportunity to fundamentally change the way banks deal with defaulting borrowers so that more people can stay in their homes by modifying their mortgages, and that they will take the time needed. “The large banks say they are doing everything they can to avoid foreclosure, but that is not the reality on the ground,” said Patrick Madigan, an assistant attorney general in Iowa who is a lead figure in the investigation. “The question is, Why?”  

Meanwhile, this month a group of top economists, academic leaders, and influential investors sent a letter to Treasury Secretary Timothy Geithner and the heads of five federal regulatory agencies urging them to take the lead in setting national standards for mortgage loan servicers.  “Widely reported servicer fraud, whether in the foreclosure process or in the systematic assessment of illegal fees against homeowners, is…a serious problem,” the group said in the letter. To protect borrowers and investors alike, the group’s proposed standards would require servicers to provide loan modifications, including principal reductions, to address “reasonably foreseeable default” as long as the homeowner “can make a reasonable payment.” They also argue servicers should be held accountable for lost paperwork on loan modifications and for failing to suspend foreclosure when a homeowner is actively engaged in the loan modification process.

Will all of this activity be productive?  Only time will tell.  Historically, the government has been unwilling to interfere with contracts between lenders and borrowers.  But this “hands-off” approach brought us a real estate crash and a foreclosure mess that has disrupted the lives of millions of Americans with no real effort to solve the problem.  While no doubt any such National Foreclosure Reform will be promoted as helping homeowners, the underlying drive will be to restore security, transparency, and reliability to the financial system so that investors – those persons that put up the money so loans can be made – will regain confidence in the banking system enough to put their money at risk. 

Whether it be to help homeowners or help investors, either way we will all benefit from reforming the  current broken foreclosure system.  Watch here for further updates as this matter progresses. If you are impacted by this foreclosure problem, take the time to write your representatives in Congress and urge them to get behind this push for reform.

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

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.

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It has now been nearly three years since the real estate market began unravelling.  Millions still struggle with over-encumbered properties and loss of income from the recession. Most economist predict that home prices may fall another 11% in 2011, as rising defaults crash with difficult to get purchase financing. Yet there is some good news for the diligent:

1.  Housing prices are really undervalued. Today’s pricing is based on distressed sales. No-one would sell if they had a choice. This means that in reality, housing prices are higher than the sales would indicate. DSNews reports that the analysts at Capitol Economics have concluded that house prices are now 14% to 17% undervalued relative to disposable income per capita.  This is a 30 year high in affordability!

2.  Mortgage Rates remain low.  Although there has been some upward movement, mortgage rates remain between 4.25% and 5%.  My own office manager just refinanced her home for 3.5%!  Incredible financing opportunities.  Qualifying may still remain a challenge. Hopefully the lenders have learned their lesson and will actually require that the borrower have the ability to pay.

3.  Foreclosures are slowing.  Due in part to the Robosigner scam, foreclosure starts have been slowing even though delinquencies remain high. November Notice of Default filings were down 9.3% in California and 31.7% in Washington.  Lenders may be starting to realize that they can recover more for their investors by negotiating than they would get from a foreclosure. 

4.  Junior lenders are more willing to take hits.  The problem in most short sales has not been first lenders; it has been junior lenders (2nds and 3rds) who would have a personal judgment claim against the borrower after a foreclosure. Of course, having a claim and collecting upon it are two very different things. In the past week, our attorneys at BPE law have successfully negotiated a $200,000 release for $17,000; complete releases for $0; $150,000 for $5,000; and we’re completing a $2.2 million commercial loan payoff for no more than $100,000.

So what should this mean to you?  If you’re in default, keep negotiating with your lenders. They may be more accepting of a loan modification or a short sale without recourse or contribution.  And get help from real estate professionals in your community. They speak the language of the lenders.

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

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.

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As recently reported in www.DSNews.com, the ongoing controversy surrounding deficiencies in foreclosure documentation is taking its toll on the housing market as a significant share of home shoppers refused to even look at distressed properties in October, according to an industry study conducted by Campbell Surveys.  Fears of litigation from former owners who lost their homes to robo-signer foreclosures are making REO properties unattractive since legal battles could tie-up the properties for months or even years to come. With foreclosures on the rise, this presents a major problem for lenders who otherwise would get stuck with holding and maintaining unsellable properties.  News reports that major servicers were pulling REO properties off the market, including some already under contract, clearly spooked would-be homebuyers, Campbell Surveys found.  The company’s closely-watched monthly survey found that 14 percent of owner-occupant homebuyers and 6 percent of investors refused to view foreclosed properties in October. This buyer fear was even worse for short sale properties, where 30 percent of owner-occupant shoppers and 20 percent of investors refused to consider short-sale homes.

Not surprisingly, the drop in overall distressed property sales activity helped produce a decline in average prices for short sales, move-in ready REO, and damaged REO in October. This certainly has helped sellers of non-distressed properties which suddenly became more attractive to ready buyers.  This increased demand has pushed their prices higher.

Is there an end in sight? Not soon.  Citigroup, which has adamantly contended that they were not involved in the robo-signer problem, has uncovered some 14,000 defective foreclosure actions.  Core Logic, the company which provided analytical date for the investment industry (www.corelogic.com), indicates that there currently are 4.2 million homes on the market for sale, a 15 month supply. However, beyond this “visible market”, there is a “shadow market” of properties more than 90 days in default, in foreclosure, or REO’s that are not on the market. Core Logic reports that there are 2.1 million more properties. When added together, we actually have a 23 month supply of houses on the market.  Typically a reading of six to seven months is considered normal, so the current total months’ supply is roughly three times the normal rate.  And it may be even more than that. Lender Procesing Services which handles foreclosure processing estimates that there are more than 7 million loans in default! (DS News 11/17/10).  In the aggregate, alanysts are projecting a possible 7% drop in home prices over the next year before the housing market starts to stabilize.

So what should this mean to you?  If you’re in default, keep negotiating with your lenders. They may be more accepting of a loan modification or a short sale without recourse or contribution.  If you’re an REO or short sale buyer, check the documents carefully and make sure the title insurance will protect you from any claims of defective foreclosure actions.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options. 

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

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

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

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

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

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

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

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

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

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

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options. 

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

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Over the past several years, we’ve assisted thousands of property owners in coping with upside down loans. Although very few have gotten actual modifications that made their homes affordable (the lenders and our government won’t go that far), most have used short sales to avoid judgments against their credit that would follow them for years.  Even most people who have gone through foreclosure have avoided the lenders’ deficiency recourse.  But now, many are shocked to discover that, although the lender has no judgment against them, the debt still appears on their credit reports as an unpaid debt. This can block future credit and could possibly used by a collection agency to force a payment that is no longer owed.

When a property is sold in a short sale, agreements are generally made with the lenders in which the unpaid balance is forgiven, ie: there is no deficiency recourse.  Similarly, in California at least, most foreclosures are done through a Trustee Sale process through which the foreclosing lender has no recourse against the debtor for any unpaid balance.  These unpaid amounts are considered “forgiven debt” and the debtor may be taxed on this amount unless they have an exemption such as the 2007 Federal Debt Forgiveness Relief Act, or their accountant determines that they are otherwise exempt: purchase money debt, insolvency, etc.  When this occurs, the debtor’s credit report should show the loan as “settled”; or “paid less than full” or some similar reference… not that anything further is due.  So what do you do if this happens.

First, get your records together to show that the loan deficiency was actually resolved.  This may be the short sale closing documents, particularly the lenders’ short sale consent letters addressing the deficiency (or removing any deficiency language). For a foreclosure, the type of foreclosure used will provide guidenance. In either case, the debtor should receive a 1099 form from each lender. A 1099C indicates that the debt is forgiven but sometimes the lenders use the wrong one.

Second, send a dispute letter to each of the credit bureaus - Experian, TransUnion, and Equifax - and challenge the debt reference. Send this my Certified Mail Return Receipt and keep all your records.  Once the credit reporting agency has received your dispute letter, they are obligated to investigate. According to the Fair Credit Reporting Act, the credit bureaus must take the following steps:

• The credit reporting agencies must resolve consumers’ disputes within 30 days limit, unless you have used the services of annualcreditreport.com, then the bureaus can take up to 45 days.
• In response to consumers’ complaints that documentation in support of their disputes was disregarded, the credit bureaus have to consider and transmit to the furnisher all relevant evidence submitted by the consumer the first time.
• Consumers will receive written notice of the results of the investigation within five days of its completion, including a copy of the amended credit file if it changed based on the dispute.
• Once information is deleted from a credit file, the credit bureaus can not reinsert it unless the entity supplying the information certifies that the item is complete and accurate and the credit bureau notifies the consumer within five days.

All of the big-three agencies are working on making sure that all disputes are handled within 30 days. See http://www.creditinfocenter.com/repair/Repair.shtml#4 for more specific details.

If a lender fails to respond to the credit bureau’s investigation, they may delete the refeence themselves. If not, or if the lender actually refuses to remove the derogatory credit reference, then you may need to initiate legal action against the lender. Reporting a false debt on the debt reporting system is slander and you could have a legal claim against the lender and the reporting credit bureau to both remove the reference and recover damages.

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 facing false credit reports which claim you still owe a forgiven debt, 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 cleaning your credit report, short sales, foreclosure, or any legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.

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As the recession has deepened and lengthened, many people who are fully able to afford the payments on their real estate loans on over-encumbered property have decided to walk-away and let the property go to foreclosure. For these people, the long time it would take to reach break-even simply doesn’t make financial sense. This practice has come to be called “Strategic Default”.   While the rights of the affected lenders will still be solely governed by the loan documents, as expected the lending industry is pushing for stronger penalties to curtail Strategic Defaults.

As reported widely on the web, Fannie Mae (“FNMA”), the government-sponsored enterprise that creates the “secondary market” by buying up mortgages, has stated that: “Defaulting borrowers who walk away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure”.  We had previously reported that both FHA and FNMA were talking 5 years for this practice so we are not surprised at this announcement.

More worrisome is the FHA Reform Act (HR 5072) which was passed by the House of Representatives with nearly unanimous consent and is now being debated in the Senate. The proposed Act contains a provision that would bar strategic defaulters from getting an FHA loan any time in the future!  This Bill was supported of course by the lending lobby, but also by the National Association of Realtors and even by that  champion of the common man, Barney Frank.  Will it pass through the Senate? Almost certainly although it’s final form remains to be seen. While the overall objective of the Act is to save the financially-damaged FHA through raising the costs of mortgage insurance, this provision is obviously targeted at stopping the practice of strategic default. 

What remains unclear despite all the hype is how to define who exactly is a Strategic Defaulter.  While obviously a person with plenty of assets and financial capacity who defaults as a business decision would seem to fit the description, that may be more the exception than the norm. More common is the person, as reported in the Washington Independent http://washingtonindependent.com/88445/strategic-default-penalties-threaten-struggling-homeowners, that suddenly realizes that they have been sinking steadily and if they don’t stop now they’ll lose everything.  Should that person be barred forever?  Of course not. What will most likely come out of this is a recommended process that upside down owners should always follow: First seek modification; then seek short sale; and only last let it go to foreclosure. For the borrower with financial capacity, the outcome may be the same but the process may infuence future borrowing ability.  Of course, if there is actual deficiency liability on the loan, the financially solvent borrower may not want to disclose their assets to the lender through a modification or short sale since this would certainly invite a demand for contribution or even for a judicial foreclosure (in California).

Lastly, there is the very real question of whether targeting strategic defaulters is fair and equitable. The loan being defaulted is a contract between the borrower and the lender that already provides remedies that the lender can take if a borrower defaults.  Both borrower and lender take on the known risks of what will happen on default. Why should government intervene in this contract to give the lenders even more remedies by effectively increasing the borrower’s risks?  Certainly the government has refused to effectively intervene to protect borrowers from the extraordinary risks in the sub-prime loans promoted by the lenders through 2007.  Meanwhile, the HAMP modification program hyped to help homeowners limps along with only 4.5% getting permanent modifications and virtually no-one getting principal reductions. 

Millions have lost their homes with no realistic assistance from the government and now this Act will not only further hurt future borrowers but will once again send a very clear message that as far as Congress is concerned, what’s good for the lenders is good for the country.  If you believe that this provision of the proposed Act should be dropped or changed, be sure to write your State Senator and make your concerns known.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are considering default on your loans, get competent legal advise in your State immediately so that you can determine your best options. 

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

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

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

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

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

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

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

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different.  If you are facing a lender lawsuit, do not ignore it. Get competent legal advise in your State immediately so that you can determine your best options. 

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

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

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

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

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

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

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

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

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

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

We’ll keep you posted as these and other similar cases move forward. Meanwhile, if you’ve been challenged with a wrongful foreclosure or if you have specific questions about your liability, short sales, foreclosure, or any legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.

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