Blog Topic

Holmes v. Summer: What Disclosures You As The Listing Agent Need To Make In A Short Sale?
Posted by: Kenny Tan
December 27, 2010

Some believe in 2011 we would see lenders opting for more short sales over foreclosure. If this is true, then agents can expect to do more short sales next year.

Have you ever wondered what disclosures you need to make in a short sale -- beyond what you already know that are required in non-short-sale transactions?

You would think that just putting the two words "Short Sale" on your MLS, flyers, or printed ads would suffice. These days even first-time buyers know what "Short Sale" means - lenders taking discounts on the money owed on the mortgages to allow sellers to make the sales work for them.

Here's a court case that might interest you

Two months ago, the Fourth District of the California Court of Appeal rendered an appellate opnion in the case of Holmes v. Summer that's worth your time reading if you're a listing agent, especially if the property is being put on the market as a short sale.

In Holmes, the buyers sued the listing agent - but not the seller- for not disclosing to them that the property was upside down and that there would be a risk that the seller might not be able to close the escrow if the lenders of the trust deeds, first and second would not agree to take a haircut on the outstanding balances. In response to the complaint filed at the Orange County Superior Court, the listing agent demurred to it on the ground it did not have a duty to disclose that the seller would have to come up with $392,000 of his own money to make up the deficiency if lenders refuse to take a discount on their loans. The trial court agreed with the listing agent and sustained the demurrer without leave to amend.

Keep in mind that the case never went to trial but was disposed of at the pleading stage.The trial court must accept the allegations of the complaint to be true no matter how unlikely they are, in ruling on the demurrer. So we don't know the agent's side of the story.

It seems rather odd that in the MLS listing or the flyers the agent would mke no mention that it was short sale. A short sale is not necessarily a negative these days. An agent might want to advertise it as such to attract bargain hunters. I surmise that this transaction took place in 2007 or earlier when short sale might have been less common then.(Case was probably filed in 2008)

What's noteworthy is that Holmes involved information that is a matter of public records. Courts are now making listing agents responsible for disclosing matters of public records notwithstanding the accesibility of this information to the buyers too. A listing agent can't shield himself from liability by arguing that the buyers could not have relied on the non-disclosure because the information withheld was public records.

This case may reach beyond short sales transactions.It sends a very strong message to the entire real estate industry.hough It didn't go as far as imposing on the listing agent to check all public records for information which may affect the desirability of the property like CC&Rs, easements, or unpermitted constructions, it seems to suggest that if certain red flags exist, it behooves the listing agent to make further inquiries on the seller or just check the property out.

While a listing agent is not the jack of all trade, there are certain things such as mortgages and deeds of trust that fall within the purview of a real estate agent's knowledge of experience. So one would expect the agent's appreciation of the risk that the escrow might not close if the property is upside down. Perhaps that's where the court is coming from. The court expects the professionals to be the gatekeepers for the consumers.

It didn't bother the court that the listing agent was representing the seller, not the buyer, and that the listing agent had an interest in protecting the financial privacy of the seller. Perhaps all that was required in terms of disclosure to the buyer was to tell the buyer that there was a risk the deal may not close escrow if the lenders didn't agree to let the escrow close because closing would require the lenders to accept less than what's actually owed - and to disclose BEFORE the signing of the contract and not during the escrow.

By now, the CAR has a standard form for Short Sale Contingency Addendum. So if the agent is experienced and not doing short sales for the first time, he or she is going to remember to use the proper form for the disclosure.

But unfortunately the CAR doesn't produce all the forms for all the disclosures the law expects you to make. If in doubt, disclose everything and investigate everything and be the good and responsible agent that you are. Good agents often tell their buyers to not fall in love with a house. Well, good agents should also not be afraid to make full disclosures even if it means losing a deal you've worked so hard on.

Permalink

Ever Wonder Why "Lenders" Won't Convert Loan Modifications From Trial To Permanent?
Posted by: Kenny Tan
December 18, 2010

By now it's pretty much common knowledge in the industry that the government's HAMP program is not meeting its objective of keeping people in their homes through loan modifications. Short sales aren't getting approved more expeditiously either.

I've wondered why for a long time and could never quite understand why things aren't working the way they are supposed to - and why borrowers have to resort to litigation to get things done.

But This morning I read a great article that may shed some light on this issue. It gives me some - but not all- of the answers to my questions.

Shortly after the foreclosure crisis began in 2007, I started receiving phone calls from borrowers in early 2008 looking for legal help in foreclosure and eviction defense. I've represented clients in foreclosure defense in the past in the late 1990s and early 2000s. But they didn't involve securitzed mortgages.

I got involved in litigation involving securitized mortgages in 2008 and has continued to be involved since then. In March 2008, I received the first frantic phone call from a homeowner who 's just been served with a 3-Day Notice To Vacate, having lost title through a trustee's sale. Before she lost title, she was the proud owner of a multi-million dollar home located on beach front. She's suffered temporary financial setback because of an illness that had caused her to incur large medical bills. She fell behind on her mortgage payments and the lender, a big institutional lender, agreed to enter into a forbearance agreement. But the lender sold the property at the trustee's sale without any notice despite the forbearance agreement.

Not long after she was served with the 3-Day notice, she's faced with an unlawful detainer. Quickly we answered the UD complaint. But in order to slow down the eviction process and assure she gets to litigate her title issues in the same action, we filed a separate action to set aside the trustee's sale and immediately filed an ex parte application to consolidate the UD into her own action. Amazingly, the lender dismissed their UD complaint before our motion to consolidate was heard. But she's not out of the woods. The title was still under the lender's name.

After about 18 months of litigation and after the court took under submission lender's motion for summary judgment, the lender agreed to settle. The amazing thing is they agreed to rescind the sale and give the title back to her and give her a permanent loan modification at about 4% interest with 40-year amortization and forgive the 18 months of missed payments on a $1.8 million principal! (We tried to reduce the principal but apparently that was impossible to obtain). She's doing well with her business now and is making payments on her modified loan and lender has one less property to worry about that they have to send to their REO department. A win-win for all.

I've also had some success helping homeowners who shouldn't have gotten into their loans in the first place. They were either on SSI or retired without sufficient income to afford adjustable loans that they'd gotten into. They litigated their cases and lenders approved them for loan modifications during litigation when they could hardly qualify with just their income alone (lenders actually considered the combined income of theirs and other family members who're not on the loans).

And conversely, in early 2010, I defended (and am still defending) a homeowner who's a healthy working adult who got into trouble temporarily because of slowing down in his business when he got foreclosed but is doing well in his business now to easily qualify for a loan modification especially the HAMP program. But the lender won't approve his loan modification and would rather spend tens of thousands of dollars to evict them. According to the lender's UD counsel, the problem lies in the struggle and conflict between the loan servicer (the financial institution) and the investors on Wall Street. Meanwhile, the borrower continues to stay on the property wanting eagerly to do a loan modification that works for both. But the lender won't budge. I don't think title is a problem. Isn't title held in the name of the people who could make decision on whether to rescind the sale and give the borrower loan modification? Who's depriving the borrowers and investors a win-win solution to this crisis?

I've read the article by Cole above. Though I don't feel like I completely understand the difficulties we face in this crisis but it gives me some perspective.    

Permalink

What Sort Of Notices Do You Need To Serve To Evict "Tenants" After You
Posted by: Kenny Tan
December 11, 2010

Lately more and more people enter the foreclosure market to buy up foreclosed property hoping to quickly flip it for a profit.

Since you can only purchase the auctioned properties in cash, in order for the investment strategy to work, you need to gain possession fast and quickly sell the property at close of fair market value. Any significant delay will tie up and make your money unavailable for more buying and flipping.

It's therefore critical that eviction be completed as soon as possible. This is not a problem in the case of an investor evicting a prior owner/borrower. Generally there are no possible defenses to this type of eviction because the investor is very likely to be a bona fide purchaser whose title is presumed to be valid and can be set aside in only very limited (I mean very very limited) circumstances.

But if the property is occupied by someone other than prior owners. The eviction is a little tricky. As long as he or she is not a tenant, they can simply be added as unknown occupants in an unlawful detainer action and be evicted together with the prior owner.

What if the occupants are tenants? Can you still serve them with the 3-day notice to vacate? The answer is "No." 

In May 2009 the federal government passed the Protecting Tenants After Foreclosure Act to give some protection to bona fide tenants who rent the foreclosed property from the defaulting homeowner, often not knowing of the pending foreclosure. 

Under this law, the new owner of the property - the investor in this case - has to honor all existing leases, whether they are month-to-month or term lease, subject to an early termination by the new owner if:

 

• a buyer has been found or
• the new owner intends to occupy the property as his primary residence. 

If these conditions are met, the new owner shall give a 90-day notice to terminate the lease - even a month-to-month lease has this advantage to the tenant.

So the Protecting Tenants After Foreclosure Act passed in May  2009 may create may delays for the investors. Usually the investors will offer "cash for keys" to the "tenants" as incentives to leave without an eviction. The "tenants" (who may or may not be bona fide) may claim they have term lease that won't expire for another year. This kind of comments will send chills along the spines of the investors who can't afford to have their money tied up for a long period of time, certainly not for a year or longer.

Investors can't in good faith say they are going to occupy the property as their primary residence. It's difficult to find buyers for the price you want if you don't have possession to fix up the place. So are you stuck with the one-year lease? You are, if they are bona fide tenants.

How do you know if these people are or are not bona fide tenants? Often times they won't show you the lease. And if you ask them any details about the rent including the amount if they will give wishy washy answer.

Certainly as the new landlord, you're entitled to receive the rent from the existing tenants. And if they don't pay, you can give them a 3-day notice to pay or quit. But you're not even sure the amount of the rent, any 3-day notices to pay or quit can be invalidated because the amount is overstated. Of course, you can always state a ridiculously low amount on the 3-Day notice. But what if the tenant cures it within 3 days because the amount is too low - then you're not able to evict. You start the process all over every month. As an investor, you can't afford that kind of delay.

So what do you do? The Protecting Tenants After Foreclosure Act does not have anything that deals with an issue that we just described above - that is what if the tenant won't show you the lease.

One option available to you if you're in this situation is to serve two inconsistent 3-day notices - a 3-day to vacate which assumes the occupants are not tenants, and a second 3-day notice to pay rent or quit which assumes they are tenants. In California, you may plead inconsistently if you are not sure about certain facts. You will have two causes of action in your unlawful detainer.

Doing it this way assures that you find out the truth about the relationship between the occupants who won't move and the prior owners - at least no later than the trial date. You will be surprised how often they don't show up for trial and you get a default judgment for possession. But if they do show up and it turns out that they are bona fide tenants and you've overstated the amount on the notice and you lose. Just start the process over again I suppose. 

There's really no easy answer to this.

 

Permalink

Can You Remove An Unlawful Detainer Case To Federal Court If Your Quiet Title Case Against The Lender Is Removed?
Posted by: Kenny Tan
December 07, 2010

After a lender acquires your property from a trustee's sale, the next thing that will happen is the lender will serve you with an eviction notice - 3-Day Notice To Vacate.

You file your answer within 5 days, alleging several affirmative defenses - the ones you are permitted to litigate in an unlawful detainer - based on non-compliance with Civil Code 2923.5 or 2924, besides the usual ones having to do with the manner in which the 3-day notice is served. Whether or not you can litigate issues concerning MERS in an lawful detainer is still questionable.

So you file your own affirmative action to set aside foreclosure sale naming the same lender who sued you in the unlawful detainer. Lender then files a Notice of Removal to federal court based upon diversity jurisidction.

You were careful with your pleading since you didn't want the lender to remove the case to federal court. Thinking that perhaps by limiting the issues to state laws, you can avoid removal based upon federal questions. But lender still removes the case to federal court.

One of the means to stop eviction after foreclosure is to file a separate action on title issues and seek consolidation of the unlawful detainer action into your title action (Asuncion v. Superior Court).

But the removal of the title action to federal court eliminates the possibility of consolidation because state cases cannot be consolidated into federal cases. That throws a roadblock in your ability to litigate your title issues -particularly MERS- and the unlawful detainer in the same action and possibly dashing any hopes of buying more time for yourself to negotiate a posisble recission of the trustee's sale and settling for loan modification and keeping your home.

Once your title action has been removed to federal court, can you now remove the unlawful detainer action to federal court so you consolidate them in federal court. The answer is 'No' and here's why...

As a forum defendant (you are a resident of California), you are precluded from removing cases to federal court based on diversity or federal questions unless the issues involve important civil or constitutional rights.

 

Permalink

Can You Litigate The MERS Issues In The Unlawful Detainer Trial?
Posted by: Kenny Tan
November 30, 2010

MERS aka Mortgage Electronic Registration Services is an entity created to facilitate the assignment of deed of trust. It has no employees.

Many mortgage transactions were set up with MERS as the"nominee" beneficiary of the deeds of trust. As a"nominee", MERS doesn't own the note secured by the deed of trust against the property the borrowers own. These mortgages were set up to make them transferable electronically without physical delivery of the promissorynotes.

I'm not aware of any state court appellate published opinions inCalifornia - but two bankruptcy courts did - that address the MERS problems.

In In Re Walker, the bankruptcy court analyzed California cases and various Commercial Codes and reached the conclusion that transfers from MERS to subsequent lenders are invalid because MERS didn't have any beneficial interest- or didn't own - the notes and therefore didn't have the power to transfer the note, and also since the there was no physical delivery of these notes, the transfers violate several Commercial Codes and are therefore not valid. The Walker court also pointed out that assignment of deed of trust alone (without the note) is not a valid transfer of the note. What this means is that if the mortgage has been transferred without a valid transfer of the note, the new lender technically doesn't own the note and the borrower owes any obligation to make payments to the new lender.

More importantly, under this analysis, the new lender doesn't even have the right to foreclose on the property because no money was owed to it.

The question is.. can you litigate these MERS issues in the unlawfuldetainer trial?

The unlawful detainer action is a summary proceeding that is only available if you meet the requirements to file your case under CCP 1161a. I think the MERS issues can be raised as an affirmative defense of lack ofstanding. An argument can be made that title was not duly perfected because the foreclosing lender didn't have the power to authorize the trustee's sale -essentially the trustee didn't have the authority to conduct the sale.

Of course it remains to be seen if the trial judges would allow these issues to be litigated. Certainly the timing may be ripe for the court of appeal to answer this question. 

Permalink