Sunday, July 31, 2011

Stripping Away Second and Third Liens in Bankruptcy...the Facts!!

I heard something misquoted again today so I thought that I would blog about it. There are many misconceptions and misperceptions about bankruptcy and distressed real estate. I frequently hear that the second (and subsequent liens) will be “stripped away” in Chapter 13. This does not happen automatically. It requires the filing of a Section 507 motion and creditors may object to it. This process is not a quick remedy when trying to strip away the liens and obtain short sale approval.

Realize too, that once a property is in bankruptcy, you will need approval from the court. This too can be a time consuming process, even though courts are eager to resolve all matters – especially ones relating to real estate.

It is also important to note that the Section 507 Motion does not “strip away” priority liens such as HOA and IRS liens. Many do not realize that an HOA not only has a lien against the property, but the individual is responsible personally as well. However, the IRS has a long standing policy of releasing its lien to get a sale accomplished - as long as the debtor is not receiving any money from the sale. The process of releasing an IRS lien is not difficult but it is time consuming. It should take about 4-6 weeks, IF all of the forms are completed correctly. The HOA is another matter. They can be out and out unreasonable to deal with….especially in Florida. I realize that they operate on tight budgets, but their goal should be to get as much as they can quickly, and get a new PAYING owner into the property. Everyone benefits by a new owner getting into the property but for some reason the HOAs have been brutal to deal with.

Anyway, the point of all of this was to dispel and misconception…Chapter 13 is a valuable tool for many, but it is not a quick fix to a short sale dilemma regarding second liens.

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Use of Revocable Trusts Frequently Problematic in Short Sales

There is a new and disturbing trend in foreclosure cases and short sales. "Experts" are advising distressed home owners to place their home in a revocable trust and appoint themself as trustee. There would be advantages to this, but I am suggesting that such home owners consider some free legal advice - and yes, I understand and appreciate the value of "free" advice!!

This is arguably fraud. It would appear to a lender or a judge, that this is an attempt to cloud title or delay or obstruct the foreclosure process. If the short sale is unsuccessful, there could be serious ramifications to this maneuver. The reasons that many experts suggest to do this are valid, but there are other - less risky methods to achieve the same results.

At the point in time that a home is in default - more than 30 days past due - anything that a home owner does regarding title, is going to be closely examined by a Court or lender. Even placing the home in a trust just prior to entering default is problematic, so my advice is "DON'T DO IT". Another problem with this tactic is that (IMHO) about 85-90% of trusts are not properly established and maintained and consequently, they are voidable. I know of one lender that threatened to charge the home owner with the unauthorized practice of law for establishing a trust without the use of an attorney. It was a complicated matter, but the point is that the tactic of delaying foreclosure, attempting to cloud title or avoid transfer tax via revocable trust is challenging and will almost always appear to be fraud to a lender or judge. Another aspect of this tactic that is problematic is that the trusts are not being set up by an attorney and they need to be. Listing and buyer agents: my advice is to never ever aid a home owner in the development of a revocable trust (I have seen this a number of times). Advise a home owner that is considering this tactic to seek the counsel of an attorney and tell them "EVERYTHING". Do not selectively leave out details as the "devil is truly in the details" in such matters.

Friday, July 29, 2011

THIS Hardship Letter Issue is Critical to Short Sale Approval

There has been a lot of discussion regarding hardship letters and their importance in short sale negotiations. However, there is a frequently overlooked aspect of them that is vitally important. The hardship letters will be different in a loan modification than a short sale. You may then ask, “That is true, by why do I care?”

You should care and you need to care – especially if the loan modification was submitted and you do not have a copy of it. The issue is what I refer to as “synchronicity”. If I were a short sale agent, I would want to see the submitted hardship letter before you submit one for the short sale. You are trying to avoid inconsistencies and discrepancies.

The goal of a loan modification hardship letter is to discuss WHY or HOW the home owner was unable to keep up with payments and hen to discuss HOW or WHY they will be able to make payments going forward, if the loan is modified. A typical loan modification hardship letter will stress hope for the economic future. It will detail why payments can be made and the basis for it (salary increase, expense dropping off, etc.).

A short sale hardship letter will probably not have this optimistic economic aspect to it. It is very important to reconcile these inherent differences so that a lender can accurately assess the situation. It is also important for the person negotiating the short sale to see what has been submitted in the loan modification package in order to avoid discrepancies. The information that a short sale negotiator would need to know is the financials that were submitted.

The important thing to remember is that you are negotiating a short sale with the same lender (servicing agent) that also was involved in the loan modification process. Hey will have whatever information was previously submitted and there is a tendency to believe that the lenders and servicing agents are unorganized and may not know what they have. Do you want the success of your short sale to be dependent upon the lender’s lack of organization??

THIS Hardship Letter Issue is Critical to Short Sale Approval!

Tuesday, July 26, 2011

Unauthorized Practice of Law in Foreclosure Debate

Last week, I blogged about the case of Matrix Financial, Corp. v. Frazer in which the South Carolina Supreme court ruled that lenders cannot foreclose if they were found to be engaging in the Unauthorized Practice of Law (UPL). In real estate, the SC Supreme Court indicated that lenders are required to have attorney review of title search, document preparation, and close of escrow.

Well, it doesn’t take long for the lenders to take action (or their political puppets). It turns out that a state representative has introduced a bill to end the Unauthorized Practice of Law mandate of the Matrix Financial case. Predictably, this representative was the founder and shareholder of a South Carolina bank that violated the UPL regulations. Sounds like Barney Frank!! LOL

I researched the proposed bill and it has only been introduced and not gotten very far. It seems pathetic that state representatives can totally ignore their constituency and put their own (and campaign donors) interests ahead of the public.

Further research indicates that Suntrust Mortgage has as much as 1 BILLION dollars in uncollectable real estate notes because they never used attorneys to review title, prepare documents and close escrow. All of their construction to perm loans required a loan modification agreement at the end of construction. Many times this agreement changed the amount and terms. These clearly needed to be prepared by or reviewed by an attorney and apparently they never were.

We are in a push and pull legal real estate environment. Courts and legislatures are at odds and even within any jurisdiction; there are what appears to be inconsistent results. I have blogged about that too – the appearance of inconsistencies is the result of different facts and standard of review. The standard of review varies based upon the legal history of a case (appeal, ruling and determination by dispositive motion, final judgment by a judge or jury). So, as I have mentioned previously, it is essential to review cases and outcomes on a case by case basis.

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Unauthorized Practice of Law in Foreclosure Debate

Saturday, July 23, 2011

Another Victory for Home Owners Fighting Forclosure

Chalk another victory up for home owners fighting back against lenders. The Maine Supreme Court overturned a Summary Judgment in favor of a servicing agent against the home owners. In the case of Kondaur Capital Corp. vs Hankins, the trial court had granted summary judgment in favor of the lender agent, but the Maine Supreme Court overturned the ruling.

This is an example though of several things. First, this does NOT mean that the Hankins will still prevail. The matter theoretically still must be heard in court. The Summary Judgment was overturned which means that everyone must start over. Procedurally, the case is returned t the trial court with instructions from the Supreme Court. However, the ruling clearly establishes that the Plaintiff did not have standing because it was not the original party on the note. The trial court will be hard pressed to rule in favor of the lending agent.

Another interesting aspect to this case is that the Hankinses failed to assert that the Plaintiff did not have standing during the original Summary Judgment motion. This is very significant because the Maine Supreme Court ruled that it does not matter when the issue is raised. This is VERY significant because in many areas of law, if you do not TIMELY assert a defense, you lose it. This is referred to as laches…the legal equivalent of “if you snooze, you lose” . LOL The Hankinses did not assert the defense until the appeal. It is really difficult typing the plural of Hankins! LOL

There clearly seems to be momentum in home owner claims of lack of standing, produce the note defenses etc. Standing is a fundamental precept of law. However, it is rarely raised because in the vast majority of cases, standing is not an issue. The well celebrated MERS cases and robo signer have clearly raised awareness. Foreclosure defense attorneys are also more aware of the issue. I have been successfully asserting the defense in many cases and it has been very successful

Friday, July 22, 2011

We Need to Review Court Cases and Regulations on a Case by Case Basis

We have to keep legal decisions and governmental regulations in perspective when we analyze a ruling or new regulation. There have been a lot of decisions on the validity of MERS for example. Many courts hold that it is invalid, while others hold that it is valid. To a lay person, this appears to be inconsistent. However, we must realize that the cases are reviewed on a case by case basis. The facts of the respective cases frequently determine the outcome. We also have to remember that these are different courts and different standards of review. In New York for example, it was a bankruptcy judge the ruled MERS invalid.

Another example of perspective is that there has been a lot of euphoria over the MARS situation relative to real estate agents. The FTC did not endorse real estate activity in these regard, it merely issued a stay of enforcement. There is a HUGE difference. This is likened to the police saying that they will not enforce speeding violations but it does not change the speed limit!! My opinion is that the FTC will review the events of the next six months or so and make a final determination.

I have also blogged about a lot of cases in regard to the “produce the note” defense. This week I blogged about Demucha v. Wells Fargo Home Mortgage. The case was a successful attempt to invalidate MERS because Wells could not prove that they had standing to foreclose (because the original assignment had not been “perfected”). Some courts within the same county make different rulings on this. In many instances, it is because the facts of a case dictate the outcome. It is also important to know when and how an issue was raised; was it an affirmative defense, objection to a Proof of Claim, Motion, etc.??

There are also tax issues such as the forgiveness of debt scenario that I have blogged about. These too must be viewed on a case by case basis because the facts of each case frequently determine the outcome.

We need to review Court Rulings and Regulations on a Case by Case Basis

Dodd Frank Act to Terminate Seller Financing

Those elves in Washington are at it again. The Clueless Duo, Barney "Circus Clown" Frank and Chris "I do not have to pay back loans" Dodd have snuck key provisions into their bill. CALL YOUR REPRESENTATIVE TODAY!

In an incredible show of effective bank/mortgage lender lobbying or government ignorance the Federal Reserve is considering rules that may end a seller's ability to finance their own property and sell on terms to a buyer!

The problem is that the Federal Reserve has proposed new rules from implementing the Dodd Frank Act. Those rules would effectively eliminate seller financing! If you believe that seller financing is important to this real estate market, we need you to let them know that you don't want these rules enacted. The comment is this Friday, July 22nd, 2011.

It is incredible that in an environment where mortgage financing is hard to get and the real estate market is hampered by problems many have getting loans, that the government is set to essentially outlaw seller financing.

My guess is that mortgage companies and banks are lobbying to prevent seller financing so they have the market all to themselves and can charge whatever interest rates they want and impose any terms they want. The numbers of creative financing deals such as lease-options, seller financing, options and other creative financing deals are increasing so sellers can get properties sold. This is a natural outgrowth of difficulty in finding buyers who can get a conventional mortgage.

Sellers need to sell, buyers want to buy and in many cases the banks and mortgage companies stand in the way because they are so strict with lending criteria including high down payment requirements high credit score requirements.

There are many people who have blemished credit because of the economic downturn - even foreclosures and short sales but who are good qualified owners but are locked out of the housing market unless they can get non-traditional financing.

Our over-zealous government is now proposing that it completely control seller financing in this country and the rules are so convoluted (179 pages) that most sellers will be too scared to offer seller financing. It is such a bad idea to eliminate a way to sell houses and get buyers financing at a time in our history when sellers need to sell and buyers want to buy and the residential real estate market has been hampered by financing issues to eliminate an alternative.

The problem is that the rules were made for traditional lenders to follow but the problem is that If these rules are passed without an exemption for seller financing, an individual who wants to sell their own home will be required to understand and comply with 169 pages of rules with draconian penalties for non-compliance that could bankrupt a seller.

WHOA!!! Dodd Frank Act to Terminate Seller Financing

Thursday, July 21, 2011

Another Case Challenging the Validity of MERS

A week of acronyms...MERS....MARS! LOL California has had another significant legal decision regarding lenders and their ability (or inability) to produce original documents. After spending more than a year attempting to get a loan modification from Wells Fargo, one homeowner has decided to challenge the bank. In the case of MARK DEMUCHA v. WELLS FARGO HOME MORTGAGE , INC, the home owner is demanding to see the original documentation and paperwork. Mark Demucha, a resident of Bakersfield, California, describes spending more than a year of failed attempts to have his paperwork filed and a loan modification negotiated. However, he simply “filled out the same paperwork over and over again,” ultimately leading him to determine that if the lender had lost that important paperwork, maybe it had misplaced other documents as well. Now, he’s demanding that Wells Fargo prove it owns his home loan before he undergoes foreclosure. “They come to me and want me to have every single piece of paper I was ever supposed to have,” he says, describing how his requests to see his own promissory note are being met “like I’m a thief.”
Demucha originally borrowed the money for his home from CTX Mortgage, which sold the loan to Wells Fargo using the embattled MERS (Mortgage Electronic Registration System). As a result of using MERS, the transfer was not recorded in county record and the papers appear to have been lost in the shuffle. The suit has been dismissed several times and now awaits a new review. As yet, Wells Fargo has been unable to produce the promissory note.
The case went to the Appellate Division which ruled in favor of DeMucha. This is another case that is requiring lenders to be able to produce the original note and documents. Home owners are increasingly holding lenders accountable and this case is another chink in the MERS armor. MERS has been embattled (rightfully so) and this case further muddies the water on MERS. Last week, the Utah Appellate division determined that MERS registrations were valid.
For the apparent future, cases will be viewed on a case by case basis. The facts of each case are unique and it is important to not put too much emphasis on any one decision (with the exception of In Re Veal that I have discussed previously).

Another Case Challenging the Validity of MERS

Wednesday, July 20, 2011

Fear of Fraud is Ruining More Workable Real Estate Transactions

It keeps getting harder and harder to get shorts sales accomplished. It is especially difficult with investors even though they are paying cash in most instances. Investors are more than one-third of current transactions so it does not behoove the industry to make matters more difficult for them.

Lenders have certainly made it more difficult for investors with restrictions in reselling, re-listing, marketing, etc. However, now the listing agents and their brokers are injecting personal feelings, emotions, and LEGAL opinions into the mix and this is REALLY hurting the industry.

Earlier today, I was on the telephone with a listing agent in Florida. I was on the call as the attorney for an investor/buyer with cash. This agent explained to me that she does not do “investor” deals. I explained to her that this is distressed real estate and she cannot afford to maintain this position. WELL!!! Missy Miss advises me that she does $20M a year in production and does not need to do investor deals! Folks, this lady would boo a cure for cancer. Could not have been more negative, condescending and arrogant.

My response to this verbal diarrhea was that she accepted a client and has a duty to the client. Her position necessarily violates that duty. She then explained that her broker told her not to accept investor deals. OK, a new wrinkle. She stated that attorneys told them not to participate in them because they might lose their licenses. I advised her that NOT participating in investor deals and presenting all offers, FAIRLY (without sabotaging them) could cause her to lose her license!!!

Ladies and Gentleman, this is really getting out of hand. Not all investor deals are fraud. A small fraction of them are. Do we judge ALL attorneys and ALL real estate professionals by the bad actions of a few?? There is NO place in the real estate market for the injection of personal feelings and emotions into the process. This listing agent was clearly sabotaging the deal because she “didn’t like it”.

I then decided to review the foreclosure status online. The foreclosure is 2 ½ years old and getting close to sale. I asked what the status of the property was and the listing agent told me “pre-foreclosure”. PRE-foreclosure?? Honey, this property is half way to gone!! Did she not know the difference?? A willing buyer, with CASH, told her that there is not a good fit – and it was not because of price or terms, it was because of her!! Investors need love too!!! LOL

Fear of Fraud is Ruining More Investor Deals

Tuesday, July 19, 2011

Reuters Study Provides insight into Leners Not Having Original Documents

A study by Reuters provides interesting insight into the foreclosure mess and in particular, whether lenders have original documents. As I have blogged, in legal terms, if a lender wants to foreclose, it must prove that it is the real party in interest. It must prove that it has standing (the legal right to sue). Without the original documents, this is difficult.

However, remember that the courts do not require that the lender prove standing when they file the lawsuit. A home owner must assert this as an affirmative or separate defense. If a lender has not been paid in months or years and believes that they can convert a property to a performing investment, and then they are going to have a very high interest in foreclosing. However, in many cases, if they had to use real, legitimate, original documents to carry out that process, it simply would never happen. Why? Because the originals simply do not exist. Reuters calls this “one of the overlooked legacies of the housing boom,” and explains in a new report that “in the rush to make new home loans and sell them off as fast as possible…the original lenders…destroyed original documents or never turned them over as required.” As a result, promissory notes and mortgages frequently never made it to the end-buyer – or even just the next guy in line. This means that “many pension funds, insurance companies and hedge funds that invested in [investor] trusts never got formal title to the mortgages they had paid for.” And that means that when it comes time to foreclose, they may have no choice but to use doctored or replicated documents in order to do so. Analysts speculate that the reason that there has not been an audit or an investigation of this issue may be simply that “if the extent of the problem became known, the housing market might worsen.” For example, the country’s largest sub-prime lender (it collapsed in 2007) almost never endorsed promissory notes or assigned mortgages to the trusts that bought its mortgages, meaning that trusts may be out millions of dollars and a millions of homes could end up with clouds on their titles.

Senior Housing Sector Now Suffering from the Real Estate Bubble

Although most analysts agree that one of the most promising housing sectors for the near future is senior housing, the current housing slump is taking a toll on that very market. Rental and condo developments marketed to senior citizens are definitely attractive to the aging population because they require less upkeep and offer more amenities, but seniors are having trouble unloading their old homes in this market. And although according to Mike Pardoll, senior vice president of investments at Marcus & Millichamp, “the seniors housing sector has improved significantly from last year,” he adds that much of the improvement is due to the need for rehabilitative services and skilled nursing facilities, which could leave out many “active living” communities that simply hoped to attract the senior population with appealing activities and low maintenance homes.
As a result of the continued housing crawl toward recovery, some senior living homes are thinking creatively about how they fill rooms and suites. For example, some seniors are using “gap loans,” which are home equity loans the enable a homeowner to budget for having their house on the market for a year. One senior living community actually suggests and facilitates the use of these loans, since they can be used to pay apartment rental expenses. Other facilities are opting to rent out condos instead of only selling them in order to fill more vacancies.
This time last year, it seemed like senior living was about the only area of new construction in the market. It will also be interesting to see the effect of the discontinuation of reverse mortgages by Bank of America and Wells Fargo. This could help or hurt the active senior citizen market. We may not know the answer for some time to come, but it certainly will have an impact. The frightening thing is that there seems to be an acknowledgement in this market sector that seniors are having difficulty getting their current homes sold.

Foreign Investors may Be Fueling Increase in Real Estate Trends in Some Areas

Foreign investors may be fueling what little surges in real estate sales that may exist. In Silicon Valley, California, for example is cited as an area with projected property value climbs and the attractiveness of the area as a future home for many foreign investors. “We’re getting a huge influx from China and India,” explains one upscale property specialist in the area, adding that “there is just a lot of wealth there.”
“I’m telling all my friends this is the time to find good deals in Silicon Valley,” says a stay-at-home mother from Guanhzhou, China, who just bought a $500,000 home in Fremont with her husband. They believe that property values in the area are set to skyrocket in the next five years and that “your real estate slump makes this a great time for us to buy.” And should they opt to move to the area, it offers good “culture…business environment and good education for the kids.”
Foreign investors typically have another competitive advantage in the market place. They are buying at a premium to the US dollar since many currencies have strengthened against the dollar. Many Asian buyers are buying at 30% discount because of currency spreads. This makes attractive deals even MORE attractive and affordable.
In fact, some analysts believe that Silicon Valley is set for another “boom” as “investors pile into internet IPOs and startups” while “house prices and salaries soar”. Office rents in the area are also climbing, with some buildings reporting 35 percent hikes. Hotels are regularly logging 80 percent occupancy and higher. The boom is leading some to speculate that another bust – reminiscent of the dot-com bubble – is on the way, but chief executive of, David Rusenko, disagrees. “These are all wealthy, private individuals who understand the gambles they are making,” he says. “It’s not like in the dot-com days when grandma was placing bets on IPOs,” he adds. And conventional wisdom indicates that this latest “tech boom” could last into 2013. The question is, in 2014, will Silicon Valley properties still be worth the money paid the year before?

Sunday, July 17, 2011

Foreclosure Rate Statistics Provide Interesting Data

There is certainly massive uncertainty about the validity of many aspects of the foreclosure process. States are enacting legislation to protect home owners, courts are holding lenders accountable for sloppy transactions and record keeping, and the foreclosure process itself has be revamped on many states. Despite all of this, foreclosure times actually decreased in three critical states last month. California, Arizona and Nevada all reported decreased foreclosure timelines in June 2011 despite uncertainty over MERS, bank processes and the general wisdom of adding to the shadow inventory in a fragile market. According to ForeclosureRadar, even though the month-over-month foreclosure duration decreased in these states, year-over-year numbers still are in keeping with the prolonging trend. In Nevada, for example, the average number of days it took to foreclosure this June was 319 versus 239 in June 2010. Sean O’Toole, CEO of ForeclosureRadar, called the decrease “statistically interesting” but said that he does not “see it as signaling an end to lenders looking to avoid losses they can’t afford by continuing the extend and pretend policies of the past.”
Nationally, foreclosure filings have fallen 32 percent in the second quarter of 2011 after falling 29 percent in the first half of the year. James Saccacio, CEO of RealtyTrac, recently projected that “One million foreclosure actions that should have taken place in 2011 will now happen in 2012 or perhaps even later.” He added that this will “only drag out the effect on the real estate market” and pointed to “an ominous shadow over the housing market” that he does not believe will dissipate until the foreclosure inventory is “whittled down to a manageable number.”
It is interesting in this market that some apparently good news is actually bad and some apparently bad news is good. These are interesting times and we all have had to change the manner in which we conduct business. I have made more changes to my short sale real estate investing in the past three months than I did in the prior three years.

Friday, July 15, 2011

WOW..this case has HUGE Implications on Foreclosure in South Carolina

I was doing some legal research in South Carolina for an investor property there. I was searching for some legal guidance on a particular issue when I stumbled upon and incredible case. The South Carolina Supreme Court had a remarkable decision in Matrix Financial Services Corp. vs Frazer, et al. In Matrix, The Supreme Court of South Carolina has enunciated a rule (albeit in dicta) that could prevent a mortgage lender from foreclosing on a mortgage if the lender closed the loan without a lawyer’s supervision of the title search, document preparation, and closing. I can tell you that it would be EXTREMELY rare that an attorney supervised the title search, document preparation and closing.
This decision caps a long line of unauthorized practice of law cases arising from real estate loan closings, the South Carolina Supreme Court has published a decision that may produce “chaotic unintended consequences” according to some real estate lawyers in South Carolina.
The essence of the case was that the South Carolina Supreme Court held that closing a loan without a lawyer’s supervision constituted unclean hands (because of the unauthorized practice of law), thus barring the lender from seeking equitable relief (foreclosure).
A quote from the case pretty much sums this up, “ Thus, Matrix has committed the unauthorized practice of law in closing the refinance mortgage, clearly violating South Carolina law. The dissent’s protestations aside, a party cannot violate the law and expect not to bear the consequences of its actions. This Court will not grant a discretionary, equitable remedy to a party who refused to follow the laws of this state.
Folks, this was a Supreme Court case – the highest court in the state. Can you imagine this?? Virtually every defendant in a foreclosure will be able to assert as an affirmative defense that the lender’s actions constituted the unauthorized practice of law since virtually every loan closing would not have been supervised by an attorney. Remember, this case indicated that an attorney must supervise the title search, document preparation and the closing itself. The effect of this case means that most foreclosures in South Carolina can be stopped dead in their tracks by asserting this defense. Even if a lender can prove that an attorney supervised all of these functions, it will take months of research to prove it!

Thursday, July 14, 2011

Mortgage Insurance Role in the Foreclosure Process

There is a lot of mis-information about PMI and its role in the current foreclosure environment. When you purchase a property and obtain a loan for that property and that loan exceeds 80 percent of the value of the purchase, the lender will require you to pay for private mortgage insurance ("PMI"). PMI is only for the benefit of the LENDER. Sometimes, the LENDER purchases PMI (sometimes referred to as MI-mortgage insurance) and the home owner is not even aware of it!!

PMI does not cover the owner of the property. It only insures the lender for the portion of the loan that exceeded 80 percent of the value of the property on the date you obtained the loan. If you fail to make your payments or walk away from the loan and never pay it back or if you sell the home for less than the value of the mortgage, the lender has insurance on that portion of the loan.

When a home owner fails to make payments with the first lender, that lender files a claim with the PMI company. The PMI company may have paid off that claim with the first lender and the lender then sold the loan to a new lender.

That new lender has the right to collect from you the full amount owed under the loan. In some cases, if the PMI company paid off the claim, the PMI company could come after you for the repayment of the amount paid to the first lender for the PMI claim.

Now that the loan has been sold off to the second lender, you still have the obligation to pay whatever debt is owed to that lender under the forbearance agreement.

Exceptions to Repaying the Note. There are some exceptions in which the homeowner might not have to pay the full amount of the loan back to the lender. One of these exceptions is when the lender and borrower no longer have the duty to repay the full amount, when the borrower files bankruptcy and all or part of the loan debt is released or in some states where the lender can only go after the property and can't go after the borrower for a deficiency judgment.

In another scenario, if a home owner has not been able to repay the loan and the lender has foreclosed, or if the home owner has sold the home for less than the amount owed under the loan - a "short sale" -- and the lender agreed to accept that short amount as full payment for the debt and agreed not to go after you for the shortage, the lender would not be able to go after you for the additional money.

You must also keep in mind that in many states the lender can still go after you to get the repayment of any amount owed under the Note. And if the PMI company paid a claim to the lender, the PMI company can come after the home owner for the amount paid out on the claim.

Tax Consequences of Distressed Real Estate - A Novel Solution

There is a plethora of misinformation and disinformation regarding many aspects of distressed real estate. I try to separate fact from fiction and I will address a lot of different issues in the coming weeks.
Today, I am going to discuss some of the tax ramifications of distressed real estate. Most of us are familiar with the issue and many have a working knowledge of the Mortgage Forgiveness of Debt Relief Act and other IRS considerations. I will be discussing these in more detail later. Today, I wanted to discuss additional ways of receiving tax relief from the disposition of distressed real estate.
I will start out by saying that it would be prudent and highly recommended to review a home owner’s situation and strategy with an attorney. You definitely so not want to be giving tax/legal advice unless you are an attorney. I am developing a strategy which has been positively reviewed by tax attorneys.
The basic element of this strategy is to avoid negative tax ramifications of the disposition of distressed real estate by alleging that the lender does not have standing to provide the 1099C (this is the correct form, although some lenders send other forms and I have seen blogs etc. that refer to 1098’s etc.). Yes, this is an adaptation of the “produce the note” affirmative defense. Recall from my prior blogs, that if the lender cannot produce the original note, it does not have standing to file a foreclosure lawsuit. Many courts uphold this theory. However, it is a different standard with the Internal Revenue Service and the likelihood of success is high if the case is presented properly.
The reason that this strategy is successful is because if the lender cannot produce the note, the debt is not forgiven, it is INVALIDATED. If the debt is invalidated, you cannot be assessed tax implications upon disposition of the real estate! Former revenue officers have responded positively to this strategy.
This can be a huge issue for those with distressed real estate – especially for those home owners that are high net worth but cash poor.

Tuesday, July 12, 2011

Isn't This Behavior What Got the Real Estate Market into Trouble in the First Place??

Those pesky little elves in Washington are at it again! I refer to them as elves because they tinker and meddle behind the scenes and no one really knows what they are doing! Of course I could refer to them as OTHER things but decorum and good taste prevent me from doing so in this forum…and besides, there are those that are equally delusional that will send me nasty emails!! LOL
In what could be a repeat of the easy-lending cycle that led to the housing crisis, the Justice Department has asked several banks to relax their mortgage underwriting standards and approve loans for minorities with poor credit as part of a new crackdown on alleged discrimination, according to court documents reviewed by Investors Business Daily. Eric Holder has no business in the mortgage industry…he is completely detached from reality and meddling in EVERYTHING! He is more dangerous than OBomshell!
Prosecutions have already generated more than $20 million in loan set-asides and other subsidies from banks that have settled out of court rather than battle the federal government and risk being branded racist. An additional 60 banks are under investigation, a DOJ spokeswoman says.
No Job, No Problem
Settlements include setting aside prime-rate mortgages for low-income blacks and Hispanics with blemished credit and even counting "public assistance" as valid income in mortgage applications.
In several cases, the government has ordered bank defendants to post in all their branches and marketing materials a notice informing minority customers that they cannot be turned down for credit because they receive public aid, such as unemployment benefits, welfare payments or food stamps.
Among other remedies: favorable interest rates and down-payment assistance for minority borrowers with weak credit.
For example, the government has ordered Midwest BankCentre to set aside almost $1 million in "special financing" for residents living in predominantly black areas of St. Louis. The program includes originating conventional home loans at fixed prime rates for African-American borrowers "who would ordinarily not qualify for such rates for reasons including the lack of required credit quality, income or down payment."
The same federal order, signed last month, praises Midwest for adopting "less stringent underwriting criteria" while under investigation.
In the case against Citizens Bank of Detroit, settled in May, the U.S. decrees that "the bank may choose to apply more flexible underwriting standards in connection with the programs under this order."
Such efforts risk recreating the government-imposed lax underwriting that led to the housing boom and bust, critics fear.
"It's absolutely outrageous after what we've just gone through," said former Rep. Ernest Istook, a Heritage Foundation fellow. "How can someone both be financially stable enough to merit a mortgage at the same time they're on public assistance? By definition, you don't have the kind of employment that can support such a loan."

Sunday, July 10, 2011

MORE on Flipping, Flopping and Fraud

We have had great dialog regarding fraud and disclosure and I wanted to follow up on this based upon the GREAT comments that we are entering. This is what Active rain should be....professional dialogue to vet issues and voice opinions (naturally networking is huge too).
Much of the discussion relating to fraud has been based on disclosure. Disclosure is a HUGE issue today because the short sale process has escalated the importance of disclosure. This is not only on what TO disclose, but also what NOT to disclose in a short sale transaction.
Many have expressed that as long as you disclose, there is no fraud. This is generally a good starting point, but it is not dispositive of the issue. Disclosure alone will not prevent fraud if the other underlying elements of fraud exist. The challenge in a short sale is that there is frequently an extra buyer – the “end” buyer. The presence of this additional party has complicated the disclosure topic.
Fraud has more to do with intentionally deceiving someone in the purchase and sale process. Misrepresenting on a HIGH level the facts or issues. Obtaining a BPO or appraisal by intentionally mis-stating aspects of the home MIGHT rise to fraud.
In these transactions, we must all stay within our lanes. By this I mean, realize who are client is, and appreciate what are duties are relative to that client. This applies to EVERYONE – agents, brokers, attorneys, buyers, sellers, title agents, mortgage brokers, and the lender. Rarely does anyone in the transaction have a duty to the lender (unless it is a listing agent and their client is the bank such as a REO). The lender has its own protections and staff. Whenever listing agents or the buyer’s agent discloses something to the lender, they probably have just violated their duty to their CLIENT! Not a good plan!!
Lenders have embarked on creating the duty by asking buyers, listing and buyer’s agents to sign various forms of addenda or disclosures that CREATE the duty to inform lenders of other offers, etc. THIS PROVES MY POINT!!! THE DUTY DOES NOT EXIST AND LENDERS ARE TRYING TO CREATE THE DUTY! DO NOT sign these addenda!!! You do not have to!! I also frequently see the reference to a “fiduciary” duty in such addenda. It is NOT a “fiduciary” duty. Perhaps use that as the reason to not sign the addendum.
Tell the lender that your attorney, broker, client, or barnyard animal of choice has instructed you to not sign this. Tell them that there is no privity of contract to sign this; no legal consideration to sign this, etc. More often than not, they will back down!!!

Saturday, July 9, 2011

More on Real Estate Fraud and the Short Sale Process, Flopping, Flipping

Since the topic of fraud received so many comments, I decided to stay on that topic for a series of blogs. This issue affects all of us and it is important to fully understand this issue. I recently had an investor with two deals under contract in Reno, Nevada. In each case (two different listing agents) the listing agent came back and stated that THEY (the agent) could not accept the offer. This threw a red flag to the investor so he inquired further.
It turns out that in each case, the listing agent contacted NVAR and their general counsel indicated that this type of transaction was fraud!!! The investor asked me to contact NVAR. WELL….I had a pleasant and professional conversation with Sue Saunders, general counsel for NVAR. Her “official” position is that whenever a property is purchased and then re-sold in less than 30 days, it is fraud!!! I asked her to justify her position with my long winded soliloquy about 29 days is fraud but 31 is not?? She replied that she cannot respond to the 60 + calls per day that she receives on this topic so she has a blanket policy. She does not even hear the facts of any particular case.
This is troublesome on many fronts. First, the listing agent should not be unilaterally deciding that this is fraud. It is arguably a breach of duty to the client. Not to mention a deal killer. Additionally, such behavior will result in investors disclosing less and that it legally permissible, but unfortunate. They simply will not state their intention. Also, this position is in NEVADA – the hardest hot state in the union. Killing deals in Nevada is not a good plan. In many, many cases, there are willing buyers and willing sellers but the deals are not being consummated because of the subjective opinions of a few -opinions that are not based on a thorough review of the facts.
Fraud is a legitimate concern for all of us. However, knee jerk, emotional reactions are rarely the best options either.

Scary Outlook for Real Estate Agents and Investors in Short Sales..MUST READ

As always, there seems to be good news and bad news for real estate investors. The truly great news is that recent statistics indicate that 37 % of transactions are now completed with investors. This is up from a previous average of 30% (according to NAR). I personally view this as good news since investors are clearly keeping the market alive since they are completing more than one-third of the transactions.
The bad news?? Seems that major lenders are continuing to clamp down on investor deals. Wells Fargo has recently released a new standard approval letter than includes a NINETY DAY restriction on reselling by the investor. Bank of America is thought to be ready to adopt this policy as well. Additionally, many lenders are placing real estate professionals in harm’s way by requiring them to sign an addendum that indicates that they acknowledge a fiduciary duty to the lender to disclose any higher or otherwise better offers during the course of the transaction.
This is legally not supportable because the lender is placing the real estate agent at a litigious risk to their contractual client (this would not be true in the case of a REO listing agent, however). In fulfilling the “fiduciary” duty to the lender that the lender has now created (and without legal consideration to you for this), you are sometimes violating your contractual duty to your client. In fulfilling the “fiduciary” duty to the lender (that legally you do NOT have) you will be causing the investor buyer to walk since their offer will be rejected and the home owner is now in a worse position than they were before (no buyer) and it is because of a the disclosure to the lender of a potentially higher or better offer that may never come to fruition! If you disclose and your client was the buyer, the sale will be rejected and the buyer will have a claim for lost profit against you since your action caused the offer to be rejected and your contractual duty was to the buyer. Whether you are the listing agent, transactional agent or buyer’s agent, the bank wants you to disclose higher or better offers.
I also strenuously object to the description of your new duty to the lender as “fiduciary”. It is not a fiduciary duty. It is my recommendation that you refuse to sign this and state that there has been no legal consideration for this promise; that you cannot execute that provision because it puts you at a litigious risk by potentially violating your contractual duty to your client (regardless of whether the client is a buyer or seller) and that you are not a party to the contract. We all need to stand up to lender intrusion into the market.

Thursday, July 7, 2011

Flipping, Flopping and Fraud

Flipping, flopping, fraud….today there is more and more misinformation and disinformation in real estate. I had an agent from back East contact me with concern about a particular deal and that it may be illegal. I hear this EVERY day now and 95% of the time, the deal is not even remotely fraud. This particular case is one in which the BANK’s appraiser came back with a low figure. The bank hired the appraiser and neither the buyer or seller ever met the appraiser. The low appraisal gave the buyer a great deal. How is this fraud?
The agent directed me to a CoreLogic study. According to a study by CoreLogic, a mortgage and real-estate data research company, short-sale fraud, or flopping, is an emerging financial crime. Lenders will lose more than $375 million this year alone when they sell undervalued houses to unscrupulous realty agents and their cohorts, the company says. In its study of the issue, CoreLogic labeled as suspicious two-thirds of short-sales that are resold within six months at a profit of 40% or more. How can they make this assumption?? It is fraud because of the amount of profit?? Or is it fraud because the property was sold within six months?? This is arbitrary and random and there are no facts to support this “study”. I tend to agree with CoreLogic on a lot of things, but they are way off base here.
Yes, 40% profit is a lot. Perhaps some of these investors added value to the property. Just negotiating a short sale and getting it approved adds value since 30% of buyers will not look at short sale properties (according to NAR). Perhaps an investor takes advantage of a seasonal swing in values - Buys during the low season and sells during the high season.
Such blanket allegations of fraud are hurting the industry and the reputations of many legitimate agents, brokers and buyers. It is difficult (and in many cases ignorant) to assume that based on arbitrary number of days that an investor holds a property or an equally arbitrary percentage of profit that fraud has been committed.

Monday, July 4, 2011

Nice work Wells Fargo....BRILLIANT!!!!

I have a client that owns a property in South Florida. The home went to foreclosure sale despite the fact that Wachovia (Wells Fargo) had granted an adjournment because there is a solid short sale offer. The sale goes through and we filed protest, objection and Lis Pendens to cloud title. A hearing is set for later this month.
The purchase certificate has not been issued and title has not transferred. Despite this, Wells Fargo advertised for a contractor to clear out personal items and perform some other services. The property is in Collier County and the contractor is from Jacksonville! Make sense??? Not to me!! It gets MUCH better! The general contractor hires illegal immigrants to actually do the work. The illegals move into the home; are driving a car with no insurance and registration is issued to another vehicle and the wife of the sub-contractor has warrants for her arrest.
The illegals remove personal and valuable items in violation of the laws. Wells did not have the right to remove or take these items. The illegals trashed the property and took everything of value. The astute real estate agent (she is fantastic, Karen Wasserman @ Sun Realty) calls the police and the police call the real estate agent from Wells and advises that all activity on the property must stop since the purchase certificate has not been issued and there is a Lis Pendens on the property.
Two weeks later (this weekend), the illegals return, move back into the property and were in the process of apparently taking the spa when then police arrive again. Apparently, the wife of the sub-contractor performed her best Michael Johnson impersonation and performed a sprint that would be the envy of the fastest runner.
When are the lenders going to bring professionalism and legal standards to this market?? When is the government going to start doing something about illegal immigrants that continue to commit crimes?

Federal Government Imposes Foreclosure Review Process

The federal government has taken some action regarding the foreclosure crisis. The government has decreed that all servicers under the supervision of the Office of the Comptroller of the Currency (OCC) must conduct self-assessments to examine foreclosure management practices no later than September of this year. This is an attempt to help clean up the industry. Upon completion of the assessment, the lenders must identify and “take immediate corrective action” to address weaknesses in the process. The OCC has issued this mandate in response to what regulators have called a “pattern of misconduct and negligence related to deficit practices in residential mortgage loan servicing and foreclosure processing” in 14 large mortgage servicers.
While this sounds like a good thing, it is actually frustrating many state attorneys general, who have been frustrated by the OCC since it reached its own robo-signer settlement with major lenders earlier in the year. In fact, the AGs have written a letter complaining that the federal agency is actually ignoring a “congressional mandate” that gives states the right to regulate their banks rather than the OCC. The letter also accuses the office of “preventing states from enforcing consumer protection laws on national banks” during the 2007-2009 financial crisis.
The other aspect of this is that the OCC actually does not have much authority to do anything. It has “jurisdiction” over member banks only and most lenders have certain divisions that are under the auspices of the OCC, but not the primary lending arms. As an example, you may have “ABC Bank” and it is one of the top five home lenders. But only “ABC Bank North Dakota” Is under the auspices of the OCC. There has been a lot written about the OCC, but it actually has very limited purpose and usefulness.
I suppose that it is worth mentioning all of this, but the truth is that this type of action will have limited impact on the crisis.

Sunday, July 3, 2011

Fannie Mae & Freddie Mac Foreclosure Listings..Good Deals??

I have a client in Boston and he has been softly looking for a second home in a warmer climate. He referred me to the Fannie Mae and Freddie Mac websites and highlighted a few homes. He wanted my opinion on value. He thought that some of the prices seemed high and he wanted to compare the prices on the Fannie & Freddie sites versus other foreclosures in the respective areas.
I looked at the subject homes...they were in Arizona and Florida. There were two things that immediately struck me as odd. The first is that there were not many homes listed in the websites. The second oddity was that the prices appeared to be above market. I kept looking and looking in different areas and was surprised at the scant number of listings.
So, I decided to look further around the sites. There were promises of special financing etc. It really seemed that purchasing one of these homes might be a good idea. A lot of value and value added services. However, when you clicked on the link, you are taken to a variety of lenders and it appeared that they were offering traditional financing with a lower down payment - an FHA type of scenario and nothing special. When I clicked on several of the “participating lender” links, they were either broken or took you to another section of the lender website with no reference to particular programs.
I then decided to look in areas that I may have interest. I was astonished to find ZERO listings in several areas. This is not possible given the number of foreclosures and the fact that the troublesome twins, Fannie and Freddie must have a massive amount of listings. What is the story??? Shadow inventory at Fannie and Freddie?? Government ineptitude in getting them listed?? Anyone have any thoughts?? This might be a fun topic to toss around!!

Saturday, July 2, 2011

Here is Where it Gets REALLY Interesting...Forgiveness of Debt Issues

I have written about the Bankruptcy Appellate Panel Decision in the matter of In re Veal. I have mentioned that two prominent tax attorneys reviewed it with me…we have made a VERY interesting and compelling argument. In a situation in which the borrower has an approved short sale, and receives a 1099 or 1098 from the lender that indicates a “forgiveness of debt issue”, there is a way to negate the tax ramifications (in addition to the provisions of the Internal Revenue Code (IRC) and the Mortgage Forgiveness Debt Relief Act (MDFRA).
Suppose the a borrower owed $1 million on a property and there was an approved short sale for $600,000 and the bank issues a 1098 for $400,000 (I might mention that regardless of whether the bank issues a 1098, the money/tax is owed). Further assume that the MFDRA and IRC guidelines to not apply and it appears that the borrower owes taxes on the forgiveness.
WELL…here is a scenic argument….if the lender does not have proof that it has the original note and that it has standing to even sue, they cannot properly issue a 1098 either and it can be voided!!! This will apply to all borrowers regardless of whether they are in bankruptcy. Apparently, former IRS auditors agree with this!!! If the bank cannot prove that it holds the original note, the obligation is invalidated not forgiven!! This is potentially HUGE!!! In other words, the debt is not forgiven, it never legally existed!!
However, I would not counsel my clients on this and neither should 99% of us on AR…it is a tax issue and should be handled by appropriate tax attorneys. HOWEVER, I can tell you that this logic/theory has already helped get a short sale under contract in California because the seller was concerned about the issue, but he has heard enough from me that he is willing to go through with the sale and consult with my colleagues on the forgiveness issue. Apparently, his CPA called the tactic “novel” and stated that it should work!!
The reason that you will need a tax attorney and not a CPA to make this argument is that it is a legal argument initially (that the lender does not have standing, etc). If you would like a referral to outstanding tax attorneys on this and other issues…send me an email and I will provide the info. I did not want the blog to become an advertisement for others’ services.