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.

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…

Senator Dodd and Congressman Frank, the people who were key players in allowing the financial collapse, have brought us legislation to “fix the problem”.

 The Dodd-Frank Act is 2,314 pages of disjointed and wide spread enabling legislation that will impact all areas of the financial structure.  To see the briefest summary I have been able to locate, 16 pages, go to http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf.

Among other things the Act creates a new federal agency, the Consumer Financial Protection Bureau (CPF), funded by the Federal Reserve system.  The CPF, which comes into existence on July 21, 2011 unless delayed for up to one year, will have broad sweeping enforcement powers in all areas of consumer finance including home loans, car loans, student loans, payday loans, credit cards, all mortgage related businesses and credit reports. It will also oversee banks and credit unions with assets in excess of $10 billion.  And the CFP has the authority to write its own regulations and then enforce them.

It is the most far reaching intrusion of government into the financial lives of its citizens in the history of the world. Many of the regulations they will be charged with enforcing have not even been written or finalized yet so the true scope of the CPF is not known, and it comes into existence in a few days.

In the area of real estate CPF will take over the power of enforcing RESPA from HUD. To bring about this transfer HUD has withdrawn all previously issued informal opinion letters. If your business is pursuing a business model in reliance on an informal opinion letter from HUD that it does not violate their rules you will need to be looking at the rules from the new Bureau to see if you are still ok.

CPF will take over enforcement of MARS from the FTC.  The FTC had been working with NAR to fine tune the regulation to remove real estate brokers from most of the regulatory requirements.  In early May the FTC advised NAR that they will not be revising the rule as promised, presumably because the CPF will now be responsible for the rule.

Part of the Act creates the Qualified Residential Mortgage (QRM) standards which generally will require that all buyers put 20% or more down for a conventional loan and meet fairly conservative qualifying ratios. And the lender will need to insure that the borrower has the ability to repay the loan.  Will non-QRM loans be available?  Potentially.  But if the borrower gets a non-QRM loan and then runs into trouble making the payments the borrower will have the ability to prevent foreclosure at any time during the life of the loan by claiming that the lender had no reasonable belief that the borrower could repay the loan at the time it was made.  Do you think you will see many of those loans?

What risk does Dodd-Frank bring to a real estate professional?  Any violation of CFP regulations can result in a fine of $5,000 per day.  A reckless violation can result in a fine of $25,000 per day.  A knowing or willful violation can result in a flat fee fine of $1 million.

So why have you not heard more about this in the industry or in the media? As I mentioned earlier, the regulations to implement much of this are still under development. No one is sure yet what the rules will be in order to advise you accordingly. In the future you will need to be diligent in watching for any news about Dodd-Frank and determining how it may impact you personally or professionally.

Big words – pure Bullshit.

Here’s what one lawyer is peddeling in Southern Califirnia.

“Here is some info that we send out to brokers. Our fundamental principal under which we work is the “educated supposition” that a preponderance of real estate loans having been originated by the banking industry in the last several years were, at least in part, predatory in nature and fraught with myriad blatant illegalities, errors and omissions in their construction and execution. We find as well that many of the documents which purport to secure these alleged loans with ownership in your real estate, have been lost or destroyed in favor of creating the more convenient and legally protective electronic mortgage recording system (MERS): thereby rending certain of the documents largely unavailable and unenforceable under the law. Our primary contention is that a copy of a negotiable instrument is not a valid instrument. Irrespective of the production of such items as “Certified Copies” or “Affidavits of Lost Document”, a certified copy of a dollar-bill will obviously not buy you a dollar’s worth of anything: as well, an affidavit saying your dog ate your dollar-bill won’t buy anything either.
During the examination (forensic auditing) phase of your transaction, we generally discover that your “lender” never made you a “loan.” We find instead that your signature and averred obligation to pay was in fact sold for a large profit well before your “loan” documents were presented to you. We find that in fact no money was ever expended by your “lender” on your behalf: thereby inferring that your negotiable and highly valued signature did in effect retire your so-called mortgage obligation well before your payment-stream was established.

Since its inception, your alleged loan has most likely been sold and re-sold several times before it was purchase by a Wall Street stock brokerage and fractionalized to securitize international stock market purchases (mostly by foreign investors, who, at the time, had an exaggerated faith in the US tock and real estate market, but who long-since have accepted their losses). For the most part, these unfortunate folks have moved on and have no expectation of recompense of any kind. Ergo, one might ask: “So where does all the money go when I am evicted for non-payment and my bank sells the property for top dollar?” The answer lies with each party in the line succession: i.e., those who purchased, re-sold and fractionated your loan by including it in a multi-million (or billion) dollar bundle of other mortgages. Each party in the queue have long since been paid far more from their acquisition of your loan than they paid for it, and in effect will have lost virtually nothing as a result of a homeowner’s inability to pay.”

Ya just gotta wonder where teh State Bar is in shutting these types down. They are as bad as the banks that started this in the first place.

This article analyzes the unspoken stifling effect the due-on-sale clause has on the California real estate market. It was published by firsttuesday online – and is one of the best, plain language, explanations of the due-on-sale clause I’ve seen in a long time. first tuesday posits that the due-on-sale restrictions hampers California’s real estate recovery. It may well be right. Read on!

A provisional wall limits sales volume in California.

Consider the California real estate market of the future: the year is 2016, and the real estate recovery is finally picking up appreciable speed. Real estate sales volume and prices are on a stable rise as Generation Y (Gen-Y) enters the California housing market, buoyed by plentiful well-paying job opportunities. Enter our first-time homebuyer, a member of Gen Y lured by reports of the ripe housing market and looking to move out of his rented housing and become a homeowner in the community.

With the help of a real estate broker, the homebuyer begins his search for a suitable single family residence (SFR) to purchase. While the homebuyer searches, the burgeoning housing boom is spurring on the economy, but inflation hovers above the Federal Reserve’s (the Fed’s) 2% target. Thus prompted, the Fed raises short-term interest rates to slow the accelerating pace of the economy and correct for the artificially low interest rates it injected to stimulate growth following the Great Recession. [For more information about Gen Y’s involvement in the real estate recovery, see the October 2010 first tuesday article, The demographics forging California’s real estate market: a study of forthcoming trends and opportunities, Parts I and II.]

An SFR suitable for the homebuyer is finally located and a purchase agreement is entered into with the seller, contingent on the homebuyer obtaining financing to fund and close the transaction. The homebuyer’s broker advises him to shop two or more competitive lenders for a mortgage, and gives the homebuyer a checklist of questions to ask to get the information he needs to make an informed decision about the type of loan to apply for. As advised, the homebuyer visits several lenders, armed with the broker’s checklist. [For more the list of questions a homebuyer shopping for a mortgage needs to ask lenders, see the June 2010 first tuesday article, A borrower’s mortgage worksheet: who has the most advantageous financing?]

What the homebuyer finds when he goes shopping for a mortgage is that lenders have, in response to rising inflation and the Fed’s actions, raised the long-term interest rates and the miscellaneous fees they charge on fixed-rate mortgages (FRMs). Higher interest rates alone mean the homebuyer cannot borrow as much money as he was able to just a few months earlier.

During his lender consultations, the homebuyer is told he no longer qualifies for the amount of financing he needs to close escrow at the price and the down payment he agreed to pay since FRM interest rates are higher — a common scenario in a rising interest rate environment.

ft. Note — Initially, rising mortgage rates tend to reduce the volume of home sales, but eventually, they drive down prices so buyers can again buy. As a result of lower prices, the volume of sales picks up. [For more information about the interplay between interest rates, seller pricing and the amount of financing a homebuyer is able to qualify for, see the February 2011 first tuesday Market Chart, Buyer purchasing power.]

The lender representatives do, however, tell him they can lend the amount of funds he needs and do so at lower interest rates if he chooses to go with an adjustable rate mortgage (ARM). The homebuyer, eager to purchase, discusses the use of a non-conventional loan (i.e., the ARM) with his broker.

The broker goes over the financial risks involved in financing real estate ownership with a short-term interest rate provided by an ARM. Together, they weigh these risks against the ARM benefit of borrowing more money than permitted by the financing fundamentals of a long-term FRM. [For more information about what the ratio of ARMs to total mortgage originations means for the real estate recovery, see the February 2011 first tuesday article, The ARMs threat: monitoring a sustainable recovery.]

As an alternative method for financing the purchase price to be paid for the property, the broker suggests they negotiate with the seller to either:

■ cash out the seller’s equity in the property and agree to take over the payments on the seller’s existing mortgage since it has a lower interest rate than can be found in the current market, an arrangement called an assumption; or
■ arrange for the seller to carry back a note and trust deed for a portion of his equity and assume the existing loan to finance payment of the price.
The homebuyer concurs, and the broker contacts the seller about the homebuyer taking over the existing mortgage on the property. The seller agrees, and will also carry back a note for part of his equity. The purchase agreement is modified to state the homebuyer is to take title to the property subject to the existing FRM loan, conditioned on the lender’s consent to the seller’s carryback arrangement, the buyer’s assumption of the loan without modification and an assumption fee not to exceed one-half point.

Together, the payments under the assumed loan (with its lower-than-current market interest rate) and the carryback financing arrangement with the seller amount to 31% of the homebuyer’s income — the typical allowable debt-to-income (DTI) ratio on a conventional FRM. [See first tuesday Form 150 §5 and 6; for more information on the debt-to-income ratio, see the February 2011 first tuesday Market Chart, Buyer purchasing power.]

The lender, upon receiving a request for a beneficiary statement and consent to the sale, informs the seller that the seller’s trust deed contains a due-on sale clause, allowing the lender to call the loan due upon the sale of the property to the homebuyer.

The lender also informs escrow (and thus the homebuyer and the seller) it will consent to the sale and proceed without calling the loan if the terms of the loan are recast to current market interest rates — interest rates under which the homebuyer cannot qualify, except by use of the perfidious ARM. And, yes, the extraction of an assumption fee of 1.5 points.

Ultimately, the sale falls through since the homebuyer is unable to arrange any suitable financing for the purchase of the home at the price demanded by the seller. To sell the property he no longer wishes to own, the seller must either drop his price, hold out for someone who will use an ARM or withdraw the property from the market since his lender will not permit a sale subject to the existing mortgage financing encumbrancing the property since it has a due-on-sale clause in its trust deed.

On a large scale, repeated thousands of times over in the real estate market, the lenders’ Congressionally-approved use of due-on-sale clauses shifts wealth from sellers to lenders. This quickly undermines the recovery’s vigor, wasting years of recuperative effort and financial stimulus on the part of the government. The inhibited sales volume comes at a great expense to the economy, the government and the people desiring to sell and buy using the mortgage financing already in place on the property (by taking advantage of the existing lower mortgage interest rates and no loan fees/charges).

The lenders’ Congressionally-approved use of due-on-sale clauses shifts wealth from sellers to lenders.On a more prosaic level, brokers and agents interested in seeing the recovery of their real estate practices under the new real estate paradigm must take steps to protect their clients, and their brokerage businesses, from the stifled sales volume caused by the due-on-sale clause. This profitable interference was engineered by mortgage lenders and has been permitted by Congress since 1982. [For more information about California’s new real estate paradigm, see the May 2010 first tuesday article, Looking through the window towards recovery: a real estate paradigm shift — Parts I and II.]

The due-on-sale clause comes due

Prior to 1982, under California law and our state’s Supreme Court ruling in Wellenkamp v. Bank of America, homebuyers and sellers had protection from lender interference. Wellenkamp barred lenders from exacting additional interest earnings and profits when prospective homebuyers enter into any type of real estate transaction, be it a cash-to-loan (CTL) sale, seller financing arrangement, a subject-to transfer (the Wellenkamp assumption) or a formal assumption agreement with the lender — no loan modification allowed. Wellenkamp prohibited any lender interference with a sale, except when it was reasonably necessary to protect the lender’s security interest in the transferred real estate from impairment — the failed credit situation of the insolvent arsonist homebuyer. [Wellenkamp v. Bank of America (1978) 21 C3d 943]

However, in 1982, Wellenkamp was superseded by new federal law. The due-on-sale codes and regulations were crafted and government-stamped under the Garn-St.Germain Federal Depository Institutions Act of 1982 (Garn) to give the then-failing savings-and-loans (S&L) outfits the ability to exact extra earnings from borrowers for simply clearing the homebuyer’s credit in assumptions. S&Ls were now able to charge points and fees, adjust interest rates to current market (always upwards) to increase lender income and remain solvent as though a new loan origination took place. All this was an attempt to supplement the shrinking profits of these mortgage lenders by allowing them to take a share of the monies a buyer was willing to pay a seller for a property — money the seller had been entitled to receive.

At the time, Garn was the financial equivalent of using a bucket to bail out a sinking cruise ship: the S&Ls eventually failed en masse despite the government-sanctioned windfall they received from sellers (and buyers) via new rates and fees on either assumptions or new loans (plus the now-restricted prepayment penalties). Yet, the due-on-sale clause remained after the closing down of the S&L mortgage financing and banking structure in the late ‘80s. The few S&Ls which did not fail simply became Federal Deposit Insurance Corporation (FDIC) banks (which are now failing) to avoid restrictions placed on S&L conduct.

In the thirty years since Garn, the government has had no measurable basis for taking the due-on-sale clause exactions away from lenders; interest rates were already dropping by the time Garn was passed, and they have been decreasing ever since. Lenders have had little reason to call a loan due on an unconsented-to transfer when interest rates are lower in the market than they are on the mortgage paper taken over by the homebuyer. If a lender called a loan, it could not re-lend the pre-paid funds and obtain a great yield. This is about to change, dear reader.

With no impetus to change, Congress has simply let the due-on-sale clause lay coiled like a somnolent rattlesnake, dormant but ready to strike at the slightest provocation — such as a rise in interest rates triggered by a battle against inflations led by the Fed and driven by the bond market. This clash will occur sometime later this decade during the recovery, just as brokers and agents least need it.

Just how economically damaging can one clause be?

California’s real estate market is in recovery, currently bumping along on the recovery plateau. Its frequent small steps forward (and occasional small steps back) show not only the recovery’s resilience, but also its sensitivity to economic shocks. When jobs return to the state, as they will in sufficient annual numbers beginning in 2013, the newly-employed potential homebuyers will be called upon to take up the mantle of homeownership. This will jump-start the next virtuous cycle of real estate sales (and at some point, prices). But their numbers and enthusiasm will not be enough to mitigate the negative effects of the due-on-sale clause on sales volume when we find ourselves in a rising FRM interest rate environment with prices accelerating. [For more information about the shape of California’s recovery, see the November 2009 first tuesday article, Divining the future: the letters game.]

Firstly, the due-on-sale clause guarantees homebuyers who enter the market during a period of rising mortgage rates that they will be unable to negotiate deals with amenable sellers for seller financing or assumptions without having lenders off a piece of the action through new loan fees, increased interest rates or prepayment penalties. Since the investors who actually own the mortgage-backed bonds (MBBs) only collect the interest income on the mortgages they own, anything exacted above the interest income (namely, the extra fees granted lenders by the due-on-sale clause) are profit collected solely by the servicer-lender — for doing a negligible amount of paperwork beyond getting the buyer’s credit score.

By limiting homebuyers’ options in a rising interest rate environment — replete with ARMs and loan takeovers — the due-on-sale clause directly tampers with the pace of the real estate market. Homeowners who cannot quickly sell and move to new job opportunities (or simply retire and relocate) will be unable to buy, reducing home sales volume.

Alternatively, emotionally-charged homebuyers who cannot afford the higher FRM interest rates and who are not permitted to take title subject-to the existing mortgage will run straight into the ARMs of lenders, trapping themselves in volatile financing arrangements too quickly leading to financial ruin. Sellers will be hit with prepayment penalties. We need look no further than the current economy to witness the chaotic negative equity disaster precipitated solely by the excessive use of ARMs during the Millennium Boom. [For more information on carryback financing arrangements, see the February 2011 first tuesday article, Carryback arrangements facilitate a sale, Parts I and II; see first tuesday Form 410]

The impact of the due-on-sale clause resulting from increasing FRM interest rates is only part of the resale and purchase picture. Sellers, restricted by the due-on-sale clause from structuring deals to more effectively find willing homebuyers, will be forced to either lower their sales price to allow the homebuyer to qualify to finance their purchase of the property under rising interest rates, or hold out for that unqualified homebuyer who is either ill-informed or foolhardy enough to take out an ARM. This lowering of the price, while it may mimic the rational seller’s propensity to price his property to sell, is as disruptive to the market as an overinflated price and for the same reason: it is not the result of the property’s fundamentals or the unavailability of Congressionally-disapproved financing arrangement.

Rather, it is a function of lender dominance (and thus, intuitively, interference with the sale). If the seller and homebuyer will not pay fees and increased interest rates to the lender to grease the wheels for the assumption of an existing mortgage, the lender will simply threaten to call the loan and put fetters on the transaction. Or, the lender may “graciously” accept additional fees and increased interest income under a modification agreement, which basically represents the costs and rates to originate a new loan. Due to its delivery of “double-ended” profits, the due-on-sale clause is an effective deterrent to the seller’s use of the property’s existing 30-year mortgage to effectively sell the property during the loan’s 30-year term.

Sellers looking to relocate to greener pastures in search of employment opportunities which match their skills will find their inability to offer flexible seller financing arrangements or CTL arrangements (as suppressed by the due-on-sale clause) a hindrance to their re-entry into the job market where jobs are available. For the new generation of homebuyers who will, in large part, prefer to live where they work, the barriers introduced by the lender’s due-on-sale clause throw up an unwelcome systemic mismatch of homebuyers to sellers whose property is already financed, and by extension, employees to employers. This continues in a vicious cycle of failed opportunities, all due to the presence of due-on-sale clauses in existing mortgages during periods of rising interest rates. [For more information about the changing housing tastes and increasing urbanization of homebuyers, see the February 2011 first tuesday article, The generations have spoken, who will listen?]

On behalf of California’s real estate users

The due-on-sale clause is one of many of the inconsistent federal government’s policies which lead back to now-weakened, but still-powerful anti-consumer lobbies. Federal housing and lending policy favors lender interests while peddling the illusion of helping the common man fulfill the “American Dream” with feel-good placebo programs (one of which is the tragically ineffective Home Affordable Modification Program (HAMP)).

Editor’s note — The federal government’s lender bias can be seen at the core of its housing policy. The federal government pushes homeownership as a sort of social stabilizer (which it may not be), but finds no irony in counting people who overreach to finance their home purchases with ARMs as part of that “stable” society. The federal government also continues to allow people to write off their mortgage interest as a tax deduction – but if the tax deduction were meant to stimulate homeownership, one wonders why the write-off is based solely on indebtedness, not homeownership… [For more information about the proposed restructuring of the homeownership tax subsidies, see the March 2011 first tuesday article, The home mortgage tax deduction: inducing debt and stifling mobility.]

Fortunately for the homebuyers, sellers, brokers and agents of this state, for decades California’s legislative and judicial history has championed the right of California property owners and the real estate market to freely sell, encumber or transfer real estate, also known as the right of alienation. This California real estate history provides precedence for lender noninterference. Under California law, limited use of the due-on-sale clause allows automatic assumptions, giving brokers the ability to structure competitive seller financing and CTL transactions once again. Equally important, the need for ARM financing as a bridge for funding sales during recessions and periods of rising interest rates, with the accompanying tight money conditions, would disappear and sales volume would remain stable.

While time still remains in this recovery period to shape the future of the recovery ahead, brokers and agents must push for change lest they let this crisis go to waste. State legislators must, on behalf California property owners and the California economy, put pressure on the federal government to change the lender double-dipping allowed under the due-on-sale clause with a state resolution, signed by the governor, kindly requesting that Congress repeal federal due-on-sale legislation. Garn, and all the backhanding regulations issued in its name allowing continuous lender interference, must be reversed.

While time still remains in this recovery period to shape the future of the recovery ahead, brokers and agents must push for change lest they let this crisis go to waste.The recent establishment of the first-ever Consumer Financial Protection Bureau to be created by Congress, in face of massive lender resistance, indicates an important shift in the nation’s overall economic mindset. Instead of turning a blind eye to profligate lender abuses implemented by 30 years of deregulation, the government has finally taken steps to again, as in the 1930s, hold lenders accountable for their policies and actions. Congress has gone even so far as to tell lenders what they cannot do so societal institutions, and the nation’s economic welfare, are not placed in jeopardy again as in our recent past. Even so, it will be an uphill battle for Congress to pry from lenders what they have come to believe is their right to exact additional fees and earnings on someone else’s unrelated property transaction.

While the recovery is still nascent and homebuyers can still be protected from the effects of the due-on-sale clause, and while the market is still relatively free of the rising mortgage rates and the taint of widespread ARMs financing, brokers and agents have a window of opportunity to do something. They can write their state and congressional representatives and voice their concerns on behalf of their sellers, buyers and themselves. In leading the charge to protect their livelihoods against the improper restraint on sales posed by the present authorized lender use of the due-on-sale clause to exact further profits on an owner’s use of his property (by selling, leasing or further encumbrancing), real estate licensees will begin paving the way for a stronger, more successful and long-lived real estate recovery.

The FBI has launched a massive foreclosure fraud campaign in northern California arresting dozens.  Plea bargains and guilty plead abound.

Here’s a report from the SF Chronicle.

http://www.sfgate.com/cgi-bin/article/article?f=/c/a/2011/02/04/MN3F1HIV4H.DTL#license-/c/a/2011/02/04/MN3F1HIV4H.DTL

What is is all about?

Greed.

The “professional bidders” get together, and agree among themselves as to who will bid on any particular property.  Then, later, they get together againand hold a second sale – among themselves.  No public bidding. 

Ouchie.

The Federal Trade Commission has banned eight mortgage relief and foreclosure prevention marketers from plying their trade and fined them over $23 million for deceptive advertising. The eight individuals involved in three companies – two of them in California — have also been ordered to return over $30 million in fees to fleeced consumers.

The California firms included:

Federal Loan Modification Law Center run by Steven Oscherowitz, which marketed a “federal loan modification program” that charged an upfront fee of $3,000 and promised mortgage mods to distressed homeowners. The settlement order includes a $11.5 million judgment against Oscherowitz, and the FTC continues to pursue five other individuals in connection with this scam.

DirectLender.com aka Loss Mitigation Services, which charged an upfront fee of $5,500 and promised loan modifications. The firm and individuals Dean Shafer, Marion Anthony “Tony” Perry and Bernadette Perry also misrepresented themselves as agents of the consumer’s lending institution. The settlement order imposed a fine of $6.2 million.

A New Jersey company – Hope Now Modifications – and brothers Salvatore and Nicholas Puglia were fined $5.3 million for claims they could provide mortgage modifications and for misrepresenting themselves as affiliated with a free federal homeowner assistance program, the Hope Now Alliance.

To date, the FTC has brought 29 cases against marketers who have falsely promised foreclosure prevention and mortgage modification services.

Attorney General Eric Holder, FBI Director Robert Mueller and HUD Inspector General Kenneth Donohue held a news conference on June 17 to announce that the agencies’ three-month “Operation Stolen Dreams” sting has already netted 485 arrests for mortgage fraud nationwide.

They also said that mortgage fraud has resulted in losses of about $2.3 billion to date. More arrests are expected as the FBI pursues more than 3,000 mortgage fraud claims.

According to the FBI’s Mortgage Fraud Report, the most prevalent schemes include:

Loan Origination Schemes

Loan origination fraud schemes involve falsifying a borrower’s financial information—such as income, assets, liabilities, employment, rent, and occupancy status—to qualify the buyer, who otherwise would be ineligible, for a mortgage loan. This is done by supplying fictitious bank statements, W-2 forms, and tax return documents to the borrower’s favor. Perpetrators also employ the use of stolen identities. Specific schemes used to falsify information include asset rental, backwards application, and credit enhancement schemes.

Foreclosure Rescue Schemes—The Use of Bankruptcy Petitions

The use of bankruptcy petitions to stall the foreclosure process continues to be a prevalent threat to delinquent homeowners looking for assistance.⁴⁷ Mortgage fraud perpetrators are exploiting the U.S. bankruptcy system by filing fraudulent bankruptcy petitions to delay the foreclosure process and extract the maximum profit from victims during the commission of advance fee, fractional transfer, and sale-leaseback-repurchase foreclosure rescue schemes. This type of fraudulent activity is increasing as perpetrators seize opportunities created by the current housing crisis and the more than 2.1 million properties in foreclosure.

Flopping, Short Sales, and Broker Price Opinions

Perpetrators are conducting short sale property flipping schemes using distressed properties of homeowners who are unemployed or facing foreclosure. The perpetrators collude with appraisers or real estate agents to undervalue the property using an appraisal or a broker price opinion to further manipulate the price down (the flop) to increase their profit margin when they later flip the property.⁶⁸ They negotiate a short sale with the bank or lender, purchase the property at the reduced price and flip it to a pre-selected buyer at a much higher price.

Commercial Real Estate Loan Fraud

Open sources and FBI analysis indicate that the $6.4 trillion commercial real estate (CRE) market is experiencing a high incidence of loan origination fraud similar to that seen during the last few years in the residential real estate market. Perpetrators, including loan officers, real estate developers, appraisers, and apartment management companies, are increasingly submitting fraudulent documents that misrepresent their assets and property values to qualify for loans to buy or retain property. When the loans are funded, the perpetrators often cease payment of their mortgages, resulting in foreclosure. According to open-source reporting, CRE loans are expected to produce more than $100 billion in losses by the end of 2010.

Preliminary analysis indicates that the commercial markets exhibiting the most significant signs of distress are in areas where there is also a significant mortgage fraud problem. These areas include the New York metropolitan area, Miami, Los Angeles and Orange County, Chicago, Boston, Dallas, Fort Worth, Houston, the District of Columbia, Atlanta, and Baltimore.