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Civil Code 2923.5 May Be Just What You Need To Give The Homeowners More Time To Complete Your Short Sale
Posted by: Kenny Tan
January 28, 2012

On December 15, 2011, the Third District (Sacramento) of the California Court of Appeal ruled that if lenders fail to comply with Civil Code 2923.5, lenders cannot foreclose. Thjs is a significant ruling for real estate agents who are running out of time to complete short sales due to pending trustee's sales. (Bardasian v. Superior Court)

No Bond Is Required For Preliminary Injunction If Lenders Don't Comply With Civil Code 2923.5

What is especially important about this ruling is that the Court of Appeal ruled that the borrower need not post any bonds for the preliminary injunction if lenders don't comply with Civil Code 2923.5 prior to recording the Notice of Default.

Under Civil Code 2923.5, lenders are required to make a good faith effort to contact borrowers to explore options to avoid foreclosure before they commence foreclosure.

Previously in Mabry v. Superior Court, the Fourth District (Santa Ana) Court also ruled that lenders are required to comply with Civil Code 2923.5 before commencing foreclosure but it didn't reach the question of bond and preliminary injunction.

I've been approached several times by borrowers desperate to stop the trustee's sales to allow short sales to complete to go to court to stop the sales. Prior to the Bardasian case, i used to believe that a bond is required to obtain preliminary injunction. Asking a borrower to post a bond is practically impossible - if they had the ability to post bond, they might not have fallen on their mortgage in the first place.

The Plaintiff/borrowers in the Bardasian case got around the bond requirement by arguing that no bond was required because it has been decided on the merits at the hearing for the preliminary injunction that lenders had failed to comply with Civil Code 2923.5. The plaintiff argued that this was not a situation that the merits of its case is yet to be decided where a bond served the purpose of compensating the defendant in the event the court made the mistake of issuing the preliminary injunction when the case is ultmately decided against the plaintiff.

Lenders Must Make Better Showing Of Effort To "Explore Options" To Help Borrowers Avoid Foreclosure

The level of efforts to "explore options" with borrowers under Mabry is minmal; all lenders had to do under Mabry to comply with Civil Code 2923.5 is to simply make a call to the borrowers to ask them when the lenders can expect the next payment. Bardasian seems to require greater efforts than that.

The trial court in Bardasian found the form declaration attached to the lender's notice of default too conclusory and inadmissible as a hearsay and chose to believe the borrower's declaration that the lender made no contacts with the borrower prior to recording the notice of default which made it invalid under Civil Code 2923.5.

More importantly, the trial court found the loan modification made by the lenders 3 years before the recording of the notice of default enough to demostrate compliance with Civil Code 2923.5 when it was not part of the discussion on loan modification with the borrower.

Almost 6 More Months To Complete Your Short Sales

Now it is at least financially feasible for the borrowers to go to court to get a preliminary injuction to stop the sale if lenders unreasonably refuse to do so.

Getting that injunction is big because it buys the homeowners and the listign agents 6 more months to complete their short sale or find a better buyer like a all cash buyer to do a short sale. The reason why it is going to be six more months is because now the lenders would have to do this thing all over again. First they have to contact the borrowers to "explore options" to avoid foreclosure, Wait 30 days and then record their Notice of Default. Wait another 90 days for the reisnstatement period to expire. Then they spend another 21 days to publish the trustee's sale. That's a minimum of 5 months. Throw in some additional time for delay in logistics. That's about 6 months.

That is good news for borrowers who desperately try to make short sales work for them and avoid foreclosure. As for the agents, this would mean their hard work would not go for nothing. There's hope they can complete their short sales and earn their well deserved commission

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When Can The Second Lien Holder Come After You If You Strategically Default On Your Second Loan?
Posted by: Kenny Tan
January 28, 2012

You are probably hearing more and more stories about second lien holders coming after homeowners who strategically default on their second loan, particularly borrowers who strategically default on their loans.

Strategic defaulter is someone who intentionally chooses not to pay their second mortgage because their house is severly "underwater" - the old adage of not throwing good money after bad.

But the homeower will probably still pay mortgage on their first. If not, he will lose his home through foreclosure. Thus, he's not paying his second yet he's not in danger of losing his home through foreclosure.

The second lender is "in a pickle"; it is not likely to foreclose on the home and end up with a property that is "underwater" and get stuck paying the first mortgage and risk never able to recover their loan if the housing market does not recover. And of course they are in it for business and are even less likely to throw good money after bad.

No matter how much the second lien holder wants to go to court to sue the borrowerfor breach of ppromissory note. It can't because of the "security first" rule. In California, Code of Civil Procedure 726 requires the lender on a note secured by deed of trust to first exhaust its remedies against the property which means foreclosure. Of course lenders can pursue judicial foreclosure as apposed to trustee's sale and still come after the borrower for deficiency after the judicial foreclosure but they need to be concerned with the anti-deficiency statute which may apply here.

However, there are two possible exceptions to the "security first" rule.

Borrower May Expressly Agree To Waive The "Security First" Rule

In order to have a valid waiver, the borrower must have knowlingly agreed in writing to give up the right to require the lender to pursue the security interest first before seeking personal liabillity against the borrower. However, in California, even if the borrower had expressly waived such right in the original loan agreement, such waiver is unenforceable. But when the loan is subsequently modified and if supported new consideration, i.e. lender gives up something in value like principal and/or interest to benefit the borrowers, lender may require the borrower to waive such right in the modification agreement. So when you're negotiating a loan modification, you should always keep this in mind and make sure you read the agreement before signing so you're not inadvertently giving up such right.

Lender May Also Pursue Personal Liability Against Borrower If Borrower Commits Waste Against The Property

Also, when the borrower does something physically damaging to the property which tends to reduce its value thereby jeopardizing the lender's security interest, lender may also pursue personal liability against the borrower. That's called waste and lender has personal recourse against the borrower.

Be Aware Of The "Security First" Defense If LenderTries To Sue You For Breach Of Contract On The Promissory Note

Some second lenders may still try to go after borrowers who strategically default because they know these borrowers are not bankruptcy candidates and there's money to be collected if they are able to get a judgment that sticks.

So if you are one such borrower, you must not ignore the lawsuit by the second where the only claim that they make in the suit is that you've breached the promissory note in failing to make the cessary payments. So even if the "security first" defense may be available to you, but if you don't answer the complaint and allow default judgment to be taken against you, after 180 days it may be too late for you to do anything and the judgment would stick.

Essentially you may give up this valuable right if you don't defend yourself.

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What Does The Largest Chinese Drywall Settlement In New Orleans Mean To California Homeowners Or Tenants?
Posted by: Kenny Tan
January 14, 2012

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Can A Botched Notarized Signature On The Deed of Trust Be A Viable Foreclosure Defense?
Posted by: Kenny Tan
October 29, 2011

The recent California appellate decisions made it pretty clear that trying to stop a foreclosure based upon a procedural defect in the origination of of the loan or the foreclosure process is difficult.

If there's anyone out there who still believes that problems with MERS or botched assignment of the securitized mortgage can be weapons to stop foreclosure, I think they're either ill informed or have not been keeping up with the latest court decisions. In 2008 and 2009, there was a lot of excitement over the In Re Walker case about MERS issue and botched assignment; certainly there was cause to be excited if you're a borrower because this issue was hardly addressed in state courts. But in the last quarter there had been at least 3 decisions that touched upon these issues that came down against the borrowers. Now that's disheartening for borrowers trying to stay in their homes but its a hard cold truth.

Recently I stumbled across an issue relating to a flaw in the notarization of signatures on the deed of trust on a case involving a seller-financed purchase (which has nothing to do with securitzed mortgages or MERS) but it may be raised as a possible defense if lenders, private or institutional, try to foreclose on your property based on a defective security instrument.

I remember coming across several deeds of trust that had not been property acknowledged back in the crazy days of mid 2000s. Signatures were forged because the notary public neglected to perform their official duties or even complicit with the lenders in procuring forged signatures.

In California, it is a crime to participate in any forgery in the acknowledgment of a deed of trust. Forged deeds of trusts are void and cannot be used to foreclose on a property.

There are notaries who let others maintain control of their notary stamps to create forged documents. There are also others who would sign false affidavit attesting the witness signed the deeds of trust in their presence when in fact they had never even met the witness. This type of illegal activity was not uncommon in the mid to late 2000s.

Probably a botched notarization of a deed of trust can be used as a ground to stop a foreclosure whether or not there is actual fraud involved. All you need to prove is a flaw in the notarization process.

I had expected to receive more phone calls about this issue but I just don't hear people complaining much about it - though I know the process was pretty sloppy back then.

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Would An Investor Have To Assume An Option To Purchase Clause On Existing Lease After A Purchase At A Trustee's Sale?
Posted by: Kenny Tan
September 17, 2011

The Protecting Tenants After Foreclosure Act of 2009 has been around for a couple of years. Its purpose is to protect innocent tenants who pay their rent to landlords who had their properties foreclosed on while they the tenants are still occupying the premises.

Before this law was passed, many tenants were evicted by the new owners as a result of the foreclosure of the properties they're renting.

However, until the Protecting Tenants After Foreclosure Act sunsets, there's presently some - but not absolute - protection from eviction for the innocent tenants.

Assuming the tenancy is "bona fide", the new owner would have to honor it with two exceptions, i.e. he's planning to occupy the property as his primary residence or he has found a bona fide buyer to buy the property. If either exception applies, the tenants can be evicted with a 90-day prior notice.



But to what extent must the new successor owner honor the existing lease? I don't think the Act covers this issue very well. Granted it was the result of an emergency bill to address an urgent situation. So it was probably not well thought through.

Some residential leases provide for right of first refusal or option to purchase. What happens to these provisions after the property has been foreclosed on?

Stating the Act in paraphrase, it basically says the successor owner shall assume any bona fide lease until the remaining term of the lease. So the successor owner literally must honor the entire lease. What if you're an investor who's stuck with this property because either you're not occupying the property as your primary residence or you can't find a bona fide buyer for the price you want, and the lease provides for an option to the tenant to purchase it at the fair market rent less an agreed-upon discount which is more than your profit margin. Suddenly the tenant gives you notice to exercise the option, then what do you do?

Would a right of first refusal clause hamper your ability to sell the property to a bona fide buyer? It could and here's why.

Most right of first refusal clause requires the landlords to give the first priority to the tenants to buy the property on whatever terms the lease provides. Sometimes it gives the tenants the right to have a discount off of the fair market price. In a declining market, or for that matter any market, this means a reduction in the profit margin for the investor.

Having a right of first refusal clause may also mean that you can't even utilize the second exception, i.e. you've entered into a purchase contract with a bona fide buyer, because you're not supposed to do that until the tenant has chosen not to exercise his right of first refusal.

When that happens, you might as well forget about flipping the property and use the proceeds for the next investment. You might be stuck with this lease for a long time especially if it also contains successive options to renew. However, being a landlord in this market may not be too bad unless you're stuck with a lease that fixes the rent for a long period of time. This rent may be the fair market rent at the time the lease was entered but it may be below asthe rental market has been hot the last several years due to a higher demand from the people who have been dislodged from their homes due to foreclosure.

About The Author: Kenny Tan is a real estate attorney practicing in the State of Caifornia with offices in both Northern and Southern California. He follows new development in foreclosure closely and regularly write blogs on interesting and seemingly unresolved issues in foreclosure

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Quit Litigating The MERS And Assignment Issues To Stop Foreclosure!!
Posted by: Kenny Tan
September 14, 2011

The messages from the Courts of Appeal in California are loud and clear - Quit litigating the MERS and assignment issues.

Back in 2009, several cases had been filed in California challenging MERS authority to commence foreclosure. The argument is that MERS didn't have any standing to foreclose because it didn't own the note and therefore if you had MERS as the "nominee for the beneficiary" on your deed of trust, you can stop the foreclosure on that ground or preempt lender's commencement of foreclosure by filing your own lawsuit first (as in the Gomez case).

Gomez is the first of several California appellate decisions that dealt with the question of whether MERS had standing to foreclose. It all started in a bankruptcy case filed Minnesota in 2008 where the bankruptcy court held MERS had no standing to file its proof of claim because it didn't own the note. Then later in 2009, a bankruptcy court in In Re Walker similarly held on a motion ruling that was unopposed by the lender. A few days ago, in Robinson v. Country wide, a different district in the California Court of Appeal published a similar opinion on an almost identical issue.

"Show me the note" defense is practically dead in California. While borrowers are frustrated in not being able to identify who the current holder of their note is, the Courts are not concerned who really holds the note as long as someone does which probably is the situation in almost all cases. The bottom line is money is owed to somebody.

So the message is "don't expect the courts to lend you a hand if you're looking to the courts for help on some mere technicalities".

In In Re Walker, the bankruptcy court stated that since MERS was not the holder of the note in the first place, it didn't have the right to assign the note since you can't assign something you don't own. The argument is since the assignment was invalid from MERS to the first assignee, any subsequent assignments to others are null and void, and therefore the last assignee didn't have the standing to foreclose as it didn't own the note. This issue has been dealt with recently. It is now abundantly clear how the California state courts feel about this issue. While these appellate opinions are based on some legal authorities and arguments, as the courts must in writing appellate decisions, you get the sense that courts have grown more and more impatient about borrowers trying to take advantage of mere technicalities to delay foreclosure.

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Does Civil Code 1950.5(h) and (i) On Security Deposit Govern Foreclosed Properties? Why The Answer Matters
Posted by: Kenny Tan
July 30, 2011

This discussion concerns a blog I wrote a few months ago about who the tenant should turn to to get their security deposit back after a foreclosure. I ended that blog with an answer of "it's not clear."

In that blog, I mentioned that in California, the contract between a tenant and landlord regarding security deposit doesn't "run with the land" because it's a personal obligation between a particular landlord and a particular tenant. And that possibly meant the successor landlord, i.e. someone who acquires title to the property from this landlord to whom this tenant had paid the security deposit would have nothing to do with it. 

In other words, the successor landlord does not benefit from it nor  is he obligated to account to the tenant the security deposit previously paid to his predecessor unless of course he expressly made a contract with the predecessor landlord to do so. That's the common law.

But the handling of security deposit has been codified under Civil Code 1950.5 in California. It should be noted that 1950.5 applies to properties that have been rented for dwelling use only. 

I received a phone call this past week from someone who referred me to Civil Code 1950.5(h) and 1950.5(i). That phone call prompted me to take another look at the statute. Essentially these two sections set forth the obligations between successor and predecessor landlords and the rights of innocent tenants against these landlords as to the security deposit that they've paid.

1950.5(h) protects the predecessor landlord from tenants' claim for unaccounted security deposit provided that the necessary steps under this section have been taken. Otherwise, according to 1950.5(i), both the predecessor and successor landlords are jointly and severally liable to the tenants for violation under Civil Code 1950.5. 

In a transfer of dwellings not involving foreclosure, there's no doubt that 1950.5(i) makes the successor landlord potentially liable for violation of 1950.5 regardless of whether the predecessor has previously complied with 1950.5(h).

But the statute is not explicit about whether it applies to successor purchaser who obtained title to such property from a foreclosure sale. However, it states in 1950.5(h):

"Upon termination of the landlord's interest in the premises, whether by sale, assignment, death, appointment of receiver or otherwise, the landlord or the landlord's agent shall, within a reasonable time, do one of the acts, either of which shall relieve the landlord of further liability with respect to the security held ? 

The "or otherwise" phrase does tend to suggest that 1950.5(h) and thus 1950.5(i) apply might possibly apply to REO or foreclosed properties that have been rented out as dwellings which include apartment complexes and single family homes, or possibly mobile homes. 

Now why does the answer matter? 

In most instances involving single family homes, the amount of security deposit paid by the tenant is relatively a small figure compared to an apartment complex which may consist of several hundred units where the amount can be rather significant. Moreover, many tenants stopped paying rents after they've learned that their landlords' properties had been foreclosed on so they tend to owe more rent than their security deposit so it is rarely something worth fighting for. And most investors buy them at trustee's sales intending to flip them and not keep the tenants. So the issue regarding security deposit is rarely a consideration for the investors in deciding whether to bid on the property at the trustee's sale.

Over the last several years, the foreclosure crisis has touched upon mostly small residential properties. But if the crisis continues, it would spread to the commercial side. In fact we are already seeing signs of it happening. 

Experts say if the economy does not recover by 2013, we will see a new wave of foreclosure involving commercial properties because a large number of commercial loans would mature in 2013 and borrowers may not be able to obtain refinance either due to lack of equity or simply tight underwriting.

For commercial buildings rented out for office and industrial uses, we know 1950.5 does not apply so we fall back on the common law that security deposit is a personal obligation that does not "run with the land". Also, regardless of whether it "runs with the landlord", if the foreclosing lender is a senior lien holder, all junior liens are wiped out anyway.

But in the case of commercial apartment complexes including mixed use properties where some units are rented as dwellings while others as shops and restaurants, big player investors who have a lot of cash and wish to acquire them at a foreclosure sale would need to think about the issue of security deposit and may be take it into account when they price their bids. But may be the amount of the security deposit though large in the eyes of some but still small in the scheme of things may not be that important after all. 

Certainly it is good to know where your rights and obligations lie when it comes to handling of security deposit, especially in the case of this type of property where the time to takes to flip them is longer and the income stream from the tenants is more important in its resale value. You want to keep your tenants happy to maintain the income stream and have to take a position early if they ask if their security deposit is safe with you.

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More Follow Up On My Blog on - "If You Won't Modify My Loan, I'll Just Do It Myself"
Posted by: Kenny Tan
July 28, 2011

A couple of weeks ago, I wrote two blogs about a woman who did the unthinkable of going to the auction site to bid on her own home at the trustee's sale. Now what she did is completely legal in California!

 Since then, she's received a phone call from Bank Of America to inquire about her situation. BOA did not call to apologize but just to have a conversation with her about the incident. 

Meanwhile, she's received another letter from Recontrust reiterating the same justification they gave her the first time - the "investors" had a policy of not allowing borrowers to bid on their own property. But, just as I mentioned in my previous post, under Civil Code 2924 in California, any person including the homeowner herself and whoever that can bring the right amount of cash or equivalent can submit a bid at the auction site. 

This time they argue on "unjust enrichment" theory that she should not be entitled to keep the property even if she could come up with the money to successfully bid on it.

"Unjust enrichment" theory has been applied in different situations but no cases - at least to my knowledge - has applied it to this situation.

No. 1, how is she "unjustly enriched" if the price she bid was higher or equal to the fair market value of the property.  

But what BOA is saying that if she had the money, why should she be allowed to bid at the trustee's sale if the same money could've been used to reinstate her loan. 

Well, speaking of fairness, why should BOA be allowed to foreclose on her when she was working with them on loan modificaiton? After all, didn't BOA receive that TARP money from the federal government - i.e. fromt the taxpayers (and she is one). Not fair, but "dual track" is legal in California.

Also, in terms of equity, she bought this house at its peak putting down $360,000, 50% of the purchase price but the house had dropped so much in value (to $217,000 at the trustee's sale) that she would be dumping good money after bad if she had continued to pay on a house that was severely "underwater." 

Certainly when she bought it, she had no idea that she was going to lose $360,000 on the property. Moreover, what if she had borrowed that $217,000 from a private lender fully intending to refinance to repay the debt after she's got it from the trustee's sale. Is that "unjust enrichment.?

The "investors" had the ability to make full credit bid of $359,000, the amount she owed as of the date of trustee's sale. Why didn't they? Or they could've authroized the auctioneer to bid against her for up to the full credit amount? Why didn't they?

I think the investors just made the bad deal on their..."investment".

California courts do not recognize a cause of action for unjust enrichment. There can't be unjust enrichment without an underlying wrong. And in this case there's no underlying wrongbecause buying your own property at a trustee's sale - not a short sale - is perfectly legal in California.

As I've said, cases like this just don't happen. It's strange but real. 

In the mean time, she's getting evicted from her home.

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How To Invest And Come Out Ahead If The Housing Market Is Going To Stay Stagnant For Generation To Come?
Posted by: Kenny Tan
July 14, 2011

Yesterday Gary Shilling predicted a 20% drop in real estate values in the next 2 years. According to him, the good news is that there's no double dip but the bad news is that there'll probably be recession in 2012. There's an excess of 1.2 million homes. Thus housing starts will have to go down until the excess is cleared. Presently there are 20% of homes that are "underwater" - which means the home is worth less than what's owed on the mortgage. That number will increase to 30%. There'll be more and more strategic defaulters - people who can afford their mortgage but simply don't want to pay but to "walk away". Not a popular view around here but not one to be taken lightly, from someone who predicted the tech bubble crash. (I'm one of those who got burned by the tech bubble so I take note of his comments seriously)

This morning I read another commentary that says the real estate market is going to stay stagnant for years to come. "The Housing Slump Is Worse Than You Think", the title reads. Whether you want to admit it or not, I feel the same way. Affordability Index hasn't been this high for many years. Yet sales are not picking up. Why? Credit market is as tight as can be. Wait till October when Fannie Mae and Freddie Mac lower the conforming loan to $625,000 from $729,000. Thanks to the all cash buyers from China. If not for them, with the credit market so tight, it could've been worse.

For most people, their own home is their biggest investment. You can live on it and it goes up in value year after year. Makes sense, right? That theory doesn't seem to hold much water lately. Just ask the strategic defaulters.

But if you still want to put your money in real estate, how should you invest and come out ahead?

A couple of friends gave me some ideas. One friend bought a single family home in Phoenix for $120,000. The down payment was $30,000 and loan amount was $90,000. She lives in Los Angeles but hires an agent to manage the property for her. She easily found a tenant who's willing to pay $1400 per month. She's investing for long term until the market recovers. Another friend of mine uses a different strategy. She doesn't have a lot of cash but she believes in paying cash for her properties. So she buys them cheap at trustee's sale. Thus far, she's bought two, each for around $65,000. She's able to rent them out for $900 a month, both in the San Bernardino county area. That's $1800 income for a combined investment of $130,000.

Experts estimated that 5 to 6 million renters became homeowners during the boom due to easy financing but these same people are facing evictions due to foreclosure.

Lately I'm seeing an increase in my eviction cases. So perhaps there are more renters now than before. From what I've heard, rents only go up, not down. So perhaps the rental market is not a bad place to put your money. I'm seeing more and more investors becoming landlords, especially if they can't flip the properties they got the auction sales in time before the prices drop. So investing in low-priced properties and renting them out for a profit may be the way to go.

Any thoughts?    

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Pay Your HOA When In Foreclosure Or You Could Lose Title Before Your Loan Is Modified
Posted by: Kenny Tan
July 03, 2011

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The Sequel: "If You Won't Modify My Loan, I'll Do It Myself"
Posted by: Kenny Tan
July 01, 2011

A few days ago I wrote a blog about a woman who surprised her lender at the trustee's sale of her own property; she did the unthinkable - at least to the lender. She brought $250,000 in cashier's checks to bid on her home. I mean how rare and unlikely is that? So rare that these days more and more lenders are opening the bids below the default amount.

I remember back in 2008 when the foreclosure crisis just began, lenders almost invariably would make full credit bid at the sale. Under California law, anybody including lenders can bid at the trustee's sale. Every one excepts lenders has to bring cash or equivalent to the auction site. The law allows the beneficiary,in this case the lender, the right to bid up to the maximum amount owed on the loan without actually bringing any cash to the site. That's called a full credit bid.

In 2008 I used to accompany a few clients to some of these trustee's sales and wound up not buying anything because these properties would revert back to the lenders because many were "upside down" making it impossible for investors to make any money whenever the lenders' opening bid were the maximum owed on the loan.

What's happening these days is that more lenders are opening bids at what they believe to be the market values of the foreclosed properties based on data in Zilllows.

Why are lenders doing that now? One plausible explanation is that the lenders' REO department may be overwhelmed with so many properties that reverted back when lenders made full credit bids on the properties that were "upside down".

Back to the amazing story about this woman who did the unthinkable.

This afternoon she emailed me a letter from a Texas attorney representing the trustee who refused her to right to participate in the bidding process. (She had previously written to them demanding an explanation of why she was not allowed to bid). The attorney wrote "Borrowers are not allowed to bid on their own properties at foreclosure sales because it is prohibited by the Servicer's investor guidelines. I'm sure you will agree that if such bidding at prices considerably under the amount of the debt owed was allowed, there would be no incentive for borrowers to become current on their loans."

Now why would it matter to the lenders who bought the property at the sale? After all, if she didn't make that offer, someone might've gotten it for the same price she offered. Of course, had they agreed to modify her loans, they wouldn't have to go so far with the foreclosure.

So the attorney pointed out a legal loophole that exists in California. I agree that her statement makes perfect sense just as a matter of public policy. But in California, any one who brings the right amount of cash to the auction site is eligible to bid.

Granted it is a legal loophole for the borrowers "to modify their loans when the lenders won't"on their "upside down" properties, but it is one that's up to the legislature to fix, not the court. Until that happens, what she did was perfectly legal and there's not a thing the lender could do about that. And the trustee was wrong in calling her "a fraud" in front of the public. If in fact she was called "a fraud", the person who called her that may see a lawsuit coming. 

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She Said To The Bank: "If You Won't Modify My Loan, I'll Do It Myself"
Posted by: Kenny Tan
June 26, 2011

Here's a story on a woman who tried so hard to get her lender to modify her loan, the bank said "No.". So she decided to do it herself. Well, not exactly. But she did somehow come up with the cash- borrowed it from friends to bid for it at a trustee's sale. (I got her permission to blog about this.)



Her property is among many in California that are "upside down." She could've easily walked away from it but she didn't because she really liked this home.

Before the market collapsed, many people saw their homes as long term investments thinking they would come out ahead in the long run. Most would faithfully pay their mortgages to protect their investments. She was no different from them.

As the foreclosure crisis continues, it makes more sense for homeowners - and for the investors too - to save their homes (and investments) if loan modification includes principal reduction. There'll be less strategic defaulters if lenders were to allow more loan modifications with principal reductions to homeowners who can afford to pay their mortgage but won't because they don't want to throw good money after bad ones. This woman is one such borrower.

How Did She Do It Herself Since The Bank Wouldn't Want To Modify Her Loan With Principal Reduction ?

Well, she went to bid on her home at the trustee's sale. As the borrower, she was entitled to receive Notice of Trustee's Sale and like every one else, to make a bid. In fact, California law allows anyone including the trustee himself to bid at the trustee's sale.

On the day of the sale, the mortgage debt was close to $340,000 but the house was only worth around $200,000. But the opening bid according to the trustee was $220,000. Before the sale date, she called the trustee and was told that was the opening bid. So she brought with her multiple cashier's checks in different nominations totaling $250,000 having borrowed that money from her friend.

Not too surprisingly, no one except her showed up to bid. The auctioneer did his usual thing. The property address was called and she identified herself as a interested buyer. He qualified her and started taking bids. He asked, " Who wants to bid?". She said, "Yes, a penny over?" Everything was fine until he saw the address on her driver's license and said, "Wait a minute", he asked,"Do you live here?". She said, "yes, I own this property." And he said (wrongfully), "No, I don't think you're allowed to bid" and halted the sale and called his office (presumably his boss).

He came back 20 minutes later and reopened the sale. And she was there and again the only bidder. And he called her "a fraud" and didn't allow her to bid. There being no offers, the property reverted to the lender.

We don't know what he was smoking" that day but what he did is unlawful and criminal under CivilCode 2924h(g)(2) which may involve jail time of up to a year or a fine of up to $10,000. That was outright wrongful.

She's now facing eviction after the sale and getting ready to defend herself and file suit of her own not only against the misbehaved auctioneer, but also the trustee and the lender. In California, the wrongful act of the trustee at a trustee's ale is imputed to the lender.

This kind of amazing story isn't unheard of but is extremely rare.

About The Author: The Law Offices of Kenny Tan is a real estate litigation firm providing foreclosure and eviction defense on distressed properties and consultation to borrowers on various options to avoid foreclosure. We assist borrowers with loan modification, short sale, and deed in lieu. 

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After The Gloom Delivered By Mabry And Gomez, Finally A Little Bit Of Sunshine From Aceves.
Posted by: Kenny Tan
June 03, 2011

Stop Thinking Civil Code 2923.5 And MERS, Start Thinking Promissory Estoppel.

After three years of foreclosure litigation with lenders, it has become clearer to me now what issues will -and what won?t- work for borrowers in the court of law.

Some people are still chasing the MERS  issue. But I think it?s very much hampered by theGomez case.  (Of course, I just learned moments after I published this blog that this issue has been hampered further by the Ferguson case published on June 1, 2011).

Mabry put a damper on borrower?s ability to defend against unlawful detainer brought by lenders based on noncompliance with Civil Code Section 2923.5 which requires lenders to ?explore options? to avoid foreclosures. But that legislation has very little teeth ? it might help borrowers delay foreclosures but doesn?t stop it. The only remedy available to borrowers under Civil Code 2923.5 is to get an injunction from foreclosure until the lenders have complied with it. But even if the lenders did not comply and you are successful in getting the injunction, it?s not difficult for lenders to cure the non-compliance.

Bankruptcy may delay foreclosure for a little while. If you?re in a Chapter 7, all the lenders got to do is to file a motion for relief from the automatic stay which is practically a ?rubber-stamp? decision by the bankruptcy judge in most cases because the property has no equity as many foreclosed properties are severely ?underwater?. Chapter 13 works better but you?re still required to make payments to the lenders under your plan. You could stop it for a few years and for only as long as you?re still in the plan. It is not a permanent solution.

For Pete?s sake, do not lose track of the trustee?s sale date. It?s no fun getting surprised and blindsided by your lenders. I?ve heard so many stories about borrowers putting their whole trust in the ?foreclosure consultants? or ?loan modification consultants? that after a while they didn?t know what the sale date was. Of course, you really can?t blame the borrowers. Many are new to this and didn?t know about the ?dual track? ? lenders? practice of working with borrowers on finding ways to avoid foreclosures on the one hand and yet at the same time continuing their efforts to complete the foreclosure on the other. Yeah, that sounds bad faith but it?s still legal in California. These so-called experts are in it to make a few quick and easy bucks, usually a few thousand dollars. Some of them made promises they couldn?t keep, For instance, principal reduction is practically impossible but the scammers used it as a lure.

Really, there isn?t any practical way to stop foreclosures.

In 2008, I brought a wrongful foreclosure case on behalf of a client after lender had commenced unlawful detainer. My motion for consolidation was denied by the court but for whatever reasons and amazingly the lender dismissed the unlawful detainer so client?s number one fear was gone!

 My main theory in that case was promissory estoppel. At that time, that was the only theory that was viable for her. I also predicated my cause of action to set aside foreclosure on my promissory estoppel. Lender brought a motion for summary judgment shortly before trial. The case actually settled after the court took the motion under submission. It was a tough fight but the we withstood the lender?s attack on our promissory estoppels theory.

While the matter was taken under submission,  Chase actually agreed to rescind the sale and let title go back to my client and modify her loan to a 40-year term with low interest. Of course, these days, it?s extremely difficult to get a result like that. At that time, I didn?t have the Aceves case to rely on. So 
Aceves sort of validates my belief all along that the only viable theory that might work is promissory estoppel.

But not every fact pattern fits within that theory.

However, in the last 3 years, I?ve heard many stories from many borrowers that lenders would promise them the homes would not be foreclosed on as long as the borrowers work with them to resolve the foreclosure. I can?t say lenders actually committed promissory estoppel or fraud in every case. You?ve got to analyze the evidence and decide for yourself what the facts are.

While Aceves offers some rays of sunshine ? and hope for borrowers in fighting foreclosure, the court was very careful in stating the remedies available under that theory. The court in essence implies that only contract-type remedy is available. But in Aceves, there was some bad faith by the lender. According to the complaint, lender asked the borrower to get out of chapter 13 bankruptcy and ?work with them? to avoid foreclosure but did not agree to modify the loan until a day before the sale date. Of course, by then it was too late for the borrowers to save her home. Borrower actually relied on that promise to her detriment. This is a unique fact pattern. Not every case fits nicely within that mold.

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Who Needs To Account To The Tenants For Security Deposit After A Foreclosure Sale?
Posted by: Kenny Tan
May 14, 2011

Foreclosure is in the news every day.

There are many victims of foreclosure - you name it, property owners, wall street investors, local governments etc. The list goes on and on. But among the most innocent ones are the tenants. They pay the rent on time and yet they find themselves entangled in this mess.

I've received phone calls from tenants who'd received foreclosure notices in the mails wondering what the heck is going on. Every month they do their part - pay their rent on time - and yet they have to worry about whether they'll still have a place a stay a few weeks later.

In March 2009, the Obama Administration passed a law, Protecting Tenants After Foreclosure Act, that guarantees tenants that they'll have at least 90 days' notice to vacate the premises if their landlords are foreclosed on. That addressed part of the tenant's concern.

But What About The Security Deposit

Most tenants paid a certain amount of security deposit to their landlords at or before the time they took possession of the premises. They have the right to know whom to look to for the return of their security deposit.

In non-foreclosure situations, whenever there's a sale or transfer, the handling of and liability for the security deposit is provided under Civil Code 1950.5(h) and (1950.5(j). Typically the transferor landlord transfers the tenants' security deposit to the successor, and provided the requirements of the code are met and the transferor makes proper election to eliminate liability for the security deposit after the transfer, they would no longer be liable after the change of ownership.  Otherwise, the transferor remains on the hook jointly and severally with the successor.

Not So Clear After A Foreclosure

Technically, a Trustee's Deed Upon Sale is not a voluntary transfer. Since Civil Code 1950.5 (h) and (j) deal with voluntary transfers, they probably don't apply in trustee's sales.

Generally, obligation to account for and refund security deposit is deemed to be a personal one, i.e. it doesn't "run with the land". Therefore, unless the statute so states, the tenants really shouldn't and can't look to the successful purchaser at the trustee's sales to get back their security deposit. It really shouldn't matter if the successful purchaser is a bona fide purchaser, i.e., an investor, or not one, i.e., the lender who foreclosed on the property. Neither has any obligation for the security deposit.

Also, morally speaking, if the person didn't receive the security deposit, why should he be liable for the refund of the security deposit.

Thus under state law, the new owner after a foreclosure sale has no liability to the tenants for the security deposit that the tenants paid to the previous owner.

However, the Protecting Tenants After Foreclosure Act states that the new owner after a foreclosure sale must honor all existing leases. To what extent does honoring existing leases mean? We know that under it the new owner must honor the term of the lease, i.e. if the lease expires on a specific date, that expiration date must be honored (of course, the exception is when the new owner has found a buyer for the property).

Does Honoring Existing Leases Under The Protecting Tenants After Foreclosure Act Mean Honoring The Security Deposit Provision In The Written Lease As Well?

But what about the provision in the lease that makes the landlord responsible for accounting of security deposit, must that be honored by the new owner as well? It is not explicitly dealt with in the Act.

It is not clear.

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Isn't It A Violation Of The Homeowner's Due Process Right To Require Him To Pay Rent To The Lender As A Condition To Grant Consolidation Of The Lender's Unlawful Detainer With His Title Action?
Posted by: Kenny Tan
April 30, 2011

Shortly after a home is foreclosed on by a lender, the lender will seek eviction of the homeowner through an unlawful detainer action. An unlawful detainer is a summary proceeding - the whole litigation process is expedited with limited time to properly prepare for trial which may be a jury trial if timely requested.

Only to a limited extent may title be litigated in an unlawful detainer to recover possession of property after a trustee's sale - courts severely limit a borrower's ability to litigate title issues in the unlawful detainer beyond challenges to compliance with Civil Code 2924. You can expect the bank to file motions to exclude any evidence on the defects in the acquisition of the loans by the bank. Courts are bound by the rules and will readily grant these motions.

Thus, a homeowner who believes his property has been wrongfully foreclosed on would have to file a separate civil suit to litigate title issues that cannot be litigated in the unlawful detainer, even when he would've been entitled to keep his house if he prevails on these issues.

But the lender's unlawful detainer and homeowner's civil action run on separate tracks - which means the unlawful detainer would probably be over long - usually in a couple of months- before the civil action is even ready for trial - usually in a year or longer. He would be evicted from his home without an opportunity to be heard on issues which if he prevails on would keep him in his house - a deprivation of his due process rights.

Under Asuncion v. Superior Court, a homeowner in this situation may ask the court to consolidate the two cases so all issues will be tried in a single trial or request a stay of the unlawful detainer action until the title issues have been decided in the title action.

But is the court required to grant the consolidation?

Asuncion seems to imply that consolidation is this instance, if requested by the homeowner, is mandatory - as evidenced by the court's use of the language "due process guarantees".

These days we're seeing more courts grant requests for consolidation but only on condition that the homeowner pays rent to the lender while the matters are litigated.

Does the court have the discretionary power to make the homeowner pay rent to the lender a condition to granting the consolidation? Isn't that condition itself a violation of a homeowner's due process right? (It's like saying to the homeowner "I think you're going to lose this case, so I'm going to order you to pay money to the lender even if you've not lost your case")

If a homeowner isn't in a landlord-tenant relationship with the lender, why should he pay rent to the lender? Shouldn't that money be deposited into the court - as opposed to the pocket of the lender - pending the resolution of the cases even if it is justifiable to make such an order. And if the case is resolved in favor of the homeowner, it goes back to him, and if not, it goes to the lender.

Also Code of Civil Procedure Section 1048 does not expressly grant the court the power to condition consolidation of cases on payment of money from one party to the other. While the court has some discretionary power under CCP 1048 to impose certain conditions to avoid "unnecessary costs or delay", what relationship does making the homeowner pay rent to the lender bear to the avoidance of unnecessary costs or delay? How is that not a violation of the due process right of an homeowner? 

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To What Extent Can You Litigate Title Issues In The Unlawful Detainer In Calfornia?
Posted by: Kenny Tan
February 13, 2011

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Can You Successfully Challenge The Validity Of A Trustee's Sale If Foreclosure Notices Were Improper?
Posted by: Kenny Tan
February 06, 2011

n judicial foreclosure states like Florida, the court oversees the foreclosure process. We heard stories about courts throwing out foreclosure cases on sloppy paperwork. I'm not talking about the MERS issue, but things like "robo-signers" churning up court papers without reviewing the files or paperwork sent to wrong person or location.

The Robo-signing controversy came out of judicial foreclosure states. Some people think it can happen in non-judicial foreclosure states as well. In Nevada, as told by an article American Banker, an employee of a title company signed the Notice of Default without reviewing the file - and without any personal knowledge that the borrower was in default. He was told that the borrower was in default and took the words at their face value and performed no further review to confirm.

If the borrower was never in default as in the case of woman in Chico, there's no question that the Notice of Default was not valid.. end of inquiry. The foreclosure should never have happened and the sale should be rescinded right away without litigation. The rescission is probably good as to bona fide purchasers too. The homeowner and investor will each get their respective title and purchase money back.

A more difficult case is when the robo-signer admits that he has no clue if the borrower is in default and signs the Notice of Default anyway but the borrower is actually in default.

Assuming the content of the Notice of Default is accurate and it is recorded and sent timely and properly to the homeowner, and that the borrower actually receives the Notice of Default and becomes aware of the start of the foreclosure of his home and knows that he has 90 days to reinstate, no cases have addressed this point.

In California, the statute that governs non-judicial foreclosure - Civil Code 2924 et seq. - has been written in a manner that favors allowing any agent of the trustee, mortgagee or beneficiarythe power of signing the Notice of Default, Substitution of Trustee, and Notice of Trustee's Sale, and other foreclosure-related documents. The agent probably need not be one who's appointed in writing. It could also be appointed impliedly as in the case of an employee of one of the agents. In the case of securitized morgages, these employees may not have any clue the true owner of the note is at the time of the foreclosure. Still, it is doubtful if you may avoid an eviction based on "robo-signing" in California (not if the law has not changed).

Now if the Notice of Default is not properly mailed, you may argue title to the property has not been duly perfected. If the borrower fails to learn about the foreclosure because the Notice of Default has been mailed to a wrong address - unlike the Notice of Trustee's Sale, the Notice of Default need not be posted - the borrower may not even be aware that foreclosure has commenced unless helearns about it from other means.

At least one court in California, Little v. CFS, has held that lack of receipt of Notice of Default is a defect prejudicial and substantial enough to invalidate the sale. Yes, it can happen! When a trustee conducts a large volume of trustee's sales, mistakes can happen. I've seen it happened a couple of times on the cases I've worked on.

It's in the news too. We heard in the news about people who are ignorant of the trustee's sale until it's too late to do anything to stop it (perhaps with more time they can hire an attorney to stop the sale).

Beware of another case, Lenner v. U.S., a case that came out of the Ninth circuit in California which says the defect based on lack of service of Notice of Default does not invalidate the sale if the borrower knew that foreclosure was "imminent."

I heard stories from borrowers who didn't expect lenders would foreclose on them when they were reassured on the phone that their loan had been modified. These borrowers typically didn't believe that foreclosure was "imminent". Certainly foreclosure defense counsel or pro per defendant should always make that argument.

Where do you get the evidence to prove that the Notice of Default was either never sent or sent to the wrong place?

Don't estimate the power of discovery in an unlawful detainer case! The bad news about unlawful detainer case is that the window of opportunity is very small for you to ask the plaintiff to produce the foreclosure file but the good news is that the response time is only 5 days. When you get the file, comb through it to look for anything like certified mail receipts that would show the address. Also, once you've had the certified mail receipt numbers, you can go to the USPS certified mail tracking webpage and find out what the USPS records show on where the mail was dropped off.

Now if you live in Northern California, and the records show the mail was dropped off in a city in Southern California, you know the trustee may have made a big mistake.

If you honestly believe your property was sold at a trustee's sale from under you without knowledge, you may be among a group of people whose homes have been wrongfully foreclosed on because the Notice of Default was either never sent or sent to the wrong place. You may save yourself from eviction. You should get help immediately.    

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Foreclosure Scammers : How They Do It In California
Posted by: Kenny Tan
February 01, 2011

Despite the crackdown by the Attorney General and the State Bar, there are still foreclosure scams out there. Some prey on homeowners in desperate need to save their homes, others on tenants looking for bargain rental. The State of California Attorney General's office posted lists of names of individuals and companies that have been investigated on foreclosure scams.

There are still companies out there offering their services to perform forensic audits of loans to help borrowers fight foreclosure. The value of these audit reports are limited. They typically go for $1,500 to as high as $5,000, from what I can gather in speaking to some of the people that have been scammed.

I've heard stories after stories from homeowners who's been scammed out of their savings - money that could've been used to seek real legal help. By the time they've realized it, it's often too late - their homes have been foreclosed on and they're facing evictions.

Some homeowners are promised that they would get their loans modified and that if their application for loan modifications are denied, the companies would help them hire attorneys that would file lawsuits on their behalf. 

Typically the homeowners  - who has previously paid for the forensic audit - would pay monthly installments of $500 to $1000. These numbers are low enough so the homeowners can afford to make them but not high enough for the homeowners to go to an attorney directly for help. 

These companies would then seek out attorneys to work with them offering the attorney an opportunity to handle hundreds of cases from homeowners for whom these companies have failed to obtain loan modification. But they want the attorneys to accept the case on a fixed monthly installment basis for $250 to $300 a month.

Now $250 a case for 100 cases, that's $25,000 each month and $300,000 a year. Most attorneys won't assume that kind of responsibility but some has. Some even offered to do the work for the attorneys, drafting pleadings and doing the work for the attorneys.

I've been approached with similar deals at least 10 times over the course of two years. Each time I've turned them down. Had I accepted them, I would  practically be loaning them my license to practice law, not to mention violating the rule against splitting fees with non-lawyers.

Unfortunately there are many desperate homeowners who fall for that. Many were attracted to the idea that they didn't have to spend a lot of money to hire an attorney to represent them, not knowing the truth about the arrangement these companies have with the attorneys.

The next time you think about going for this type of deals. Think carefully. If it sounds too good to be true, it usually is.

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Did You Know That Servicemen On Active Military Duty May Be Protected From Foreclosure For 9 Months After Off Duty?
Posted by: Kenny Tan
January 23, 2011

of the servicemember's military service except-

(1) upon a court order granted before such sale, foreclosure, or seizure with a

return made and approved by the court; or

(2) if made pursuant to an agreement as provided in section 107 [section 517

of this Appendix]. "

If the word "foreclosure" is intended to mean the process itself that leads to the ultimate sale, any NOD recorded within the 9-month protected period "shall not be valid." If it's intended to mean the actual trustee's sale, then maybe it is okay to first record the NOD and let the 90-day expire and then publish the Notice of Trustee's Sale and set the sale date till after the protected period.

If you're a serviceman and you've just lost your home through a trustee's sale based on an NOD that was recorded during the protected period, do you have a legitimate to an eviction based on that Trustee's Sale.

No case can be found in California that deals with this precise issue. So it is anybody's guess how the court will decide this issue.

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Will Mandatory Mediation Work To Reduce The Number Of Foreclosures In California?
Posted by: Kenny Tan
January 22, 2011

When it comes to the number of foreclosures, California ranks in the top two in the nation. According to Realty Trac's data, foreclosure sales have increased for the fifth straight month in California to 31 percent of all purchases - nearly 1 every 3 homes sold.

Why The Current Foreclosure Legislation In California Have Been Ineffective

Despite legislation passed in the last couple of years, SB 1137(2008) and SB 931(2010), if the goal of these legislations is to slow down foreclosure, the verdict is now out, these legislative efforts have proven to be woefully ineffective. It seems that if nothing else is done, California is most likely going to remain as the state with the highest number of foreclosures in the nation for 2011. More foreclosures will probably mean further decline in the real estate values - perhaps much to the delight of buyers sitting on the side line with cash awaiting to pour into the market but bad for the recovery of the state's beleaguered economy to the chagrin of the politicians running for re-elections in 2012. San Francisco Bay area saw a month-over-month decline of 1.3 percent in home prices in December 2010.

SB 1137 which was later codified into Civil Code 2923.5 "has no teelth", We saw how the court in Mabry v. Superior Court interpreted it. Apparently lip service from lenders may be sufficient to get around the "explore foreclosure options" requirement for the recording of a Notice of Default.

SB 931 which just became effective January 1, 2011 is supposed to remove a hurdle in short sale transactions to make them more easily approved. But frankly, it is probably not going to bring much change for a couple of reasons.

First, it supposedly makes it impossible for lenders to come after the borrowers for recourse first loan. As a practical matter, lenders simply won't do that anyway. They're too busy clearing their foreclosure backlog. Also, if they proceed by way of trustee's sale, the existing anti-deficiency statute prevents them from coming after borrowers. Moreover, if the lenders themselves become the successful bidders at the trustee's sales, the one-action rule prevents them from taking further actions against the borrowers.

Second, many homeowners who are in foreclosure have first and second loans. SB 931 addresses the first but not the second loan - an equally if not more important one to resolve if you want short sales to work. Most sales through foreclosures are usually initiated by the first lender, rarely the second. The second lenders, as wiped out junior lienholders, are more likely candidates to come after the borrowers. The strong lobby by the lending industry in Sacramento might have something to do with the way SB 931 ended up- another ineffective legislation out of Sacramento to deal with the foreclosure crisis. (Also, in my view, existing state law under the one-action rule prevents the second lender from coming after the borrowers anyway making the legislation superfluous had SB 931 included the second. Please read my blog on that issue).

What about mediation? Apparently there was a bill in California proposing mandatory mediation as a prerequisite to the recording of Notice of Default that was defeated. It seems lenders would prefer not to mediate because in their view mediation delays foreclosure and proves more expensive for them with no real potential for settlement.

Why Mandatory Mediation Might Work In California

Mediation has proven to work some states and cities . Why wouldn't it work in California? What's more convincing than the actual statistics. These states report that close to 75% of the cases that were mediated result in no foreclosures. Many cases resulted in loan modification, deed in lieu or short sales.

As a result of the recent Massachusetts Supreme Court ruling, big lenders are probably going back to get their paperwork in order before they proceed with foreclosures again. Isn't this a perfect time for the lenders to sit down face to face with their borrowers to work things out? After all, there is now going to be delays even without mandatory mediation.

One complaint that I constantly hear from borrowers is that their lenders won't return their phone calls or they would be talking to different persons each time the phone is picked up or they would be asked to submit the same documents several times. There's simply a major breakdown in communication. Mediation can solve that problem.

Mediation allows a third party neutral to help the borrower better evaluate their options in light of their current financial conditions. Sometimes you need an independent to look at the case objectively and explore options that would result in a win-win for the lenders and borrowers.

Mediation doesn't always have to result in loan modifications even if that is what homeowners want. Let's face it, not every homeowner is qualified for a loan modification. By the same token, not every lender is entitled to foreclose on a home, as we have seen in some states like Massachusetts where the lenders did not have proper documentation to prove ownership of the notes.

My experience has always been that mediation really works to resolve foreclosure cases. More than 75% of the foreclosure or mortgage cases that I've litigated since 2008 resulted in settlements in either mediation or settlement discussions. In the majority of the instances, lenders approve either loan modifications or short sales.

But unfortunately, unless the law changes, homeowners would need to file suits in California to force lenders to mediate. In California, many courts have mediation programs managed through the court's alternative dispute resolution programs. The only way to participate in these programs is to file a lawsuit.

Like Massachusetts, California is a non-judicial foreclosure state which means courts do not get involved in the foreclosure process - often when it is too late when title has transferred at auctions.

The foreclosure scheme in California is statutory. It is really up to the legislature to do something about amending Civil Code 2924.    

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