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.


New laws that have come into effect include such things as the DRE’s new mandate for “consumer protection” (read: get the brokers) and notice to buyers regarding water conserving plumbing fixtures (has the crap really hit the fan yet?).

More to follow in the next few days.

Representative Zoe Lofgren, a California Democrat, proposed securing meaningful principal write-downs for underwater homeowners by allowing a temporary reduction in the interest rates of those homeowners who file for bankruptcy.

She presented the plan in a letter to President Barack Obama earlier this month and it was discussed by the Democratic lawmakers and FHFA’s acting director Edward DeMarco on Wednesday.

A cramdown is a would-be bankruptcy process whereby a borrower would file bankruptcy, and as part of a reorganization plan, cram a principle reduction of a mortgage down a lenders throat. (Not just a “temporary” reduction in interest, by the way, but a true write down of principal.)

Seems counter-intuitive, doesn’t it?

“Hi, Judge. I’m a bankrupt borrower, but I could afford my house if I owed less, and had to pay less interest. The lender won’t agree. Will you make them, please.”

How does someone who is “bankrupt” afford a house?

It’s simple, in some cases anyway.

The largest debt of a cramdown borrower would be the mortgage. The borrower ** would be ** able to afford the house mortgage ** if ** the mortgage amount was equal to the value of the house – not 125% or 150% of the value of the house. If the interest rate were lower, that would help too.

Who loses in this scenario?

Fannie Mae and Freddie Mac – those GSEs that hold 75-85% of all mortgages in the US. (Oh, and some private banks that hold the balance. After all, what’s good for the goose…)

Can Freddie and Fannie afford to take the hit? THAT’s the question.

We’ve (as a Country) already dumped 2 TRILLION dollars into the economy. The Government (that’d be you and me by the way) will need to pay for the write offs any cram down allowed. How much more would that be – and where would it come from?

Here’s my $0.02.

The economy limps along like overcooked spaghetti. It’s going nowhere until the banks can get rid of the toxic debt, and consumer confidence rebuilds. Take the losses now, and we can start the recovery sooner. Yes, the losses WILL BE staggering. The bankruptcy courts will be overwhelmed. (I’d bet that some smart folks will start renegotiating those loans without the need for bankruptcy court intervention if the law allowed a borrower to do it through a bankruptcy proceeding – after all, it’d be cheaper for the banks that way…)

But, once the borrowers start paying on their loans again, once borrowers “feel” like they have readjusted on their homes, confidence – i.e. certainty – returns. And with certainty comes spending. With spending comes an uptick in the economy, and the ability for everyone to start making money again. Even he Banks. THAT’s how we pay for the losses Fannie and Freddie will take. We tax our way through it, with the increased economic activity.

Hell no, it’s not pretty. But it could work!

What is H.O.M.E. ?

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.

Once again, I can say the Banks continue to rob homeowners blind with all the blather about “negative impact” of walking away.

Here is yet another article from first tuesday…

“Fair Issac Company (FICO) researchers have developed new analytics to predict a borrower’s likelihood of walking away from a mortgage – a strategic default – whether or not he is delinquent on his payments. The rise in strategic defaults over the past year is of concern to mortgage lenders. Thus, FICO consulted with them (not underwater homeowners) to develop the analytics with the purpose of preventing strategic defaults and their costly impact on lenders, investors, homeowners and the housing market.

35% of mortgage defaults in September 2010 were strategic, an increase from the 26% more than a year earlier in March 2009 according to a University of Chicago Booth School of Business study. 22.5% of residential mortgage defaults nationwide were strategic in the third quarter of 2010. This number increased to 23.1% in the fourth quarter of the same year.

In negative-equity-laden California, strategic defaults are also widespread (more so than the nation as a whole since California is a nonrecourse state and lenders cannot viably threaten to sue for their losses). There were 45,380 strategic defaults in 2009 – 80 times the number in 2005.

FICO researchers found borrowers who walked away from their mortgages had common traits including:

higher FICO scores;
better credit management (understood financial statements);
less retail balance (did not need credit to buy);
shorter length of residence on the property and thus greater likelihood of a negative equity; and more open credit in the past six months with which to purchase items.

The study concluded the degree of difference in the loan-to-value (LTV) ratio between the current market price for a home and the mortgage owed on the home (home price depreciation) is not as strong of an indicator for predicting a homeowner’s ability or willingness to strategically default. However, the study did conclude a borrower with a stronger history of good money management and a higher credit score tended to strategically default at a higher rate than other borrowers.

FICO and mortgage servicers are alarmed of the increasing frequency of strategic defaulters and warn homeowners of the consequences of walking away from their mortgage payments. Not only will homeowners suffer a 150+ point hit to their credit scores, but they may also face higher rates, tighter terms for other types of credit and a bump in insurance premiums. FICO goes on to implicitly threaten the homeowner who reverts to renting after walking away by saying landlords will be more unwilling to accept them as a tenant when they see a strategic default on the tenant’s credit record.

This is a fabrication of the worst type. FICO and the lenders they consulted with (who incidentally are the ones who pay FICO for the use of their algorithms) have an economic interest in keeping California’s population of negative equity homeowners imprisoned in their underwater homes. The truth is, any landlord fully understands that a strategic defaulter is going to make a very fine, long-term tenant if they have a job and otherwise pay their bills – and most all do since they made the sound decision to strategically default.

Walking away is for smart people, and lenders know it.

Several studies over the past years have already observed strategic defaulters tend to hail from a more financially savvy crop of people. The recent FICO study repeats this conclusion of which many of us are familiar.

What it also advertises — to the endorsement of lenders — are the detrimental effects of walking away from a mortgage. Agents and brokers must construct the bigger picture, especially in California where underwater homeowners collectively hold over 2,000,000 negative equity mortgages.

California negative equity homeowners have the short end of the stick with black-hole assets on their hands, so the question they should be answering is not whether a strategic default would be a in the best interest of their lenders. Rather, they should be considering whether a strategic default would be a prudent choice for their personal financial situation.

It’s true, homeowners will see a hit to their credit scores from a strategic default — and of course FICO will highlight this since the media often overstates this figure — but homeowners must not be inveigled into staying in negative equity properties by the vague economic threat of a lower FICO score. It’s not about the FICO score alone, but the costs versus benefits analysis of the homeowner’s individual situation.

Either a homeowner can continue to siphon his money into a dead-end loan, or he can save that money and invest it into a much more lively investment — improving his family’s standard of living.

Paying lenders the full amount on an underwater home is not what is going to fuel the recovery of a family or the California economy — what we need is to put cash in the hands of negative equity Californians.

A strategic default when the LTV is above 125% is not a dishonest financial bailout – it is prudent business decision. It may temporarily hurt the pride and credit scores of California homeowners, but these things are soon remedied.

Paying lenders the full amount on an underwater home is not what is going to fuel the recovery of a family or the California economy — what we need is to put cash in the hands of negative equity Californians. If they aren’t going to get any cramdowns in bankruptcy courts, they need to exercise their legal right to strategically default — that “put option” in every trust deed. Besides, it’s what all the smart people are doing anyway, right?

Copyright © 2011 by first tuesday Realty Publications, Inc. Readers are encouraged to reprint or distribute this information with credit given to the first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516.”

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.

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…

In July, the California legislature passed SB 458, which revised Ca Code Civ Procedure 580e to prevent “short sale” deficiencies on second position loans.

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.

SB 458 – effective July 11, states no liability will inure to sellers of short sale 1-4 unit properties in California with respect to second position loans. (Recall that first position loans sold short lost recourse liability becasue of SB 931 in 2010).

Good news? Or bad?

Some say it will actually hurt sales in California, becasue banks won’t have any incentive to deal and will just foreclose. Maybe.

I’d bet neither law stays on the books very long. Huh? Why not?

The US and State Constitutions have Ex Post Facto laws. Fancy words that mean, in essence, “Thou shalt not pass a law that interferes with a preexisting contractual relationship.”

Isn’t that just what these laws did? Change the preexisting contractual relationship between a bank and a borrower?

With hundreds of BILLIONS of dollars at risk, don’t you think the banks will challenge the laws? I would.

We’ll all find out in about three years. That’s how long it takes for a trial, and then an appeal. (Longer if it goes to either of the Supreme Courts – state or federal.)