Housing Market at 50 Year Low

June 24, 2008

If you are interested in the current housing market and wish to read more, an excellent place to look is Harvard’s Joint Center for Housing Studies, which just this week came out with the best study that I have seen. The study says that the housing market has not been this bad in fifty years. Again, the report addresses the national problem.

It is a little stunning to see the map showing areas where permitting is down by more than 50%.  Nonetheless the report notes the historic ability of this market to spring back and lead economic recovery.  It says the forecast over the long term remains very good.


Selling Before Foreclosure

June 20, 2008

With the number of foreclosures still rising, and the peak  not expected until fall, more and more people will be  confronted with  the decision whether to sell before the foreclosure date.   Before deciding to sell the homeowner should be satisfied that selling is the best alternative.

Due diligence in this regard should include talking with a bankruptcy lawyer, consulting with a knowledgeable mortgage broker or other qualified consultant about the possibility of refinancing, negotiating with the foreclosing lender, contacting local governmental agencies to see about assistance programs, consulting with a foreclosure expert to see what price the property is likely to get if it were sold in foreclsoure and to understand the process, and speaking with a real estate agent with experience in foreclosures about the market.  I can’t over emphasize the importance of talking to people with expertise in foreclosures, as they are likely to be far more helpful than people with general experience.

Once it is determined that sale is the best option, the laws of the state should be ascertained.  Some states, such as Washington, have distressed property laws that are intended to assure that a home owner in this situation makes an informed decision before parting with title.

These laws generally speaking reduce the interest of investors in buying distressed property, creating great opportunity for investors who are willing to comply with the law.  The laws also dramatically reduce the number of “rescuers” who hound homeowners in financial crisis and often prove to bring only financial disaster to a home owner.

I recommend that you list the property with a real estate agent with knowledge and experience in the area.  If you try to sell without an agent, give yourself a deadline, then list it if the property has not sold.  An agent will give the property much more marketing exposure than the typical non-agent sale and the expertise in this situation is usually helpful.

In marketing the property,  emphasis should be placed on  assuring the prosepctive buyer that you have done your homework and that  the buyer need not fear running afoul of the depressed property laws of the state.  A lawyer can help with this.

There should be a backup plan.  Often people plan to file bankruptcy if the property is not sold by a specified date.  It is a good idea to have already consulted with a bankruptcy lawyer and have the papers ready to file before that date.


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.


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.

Conveyance of Real Estate

February 22, 2008

The statute of frauds is an example of the path of good intentions often leading into the thicket of dispair. Washington’s statute of frauds for real estate conveyances (RCW 64.04.10) requires that any agreement to convey land be in writing and that there be a sufficient legal description of it. This was intended to prevent people from falsely claiming that they had an agreement to purchase land or that land had been given to them by oral agreement. Rigid adherence to this rule though has often achieved the opposite result. An insufficient description of the property on an earnest money agreement has allowed people, both buyers and sellers, to escape their written agreements.

In 1949 the Washington Supremem Court decided to take a hard line on this matter and follow the monority of states by declairing that any agreement to conveyland must contain a full legal description, thereby allowing people who used a street address or shorthand description to escape from their contracts.

Because legal descriptions are usually not available when contracts are signed this meant that many, if not most, contracts to buy land were avoidable by either party. Trying to avoid the obvious unfairness of this result courts with increasing frequency started applying exceptions to the statute of frauds, trying to prevent it from becoming an instrument of fraud.

The result has been confusion about whether any given contract of sale is enforceable. Real estate agents started using tax lot numbers, as these were usually more accessible than legal descriptions (which more often than not were meaningless to the parties anyway), thinking that this satisfied the statute of frauds. Recent case law however makes this practice unreliable.

Rodney Tom, a representative from Bellevue, sponsored a bill intended to alleviate the plight of real estate agents and their clients. Senate bill 6514, as amended, recently passed the senate and was sent to the state house. This bill provides that henceeforth the use of tax lot numbers, instead of the full legal description, satisfies the statute offrauds with respect to contracts to convey land.

This is an easy solution, or partial solution, to an ill-advised 59 year old decision.