Washington Distressed Property Law (2)

June 11, 2008

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)

June 9, 2008

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.

A Victim of the “Foreclosure Crisis”

May 9, 2008

For many of the people in our community in the Northwest the “foreclosure crisis” is not an exercise in economic theory or a lame talking point. To some degree we have all been affected by the recent financial crisis which involves the selling of consumer mortgage debt as if it were a security. The billions of dollars that are washing around banks and investment firms and pouring out of our federal government to solve the crisis give us a notion of the scope of the problem. But that is all so theoretical seeming.

Over the last few years in the consumer lending industry there has been a frenzy not at all unlike the one that gripped our area 110 years ago. In the 1890’s the Puget Sound area experienced a boom driven by the rush to riches in Alaska. Timber was needed on a large scale, outfitting, shipping. This was the staging area for the search for gold in Alaska. At the same time wood was needed to rebuild Tokyo and logs could hardly be taken down fast enough. Coal then was found and mined in Eastern King County. People here were getting rich fast.

With our frontiers pretty much explored and exploited, the vast timber reserves gone, we discovered that our growing number human resources were not just a labor force but a potentially rich field for financial exploitation. Traditionally the home loan market has been relatively stable. Everybody want to buy a house and the average home is occupied about seven years before it is sold again.

The savings and loan scandal during the Aust years of the Regan administration was tremor of instability in which the relatively unregulated savings and loan industry was found to be exploiting home buyers and investors. It was quelled with federal money and added scrutiny. While it devastated many people scope of the problem was relatively confined. Here a few savings and loan institutions disappeared (anyone remember Shoreline Savings and Loan?) and a few real estate agencies were hurt.

That paled in comparison to what happened more recently. A few years ago people decided that mortgage loans could be bundled and sold on the open market. Investment banking firms could buy and sell these things. For a long time banks had been making home loans and selling them to quasi government institutions, Freddie Mack and Sallie Mae. Suddenly there was a new market for these instrument and far greater demand than ever. Not only that but this new makrket was largely unregulated. Banking has been highly regulated since the Great Depression of the 1930’s but investment banking was pretty much wide open. When banks had only Sallie Mae as a buyer of their home loans, all the home loans had to meet rather strigent requirements, but with new buyers in the field those requirements could be fudged. This new demand also allowed lending institutions that were not national banking associations to sprout up all over.

The federal reserve cooperated by keeping interest rates low so that money for buying homes could be obtained relatively cheaply. A set salary could afford the monthly payments on a higher debt with lower interest rates. This was magnified by the now well established custom of married couples both working. The housing industry boomed, the building industry boomed and house prices soared.

This caused the proliferation of what had been a rather quiet industry: mortgage brokers. With interest rates low and all sort of different lending program, a broker could be very helpful in finding a good deal. Everybody made money by closing deals. The mortgage broker made money when the loan closed, as did the real estate agent and the lender. The lender made more money when it sold the loan to a bundler who made money when the bundle was sold and so on down the stream of finance.

Around here people were now more plentiful that the forests that they had replaced and we began profiting on each other with the frenzy of a gold rush. This was of course a national phenomenon and often the loan was made by a far away lender but we were certainly on the front end of this financial sunami.

Somewhat ironically greed seems to flourish best when money accumulates. It must have to do with oppotunity. At any rate significant segments of our community sttod to profit by getting loans to close. Even the lenders were not motivated to make sound loans becasue they were just selling the paper upstream. Big profit depended on large vloume.

I’ve recently met a few people who were sucked into this vortex of greed and induced to obtain mortgage financing. I’ll tell you about one of them. Nancy was a retired widow who wanted to buy a small home in the Redmond area but everything seemed too expensive, even the modest homes that she desired. She met a nice lady in a senior singles group who worked as a mortgage broker who told her that she should not be put off by the price. Instread she should look at the amount of the monthly payments and she should gage what she could buy by the amount she would have to pay each month. Prices increased quickly enough that she should view the payments as an investment because when she sold she would make a lot of money on th eequity she built up.

This made sense to Nancy so she decided to at least have a real estate agent show her some houses. They found a modest house and the real estate agent assured her that it was an excellent investment; houseswere going up in price so much that she could always sell the house without any trouble and after a year or so sell it at a profit. Nancy did not want to sell the house but this did give her comfort. She went back to her “friend” the morgage broker who said that she was getting a great deal on the house and that if Nancy did not buy it she would.

When Nancy asked about financing she was told that the payments would be about $1,300 per month. This was a bit of a stretch but something that she could afford. The broker ran off some numbers and printed a page showing that her payments would come to $1,334.50 each month. She was told that by renting the basement (which could be used as a stand alone aprtment) she could easily afford this. Nancy then signed a purchase agreement and went back to the broker who asked her to sign a poan application. She got a call a few days later from the mortgage broker who told her everything was ok and she would receive the loan. She then waived the financing contigency and was locked into buying the house.

Before the closing she went to the borker’s office again and was told that everything went smothly, that she had to tinker with the application a little bit but it was no problem. A couple of days laterwent to the closing office at a title company to sign the papers. She overwhelmed by the stack of papers that awaited her there. The note that she had to sign was three single spaced pages and was utterly incomprehensible. The Truth in Lending sheet showed that the amount would increase over time but not over $1900. When she called her friend about this she was told that this would not occur for anumber of years and that it would be covered by the rent of the improved basement out and anyway she could always sell the house for a profit.

That was two years ago and now she has monthly payments of $3,900, which she cannot afford to make. Foreclosure has been commenced and the house has been listed for six months without an offer. When the foreclosure is completed she will have lost her down payment of $100,000 and installment payments totaling about a third of that. The truth in Lending discloures were false, but the subprime lender that made the loan is long gone and bankrupt.

There are many people in Nancy position, truly victims of unscrupulous lending practices. I rankle when the “foreclsure crisis” is blamed on greed-driven consumers. Most victims are just people who were not very sophisticated and whose fault was misplaced trust.

McCain on the Mortgage Crisis is a Reactionary

March 29, 2008

Would someone explain to me the difference between Herbert Hoover or Calvin Coolidge and John McCain. Hoover of course focused his attention, such as it was, on keeping business free of regulation. His “just wait and see” approach saw us into the Great Depression.

There are two very obvious fiscal problems facing us now: the cost of the war and the mortgage crisis. His answer to rapidly broadening deficit created by the war is to say that we will continue it for 100 years if we have to and he will lower taxes for the middle class. This so called straight talking maverick promises even greater deficit spending on war, as I understand it, and no end in sight. He has no answer for the burden this puts on our economy as more and more of our money is spent just servicing the debt created by five years (an counting) of war. (Remember that one of our stategies when the Soviet Union invaded Afghanistan was to foment radical Islam so that so the fight could continue long enough to bankrupt the Soviet Union. Why are we immune from this?)

While accepting a downward spiral of national debt, McCain said that irresponsible homeowners are getting their just desserts when 4 million of them are facing foreclosure. He further suggested that the ones in trouble are the people who refuse to get second jobs. He did suggest that we might consider giving consumers more Truth in Lending disclosures, a proposal that he voted against a few months ago and one that everyone (including McCain a few months ago) acknowledges would be of no meaningful assistance in the current crisis and unlikely to avoid similar problems in the future. He did come out though in favor of bailing out financial institutions which bought heavily into bad mortgages if their troubles presented a “systemic” threat.

This mortgage crisis is serious. It, according to the Economist, involves 1.1 trillion dollars. McCain seems to be saying “Wake me up if our system starts to collapse.” The Economist, which was taken seriously by Republicans before the party was hijacked by ideologues, suggests that regulation is appropriate, that a systemic fix is in order as unregulated investment banking presents a risk of serial bailouts. It also suggested the government might buy some of the subprime debt because it could be acquired at a fire sale discount. The government could then work with the home owners and might very well profit be the investment.

Isn’t McCain proposing that we do exactly what we did in the late 1920’s?

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.

This Will Never Happen: The Good Faith Requirement for Banks

February 13, 2008

The financiers’ publication American Banker reports that Rep. Maxine Waters, who chairs the House Financial Services housing subcommittee, is drafting legislation that would ban foreclosures unless lenders make good-faith efforts to keep borrowers in their home and would require reporting on modifications. This not yet even introduced bill has already drawn a thunderstorm of outrage from the banking community. After months of haggling the banking community agreed to a meaningless 30 day extension on some foreclosures, but asking for good faith negotiations is asking way too much! Next thing you know they’ll be asking for warrants for wiretaps.  At least someone is asking for something substantive and not more window dressing for the problem

Project Lifeline

February 13, 2008

The Treasury Department announced that several major banks had entered into an agreement to provide a ray of hope to some people experiencing foreclosure. The announcement says that if your home is more than thirty days from foreclosure sale, then certain qualifying homeowners will be given 30 extra days in which to try enter into a plan to repay the arrearage and bring the mortgage current. For all the hoopla attending the announcement, nothing concrete was presented. On the face of it some lucky homeowners get 30 more days to convince the bank to do something they have probably been talking themselves blue in the face about. I don’t see anything here except callous politics intended to improve the image of the administration without doing anything at all for the people in need. The problem is too significant for such a shallow gesture to appear anything but insulting. One in twenty homes, for example, were affected in Detroit.