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Courtside Newsletter: New Protections for Short-Sale Sellers – August 2011


By: J Niswonger, Riverside County Office
There is some good news for homeowners who have to sell their properties for less than they owe (known in the industry as short sales).  The California Legislature has passed Senate Bill 458, which mortgage holders from seeking to recover additional money from the seller after approving a short sale.  This month’s newsletter addresses the effects of Senate Bill 458 and the benefits to homeowners of this change to an existing statute.

Senate Bill 458 was signed by Governor Brown on July 11, 2011 and filed with the Secretary of State on July 15, 2011.  The Bill modifies Code of Civil Procedure Section 580e and, by its terms, takes effect immediately.  The most significant effect of this new law is that now any bank or other lender that holds a note secured by real property (i.e., a mortgage) may not seek to recover a deficiency on that note after a short sale.  That is, lenders who approve a short sale are entitled to receive only the money received through the sale of the property and may not collect any remaining balance from the seller.  Previously, only the holder of the first mortgage was prohibited from recovering a deficiency.  Thus, before this law recently changed, second mortgage holders (and other junior lenders) commonly approved short sales on the condition that they retain the right to recover from the seller any balance owed after the sale.  This practice is now illegal.

To illustrate, assume that a seller owes $350,000.00 on a first mortgage, and $60,000.00 on a home equity line of credit (HELOC).  Assume also that a buyer offers to purchase the property for $200,000.00, and the first mortgage holder offers to pay the HELOC lender $10,000.00 to approve the sale.  Before the law was amended, only the first mortgage holder was prohibited from recovering additional money from the seller (i.e., it could only receive the proceeds from the short sale, which, in this example would be $200,000.00 minus $10,000.00 to the HELOC lender minus costs and real estate commissions).  A HELOC lender in this situation, however, would often include a provision in the short-sale approval that gave it the right to recover from the seller the remaining amount owed ($50,000.00 in this example).  Junior lenders, such as the HELOC lender in this example, can no longer recover any money outside of the short sale.  Like first mortgage holders, a junior lender that approves a short sale now receives only the money it agreed to receive under the terms of the short sale.

Under the law as amended, junior lenders cannot even ask sellers to contribute additional funds as a condition of approving the short sale.  Thus, in the example above, the HELOC lender may not ask that the seller agree to contribute any additional funds as a condition of approving the short sale.  Previously, junior lenders often negotiated with sellers to receive an additional lump sum payment to satisfy the obligation in full.  For example, lenders like the HELOC lender above regularly negotiated an additional $5,000.00 or $10,000.00 from the seller with the promise that the loan would be treated as paid-in-full.  This practice is no longer allowed.

Like the original, the modified law continues to apply only to dwellings of four units or less.  Unlike the original statute, however, the new law distinguishes between loans that are secured “solely” by the property subject to the short sale and those that are secured by additional collateral (either other real property or personal property).  If the loan is secured “solely” by the property subject to the short sale, the lender may not recover any deficiency.  If the loan is secured by other property as well, then a lender may recover a deficiency only to the extent that a deficiency would have been available if the property had been sold through non-judicial foreclosure (see our September 2009 Courtside Newsletter for a discussion of judicial and non-judicial foreclosures).

The amended statute retains the exceptions for fraud and waste that were in the original version.  This allows lenders to recover compensation from sellers who try to defraud lenders or who damage the property.  An example of fraud would be if the seller received money from the buyer outside of escrow.  The amended law also retains exceptions for sellers that are corporations or “political subdivisions of the state,” and adds exceptions for limited liability companies and limited partnerships.  The result of these exceptions is to make the law applicable only to sellers who are natural persons.

IS THE LAW RETROACTIVE?

Senate Bill 458 officially became law on July 15, 2011 when it was filed with the Secretary of State, and applies to all short sales after that date.  Questions arise regarding whether the amended statute provides any protection for sellers who completed short sales before July 15, 2011, or for sellers who entered into short-sale agreements before July 15, 2011 with escrow closing after that date.  The analysis of whether a law is retroactive is complex, and involves a number of considerations beyond the scope of this newsletter.  It appears, however, that the revised law will protect many sellers who closed escrow before July 15, 2011 or who entered into contracts before that date.

The precise wording of the amended statute states, “No deficiency shall be owed or collected, and no deficiency judgment shall be requested or rendered for any deficiency. . . .”  Based upon this wording, a reasonable argument may be made that a lender who has not yet obtained a deficiency judgment will be prohibited from recovering any deficiency from a seller.  This analysis is consistent with current California court determinations regarding whether and to what extent a statute is retroactive.  It is possible that the words “no deficiency shall be owed or collected,” may even prevent lenders from collecting existing deficiency judgments.  How the courts will determine these issues, however, remains to be seen.  The legislative history of this amendment strongly suggests that the lawmakers intended immediate protection for all sellers, including those who do not yet have judgments against them.  The Giardinelli Law Group is currently vigorously defending deficiency claims based on the interpretation that such claims are absolutely barred as of July 15, 2011.

A LIKELY REPERCUSSION OF THE NEW LAW

 

Nothing in the amended law requires junior lenders to agree to a short sale.  Thus, it will likely likely be more difficult in the future to convince junior lenders to approve a short-sale offer.  Instead of accepting a fraction of the amount owed by approving a short sale, junior lenders may prefer to allow the property to go into foreclosure and pursue a deficiency judgment after the foreclosure sale (see our September 2009 Courtside Newsletter for a discussion of when a junior lender may seek a deficiency after a foreclosure sale).

Also, junior lenders may initially withhold approval of a short sale in the hope that the seller may offer additional compensation as an incentive for the lender to sign the short-sale approval.  While the law specifically states that junior lenders “shall not require” the seller to pay additional compensation, nothing in the law prohibits sellers from voluntarily offering additional compensation.  Whether such a tactic is permissible will likely be the subject of future court decisions.

Senate Bill 458 closed a large loophole in short-sale law, but while it provides important protections for sellers, it creates a likely cost that fewer short sales will be approved by junior lenders.  Only time will tell whether this law will have a positive impact on the current mortgage crisis.

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 Biography

J Niswonger is the senior litigation attorney at The Giardinelli Law Group, APC.  Mr. Niswonger has been a general civil litigator for more than 18 years, and has litigated real estate matters for more than 16 years.  In addition to his litigation experience, Mr. Niswonger has successfully mediated a significant number of real estate cases.  Mr. Niswonger may be reached at [email protected] or (951) 244.1856.

This Newsletter is a copyrighted publication and may not be reproduced or transmitted in any form or by any means without written permission.  This article does not necessarily reflect the point of view of the Giardinelli Law Group, APC, or other person or entity who publishes it.  This article provides legal information abridged from statutes, court decisions, and administrative rulings and contains opinions of the writers.  Legal information is not the same as legal advice, which is the application of law to an individual’s specific circumstances.  Although every effort is made to ensure the information is accurate and useful, it is recommended that you consult with a lawyer to obtain professional assurance that the information provided and your interpretation of it is appropriate for a particular situation. To request further information or to comment on this newsletter, contact us at (951) 244-1856 and visit our website at www.glawgroupapc.com.

 

 

Courtside Newsletter: Of MARS and Short-Sales


According to statistics compiled by the California Association of REALTORS® (C.A.R.), short sales comprised 23 percent of all California home sales in February 2011; that number was 20 percent in March 2011 (see www.car.org/marketdata/data/distressedsales/). Because of the high percentage of short sales, almost every REALTOR® in California will participate in a short sale transaction at some point. This month’s newsletter addresses what every REALTOR® should know about a new Federal Regulation applicable to REALTORS® involved with short sales.
Effective January 31, 2011, a new Federal Law (Title 16, Code of Federal Regulations, Part 322) imposes certain requirements on anyone who provides Mortgage Assistance Relief Services (MARS). Many REALTORS® may incorrectly assume from the title that this new regulation applies only to those who assist homeowners with loan modifications. As written, however, this regulation also applies to REALTORS® involved in short sales. This new law defines Mortgage Assistance Relief Service to include any service “to assist or attempt to assist” a person with “Negotiating, obtaining or arranging: (i) A short sale of a dwelling, (ii) A deed-in-lieu of foreclosure, or (iii) Any other disposition of a dwelling other than a sale to a third party who is not the dwelling loan holder.”

By this definition, any REALTOR® who lists a short sale property is a provider of Mortgage Assistance Relief Services and must comply with the MARS rule. Further, under a strict reading of the MARS rule, even a REALTOR® who represents a buyer of a short sale property may be required to comply with the rule. For example, a REALTOR® who makes a phone call to the seller’s lender in order to provide information to assist the lender in approving the short sale has arguably assisted the seller with obtaining the short sale. Thus, a buyer’s agent who actively participates in the short sale approval process should be aware of and consider complying with the MARS rule. In general, REALTORS® need to be aware of three primary provisions of the MARS rule: 1) Prohibition Against Advance Payments; 2) Prohibited Representations; and, 3) Required Disclosures.

Prohibition Against Advance Payments

The MARS rule prohibits anyone who performs covered services from receiving any advance fee for the services. This does not usually apply to a REALTOR® who agrees to a commission, since commissions are generally not paid until escrow closes, when most services have already been performed. This may be a problem, however, for any REALTOR® who retains a short sale negotiator. Requiring the short sale negotiator’s fee up front probably violates the MARS rule. Further, the MARS rule prohibits a person from assisting or facilitating someone who violates the rule. Thus, a REALTOR® could be held in violation of the MARS rule if he or she sends a client to a short sale negotiator who collects an up-front fee. Of course, as reported in our June 2010 and July 2010 Courtside Newsletters, there are other potential serious issues related to the use of short sale negotiators (past issues of our Courtside Newsletter may be found on our website at www.glawgroupapc.com).

Prohibited Representations

Any REALTORS® who provide services covered by the MARS rule are prohibited from making certain representations. First, REALTORS® may not tell the sellers to avoid contact or communication with the lender or servicer. Second, REALTORS® may not represent to sellers any specific benefits or anticipated results of a short sale negotiation unless the REALTOR® is able to support the representations with reliable information. Finally, REALTORS® may not make any misrepresentations related to the short sale. The MARS rule lists 12 categories of misrepresentations, but makes it clear that misrepresentations which fall outside of these categories are also prohibited. Included in these categories are statements regarding the likelihood of success, time estimates for accomplishing results, affiliation or compliance with government programs, whether or not the seller should continue making payments, the possibility of refunds, the conditions that create the right to compensation for the service, and whether the seller is obligated to accept the relief offered.

Thus, for example, unless statements are true and can be supported by reliable documentation, REALTORS® should not tell sellers that they are likely to get an answer in three to four weeks, or that the lender is likely to approve a particular purchase offer from a buyer. REALTORS® should not tell sellers that a particular transaction complies with government regulations, or is part of any government program designed to help homeowners. REALTORS® should not tell sellers that they are required to pay for the services of a short-sale negotiator, or that the REALTOR® is entitled to a commission even if the sale does not close. This last issue is problematic for REALTORS® who use the standard C.A.R. Listing Agreement, which entitles the Broker to damages if the seller terminates the agreement early. The Federal Trade Commission (FTC) is currently reviewing this and other REALTOR® specific issues. According to the National Association of REALTORS® (N.A.R.), the FTC is not likely to strictly enforce some of these provisions against real estate practitioners until such conflicts are addressed and resolved. The MARS rule is essentially designed to protect homeowners from any sharp sales tactics.

Required Disclosures

Probably the biggest trap for the unwary REALTOR® arises from the disclosure requirements. A REALTOR® who advertises short sale services must make specific disclosures, as does a REALTOR® who assists a single client in a short sale transaction. The MARS rule sets forth what disclosures must be made, and under what circumstances.

1. General Commercial Communications.

If a REALTOR® represents to the general public that he or she can help short sell a residential property, disclosures are required to be part of every communication. All written communications, such as advertisements, flyers, brochures, newsletters, and even business cards, (if they identify the REALTOR® as knowledgeable in short sales), must contain the following disclosures:

IMPORTANT NOTICE (in bold-face type that is two points larger than the font size of the disclosure) (Name of company) is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.

If the REALTOR® orally communicates his or her ability to assist with short sales, these same disclosures must be made, and must be preceded by the statement “Before using this service, consider the following information.” In any telephone communication, this wording must be used at the beginning of the call.

If the REALTOR® makes any statement regarding whether a seller should stop making mortgage payments, the following disclosure must be added:

If you stop paying your mortgage, you could lose your home and damage your credit rating.

2. Specific Commercial Communications.

REALTORS® who handle short sales without generally advertising this fact are also required to comply with the MARS rule disclosures. In such cases, the following disclosures must be made at the moment the REALTOR® becomes aware that the transaction will be a short sale:

IMPORTANT NOTICE (in bold-face type that is two points larger than the font size of the disclosure) You may stop doing business with us at any time. You may accept or reject the offer of mortgage assistance we obtain from your lender or servicer. If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us (insert amount or method for calculating the amount) for our services. (Name of company) is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.

If the REALTOR® makes any statement regarding whether a seller should stop making mortgage payments, the following disclosure must be added:

If you stop paying your mortgage, you could lose your home and damage your credit rating.

As noted above, the part of the required disclosure stating, “If you reject the offer you do not have to pay us,” causes a conflict with the standard C.A.R. Listing Agreement. Both C.A.R. and N.A.R. are awaiting clarification from the FTC on this and other issues unique to REALTORS®.

3. Fee Disclosures.

As stated above, the MARS rule prohibits all up-front fees. It also requires that fees be disclosed before the seller signs the listing agreement (if it is a known short sale at that time). More importantly, the fee must be disclosed once again before the seller completes a transaction. The MARS rule requires that the stated fees be the same on both disclosures.

This creates a problem when, as commonly occurs, lenders reduce the amount of commissions that will be paid to listing agents before closing. In such a situation, it may be impossible for REALTORS® to comply with the requirement that the fee disclosed to consumers be the same on the two required disclosures. This is another of the issues that N.A.R. has addressed with the FTC, and for which a resolution is expected.

C.A.R. Forms

The California Association of REALTORS® has created two forms to help REALTORS® comply with the MARS rule. If the REALTOR® knows at the time the listing is taken that the transaction will be a short sale, the REALTOR® should use form MARSSN. This form should be part of the Listing Agreement. If the REALTOR® later learns that the sale proceeds will not cover the amount owed on the property, the REALTOR® should immediately present form MARSMRN to the seller. These forms contain the required language set forth above.

It is important to be aware of two potential pit falls. First, these forms are specifically drafted for listing agents. As stated above, circumstances may arise where the buyer’s agent contacts the seller’s lender in an effort to facilitate negotiation of the short sale. Under a strict reading of the MARS rule, the buyer’s agent in such a situation would also be providing Mortgage Assistance Relief Services, and therefore would be required to make disclosures to the seller. If that occurs, it is recommended that the buyer’s agent modify form MARSMRN and provide it to the seller’s agent for the seller’s signature. This matter has been discussed with the C.A.R. legal department, which is likely to review it further depending on how the FTC clarifies the MARS rule as it applies to REALTORS®.

The second and more important pit fall arises for REALTORS® who think that using the standard C.A.R. forms will assure that they have complied with all of the requirements of the MARS rule. This is not true for any REALTOR® who publicizes the fact that he or she can handle short sales. If the words “short sale” occur in any communication to the general public (such as advertisements, flyers, brochures, newsletters, business cards, or even conversations), that communication must contain the required disclosures for General Commercial Communications (above). Simply using the standard C.A.R. forms does not fulfill the disclosure requirements for commercial communications.

This article has discussed the MARS rule only in the context of short sale services. There are many other provisions of the MARS rule that could create exposure for a REALTOR®. For example, if a REALTOR® gives any general advice about loan modifications or foreclosures, or advises clients regarding whether or not to continue making mortgage payments, that REALTOR® could be found to violate the MARS rule. As with any legal issue, it is important to receive guidance from qualified legal professionals.

This Newsletter is a copyrighted publication and may not be reproduced or transmitted in any form or by any means without written permission. This article does not necessarily reflect the point of view of the Giardinelli Law Group, APC, or other person or entity who publishes it. This article provides legal information abridged from statutes, court decisions, and administrative rulings and contains opinions of the writers. Legal information is not the same as legal advice, which is the application of law to an individual’s specific circumstances. Although every effort is made to ensure the information is accurate and useful, it is recommended that you consult with a lawyer to obtain professional assurance that the information provided and your interpretation of it is appropriate for a particular situation. To request further information or to comment on this newsletter, contact us at (951) 244-1856 and visit our website.

Courtside Newsletter: May 2010



Despite various reports that the economic crisis may be improving, many property owners face the continuing problem of owing thousands if not hundreds of thousands of dollars more than their properties are currently worth. Many of these owners have chosen to allow their properties to go into foreclosure rather than continue to pay on loans that far exceed the value of the property. For many property owners, however, there may be an alternative to foreclosure. This month we provide a brief overview of the potential benefits of a Chapter 13 Bankruptcy proceeding when a real property owner owes more than the property is worth.

PROPERTY OWNERS MAY BE ABLE TO REDUCE THE DEBT OWED ON REAL PROPERTY THROUGH A CHAPTER 13 BANKRUPTCY PROCEEDING

While many economic reports note that foreclosures have been gradually decreasing, a significant number of real property owners struggle to make payments on loans that exceed the value of their properties. A Chapter 13 bankruptcy proceeding may offer relief to such property owners who are “under water.” In certain situations, Chapter 13 bankruptcy can eliminate a second or third lien against real property. In bankruptcy parlance, this is known as “lien-stripping.”

In order to qualify for this benefit, the property owner must be eligible for a discharge in bankruptcy under the provisions of Chapter 13 of the Bankruptcy Code (lien-stripping is also available in Chapter 11 bankruptcies, but that discussion exceeds the scope of this article). If a person has been discharged in a Chapter 7 bankruptcy within four years of filing the Chapter 13 petition, for example, then he or she is not eligible for discharge under Chapter 13. Additionally, if the property is the debtor’s personal residence (the “debtor” is the person who files for the bankruptcy), the lien cannot be stripped unless it is completely unsecured. This means that the homeowner must owe more on a senior lien than the property is worth.

To understand how this is applied, assume that a person’s home is worth $200,000.00, and that the person owes $236,000.00 to Wells Fargo Bank (the “first” mortgage). Assume also that this person obtained a second loan from Bank of America in the amount of $75,000.00 that is secured by the property (the “second” mortgage). In this situation, the second mortgage is considered completely unsecured because the value of the home is not enough to pay the first mortgage if the property went into foreclosure. If the homeowner is otherwise eligible for discharge in bankruptcy, a Chapter 13 proceeding will allow him or her to “strip” the second mortgage. Thus, following completion of the Chapter 13 proceedings, this person will not have to pay back any part of the second mortgage.

If, on the other hand, the home is worth $250,000.00, the second mortgage is not completely unsecured because there is a $14,000.00 difference between the value of the home and the amount owed on the first mortgage. The second mortgage is therefore partially secured by that $14,000.00 in value. In this situation, the homeowner cannot strip the second mortgage through a Chapter 13 bankruptcy.

In order to receive the benefit of a Chapter 13 lien-strip, a homeowner must observe certain other formalities required by the bankruptcy court. For example, a formal appraisal must be performed on the property, and the appraiser must verify the appraisal under penalty of perjury. The homeowner will have to prove the amount owed under the first mortgage, and must follow certain procedures designed to give proper notice of the intent to strip the lien. Finally, the homeowner must remain current on all payments required by the first mortgage after the Chapter 13 petition has been filed.

If the bankruptcy court approves the lien-strip, and the debtor completes all of the requirements of the Chapter 13 bankruptcy (which involves payments to the bankruptcy trustee for three or five years), then the second mortgage is “discharged.” This means that the debtor does not have to pay it back. Once the debtor obtains the discharge, then the second mortgage lender must re-convey title to the property back to the debtor. This re-conveyance will show that the property is free and clear of any lien by the second mortgage holder.

Chapter 13 bankruptcy is a powerful tool that can provide significant relief to homeowners who are struggling to pay multiple mortgages against their homes. Chapter 13 bankruptcy relief may also be available to owners of investment properties that are “under water.” As noted above, however, not all property owners will be able to obtain the lien-stripping benefits of a Chapter 13 bankruptcy. As with all legal issues, it is important to consult a qualified legal professional in order to understand all of the risks and benefits of filing for bankruptcy.

The author of this month’s newsletter is J Niswonger, an attorney with The GIARDINELLI LAW GROUP, apc.  Mr. Niswonger may be reached at [email protected] or 951/ 245-9163.

The GIARDINELLI LAW GROUP, apc

Riverside County Office
31772 Casino Drive, Suite C
Lake Elsinore, CA  92530
951 / 245-9163

Orange County Office
1601 East Orangewood Avenue, Suite 175
Anaheim, CA 92805
714 / 978-2060

This article is a copyrighted publication and may not be reproduced or transmitted in any form or by any means without written permission.  This article does not necessarily reflect the point of view of the Association or other person or entity who publishes it.  This article provides legal information abridged from statutes, court decisions, and administrative rulings and contains opinions of the writers.  Legal information is not the same as legal advice, which is the application of law to an individual’s specific circumstances.  Although every effort is made to ensure the information is accurate and useful, it is recommended that you consult with a lawyer to obtain professional assurance that the information provided and your interpretation of it is appropriate for a particular situation. To request further information or to comment on this article, contact The Giardinelli Law Group, apc, at [email protected], or 951/ 245-9163 and visit our website at www.glawgroupapc.com

Courtside Newsletter: April 2010


This month we provide a brief overview of two recent acts which impact the real estate industry:  (1) the SAFE Act which must be complied with by January 1, 2011, and (2) HAFA which was recently enacted.

THE SECURE AND FAIR ENFORCEMENT MORTGAGE LICENSING ACT OF 2008

The Secure and Fair Enforcement Mortgage Licensing Act of 2008 (“SAFE Act”) became federal law on July 30, 2008, and California law in October 2009.  The California law requires all DRE real estate licensees who conduct residential mortgage loan originator (MLO) activities to meet certain requirements to qualify for a MLO real estate license endorsement by January 1, 2011.  The SAFE Act requires completion of 20 hours of pre-licensing education and passing a written qualified test.  Currently licensed MLOs must pass both the National component and the California State component of the examination with a test score of not less than 75 percent.  Existing MLOs must pass the National and the State component by September 15, 2010 in order to be issued an MLO license endorsement by January 1, 2011.

Besides passing the written qualified test, the SAFE Act requires licensees to submit a set of fingerprints and to pay a $39.00 fee to have a criminal background check performed. Furthermore, MLOs must demonstrate financial responsibility by authorizing a credit report to be obtained.   Finally, MLO endorsements will be issued annually and will expire each year on December 31st.  A licensee must  complete 8 hours of continuing education each year to renew his or her license.

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