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.

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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.


Equity Skimming in Washington: A Brief History

June 7, 2008

There are three main reasons that real estate has attracted so many unscrupulous people in recent years.

First it is an asset that can be highly leveraged. Homes can be purchased for a relatively small amount down and the balance financed. When property goes up in value this confers wild profit on the owner. For example, say you buy a home for $100,000 and pay 10% down. When the transaction closes you have purchased a $100,000 asset for an expenditure of one tenth its value. Putting aside transactional costs, if the property increases in value 25%, you have gained $25,000 in value on an original investment of $10,000. You more than doubled your money on a 25% increase in value of the asset.

The second aspect that attracts the criminally inclined, is that these very valuable assets are often owned by people who are not sophisticated in real estate financing. This is an area where people typically just given themselves to the grinding wheels of commerce without knowing a lot about what is going on in a real estate transaction. Thus there is great opportunity for duplicity behind a mask of convention.

This area is also relatively unpoliced. In the early 1900’s the scam of choice was securities fraud. So many people were falling victim to fraudulent securities schemes that the federal government created the Securities Exchange Commission and in the 1930’s passed legislation imposing severe penalties for securities fraud and implementing broad disclosure requirements.

Many equity skimmers would probably have been selling bunko stock one hundred years ago. The equity skimming schemes of today occupy a relatively unpoliced area without much in the way of legislation (although states such a Washington are passing legislation to thwart this form of fleecing). In short home sales is an area where a lot of money passes hands, there is potential for fast profit and there is not a great deal in the way of scrutiny — similar to stock sales before the Security Exchange Commission.

There have always been lots of real estate scams but for our purposes the story starts in the 1970’s. There was a recession in the early 70’s (or something that looked remarkably like one). An average house in Seattle could be purchased for $15,000, due in large part to local economic problems. This was followed by a period of inflation and breathtakingly high interest rates.

The inflation encouraged people to sell their real estate profitably, but the high interest rates prevented many people from getting loans to buy real estate. These pressures created an era of seller financing. The buyer would give the down payment to the seller and make monthly payments to the seller with an agreement to pay the purchase price off in full in three to five years, when financing could be obtained. This sort of arrangement was commonplace.

The buyer got the house and with it the obligation to pay payments to the seller and the obligation to continue to pay the seller’s mortgage. The buyer could assume FHA loans but usually the buyer just agreed to make the payments for the seller after the sale. The malevolent instincts that had been somewhat suppressed by federal laws in the area of securities sales were revived in this situation.

All sorts of bad things happened. Crooks would buy homes with faulty seller financing documents so sellers could not foreclose if they were not paid by the buyer, while at the same time they remained obligated on the mortgage which the buyer might choose not to pay. Companies were formed that bought real estate on seller financing, then just stripped the property of everything of value and left the barren property for the sellers to foreclose upon.

Seller financing deals could be structured to protect the seller, but there is always a portion of the population that does not consult a lawyer before entering into a transaction of this sort. It is this group around which financial vultures circle.

There was nothing of the magnitude of the massive systematic fraud of recent years, so the legislature was relatively slow to address the problem of equity skimming. In 1988 Washington passed a law that criminalized equity skimming and declared it to be a violation of the Consumer Protection Act. The forward to the bill states in part:

The legislature finds that persons are engaging in patterns of conduct which defraud innocent homeowners of their equity interest or other value in residential dwellings under the guise of a purchase of the owner’s residence but which is in fact a device to convert the owner’s equity interest or other value in the residence to an equity skimmer, who fails to make payments, diverts the equity or other value to the skimmer’s benefit, and leaves the innocent homeowner with a resulting financial loss or debt.

Financial institutions had their hands full in the 1980’s. Seafirst Bank, the biggest bank in the Northwest was going bankrupt until it was purchased by Bank of America. Other big banks swallowed smaller ones into the nineties. Two of the biggest Seattle banks, Peoples Bank and Old National Bank, were bought by U.S. Bank of Oregon and merged into U.S. Bank of Washington. This activity seemed to occupy attention much more than occasional fraud on homeowners.

The opportunity for homeowner fraud errupted like never before during the Bush Administration. The administration’s laizes faire, anti-regulation bias allowed this situation to reach international economic crisis proportions, despite obvious abuses all along the way. (The policies that created the situation were constant between Clinton and Bush, but Bush’s response to the financial crisis made Katrina relief look adequate and timely.)

The subprime era was awash in home loan money; lenders could hardly give it away fast enough. Home loans were obtained without a great deal of review for as much as the full purchase price of a home. This was like a petri dish for raising a culture of financial fraud.

People were so eager to get at the money there were numerous seminars given on equity skimming. Small fortunes were made on the price of admission alone. These week-long seminars were packed with local real estate people, real estate agents, brokers and miscellaneous others. People from Seattle, Everett, from all over the Western part of the state attended.

Recently indicted Charles Head (California based) advertised on the internet, sent faxes to mortgage brokers and people in the real estate industry and nurtured relationships with lenders and escrow companies. He had dozens of companies that were nothing more than names to confuse the public. Sometimes the companies described themselves as facilitators, sometimes as lenders, sometimes as lenders’ agents, sometimes buyer’s agents, sometimes both lender and buyer’s agents and often not at all.


Washington State Economic News

May 14, 2008

The week already there have been a few startling reports about the economy. The Associated Press reported that in the construction industry there was an unprecedented decline in starts. The biggest drop ever! It also reported that the salmon industry is being designated a disaster qualifying it for federal help. The Washington Center for Real Estate Research also reported that in Pierce, King and Snohomish Counties home sales (excluding new homes) were down by about one third over last year, a little above the national average. This suggests that the local insulation from the national trend that we have enjoyed may be ending. Finally, Realty-Trac reported that in April foreclosures are up 65%. Now one in 519 homes in the country is in foreclosure. Washington, which initially was not severely affected by this phenomenon, is now in the middle of the pack among the states.

That’s not all the sobering economic news but all I could stomach mentioning. It is not clear to me how Bush’s policies influenced the number of salmon swimming around (a joke), but these trouble spots are directly linked to the mortgage crisis and generally attributed to the financial community’s exploitation of the absence of regulation, particularly in the investment banking area. Some people more informed than me say that the country’s rampant deficit spending also plays a role, but precisely how I do not understand.

The rising local concern about the economy will play an important role in the November elections.


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.


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.


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.