In a bold attempt to further energize the economic recovery, the federal government through the SBA 504 Loan Program has modified its debt refinance program to help small businesses facing imposing balloon payments.

Imagine a scenario where you have a small business in a building you purchased in 2001 for $1 million, and for which you have a loan of $850,000.

The property has gone up in value, and is now worth $1.5 million. You have inventory of $100,000 that needs to be paid, and a new order that needs an additional $100,000 for inventory. You would love to tap into the equity in the building to pay off that old inventory, fund the new, and lower your interest rate on the original loan. Your commercial bank has told you that your credit is great, and your cash flow is good, but that it will only loan 65% of the market value of the property. That’s only $975,000. You need $1,050,000. What can you do?

You call a Certified Development Company (CDC) and apply for an SBA 504 loan. CDCs are conduits for commercial banks and their borrowers to access Small Business Administration-guaranteed financing.

Mark Stebbins and Fernando Alvarez of California’s CDC Small Business Finance commented on the recently revised SBA 504 Debt Refinance loan program. Regulations were made substantially less restrictive Oct. 12, 2011.

“We think there are many commercial property owners who can benefit from this program, who have been shut out of refinancing programs in the past,” Stebbins said.

The SBA rules previously required that borrower’s provide historical records showing that each and every refinance of their commercial property resulted in at least 85% of the proceeds going towards the acquisition and or improvement of the real estate. That restriction is gone, replaced by the requirement that only the original loan satisfied the requirement that 85% of the loan proceeds were used for the acquisition and or improvement of the real estate. In addition, if the original purpose in acquiring the real estate was for investment purposes, but now the property is at least 51% owner occupied, the refinance of the original and all subsequent debt would be eligible.

Another huge obstacle that has been removed is the requirement that the commercial bank no longer has to finance 50% of the property’s value. That’s huge. CDC Small Business Finance’s Fernando Alvarez explained: “Under the recently revised 504 debt refinance program, the commercial bank and the SBA lender can each loan the same amount, as long as that isn’t more than 90% of the property’s value.”

A 90% LTV (loan-to-value) is an advantage to a commercial property owner, in and of itself. But the critical point is that the commercial bank doesn’t have to loan the first 50% LTV anymore.

Imagine if the owner in the scenario above wanted to refinance a total debt of $1,050,000. Under the old rules, the SBA 504 loan required the bank to loan the first $750,000 (50% of the value of the property). The SBA could then loan the difference for an additional $300,000. The old rules did not allow for cash out to cover inventory or any other business purpose.

Under the new rules, the commercial bank can lend the same amount as the SBA, not the first 50% of LTV. That means the commercial bank loan would only have to be $525,000 instead of $750,000 thereby saving the business owner increased interest expense for the additional $225,000 . The interest savings is derived from the SBA taking an equal share of the loan at rates historically below current commercial rates.

In the last couple of years of very depressing economic news, the changes to the SBA 504 debt refinance program is certainly a breath of fresh air and a step in the right direction.

The Sacramento Bee recently reported that the “move-up” buyer (the one who has the starter home, and now, a growing family) has no way to sell the old house and move – anywhere.

A fascinating statistic was reported by the Bee:
“Andrew LePage is an analyst with DataQuick, a San Diego real estate information firm. He said the lack of move-up buyers can easily be detected by looking at what’s happened to sales of homes in the $250,000-to-$600,000 range.
In 2006-07, when the local market was near its peak, that segment accounted for 70 percent to 80 percent of all sales in the Sacramento region, according to DataQuick. These days, homes in that price range account for less than 19 percent.” ((Read more: http://www.sacbee.com/2011/08/29/3868485/generation-of-homeowners-stuck.html#ixzz1aPXy6jHp ))

80% down to 20%. That is where the market transaction counts are as well.

“Starter homes” are being bought up by savvy investors, who can rent them for more than the mortgage, because they can be bought cheap. But what about the “middle?”

Just like the middle class on every other front (loss in income levels, increased taxation, stagnant employment) the middle home-buyer-owner market is stuck in the mud.

… especially if you don’t know what you’re doing.

A recent article in the NY Times …

http://bucks.blogs.nytimes.com/2011/05/16/the-dangerous-allure-of-distressed-real-estate/?ref=business

… hit it right on the head. Which is where you and your clients can get hit if everyone isn’t REALLY careful.

It was fun reading. I’d recomend it.

The L.A. Times recently reported that the Fed is now looking to find ways to dispose of the 248,000 homes it owns (through bank REOs) by either selling them in bulk to investors who will be required to rent them, or to sell them on rent-to-own basis.

“One idea could be to create pools of foreclosed properties that would be sold in bulk to private investors, who would then rent them out, helping reduce taxpayer losses on the bailouts of Fannie and Freddie. Another idea could be for investors to buy homes and then rent them on a rent-to-own basis.”

http://latimesblogs.latimes.com/money_co/2011/08/foreclosure-obama-housing-market-rent-fannie-mae-freddie-mac.html

Who is kidding whom here? “Rent-to-Own”? What are we – a mattress store?

The Fed will give a new buyer a break by allowing them to rent, then buy at a price (presumably) fixed at the time they enter into this agreement (thus allowing the buyer to get some upside?) Or, is the program designed to let the Renter buy it at market value several years from now, if they qualify? (That way, the Fed gets the upside, and the rental value. It beats having an empty house…)

Why not just take the mark-down to market value today, and reform the existing loan – and allow the current owner to keep it?

Either way, there is going to be a loss.

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.

The Allen Matkins/UCLA Anderson Forecast states that real estate “investors” are optimistic and buying up “class A” properties at above market value. The Orange County Register wonders is this is the beginning of a new real estate “bubble.”

Only for bubble brains, I’d say.

At the conference of bankers (senior asset managers for three SF Bay Area Banks) I attended this morning, the story was very different.

No, they are not lending on commercial properties – unless those LTVs are in the mid-60′s and the DCRs are at or above 1.35. Hell, we’d all lend on those terms.

As for their forecast: a flat bottom for the next five years.

I’d bet on the bankers. This time.

Sellers (and listing brokers?) of residential real estate seem stuck in the ‘olden days’ of value. They are stuck with the old price. It’s the “sticky price” problem. They seem to ignore a reality: Value is based on CASH PRICING.

Yup. Those REO speculator investor buyers are setting the new market value of EVERYTHING.

And why not?

Isn’t “value” what a willing buyer will pay a willing seller – absent outside influences? And isn’t financing an outside influence? We only need to look at what the ability to get easy money (i.e. stated income loans with teaser initial rates and optional payment plans) did to values in the last 10 years. Now that governmental influence in lending money has reversed itself – making it feel nearly impossible to get a loan – even for a well qualified, fully documented loan applicant – prices are still ‘in the gutter.’ How come?

Because that’s where they belong.

Take a look at any chart that goes back, say 30 years. You can see the line of price increase is a relatively shallow one. If you take out the last 10 – 15 years, the place where today’s prices hits is just about in line with the historical norm. This ‘market adjustment’ has ben huge – no doubt about it. But is adjusted to where it ought to have been in the first place – absent government interference.

So, cash is king. It always has been. And a cash price value is THE value. That a borrower might be able to borrow dollars to buy at the cash price just gives that borrower leverage. What a nice thing. If you can get it.

Zillow Mortgage Market recently reported some alarming – but not surprising – news.

Buyers still don’t know how to do mortgage math.
More specifically:

■ 44% admitted they were not confident in their comprehension of the mortgage process;
■ 57% did not understand how adjustable rate mortgages (ARMs) work;
■ 34% were not aware loan terms vary from lender to lender, lender fees are negotiable and different lenders charge different fees for appraisals and credit reports;
■ 55% did not know mortgage rates are constantly fluctuating;
■ 45% believed they should always purchase mortgage discount points (prepaid interest) regardless of the length of time they intended to keep their home;
■ 37% were under the impression that pre-approval for a loan is synonymous with obtaining permanent financing; and
■ 42% believed Federal Housing Administration (FHA) loans are only available to first time homebuyers.

In a marketplace where (in California) it is possible (perhaps for the first time since, what, 1953?) to buy a single family home and rent it out with POSITIVE cash flow, investors and/or Joe and Martha Buyer still don’t grasp mortgage fundamentals.

So, brokers and agents should not despair. There is still a client base out there that NEEDS your help.

The New York Times recently reported that “high value” homes are going to lose government support in the secondary mortgage market – and that that loss will likely further deteriorate the real estate recovery. It was right.

“By summer’s end,” it reported “buyers and sellers in some of the country’s most upscale housing markets are slated to lose their biggest benefactor of the economic downturn: the deep pockets of the federal government. In [Monterrey, CA, a] seaside community of pricey homes, the dread of yet another housing shock is already spreading.

‘We’re looking at more price drops, more foreclosures,’ said Rick Del Pozzo, a loan broker. ‘This snowball that’s been rolling downhill is going to pick up some speed.’

For the past three years, federal agencies have backed new mortgages as large as $729,750 in desirable neighborhoods in high-cost states like California, New York, New Jersey, Connecticut and Massachusetts. Without the government covering the risk of default, many lenders would have refused to make the loans. With the economy in free fall, Congress broadened its traditionally generous support of housing to an unprecedented degree.

But Democrats and Republicans agree that the taxpayer should no longer be responsible for homes valued well above the national average and are about to turn a top slice of the housing market into a testing ground for whether the private mortgage market can once again go it alone. Michael Barr, a former assistant Treasury secretary, said the federal government’s retrenchment would be painful for many communities.

‘There’s always going to be a line, and for the person just over it, it’s always going to be an arbitrary line,’ said Barr, who teaches at the University of Michigan Law School. ‘But there is no entitlement to living in a home that costs $750,000.’

As the housing market braces for the trouble, homeowners everywhere have been reduced to hoping things will some day stop getting worse. In some areas, foreclosures are the only thing selling. New-home construction is nearly nonexistent. And CoreLogic, a data company, said Tuesday that house prices fell 7.5 percent over the past year. Each month, the number of faltering cities rises.

Federal agencies last year backed nine out of 10 new mortgages nationwide, and losses from soured loans are still mounting. Fannie Mae, which buys mortgages from lenders and packages them for investors, said last week that it needed an additional $6.2 billion in aid, bringing the cost of its rescue to nearly $100 billion.

Getting the government out of the mortgage business, however, is proving much more difficult than doling out new benefits. As regulators prepare to drop the level at which they will guarantee loans — here in Monterey County, the level will drop by a third, to $483,000 — buyers and sellers are wondering why they should be punished simply for living in an expensive region. Sellers worry that the pool of potential buyers will shrink. ‘I’m glad to see they’re trying to rein in Fannie Mae, but I think I’m being disproportionately penalized,’ said Rayn Random, who is trying to sell her house in the hills for $849,000 so she can move to Florida.

The National Association of Realtors is making an extension of the loan guarantees a top lobbying priority.

‘Reducing the limits will put more downward pressure on prices,’ said president Ron Phipps. ‘I just don’t think it makes a lot of sense.’ But he said that in contrast to last year, when a one-year extension of the higher limits sailed through Congress, ‘there’s more resistance.’
Federal regulators acknowledge that mortgages will get more expensive in upscale neighborhoods but say the effect of the smaller guarantees on the overall housing market will be muted.”

Really? No “entitlement” to live in an expensive house? Let Wall Street come up with a private secondary market for expensive (i.e. anything over $500,000?) homes? Who are they kidding? Especially in CA, CT, NT, VT.

This “sock it to the ‘rich’” business is a bunch of baloney.

Deeds of Trust on commercial real estate are often accompanied by personal guaranties – agreements between borrowers, or more likely the principals of the borrower-entity, and the lenders.

Much like the debt collectors seeking redress of sold out seconds in residential real estate, banks are going after guarantors. Aggressively. Frequently even before the banks go after the property itself! Yup, you read that right… BEFORE the banks go after the property.

Can they do that? You betcha.

The law that governs the relationships between banks, borrowers and guarantors is as complex as the bones in a human hand. And much of the time, hurts as much when smashed against aggressive debt collection efforts.

Borrowers who set up “single asset holding companies” to try to avoid personal recourse liability often give up that very protection when they sign guaranties. “Often” being the key word.

In a recent 2010 case, Bak of America v. Stonehaven Manor (( http://www.courtinfo.ca.gov/opinions/archive/C060089.PDF )), the 3rd District Court of Appeal noted that guarantors DO have the right to force banks to go after the real property first, then come after the guarantors for any deficiency – BUT that court also noted that guarantors can also waive that protection, as did the guarantors in the Stonehaven Manor case.

Can a guarantor insist upon the right to force the banks to seek the real property security first – sure they can. But they might not get the money In the first place if they do.

Remember, the Golden Rule is in play – always. He with the Gold, Makes the Rules.