Thursday, November 24, 2011

Ohhhh Boy!! Another Case of a Foreclosure Sale Gone Bad!!

Ohhhh Boy!! Another Case of a Foreclosure Sale Gone Bad!!I always stated that a bone fide third party purchaser has a lot of rights when they purchase a property in a foreclosure auction sale. They should have a lot of rights because they did nothing wrong in the transaction and they have every right to assume that they will get good and marketable title. Of course, they should always perform their own due diligence.

However, recently, The Massachusetts Supreme Court ruled against Francis Bevilacqua. Mr Bevilacqua purchased his home at a foreclosure auction in 2006, but the Court ruled that he never had legal title to the property since the lender had no right to foreclose on it in the first place! Five years after the purchase, the robo-signing bank’s “dubious practices” stand to cost Bevilacqua. Realize that he purchased the home long before the issues with title associated with robo-signing came to light and he reasonably believed that the title was clear!

Bevilaqua’s attorney commented that this is “scary” and he added that people with this new type of cloud on their title “don’t know they have this problem.” Prior to the state’s U.S. Bank vs. Ibanez decision, in which the Supreme Court ruled that the prior owner of a property has claim to a property if the foreclosure process is proved invalid, Bevilacqua would have been considered to have clear title. However, the Ibanez case changed the game because, according to the decision, if “the bank held nothing [due to improper foreclosure], Bevilacqua acquired nothing and had no standing as a result”.

Although Bevilacqua attempted to clear the title upon learning of the issue recently, his petition, based on a statute “designed to allow the holder of a clouded title to clear that title,” was denied by the state Land Court. The court ruled – and the Supreme Court upheld the ruling – that Bevilacqua did not have the necessary “plausible claim to the title” since he acquired the title following an invalid foreclosure. The ruling makes it clearer, at least in Massachusetts, how courts will respond when ownership of properties that were foreclosed on during the “robo-signing era” comes in question. They will likely rule in favor of the former homeowner.

There is still a possibility that Bevilacqua will be able to keep his home via a foreclosure proceeding on the prior owner. His lawyer has stated that they will proceed with this option. There is currently no information available on how the former owner of the home plans to respond to the news.

I wonder what would have been the result if Bevilacqua had purchased via a short sale as opposed to a foreclosure auction sale…..

Everyone have a wonderful Thanksgiving!!

Padraic Deighan Esq

Tuesday, November 22, 2011

New GSE Short Sale Guidelines...More Out of Touch B.S. from the Government

According to Realtor Magazine a product of, Fannie Mae and Freddie mac will be implementing new short sale guidelines after the first of the year. It appears that everyone involved in a short sale will be liable for “negligent or intentional misrepresentations in the transaction” and will have to sign affidavits stating that they are handling the transaction to federal standards. The addition of the affidavits to the short sale process is designed to help everyone involved in the short sale “identify potential mortgage fraud and [have] a clearer understanding of the intent of all parties involved in the real estate transaction,” the GSE (Freddie Mac) announced in a public statement last week. The move is specifically designed to prevent “flopping” short sales, which occurs when short sale properties are purchased from the bank at a discount, then sold immediately for a higher price. That is not my definition of flopping. Flopping is when there is fraud added to the short sale equation; such as agents buyers and sellers, title professionals etc. intentionally and fraudulently participating in the acquisition and sale of short sale properties. Examples of fraud would be fraudulent BPOs being submitted or utilization of a straw buyer. The government agency apparently considers this practice unscrupulous because it involves at least one party having knowledge of another party willing to pay more for the property than the amount for which the bank is settling.
The notion that reselling property for a profit is apparently unheard of to the GSEs. But Fannie Mae is utterly unconcerned with reality.
Although the changes to the process do not have to be implemented before January 1, 2012, the government is asking that servicers “implement the change immediately to fight fraud.” Along with the affidavit announcement, Freddie Mac also announced that borrowers more than 120 days delinquent no longer have to list their home for sale in order to become eligible for a deed-in-lieu transaction (DIL).
At least that is one good aspect of the GSE actions. DILs may be an option for many homeowners now.

Paddy Deighan, Esq

Tuesday, November 15, 2011

3rd Part in a Series of Why Short Selling Lender Restrictions are Unenforceable

A few days ago, I wrote a blog about the four reasons why lender restrictions in short sale addenda are unenforceable. To recap, they are:

The Four Components

1. The restrictions are required without legal “consideration” and are therefore invalid;

2. The restrictions are voidable because there is no “privity” of contract;

3. The restrictions cloud title (some states formally prohibit the restrictions);

4. The restrictions violate the spirit and intention of Uniform Commercial Code.

Today, I will discuss the third component in the four part series. Many if not most of the restrictions placed upon a subject short sale property are unenforceable because they cloud title. Real estate agents, attorneys, title underwriters and title agents are all put in an uncomfortable position because of these restrictions. The restrictions place liability upon all of these real estate professionals because they may be placed in a position of being deemed to know details about a prior or up-coming transaction. Real estate agents are being placed in a challenging position as their duty to their client (unless it is a REO property) is being jeopardized by the restrictions. Honoring the restrictions may violate the contractual duties of a client.

Additionally, such restrictions place a cloud on the title and the short selling lender does not have the legal capacity to cloud title after the sale. Several states have regulations against such activity as well, and despite this, lenders continue to place restrictions on future sale. I have experienced this first handed on a transaction in North Carolina. The closing attorney indicated to Wells Fargo that North Carolina has a law that prohibits restriction on sale (clouding of title). Wells’ response was that they do not care about the North Carolina law because the investor (Freddie Mac) indicated that the closing attorney must honor the prior short sale restrictions or the transaction is void. Pretty nasty, huh??
It took several calls to closing attorneys to get escrow closed because none of the closing attorneys would sign the required affidavit.

Padraic Deighan, Esq

Thursday, November 10, 2011

A New High in Short Sale Lows...even for Wells Fargo!

Some days are so bad that you have to laugh when the day gets even worse. I was on the phone for three hours yesterday with Wells Fargo on a short sale that is in bankruptcy. Normally, I prefer short sales in bankruptcy because the bankruptcy departments have a higher caliber of negotiator and they tend to be more diligent. Not on this one!!! It has been a nightmare!!
Wells Fargo claims that the file was no longer in the bankruptcy department. I advised them that the debtor was still in bankruptcy so there must be some mistake. They also advised that their records indicated a zero balance on the $2.2M obligation, so I knew that something went awry!! After two hours, they still could not determine wear the file was!! They asked me to prove that he was still in bankruptcy!!! Kinda hard to do that on the telephone and AHEM, they are talking to the attorney who should know!
We finally determine that servicing has been assigned to BSI and that there is a new investor on the loan. Great!! Three months wasted as the short sale will start over again!! Not to mention that the bankruptcy petition schedules will have to be amended because there is a new investor on the loan.
During the call, Wells transferred me to BSI but the representative must have entered a wrong digit as I was transferred to a porn line!!! I was told what can be done to me for $9.95/ minute! That has to be a first....getting transferred to a porn line during short sale negotiations!!! I must admit that at this point, my frustration level was so high, that I laughed pretty hard at that one!
Perhaps the lenders will use porn lines and charge $9.95/minute for short sale negotiations!!! Might be a creative solution to the banking crisis!!!
Paddy Deighan, Esq

Wednesday, November 9, 2011

2nd Component on the Unforceability of Lender Short Sale Restrictions

Yesterday, I wrote a blog about the four reasons why lender restrictions in short sale addenda are unenforceable. To recap, they are:
The Four Components
1. The restrictions are required without legal “consideration” and are therefore invalid;
2. The restrictions are voidable because there is no “privity” of contract;
3. The restrictions cloud title (some states formally prohibit the restrictions);
4. The restrictions violate the spirit and intention of Uniform Commercial Code.

Today, I am writing about the second component. The restrictions are unenforceable or voidable because there is no “privity” of contract between the lender and the buyer. This is a very old legal contract law issue and it is rarely asserted because it is so basic that it rarely is an issue. In most situations, that is! Real estate of course is different.
The premise is that you cannot contractually enforce a right, obligation, or duty upon someone unless you have a direct, contractual relationship with that person. In the case of restrictions placed in addenda or affidavits, there is no contractual relationship between the short selling lender and the buyer. There IS a contractual relationship with respect to the short selling home owner and restrictions on them MAY be valid (or I would say less INvalid). However, there are still solid arguments that the restrictions against the seller are invalid or unenforceable as well.
The premise here is simple and a long-standing principle of contract law. If A owes B $1,000 and B owes C $1,000, a simple solution would be to have A pay C. Let’s suppose that A and B agree to that and that A never pays the $1,000. C cannot enforce the deal against A because he has not “privity” of contract with A. His relationship is with B only.
You can take this argument a step further because if the buyer is an investor that intends to sell the property, there is even a stronger argument against enforceability of restrictions because now there is another party that has no relationship to the short selling lender and they are one step further removed from the transaction.
Link to prior article:

Paddy Deighan Esq.

Tuesday, November 8, 2011

The reason that short selling lenders cannot legally enforce their restrictive affidavits has four basic legal components. I will address each in a separate blog because of the length of each component.
The Four Components
1. The restrictions are required without legal “consideration” and are therefore invalid;
2. The restrictions are voidable because there is no “privity” of contract;
3. The restrictions cloud title (some states formally prohibit the restrictions);
4. The restrictions violate the spirit and intention of Uniform Commercial Code

I. Legal Consideration. In order for a promise (or in this case restriction) to be legally enforceable, there must be something of value given in exchange for the promise (or you have to surrender a right that you have). In the case of the short sale affidavits and the restrictions contained therein, there is no legal value given in exchange for the requirements. With respect to the short seller/owner, one could argue that the restrictions are a condition of the approval and therefore enforceable with respect to the home owner. Fair argument. However, there is no consideration given to the buyer in exchange for restrictions placed upon the buyer. The buyer did not default on the loan; the buyer does not owe anything to the lender and so on.
An example of this argument is that Bob promises to write a blog every day for Jim. Jim will clearly benefit from this (especially if the blog is on Active Rain)!!! Bob fails to write blogs or writes a few and stops. Jim has now suffered a loss. He is now deprived of the benefit of having Bob write the blog.
In this scenario, Jim has no legal recourse against Bob (unless Jim is from Jersey, in which case there is plenty that he can do – LOL). In the same manner, how can the short selling lender believe that they can enforce restrictions against a buyer??? IMHO, they cannot. I am not aware of any of these restrictions being tested in court. They certainly will!!!!
Paddy Deighan

Monday, November 7, 2011

New Twist in Short Sale Negotiations

New twists in negotiating short sales are occurring almost daily. Frustrated by long delays and lack of success in utilizing others, some investors have entered the negotiation arena. The concept is fair and simple: investors want some control over the process and many have taken to negotiating the short sale.
Everyone in the industry has an opinion on who should negotiate a short sale. I can say that major lenders (I work as a consulting attorney for two of the largest) do not favor short sales that are negotiated by someone with an interest in the property, or an interest in whether a property closes escrow. This would include listing and selling agents as well as the home owner. I suppose that this must now also include the investor as well. It would also include third party negotiators that are paid only if the property closes escrow. However, it is unlikely that a lender would ever discover the financial arrangements of a third party negotiator and client.
You can understand why – temptation and greed are powerful motivators for someone to fudge a short sale a little bit – state something to the lender that may not be accurate or fail to provide information that may lead to a denial or less favorable terms.
Today, I was contacted by a gentleman who was advised IN WRITING that the second and third liens were released and that a waiver of deficiency had been obtained. The short sale was negotiated by the investor buyer personally. You can imagine what happens next: there was not a full satisfaction of the second and third liens and one of the lenders filed suit in pursuit of a deficiency judgment. Perhaps the investor buyer honestly believed that he had obtained a waiver. It does not matter because the fact is that there was no waiver and now the home owner is in litigation.
There is a dramatic increase in litigation such as this. There is likely to be a lot more ahead as more restrictions are belong placed upon a short sale home.

Paddy Deighan

Thursday, November 3, 2011

Hypocrisy of Freddie Mac and Lenders in Short Sales

It never seems to get any easier. Short sales have become increasingly more difficult. Wells Fargo for example, has included addenda that require an investor buyer to hold a property for 90 days prior to reselling. This mandate comes from the investor on the note (Freddie Mac). Here is the hypocrisy: Freddie Mac is not the government as many people believe. However, the government (and taxpayers) have a relationship with Freddie Mac and own a sizable chunk of the company.
Several states have enacted legislation or already have legislation that prohibits such restrictions. I am going to blog about the topic of the legal implications of the restrictions in another blog because it is a lengthy discussion. There is little question that addenda are getting more restrictive on buyers. There are legal, contractual problems with this and there are also title issues as well. Regardless, lenders are including the restrictions in the approvals.
Yesterday, I had a conference call with Freddie Mac, the lender (servicer), the buyer and the closing attorney. The closing attorney (who of course is neutral in the transaction and does not takes sides) indicated the Freddie Mac that there 90 day restriction on sale violates North Carolina law. Freddie Mac responded, “We do not care. Unless the affidavits are signed as is, we will not approve the sale”. So a quasi-federal governmental agency does not care about state law and it wants what it wants even though there are legal and title issues in their policy. Despite such behavior, there are many in the real estate industry that believe that the federal government is a solution to the sagging real estate market.
I have a solution to this situation and it works for now, but we should not have to go through this. Real estate agents should not be required to execute affidavits that are not legally supportable and which put them at a litigious risk. In one recent transaction, the real estate agent felt so strongly that he should not sign the affidavit that he withdrew from the transaction.
We all have to stand up to this because the lenders and their investors are making more and more restrictions on transactions. The ultimate hypocrisy is that they do not even have standing to assert these restrictions, but that argument is reserved for another day and another blog.

Paddy Deighan, Esq