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.

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.

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.”

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.

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.

A recent article (( http://firsttuesdayjournal.com/reo-resales-in-ca/ )) in first tuesday, a California real estate centric on-line magazine (with views that match mine – most of the time) predidcts REO sales to remain above thier historical 9% until 2017. I bet they are right.

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.

firsttuesday online reports that “40% of all California resale activity in the first quarter of 2011 can be attributed to real estate owned (REO) inventory — 3% lower than the same period in 2010. REO resales varied significantly from county to county, from rates as low as 12% in San Francisco County to as high as 61% in Stanislaus County.

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