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Allan S. Glass' Blog

By Allan S. Glass | Broker in Los Angeles, CA
  • California Takes Hard Stance Against Deficiency Judgments

    Posted Under: Home Selling in Los Angeles, Financing in Los Angeles, Foreclosure in Los Angeles  |  August 13, 2011 8:53 AM  |  2,548 views  |  No comments

    photo credit: Andrew Ciscel

    California jumped ahead of the nation in July with regards to protecting homeowners against deficiency judgments during a short sale or foreclosure.  With the passage of SB 458 (Corbett) signed into law by Governor Brown July 11, 2011, it’s now illegal for lenders to pursue most homeowners after agreeing to settle their debt in a short sale.

    Adding to the protection already afforded to many California homeowners after a non-judicial foreclosure auction, SB 458 and SB 931, which passed in January 2011 now extend deficiency judgment protection to most borrowers on single family homes, condominiums and 2-4 unit apartments in short sale transactions.

    This new law (CA Civil Procedure Code 580e) has been lauded by most real estate trade groups who recognize it as the last hurdle towards bringing short sale regulations in line with non-judicial foreclosure regulations in the state.

    Significant to Note

    • It covers all parties related to or represented by the lender in the transaction.  Therefore in agreeing to a short pay, the borrower will not be pursued by the lender, the investor on the loan or the Mortgage insurer after the close of escrow.
    • It specifically states that, the lender cannot require the borrower to “pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent to the sale.”  Therefore the lender cannot legally ask the seller to sign a promissory note, or contribute cash at close of escrow.

    Potential Snags

    It’s hard to find a reason why anyone would choose foreclosure over a short sale in California now that the new laws have passed.  However, there are a few potential snags which remain.

    For example, junior lenders are not compelled to agree to a short settlement.  Since they have nothing to lose and everything to gain, it may compel some lenders to hold out for a better contribution towards their debt.  Although promissory notes are out of the question and seller contributions are prohibited, the law does not forbid other parties from contibuting towards the debt settlement.  Family members, ahem… agents in the transaction, buyers, may all be “hit up” for additional money to settle the debt.

    Junior liens not associated with the senior loan are still able to pursue a deficiency judgment after a non-judicial foreclosue sale.  Considered “sold out junior liens” after the foreclosure sale and rendered legally worthless these loans allow the lender to pursue a borrower after a foreclosure.  In cases of a strategic default and short sale where a borrower has other significant assets to pursue, the junior lender may choose to take it’s chances, foreclose and pursue a judgment.

    To note, these sold out junior loans do not have the same rights to deficiency in cases where the foreclosing lender wiped out it’s own interest (Simon v. Superior Court (Bank of America), 4 Cal. App. 4th 63 (1992)) or in cases where the worthless security exception does not apply, like purchase money loans (Brown v. Jensen, 41 Cal. 2d 193 (1953)).

    Conclusion

    Primarily a non-judicial foreclosure state, California has protected homeowners against deficiency judgments better than most.  As a single action state, lenders have but one remedy to collect on debts when a borrower stops paying.  Security first rules further protect borrowers in California by requiring lenders to exhaust the collateral of the loan before personally pursuing the borrower for liability.

    Now that the state has passed laws that protect borrowers both in short sale and foreclosure scenarios it will be rare and difficult to find situations where a homeowner remains on the hook for a debt after resolving a sale.

  • California Deficiency Judgment Rules

    Posted Under: Agent2Agent in Los Angeles, Foreclosure in Los Angeles, Property Q&A in Los Angeles  |  March 25, 2011 4:06 PM  |  3,281 views  |  No comments

    DISCLAIMER:  This article is intended for informational purposes only.  None of the information contained in this article should be taken as legal advice. Neither ASG REAL ESTATE INC Nor Allan S. glass are attorneys.  Readers are advised to seek legal counsel regarding any information provided herein as they relate to specific personal situations a reader may face. Further the information herein pertains to California only.  Deficiency laws will differ in each state.

    California has historically taken a strong public policy stance against deficiency judgments.  The policy objective of the states anti-deficiency legislation is to place the risk of valuation upon the lender who is typically in best position to understand true market value and to discourage sellers and lenders from taking advantage of less knowledgeable buyers by overvaluing the underlying collateral in a standard real estate transaction.

    The last part of this explanation dates back to the wild west days of California when most areas were still rural and the original housing boom was in full swing.  In many ways similar to what happened in areas of Nevada earlier this decade, real estate syndicators would buy large tracts of undeveloped land in the middle of nowhere, subdivide the land into parcels and then sell those parcels to homeowners with the promise of future roadways, commerce, jobs and riches.

    In many unfortunate circumstances  these unknowing buyers found themselves not only with a worthless piece of land in the middle of nowhere, but also facing a financial judgement against them by a lender who allowed the prices to be artificially inflated, or by unscrupulous speculators who both sold and financed the purchases themselves at unfairly high prices.

    definition of deficiency judgment

    So what exactly is a deficiency judgment?  According to Webster’s New-World Law Dictionary, it is defined as the following:

    “N. A judgment for the balance of a debt already partly paid, typically through a forced sale of personal or real property.”

    Relating to real estate, deficiency judgments occur as a result of a short sale or foreclosure sale and the rules governing when a lender may seek such judgments are set by state law.  Each state has its own statutes and limitations and most rules have many exceptions adding furhter confusion to the process.

    California Foreclosure Process

    California is a lien theory state meaning you own your property after the close of escrow and lenders secure their loan with a promissory note (promise to pay) secured by a deed of trust.  It is the deed of trust which allows them to take action should you choose or find yourself unable to pay as agreed.  For a more in depth description of the California Foreclosure Process you may read my previous post.

    To summarize, California lenders may choose to pursue the more lengthy court action referred to as a judicial foreclosure, or the expedited non-judicial foreclosure process to recovery their loss.  An overwhelming majority (think 98% or more) of lenders in California choose to pursue the non-judicial method to foreclose for three primary reasons.  First, it does not require additional court proceedings to complete, which leads to the second reason, the process is much faster than a judicial foreclosure.

    The third primary reason lenders pursue non-judicial foreclosures is the “right of redemption” which is afforded to borrowers only after a judicial foreclosure; this rule effectively prevents the foreclosing lender from reselling the property as an REO anywhere from three (3) to twelve (12) months after the judicial foreclosure sale date.  The right of redemption does not apply in a non-judicial foreclosure, thus lenders typically seek to resolve their problem loan quickly through the non-judicial process.

    One Action Statute, A Security First Rule, and the Single Action State

    California is considered a single action state with regards to a lender’s remedy in the recovery of any debt or the enforcement of any right secured by a mortgage upon real property.  The rules governing this statute are found in California Civil Procedure Code Section 726(a).  The purpose of the one-action rule is to protect a defaulting mortgagor (borrower) from being harassed by a lot of different actions filed against it by the mortgagee (lender).

    The security first provision of 726(a) directs lenders to first proceed against the security for the debt prior to trying to enforce the underlying debt.  In essence, if a lender takes real estate collateral as security for a loan in California, the lender must foreclose on the real estate security first. Further, a lender can only bring one “action” against the borrower, and must use it as the primary source of repayment when collecting the loan.  If a lender chooses to seek a deficiency judgment against a borrower prior to seeking repayment through foreclosure they risk the possibility of losing their claim to the collateral.  (See Security Pacific Nat’l Bank v. Wozab, 51 Cal. 3d 991, 997 (1990).)

    Deficiency Judgment Protection in Foreclosure - Codes 580(b), 580(d)

    Two sections of the California Civil Code Procedures outline the deficiency judgment protections afforded borrowers after a foreclosure sale.  These codes do not protect borrowers in a short sale transaction, however most lenders facing these limitations after a non-judicial sale will negotiate a full release of liability on these loans if the short sale is financially beneficial when compared to a foreclosure.   In most basic terms protecting 1-4 unit residential properties, owner occupied, where the purchase money loan was foreclosed on using a non-judicial foreclosure method, the following codify California’s rules:

    California Civil Procedure Code 580 (b) - Covering the “character” of the loan, this section protects purchase money loans explicitly limited to loans on properties of 4 unit dwellings or less used as a principal residence.  This section utilizes the term “vendor” which has been interpreted by the courts to also cover seller carrybacks and/or existing loans assumed by a new buyer in any type of property purchased (Costanzo v. Ganguly, 12 CA. App. 4 1085 (1993)).  This statute explicitly precludes a deficiency judgment when sellers carry back financing at the time of purchase.  This section, however, does not protect non-owner occupied or commercial properties.

    California Code Civil Procedure 580 (d) - Covering the “process” of the foreclosure action. This statute is considered to create a “parity of remedies” for lenders allowing them to choose between the judicial vs. non judicial procedure.  Initially enacted to protect borrowers from the practice of under bidding at a non-judicial sale which would then worsen the deficency, the statute now expressly prohibits a deficiency judgment after a non-judicial sale.  Althougth 580d does not bar a sold out junior lien from seeking a deficiency judgment (see Walter E. Heller Inc. v. Bloxham, 176 Cal.App.3d 266 (1985)), it does protect borrowers on junior loans in cases where the senior foreclosing loan is the same lender (see Simon v. Superior court below).

    Code 580d does set limitations on deficiency judgments when the lender chooses the judicial process.  In these cases deficiency judgments are limited to the lesser of:

    a) the amount by which the debt exceeds the fair market value of the property at the time of foreclosure sale
    or
    b) the amount by which the debt exceeds the sale price of the property at foreclosure sale

    It’s important to note that each of these rules apply on their own, regardless of the other rules.  Meaning you only need to meet the requirements of one of these civil codes to be protected against a deficiency judgement on any particular loan.

    Pending Additional Protection

    During the recent housing crisis many professionals and politicians addressing foreclosures felt it unfair that a borrower who refinanced a purchase money loan unwittingly put himself at risk of a deficiency judgment after a foreclosure sale.  In particular, those who simply refinanced to lower a monthly payment without taking additional cash out of their homes. As a result California Senate Bill 1178 was introduced and passed by the California legislature in 2010.

    Intended to extend homeowner protection against deficiency judgements to refinanced purchase money loans in instances where  the homeowner did not “cash out” the bill was ultimately vetoed by then Governor Arnold Schwarzenegger last year.

    Short Sale Protection Code 580(e)

    Seen by some to be a compromise on the failed SB 1178, legislators introduced California Senate Bill 931 in 2010 to extend deficiency judgment protection to homeowners in a short sale transaction.  The bill was passed by the legislature, signed into law, and became California Civil Prodecure Code 580(e).

    Prior January 1, 2001 deficiency judgment protection was only afforded to certain borrowers after a non-judicial foreclosure sale occurred.  However, the passage of SB 931 created this new statute extending further protection in the case of short sale on one to four unit residential properties regardless of residency.  This statute only applies to senior liens and therefore does not protect borrowers from deficiency judgments on junior liens after a short sale.

    Exceptions to the Rules

    In spite of the statutes listed above, there are circumstances where a borrower can lose his/her deficiency protection, and other exceptions to the rules.  They include:

    1) Fraud - Deficiency protection is not extended to a homeowner in cases where a borrower fraudulently induced the lender into making the loan in the first place.  California Civil Procedures Code 726 (f) (g) & (h).  In these instances lenders may also seek punitive damages.

    2) Bad Faith Waste - You may have heard about the case of San Diego Police officer Robert Acosta bulldozing his home last June after losing it to foreclosure.  This is an extreme example of “bad faith waste” which can also describe willful neglect on the part of the homeowner (Cornelison v. Konbluth 15 Cal .ed 590 (1975)).  These acts include reckless, intentional, and/or malicious injury to the property by the homeowner.

    3) Non standard Transactions - These transactions include those where non traditional means of financing were used to consummate the transaction.  Examples would be loans which originated with a seller as non purchase money and were later assumed by a subsequent purchaser, construction loans on property not intended as a principal residence, or subordinated seller carry back loans on vacant land.

    Simon v. Superior Court (Bank of America), 4 Cal. App. 4th 63 (1992)

    Although a borrower is not protected from a deficiency judgment after foreclosure on a junior lien which is sold out and rendered economically worthless, that exception does not apply if the lender itself has taken some action to make the security worthless.  The California courts clarified this position in Simon v. Superior Court stating that a creditor who loses it’s security through a culpable act does not come within the exception to the security first rule.

    In plain speak, if the same lender holds both the senior and junior loan, the lender cannot pursue a deficiency judgment on the borrower for the junior loan after foreclosing on the senior loan.  This is also true if the junior loan obligation was originated by a different entity, but was later assumed by the senior lender.

    For example, let’s assume a borrower had a first trust deed held by Chase Bank and a second trust deed originally held by Washington Mutual Bank.  Now that Chase has assumed the liabilities of Washington Mutual (WAMU) they have effectively become the same lender.  If Chase were to foreclose on this first trust deed, they would not be able to pursue a deficiency judgment against the borrower on the second trust deed.  The same holds true for Countrywide / Bank America, etc. etc.

    Although this only applies in the case of a foreclosure sale and does not apply in a short sale, it is very important to understand the implications of this case when negotiating a short sale transaction.  If a short sale is in the financial best interests of a lender, a skilled negotiator can use this case to reason with a lender and help them understand why a claim to deficiency should be waived.  If it is not, the seller can hold out for a more costly and lengthy foreclosure sale that ultimately prohibits the lender from seeking the deficiency.

    Release of Lien v. Full Satisfaction or Release of Liability

    Not every short sale approval letter is created equal.  Further, receiving a settlement letter from the bank does not mean that they have agreed to release the borrower from all future liability in connection with the loan.  In order to complete a short sale a lender must agree to release the lien against the property securing the loan.  Thus every approval letter will stipulate a “release of lien” to accommodate the short sale.

    However, unless your approval letter specifically includes language referring to a “full satisfaction” or “release of liability” the borrower may find themselves subject to a deficiency judgment after closing a short sale.  Therefore a full release or satisfaction should be sought on approval letters from a junior lender (senior liens are protected under code 580e) whenever possible.

    Conclusion

    California is very protective of borrowers when is comes to deficiency judgments.  With the introduction of Ca. Civ. Proc. Code 580(e) in January of 2011, some of these protections have also been extended to borrowers in a short sale transaction.  Most protection is afforded to purchase money loans on principal residences, however several cases have extended the reach of deficiency protection to consumers.  Although most sold out junior lenders retain the right to pursue a deficiency judgment, this right does not apply to all junior liens in California (Simon v. Superior Court).

    Finally, a short sale approval letter does not always release a borrower from future liability and should be reviewed carefully for specific language addressing a full release of liability.

    © 2010 Allan S. Glass - ASG Real Estate Inc. ®

  • 10 Things Everyone Should Know about Foreclosures

    Posted Under: Home Buying in Los Angeles, Foreclosure in Los Angeles, How To... in Los Angeles  |  March 22, 2011 3:35 AM  |  1,791 views  |  7 comments

    I always seem to know when the latest real estate guru runs a late night infomercial in the Los Angeles market.  How you ask?  An overwhelming number of phone calls the next day from new investors with the same script asking me to send them “deals” and telling me they have a system to buy and flip REO properties.  As a real estate professional who has sold REO assets since 1992, I can confirm that it is possible to make money and find good investments in the REO market, but not every REO is a good deal.

    So what are the 10 things everyone should know about Foreclosures?

    1. REO does not necessarily mean cheap.  Anyone with kids understands how crazy it is finding the hottest Christmas / Holiday toy that your child simply must have.  If you’re a planner, you can easily find the toy before the “after Thanksgiving rush”.  Once black Friday hits, the word is out and hungry parents shop in force buying up supply.  Store after store sell out and you may find yourself making a few trips to find your prize.  By late December everything is picked over; to get that same toy you must check Ebay or craigslist, pleading with an early shopper to sell you their wares at double the price.  Well, it’s black Friday in the REO markets.  Everyone is shopping for the same deals.  What that means is not every REO property is a steal and because of the increased demand for the hot toy, (REO’s) they aren’t always cheap compared to other properties on the market.
    2. Buyer beware.  REO properties are owned by absentee sellers who most often have never seen the property.  They all employ agents to be their eyes and ears and rely upon their ability to be the triage surgeon, getting the patient in good enough shape to sell.  My point here is that there is a difference between the banks obligation to their investors and the long term ownership objectives of an investor who buys REO property.  I cannot stress enough how important it is to have professionals thoroughly investigate the physical condition of the property you buy.
    3. Have a plan, don’t window shop.  The words I hear most often from asset managers are “certainty of a deal”.  What this means for potential buyers is that banks want to know they have a real buyer that will perform on the contract they’ve signed.  A quick close and short due diligence period from a pre-qualified buyer will often trump the higher priced offer from a less organized buyer.
    4. Lowball offers are filed in the circular file.  Bank asset managers and the professionals who work with them are smart.  By the time a property gets to market they have a clear understanding of value and have an obligation to the bank to achieve a price within close proximity to the list price.  Although by definition an REO is a distressed asset, the bank does not need to nor would it be prudent for them to accept your 50% of value all cash offer.
    5. No, you can’t get paid as a broker if you are the buyer.  Everyone is encouraged to find representation with which they are comfortable.  If that means representing yourself, great!  However, banks will not pay you a commission if you are also the buyer.  Most banks require you to sign a disclosure that strictly prohibits earning a commission on a purchase where you are also the buyer.  Before you get cute, as agent you have a legal requirement to disclose to all parties if you are in any way related to the client you represent.
    6. Yes you can have your own buyer’s agent.  Some banks do not allow their listing brokers to represent buyers.  Many of the most successful REO agents simply make it a policy not to double end deals.  Therefore, that agent who has been driving you all over town for the past 3 months can earn a commission by submitting an offer on your behalf.
    7. Seller will choose the services.  In 17 years I can’t remember a time when a bank seller allowed a buyer to choose escrow or title services in a transaction from a vendor who was not already approved by the bank.  I’m sure your grandmother’s escrow company has been around for 50 years and has an impeccable track record.  If she’s not an approved vendor it “ain’t gonna happen.”
    8. “As-Is, Where-Is”.  Get very familiar with these words.  EVERY REO is sold As-Is.  No exceptions!  see #2 above.
    9. You probably can not buy it before they put it on the market.  If you are trying to buy a short sale you may find opportunities to strike a deal without the property being on the market.  However, once the property becomes REO and is put in the bank’s system they have an obligation to obtain the best price for the asset.  this most often means that it would be prudent for the bank to list the property and expose it to the market before they accept an offer.  If you wish to pay more than list price and can close quickly, providing “certainty of close” there may be an exception to be made.
    10. There are a ton of opportunities.  We are only beginning to scratch the surface of our current foreclosure situation/opportunity.  Foreclosure rates are at extraordinarily high levels and the expectation is that many more are coming.  If there is a silver lining to our current economic situation it is that some of the greatest wealth is built during the darkest of times.  Prepare yourself well and best of luck!

    Allan Glass has been working in the foreclosure markets since 1992.  The ASG REO Team has completed over $1 Billion in real estate transaction and has sold REO property throughout California, both commercial and residential.

    © 2010 Allan S. Glass - ASG Real Estate Inc. ®

  • Is it Wrong to Make a Profit as a Real Estate Investor?

    Posted Under: Quality of Life in Los Angeles, Home Buying in Los Angeles, Foreclosure in Los Angeles  |  March 21, 2011 9:29 AM  |  1,388 views  |  No comments

    As a nation on edge and in the midst of the worst economic crisis since the Great Depression, many of the daily aspects reflected in “Americana” seem to have become taboo.  For the past two years our stunned and gun-shy population has wandered through news of continued job losses, store closings, grim foreclosure statistics driving the economy south, and consumer confidence to all time lows.

    In times of chaos and turmoil it’s normal to wonder who is to blame for our collective misery as it is expected that we all seek solutions to our temporary slump.   However, one unfortunate by-product of this circumstance is the blurred distinctions between actions that lead to recovery and those that caused our loss.  In the real estate industry this has become most evident in the grouping of profit with greed, and investment with speculation.

    Profit vs. Greed

    In a recent article for the Washington Post, conservative columnist George Will writes, “Greed, we are agreed, is bad. It also is strange. It has long been included among the Seven Deadly Sins, which suggests that it is a universal and perennial facet of the human fabric.”  He continues on with the example of ticket brokers, like Stub Hub, to illustrate his point that the open market properly punishes greed with missed opportunities and sudden collapse due to improper timing. “Greed is worse than a moral defect, it is a cause of foolish pricing. That is why markets know it when they see it.”

    Without entering a conversation about regulation versus free markets I would concur that greed unchecked leads to downfall.  Further, the collapse of the US housing market shows that the unfortunate side effect of unchecked greed is the collateral damage done to those who were not greedy but remain caught in the crossfire.

    Profit on the other hand is a basic tenet of Capitalism and the cornerstone to our free market society.  Profit is the engine that propels entrepreneurs, investors, and jobs, manufacturing, creativity, and expansion alike.  In his seminal book “The Science of Getting Rich” Wallace Wattles explains that one must always give more in “Use Value” than they receive in “Cash Value.”  His clear yet sometimes lost point among business ventures is that a properly functioning marketplace allows for a reasonable entrepreneurial profit to those who add value to the business process.  This distinctive balance lies within the intent of the business performing the service.

    In illustration of this point can be found in the real estate industry by comparing investors to speculators.

    Investor vs. Speculator

    A real estate investor is an individual or entity that invests equity into a real estate asset for the purpose of generating income from or adding value to the existing improvements.  Investors can have long term or short-term strategies.  They may use their own capital or they may borrow (leverage) equity to varying degrees.  Some create value by curing defects either physical (dilapidation) or financial (cash buyers with quick closings), while others employ long-term hold strategies that gather value from timing and appreciation. Yet all prudent investors share the distinction of returning to the marketplace “Use Value” for the profits or “Cash Value” they earn.

    Speculators can share timing and leverage strategies with investors, yet that is where the similarities end.  The intent of a speculator is not to add value to the economic engine; rather they look to take advantage of the marketplace by simply getting in line first.  The speculator is driven by greed.  Profit margins and financial gain are not based on business strategies that help balance supply and demand, thus making the business plan viable in the long term.  Instead the speculator looks to horde or corner markets to their advantage intending to reap exceptional short term profits before quickly exiting the marketplace without regard to what is left behind.

    The Soap Analogy

    Most all of us bathe on a regular basis.  To do so effectively we use water and some form of cleaning agent.  For this example let’s assume we all use soap.

    If one were to plan for a shower and find all the soap gone, the reasonable response would be to go down to a convenience store (grocery store, warehouse store, or drug store) and buy another bar.  Most of us would look for the best bargain or our favorite brand and gladly pay the store’s asking price.  For this transaction to occur we realize that some other business distributed the bars of soap in large bulk quantities to that store to accommodate our smaller purchase.  Before that, a manufacturer bought raw materials mixing together bars of soap to later package and sell to that same distributor.

    Each step along the way a business invested their capital to provide a service both for the entity before them and customer who comes after them in the economic process.  For this privilege and purpose each investment entity earns a tidy profit.  By charging too much for their service they lose customers and go out of business.  By contrast, not charging enough leads to loss, inhibiting the ability to remain a viable and profitable concern.  Either way, free market forces act to keep profits in balance and all of us clean.  Further we support these profits and welcome the service provided by continuing to buy bars of soap.

    But what happens when someone only seeks to take advantage of system for the short term and their own personal gain.  Let’s imagine we’ve all taken a two-week cruise across the Pacific Ocean.  Forced to share close quarters for an extended period of time it would quickly become apparent that good hygiene practices are necessary to the shared enjoyment of the passengers.  Again, enter the need for soap.

    For this example let’s assume that the passengers did not realize this need until the boat was long to sea and the boat’s sundry shop was grossly undersupplied with the sudsy necessity.  Enter the speculator.  Realizing that other passengers have nowhere to turn, too little supply and extraordinary demand, he quickly gathers all of the available soap and waits for the pandemonium to begin.  Beyond the myriad of possible disasters awaiting the group one outcome remains certain – Imbalance and market failure.

    The Real Estate World

    Examples of our ship bound soap pirate were seen all across America this past real estate cycle.  From Brooklyn to Las Vegas, Florida to California speculators bought or reserved condominium units before homeowners could find their place in line.  Speculators bought income property that did not earn enough income to support the prices paid intending to sell it in short order by way of rapid appreciation.  Eventually the music stopped.  The result – Imbalance and market failure.

    Yet amid the ashes born of greed and speculation, comes the profitable investor intent on creating value within the economic system.  Recognizing a need and providing a valuable service, the investor uses free markets to find balance in the economy and provide profits for its coffers.  Identifying “Use Value” in exchange for “Cash Value” the profitable investor solves problems, creates jobs, provides a service, fuels growth, inspires innovation, and is the cornerstone to the American Capitalist System.

    That is never wrong.

    © 2010 Allan S. Glass - ASG Real Estate Inc. ®

  • What is a HAFA Short Sale?

    Posted Under: Agent2Agent in Los Angeles, Foreclosure in Los Angeles, How To... in Los Angeles  |  March 19, 2011 10:59 PM  |  5,037 views  |  4 comments


    The Home Affordable Foreclosure Alternative (HAFA) program began as part of the Financial Stability Plan back in April 5, 2010.  The idea was met with great fanfare and was intended as an add on to the Home Affordable Modification Program (HAMP) initially implemented as part of the "Obama plan."

    Initially intended to help the 3 to 4 million homeowners who were considered eligible for modification, thus far HAMP has fallen far short of it's goal.  Fitch Ratings released a report on February 4, 2011 indicating that nearly 60 percent to 70 percent of all sub-prime loans modified will re-default within 12 months.  Even prime loans, those made to top quality borrowers with above average credit, experienced a re-default rate of 50 percent to 60 percent within the 12 months following a modification. According to Diane Pendley, a managing director at Fitch and co-author of the report, "the combined efforts of HAMP and other mortgage loan modification programs have made little more than a dent in the large volume of outstanding distressed loans.”

    HAFA has been equally disappointing.  As of year end 2010 only 661 HAFA short sales were closed nationwide according to the US Treasury, concluding the first 8 months the program was in place.  That is a far cry from the hundreds of thousands this program is expected to help, but comes as little surprise to the legions of real estate professionals who specialize in distressed transactions.  In theory a much needed crutch for ailing homeowners drowning in debt and looking for a "graceful exit" the program included two hurdles that either eliminated many potential homeowners from qualifying or prevented lenders willingness to cooperate.

    A GRACEFUL EXIT




    HAFA's Dual Flaws

    Prior to February 1, 2011 all homeowners hoping to participate in a HAFA short sale were required to submit financial information allowing the bank and their debt counselors to qualify them based on a Debt to Income Ratio.  If a homeowners mortgage payment did not push them to a debt-to-income ratio greater than 31 percent the home owner was eliminated from consideration for a HAFA short sale.  The idea behind this requirement was to limit the reach of the program to help only those who were truly in dire straits.  The problem was the 31 percent threshold eliminated far too many upside down borrowers from consideration. 

    Second, the HAFA program required that junior lenders accept a payoff of 6 percent of the outstanding loan balance or $6,000 whichever was less.  In exchange for this, junior lenders were required to both release the lien on the property and all future liability from the borrower.  It was the second condition that led most experienced professionals to conclude, in many cases, HAFA was doomed to fail.  Many lenders (in particular Bank of America) have been reluctant to release borrowers from all further liability on junior liens after a short sale without a substantial payoff upon concluding a short sale.

    To further clarify, there is a very big difference between getting a release of lien on your short sale approval letter and getting a full release of all future liability for the debt.  The former simply means the lender will accept less than what it owed to release their lien on the property in question and allow a new buyer to complete a short sale transaction.  The latter requires the lender to both forgo any attempts to get the homeowner to sign a promissory note for the outstanding balance of the loan and precludes the lender from pursuing the defaulting homeowner with a deficiency judgement.  In many instances junior lenders will require anywhere from 10 to sometimes 20 percent of the outstanding balance before agreeing to a full release of liability, particularly in judicial foreclosure and recourse states.

    In California where junior liens can reach hundreds thousands of dollars, it was clear that few junior lenders would agree to accept such small settlement amounts in exchange for a full release of liability.

    Criteria to Qualify for a HAFA Short Sale

    The guidelines determining protocol for servicers and borrowers attempting to complete a HAFA short sale were initially outlined in the Treasury's HAFA Supplemental Directory 09-09 March 26, 2010.  However those guidelines were recently revised in HAFA Supplemental Directory 10-18 released on December 28, 2010 and became effective beginning February 1, 2011.  Further complicating the process, GSE owned loans (those where Freddie Mac or Fannie Mae is the investor) each have slightly modified conditions and requirements affecting eligibility in the HAFA program.Those differences were highlighted in a Government Affairs Update released by the National Association of Realtors in September 2010 titled, Key Differences in HAFA Guidelines for Non-GSE1, Fannie Mae, and Freddie Mac Mortgages.  In general, however all borrowers must meet the following criteria to be eligible for a HAFA short sale:

    • HAMP Eligible, Unable to Perform - The borrower must be eligible for, but unable to complete, a loan modification under the Home Affordable Modification Program (HAMP).
    • Occupancy - The property must be the homeowner’s primary residence.  Prior to February 1, 2011 the borrower was required to either currently reside in the property or have lived in the property as a principal residence within the prior 90 days from initiating a HAFA short sale.  The changes effected by SD 10-18 modify that requirement to cover all homes that are either currently occupied by the homeowner as principal residence, or have been occupied by the homeowner in the previous 12 months prior to initiating the HAFA short sale process
    • New Purchases - To be eligible for a HAFA short sale the borrower may not have purchased another 1-4 unit property within the prior 12 months from initiating a HAFA short sale.
    • Origination - The first loan must have been originated before January 1, 2009
    • Default Status - The mortgage payment must be sixty (60) days delinquent or facing imminent default.
    • Conforming Loans - The balance of the loan cannot exceed the High Cost Area conforming loan limit of $729,750 for single family homes.  different limitations are imposed on 2-4 unit properties
    • Debt to Income Ratios (Eliminated) - Prior to February 1, 2011 the total monthly mortgage payment a borrower was obligated to pay had to exceed 31 percent of the household gross income.  This requirement was eliminated in SD 10-18 and no longer affects HAFA short sales.
    • Hardship - Although debt-to-income ratios are no longer a factor of consideration in HAFA short sales, borrowers are still required to provide their servicer with a hardship letter indication the reason behind their inability to continue paying their mortgage.
    • 1-4 unit properties only - commercial properties and multifamily properties over 4 units are not eligible for the HAFA program

    Other Noteworthy Aspects of a HAFA Short Sale

    Most lenders have a specific process they follow when reviewing loans for HAFA and will always review it for this program before they look at any other options. Speaking with a short sale expert should never cost a homeowner anything and will be extremely valuable to help determine any and all options to avoid foreclosure.  The following additional aspects are also to be considered in a HAFA short sale:

    • Arms Length Transactions only - The sale of the property must be to a buyer that is not related or affiliated with the seller
    • Negative Effect on Credit Scores - Like a regular short sale the servicer will report the short sale to credit reporting agencies as settled for less than the full balance, which may negatively impact the credit score.  However, unlike a foreclosure or Deed in Lieu of Foreclosure, a short sale will have less of an impact on your credit score and allow you to reenter the market as a home-buyer within a shorter period of time.
    • 90 Day No Flip Rule - The new buyer may not resell the house for a period of 90 days from purchase.
    • End of Program - The HAFA program is slated to end on December 31, 2012
    • Relocation Assistance - At the conclusion of a HAFA short sale the borrower will be eligible for up to $3,000 in relocation assistance to help them get back on their feet at the conclusion of the transaction.  This assistance is also available to homeowners who complete a HAFA short sale and reach agreement with the lender to stay in the property as tenants after the close of escrow.
    • Junior Lenders (Modified) - As mentioned above, in order to complete a HAFA short sale any/all lenders must agree to accept a maximum of $6,000 as full settlement at closing.  All lenders (including the senior lender) must agree to fully release the borrower from any furhter obligations towards the debt and may not request a promissory note for the remaining balance or seek a deficiency judgement.
    • Commissions Due - Servicers participating in the HAFA short sale program cannot require sellers, brokers or agents to reduce their commission to a percentage less than what is already agreed upon in the current listing agreement.  Commission rates cannot exceed 6 percent.

    HAFA procedures

    The steps involved in completing a HAFA short sales are fairly straight forward.  The short sale can be initiated either prior listing the home for Sale, using a Request for Approval of Short Sale (RASS Form) or can be initiated after listing the property for sale with a real estate agent and after obtaining a qualified offer from a potential buyer using a Alternative Request for Approval of Short Sale (ARASS Form).   The steps to follow are listed below:

    1. Lender evaluates borrower for a loan modification under HAMP.
    2. Lender evaluates borrower unable to complete HAMP modification for short sale.
    3. Lender issues Short Sale Agreement (HAFA SSA).
    4. Borrower lists the property for sale using a licensed real estate agent.
    5. Borrower and agent market and sell the property.
    6. Borrower submits to lender a Request for Approval of Short Sale (RASS).
    7. Lender approves RASS within 10 business days.
    8. Sale closes escrow.

    Conclusion

    Simply put, don't rely upon the federal government to devise a plan that will save your home or help you as an agent complete a short sale.  Although it's incumbent upon all real estate professionals to understand all the alternatives available to homeowners in the event of default, programs like HAMP and HAFA will only help a small percentage of distressed homeowners and fall dismally short in high cost areas like Los Angeles, Chicago, New York, etc.  I do believe the eligibility modifications made effective February 1, 2011 will expand the reach of the current program, however I don't expect this to have the expansive impact touted by the Obama Administration.

    For those who do fit the criteria, this program offers very beneficial perks including relocation assistance and the prevention of deficiency judgements.

    For those unable to qualify, take heart in the fact that traditional short sales are still available to you and, at the moment, have a far greater likelihood of being completed.

    Best of Luck to Everyone!

    © 2010 Allan S. Glass - ASG Real Estate Inc. ®

  • The California Foreclosure Process

    Posted Under: Agent2Agent in Los Angeles, Foreclosure in Los Angeles, Property Q&A in Los Angeles  |  December 15, 2010 8:47 AM  |  2,772 views  |  1 comment


    chart courtesy of: Foreclosureradar.com

    As I established in my last post “Understanding the Foreclosure Process” every state follows a different procedure and set of laws during the foreclosure process.  The two primary routes are judicial and non-judicial foreclosure and which process is followed can often be determined by which “theory” of ownership has been established in the state.

    California is a lien theory state that uses a trust deed and underlying promissory note to secure the loans made against real estate. Essentially the promissory note is an unsecured “promise to pay” agreement between a borrower and lender; to provide security for the obligation borrowers sign a deed, which is held in trust by a third party “Trustee,” until the the debt is paid in full and the lien is released.  The trust deed will also include a power of sale clause, allowing the lender to initiate foreclosure if the borrower fails to pay.

    Because of these factors lenders in California have the option of pursuing both types of foreclosure proceedings if the borrower fails to meet his/her obligation.

    Judicial Foreclosure

    The Judicial Foreclosure process is the lengthiest process and requires a court proceeding to be concluded.  Further complicating this option, a foreclosed borrower reserves the right to reinstate their home after the foreclosure sale up to one (1) year after a judicial foreclosure proceeding is completed.

    The benefit to lenders with a judicial procedure is the right to pursue a borrower for a deficiency judgment.   Judicial foreclosures are primarily reserved for large transactions where the borrower has pledged personal liability and has substantial assets the bank could pursue after the sale.  These situations are most often seen in large commercial transactions, rarely if ever in residential situations.  As such an overwhelming majority of foreclosures in California are done with the non-judicial method.

    Non-Judicial Foreclosure

    The Non-Judicial foreclosure method in California has been developed through the process of case law and is governed by the statutes in California Civil Code 2924.  The result established after adopting a lien theory for the state, it concludes that a loan does not transfer ownership of a property to a lender, rather it creates a lien against the property.  Cal. Civ. Code 2924 establishes the rules and regulations governing mortgages in the state and the process by which lenders can forclose on delinquent borrowers.  Also known as a Statutory Foreclosure, this method does not require additional court involvement and is agreed to by borrowers via the power of sale clause found in the trust deed signed when the mortgage was originated.

    Most foreclosures occur using this method which does not allow a right of redemption after the foreclosure or “trustee” sale.  Additionally, as a single action state, defined by Cal. Civ. Code Section 726(a), there can be but one form of action for the recovery of any debt or the enforcement of any right secured by a mortgage upon real property.  In plain speak, a lender choosing to pursue an complete a non-judicial foreclosure in California cannot also pursue a deficiency judgement against the borrower.

    Perata Mortgage Relief Act - SB 1137

    As a result of the recent turmoil in the housing markets, California has passed several new laws which also affect the foreclosure process in the state.  The first was signed into law by Governor Schwarzenegger in 2008 and applies to loans originated between January 1, 2003 through December 31, 2007.  SB 1137 established three primary changes to the foreclosure process.

    First, it established a notification process for tenants living in a foreclosed property.  Prior to SB 1137 many unfortunate tenants were left in limbo unaware the home they were renting was in foreclosure until after the sale had occurred.  The new law sets rules requiring a minimum sixty (60) day notice prior to any eviction and sets specific language required in the notice of foreclosure given to tenants.

    Second, 1137 empowers local authorities to impose a fine on financial institutions that do not maintain a vacant home after foreclosure.  Primarily a means of fighting blight and protecting neighborhood health and welfare the potential $1,000 per diem is a costly deterrent for banks unwilling to address dilapidated homes expeditiously.

    Finally, the most important change pertaining to home owners, SB 1137 now requires lenders to make their best attempts to contact a home owner and discuss the options available to help avoid foreclosure prior to filing a notice of default.   This lender diligence period can and should included discussions regarding loan modification, short sale, deed in lieu of foreclosure and has added anywhere from fifteen (15) to ninety (90) days to the foreclosure process.

    California Foreclosure Prevention Act - ABX2 7 and SBX 27

    Aimed at mortgage servicers and lenders, ABX2 7 and SBX 27, known collectively as the California Foreclosure Prevention Act (CFPA) adds ninety (90) days to the foreclosure process after a lender has filed a Notice of Default (NOD).  The law was passed on February 20, 2009 and will sunset on January 1, 2001, covering loans originated between January 1, 2003 and January 1, 2008.  CFPA applies to first trust deeds on homes which are the primary residence of the borrower in question.

    It is important to note that CFPA only affects servicers and lenders who have not filed or received an exemption to the law.  Exemptions will be granted to all servicers following and adopting a comprehensive loan modification program aimed at helping defaulted homeowners avoid foreclosure.  Although lenders can avoid the 90 day delay with the exemption, often times the required modification process itself will delay the foreclosure process up to the ninety (90) days stipulated in CFPA.  CFPA also exempts lenders and servicers in cases where the borrower has previously filed for bankruptcy.

    While the act does not dictate modification plans a lender or servicer must follow it does provide a suggested framework to be used.  This includes rate reductions as needed for a fixed term up to five (5) years, extension of the amortization period of a loan up to forty (40) years from the date of origination, deferral of a portion of the principal unpaid balance until maturity of the loan, and/or some form of principal reduction.

    Non-Judicial Foreclosure Timeline in California

    Prior to the passing of recent legislation aimed at helping homeowners avoid foreclosure the non-judicial foreclosure process averaged approximately 125-130 days from the initial moment of default to the completion of a trustee’s sale.  According to the October 2010 foreclosure report from Foreclosure Radar, lenders averaged 279 days to foreclose monitored from the time a notice of default (NOD) has been filed to the date of the foreclosure sale.   It is not uncommon per the new laws mentioned above, for lenders to take up to ninety (90) additional days to file a NOD from the date a mortgage first becomes delinquent.   This means the average foreclosure timeline in California can now reach 369 days, more than one year, start to finish.

    To further complicate matters, California law also stipulates according to Cal. Civ. Code 2924 g(c)(1), “In the event that the sale proceedings are postponed for a period or periods totaling more than 365 days, the scheduling of any further sale proceedings shall be preceded by giving a new notice of sale in the manner prescribed in Section 2924f.”  In other words, if the lender does not foreclose on a property within 365 days from filing a NOD, a new NOD must be filed and the process starts all over again.

    The Aftermath

    Barring cancellation or postponement, the outcomes of a trustee sale are two-fold.  1) the property is sold to a third party bidder who becomes the new owner of record once funds are settled and the deed is recorded or 2) Property ownership reverts to the foreclosing lender and becomes an REO or bank owned property.  At this point ownership has ended for the defaulted borrower and they or any existing tenants will be contacted within hours by the new owner or their representatives to begin the process of transferring possession.

    This ends the foreclosure process for the defaulted borrower and begins a new chapter for the property in question.

    © 2010 Allan S. Glass - ASG Real Estate Inc. ®

  • The Short Sale Dilemma - Understanding Fiduciary Responsibility

    Posted Under: Home Selling in Los Angeles, Agent2Agent in Los Angeles, Foreclosure in Los Angeles  |  December 14, 2010 10:21 AM  |  964 views  |  2 comments

    In the most simple of terms a real estate agent serves a fiduciary duty to the client. This legal and ethical relationship of confidence and trust bonds the client to the agent in reliance of protection and aid during the transactional process. For the real estate broker and agent, the fiduciary responsibility is a clearly defined relationship requiring specialized knowledge, dutiful care, and pragmatic repose.

    Traditionally, the mechanics of a real estate transaction allow for a seller to financially gain by selling their asset to the highest bidder. In these cases the broker/agents role includes advising on how to best position the property for sale, qualifying the potential buyers, negotiating for the highest price, and maneuvering through the logistics of escrow. But what happens when profit is removed from the equation?

    What is a Realtor’s® fiduciary responsibility in a short sale?

    First and foremost, a real estate professional should understand how the term is defined. According to the 2004 edition of California Real Estate Practice by Lowell Anderson, Daniel S. Otto, and William H. Pivar, a fiduciary duty is one of good faith and trust. “The agent must be loyal to his or her principal, placing the principals interest above those of the agent. An agent’s actions, therefore, cannot be inconsistent with the principals interests. The agent cannot act in a self-serving manner to the detriment of his or her principal.”

    According to the National Association of Realtors a fiduciary responsibility is like an OLD CAR. the acronym used to account for the six duties outlined by NAR. These responsibilities include:

    1. Obedience - the duty to promptly obey and follow all legal instructions of the principal
    2. Loyalty - the duty to act in the best interest of the client, putting their interests above others, including your own
    3. Disclosure - the duty to disclose all relevant facts affecting decisions of the principal during the transaction
    4. Confidentiality - the duty to safeguard a principals secrets, unless doing so violates disclosure laws
    5. Accounting - the duty to account for all funds and proceeds entrusted to you by the principal
    6. Reasonable Care and Diligence - the duty to use all of your real estate skills in pursuit of the principals affairs, including the responsibility of knowing when you are beyond your scope of knowledge

    Two Transactions

    Short sales actually involve two separate transactions that occur simultaneously. The first is a real estate transaction, where the defaulted seller enlists a Realtor® to find a ready, willing, and able buyer to purchase real property. Most agents are very qualified to handle this part of the equation as it falls squarely within the scope of expertise shared by all. Like most other non-short sale transactions the agents and brokers are paid for this work by way of a real estate commission earned upon the successful completion of a sale.

    The second transaction in the short sale process is a financial transaction. This occurs between the principal and the one or more lien-holders with financial claim against the real estate in question, over and above the net purchase price offered by a buyer in the first transaction mentioned above. Unfortunately many Realtors® attempting to handle this transaction do not have the technical expertise nor the experience to dutifully represent the principal in this matter. This transaction has legal ramifications, tax consequences, and can carry significant financial impacts. Additionally, unless an agent imposes a negotiation fee, paid by the lender on the HUD-1, they do not get paid for the work on this second transaction.

    Understanding Who the Client is

    In a world of REO’s it’s sometimes lost on the listing broker that his or her client is not the bank during a short sale. Quite the contrary. If you were to ask a loss mitigation representative at your local bank how they view a defaulted seller requesting a short payoff you might be surprised to find that the relationship is considered adversarial. Anything and everything collected by the banks representatives can and will be used against the defaulted seller when negotiating a settlement.

    Effective customer representatives, asset managers, and loss mitigation specialists while sometimes warm and pleasant are building the banks case against your client with each and every financial document you share. You are not working together to find a solution. They are looking for ever last possible dime they can extract from your client before writing off the balance as a loss. Agents would be well advised to understand the dynamics of this relationship and exercise the utmost care with their approach in negotiating debts.

    What Constitutes the Best Offer?

    As I mentioned above, a defaulted seller walks away from a completed short sale with the same amount of money in their pocket regardless of the purchase price. Zero, zilch, nada. The short lender in the transaction will, as condition of their approval, specifically address this point and strictly prohibit the defaulted seller from any form of financial gain. As is the case in most distressed sales, the best deal is often not the highest priced offer, rather it is the offer that presents the greatest “surety of closing” to both the distressed seller and bank accepting the loss. My point here is not to contend that price is completely irrelevant; rather i’d suggest when reviewing multiple offers, consider how much staying power the potential buyers possess along with other intangible assets like buying / investing experience, and patience.

    I’ve seen short sales completed in less than 90 days and I’ve heard of short sales that have taken longer than a year to complete. In most cases, the difficulty in closing a short sale is keeping an interested buyer motivated to close. It is not uncommon for retail buyers to submit offers on several short sale listings hoping at least one in the group will be approved by the lender absorbing the loss. The unfortunate reality is that many families cannot wait for months to make a housing decision. Parents need to accommodate work needs, kids have school schedules, and families, especially in this market, have other options.

    How to Get the Ball Rolling - Offer Tactics

    The short lender has no interest in discussing a short sale transaction unless a qualified offer is in hand. To address this issue, temptation sometimes drives a distressed seller and their agent to submit an offer, any offer, to the bank even if the buyer isn’t real. The use of “straw buyers” is a dangerous practice and walks an agent and their client down a slippery slope. Even if the principal suggests or demands the use of these tactics, the agent has a fiduciary duty to be obedient along the letter of the law. It is the agents responsibility to be aware of both legal and illegal practices and inform the client when such lines are crossed.

    Only substantiated offers from real buyers should be accepted and/or submitted to the lender with a completed short sale package. If a home is languishing on the market, an agent has a responsibility to investigate and inform the seller what may be causing the problem, why buyers have not written offers, or why agents are avoiding showing their property. If a defaulted seller has waited too long into the foreclosure process to allow for normal marketing time, the agent has a responsibility to price the listing appropriately to allow for maximum interest from the buying community.

    Putting it All Together

    Fiduciary responsibilities require a broker / agent to enact a responsible business plan incorporating a full awareness of the real estate process. Understanding what can be done legally, determining who exactly is the client, discerning the clients objectives, protecting client interests, and diligently advocating on their behalf are primary to the agent / client relationship. Although the agents expertise and experience are relied upon for guidance through the real estate transaction, the agents fiduciary duty is to put the clients interest and desires above their own.

    Short sales present a unique set of circumstances that likely contradict common practice due to the absence of profit for the principal, and the cumbersome financial transaction that accompanies the real estate sale. Broker / agents taking short sale listings bear the burden of responsibility to their clients to know when they are in over their heads. It’s not enough to simply declare yourself a short sale expert because distressed assets are the only properties selling in your marketplace.

    Brokers and agents must understand the primary objective of the seller in a short sale is to avoid foreclosure. This objective is met only if and when a bonafide offer from a real buyer is submitted and approved by the lender modifying a debt. If you take a short sale listing, the bank is not your client and is not working in tandem with your principal to accomplish their goal. It is incumbent upon the broker / agent to understand this adversarial relationship, protect the interests of their client, and maintain a modicum of confidentiality on their behalf. A broker / agent who accepts a short sale listing must be willing to put subjective viewpoints aside and present all potential options objectively to the client. Finally, a broker / agent must understand from both the buyer and seller’s perspective the correct legal procedures necessary to complete the sale of property in imminent default.

    The responsibility is great, but the reward of helping a client avoid foreclosure is even greater. If you educate yourself, understand the process, remain objective, and focus on the client’s goals your fiduciary duty can easily be maintained.

    © 2010 Allan S. Glass - ASG Real Estate Inc. ®

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