It seems a business that chooses to declare bankruptcy at the opportune moment to preserve cash flow is a wisely managed entity in the eyes of financial analysts everywhere, but a homeowner who does the same is labeled a cheat. The ability to strategically default with impunity is unique to businesses since the concept of morality in finance varies depending on whether it’s businesses or individuals involved.

The double standard is nutty.

Political rhetoric aside, the decision to strategically default is not a moral decision. Every trust deed contains a contract provision requiring the lender to take the home on any default. Homeowners are not committing a crime (or even a theological no-no) by exercising their right to default, but merely making a wise financial decision in light of current economic conditions. Declaring bankruptcy is very commonly used in the business world as a sort of restart button; a chance to pare down debt before it gets out of hand. American Airlines recently declared bankruptcy, but not as a last ditch effort to salvage the company. They made a tactical decision to cut their losses, shed some debt, get competitive standing and preserve their earnings — and investors rewarded them for it.

Underwater homeowners can do the same, but most don’t because of the perceived social and seemingly moral consequences. Though businesses are commended for a strategic bankruptcy to avoid going under, homeowners who owe more than their homes are worth are warned not to employ the same wisdom for fear of public ridicule and a scarlet letter from their lender.

What’s ironic is organizations (and Banks) that criticize the strategic default have chosen to strategically shed their black-hole assets themselves.

(Excerpts taken from: first tuesday.)

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.

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.

“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.

 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.

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…

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.

“Six new Bank of America (BofA) mortgage help centers will be opened in Los Angeles, San Diego, Riverside/San Bernardino, Antelope Valley, Modesto and Bakersfield by early summer. These new mortgage help centers will provide homeowners in danger of foreclosure on a BofA loan the ability to discuss their individual loan situations with BofA staff in hopes of obtaining the near-mythical permanent loan modification.

This newly-announced move comes in response to a scathing critique (full of bark, but oddly bite-less) of the Big Banks’ loose lending and servicing procedures which precipitated the Great Recession.

The housing counselors staffing these new mortgage help centers will be comprised largely of existing BofA employees the Big Bank is looking to redistribute during the current slowdown in loan originations.

But will these six new mortgage help centers actually help? The critics are skeptical. Like many Americans, the pundits have taken a “we’ll-believe-it-when-we-see-it” attitude to the multitude of reform promises made by the Big Banks. These centers, after all, aren’t changing BofA’s modus operandi; they merely provide friendlier faces for their refusals.

first tuesday Take: Count us as one of the critics, but don’t believe the modifications will somehow magically flow forth. Viewed in the best light, BofA is 1) providing its homeowners with a more reliable way of reaching someone who will deny their loan modification requests, and 2) giving its under-employed employees something to do. But we are talking about a bank here, so the likelihood that this move will live up to the best possible interpretation is pretty darned miniscule.

It’s been clear for awhile that marking all these loans to market will hugely undermine (and that’s a nice way of saying “topple”) BofA’s claim to solvency. And even if you believe BofA cares for its customers, it doesn’t care enough for them to go out of business. [For more on mark-to-market vs. mark-to-management accounting, see the October 2010 first tuesday article, Deflation’s push on the real estate recovery.]

So, we’ll say this for BofA: they can be congratulated on their ability to get press coverage on their staffing acuity while they avoid increasing the swollen ranks of California’s unemployed. But mortgage assistance? Don’t count on it.”

From first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516

The Ney Work Times reported on teh story May 5. Some of its commentary:

“Just over two million homes are in foreclosure nationwide, according to LPS Mortgage Monitor, and another two million borrowers are severely delinquent.

Additional centers may open later this year, the bank said. Counselors fluent in languages including Spanish, Korean, Vietnamese and Russian will be available for non-English speaking customers.

‘There are some people that prefer a face-to-face experience,’ said Rebecca Mairone, national mortgage outreach executive for Bank of America. ‘They prefer telling their story face to face or need additional information about documents or other counseling. We’re committed to helping distressed customers.’

Most of the counselors in the new centers will be transferred from other areas of the mortgage business, like sales and originations, which have slowed with the decline in mortgage demand.

Bank of America officials said their internal foreclosure procedures had changed in the wake of public criticism, and that the centers were being opened partly in response to customer feedback.”

“THERE ARE SOME PEOPLE THAT PREFER THE FACE TO FACE EXPERIENCE”?

“WE’RE COMMITTED TO HELPING DISTRESSED CUSTOMERS”

“MOST OF THE COUNSELORS WILL BE TRANSFERRED FROM OTHER AREAS OF THE MORTGAGE BUSINESS”

What a crock.

It would have been more honest to say: “We don’t want any more bad press so we’re not going to announce layoffs of our mortgage staff, and it’s better public relations to give our customers a face to face denial.”

Prices continued to drop in CA this year – with about an average 1-% year-to-year decline. More in some regions, it’s even worse.

Will ‘it’ ever end? Best to stop thinking that way. “It” is the new normal. Let’s all get used to it.

68,239 Notices of Default (NODs) were recorded in California in the first quarter of 2011, down from 81,054 in the first quarter of 2010. By percentage, the most notable drops in NODs took place in Imperial (-41%), Merced (-28%), San Benito (-28%), and Monterey (-27%) counties.

This is the lowest number of NODs issued in any quarter since the second quarter of 2007. NOD volume peaked in the first quarter of 2009 with 135,431 NODs recorded. 2010’s peak was the third quarter, with 83,261 NODs recorded.

Also in the first quarter of 2011, a total of 43,052 homes were foreclosed upon. This is up from the recent low of 35,431 in the fourth quarter of 2010, and slightly higher than the 42,857 homes forclosed on one year earlier.

Statewide, high-tier regions (zip codes with median home prices higher than $800,000) saw an 8% increase in foreclosures from the fourth quarter of 2010, and a 2% drop over the preceding year. Foreclosures in low-tier areas (zip codes with prices lower than $200,000) rose 23% from the fourth quarter of 2010, dropping 2% from one year earlier. Low-tier neighborhoods continue to see the highest concentration of both NODs and foreclosures.

The most recent data indicates that it takes an average of nine months to complete a trustee’s sale following the recording of the NOD. One year earlier, foreclosure proceedings generally elapsed over an average period of seven and a half months. MDA Dataquick, a real estate information service, sees the extended processing time as a product of legal complications and lender backlogs combined with the pursuit of loan modifications and short sales to circumvent foreclosure.

It is estimated that 24% of homes sold at trustee’s sales were bought by individuals other than the lender or government groups — almost unchanged from 25% last year, indicating that speculators are not yet gone from the real estate market.”

I’d bet that the drop in the overall number of foreclosures is becasuse the “sub-prime” folks are already far into the foreclosure system – thus new” foreclosures aren’t impacted by them. So where are the numbers coming from? STRATEGIC defaulters. That’s my bet. It’s the folks that have homes so far underwater that it makes no sense to continue to pay the mortgages – even if they can afford to do so. And many can. Many could have – but used up all their savings doing so. If only they had let it go to default sooner?

The mess continues.

Much of this article is reprinted from the first tuesday Journal Online — firsttuesdayjournal.com P.O. Box 20069, Riverside, CA 92516