Just last week, in Harbour Vista, LLC v. HSBC Mortgage Services Inc., 2011 WL 6318525 (Cal.App. 4 Dist. 2011), the California Court of Appeal held that plaintiffs may not obtain default judgments in quiet title actions. But … (And the “But” is fascinating.)

Harbour owned a ground lease under a condo complex. Julie Nugent purchased a condo and paid her mortgage to Fieldstone Mortgage Company. She also subleased from and paid rent to Harbour. Both the mortgage and the sub-lease were secured by the condo. Nugent eventually defaulted on both her rent and mortgage. After HSBC purchased the condo from Fieldstone at a foreclosure sale, Harbour filed a complaint to quiet title. HSBC failed to respond to the complaint and Harbour obtained a default judgment. HSBC then moved to set aside the default judgment, but the trial court denied the motion. HSBC appealed.

The Court of Appeal reversed the judgment based on the language of California Code of Civil Procedure Section 764.010, which expressly provides that the “court shall not enter judgment by default.” According to the Court, this language “is unequivocal,” and the “prohibition against default judgments in quiet title actions appears absolute.” The statute does not, however, prevent a quiet title plaintiff from taking a default.

Instead of a default judgment, after taking a default, the court must hold an evidentiary hearing at which the parties (including the defaulted defendant) are entitled to present evidence regarding their conflicting claims to the property. Thus, even though HSBC had not answered the complaint and was in default, the trial court should have allowed HSBC to present evidence about its claim to the condo. Once a court holds a properly noticed evidentiary hearing, it may render a regular judgment in accordance with the evidence and the law regardless of whether the defaulted defendant appears.

Here is the fascinating part …

Though a defaulted defendant has a right to appear at the evidentiary hearing, a plaintiff has no obligation to provide notice to the defaulted defendant of this hearing. Nor does the plaintiff have any obligation “to serve documents or give notice of any future court dates” to the defaulted defendant.

If the defaulted defendant nevertheless learns of the evidentiary hearing and appears, it may be heard.

If it does not appear, the Court will proceed and render judgment without the participation of the defaulted defendant. Following the evidentiary hearing, the Court should issue a judgment resolving all issues as to title.

Imagine the HOA’s joy:  It gets a default, then notices the prove-up hearing without the need to even give notice to the other side.  Talk about form over substance.

Other causes of action and claims for relief will not be addressed at this evidentiary hearing and are not affected by this rule. If a defendant defaults as to other claims, normal procedures for obtaining entry of default and default judgment apply.

So did the lenders win?  Or not?  I’d say not.

Shaterian v. Wells Fargo Bank, N.A. , (N.D.Cal.)
January 11, 2012

A borrower stated a claim against a lender for violations of TILA disclosure requirements by alleging that the lender had failed to clearly and conspicuously disclose that payment schedules for an option adjustable rate mortgage (Option ARM) on the borrower’s residence were not based on the actual interest rate, and that negative amortization would occur if the borrower followed the payment schedule provided. The court found that the borrower’s state law claims for aiding and abetting fraud, fraud through misrepresentation in an oral contract, and breach of contract were not preempted by Home Owners’ Loan Act (HOLA), but that HOLA preempted his claim for fraudulent omissions.

Here’s a thought that ought to strike fear in strategic defaulters…

What impact does the “partially worthless security” exception (Calif. Code of Civil Procedure section 483.010(b)) to the “non-recourse” status of a purchase money loan (see the conjunction of CCP 726(a) and CCP 580b and 580d)?

If the lender can seek a deficiency – or foreclose judicially, even on purchase money, owner occupied, 1-4 unit loans and collect a judgment that isn’t protected by the 726/580 cocktail, because eh security was “partially worthless” – can the lender negotiate from an even stronger position to get more money from a short sale seller?

I’d urge caution…on both sides.

The L.A. Times recently reported that the Fed is now looking to find ways to dispose of the 248,000 homes it owns (through bank REOs) by either selling them in bulk to investors who will be required to rent them, or to sell them on rent-to-own basis.

“One idea could be to create pools of foreclosed properties that would be sold in bulk to private investors, who would then rent them out, helping reduce taxpayer losses on the bailouts of Fannie and Freddie. Another idea could be for investors to buy homes and then rent them on a rent-to-own basis.”

http://latimesblogs.latimes.com/money_co/2011/08/foreclosure-obama-housing-market-rent-fannie-mae-freddie-mac.html

Who is kidding whom here? “Rent-to-Own”? What are we – a mattress store?

The Fed will give a new buyer a break by allowing them to rent, then buy at a price (presumably) fixed at the time they enter into this agreement (thus allowing the buyer to get some upside?) Or, is the program designed to let the Renter buy it at market value several years from now, if they qualify? (That way, the Fed gets the upside, and the rental value. It beats having an empty house…)

Why not just take the mark-down to market value today, and reform the existing loan – and allow the current owner to keep it?

Either way, there is going to be a loss.

As you know, I have been preaching that “Strategic Defaults” are – often – a good thing for a borrower.

first tuesday agrees.
“If mortgage lenders will not lend homeowners a hand, then homeowners can force lenders’ hands by exercising their right to default, made imperative by a loan-to-value ratio (LTV) above 125%. Waiting for a modification that isn’t available just isn’t the best bet for a homeowner or for California’s economy. And don’t listen to the preaching on the effect on how a strategic default is better or worse for Fair Isaac Corporation (FICO) credit scores – a short sale delivers the same amount of adverse credit scoring as does a foreclosure. ”

Couldn’t have said it better myself.

Last year the Legislature passed Senate Bill 931 adding Section 580e to the California Code of Civil Procedure.  This new Section established that the beneficiary on a loan secured by a first deed of trust on 1 to 4 unit residential property could not pursue a deficiency judgment after a short sale which they had approved.  The law applies equally to purchase money, hard money and refinance loans.

 This year the Legislature passed Senate Bill 458 which amended Section 580e by making it applicable to junior liens as well.  It also applied additional limitations to the loans subject to the section. In addition to not being able to get a deficiency judgment it provides at Section (a)(1) that after a short sale no deficiency shall be owed or collected and no deficiency judgment shall be requested or rendered provided the short sale closed escrow and the lender was paid the amount they agreed to accept.

 Although the law does not specifically say so it is likely the courts will interpret that section to mean that it applies to a short sale closing either before or after July 15, 2011, the effective date of the new section.  That analysis is based on the provision that the short money cannot be collected and no deficiency can be requested.  It also will bar lenders from turning these loans over to a collection company which some lenders were doing even though the earlier section barred a deficiency judgment.

 The amended law provides at Section (b) that the holder of a note shall not require the seller to pay any additional compensation, aside from the proceeds of the sale, in exchange for their consent to the short sale.

 Some people have taken the position that, since only the seller is prohibited from providing additional compensation, the 2^nd lender can request the buyer or real estate brokers to pay them additional money above that the 1^st has agreed they can receive from the sale. 

 That might be true if only this code section applied.  But if the 1^st lender has based their approval on their consent to the 2^nd only receiving a specified amount then any attempt to pay the 2^nd more without the consent of the 1^st would likely be considered loan fraud.  If the 1^st finds there is more money available in the transaction they will rightly feel it should go to them rather than to the 2^nd.  That is the purpose of being in 1^st position.

Section 580e (c) provides that if the borrower commits loan fraud the limitations of the section would not apply.  The lender would then be able to pursue the entire unpaid balance. If you are the broker in a transaction where the 2^nd lender requests the broker or buyer to pay them some additional money either within or outside escrow you need to make sure that either the 1^st lender specifically approves the additional money being paid to the 2^nd or you run away from that transaction as quickly as possible.  Participating in a fraudulent transaction can expose you to monetary liability to the lender, revocation of your license by DRE and criminal prosecution.

The real question remaining to be answered is whether this new law will be a great protection of the seller from liability after a short sale or whether it will lead to lenders denying short sales in favor of pursuing foreclosure where a deficiency by a junior lien holder may be possible.

If you have any questions on this article or any other aspect of real estate law please contact the Hanson Law Firm at 916 447-9181 or log on to our website at www.HansonLawFirm.com.

Calling a Bank about a loan is THE most frustrating experience … even more so than sending in a loan mod request package — for the 15th time.

From a legal perspective, it gets worse, especially when “Joy” or “Nancy” tells you one thing (like, “You’re approved for our internal Loan Modification Program…”) but refuses to put it in writing. Or the letter you get says something different than the Bank’s representative said on the phone.

What do you do to protect yourself?

Try this:

When someone from the Bank calls, tell them: “I am recording this call for LEGAL purposes. Please state your full name and your birthdate – for identification purposes.”

How much you wanna bet the call will end – right there?

It will. And that’s OK.

If the Bank representative won’t agree to be recorded – END THE CALL. Nothing that is said in it will will matter anyway. The Bank will change its position. And you won’t be able to prove a thing. (And having the Bank’s representative refuse to be recorded, can work to your advantage later in court…)

Oh, and when Joy or Nancy balks, remind her that the Bank is recording the call already. For “training purposes.”

In a recent California case (as reported by firsttuesday) “an owner of property defaulted on a mortgage encumbering the property, causing the lender to record a notice of default (NOD). Prior to the trustee’s sale, the owner’s loan broker arranging financing to pay off the delinquent mortgage requested the lender postpone the trustee’s sale, which the lender did. The lender’s representative also orally promised to further postpone the sale on a further request from the loan broker. Before the trustee’s sale, the loan broker called the lender’s representative and left messages requesting a further postponement of the trustee’s sale. The lender’s representative did not respond. The trustee’s sale was not postponed and the property was sold. Unaware of the foreclosure sale, the broker and owner completed the financing and forwarded the payoff funds to the lender. The lender refused receipt of the payoff funds. The owner suffered money losses due to the loss of his property by the lender’s foreclosure and the cost of obtaining the payoff funds. The owner made a demand on the lender for the losses, claiming the lender was liable since the owner relied on the lender’s oral promise to postpone the trustee’s sale on request. The lender denied liability for the owner’s losses, claiming the oral promise to postpone the trustee’s sale was not enforceable since the lender received no consideration for the promise. A California court of appeals held an owner of property is entitled to money losses from a lender who orally promises to postpone the trustee’s sale of the owner’s property when the owner relies on the promise to his detriment since the owner’s detrimental reliance on the lender’s promise serves as a substitute for the consideration necessary to enforce an oral promise. [Garcia v. World Savings (2010) 183 CA4th 1031]”

What does all this mean?

It means that – in some very limited circumstances – a borrower CAN compell the Bank to honor an ORAL agreement NOT to foreclose. It is a very difficult promise to enforce, and most judges (especially one particular one in Contra Costa County) simply don’t give a damn; they feel overloaded with “just another mortgage case.”

If you think you have a situation where a foreclosure should not have happened, give us a call…

The latest and greatest news is that FHA will allow borrowers who are unemployed up to one year of deferred mortgage payment relief (read: live for free) while they get back on their feet.

This represents about 4% of the troubled California mortgages.

Fannie Mae and Freddie Mac loans are NOT included in this program. Neither are portfolio residential loans held by banks (like all those pesky seconds out there…).

So, for the very few that the “new” program will help (the unemployed, FHA insured, one loan only borrower), congratulations!

For the rest of us: Isn’t it grand how the Government is here to help?

Next.

“The goal is to reinstate as many borrowers in a modification that performs well,” said Tony Meola, a servicing executive with Bank of America. “It also is likely to lead to faster resolution in those unfortunate situations where foreclosure is inevitable. While not a desirable outcome, the recovery of the housing markets depends on moving through the foreclosure process as quickly and fairly as possible.”

Thus reported the New York Times.

You might want to read this: We settled with the investors, now we have to move this garbage through the system and foreclose on everything. If only the Bank would.

8 Billion (with a B) is a lot of money. But it’s a drop compared to the amount of underwater residential (we haven’t even touched commercial) loans out there.

Want to get the economy running again? Take the hits needed on these bad loans. Re-balance the balance sheet (yes, you WILL BE a smaller Bank), and then let’s get back to business.

My $0.02.