Most people (buyers, sellers, real estate agents) think that when a real estate contract stipulates a nonrefundable deposit, it means the person paying that deposit will not get their money back under any circumstance.

Earlier this month, a California court said: not so fast.

The Feb. 3, 2010 decision by the California 4th District Court of Appeal in Kuish v. Smith (Cal.Rptr.3d —-, 2010 WL 373225) said that under California law, nonrefundable deposits are not nonrefundable.

The basic facts of the case: In 2006, Buyer Kuish agreed to purchase Seller Smith’s Laguna Beach home for $14 million. Their agreement included $620,000 in nonrefundable deposits, which Buyer Kuish made by April 21. Escrow was set to close on Sept. 15. On Sept. 18, Buyer Kuish requested escrow cancellation. Seller Smith agreed to cancel escrow in October, and sold the LB home for $15 million in November. Seller Smith refused to return Buyer Kuish’s nonrefundable deposits.

Litigation ensued and the trial court found for Seller Smith.

However, the appellate court reversed the trial court, finding that Seller Smith’s retention of the deposit in the context of a rising market constituted an invalid forfeiture:

In the context of a rising market, which was the circumstance of the instant case, an interpretation of the nonrefundable term of the agreement as precluding the return of plaintiff’s deposit above and beyond any damages suffered by defendants as a result of plaintiff’s breach would render that provision unenforceable. As discussed ante, “ ‘any provision by which money or property would be forfeited without regard to the actual damage suffered would be an unenforceable penalty.’ “ (Freedman, supra, 37 Cal.2d at pp. 21-22, 230 P.2d 629.)

What a difference a couple of years makes. In the current market, Buyer Kuish would be S-O-L no matter the S-O-L-D price of Smith’s Laguna Beach property.

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In Shakespeare’s Julius Caesar, Caesar is warned to “beware the Ides of March.”

The same can be said this year for the mortgage market, as the Fed prepares to wean it off government life support (the purchase of mortgage-backed securities) by March 31.

According to a piece this past week in the San Francisco Chronicle:

The Fed started buying securities backed by Fannie Mae, Freddie Mac and Ginnie Mae in January 2009 and originally planned to conclude the program by year’s end. It extended it for three months to ease the impact on mortgage markets, although it didn’t allocate more money. The program’s ultimate cost won’t be known until the Fed sells off the securities, something that officials said it will do gradually starting this year. It’s conceivable that the program could end up generating a modest profit, breaking even or losing money, depending on what prices the securities go for.

While experts agree that the Fed’s exit will cause mortgage rates to rise, the big unknown is how severe the effect will be.

Other federally funded housing market shore-up programs are also undergoing changes that may rock the recovery boat:

• The home buyers’ tax credit expires on April 30;
• FHA loans with new, more stringent lending criteria were announced last month;
• HAMP acts to stem foreclosures, but if homeowners default on those modified loans, a delayed wave of foreclosures could further erode home prices.

This one is for the birds… (we can’t make this stuff up!). According to an article in the Beaufort (SC) Gazette, two Hilton Head siblings were recently awarded $4.25M in a pet turkey lawsuit:

What began as a dispute between neighbors about pet turkeys ended Friday when a Beaufort County jury awarded two Hilton Head Island siblings $4.25 million in damages.

In 2004, defendant Ralph Dupps accused Robert and Jennifer Klippel of taking his turkeys from his Sea Pines home and setting them free. The charges were dismissed, and the Klippels sued Dupps. They claim he accused them falsely and that their wrongful arrest caused public humiliation and emotional distress that drove Robert Klippel to alcohol and Jennifer Klippel to the use of sleep aids and depression medication.

Much of the plaintiffs’ claims revolved around arguments that the turkeys shouldn’t have been on Dupps property in the first place.

The issue dates back to the fall of 2004 when, according to the Klippels, the birds began roaming their yard, defecating, creating traffic issues and scaring Robert Klippel’s son.

After reporting the turkeys to Sea Pines Security, an officer allegedly told the Klippels that Dupps had set them free. The officer offered to help catch the birds and later suggested shooting them, according to the Klippels’ complaint.

The Klippels admitted they took the turkeys to a wildlife preserve, saying it was out of concern for the birds’ safety.

When Dupps arrived home to find his birds missing, he contacted authorities….

Three law enforcement officials told Dupps no crime had occurred, Kippel attorney Richard Rosen said. Yet, Dupps proceeded to get arrest warrants for the Klippels from a Hilton Head Island judge and sought out his brother-in-law, a special prosecutor in the 14th Circuit Solicitor’s office at the time, to prosecute the case, Rosen said.

Rosen suggested to jurors that Dupps should pay $10 million in damages for “seeking revenge on the Klippels” and subsequently causing them great distress.

Our opinion: $4.25 million ought to clean up a LOT of turkey poop!

CitiMortgage has launched a pilot program that will allow distressed mortgage holders to stay in their home an additional six months in return for turning the keys over to the mortgage lending giant at the end of that period.

In a press release issued last week, CitiMortgage announced that the program will initially be offered in six states: Texas, Florida, Illinois, Michigan, New Jersey and Ohio:

In exchange for the deed on their property, CitiMortgage will allow borrowers to stay in their homes for a period of up to six months. At the end of the six months, the borrower will turn over the property deed to CitiMortgage, and CitiMortgage will provide a minimum of $1,000 in relocation assistance to the borrowers. Citi will also provide relocation counseling by trained professionals and will cover certain monthly property expenses if Citi determines that the borrower can no longer afford them. Payment of utilities costs will be the responsibility of the borrower. Other costs incurred by the borrower, such as homeowner’s association and escrow fees, will be determined on a case-by-case basis considering the borrower’s specific financial circumstances. As part of the agreement, borrowers must maintain the property in its current condition and agree to bi-monthly meetings during which trained relocation professionals will help the borrower prepare for the next chapter of their lives.

Before a borrower enters the Foreclosure Alternatives Program, they must first be evaluated for a permanent mortgage modification. For those who do not qualify for a modification or another solution, CitiMortgage will explore the possibility of a short sale in which the company might accept a buyer’s offer for less than the outstanding amount of the mortgage. If a short sale is not feasible, then the borrower may be considered for the deed-in-lieu program. In addition, in order to be eligible, homeowners must hold first mortgages with a clear title owned by CitiMortgage, occupy the property, and be at least 90 days delinquent on their mortgage payments.

As it evaluates the progress of the pilot program, CitiMortgage will assess whether or not to expand the program to other parts of the United States. The initial pilot is expected to help as many as 1,000 families.

The Wall Street Journal reported this week on the HAMP ramp-up, noting that the number of households benefiting from the Home Affordable Modification Program (HAMP) was up 11% in January and that, overall, about 947,000 households have taken advantage of the government’s foreclosure prevention program.

The article also noted the steps the Treasury is taking to (cattle) prod more lenders into participating:

Prodding lenders to saving more borrowers, the Treasury is publishing monthly comparisons of their performance. As of last month, it said Citigroup Inc. had provided modifications to 50% of the estimated number of eligible borrowers. Both J.P. Morgan Chase & Co. and Wells Fargo were at 38%, and Bank of America Corp. was at 22%.

In a statement, Bank of America said it had made stronger gains than rivals last month in providing trial modifications and converting trials into permanent fixes.

So maybe, just maybe, there is a glimmer of hope that the Fed’s historically low interest rates are being prodded out of the cold, dead hands of the bankers to reach the folks who really need them?

From the hallowed pages of the Washington Post came news this week that home equity is on the rise.

Digging through the pile to find the pony, the Post reported on what it called “the least-publicized statistic” from Federal Reserve research on mortgage balances and home-value changes:

According to the Fed’s most recent “flow of funds” survey, homeowners’ net equity grew by nearly $1 trillion from the recession’s nadir in the first quarter of 2009 through the third quarter. From June 30 to Sept. 30, net equity rose by $418 billion.

That’s not all that impressive compared with the quarterly increases during the hyperinflationary housing boom years, but it could signal something important: After three years of unprecedented shrinkage in home equity — and three years of rapid expansions in the number of underwater borrowers with negative equity — there are signs that the down cycle may be shifting.

A Zillow.com study found that the overall negative equity rate among U.S. homeowners remained flat in the fourth quarter of 2009 – another indicator that the slippery slope of declining home equity may be leveling off.

HUD Commissioner David H. Stevens announced a new initiative this week that focuses on mortgage companies with significant claims against the FHA mortgage insurance program, issuing 15 subpoenas to mortgage lenders across the country demanding documentation on failed loans that resulted in claims paid by the FHA insurance fund.

According to a press release posted on the HUD website:

“This initiative was prompted, in part, by the FHA Commissioner, David Stevens, who was alarmed by the incidence of claims against the FHA insurance fund by a number of poor performing companies and reached out to the HUD OIG for assistance.

FHA Commissioner David Stevens said, “We are taking risk management extremely seriously. In addition to the policy changes we are implementing and additional changes we plan to announce later this month, we need to hold FHA lenders accountable for the high rates of defaults and claims against FHA. The Inspector General’s initiative will help us determine whether there is fraud and better manage risk in the long run.

”The HUD OIG identified these direct endorsement companies from an analysis of loan data focusing on companies with a significant number of claims, a certain loan underwriting volume, a high ratio of defaults and claims compared to the national average, and claims that occurred earlier in the life of the mortgage. These are key indicators of problems at the origination or underwriting stages. The HUD OIG wants to see why these loans failed.”

The companies served with subpoenas included:

• First Tennessee Bank N.A., Memphis, TN
• Alethes LLC, Lakeway, TX
• Security Atlantic Mortgage Co., Edison, NJ
• Pine State Mortgage Corporation, Atlanta, GA
• Birmingham Bancorp Mortgage Corporation, West Bloomfield, MI
• Alacrity Financial Services, LLC, Southlake, TX
• Assurity Financial Services, LLC, Englewood, CO
• D and R Mortgage Corporation, Farmington, MI
• Webster Bank, Cheshire, CT
• Mac-Clair Mortgage Corporation, Flint, MI
• Americare Investment Group, Inc., Arlington, TX
• 1st Advantage Mortgage, Lombard, IL
• American Sterling Bank, Independence, MO
• Sterling National Mortgage Company Inc., Great Neck, NY
• Dell Franklin Financial LLC, Columbia, MD

No California mortgage lenders on the HUD subpoena list…yet.

…or how to get rid of the underwater second mortgage, from a recent Ezine article by David Reinholtz, founder of LoanOfficerSchool.com, a speaker and an approved education provider for NMLS:

One day Suzie homeowner reviews her personal finances and comes to a stomach-churning realization: the house that she has lived in and made payments on and invested with her dreams is worth less than her total mortgage debt. She is deeply “underwater.” Her financial situation is serious enough so that she contemplates Chapter 13 bankruptcy. But in reviewing her options, her attorney tells her about something called “second lien strip.” Resisting the urge to slap him across the face at this seemingly risqué suggestion, she listens. He outlines a scenario.

Ten years ago Suzie bought her home for $295,000. Today it is worth $215,000. She owes $250,000 on her first mortgage. To make matters worse, a few years ago during the real estate boom her home was appraised for $350,000. Feeling confident, Suzie took out a second mortgage for $25,000 from ABC Finance. At the time it seemed like a safe enough bet. She spent the money on some unsecured debts, home improvements, and a new powerboat that she keeps on the lake. Today she owes $20,000 on the second mortgage.

Her house is worth $215,000. She owes $250,000 on her first mortgage and $20,000 on the second. Clearly there will not be enough money from the sale of the home to pay off the first mortgage, let alone ABC Finance.

Suzie files Chapter 13 bankruptcy. Her attorney explains that under Chapter 13, she can keep her home but will be required to use her income to repay some or all of her debts. A court-sanctioned Chapter 13 bankruptcy plan pays off most secured loans first and delays payment of unsecured debts. The representative from ABC Finance insists that because her second mortgage is secured debt, ABC needs to be at the front of the line for repayment.

The courts have disagreed. To understand why, it’s helpful to refer to the U.S. Bankruptcy Code. Here is the relevant excerpt from 11 USC 506 – Sec. 506 – Determination of secured status:

“(a) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim.”

Courts have ruled that because a second lien like Suzie’s ABC Finance mortgage is debt that is not supported by equity, the debt is by definition unsecured. If Suzie’s second lien is stripped, the court will classify it as an unsecured debt in the payoff plan. Suzie will be able to pay a fraction over five years, just like her credit card debt. The actual percentage that she must pay will depend on factors including her income and the value of unencumbered assets.

For this strategy to work, you must consult a qualified attorney. Your home must be underwater on your first mortgage (or if you have multiple liens, underwater on at least the last one). If this applies to you, you can take comfort in the fact that you have lots of company; recent studies suggest that nearly one-quarter of Americans are underwater on their home mortgages.

The federal regulator for Freddie Mac and Fannie Mae told the mortgage finance giants “thanks, but no thanks” to generating new loan products – at least while they are under the control of the U.S. government.

Too bad, when the past ones worked so well….(!?!)

The Federal Housing Finance Agency’s acting director Edward DeMarco told lawmakers that FHFA “concluded that permitting the enterprises to engage in new products is inconsistent with the goals of conservatorship.”

In other words, let’s keep our eye on the ball – you remember, that big ball of managing $5 trillion in mortgage holdings and guarantees that are supported by taxpayers.

DeMarco says the new ruling does not apply to foreclosure prevention efforts.

Hotels are becoming one of the biggest bargains in the CRE industry right now, at least in northern California. This week, the Sheraton Pleasanton Hotel was purchased by a partnership of realty investment firms Sethi Enterprises and Kapoor Enterprises.

According to an article in the Contra Costa Times, Sethi executive J.P. Sethi said the purchase price “was 30 percent below what you would have seen in normal times.”

Distressed hotel properties litter the landscape of northern California commercial real estate. According to the Times article:

The value of the Bay Area hotels in arrears on their property loans totaled $1.1 billion in 2009, according to a report by Real Capital Analytics.

That’s 12 times the $90 million in delinquent loans for Bay Area hotels in 2008, Real Capital estimated.

More hotels will become mired in foreclosures as the economy sours further, warned Alan Reay, president of Atlas Hospitality, which tracks the California hotel market.

“In California alone, we have 67 hotels being foreclosed on, and 320 in default,” Reay said. Both numbers are about five times the totals from a year ago, he estimated. “The number of hotel defaults is growing exponentially.”

Prices have melted down for hotels, he said.

“From the 2007 peak in values, prices for hotels have fallen 50 to 80 percent,” Reay said.

As lenders dangle foreclosed hotels before investors, the buyers have found some choice morsels.

“Investors are starting to feel we have reached or gotten near the bottom,” said Bose. “Prices are stable enough that you can see a good future with these investments.”

Here’s where investment dollars can make long-term cash. If you have staying power.