MLS Listings on Net Sale Price
The bank wants to maximize its money on the sale of an REO property. It also wants your best efforts to sell the property. So, it will try to get you to agree to a commission on a NET sales price. Or, at the last minute, once you’ve presented an offer, then banks says “OK, but we have to cut the commission.”

It’s happened so often that MLS rules have been instituted with respect to how you split commissions when a bank demands a reduction. Most MLS rules require either a percentage of the GROSS selling price, or a fixed dollar amount be shown as compensation to the selling (buyer’s) office.

What to Disclose
We all know that banks are exempt from having to give a TDS to a buyer. Banks are also exempt from NHDs, Mello-Roos, Supplemental Property Tax, Military Ordinance, Airports, Industrial Zoning and Private Transfer Fee disclosures as well.

Banks still have to provide disclosures of Natural Hazard Zones (not the NHD form mind you, but the zones), and the Megan’s Law, Lead Based Paint, Smoke Detector, Water Heater and Meth Labs, FIRPTA and HOA disclosures as well. Banks also must disclose anything that materially affects the value or desirability of the property.

What about things like the Seller Property Questionnaire, or the Statewide Buyer and Seller Advisory or the HOA documents? What about them? The bank has no duty to provide them. And often doesn’t.

Brokers, by the way, still have to give an Agency Disclosure form to both the bank and any buyer, as well as a TDS. You read it right. An agent still has to complete that reasonably competent, diligent, visual inspection of the accessible areas, and disclose what was observed that might materially affect the property’s value or desirability. Selling agents [representing the buyer] have an even higher level of inspection and disclosure duty.

What does the poor broker/agent do when the bank refuses to comply with these regulations? Document the file. Fill it with a paper trail that shows how much and how often you tried to get the bank to do so. Then make sure the buyer knows that the bank hasn’t given over the required and recommended disclosures. Get an acknowledgment from the buyer that he/she has been so notified, and elects to proceed with the transaction anyway. The best of all worlds is to get a waiver from the buyer of any claims the buyer might make against the broker/agent as a result of the bank’s refusal to comply — in advance of the sure-to-follow claim.

You are a broker/agent. You are desperate for listings. The only kinds of listings out there are bank REOs. The bank wants you – as part of the listing agreement – to do things like get the property professionally cleaned, arrange for repairs, watch over the repair professionals to make sure they get the job done right and on time, tell the repair people what to do that will maximize the re-sale value of the property, take care of the landscaping, stage the property, etc., etc. Oh, and front the money necessary to do these things, and submit expense reports on a monthly basis for reimbursement.

What do you get in return? A listing agreement. Mind you, it’s not that CAR form listing agreement you’re used to. Nope. It’s the bank’s listing agreement. Remember, banks are NOT your friend. Also remember, to get paid, you must have a written agreement signed by the bank.

A bank will use its leverage to force you to sign a listing agreement that calls for you to do all these extra things, and more. When you do, you have now begun acting as an unlicensed general contractor. All costs (including reimbursements) must now be given back to the bank; and – thank you for selling it – but you get no commission. Why not? Because that commission was compensation for general contractor services.

Banks are NOT your friend. Don’t think it can’t happen to you. Especially when the bank is later sued for non-disclosure of that material defect it didn’t disclose, that you knew about, because, after all, you had it ‘repaired (but the repair job was done poorly, and the problem persists).

So what do you do here?

If you’re going to undertake property management services, get a property management agreement with the bank. Get paid for it. Make sure the bank hires general contractors. Get the bank to insure you for claims made against you for property management related claims.

Whatever you do, please, be sure that the ‘asset management company’ you hire as the property manager is really an ‘asset management company’ and not your unlicensed brother or friend.

Paying someone who doesn’t actually perform any services is a fraud, a breach of contract, and, potentially, a RESPA violation. Is it really worth it for a few extra dollars?

Acting as a General Contractor

You are a professional, licensed, real estate agent. You are not a licensed general contractor. Understand the differences. They’re critical.

Most of us intuitively know that a general contractor is a person who builds things, or repairs
things. Sometimes they are big outfits; sometimes the office is the passenger side of the bench seat of their pickup truck. Either way, they have licenses to do certain things. The State likes that. A lot. So much, in fact, that it is very protective of those persons who went through the pain and suffering necessary to get that general contractor’s license.

Here’s the rub. Supervising the work of others (which work would have required a general contractor’s license if the others were doing it unsupervised) also requires a general contractor’s license.

If you are acting as a supervisor, and are not licensed, then you have violated the Contractors State License Law. The penalty? You may not be paid for any of the work. You may not be reimbursed for any costs you have advanced on the project. You must give back all money received already – even if that money was to reimburse you for materials you bought and installed on the property.

Property Management
Banks may call for the broker/agent to manage the property. And “property management” can mean something very different to a bank than to a broker/agent.

In some instances, all a broker/agent is asked to do is determine if the property is occupied. That’s it. Sounds simple enough, right? Wrong.

In rent-controlled cities (Oakland in particular), brokers are being sued - by the City – not the bank, not the occupant, not the buyer, not the borrower/seller, but the City itself – for violation of the City’s rent control ordinances. It seems the City believes that almost any notice to a tenant by a bank to move out is a violation of its rent control ordinances. So, the City is filing suit against all the banks. All of them. And the broker/agents too. On what theory? Aiding and abetting the banks in wrongful evictions. Settlements are in the tens of thousands of dollars, with requirements that the agent disclose each and every bank owned property it has listed (or worked on in any way, including just giving a BPO) over the last five years, and that the agent stipulate in advance to a minimum fine of $5,000 for every violation the City finds in all those previous listings or BPO assignments.

Did we mention that many E&O policies exclude violations of City ordinances from coverage? But wait, as they say, there’s more.

Collecting rent from an occupant pending the occupant vacating the property? Doing it just as a ‘courtesy’ for the bank client? Hopefully your trust account procedures are up to snuff. Oh, and by the way, did you know that if the owner (bank) is an out-of-state person or entity, the broker/agent/property manager is required to withhold seven percent (7%) of the gross rental proceeds and turn it over to the State Franchise Tax Board?

We’re not done yet…

What if the property is vacant, but the occupant left stuff behind? You guessed it. Call your favorite attorney – better yet, let the bank call its favorite attorney, and give the required Notice of Belief of Abandonment, etc., etc.

What if a trespasser has gained entry in an otherwise vacant and abandoned house? Can you just cut off the utilities? Nope. Do you call the cops? They’ll tell you it’s a ‘civil matter’ and direct you to contact, you guessed it, your favorite attorney. (Call the cops anyway. It creates a record of your belief the occupants are trespassers.)

What if the trespasser goes swimming in that “green pool” and is bitten to death by mosquitoes? Or just contracts malaria or the West Nile Virus? Call an attorney.

What about ‘cash for keys?’ Done correctly, it’s a win-win for everyone. Done incorrectly, it’s just another kind of unlawful eviction.

BPOs and the Thorough Inspection
The bank listing agreement may call for the broker/agent to give opinions of value (BPOs). A BPO is an in-depth analysis of a property’s value. Think of it as a mini-appraisal. To do one properly, the broker/agent needs to thoroughly investigate the property’s condition.

Some might suggest even more thoroughly than a broker/agent would do for a “regular” TDS inspection. When undertaking this analysis for the bank on value of the property, remember it is an analysis the bank is going to rely upon to set its sales price (a price that the bank – and broker – knows is less than the loan amount they foreclosed on, and needs to be as reasonably high as possible to minimize the bank’s loss).

So, inspect carefully.

But not too carefully. After all, whatever is found in this ‘thorough’ inspection must be disclosed on the agent’s TDS. “But wait,” you say, “banks are exempt from giving a TDS if it’s a foreclosure property.” And, right you are. Banks are exempt. The broker is NOT. So, that wonderfully thorough inspection you just did, the one necessary to assist the bank in determining true foreclosure market value, is the proverbial double-edged sword. Now, you must also disclose that very same information to a prospective buyer.

Don’t get caught in the trap of thinking, “I wasn’t the BPO broker/agent, so I don’t need to worry about that.” Once the BPO broker/agent has given that information to the bank, the bank has actual knowledge of the facts – and a bank MUST disclose information of which it has actual knowledge — material information affecting value. What’s “material” information? Anything that would impact a buyer’s decision to buy, and at what price.

Wasn’t that BPO information the very thing that was used to determine value? If it determines value, it affects value. Disclose it.

Welcome to the REO Business
How do you start? By getting to know your local bankers. (Note: most REO properties are coming from national banks, and bankers handling the mass volume of REO properties are just too busy and losing too much money to be friendly. So be persistent. And take donuts.)

We presume that you’ve been able to make the contacts necessary, and have established the relationships to be considered as a listing agent for a bank’s REO portfolio. Or a portion of it anyway. Now what do you do?

First, you read. Carefully. Get out the magnifying glass, and read everything. Especially the fine print. And always – ALWAYS – remember: The Banks are NOT Your Friend.

Listing Agreements: The First Step
Real estate agents get authority to sell property by way of a contract called a Listing Agreement. CAR (the California Association of Realtors, a terrific trade association that lives, breathes and exists for the purpose of helping its members) has prepared forms for use by its members.

To get paid as a listing agent, a written agreement, signed by the seller, is required. That written agreement can take many forms. Sometimes it can be a memo, or an email. Sometimes it’s a bank’s special form, and not a CAR Listing Agreement at all. That’s where you want to be most careful.

Remember Rule 1: Banks Are NOT Your Friend. Many banks have prepared their own form of listing agreement. And those forms contain all kinds of things that most brokers/agents are not used to seeing in a listing agreement. Review the listing agreement carefully – better yet, get a knowledgeable California real estate attorney to help.

By now, if you don’t know that REO stands for Real Estate Opportunities, you’ve been living under a rock.

For agents and brokers in California, REO (bank parlance for foreclosed properties which are now, to them, “Real Estate Owned” assets) properties ARE the market. After all, with home values plummeting nearly 50% in some areas, who in their right mind wants to sell a property if they don’t have to?

Brokers and agents still need to make a living; banks haven’t a clue as to how to market and sell residential real estate, so who else are they going to turn to? It’s a match made in heaven. But banks being banks, this particular heaven can turn into a living hell for an unsuspecting broker/agent. You need to know how to navigate through the traps and pitfalls, and still make a living.

First, buying an REO asset is not the same as buying at a non-judicial foreclosure sale (“Foreclosure”). A Foreclosure is a legal process where non-performing loans are auctioned off by the trustee in a deed of trust. While the bank (or person) who lent the money is the first bidder, and the property could go to them, it doesn’t always happen that way. Sometimes, a third party bids at that sale and buys the property. That third party (those who have been doing this for a long time are called “professional bidders”) generally re-sells the property almost immediately – but that sale is NOT a REO sale. The distinction is critical – especially when it comes to disclosure obligations. So remember, REOs are “bank owned” properties.

If you get lucky and get a good deal at a foreclosure sale, can the former owner challenge your bid and get it set aside? Sometimes.

The key is to get the Trustee’s Deed DELIVERED to you as soon as possible. Acceptance of delivery (which doesn’t require recording, but that’s important too) gives you, as a buyer, a “conclusive presumption” that the same was conducted properly.

And that’s “special.”

This Kansas Supreme Court decision is the latest to expose the flaw affecting lenders’ ability to foreclose “securitized” mortgages:

In a unanimous opinion, the Kansas Supreme Court has ruled that, under the facts presented, a second mortgage holder who was not given notice of a foreclosure performed by the first mortgage holder on the same property could not set aside the judgment of foreclosure obtained by the first mortgage holder, due to the complex legal relationship among the holder of the second mortgage, the holder of the underlying promissory note, and an intermediary company.¹

While not binding in any state other than Kansas, this decision is the latest indication that a flaw exists in the way millions of “securitized” mortgages were structured, a flaw that gives millions of borrowers a legal argument that may allow them to avoid foreclosure of their mortgages.

Kesler was the borrower on two loans secured by the same parcel of real property located in Kansas. The lender on the first loan was Landmark National Bank. The original lender of the second loan was Millenia Mortgage Company (Millenia). The mortgage documents for the second loan named Kesler as the Borrower and the Mortgagor, and named Millenia as the lender, but also named Mortgage Electronic Registration Systems (MERS) as the mortgagee, as “nominee” for the lender. This means that while Millenia was the original holder of the promissory note for the loan, MERS was intended to be the original holder of the mortgage by which the loan was secured.

MERS is a private corporation that administers the MERS System, a national electronic registry that tracks the transfer of ownership interests and servicing rights in mortgage loans. Through the MERS System, MERS becomes the mortgagee of record for participating members through assignment of the members’ interests to MERS. MERS is listed as the mortgagee (as nominee for the lender) in the official records maintained at county register of deeds offices. The lenders retain the promissory notes, as well as the servicing rights to the mortgages. The lenders can then sell these interests to investors without having to record the transaction in the public record. MERS is compensated for its services through fees charged to participating MERS members.²

If the borrower were to default on the loan, MERS would bring a foreclosure action in its own name. By taking over the role of mortgagee MERS is in position to administer the loans and to conduct any necessary foreclosure proceedings. By providing this service, MERS made it easier for lenders to sell their loans, and for these loans to be bundled together as mortgage-backed securities to be offered for sale to investors, who did not wish to have to be involved in the administration of the loan or in foreclosure process. In this way MERS became the mortgagee on millions of mortgages taken out by Americans over the part decade.

In this case it appears that Millenia sold its interest in the second loan to Sovereign Bank. Later, Kesler became insolvent and filed for bankruptcy. Landmark filed a foreclosure proceeding under Kansas law. Kesler and Millenia were given notice of the foreclosure action, but MERS and Sovereign Bank were not given notice. (No record of the transfer of the underlying promissory note from Millenia to Sovereign had ever been recorded in Kansas.) The property was then sold at auction as a result of this foreclosure. The auction sale produced cash proceeds in excess of the amount required to pay off the loan, and Kesler and Landmark filed a motion in the foreclosure proceeding to determine how the excess proceeds should be divided.

At this point Sovereign and MERS attempted to intervene in Landmark’s foreclosure proceeding and to overturn the judgment for foreclosure on the grounds that they, as junior lienholders, had not received notice of Landmark’s foreclosure. The trial court denied MERS’ and Sovereign’s motion and refused to allow either of them to participate in the foreclosure action; they appealed to the Kansas Court of Appeals which upheld the decision of the trial court.

The Kansas Supreme Court rejected Sovereign’s and MERS’ appeal. Sovereign was not entitled to notice of Landmark’s foreclosure because no document had ever been recorded, or any other notice given to Landmark or to the public that Sovereign was the owner of the second loan.

As to MERS, the court found that the trial court was correct in not setting aside the Landmark foreclosure sale and allowing MERS to participate because, the court said, even if MERS participated in the foreclosure action, it would not have had a meritorious defense to it. The court found that MERS’ true role in the loan transaction did not give it standing to participate as a party to a foreclosure action as a mortgagee, or in any other way. The court said:

“The mortgage instrument states that MERS functions “solely as nominee” for the lender and lender’s successors and assigns. The word “nominee” is defined nowhere in the mortgage document, and the functional relationship between MERS and the lender is likewise not defined. In the absence of a contractual definition, the parties leave the definition to judicial interpretation.

“What meaning is this court to attach to MERS’s designation as nominee for Millennia? The parties appear to have defined the word in much the same way that the blind men of Indian legend described an elephant–their description depended on which part they were touching at any given time. Counsel for Sovereign stated to the trial court that MERS holds the mortgage “in street name, if you will, and our client the bank and other banks transfer these mortgages and rely on MERS to provide them with notice of foreclosures and what not.” He later stated that the nominee “is the mortgagee and is holding that mortgage for somebody else.” At another time he declared on the record that the nominee is more like a trustee or more like a corporation, a trustee that has multiple beneficiaries. …”

The court then found that “[t]he relationship that MERS has to Sovereign is more akin to that of a straw man than to a party possessing all the rights given a buyer.” Further, the court said:

“What stake in the outcome of an independent action for foreclosure could MERS have? It did not lend the money to Kesler or to anyone else involved in this case. Neither Kesler nor anyone else involved in the case was required by statute or contract to pay money to MERS on the mortgage. … If MERS is only the mortgagee, without ownership of the mortgage instrument, it does not have an enforceable right.’

This finding that MERS really possessed no enforceable right in the second mortgage formed the basis of the courts finding that MERS need not be included as a party in the Landmark foreclosure. The Landmark affirmed the decisions of the lower courts and the Landmark foreclosure was allowed to stand, without any participation of, or compensation to, the holders the second loan.

In so ruling the Court rejected an amicus brief filed by ALTA which argued that the role of MERS should be recognized on the basis that “MERS provides a cost-efficient method of tracking mortgage transactions without the complications of county-by-county registration and title searches,” and that the existing recording scheme stems from “seventeenth-century property law that is entirely unsuited to twentieth-century financial transactions.” The court found that it was not the court’s role to usurp the legislature’s role of making laws regarding the recordation of documents or “to substitute its view on economic or social policy.” The court further stated that the system advocated by MERS and ALTA had serious problems of its own:

“One such problem is that having a single front man, or nominee, for various financial institutions makes it difficult for mortgagors and other institutions to determine the identity of the current note holder.

“‘[I]t is not uncommon for notes and mortgages to be assigned, often more than once. When the role of a servicing agent acting on behalf of a mortgagee is thrown into the mix, it is no wonder that it is often difficult for unsophisticated borrowers to be certain of the identity of their lenders and mortgagees.’”³

As noted above MERS, as part of its business, brings many foreclosure actions in its own name as against borrowers who default on mortgages and deeds of trust in which MERS is named as the “nominee.” There are millions and millions of such mortgages on which MERS appears. The Landmark decision is important because it indicates, although it does not expressly decide, that MERS will have a great deal of trouble bringing foreclosure actions in its name because, based on the reasoning of Landmark, MERS is not a proper party in a foreclosure action, having no substantive interest in the ownership of the loan or in the security for the loan.

But if MERS cannot bring the foreclosure action, who can? As noted above, the original lender has almost always sold the loan to other parties long before the borrower’s default occurs, and thus has no interest in the transaction on which it could base a foreclosure. The party who has purchased the loan has in fact usually purchased only the underlying debt obligation such as the promissory note, and has not purchased the mortgage security or deed of trust which was designed under the MERS system to remain with MERS, as nominee. Thus the holder of the debt is also not in a legal position to bring the foreclosure action.

It is certain that attorneys for borrowers will use the findings of this case and others like it4 to challenge MERS’ right to bring foreclosure actions against their clients. This could potentially result in a situation where millions of delinquent loans can not be foreclosed upon under the current MERS system. Such a situation could create a serious impact on the U.S. financial system. This situation will continue to develop as more such cases work their way through the legal system. It is an area of law bears watching by all involved in the real estate industry, either as investors or as professionals.

1 The case reviewed is Landmark National Bank v. Kesler (August 2009) (No. 98,489); 2009 Kan. LEXIS 834.
2 Mortgage Elec. Reg. Sys., Inc. v. Nebraska Depart. of Banking, (2005) 270 Neb. 529, 530, 704 N.W.2d 784
3 Citing In re Schwartz, 366 B.R. 265, 266 (Bankr. D. Mass. 2007).
4 See, e.g., Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. App. 2009); Mortgage Electronic Registration System, Inc. v. Southwest Homes of Arkansas (No. 08-1299, Arkansas Supreme Court, March 2009) 2009 Ark. LEXIS 121.