More to follow in the next few days.

The Hardship Outlays to protect Mortgagee Equity Act (HOME) is the legislation currently being discussed in Washington. HOME proposes to allow underwater homeowners to make tax-penalty-free hardship withdrawals from their 401(k) retirement accounts to avoid foreclosure.

The way the tax code currently stands, individuals who make early hardship withdrawals from their 401(k) accounts pay a 10% penalty in addition to income taxes. HOME pushes to remove the penalty and grant homeowners the right to withdraw up to $50,000 to either pay a delinquent mortgage, make up for lost household income or incorporate it in a lender’s loan modification arrangement. The legislation provides withdrawals be capped at 50% of the 401(k) account and requires the withdrawn amount be spent within 120 days. Proponents of HOME believe the plan gives distressed homeowners one last alternative to foreclosure while avoiding additional government expenditures.

This is the MOST STUPID of all the dumb, dumber and dumbest of the Federal Programs I’ve seen yet.

Let’s think about it.

The Homeowner should take money out of a 401(k) retirement account and dump it into an underwater home loan.

What stupid goober thought this one up? Some Banker I’d bet.

Who wins in this? The Banks – who get paid on a mortgage that should be flushed down the toilet; and the Federal Government (those folks that de-regulated the Banking Industry and allowed all this to happen in the first place) – who will have to continue to bail out the Banks if the homeowner defaults.

Why – WHY! – would someone with an ounce of sense want to spend “good” retirement money on a “bad” mortgage? They won’t.

Write off the loan losses.
Take the hit.

Yes, it will hurt the already hurt economy even more. But then – and only then – will we be able to begin a true recovery.

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.

 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.

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.”

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…

So, here’s the rub. No one knows for certain if it is retroactive.

If you closed a deal in 2010, and the Bank has not yet sued for a deficiency on that second loan, can it do so now? What if it HAS filed suit, can you get out of the lawsuit now based on CCP 580e?

There are arguments – pro and con.

HLF can represent borrowers who have been subjected to these kinds of claims – and brokers/agents who are being brought in for indemnity cross complaints because a borrower is being sued by a Bank for a deficiency.

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.

In October of 2010 the California Court of Appeal came out with a ruling that says the Listing Agent is liable to a non-client buyer (read that carefully!) For failure to disclose material facts effecting value or desirability of a residential property.

Now, how the hell will a Listing Agent know what a non-client Buyer thinks is “material” or will effect value or desirability? Will you have the Buyer’s Agent set up a meeting so you can take the Buyer out to dinner and discuss it?

I didn’t think so.

But, the Listing Agent still has liability. (WHAT was the Court thinking?!) So, what to do?

Use the BMI. Treat it as your BFF.

Don’t know what a BFF is? Ask your teenager.

Don’t know what a BMI is? Look at WinForms. It’s been a C.A.R. Form for, what, 10 years.
It’s a “Buyer’s Material Issues” form.

Require the Buyer to fill it out at the time they remove contingencies. That way, if he Buyer doesn’t say something, I can use it in defending the Agents. After all, how are you supposed to know, if the Buyer didn’t tell you?

Buyers still don’t know how to do mortgage math.
More specifically:

■ 44% admitted they were not confident in their comprehension of the mortgage process;
■ 57% did not understand how adjustable rate mortgages (ARMs) work;
■ 34% were not aware loan terms vary from lender to lender, lender fees are negotiable and different lenders charge different fees for appraisals and credit reports;
■ 55% did not know mortgage rates are constantly fluctuating;
■ 45% believed they should always purchase mortgage discount points (prepaid interest) regardless of the length of time they intended to keep their home;
■ 37% were under the impression that pre-approval for a loan is synonymous with obtaining permanent financing; and
■ 42% believed Federal Housing Administration (FHA) loans are only available to first time homebuyers.

In a marketplace where (in California) it is possible (perhaps for the first time since, what, 1953?) to buy a single family home and rent it out with POSITIVE cash flow, investors and/or Joe and Martha Buyer still don’t grasp mortgage fundamentals.

So, brokers and agents should not despair. There is still a client base out there that NEEDS your help.