From the California Dept. of Real Estate website, here are the last five of 10 most common violations found in DRE Audits:

Regulation 2832.1 – Trust Fund Handling for Multiple Beneficiaries (Trust Fund Shortage)
Regulation 2832.1 requires the real estate broker to obtain written consent from every owner of the trust funds in the bank account prior to each disbursement if the disbursement will reduce the balance of the funds in the bank account to an amount less than the existing trust fund liability of the broker to all owners of the funds. A trust fund shortage therefore exists when the following conditions are present:

• The balance of the bank account is less that the total trust fund liability of the broker to all owners of the funds; and
• There is no written authorization from all owners of the trust funds allowing this.

The most obvious reason for a trust fund shortage is the intentional misuse (conversion) of trust funds. However, simple record keeping errors that remain undetected could result in trust fund shortages and an actual loss of funds. Failure to record a disbursement, or understating the amount of a check disbursed, or overstating the amount of a deposit on the beneficiary ledger/record will cause the beneficiary ledger to show a balance that is larger than the true amount owed to the individual beneficiary. This overstated balance on the ledger is more likely to be paid and, consequently, the beneficiary will be paid more than what is due. The end result is a trust fund shortage.

Performing the proper trust account reconciliation pursuant to Regulation 2831.2 should enable the broker to detect such causes of a trust fund shortage.

Regulation 2832 – Trust Fund Handling
The most common violations of this section found in audits relate to Commissioner’s Regulation 2832(a), which requires that a broker place funds accepted on behalf of another into the hands of the owner of the funds, into a neutral escrow depository or into a trust fund account in the name of the broker, or in a fictitious name if the broker is the holder of a license bearing such fictitious name, as trustee at a bank or other financial institution not later than three business days following receipt of the funds by the broker or by the broker’s salesperson. Two of the most common problems related to this regulation are:

• A broker’s failure to designate accounts receiving trust funds as trust fund accounts in the name of the broker or broker’s dba as trustee; and
• Failure to deposit trust funds received by a broker or broker’s employee into a trust fund account within three business days of receipt.

Other violations of this section relate to a broker’s use of an improper interest-bearing account {Regulation 2832(b)}, a broker’s failure to place checks received from an offeror into a neutral escrow depository or trust fund account in a timely manner following acceptance of an offer {Regulations 2832(c & d)} and failure of a broker acting as an escrow holder in a transaction in which the broker is performing acts for which a real estate license is required to place trust funds received as required not later than the next business day following receipt of the funds {Regulation 2832(e)}.

Regulation 2834 – Trust Account Withdrawals
Commissioner’s Regulation 2834(a) states that withdrawals may be made from a trust fund account of an individual broker only upon the signature of the broker or one or more of the following persons if specifically authorized in writing by the broker:

• A salesperson licensed to the broker.
• A person licensed as a broker who has entered into a written agreement pursuant to Section 2726 with the broker.
• An unlicensed employee of the broker with fidelity bond coverage at least equal to the maximum amount of trust funds to which the employee has access at any time.

Regulation 2834(b) also states that withdrawals may be made from a trust fund account of a corporate broker only upon the signature of:

• An officer through whom the corporation is licensed pursuant to Section 10158 or 10211 of the Code; or
• One of the persons enumerated in paragraph (1), (2) or (3) of Regulation 2834(a), provided that specific authorization in writing is given by the officer through whom the corporation is licensed and the officer is an authorized signatory of the trust fund account.

Regulation 2834(c) states that a broker or broker-officer is responsible or liable for the handling of trust funds regardless of the existence of any authorization given regarding signature authority.

The most common violations found in audits related to Regulation 2834 are:

• The failure of the broker or designated officer to be a signatory on the trust account (this may indicate a supervision problem).
• Presence of an unlicensed signatory on the trust account who does not have fidelity bond coverage.
• Fidelity bond coverage inadequate in amount and/or has a deductible.
• The failure of the broker or designated officer to give specific written authorization permitting a salesperson, broker or unlicensed person to sign on the trust account.

B & P Code Section 10145/ Regulation 2835 – Commingling
A broker shall not commingle with his or her own money or property the money or property of others that he or she receives and holds. Common causes of this violation are the deposit of trust funds received into the broker’s general business account or maintenance of over $200 in broker funds in a trust account holding trust funds.

A common example of this violation is when a broker deposits credit report fees and/or appraisal fees received into his or her general bank account instead of a trust account when he or she has not yet paid the bill. Often, the reason for this violation is that the broker does not maintain a trust account or the broker was not aware that credit report fees and appraisal fees are trust funds.

B & P Code Section 10240 – Written Disclosure Statement
Another often-cited violation is Section 10240 of the code which requires brokers to provide a borrower with a mortgage loan disclosure statement within three business days after receipt of a completed loan application or before the borrower becomes obligated on the note, whichever is earlier. Real estate brokers often fail to provide the Mortgage Loan Disclosure Statement (Borrower) or, in a federally regulated residential mortgage loan transaction, fail to comply with Section 10240(c). Other brokers fail to maintain completed copies for their files.

A recent New York Times article reported succinctly on the growing trend of homeowners who are “underwater” on their mortgages simply packing it in and walking away. Called “a situation without precedent in the modern era,” abandoned homes are becoming more prevalent as “people’s emotional attachment to their property is melting into thin air.”

An Arizona mortgage broker admitted that he has advised many of his clients to walk away. He even defaulted on a rental property he owns.

By June, the number of homeowners who owe more than their home is worth is projected to be over 5 million – which is approximately 10 percent of all American mortgage holders.

And with some big commercial property owners walking away from their financial obligations –like Tishman Speyer BlackRock, one of the country’s largest commercial property owners, that sent their $5.3 billion investment in 11,000 apartments in New York back to their bankers – homeowners are often left thinking, “why not?”

Pile on the bank bailout outrage and headlines about the reinstatement of big bonuses for bankers, and the “why not?” can quickly turn into a “hell yes”.

So are “strategic defaults” a good thing for a borrower? In many cases – you’re darn right they are. So why so few of them? Read more here.

The walkathon in the commercial real estate market continues.

A Wall Street Journal article last week reported on the Mortgage Bankers Association’s sale of its headquarters building in Washington, DC to CoStar Group for $41.3 million – about $38 million less than what it paid for the building three years ago, and also way below the $75 million the MBA received from a group of banks to finance the purchase.

So is the MBA taking a walk on their underwater HQ? They aren’t saying.

In the WSJ piece, MBA CEO John Courson said, “We’re not going to discuss the financing.”

Which is a different tune than he was singing a few months ago, saying those who owed more than their property is worth should continue paying, even if it didn’t make economic sense. “What about the message they will send to their family and their kids and their friends?” Courson asked.

Yeah, about that message….we got it loud and clear: it’s the smart thing to do!

Real estate agents and talking on the phone while driving go together like milk and cookies. Just be sure California doesn’t turn it into sour milk!

Look at these fines and think again about the cost of that hands-free cell phone headset:

• Drive using wireless phone not hands free, first offense: $148
• Drive using wireless phone not hands free, for each subsequent offense: $256
• Drive using wireless device to send, read or write text: $148

According to the CHP, “The base fine for the FIRST offense is $20 and $50 for subsequent convictions. However, with the addition of penalty assessments, the total amount can be more than triple the base fine.”

And with California scrambling for any and every opportunity to add revenue to our starved coffers, you can be sure those penalty assessments will be added!

From the California Dept. of Real Estate website, here are five of the 10 most common violations found in DRE Audits:

B & P Code Section 10148 – Retention of Records
Business and Professions Code Section 10148(a) states that a real estate broker shall retain for three years copies of all listings, deposit slips, canceled checks, trust records, and other documents executed by him or her or obtained by him or her in connection with any transactions for which a real estate license is required. This section requires that, after notice, the books, accounts, and records shall be made available for examination, inspection, and copying by the commissioner or his or her designated representative during regular business hours; and shall, upon the appearance of sufficient cause, be subject to audit without further notice, except that the audit shall not be harassing in nature.

A broker who fails to keep transaction files, canceled checks, deposit slips or other records prepared or obtained for a period of three years may be cited for violation of this section. Some brokers cited for violation of this section have simply failed to provide records after reasonable attempts by the Department to examine them. Other brokers cited have lost control of or destroyed records that should have been maintained. Formal legal action can result from a broker’s failure to provide records. You should review the record retention policies for your office to make sure you are in compliance with this code section.

Regulation 2731 – Use of False or Fictitious Name
Commissioner’s Regulation 2731 states that a licensee shall not use a fictitious name in the conduct of any activity for which a license is required under the Real Estate Law unless the licensee is the holder of a license bearing the fictitious name. Brokers should periodically check their license status with the Department to be sure that their license bears the fictitious name(s) they are using. Many brokers cited for violation of this regulation believed that having the dba registered with the county was sufficient to allow them to use it in their real estate business. Other brokers who are cited for this violation state that they had the fictitious name on their license at one time but may have had their license lapse for a brief period of time and failed to add the dba back on to their license.

Regulation 2831 – Trust Fund Records To Be Maintained
This regulation requires the broker to maintain, in columnar form, a record of all trust funds received and deposited by the broker. At a minimum, the following information must be indicated in columnar form in chronological order: date funds were received; name of payee or payor; amount received; date of deposit; amount paid out; check number and date; and the daily running balance of the trust account. If any of these columns are not present, then there is a violation of Regulation 2831. The accurate use of DRE form RE 4522 fully complies with this regulation.

When we cite this regulation, most of the time it is for one or more of the following reasons:

• The broker did not maintain any trust fund records.
• If trust fund records were maintained, they were either not in columnar form or a column (noted above) was missing. We have seen many brokers utilize a standard checkbook as trust fund records. These records do not comply with Regulation 2831.
• In some instances, columnar records were maintained by a licensee but he/she was still cited because the items posted were not accurate, e.g., when posting a check, it was the wrong amount; or, for a deposit, “the amount” was wrong and/or “the date of deposit” was the wrong date.
• A broker maintaining columnar records can still be cited if a daily running balance is not maintained or is inaccurate. Brokers must always keep a daily running balance of the aggregate amount of trust funds in their bank accounts. (For trust funds not deposited into a trust account, the columnar record should show the date trust funds were received, the form of the trust funds, amount received, description of the property, identity of the person to whom funds were forwarded, and date of disposition. The accurate use of DRE form RE 4524 fully complies with this part of the regulation.)

It should be noted that records maintained under an automated data processing system in accordance with generally accepted accounting principles should be in compliance as long as they contain the elements previously noted.

Regulation 2831.1 – Separate Record for Each Beneficiary or Transaction
This regulation requires the broker to maintain, in columnar form, a separate record of trust funds for each beneficiary or transaction accounting for all funds that have been deposited into a trust account. This record identifies which beneficiary has funds in the trust account. This record must indicate the following in chronological order and in columnar form: date of deposit, amount of deposit, name of payee or payor, check number, date and amount, and running balance of the separate record after each transaction on any date.

This regulation is cited mostly due to one or more of the following reasons:

• The broker did not maintain separate records for each beneficiary.
• Separate records were maintained, but the broker was cited because information was missing.
• Separate records were maintained, but the broker was cited because the items posted were not accurate, e.g., when posting a check, it was the wrong amount; or, for a deposit, “the amount” was wrong and/or “the date of deposit” was the wrong date.
• Separate records were maintained, but a daily running balance for each record was not maintained or it was not accurate. Brokers must always keep a daily balance for each separate record.

It should be noted that records maintained under an automated data processing system in accordance with generally accepted accounting principles should be in compliance as long as they contain the elements previously noted.

Regulation 2831.2 – Trust Account Reconciliation
Regulation 2831.2 requires that the total of all Separate Beneficiary or Transaction Records maintained pursuant to Regulation 2831.1 be reconciled with the balance of the Record of All Trust Funds Received and Paid Out required by Regulation 2831, at least once a month except when the bank account did not have any activities. The requirement is that the accounting records be reconciled to each other. This is not only a legal requirement; this is also part of a sound internal control for trust fund handling.

In order for this procedure to have a reliable result, the Record of All Trust Funds Received and Paid Out must be reconciled first with the bank account statements as of a certain cut-off date. This procedure is commonly known as bank reconciliation and is performed basically to determine the accuracy of the records. A cut-off date is the calendar date (usually end of the month), when no transaction or activity thereafter is considered. This process is completed once all adjustments and corrections of any reconciling items have been made to the ending balance on each record to arrive at an adjusted cash balance. In other words, the balance of the record of all trust funds received and paid out has to equal the adjusted cash balance.

The next step is to compare and reconcile the total of all beneficiary or transaction records with the adjusted cash balance as of the cut-off date of the bank reconciliation. The main objective of this procedure is to determine, based on the records, whether all trust funds held on behalf of others are on deposit in the corresponding trust account. Another purpose of this procedure is to ascertain that there is no unidentified overage or broker’s funds in excess of $200 in the trust account. Any discrepancy must be corrected accordingly. The broker is required to maintain a record of the trust account reconciliation showing the name of the bank account and number, date of the reconciliation, account number or name of the principals, beneficiaries or transactions and the amount of trust funds held by the broker for each of the principals, beneficiaries or transactions. Failure to comply with this Regulation could result in substantial loss of trust funds and disciplinary action against the broker by the Department.

Many banks suspended their foreclosure activities in December for the holidays (can’t have Tiny Tim in the street at Christmas….let’s wait until January!). So it wasn’t unexpected to see the December foreclosure rate decline.

However, according to ForeclosureRadar.com:

Foreclosure activity dropped dramatically in December, especially when looked at on a daily average basis. For example while Notices of Default dropped 17.5 percent in aggregate, they actually dropped 32.5 percent on a daily average basis due to the fact that December had 22 days on which documents were recorded, versus 18 in November.

“The dramatic drop in foreclosure activity may have been a Christmas gift to homeowners,” says Sean O’Toole, Founder and CEO of ForeclosureRadar.com, “however, given rising mortgage delinquencies it is becoming increasingly clear that foreclosure activity no longer fully represents market realities”.

Unlike November where we saw nearly flat foreclosure filings on a daily average basis, with declines being due to the holiday shortened month, the decline in December foreclosure filings is actually understated due to the increased number of recording days. On a daily average basis, Notice of Default filings dropped a dramatic 32.5 percent from November and Notice of Trustee Sale filings dropped 23.0 percent. We have not seen a similar December drop in recent years, so this is not simply a regular seasonal decline.

Another tiny pinpoint of light in the foreclosure debacle? We won’t know until we get more number from the first few months of 2010.

But maybe…just maybe…we won’t get Scrooged quite as hard this year as last.

The FHA has announced a number of policy changes “to better position the FHA to manage its risk while continuing to support the nation’s housing market recovery.”

The FHA said it would take the following steps:

• Increase the mortgage insurance premium (MIP);
• Update the combination of FICO scores and down payments for new borrowers;
• Reduce allowable seller concessions from 6% to 3%;
• Implement a series of significant measures aimed at increasing lender enforcement.

Of particular note is the reduction by half of allowable seller concessions and the increased enforcement on FHA lenders, including:

• Posting lender performance rankings on the HUD website
• Increased scrutiny of lender performance and compliance with FHA guidelines and standards
• Enforcement of indemnification provisions for lenders using delegated insuring process
• Requirement that all approved mortgagees assume liability for all of the loans that they originate and underwrite
• Authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

The Purchase Agreement

You may think that that CAR form Residential Purchase Agreement you know so well will be the form of purchase agreement used in the transaction. Right up until the time you get a 12-page Counter Offer from the bank. That Counter Offer overrules many of the protections in the CAR RPA form. You read it, and re-read it. Then you go talk to your client, the buyer. You start explaining the differences in the terms. You start walking them through each new term and condition and explain the meaning and consequences of each new provision. You have now begun practicing law without a license. And, if you thought the penalty of doing general contractor work was bad, just wait till the lawyers get hold of you.

The consequences of the contract form provided by the bank is just not something you, as a broker/agent, are allowed by law to discuss with your client. Tell them to seek advice from a
lawyer. Give that advice to them in writing. Tell them to think of it as a “legal inspection” just like a termite inspection, or a roof inspection. After all, they are getting a ‘bargain’ when buying the REO property in the first place. This legal review is just an additional cost of doing business. One that can save them tens of thousands of dollars later.

Banks are selling off tens (hundreds?) of millions of dollars of real estate. They have paid their lawyers tens (hundreds?) of thousands of dollars to draft purchase agreement forms that the bank will use in each transaction. The banks are NOT your friend. The bank’s lawyers certainly aren’t your friends.

What are some of these “bank terms?”

Disadvantageous terms (for the buyer) include, but are not limited to: mandating substantial down payments, liquidated damages clauses, forcing the buyer to prequalify with the selling bank, refusing to pay any closing costs, refusing to provide any disclosures, requiring hold-harmless agreements, requiring the buyer to waive certain rights while maintaining all of their own, charging per-diem fines for any delay in closing, not allowing any buyer inspections or contingency periods. And this isn’t a complete list.

Let’s not forget the infamous “as is” clause. A bank will try to get the buyer to waive any right to make claims for intentional withholding of known material facts, and then compel the buyer to agree to buy “as is.”

Dr. Sam Chandan, President and Chief Economist of Real Estate Econometrics and an adjunct professor of real estate at the Wharton School of the University of Pennsylvania, recently gave a presentation on what he believes 2010 holds for the commercial real estate market. The upshot of his findings:

• Though the economy remains fragile, we are beginning to recover from the depression scenario
• The economy will need support the next few years
• There will be some modest growth in spending in 2010
• Multifamily is not faring well as the greatest demographic for renters is in the 21-29 year age range; this group is facing 16% unemployment and living back at home or pursuing advanced degrees
• The real estate sector of the economy has declined sharply from 2007 highs
• The first time home buyer program undercut the industry
• NOI will stabilize over time; last recession it took 4 years to stabilize
• Transaction activity will be primarily concentrated in the REIT sector and private buyers
• Private buyers will be seeking properties in the $1-3,500,000 price range
• Prices will stabilize and credit availability will be more robust
• Retail operations will remain challenging
• Still a disparity between buyers and sellers but the gap is narrowing
• Investors waiting for the flood of distressed properties have been disappointed
• FDIC has instituted a variety of programs to avert flooding the market
• Lenders are exercising the extend and pretend option
• The CRE section of the economy will revive with the creation of sustainable jobs

Dr. Chandan’s personal website is www.chandan.com.

The government continues to struggle to put together a loan modification program that will work for both the homeowner and the lender. According to a recent announcement by HUD and the U.S. Department of the Treasury, new provisions to the mortgage modification program (HAMP-Home Affordable Modification Program) that will speed the process will go into effect on June 1, 2010 and include:

Documentation – homeowners must supply three types: a Request for Modification and Affidavit form, IRS Form 4506T-EZ and proof of income.

Acknowledgement – lenders must acknowledge in writing within 10 days that they have received the documentation and provide a timeline and explanation of the evaluation process.

Evaluation – lenders must evaluate application within 30 days and request any additional information needed from the homeowner within that timeframe. Also within that same 30 days, lenders must provide homeowners who meet modification eligibility requirements with a trial modification plan notice. If the homeowner does not qualify, they must also be notified within 30 days and be given consideration for other options, including forbearance, refinancing, non-HAMP modifications, short sales or deeds in lieu of foreclosure.

Homeowners who obtain a trial modification must make payments on time for the modification to become permanent.

And when they say “permanent”, it’s the government definition: the lender can choose to continue or end the modification at any time, even years later.