Dual Agency Issues: The New Depressed Property Law

Real estate agents are concerned about the situation in which they present an offer to buy unlisted property that is being foreclosed.

In that context if the agent says that the owner ought to sell to avoid the foreclosure or something of the sort the agent risks risk being deemed a “distressed home consultant,” and would then have fiduciary obligations to both sides of the transaction, as the agent would with a dual agency. In this situation though there is an inherently strong conflict of interest.

I believe that you would have to have the seller consult with a lawyer of his or her choice and have the seller be independently represented in the sale by the lawyer or an independent agent, perhaps chosen by the lawyer. The seller’s interests would then be protected and in the abstract I believe the agent would probably be deemed to have fulfilled his or her duty to the seller.

I would certainly recommend that even after the seller has independent representation the agent make full disclosure to the other side and maintain the highest level of honesty. I would strictly comply with the other requirements of the new law.

I’m not sure whether the new NWLS forms cover this situation, but it would certainly be appropriate to discuss the details of the situation with a lawyer at that time.

Washington Distressed Property Law (2)

It appears that most of the complaints about the equity skimming law are originating with representatives of real estate agents. (See a comment to an earlier entry.) The reason for this is that the law impresses new duties on the agents and with the new duties the prospect of liability. Over the years there has been a good deal of marketing to get you to think of real estate agents as “real estate professionals.” This law they believe is taking this idea too far.

The crux of this concern is that real estate agents might be characterized as “distressed home consultants” who the new law says owe a fiduciary duty to the the distressed home owner, someone facing foreclosure. Courts have described “fiduciary duty” as the highest obligation of care, loyalty and good faith. Most distressed home owners believe that they are getting this from the person who is advising them. (For that matter many people who retain a real estate agent imagine that they are receiving this level of commitment.) Illegal equity skimming, at least the cases I have seen, all involve engendering this level of confidence in the home owner and practicing beneath that level.

Representatives of real estate agents argue that this is not fair to the agents because the standard is vague and broad in scope. Remember though that the law applies only to agents, as well as all other people, who meet the definition of “distressed home consultants.” The law describes two categories of these “distressed home consultants.” The first is a person who solicits or contacts a “distressed home owner” and makes a representation or offer to to provide a service that will avoid the foreclosure.

The statute lists 13 types of offers that render a person a “distressed home consultant.” They include such things as avoiding or delaying the foreclosure, arranging a lease with a purchase option and the like. Do any of these things and you are a “distressed home consultant” with a fiduciary duty to the home owner. Clearly a real estate agent could inadvertently say something that would render him or her potentially liable as a fiduciary. So could anyone else.

The other way a person can be a “distressed home consultant” is by systematically contacting owners of homes that are in foreclosure. If you systematically solicit people in foreclosure you owe them a fiduciary duty. This should reduce the wildly misleading solicitations that are routinely sent to people after a notice of foreclosure is recorded, then published. Home owners in foreclosure receive dozens of these mailed promises of relief. Real estate agents, and others, who do mass mailings and target these people fall under the definition.

“Fiduciary duty” is a court-defined term that has been in use since long before Washington was a state. It is a term imposed by the courts where there is a relationship of trust and dependence. Its scope is defined by published cases, trial judges and juries. Lawyers have a fiduciary duty to their clients. Escrow agents and closers have fiduciary duties to both the buyer and the seller. The successor trustee performing the foreclosure has fiduciary duties. Trustees of real estate trusts and all other trusts have fiduciary duties. Partners in real estate transactions have fiduciary duties to each other. The concept is far from alien in real estate transactions.

What is interesting to me is that the real estate agents who are so confounded by the idea of having a fiduciary duty already have a fiduciary duty to their clients. This was imposed by the courts some time ago. When agents represent the buyer and the seller, a “dual agency,” they have fiduciary obligations to both sides. I hope that they are aware of this.

I presume that the aspect of fiduciary duty that troubles real estate agents the most is the standard of care. If a real estate agent or anyone else presumes to tell a person in foreclosure what to do or promises relief from the foreclosure, he or she should be held to the standard of care of a profession that can give such advise. This is currently the law. A real estate agent has court approval to fill in the blanks on real estate forms. A real estate agent is not permitted to discuss with the client the legal effect of contractual provisions. This would be the unauthorized practice of law. They are supposed to refer the client to a lawyer for legal advise.

In the context of a foreclosure a real estate agent, or any other person offering advise about what steps to take, is usually offering legal advise regarding foreclosure procedure or legal artifices to avoid foreclosure. This is not something most people (including real estate agents) are qualified to do and it has recently led to broad scale disasters for home owners in connection with equity skimming. A real estate person or anyone else finding himself or herself in this situation should refer the home owner to a lawyer rather than offering legal advise. This is already the law.

Washington’s New Distressed Property Law (1)

HB2791, entitled “Property Conveyances — Distressed” becomes effective June 12 and this prospect is causing concern and confusion in the residential real estate industry. Memos are flying around real estate agencies and you hear occasional cries of doom from bleak Cassandras and doleful Jeremiahs The law is not complex, so reasonably diligent agents and others in the field should at least not be confused. Furthermore, the law will not entrap any reasonably well intentioned and informed person in the future. It should, however, dramatically reduce pandemic fraud.

First, it applies to contracts signed after June 12. Any pending unconscionable equity skimming transactions, while not subject to the terms of the new law, should be abandoned in some sensible fashion, however, because of common law and statutory liability that predates SB 2791. (I have several of these lawsuits brought by deceived homeowners under the previously existing law.)

I often hear that this new law does far more harm than good because it scares aware legitimate foreclosure rescue investors. The homeowners will be tied to the tracks of nonjudicial foreclosure procedure and left destitute and homeless. That of course is exactly where these equity skimming schemes leave people. I have been involved with these for a few years now and I have yet to meet a homeowner who cliamed to have benefitted by an equity skimming arrangement, and I have heard of only one family that came out of it with their home. They lost all their equity and could barely make the payments on their heavily encumbered house but they last I heard still had it.

What is not spoken of much is that part of the scam is to convince homeowners not to legitimate alternatives to avoid the foreclosure. First, people can sell their houses and buy new ones, using the equity from the sale. They can also resort to bankruptcy to sell the house or reorganize their debts. That after all is why bankruptcy courts were created. Also a foreclosure slae does not mean that the homwowner will necessarily be left penniless.

Equity skimming is generally done by people who cannot afford to bid at a foreclosure sale and who want to get homes more cheaply than they would if they could afford to bid at a foreclosure sale.

Recently prices of homes being sold at foreclosure sales, because of competitive bidding, were about 60% on average of fair market value. The difference between the balance on the mortgage being foreclosed and the foreclosure slaes price would go to the homeowner. If not it went to pay secured debt that would have followed the homeowner after the foreclosure. So usually the homeowner would be in better financial shape with a foreclosure than by falling into one of the equity skimming schemes.

Sincere investors who really wanted to help the homeowners would just have to loan them the money to bring the mortgage currently, typically $8,000 to $20,000, and take a second mortgage at a profitable interest rate. Very simple and straight forward. Equity skimmers are after extravagant profit at the expense of distressed homeowners.

Bush Foreign Policy: A Bee in a Jar

Last month from Israel Bush accused Obama of being a modern Nazi appeaser by proposing that diplomacy be attempted with Iran. John Bolton on Fox TV celebrated these words and denounced the appeasers who would engage in diplomacy with Iran. McCain jumped on the band wagon and called Obama naive for suggesting such a thing.

Today, about three weeks later Dana Perino said: “We are trying to solve this diplomatically” when asked about comments that Israel intends to attack Iran to disable the facilities our National Security Estimate said are benign. Isn’t this what Bush called appeasement? How can Bush in Israel of all places compare a country with Nazi Germany, reject diplomacy as even worthy of consideration, an blanch at Israel’s apparent intention to attack?

You sure get the impression of a lot of angry directionless buzzing from Washington DC. It seems like our direction though is governed, not by policy, but the shifting winds of politics and a changing sense of expedience.  Apparently Bush’s grandiose appeasement speech was intended merely as a political attack from foreign soil on a candidate for president of this country and not as a serious policy announcement.  (Thank goodness, I think.)

The Climate Security Act: Where are our Leaders?

The Senate could not muster the votes to block a filibuster of the Climate Security Act and with that Harry Reid took the bill off the floor, ending any realistic prospect of passing the first global warming legislation of note.

To some degree this fate is a product of the polarized atmosphere, not just in our Congress, but throughout the country. With roughly 80% of our senators claiming to be creationists (who tend to disregard scientific conclusions), the “base” oriented Republicans could not accept the bill without risking the alienation of critical constituents, including powerful utility companies. (This is the reason that McCain distanced himself from the bill after sponsoring it’s predecessor six years ago.)

On the other hand the bill’s heavy backing of the nuclear industry alienated many environmental groups and several senators in favor of legislation addressing global warming risked alienating environmental interests for backing the bill as it was presented on the floor.

Before it became the captive to various interest groups Congress was regarded as a sort of milieu of compromise. Congressional leaders were people who could get deals done through astute negotiations and compromise. Now, with the various rating systems which rate according to yes or no votes on designated bills, the notion of succeeding through compromise is being replaced by evaluation according to the zealous advocacy of special interests. This is a good example of how the people fare in such a system.

Resolving McCain’s Environmental Record

John McCain is campaigning on his environmental record. If you’ve heard or seen his ads, they rather boldly distance him from Bush, suggesting Bush is an unpopular extremist on the issue of global warming and that McCain is a centrist, but not an eco-freak. Many people see McCain’s position on the environment as the heart of McCain’s reputation as a maverick and it is certainly critical to getting the votes of the “Reagan Democrats” that he covets.

McCain’s ads seem to represent the prevailing view among journalists, including the Seattle P.I.’s Joel Connelly, who criticized the Sierra Club for ranking McCain as the worst congressperson on the environment and went on to extol to his leadership as an environmentalist. He seemed to attribute the Sierra Club’s evaluation of Senator McCain to some sort of undefined personal vendetta.

Mr. Connelly sites three areas in which Senator McCain has been a leader on environmental issues: a) voting against oil drilling in the Arctic National Wildlife Refuge; b) introducing legislation to cut greenhouse gas emissions; and c) co-writing a 3.5 million-acre statewide wilderness bill. These three things are illustrative of the difficulty claiming that McCain is an environmentalist.

First, Senator McCain has actually voted on both sides of the Alaska drilling issue, most recently he has been in favor of drilling. In 1995 and subsequent years he voted for drilling. The Republicans have made several attempts to get this through Congress. This year they attached it, as an amendment to a defense spending bill. This provided cover for voting for drilling. The party line was that we should not compromise our defense by voting against the measure, a false dichotomy. Senator McCain followed the party line and supported the bill as amended, saying that our defense was too important to sacrifice it for an Alaska wildlife refuge drilling ban. The Washington Post reports that environmentalists then went to two other Republican senators and found the necessary support to get the drilling authorization separated from the defense spending bill. In this way the prohibition against drilling in the refuge was maintained in spite of Senator McCain.

Senator McCain’s green house gas emission legislation is one of his chief platforms. His speech in Portland featured this legislation, so it is certainly worth discussing. He cosponsored the Climate Stewardship Act of 2003, which was defeated. It was a good faith effort to achieve bipartisan support of a global warming measure. It called for study of the phenomenon, development of a database and the regulation of emissions by the EPA. It was a highly flexible system with exemptions sold by auction. As such proposed legislation goes it is less onerous to industry than most of the other proposals, which is to be expected.

In 2005, after his proposed legislation failed, he seemed to swing leftward and called for flat-out mandatory limits on greenhouse gas emissions.

He has most recently swung to the right calling for no regulation but at the same time the institution of a system where permission to exceed prescribed levels (or environmental credits) is bartered. He obviously pushed his proposal somewhat rightward to appease his base but I am unclear about the details of his current thoughts on the subject. His website is no help here, but in his Portland speech he seemed to be somewhat hearkening back to the Climate Stewardship Act of 2003. What exactly is his “free market solution”? It sounds like something to appease both sides which isn’t necessarily bad, depending on the as yet unclear substance. The League of Conservation Voters had a similar response, commending the rhetoric but wonder what precisely he proposed.

A cornerstone of his policy is heavy subsidies to the nuclear energy industry with greatly increased reliance on this energy source. Obama seems equivocal about this but McCain as an ardent supporter of nuclear energy.

He clearly disregards all the pseudoscience about there being no global warming and accepts the judgment of science on the subject. It appears as if he is struggling for a way to address the crisis without alienating his base, which consists in substantial part of industrialists and libertarian leaning people against regulation of any sort. This, coupled with his recent nearly perfect record of voting with the administration on environmental issues, makes it almost impossible to guess what he might actually do as president. The words have always been there but he does not seem to feel that this is a paramount issue, at least to the extent that his voting record is the measure.

This Climate Stewardship Bill was introduced during the period when he seems to have gained much of his “maverick” reputation, the first term of the Bush administration. In the second term (and the last year of the first) there was no significant deviation from the dictates of the administration. After 2003 he seems to have diminished his efforts with this legislation although it was twice again introduced.

Last I will mention the statewide wilderness bill. But first I’d like to call attention to a December 2006 article by Mr. Connelly in which he said that the McCain 2000 run at the nomination presented McCain as a moderate Republican, a person with whom Connelly had a great deal of sympathy (except in the area of foreign policy where where he was referred to as a over zealous militarist). Since then Mr. Connelly acknowledges that Senator McCain has reformulated himself as a lockstep administration proponent. Mr. Connelly’s view on McCain as an environmentalist seem to be based entirely his now discarded 2000 to 2003 manifestation. If you are willing to disregard particular periods of Senator McCain’s public service you can characterize him as almost anything. I’m trying to get some sort of overview.

Back to the wilderness bill. Senator McCain admired Mo Udall and his efforts to preserve the wilderness. He worked for bills championed by Udall in 1984 and 1990. He has voted for a number of wilderness bills and other environmental matters. This is a little misleading though as many of these bills, are free passes to get a higher environmental rating. For example Washington’s Wild Sky Wilderness bill, after getting scaled down and massaged, passed the Senate unanimously. Senator McCain’s environmental credits are chronicled at the Republicans for the Environmental Protection website. On the other hand Senator McCain would eliminate any ban on new roads in wilderness areas and, among other things has many times opposed significant bills for funding for wilderness areas and national parks. His environmental failings are chronicled on sites such as the Sierra Club.

The Sierra club of course rates him the worst there is in Congress on environmental issues. This is based on his recent voting record, or lack of a voting record. He has failed to vote on myriad environmental issues since beginning his campaign. He did this of course to avoid alienating interest groups,  to give him campaigning room. While not particularly commendable, this would somewhat level the playing field with Obama, who has a rather sparse voting record because of his junior status as a senator.

The League of Conservation Voters is an established collection of environmental groups, which endorsed McCain is the 2004 Arizona senatorial election. It confirms that in 2007 McCain ducked out of every single critical envornmental vote. There apparently were 15, which is a lot of ducking.  LVC also gave him a zero for that period which should help resove some of Mr. Connelly’s questions about the Sierra Club’s rating of him but the LCV gives him a lifetime rating of 26 which means little until compared with Obama’s 86.  LVC’s lifetime rating puts McCain relatively low among Republicans on environmental issues.

McCain’s strength seems to be his forthright calls to do something about global warming.  When many Republicans would not say a thing against a president who refused to accept very clear scientific conclusions, McCain stepped up and said the evidence was irrefutable.  He however did not establish a voting record that would separate him from mainstream Republican positions defined by the administration.

My sense of this is that his environmental sentiments are sincere but they are not terribly high among his priorities.  The issues on which he has an unwavering voting record are any legislation against abortion rights and any legislation favoring expansion of the military or its adventures.  There is very little deviation in these areas.  On environmental issues more often than not industrial interests seem to prevail.

Washington State: Haven for Special Interests

It is my impression that Washington, more than perhaps any other state, is led by special interests. My impression is based in part at least on my law practice which focuses on real estate and business, so my awareness of this influence is pretty much confined to those areas.Let me give you a few examples of what has given me the impression that special interests are more influential here than most other places.

Perhaps my most shocking moment practicing law occurred when, during oral argument before the State Supreme Court, a representative of the insurance industry pointed to the justices and told them that his people were closely looking at how each one of them voted on this case and the insurance industry would be heard from come election time. (I am paraphrasing here but this message was loud and clear.) I thought that this was a truly shocking insult to the integrity of the court, but the justices said nothing.

In the area of construction law Washington is I believe the most repressive with respect to consumer rights. Did you know that if a building or bridge collapses six years after it is permitted, there is absolutely no recourse against anyone in the construction industry, including builders, suppliers, architects, engineers, even surveyors and anyone one else claiming to be in the industry? Condominium owners have no recourse if their building collapses four years after it was permitted (although this is a little murky). In Washington, at least with respect to being able to enforce warranties and representations, all the talk about the useful life of structures is bogus. After six years (four for condos) no one is responsible.This is the result of Washington’s statute of repose, which is jokingly said to have received that name named because people had to be asleep for the legislature to get the law through.

Other states have statutes of repose. These were pushed through state legislatures by an unprecedented lobbying effort on the part of the insurance and building industries in the 1960’s. Washington’s four year statute for condos and six years for absolutely everything else is extremely rare among the states and may be the shortest of any state. If you buy a new condo you should know that you are stuck if anything (however disastrous) goes wrong four years after the permit was granted, which is ofter about two or so years after it is filled.

To give you a sense of the influence of the building lobby, in Washington say a school building collapses six years after completion and kills a child whose watch stops for no good reason. There would be no recourse against anyone in the construction industry but the parents could sue the watch manufacturer for the cost of the watch. Personal property here has a twelve year (or the useful life of the product) statute of repose.

Perhaps the best indicator of the exalted state of special interests here is that when three sitting justices of our State Supreme Court announced last week that they were seeking reelection, the newspaper interviewed not a law professor or someone who practices before the court, but a representative of B.I.A.W., the building industry lobby.

The Foreclosure Crisis

There is a lot in the news these days about the real estate industry and the breath-taking number of home foreclosures. As the number of foreclosures spiraled upward nationally, Washington was said to be relatively protected from this trend. We are now however rapidly climbing the ladder of state rankings in number of foreclosures per capita.There are two aspects of this crisis that receive a great deal of attention.

First the lending practices of banks are roundly assailed now. Our legislature just passed laws curtailing certain home lending practices of state regulated institutions. On the national level Fannie Mae and Freddie Mac just signed an agreement that says they will not accept a loans based on an appraisal originating at the bank. This will affect the industry and should serve to delay closings a bit, at least in the short term. In order to help a stagnating home lending industry the FHA has revised its rules.There has also been publicity about foreclosure rescue scams, the practice of preying on people going through a foreclosure by taking their title to their homes, paying off the defaulted mortgage, renting the home to the former owner and eventually evicting the former homeowner. This is structured so that the “rescuer” receives all of the equity in the house and the home owner receives nothing. This term our legislature passed laws closely controlling this activity.

Something that has received almost no attention is the research into fraudulent practices of borrowers, usually home buyers. The Mortgage Bankers Association announced a report that attributes a portion of the current crisis to fraudulent credit applications. The most frequent false statements in credit application in 2007 related to employment history and income. There were also a great number of false statements related to the borrower’s intention ot occupy the home. It should be anticipated that there will be heightened scrutiny in those areas.

Frank Chopp Kills Another Consumer Bill

The State Speaker of the House, Frank Chopp, refused to let the Homeowners’ Bill of Rights out of committee, thereby killing it. The bill, sponsored by Democrat Brian Weinstein, who is quitting after this session, merely gives homeowners what they think they already have. It merely causes Washington law in the narrow area of responsibility for unsafe or negligently built residences to conform with common sense. It eliminates only one of many immunities enjoyed by the construction industry and then only with respect to homes.The bill is very simple. It says that someone guilty of the defective construction of a home is responsible to the homeowner if the defect causes damage to the home. Not all that controversial is it?Speaker Chopp killed this bill last year and did the same thing again this session. There is absolutely no legitimate reason for this bill not to be law. There is no policy reason, no legal reason, no legitimate reason of any kind.

Speaker Chopp killed this common sense measure to preserve the immunities of the construction industry, maintaining the burden of defective construction on the back of the absolutely innocent consumer. Mr. Chopp believes that by catering to BIAW, the building industry lobby, the Democratic Party will curry the favor or at least avoid the opposition of one of the State’s most influential special interests.

By the way, frequently homeowner’s property insurance does not cover this loss, leaving the consumer completely out of luck.

Washington Becomes a Lead State in Cracking Down on Foreclsore Scams

I almost missed it! This is great day because the legislature passed last night the equity skimming bill recommended by the Washington State Attorney General in January of this year. In two months the legislature passed a comprehensive bill specifically addressing foreclosure rescue scams. Representative McIntire called my this morning on his way back to Olympia from Seattle. He said that the yesterday’s session did not end until 1:30 this morning. The time was apparently very well spent.

This bill, HB 2791 , strikes right at the heart of the frauds that have been perpetrated on homeowners, making these scams felonies, as they should be. People who p[resent themselves to homeowners as consultants for foreclosures and default ed home loans are now subject to disclosure requirements and well articulated standards of behavior. The “savior” is prevented from absconding with more than 18% of the equity.

I will provide a more detailed discussion of the bill at a later date. When not impeded by special interests the Washington legislature is capable of very speedy action. With this bill (assuming the governor signs it, which is a safe assumption) Washington become one of the lead states in criminalizing this reprehensible behavior and regulating the permissible scope of legitimate activity.