Dual Agency Issues: The New Depressed Property Law

June 17, 2008

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.

Don’t Buy Foreclosed Property From Dirty Lenders

June 4, 2008

There is a hidden risk in buying foreclosed property that nobody seems to be talking about.  Many of the houses being foreclosed upon were subjected to liens securing sub-prime loans.  Many of these loans were made by disreputable lenders, sometimes by now indicted loan officers.

In Washington, like many other states, the purchaser at a foreclosure sale takes the title that existed at the time that the loan was made and the deed of trust recorded.  If the lender had nothing to do with any deceit on the owner and was not on notice of any irregularity, then the lender is deemed a “bona fide purchaser for value.”  This is a legal term meaning that title cannot be recovered by the owner, even if there was fraud.  When the lender was involved in the fraud or had reason to know of it, then the owner can clear title of the deed of trust and the ownership interest of the purchaser at the foreclosure sale.

Thus, a truly prudent buyer at a foreclosure sale or purchaser from a bank after foreclosure should check to see which lender made the loan originally.  Only after finding out about that lender can the purchaser have comfort that title cannot be reclaimed by a defrauded or deceived owner.

What you Should Do If Facing a Foreclosure

March 14, 2008

It is readily understandable when people in financial distress make bad decisions and a notice of default or foreclosure from your bank is certainly distress inducing. I will list some things that everyone in this situation should at least look into. I will focus on Washington law, which may be instructive to people in other states but care should be taken to verify the law of your state. This almost certainly requires seeing a lawyer.

Almost all foreclosures are deed of trust foreclosures but you must know what type of instrument encumbers your home. For example with seller financing, if you went that way instead of conventional financing, a real estate contract may be involved and sometimes a mortgage rather than a deed of trust is involved. Because mortgages have used in all states the literature usually refers to “mortgage foreclosures” and when used in this way “mortgage” is being used as a generic term covering any or all of the three mentioned security instruments.

I will be writing in reference to nonjudicial deed of trust foreclosures because over 99% of home foreclosures are of this sort. It is called “nonjudicial” because there is no lawsuit; instead there is only a series of notices culiminating in a trustee’s sale.

The Process

The sequence of events involves typically a few preliminary letters from the bank. This is followed by a notice of default which is a formal notice that starts the statutory foreclosure process. It is mailed, and may be served or posted on the door. It contains information about the debt and information about the foreclosure process. After at least a month and maybe a longer period you receive a notice of foreclosure and a notice of trustee’s sale. These have all the details about the foreclosure sale and the debt to the bank and set the time and date of the foreclosure sale (called the “trustee’s sale” in the notice). Notices are published and recorded but there a no more notices sent to the homeowner.

What to Do

1. Read every letter and notice carefully. This is rarely done. Most people are so upset they do not know what the communications say, but they contain vital information that must be considered.

2. Try to refinance. Make this a rigorous process. Talk to the foreclosing bank if you can and other banks, then talk to several mortgage brokers. They do not all have the same information or ability.

3. Consider selling. There are so many of these sorts of sales that they warranted a name: “short sales,” meaning they have to close before the trustee’s sale. Find a good real estate agent with whom to list the property. Again talk to more than one. The listing agreement should include exactly what will be done to market the property. Put that in — all the details — because the form will only have very general information. Get the most aggressive plan that you can find. Often there are scheduled price reductions as you get closer to the sale date. If you do this, write to the bank to see whether the bank will cooperate with the sale. It may agree to put the foreclosure off to allow a sale by you because if the foreclosure goes through the bank usually ends up with the property and then it has to try to sell it. Your sale of the property can save the bank time and money.

4. Inquire about programs to help you you bring the loan current. You may qualify for a program designed to assist you. There are not many of these but inquire of the city, county and state whether there are any programs that might provide financial assistance.

5. Talk to a bankruptcy lawyer. Bankruptcies are intended to provide relief for this sort of financial distress. There may be a plan which will enable you to bring the loan current. Even if there is no such plan available, you may be able to sell the property under the protection of the bankruptcy court so as to be able to preserve the equity you have in the property.

6. You are likely to receive a number of “rescue” proposals in the mail. Do not enter into any of these without consulting with a real estate lawyer. Usually the inducement for people to offer these to you is that they can take your equity in your home. There are dozens of ways to accomplish this. These “rescues” are so frought with peril for the home owner that you should absolutely never enter into one without legal advise and a clear understanding of what is happening. Some of these “rescues” even involve identity theft and forgery, so do not even apply for anything before you are certain of what you are doing and who you are doing it with.

7. Make sure your adviser complies with the law and make sure that everything of consequence that you are told is put in writing. You can just jot it down and ask the adviser to sign it. In any case there should be a record of the things that you are told. Also be aware that these “advisers” are probably required to be licensed as a real estate agent. Find out all you can about the person and his or her history. Find out how many of these deals they’ve done and how many ended in the eviction of the homeowner. Get this in writing. Do a property record search to see how many homes this person or her company has taken. Search for everyone involved in the transaction, as there are usually at least two people and a company or two.

The Bill to Prevent Scams

The Washington legislature just passed a law to regulate people who come forward with advice for you about how to escape your situation. As of this writing House Bill 2791 has not been signed by the governor but it surely will be, as it passed both the state senate and house without a dissenting vote. It should become effective 90 days after being signed by the governor.

This bill requires that a number of different written disclosures and notices be provided to the homeowner by the “distressed home consultant.” The terms of the transaction must be spelled out in detail, including all the money being paid to the consultant and others who are involved. This must be signed by both parties. If the consultant represents anyone else, this must be fully disclosed in writing. Follow up on this very carefully. Find out all the details of the other relationship and be sure you get them in writing.

The bill creates a fiduciary duty from the adviser to you. This is the highest duty imposed by law. You are owed the duty of complete disclosure and full honesty. Your questions and concerns must be fully addressed. They are required to act in your best interest, so it is quite possible that a relationship with someone else in the transaction creates a conflict of interest.

All contracts are required to be in the language used by the homeowner. (This requirement would reduce fraud in a number of different situations apart from foreclosures, but at least in Washington I believe that it stands alone.)

The contract must comply with a number of requirement, including a notice of a five day cancellation right.

No doubt the most significant substantive right created by the bill is the duty of the consultant to verify that in fact the homeowner is able to buy back the home. Usually in these situations, the home owner is given an option or something of the sort to buy the property back after giving it away. In my experience it is unusual for a homeowner to be able to exercise this right before it terminates. This bill puts the burden on the facilitator to verify, and be able to prove, that the home owner had the ability to buy his or her home back.

Another provision with teeth is the requirement that the homeowner recieve at lease 82% of the market value of the home before an eviction can be done. This will certainly slow down people motivated by windfall profits and it gives assurance that the homeowner will not usually be left homeless and penniless.

There are a number of other aspects of the bill but time prevents a full discussion.

The Foreclosure Crisis

March 13, 2008
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.

Amending the Law to Make it Harder to Stop Foreclosure Scams.

February 26, 2008

Here’s one that is sailing through the state legislature without discussion and under everyone’s radar.  Today the senate had a public hear to amend the deed of trust act so as to make it easier for trustees to conduct foreclosure sales when they are disputed.  Substitute Senate Bill 5378 removes a deed of trust trustee’s (the one who does the foreclosure) fiduciary duty to the owner and frees the trustee from having to field phone calls by saying requests for payoffs must be in writing.  Not only that but by law the trustee would not have to respond to a written request sooner than 10 days from receipt.  Not only that but the new law would make it clear that the trustee is under no obligation to discontinue a sale for any reason whatsoever.  Finally the owner, or anyone else, trying to stop the sale is required to put up security for damages, attorneys fees and costs.  This of course is a crippling requirement for someone going through a foreclosure.

That’s one way to stop a scandal: Deny access to the courts by prohibitive procedural and substantive legal requirements for getting a hearing.  This approach is reminiscent of the legislature’s answer to the condominium scandal, where developers were using materials that after a few years became defective and required replacement. The legislatures answer was to pass a law that said as to condominiums only if the problem does not show up within 4 years of the completion of the building, the owners have no recourse against anyone.

Substitute senate bill 5378  is skipping through the legislature without any debate.  In the area of real estate scandals the Washington legislature has developed a very clear pattern of resolving these things by curbing the rights of the victims.

This bill is sponsored by senators Weinstein, Kline and  Rockefeller.  What exactly is their connection with the banking industry?

Interested in Buying at a Foreclosure Sale?

February 8, 2008

foreclosureauction.jpg Like everything else I suppose foreclosure sales present a path of opportunity along the precipice of disaster. Here’s a quick sketch of some of the considerations that should precede your participation in this activity.

We will not discuss sales under federal law, including IRS sales. Maybe another time. Rather, we will discuss foreclosure sales under state law, the vast majority of forced sales. There are two kinds of these: trustee’s sales and sheriff’s sales.

Where’s the Money? First, have liquidity sufficient to pay in full on the day of the sale. One of the reasons that you can get good deals is that you have to have money in hand at the time of the foreclosure sale. There is no time to apply for a loan. Before you bid a make sure that you are clear about the payment arrangements. You can call the trustee (for a nonjudicial sale) or the civil division of the county sheriff’s office (for a judicial sale) beforehand to find out about this. Hopefully, you will have time to go to the bank after the sale to get the money to pay for the deed.

Judicial Sales. Sheriff’s sales are sometimes called judicial sales because they are sales under the jurisdiction of the courts and are ordered by the courts. Because sheriff’s sales are the less common of the two types and because they are more complicated, the bidding is usually not very competitive. Bidding at one of these sales requires an understanding of redemption rights, an area in which most lawyers are a little foggy. Usually, but not always, sheriff’s sale will result in a redemption period in which the former owner and perhaps other lenders or lien holders can buy the property from the successful bidder. The length of the redemption period varies from eight months to a year in Washington, although under certain circumstances there is not redemption period. After you look into this and determine who the redemptioners are and the likelihood that the property might be redeemed, be sure to check to see whether the court has imposed an upset price, a minimum price. If you are not experienced with this, you should consult with someone who knows about these things and can give you good, reliable advise.

Trustee’s Sales. Nonagricultural loans are almost always secured by a deed of trust because the Washington Deed of Trust Act provides for a relatively cheap and quick means of foreclosure. It is cheap and quick because it does not involve the courts and for that reason is called a “nonjudical foreclosure.” Most significantly to the prospective bidder, there will be no redemption period. The successful bidder will get a trustee’s deed, conveying title free and clear of redemption rights. This makes preparation a lot easier.

There are three areas that must be investigated. As with all of life so far as I am aware, the people who do the best with this enterprise tend to be the most thorough in preparation.

Title Investigation. First, get a title report. Call the trustee about this. You should focus on that the recordings that preceded the deed of trust being foreclosed because the foreclosure only eliminates the liens and deeds of trust recorded afterwards. For example if a “second mortgage” (we still use this term even though a deed of trust is used instead of a mortgage) is foreclosed and you are the winning bidder, you take title subject to the first deed of trust and must pay it or lose the property in the foreclosure of the first deed of trust.

It may also contain notes about possible defects. You may find that there are easements, covenants or use restrictions that affect your decision whether to bid. Also be aware that you will get the title of the person who signed the deed of trust, the grantor. If the property has been sold you take the interest of the grantor’s successor. Check this out so that you are comfortable that the grantor had good title at the time he, she or it granted the deed of trust. In short know what you are getting when you get title.

Physical Investigation. This is often a problem area because the property is usually occupied and you cannot get access. There is no rule against asking the occupant if you can look around, but as you would guess this can be a bit dicey. There are helpful records, such as those at the building department. Be sure to always at least drive by.

Market Value. No one should ever bid at a forced sale without have a good sense of the market. The reason most people go to trustee’s sale is to acquire the equity in the property. To determine that to determine that you subtract from the market value the sum of all the debt on the property. This, of course, is the cornerstone, calculation and will be the key determining factor in the competitiveness of the bidding. It is the determination of market value that will determine your success with this type of investment. This determination must be made with a critical factor being unknown: the physical condition of the interior of the improvements.

Zoning and Future Development. Check the zoning to see whether the property is in a sensitive area (and if so what that means) and what building restrictions there are. Check with the building department to see whether there are any permits for developing the area. Generally this sort of investigation involves the same sort of inquiry regardless of whether the property is in foreclosure or being sold on the market.

Foreclosure Scam Reaches the Court of Appeals

February 7, 2008

In a decision dated February 4, 2008 the Court of Appeals went against a foreclosure scam victim. In Torkild v. Johnston, the homeowner had made a number of procedural mistakes and the court sided with the so called “investor.” The victims case appears not to have been presented very well at all, so the outcome was not surprising. What was most interesting about this case is that the Court of Appeals decided not to have it published, so it is of no value as precedent at all and will not be an obstacle in a later, better presented case. This decision suggests that the court may be sympathetic to these fraud victims and be waiting for a better case for it to publish an opinion.

Beware of Rescuers

February 6, 2008

There is a nearly unprecedented number of foreclosures, prompting among other things press releases by national banks, a foreclosure relief fund created by the City of Seattle and frantic activity by people faced with losing their homes.  The people faced with this financial disaster are often unsophisticated in regard to real estate financing and usually have suffered a medical catastrophe, lost a job or suffered some other personal crisis.  They are usually desperate and easy prey for the unscrupulous.

Before talking about how people fall victim to “foreclosure scams” or what are sometimes referred to “equity skimming scams” let’s discuss time-honored ways to help a person out who is facing the prospect of being foreclosed upon.

A benificent investor wishing to help a financially strapped homeowner might loan the home owner enough money to either bring the loan current and secure this loan by a second deed of trust. This type of approach is being undertaken by the City of Seattle in a rather tepid — but commendable — program which supplies small loans to a narrow set of qualifying homeowners for the purpose of curing mortgage defaults.  Alternatively a high minded investor might pay off the mortgage in default and record a new mortgage (or deed of trust) with new repayment terms that the homeowner could afford, and set a date by which the loan has to be paid off by refinancing or selling the property. This would be an entirely conventional transaction, as sort of private refinancing arrangement.  In either case the investor could realize a small profit while seeing that the homeowner’s equity is protected.

There are two reasons that these perfectly traditional approaches are not pursued. First, in the world of investors in this type of situation there are not many people who have enough money to pay off someone’s mortgage or in many cases even pay off the past due arrearage. Those who have the financial resources are not inclined to make this sort of loan because the return would likely be relatively small. Because the loan by the investor might be a consumer loan, it may fall under Washington’s usury statute, limiting the return to the investor. (It is possible to structure this loan in a way that it is exempt from the usury law, but this is largely unexplored.)

The preferred method among those who seek extraordinarily high returns through “foreclosure rescue” is one that requires little money from the investor, offers immediate return, and creates a  high risk for the homeowner. The basic structure of these deals is that the homeowner transfers title to an investor (who is usually someone other than the “rescuer” with home the homeowner discusses the deal. The home is then sold to the investor for enough money to pay off the mortgage, plus $50,000 to $100,000 or more. The investor gets a loan to buy the house and agrees to rent the house to the homeowner with an option to buy the home back. Instead of going to the homeowner who is “selling” the house, the money (the $50,000 to $100,000 or more) generated by the sale goes to the “rescuer,”  sometimes it is split between the investor and the “rescuer.”

From this basic format there are countless permutations. The most common problem is that the the price to buy the home back is increased $50,000 or $100,000, or more, above the amount necessary to pay off the loan that is in default.  This requires the homeowner to qualify for a loan substantially higher than the amount of the mortgage that was in default.  Many times this proves to be an impossible task.  At best the homeowner’s chance of being able to refinance the house in order to exercise the purchase option is questionable. Unable to exercise the purchase option to get the house back, the homeowner is forced out of the house at the end of the lease term and the investor sells the house to get whatever equity might remain in it.

Even if the homeowner experiences uncommon good fortune and is able to buy the home back at the option price, sometimes other difficulties prevent this from happening.  Some people find that the investor has already sold the house when they try to exercise the option.  Some find that the investor has encumbered the house with additional loans so that it cannot be purchased at the option price but only at some inflated price equaling the sum of all the loans that have encumbered the property since giving it away.

There are alternatives to entering into such a high risk transaction that involves parting with most if not all the equity in the house and way too often involves eviction from the family home.

Selling the house is one traditional action by a homeowner who is confronted with foreclosure.   There are so many of these sales now that realtors call them “short sales.”  By selling, the homeowner receives the equity in the house and a chance to start over. If the homeowner enters into one of these “foreclosure rescue” programs and can’t exercise the purchase option, then he or she has sold the home without getting any of the equity out of it, essentially giving it away.  In the best case scenario when the homeowner is actually able to exercise the option, the price is so high that much of the equity has already been drained by the “rescuer.”  The bankruptcy court is tended to alleviate exactly the sort of situation confronted by the homeowner experiencing an uncurable mortgage default.  Consideration should be given to debt restructuring under a Chapter 13 wage earner plan.  Even a Chapter 7 liquidation offers a means of selling the house to preserve the equity which may have been built up over a lifetime.

There is pending right now in the State Senate Committee on Consumer Protection and Housing SB6413, a bill which addresses some of the issues to which consumers are most vulnerable in these “foreclosure rescues.”.  Apart from disclosure requirements and a five-day right of cancellation, the bill requires the “rescuer” to demonstrate that the homeowner has the financial ability to perform and actually get back title to the home. HB 2791 is the corresponding bill in the House, where it is in the Judiciary Committee.

Tips for Buying Foreclosed Real Estate

January 28, 2008

A buyer can often get a good-sounding deal after a bank has foreclosed on a parcel of real estate. Like all good-sounding deals, however, this one comes with risks that people ought to understand before making an offer. Typically this property is sold by a subsidiary of a bank, sometimes by a federal agency such as H.U.D. Remember that your seller (the bank or federal agency) knows nothing about the property and will take every imaginable step to immunize itself from responsibility to the buyer. (With banks it is usually a wholly owned subsidiary that has title to the property.) You will be pretty much on your own after closing and cannot look to the seller if the roof collapses the next day or some other disaster befalls you with your acquisition. If you receive a seller’s disclosure statement about foreclosed property, it may be a bit misleading since the seller’s period of ownership is likely to have been just a few months and chances are that the property has been unoccupied during that time.

Another point to bear in mind is that there are many different reasons a person suffers a foreclosure. One reason is that the property is not worth the debt on it. Another reason is that it would cost too much to repair to justify paying on the debt. Sometimes the property cannot be sold for enough to pay off the debt. Some bank owned property has been given back to the bank by a deed-in-lieu- of-foreclosure.

Banks look to recoup their loan balance and carrying expenses when they sell property they received through foreclosure. When large down payments were required of buyers, a purchaser of foreclosed property could count on there being equity in the property at the time of the foreclosure so that the price asked by the bank was likely to be beneath market value. With subprime loans accounting for a good number of the foreclosures, a buyer certainly cannot rely on the expectation that the debt on the property was less than market value. With 100% financing frequently provided to customers, banks in setting the asking price of foreclosed property at the amount of their debt are often putting the price at or above market value.

All of this requires that the buyer have a very clear idea of market value and that absolutely everything on the property be thoroughly inspected. You may also need bids for repair work before you make an offer.

It is often useful to get all the information you can from the bank about the history of the property.

You need to pay attention to the title to the property. If work has been done on the property you need to be sure that there are no disputes with contractors that could result in the filing of a lien after you buy the property. You should try to get a warranty deed at closing and discuss with the title company the array of title insurance options that are available to you through endorsements and extended coverage.

You can also talk with neighbors and through the recorder’s office get the names of prior owners. With luck you will be able to track down a prior owner to discuss the property.

One Foreclosure Scam: Charles Head

January 15, 2008

The F.B.I. has been searching for Charles Head, who operated out of Southern California and stole millions of dollars from homeowners, leaving them without their homes and sorting through a maze of paperwork. Mr. Head’s various companies advertised on the internet and through unsolicited faxes to mortgage brokers and the like. He and his companies victimized hundreds of people, including about 15 Washingtonians.

All his scams were directed at people who were behind on house payments — people in distressed circumstances and often frantically looking for a means of saving their homes. There were many variations on the standard scam. Generally though the it was proposed that the debt would be paid off if the victim conveyed title to a third person who would hold title for one to three years, at which time the victim would buy the house back. Meanwhile the victim would stay in the house paying rent. Usually it was acknowledged that the price to buy the home back would be slightly higher than the balance on the loan that was being paid off.

The third party to whom title would be conveyed used his or her credit to pay off the victim’s mortgage. (This scam could only be done when credit was reasonably easy.) This “investor” would then be in title and would wait to convey the property back to the original owner at a profit. The “investor” understood that one of Mr. Head’s management companies was collecting the rent and paying the mortgage. Typically the “investor” was not sophisticated in real estate transactions and did not understand the details of what was occuring with the raft of papers.

Meanwhile Mr. Head arranged for an appraisal at the highest amount he could get and applied for a loan for the “investor” at the full appraised value of the home. When the “sale” to the “investor” closed the loan proceeds were used to pay off the victim’s mortgage and all of the rest of the money was wired to Mr. Head. When the victim paid rent after closing, Mr. Head kept al the money and paid nothing on the mortgage taken out by the “investor.” After a few months, the mortgage company would begin a foreclosure, usually taking title to the home from the investor and evicting the homeowner. The investor’s credit is ruined the victim’s is homeless and Mr. Head ends up with all the money.