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 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.

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.

Desperate Times, Lead People to Desperate Measures. Or so it seems. In the last few weeks, we’ve been contacted by three different brokerages who have been the subject of lawsuits against them because of – embezzlement. Embezzlement by agents working for the brokerages – taking client’s money! One case involved property management trust accounts, the other two arose from agents “borrowing” money from their clients for “real estate deals” the agent was going to invest in for the client.

The brokers knew nothing about it. In any of the cases.

With so much turmoil in the market, with so much revenue loss impacting so many agents – will we see more of this? I’d bet so.

Arbitration is arbitrary.

Originally conceived as an instrument of community empowerment, arbitration quickly degenerated into a travesty of the American judicial system.

The framers of arbitration were the progenitors of the modern legal apparatus — lawyers, judges and politicians who restructured the fundamental concepts of the judiciary and placed the power of adjudication into the hands of every citizen who desired to contract for an alternative to litigation. Thus, arbitration promises the justice provided by the American legal system but is all too often a risky and uncertain venture — a crapshoot.

Although arbitration in America originated in the colonies as the preferred form of non-legal dispute resolution, arbitration as we know it today is an effort to circumvent jury awards by the dominant organized trade groups and corporate enterprises, which began during the industrial revolution and reached near ubiquity in the late 1970s. Today, arbitration is losing favor among the rank and file of the California real estate trade union, and for good reason.

The concept of alternative dispute resolution (ADR) arose due to society’s general dissatisfaction with the complex and often costly judicial system. If parties agreed to arbitrate their disputes, they avoided court entirely by giving a “neutral” third party the authority to make a final and binding decision for them.

However, it quickly became evident that the absence of judicial accountability in an arbitrator’s decision was not worth the binding arbitration bargain they contracted for when arbitrators misinterpreted the law or gave erroneous awards — leaving disputants with an unpredictable and arbitrary decision with no chance of remedy.

Discretion outside the law.

One of the primary avenues for introducing arbitration into the mainstream real estate market was the widespread use and acceptance of ADR imposed on members of the predominant California real estate trade union. Arbitration became their favored method of ADR in real estate transaction disputes as it provided trade union members recourse for resolving disputes among themselves without the need to squander their resources on costly litigation.

More importantly, the advent of arbitration allowed trade union leaders to maintain control over their constituents by requiring all disputes be settled internally without the influence and involvement of state or federal governments, and outside the influence of the law. [The People v. National Association of Realtors (1984) 155 CA4th 578]

Thus, members of the trade union are required to settle disputes amongst each other via arbitration. Since what’s good for the goose is good for the gander, arbitration has also crept into the real estate forms published by the trade unions and now the unlicensed, ordinary citizens looking to buy or sell real estate have become subsumed into the arbitration machinery.

Editor’s note — As a matter of policy, first tuesday’s [and HANSON LAW FIRM'S] purchase agreements and addenda have never contained an arbitration provision or an attorney fee provision in an effort to reduce the risk of litigation to brokers and agents by making litigation less economically feasible for sellers and buyers along with their attorneys, and to better protect buyers and sellers from the perils of arbitration.
The real estate market has since been flooded with agents and brokers trained to reassure their buyers and sellers that initialing the arbitration provision is a “standard” practice, a custom that bears multiple benefits with no risks — that is, if any guidance is given at all. [For more information regarding erroneous real estate customs, see the November 2010 first tuesday article, Holmes v. Summer: dilatory disclosures and the damage done.]

Most homebuyers (and misguided real estate agents) know little about arbitration beyond its guise of being less costly and more efficient than litigation. Arbitration has become one of the sacred cows of real estate transactions. The myth of arbitration’s benefits has become so ingrained that it is no longer questioned — buyers and sellers do not know enough to inquire and agents are not equipped with sufficient knowledge and awareness by their brokers to advise. Thus, the virtuous view of arbitration is passed down as tradition, while widespread ignorance of its risks persists among agents.

What follows is a rigorous review and analysis of recent case decisions and common scenarios in real estate transactions that bear out the full extent of the inherently flawed and ultimately irredeemable approach to arbitration as an appropriate method of dispute resolution.

Lost right to correct a decision gone awry

The chief flaw of arbitration lies in the loss of the disputants’ right to judicial review. Parties involved in arbitration often enter this action with hopes for all the benefits offered by the American justice system and none of the costs. Rather, these naïve disputants all too often invest as much time and money as they would have in litigation, only to be scorned by a misinterpretation of the law or a host of other fatal flaws.

The chief flaw of arbitration lies in the loss of the disputants’ right to judicial review.Consider a seller who enters into a listing agreement with a real estate broker, negotiated by the broker’s listing agent. The listing agreement contains a provision calling for disputes to be submitted to binding arbitration — no judicial oversight permitted.

A buyer is located and a purchase agreement offer is submitted by another agent employed by the same broker, called a selling agent. Both the agents and the broker are aware the buyer is financially unstable and may encounter difficulties closing the transaction.

However, confirmation of the buyer’s creditworthiness and net worth are not made the subject of a contingency provision by the selling agent who prepared his buyer’s offer. More importantly, the listing agent does not include a further approval contingency provision in a counteroffer. The clearing of such a contingency would have put the seller on notice that the buyer’s financial status needed his further approval (or cancellation of the purchase agreement), if the buyer’s creditworthiness proved unsatisfactory.

When the listing agent, acting alone, submits the buyer’s offer to the seller, the buyer’s financial status is not discussed even though the listing agent was duty-bound to the seller to disclose it. The supervising broker fails to catch or correct the oversight. The seller accepts the purchase agreement offer.

Later, the buyer fails to close the transaction due to his disabling financial condition, resulting in the seller losing money on a resale. The seller discovers that the listing agent, broker and selling agent all knew of the buyer’s financial condition and failed to advise him of this fact.

The seller makes a demand on the broker and both agents for his losses resulting from the failed transaction. The seller claims the buyer’s financial condition interfered with the buyer’s ability to perform and thus was a material fact in the transaction known by the agents and broker who failed to disclose it at the time of acceptance.

The dispute is submitted to binding arbitration. The arbitrator awards money damages to the seller based on the professional misconduct of the listing agent and employing broker for failure to disclose their knowledge of the buyer’s unstable financial status on acceptance.

Further, the arbitrator erroneously issues the seller a money award against the selling agent, ruling the selling agent and the listing agent were “partners” since they shared in the fee the broker received on the transaction. Thus, the selling agent is improperly held liable as a partner of the listing agent for the seller’s money losses resulting from the misconduct of the listing agent and the broker.

The selling agent then seeks to vacate the portion of the arbitration award holding him liable as a “partner” of the listing agent, claiming the arbitrator incorrectly applied partnership law to a real estate agency and employment relationship.

Can the award against the selling agent be corrected by a court due to the arbitrator’s erroneous application of partnership and agency law?

No! An arbitrator’s award, based on an erroneous application of law, is not subject to judicial review. The requirement for judicial review of the arbitrator’s award was not included in the wording of the arbitration provision. The arbitrator acted within his powers granted by the arbitration provision, even though he applied the wrong law and produced an erroneous result.

A court of law confronted with a binding arbitration agreement without a provision for judicial review cannot review the arbitrator’s award for errors of fact or law even if the error is obvious to the court and causes substantial injustice when the court enters judgment for collection of the award. [Hall v. Superior Court (1993) 18 CA4th 427]

Unless the arbitration provision states an arbitration award is “subject to judicial review,” as in all fairness it must, the award resulting from arbitration brought under the clause is binding and final. Without judicial review of an award in an arbitration action, the parties cannot be assured the award will be either fair or correct. Currently, the prevailing arbitration provision used in purportedly “standard” purchase agreements has not yet evolved to include language allowing for judicial review.

Copyright © 2010 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.

The Federal Reserve Board has amended Regulation Z, which implements the Truth in Lending Act and Home Ownership Equity Protection Act, with new policies for how loan originators may be compensated.
Effective April 1, 2011, all loan originators will no longer be able to receive compensation based on the interest rate or other loan terms, but instead be compensated based on a percentage of the loan amount.
The final rules protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices.
The final rules, which apply to closed-end loans secured by a borrower’s home, will:
·Prohibit payments to the loan originator that are based on the loan’s interest rate or other terms. Compensation that is based on a fixed percentage of the loan amount is permitted;
·Prohibit a mortgage broker or loan officer from receiving payments directly from a consumer while also receiving compensation from the creditor or another person;
·Prohibit a mortgage broker or loan officer from “steering” a consumer to a lender offering less favorable terms in order to increase the broker’s or loan officer’s compensation; and
·Provide a safe harbor to facilitate compliance with the anti-steering rule.
This policy eliminates yield spread premium as of April 2011, and will be a very significant change to the lending business. There will be a drastic reduction in mortgage broker profitability unless they increase their loan origination fees to cover the change.

In a recent EZine, we wrote that it was our opinion that BPOs (Broker Price Opinions) should be disclosed.

What do you think?

AB 1046 – Effective January 1, 2010: Increase in Homestead Exemptions
Increase in Homestead Exemptions: Coming into effect on January 1, 2010, the homestead exemption protecting a homeowner’s equity from judgment creditors has been increased by $25,000 across the board to $75,000 for individuals, $100,000 for married couples or family units as specified, and $175,000 for persons over 65 years, disabled, or over 55 years with limited income as specified.

AB 1061 – Effective January 1, 2010: HOA Landscaping Restrictions Limited
Low Water-Using Plants: Renders unenforceable any HOA provision prohibiting landscaping with water-efficient plants in common interest developments.

AB 1094 – Effective January 1, 2010: Presumption re Records Ownership and Destruction
Disposal of Records: Provides shield from liability for businesses that dispose of abandoned records containing personal information by shredding or erasing, and gives a legal presumption that a tenant owns records remaining on the premises after tenancy termination.

SB 290 – Effective January 1, 2010: Sunset Removed for 60-Day Notice Law
60-Day Notice to Terminate Tenants Extended: Existing law generally requiring a 60-day notice to terminate a month-to-month residential tenant, which was originally slated to sunset on January 1, 2010, has been extended indefinitely. A 30-day notice to terminate is sufficient if the tenant has lived in the property for less than one year, or if the landlord has sold the property and certain requirements are met as specified in the CAR standard-form Notice of Termination of Tenancy (C.A.R. Form NTT). The 60-day notice requirement does not apply to fixed-term leases, such as a one-year lease. Other laws address tenants in properties foreclosed upon.

SB 804 – Effective January 1, 2010: Restrictions Prohibited on Broker Selection
Mobile home Parks: Prohibits management from requiring a homeowner to use a specific broker or dealer when replacing a mobile home or manufactured home on a space in a mobile home park.

SB 407 – Effective January 1, 2014 and Later: Plumbing Retrofit Requirements and Disclosures
Plumbing Fixtures: Provides new disclosure and other requirements for water-conserving plumbing fixtures effective on or after January 1, 2014.

1. On or after January 1, 2014 all building alterations to a single-family residence will require replacement of all non-compliant plumbing fixtures for the permit to be finalized. This may also apply to multi-family and commercial properties depending on the scope of the alterations.
2. On or before January 1, 2017 all non-compliant plumbing fixtures must be replaced in single-family residences.
3. On or after January 1, 2017 a seller shall disclose to any prospective purchaser the presence of any non-compliant fixtures.
4. On or before January 1, 2019 the requirements expand to all multi-family and commercial properties.
5. An owner will be exempt from compliance for one year after a demolition permit is issued.

You can continue to keep up to date on changing California real estate legislation and learn about ways to mitigate your risk as a practicing real estate broker by clicking here to sign up for your free trial of our Risk Management Program.

In 1998 Alanna Spencer, a first-time home buyer, bought a two-bedroom condominium in Hayward, California. Later, Spencer became delinquent on her mortgage payments to her lender. The lender recorded a notice of default to begin foreclosure proceedings in November 2002. Spencer filed a Chapter 13 Bankruptcy petition in January 2003. The automatic stay provided upon filing this bankruptcy halted the foreclosure proceedings.

One year into the bankruptcy, the lender on Spencer’s mortgage filed a motion with the bankruptcy court seeking relief from the automatic stay so that it could proceed with its foreclosure against Spencer. While this motion was pending, Spencer signed a contract to sell her home for $220,000, less than its appraised value of $290,000, to Ryan Marshall, a licensed real estate broker doing business in Alameda County, California. Spencer at the same time signed an agreement to lease her home back from Marshall and also signed an option agreement which allowed Spencer to repurchase her home from Marshall at a price of $260,000, within one year after the sale to Marshall.

The sale of the condominium by Spencer to Marshall was approved by the Chapter 13 Bankruptcy Trustee for Spencer’s bankruptcy, but was not submitted to the bankruptcy court itself for approval. This procedure for approval of the sale was set forth in the bankruptcy court’s order approving Spencer’s Chapter 13 plan, and was a common procedure in use in the U.S. Bankruptcy Court in Oakland, California at that time.

In September 2004 the escrow for the sale by Spencer closed, and the proceeds were used to pay off Spencer’s creditors in the Chapter 13. The Bankruptcy Court then issued an order discharging Spencer’s debts in the bankruptcy. Soon after the close of the sale, title to the property was transferred to a corporation partly owned by Marshall; this transfer of title was made without the consent of Spencer.

Spencer continued to reside in the condominium under the leaseback, but she was unable to repurchase the home from Marshall’s assignee by the deadline of September 2005. Upon the expiration of the one-year leaseback, Spencer was served with a 60-day notice to terminate her tenancy.

In December 2005 Spencer sued Marshall and related entities. Among other things, Spencer alleged that the terms of the contracts between Spencer and Marshall violated the terms of the Home Equity Sales Contract Act (HESCA).¹

HESCA seeks to regulate transactions between an equity purchaser and an equity seller resulting in the sale of residential real property in foreclosure. At the heart of the statutory scheme is the requirement that the agreement between buyer and seller be in writing, with specific terms aimed at protecting the homeowner.² The contract must include the total consideration given, terms of payment and terms of any rental agreement; a conspicuous statement of the right to cancel within five business days or until 8 a.m. on the day scheduled for foreclosure, with an attached notice of cancellation; and a conspicuous notice that until the right to cancel has ended, the equity purchaser cannot ask the seller to sign a deed or any other document.³ The equity purchaser must provide, and complete, the contract in conformity with these terms.⁴

During the “cooling off” period, the equity purchaser cannot take title to the property by written instrument; cannot transfer or encumber any interest in the property; or pay the seller any consideration.⁵ Moreover, the purchaser cannot make untrue or misleading statements about the value of the property, any foreclosure proceeds, or the terms of sale.⁶ Additionally, when the seller grants the residence by an instrument purporting to be an absolute conveyance such as a deed, but reserves or is given an option to repurchase the residence, the equity purchaser cannot grant any interest in the property to another without the written consent of the equity seller.⁷ Finally, it is unlawful to take unconscionable advantage of the property owner in foreclosure.⁸ Depending on the nature of the violation, the aggrieved seller may be entitled to rescission, other equitable relief or damages, including punitive damages.⁹

At the time of trial, it was found that Spencer’s home was in foreclosure at the time of the sale to Marshall; the foreclosure proceeding started by Spencer’s lender had been halted by the bankruptcy filing, but had not been finally terminated. There was also no dispute that the contract documents used by Marshall did not comply with the formal requirements of HESCA. It was also found that Marshall had improperly transferred the title to the property without Spencer’s consent (which was required because she held an option to repurchase. Marshall was found liable for damages of $280,000, including $210,000 in punitive damages, reduced by $27,300 for unpaid rent.

On appeal, Marshall contended that he was exempt from the requirements of HESCA, citing a provision that a purchaser is exempt from the requirements of HESCA when the purchaser acquires title “At any sale of property authorized by statute.”¹⁰ Marshall contended that a The 11 case reviewed is Spencer v. Marshall (2008) 168 Cal.App.4th 783. provision of the U.S. Bankruptcy Code which states that the bankruptcy trustee, after notice and a hearing, may sell property of the bankrupt’s estate (such as the condominium). Marshall contended that because the sale of the property was approved by Spencer’s bankruptcy trustee under the procedure established by the local rule in the Oakland bankruptcy court, this amounted to a sale “authorized by statute.

Marshall also contended that a second exemption in HESCA applied: that a purchaser who acquires title “by order or judgment of any court” is exempt.

The appeal court rejected these arguments, finding that Marshall did not purchase the property “at” a sale authorized by statute, such as a purchase of a property at a government sale for unpaid taxes, and that the first exception cited by Marshall therefore did not apply. The court also found that no court order or transfer ever directed that the sale to Marshall take place; that the only scrutiny of the sale was by the bankruptcy trustee, and not the court itself, and that the bankruptcy trustee had no interest in ensuring that the terms of the sale were fair to Spencer, but only the creditors in the bankruptcy were fairly treated.

The appeal court also found that HESCA was enacted to protect homeowners in foreclosure from fraud, deception and unfair dealing, and that the trial court had not been wrong in finding that Marshall had engaged in the type of abuse prohibited by HESCA. The trial court had found Spencer’s version of what happened more credible than Marshall’s rendition. Spencer stated that she saw Marshall’s offer as the only way she could remain in her home and testified that Marshall misled her into believing that, by selling the property to him and getting out of bankruptcy, she could afford, with his help in obtaining financing, to buy back her home within a year. The court concluded that Spencer was especially vulnerable to Marshall’s predatory tactics. The appeal court concluded that the record amply supported the trial court’s findings that Spencer was vulnerable and susceptible to Marshall’s promises that he could help her.

This case gives clear warning to all persons, including real estate brokers and agents, that in dealing with owners of residences that are in foreclosure, great care must be exercised to ensure that the requirements of HESCA are complied with in connection with any sale of the property by the homeowner. It is imperative that the documents used in any such sale be reviewed by someone with specific expertise in the area of home equity sales. It is also critical that the substantive terms of the transaction be fair to the home equity seller, and that the procedures outlined in the contract documents concerning options to repurchase be followed exactly, taking care that no transfer of title or encumbrance of the property takes place within the term of any option to repurchase held by the equity seller.11

1 California Civil Code §§1695 et seq.
2 California Civil Code §§1695.2, 1695.3, 1695.5
3 California Civil Code §§1695.3 – 1695.5
4 California Civil Code §§1695.6(a)
5 California Civil Code §§1695.6(b)
6 California Civil Code §§1695.6(d)
7 California Civil Code §§1695.6(e)
8 California Civil Code §§1695.13
9 California Civil Code §§1695.7, 1695.14
10 California Civil Code §§1695.1(a)(4)