Foreclosure
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
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 borrower for 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.
What Does The Largest Chinese Drywall Settlement In New Orleans Mean To California Homeowners Or Tenants?
Posted by: Kenny Tan
January 14, 2012
Two days ago, a Federal Court in New Orleans approved what has been regarded as the larges
tsettlement ever for Chinese drywall cases in the United States. That case involves approximately 4500 homeowners located in the Southeast. The settlement has both property damage and personal injury components in it. Knauf Tian Jin, the supplier/ manufacturer for the defective Chinese drywalls has agreed to provide uncapped funds - estimated to be hundreds of millions to remedy the phsical damages caused by Chinese drywalls and capped funds in the amount of $30 million to compensate the victms for personal injuries attributable to Chinese drywalls.
It is believed that similar Chinese drywalls had been shipped to and installed in Western states such as California and Arizona between 2002 and 2007 during the construction boom and after Katrina which created a shortage of drywalls that prompted US suppliers and manufacturers to import the gypsum from China that was used to make these drywalls hence the name "Chinese drywalls" had been used to refer to and distinguish them from other drywalls.
At first glance, the settlement seems large. But this is a class action that involves about 4500 homeowners. Do the math and you'll see that the average amount to be paid to each homeowner to compensate them for personal injury is less than $10,000 - nonetheless still a rather attractive figure for an average wage earner.
What does this settlement mean to Californians?
So far, Chinese drywall problem has not become a phenomenon in California which is more arid and less humid than the Southeastern states like Louisiana and Florida which reported the most cases of Chinese drywall problems in the United States. It is believed that the culprits can be traced to either the chemicals or bacteria that came with the materials that were used to construct these drywalls either due to reactions with moisture in the air by certain chemicals or metabolism by the bacteria that lives in these drywalls. Whatever the theory may be, defective drywalls make a construction defect case for which the victims may claim compensation for property damage and personal injury if you're homeowner or tenant.
These Chinese drywalls may or may not manifest themselves as being defective for a long time if humidity is not a concern. But if there's a significant increase in the humidity in your household, you might notice some changes around the house that cause concerns. If you start smelling rotten eggs which can't be traced to bad eggs in your home and seeing your copper pipes corrode for unexplainable reasons or experiencing certain mold-like symptioms like watery or itchy eys, skin rashes, headaches and not able to trace them to mold around the house, and it your house was built around 2002 to 2007, you mightbe having Chinese drywall problems.
California has a 10-year statute of limitations for construction defects cases. We are now in 2012 so if Chinese drywalls had been used for the construction of your home in 2002, your claim may be barred by the statute of limitations if you have not discovered the problem early.
For now, however, it is not a huge problem in California.
