Kirk M West's Blog

It is a new day in America and here in California compared to just 24 hours ago.  Before I share with you how I see our new political climate should bring on meaningful change for homeownership I feel it is best to first give a brief history lesson.  

The roots of the housing crisis actually started back in the 1970's with the evolution of real estate investment gurus such as Robert Allen who's book Nothing Down started a frenzy for buying real estate that continued to grow. The only constraint was qualifying for loans.  By the 1990's, a push was on to open the "American Dream" of home ownership to everyone. But, if they couldn't qualify for a loan, how were they going to buy a home? That was answered in the late 1990's by Federal deregulation of the financial markets, opening up Fannie Mae and Freddie Mac to buy the loans, and the creation of supposed insurance programs called "credit default swaps".  Remember from my previous posts that Fannie and Freddie are actually Government Sanctioned Enterprizes (GSEs).  This means they are ran/controlled by our government.  Banks now were happy to lend because they could get the high-risk, "subprime loans" off their books and they had a ready supply of money through Wall Street investment firms which packaged these loans as securities and passed them off as safe investments. The problem was that they were never really safe investments. But, as long as there was a buyer, no-one cared.  So we ended up with the perversity of lenders offering nothing down, no payment required loans, to unemployed people who were destined to fail.  These available loans also manifested a greed in all of us a s potential homeoweners.  I too was guilty as charged. Just like you I don't remember anyone standing over me with a gun or knife making me sign on the dotted line.  So the loans drove the demand higher and the prices higher and the sales and loan commissions higher, inflating the bubble.  We didn't think it would ever end.  But then came the crash.

By late 2006, loan defaults were increasing as original "teaser" interest rates reset to full payments that buyers could not afford. The bubble was popping. By 2007, as defaults and foreclosures started skyrocketing, the housing bubble began deflating but this was still lost on Wall Street which did not realize (or had ignored) that these sub-prime loans now made up the majority of their investments. By 2008 however, Wall Street was in a panic as they realized that hundreds of billions of dollars of investments they had sold the American public was backed by worthless loans.  They had no money to operate and no more money to loan to banks to make more loans. The market finally collapsed and the entire economy was threatened.  In came the U.S. Treasury in 2008 with a series of (failed) bailouts and buy-ups to stop the damage. When the dust cleared, many Wall Street investment firms were gone anyway, banks went under, and you and I, the American taxpayers, were on the hook for 80% of the sub-prime loans which by now were held by Fannie Mae and Freddie Mac.  The only thing left was to clear out the bad loans and that led to the housing and foreclosure mess that we're still going through today.

So what should we expect going forward?  Here's my thoughts on this:

1.   Don't expect help from the Government - I am not saying there won't be relief.  However, preserving bad loans is not on anyone's agenda and with the increased Republican control nationwide, the push will be to strengthen the economy and provide incentives to create more jobs.

2.  Expect the pace of loan resolutions to increase - While loan modification success has been dismal, Government financial incentives for principal reduction kicked in October 1st and may improve these numbers.   However, news as recent as this past Monday already shows Fannie has rejected the principal reduction policy. But again, preserving bad loans is not on the agenda.  I do expect short sale success to improve as lenders finally seem to be getting it that a sale yields a better return for their investors than a foreclosure.  But all those HELOC second loans may get in the way as they demand full recourse or substantial payoffs.  The most likely scenario is that foreclosures will increase as lenders seek to get what they can and move on.  We're already seeing a faster recording of Default Notices, even by the highly publicized BofA.  You should expect this to continue.

3.  Prices are not likely to rise soon - According to the US Census Bureau, in 1900 less than half of people owned their homes. By the start of the housing bubble in 1999, that number had increased to 66.9% and, at it's bubble peak, the rate reached 69.2% nationwide and much higher in some States.  Today, that ownership number has returned to pre-bubble levels.  Over 18 million homes stand vacant or are in default.  This supply, plus harder to get loans, will keep a lid on any upward price pressure for many years.

4.  Credit Challenges will continue to rise -   The chain of events has left many of us facing increasing issues with our credit and credit reports.  It could be job losses, short sales, foreclosures, furloughs, divorce, stress induced illness, or any life changing event that has forced many to make choices that have negatively impacted their credit reports and scores.  This will be a growing concern for everyone as the availability of credit cards, loans, etc will remain short.

One thing is for certain, we still will have problems to deal with over the next several years as this housing crisis continues.  So, if you, your family member, coworker, neighbor, parishioner, or your clients are upside down on a loan and facing foreclosure, this is a time to act to seek that modification or complete that short sale. Whatever the challenge we offer customized solutions at no cost.  We understand both the practical and emotional aspects of your situation and have the experience to help you navigate your tough decisions. 

Keep in mind that the information presented in this post is not to be taken as legal advice. Every person's situation is different. If you are upside-down on your loan(s), especially if you're facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options. 

Look forward to hearing from you.

September 30, 2010 was a big day for anyone in California short selling property. On that day, Governor Schwarzenegger signed into law SB 931, will take effect on January 1, 2011 and will be codified in the California Code of Civil Procedure Section 580e, what we commonly refer to as the "anti-deficiency" statutes. This is an important win for upside-down owners. For the last few years, the question has been: what is the deficiency liability following a short sale. This statute answers it in part.

The new 580e states in part: "No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage."

What this new law appears to mean is this: if you complete your short sale on your residential property, there will be no deficiency obligation on the first mortgage. Unlike the existing Section 580b which only protects borrowers with "purchase money loans" on their primary residence, the new 580e catches all first loans on all residential properties regardless of whether they have been refinanced or not. While there are some ambiguities, the statute states that there will be no deficiency for any note secured by a first deed of trust or first mortgage. By writing the statute with such broad language, it reasonably should cover both residential investment property as well as refinanced first loans. Essentially, what the new 580e does is provide the same anti-deficiency protection that Section 580d currently provides following a Trustee Sale.

While this is good news with respect to first mortgages, the statute has no effect on liability regarding junior loans (seconds, thirds, HELOCs, etc). Sellers will still need to work with and negotiate with their lenders on obtaining a release of liability from the juniors. However, this is a step in the right direction. The majority of time, the first loan is the biggest loan and the biggest worry. California has now provided the assistance and tools needed to deal with the deficiency on the first.

The information presented in this Article is not to be taken as legal advice. Every person's situation is different. If you are upside-down on your loan(s), and considering a short sale, get competent legal advise in your State immediately so that you can determine your best options.

This is not given as legal advice but merely our desire to keep our valued friends and clients informed. 

If you have specific questions about your liability in California or about short sales, foreclosure, tax implications, feel free to contact me at Kirk@KirkMWest.com or call Realty Qwest at (916) 473-1334.  We offer a FREE consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone.  Till next time!

It was bound to happen.  I mean really.... our recent success rate was just too strong.  Out of over 150 successful short sale transactions that we have been involved with one of our valued clients recently received legal documents via certified mail.   You guessed it. A collection agency was attempting to collect the unpaid balance from their old 2nd mortgage. But fear not.... that same collection agency quickly "went away"!

I have found myself more frequently addressing this question or several questions about this topic.  So I felt I needed to share it with the public (and make it easier on myself in the long run by simply referring clients to my blog in the future)

1. Here is what to Expect when you get that speical pakcage or visitor at the door - a lawsuit is simply a claim by one party (the Plaintiff) against another (the Defendant), which is filed in a court, asking a Judge to Order the Defendant to do something. For example, the lender sues the debtor seeking a Judgment ordering the debtor to pay the remaining debt. In many cases, the Plaintiff will not be the actual lender who made the loan. Collection companies are buying loans from lenders for pennies on the dollar then suing the borrowers for the full amount. I have read that one company, Cohen & Slamowitz in New York, has actually automated the process and is filing 80,000 lawsuits a year! The lawsuit has two parts: the Summons and the Complaint. The Complaint states the facts as to why the Plaintiff claims they are entitled to a Judgment against the Defendant. The Summons is the Order for the Defendant to respond to the Complaint within a certain amount of time which varies from State to State. In California it is 30 days.

2. What do you do next - How to Respond - Plaintiffs hope that Defendants will ignore the Summons and fail to file a response, usually an Answer, within the allowed time. If so, the Plaintiff will quickly get a Default Judgment and can start pursuing the collection by attaching the Defendant's property and garnishing their wages. This is the worst possible result for a Defendant because it is giving up without a fight. Instead, upon being served with a Summons and Complaint, the debtor should get together with an Attorney and determine how best to respond. Often, the first response is attacking the Complaint through a legal process called a Demurrer. There are many grounds for this such as: (a) the Plaintiff doesn't own the loan and therefore has no right to file the lawsuit; (b) the lawsuit is barred by various laws of the State (in California we have several related "anti-deficiency" laws); and (c) the Complaint is defective. At the same time, the attorney will start the Discovery process of compelling the Plaintiff to produce copies of every document they are relying on in filing the lawsuit. While the Demurrer could actually make the lawsuit go away like in the case of our client, it generally won't. What it will do is force the Plaintiff to spend time and money responding which is the last thing they really want to do. So it starts the negotiation for Settlement.

3. Why Settle? - Settlement Negotiations - At the start of a lawsuit, the Plaintiff wants to collect everything and the Defendant wants to pay nothing. While both sides want to win at trial, only one side will. Settlement eliminates that risk and avoids the heavy financial and emotional costs of lengthy litigation, usually well over a year.  As local Attorney Steven Beede has stated, in Sacramento, CA where we are based, 98% of lawsuits will settle before trial. The hard part is reaching an agreement. Inevitably the Plaintiff will feel they got too little and the Defendant will feel they paid too much, but both will agree that the settlement is better than the alternative of continuing in litigation. There is no standard percentage that determines settlement. Rather, it is a complex evaluation of the Plaintiff's evidence, the Defendant's defenses and financial capacity, and the likely outcomes.

5. The Role of Bankruptcy - The Bankruptcy laws of the United States are designed to give an insolvent debtor a "fresh start" if there is no way they can pay their debts. While some attorneys would recommend filing Bankruptcy if faced with a lender lawsuit, this is not necessarily the best solution for everyone. For example: First, other than this bad debt, the defendant may have other assets they want to keep; Second, by responding to the lawsuit, the defendant may be able to settle the debt or avoid it entirely; Third, Bankruptcy will stay on the debtor's credit for 7-10 years; and Fourth, the defendant may not even qualify for Bankruptcy. So, while it is one solution, Bankruptcy is not always the best solution.

while I realized this weeks blog post may not make you feel all warm and fuzzy inside, it should at least give you a clearer ideas what how the overall process works.  Educating yourself can often releive a lot of that stress caused by ther unknown.  The information presented in this Article is not to be taken as legal advice.... because I ain't no lawyer. *chuckle*  But I would be happy to refer you to one that specializes in these types of cases. 

Every person's situation is different. If you have specific questions about your situation, about short sales, foreclosure, or any other issues you may be facing, feel free to contact us me at kirk@kirkmwest.com. I offer a completely confidential and FREE consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-893-9666.

Wow!  We recieved over 250 emails after yesterday's Blog Post.  Thank you for all of the great questions.   Your emails have sparked today's comments.  The most widely asked question yesterday was, "What happens next?"  "Will my lender come after me?" 

One of the most critical and least known questions facing sellers, agents and lenders is whether the lender can really come after a borrower for a deficiency after a Short Sale. While the answers may vary according to the laws of your State, here in California the answer is a solid "maybe". Meanwhile, lenders will continue to seek to put deficiency recourse language in their Short Sale Consent Agreements and the borrowers and their agents will continue to seek the removal of that language like we do.  While the presence or absence of recourse language may be enough for the Courts, that remains unclear for the reasons set forth below. This lack of certainty causes many short sales to fail and, until this issue winds its way through the legal system, no-one can know for sure whether a lender has any rights to collect a deficiency . But there are good arguments for both sides.

A. BORROWER ARGUMENTS AGAINST RECOURSE:

1. Short Sale is an "Accord and Satisfaction" - The short sale is inherently an agreement for resolution of a dispute between the borrower and the lender as to how much must the borrower pay. In completing the short sale and receiving money they otherwise would not have received, they have arguable settled all claims. The "Accord" is the agreement; the "Satisfaction" is the money the lender received.

2. Seeking Deficiency Violates the "Single Action Rule" - California only allows a lender one shot at collecting a debt. Arguably, the negotiation of the short sale and the lender's acceptance of money from the Buyer is a collection action. If so, then the lender would be legally barred from filing a lawsuit against the borrower to collect anything else.

3. Seeking Deficiency Violates the "Anti-Waiver Rule" - California real estate law provides that, if there is a default, the lender must take the security first (foreclose on the property) before going after the borrower for anything else. There are only a few exceptions to this Rule which could allow a lender to "waive" the security and sue the buyer, ie: such as bringing hazardous waste onto the property; or destroying the property's value by stripping out the plumbing or electrical systems. These conditions do not exist in a short sale. Yet arguably what the lenders are doing is waiving the security to allow the short sale to be completed. If that is in fact a legal "waiver", then the lender may be legally barred from coming after the borrower for a deficiency.

4. No "Consideration" for waiving or modifying - Any contract or any modification requires that there be an equal trade of benefits and burdens. The borrower gets the benefit of the loans to buy the property but also gets the burden of having to repay what they received. The value of what is exchanged by each of the parties is called the "legal consideration". When only one side gets a benefit, there is what is called a "failure of consideration" and the contract may not be enforceable. Arguably, this same requirement exists in a short sale: the lender is getting money now and that's a benefit but what is the benefit to the borrower? They're losing their property: that's not a benefit; they're getting no money out of the deal: that's not a benefit; they're going to get taxed on any debt forgiveness: that's not a benefit; If the lender does have a right to pursue deficiency recourse against them, that's definately not a benefit. So, what benefit does the borrower get out of a short sale that would be sufficient consideration fore remaining liable for a deficiency? Not much, if anything at all. Arguably then, if the consideration is insufficient, then the lender's right to waive the security and pursue a deficiency should fail for lack of consideration.

5. Additional Arguments - Creative attorneys will find a fertile field of additional legal arguments to be raised in defending borrowers against lender deficiency claims. These can include a) the loan should never have been made; and b) the lenders caused the crash, why should they profit from it.

B. LENDER ARGUMENTS IN FAVOR OF RECOURSE:

1. It is a Modification not a Release - A short sale is in effect a modification of the terms of the loan. The lender has agreed to release their lien on the borrowers property so the property can be sold. The lender agrees to do this without getting paid in full. Arguably, the Short Sale agreement only modifies the terms referenced in the agreement. Unless the short sale agreement expressly waives recourse against the borrower for the unpaid balance, the lender may argue that they still possess the right to collect on the deficiency after the short sale is completed.

2. Unfair to penalize lender if Borrower is otherwise liable - In California, some loans are non-recourse such as a loan obtained to buy the home you live in. However, these "anti-deficiency" protections kick in when there is a foreclosure. These rules might not apply in a voluntary transfer such as a short sale. When there are no such protections, ie: non-purchase money or refinance or investor loan, the lender could have recourse against the borrower through the foreclosure method used. So, lenders would argue it is not fair to deny them the recourse that the borrower already agreed to in the loan.

Who's arguments prevail will be determined in the Courtrooms across our Country in the next few years to come. Initially rulings will be made by Judges in the local courts and they could vary greatly. In time, these inconsistent rulings will be challenged in the Courts of Appeal until a clear legal answer becomes apparent. Of course, Congress could pass a law and give us an answer now but I wouldn't hold my breath waiting for that to happen. Meanwhile Lenders will seek to put language in their Short Sale Consent Agreements requiring the borrower to agree to deficiency liability

If you have specific questions about your liability, short sales, foreclosure, or any other real estate or mortgage issues, feel free to contact me at kirk@kirkmwest.com. We offer a FREE consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-893-9666.

Trying to reduce the rising number of foreclosures in the U.S., the Treasury Department introduced a new federal program that makes it easier to process a short sale for people unable to keep their homes.

Home Affordable Foreclosure Alternatives (HAFA) streamlines the process for doing a short sale or deed-in-lieu of foreclosure for distressed homeowners who do not qualify for a federal home loan modification through the Home Affordable Modification Program (HAMP) or have missed consecutive payments after a modification.

The HAFA program started April 5, 2010, and ends December 31, 2012. Federal rules require servicers participating in HAMP to implement HAFA. The new program also requires borrowers to be released fully from future liabilities related to their first mortgage, including cash contributions, promissory notes and deficiency judgments.

Participation in HAFA cannot save homeowners from losing their property, but it can eliminate the effects of a foreclosure on their credit. Financial incentives for program participation include a $1,000 servicing bonus for lenders and a $1,500 relocation bonus for displaced homeowners. Lenders of other subordinate liens (e.g., HELOCs) may be allowed to keep a limited portion of the proceeds (up to $3,000 each) of a short sale, with the first-lien lender’s approval.

HAFA is designed for homeowners who have applied to HAMP for assistance but have had no success with their loan modification program. To participate in HAFA, homeowners must still meet HAMP’s eligibility criteria: home is principal residence; first-lien mortgage is in delinquency or default is reasonably foreseeable; loan closed before January 1, 2009; unpaid balance is under $729,750; and the mortgage payment is over 31% of gross income.

Here is the issue..... much like HAMP the program is seems good at the outset.  However, now that we are just shy of 2 months into the program there are hiccups.  First, many lenders don't have staff to handle the short sales to begin with and have not adopted the program just yet.  Second, the program will be taking, on average, an additional 2 to 4 months longer than the already 6 month long short sale process.  This is because the HAFA program needs approval from the government run program.  Lastly, the "qualifying" has been the #1 issue for the HAMP modification program and I expect it to be the same here. 

Keep in mind, if you are planning on selling your home, call me first. There are so many things to consider before making that decision.  Did you know there are 3 other short sale programs as well? 

As you may have already heard California has initiated its own homebuyer tax credit. The start date for this credit is fast approaching.  But you better hurry; only a certain number of you may qualify in time. 

Here is how it works.  The credit is for 5% of the purchase price, with a maximum credit of $10,000. That’s a dollar-for-dollar reduction against income tax payments that would otherwise be due. Homebuyers must claim the tax credit in equal installments over three consecutive years, beginning with the year of purchase. Purchasers are required to live in the home as their primary residence for two years or forfeit the credit.

To be eligible, first-time homebuyers can purchase a new or existing home. Repeat or move-up homebuyers are eligible for the credit only if they buy a new home.

Buyers of existing homes must close escrow between May 1 and December 31, 2010. The credit is available to buyers of new homes who sign purchase agreements between May 1 and December 31, and close escrow by August 1, 2011.

Separate from the California tax credit is the federal tax credit. The federal homebuyer tax credit will expire soon. If your clients want to take advantage of this tax credit, they must act fast. The tax credit is available to buyers who sign purchase agreements on a new or existing primary residence home between December 1, 2009, and April 30, 2010. Buyers have until June 30 to close the mortgage loan on their new home.

If you have any questions about how the California or federal tax credit may benefit your clients, call me today.  As your only Licensed Tax Professional and Certified Mortgage Planner,  it is imperative that you receive  the most current and reliable information. 

Distressed homeowners no longer have to pay California state income tax on debt forgiven in a short sale, foreclosure, or loan modification. Enacted into law yesterday, Senate Bill 401 generally aligns California's tax treatment of mortgage debt relief income with federal law. For debt forgiven on a loan secured by a "qualified principal residence," borrowers will now be exempt from both federal and state income tax consequences. The existing federal exemption is for indebtedness up to $2 million, whereas the new California exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000.

"Qualified principal residence" indebtedness is defined as debt incurred in acquiring, constructing, or substantially improving a principal residence. It includes both first and second trust deeds. It also includes a refinance loan to the extent the funds were used to payoff a previous loan that would have qualified.

The tax breaks apply to debts discharged from 2009 through 2012. Californians who have already filed their 2009 tax returns may claim the exemption by filing a Form 540X amendment.

Taxpayers who do not qualify for the above exemptions (e.g., second home or rental property) may nevertheless be exempt under other provisions. Most notably, taxpayers who are bankrupt are exempt from debt relief income tax. Also, taxpayers who are insolvent are exempt from debt relief income tax to the extent their current liabilities exceed current assets.

For more information about mortgage forgiveness tax consequences, go to California Franchise Tax Board's Mortgage Forgiveness Debt Relief Extended webpage and the Internal Revenue Service's Mortgage Forgiveness Debt Relief Act and Debt Cancellation webpage. The full text of Senate Bill 401 is available at www.leginfo.ca.gov.

For a more complete look at your situaiton call 916-893-9666 the ONLY Realtor Tax Professional!!!

As many of you know, the new credit card rules took effect nationwide last week. While definitely a "win" for consumers, they present "new" challenges as well that we will face from the credit card companies and banks. Let's start with how the new law will affect us:

1. The end of confusing billing practices Credit-card payments will be due at the same time each month, with notification of the bill made at least 21 days in advance of its due date. Payments will be applied to highest interest-rate balances first so that customers can pay off their balances faster and more cheaply. Finally, credit-card companies will be obligated to use plain language in plain sight” on all materials related to the account and periodically display on statements how long it would take consumers to pay off their existing balance and interest charges if they paid only the minimum due.

2. Interest-rate reform Nearly all interest-rate increases on outstanding balances will be prohibited and card companies must notify the consumer 45 days in advance of an interest-rate increase. Additionally, there cannot be wny interest rate increases for the first year any account is open.

3. Opting-in for overdraft and overlimit protections Customers will now have to opt-in to an overdraft program instead of being automatically enrolled. This means that if cardholders try to make a purchase that exceeds their limit or overdraws a debit account, their card will simply be declined. Under the old rules, the transaction could go through and the consumer would be fined.

4. Protections for young consumers Credit-card companies face greater restrictions on marketing cards to college students. More generally, those under 21 will have to prove that they have the means to pay off their card limits or have a cosigner before they can be granted a card.

The way in which the banks say that they will "compensate" for the billions of dollars of lost revenue that they say that they will face is through higher initial interest rates as well as higher fees.

Here's my BIG RECESSION BUSTING TIP of the day (Ok, Ok, it really came from Suzie Orman;):

Go to www.creditcardconnection.org and use the tool that allows you to enter your zipcode to find the local bank with the LOWEST interest rate on their credit cards. It's like magic!!  The federally chartered banks and lending institutions (such as credit unions) are capped by law an 18% finance charge, so why not save money AND support your local businesses? Brilliant!

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