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.

In a recent ‘first tuesday‘ article about the “American Dream” ft wrote: “California’s response to the relationship between homeownership and the health of a community differed from national results, which is not surprising since the state has been hit much worse by the housing crisis than the rest of the country. Seventy-seven percent of Californians report their homes have decreased in value (fact: all have decreased), compared to the 41% nationwide, and 40% say their homes are underwater, compared to the 18% nationwide.”

Only 77% think it true. I wonder where the 23% live that have not had a housing value decrease?

That thinking (the 23% that is) is more prevalent than you might guess. There are still sellers out there that have an over-inflated sense of their house’s value.

If you come across one of them – send that seller to a real estate agent down the street. Don’t waste your time. And since you only have so much time on this planet, make sure you spend it on clients that are ready to sell – and ready to buy. (The flip side of the unrealistic seller, is the buyer looking to pick up the bargain of the century – rather than just the bargain of the decade. Send that buyer down the street too.)

The Wall Street Journal recently reported that the oprices of houses are Up, and Down. Depending on where.

Seems like everyone jusst wants to ad their own shpin on a story that has no right, wrong, left or middle.

“With the National Association of Realtors reporting that home prices rose in about half of U.S. metropolitan areas in the last three months of 2010, it’s easy to think that that the housing market is showing some signs of recovery. “Home sales clearly recovered in the latter part of 2010,” Lawrence Yun, the NAR’s ever-optimistic economist says in a statement.

But the proverbial grain of salt is in order, given many other sources report prices continue falling. The Journal recently reported that home values declined in all of the 28 major metropolitan areas tracked during the fourth quarter when compared to a year earlier, and repeat-sales indexes such as the S&P/Case Shiller index have shown that prices declined in October and November.

The Realtors are looking at a different measure, median prices, which show that prices for home resales rose in about half of the nation’s 152 metro areas during the October-December quarter. Prices rose in 78 cities, fell in 71 and were unchanged in three. The group says the national median price for single-family homes was $170,600 in the fourth quarter of 2010, up 0.2% from $170,300 a year earlier.
The Washington, DC, area gained 8.1%. There were decliners: Portland, Ore., came in down 3.8% and Seattle dipped 3.9%.
Data from Zillow, however, show bigger declines in those three markets. Washington fell 5.8%, Portland declined 12.1% and Seattle tumbled 11.9%.

Why the difference? When comparing the fourth quarter of 2010 to the prior-year period, the Realtors use median price, the point where half of sales fall above and half fall below. Last year’s data still include buyers tapping a tax credit of up to $8,000. Many of those sales were first-time buyers, who typically buy lower-priced houses. The expired credit isn’t in this year’s numbers, so median prices in some markets could be higher from a year ago because the more higher-priced sales were added to the “mix” of sales.

Most industry watchers agree that the housing market must endure more pain before it can fully recover. Lending standards are tight, preventing would-be buyers from inking deals. The foreclosure crisis, meanwhile, continues with no end in sight. Many economists and housing analysts expect home prices to fall an additional 5% to 10% before prices hit the long-awaited bottom later this year or early next year.

By Alan Zibel, WSJ.com; Dawn Wotapka and Nick Timiraos contributed to this article.

According to Fair Issac Company (My FICO) a company that provides analytic, decision making, and credit scoring services for financial service companies a credit score will go down by 40 to 110 points after being 30 days late. Further, the scoring drop will increase to 70 to 135 points after 90 days late on a mortgage payment.

The average scoring drop in a short sale, foreclosure or deed in lieu is 85 to 160 points. You need to keep in mind that in both short sales and foreclosure it is possible that the credit score drop could be closer to 200-300 points.

Credit scoring factors vary from individual to individual. The scoring change is heavily dependent on where the credit score was before the negative event took place. Both a short sale and foreclosure are considered a loan that was not paid as agreed.

While there will always be opportunities for the knowledgeable and dilligent to make money flipping properties, declining prices and increasing loan costs will shrink the profit margins available as flippers find it harder to re-sell.

First it was the (unreasonable) restriction on the number of loans an investor could get, then it was the (reasonable) restriction of Uncle Fluffy purchases. The Fed only wants you to flip so many, you see.

In contrast, those who buy for their home or for rental investment could benefit from 1) locking in the profit margin between current prices and actual value (I know, whatever THAT is?); and 2) potentially higher rental values as the ranks of renters swell with people who cannot obtain a loan to buy their own home.

So, “right now” may be the ideal time to buy real estate, not for quick profit but for the long-term stability and financial growth that real estate has historically provided as a part of an overall financial plan.

You may have heard? The future of FNMA and Freddie Mac is in jeopardy.

These Government Sponsored Enterprises (GSE’s) were originally created to provide a funding source for socially desireable but higher risk loans. When started, GSE’s provided funds for 30% of all loans. Today, that number is 90% — and steps are being taken in Congress to get government out of the lending business or at least scale it back.

Freddie Mac recently published a Memo that starting June 1st, they will no longer purchase loans with loan-to-value ratios of less than 5%. As these GSE’s retract from the marketplace, interest rates and down-payment requirements are likely to rise making home ownership less achievable.

But that’s OK (I guess). I’m sure some smart banker or government type will come up with the new ‘best thing ever’ and create a program to let people who can’t afford a house to buy one anyway. That is, after all, how we got into this mess in the first place.

Conveyance of title from one spouse to another for refinancing does not transfer ownership of community property.

A married couple decided to refinance their home, which was community property. Due to the wife’s poor Fair Isaac Corporation (FICO) score, the wife conveyed her legal interest in title to her husband in order to obtain a lower interest rate on refinancing, expecting her husband to reconvey her interest in title after refinancing. The husband refinanced the home, but refused to deed back her legal title to the property. The wife sought to recover her legal interest in the property on dissolution of the marriage, claiming she retained her right to ownership of the home as community property since she did not transfer her community property right to ownership when she transferred her legal interest in title for the purposes of refinancing. The husband claimed his wife did not retain her community property right to ownership since she relinquished her right to ownership of the property when she delivered legal title. A California court of appeals held a spouse who transfers legal title in community property to their spouse in expectation that legal title will be returned upon refinancing of the property retains their community property right to ownership since the transfer of legal title to another spouse for the purpose of refinancing does not terminate the spouse’s community property ownership rights. [In re Marriage of Fossum (2010) 192 CA4th 336]

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.

One recent blogger commented:

“All the news you have heard this last month does not bode well for those trying to foreclose on poor home owners. Foreclosure levels have dropped tremendously. And the housing market reacts.