In this his first appearance on our show Jim offers a background of what one can expect and answers a few of the questions submitted via the Q&A section of our site. Below are the time-stamped show notes with links to the topics discussed and a transcript of the interview.Â If you want to hear more from Jim, leave a comment here and ask him a question for a future episode or call our podcast hotline and leave an audio question 615-short-it (615.746.7848).
Sean: Welcome, Jim, to our first episode of the podcast.
Jim: Thanks, Sean. I’m really glad to be here and I’m glad that out of all the lawyers out there on the planet, you picked me to be on your show. I think we have something to say and we have been saying something for at least the last five or six years. I believe we’ve been on the edge of all of this crisis and we’ve tried to remain there.
Sean: Yes. Here’s a really quick introduction for all the people listening. I met Jim about six months ago.
Jim: I guess it’s been like that. I’m sure it’s been about a half a year by now.
Jim: First it was by an introduction through e-mail. You wrote to me, as you recall. Then later on, you sent me some of the materials you had. I thought this program and your site was really amazing. Then you, ultimately, came to one of the sessions I was teaching to real estate licensees about how to handle short sale situations and foreclosures, generally. We visited there, and since, we’ve visited a little bit more. I’m appreciative of what you’re doing and it’s desperately needed.
Sean: Okay. Great. Well, the whole goal of this is to eventually turn it into a call-in show where people can call in with their questions. This just provides another means for people to get some answers to their specific situation. Granted, this is our first episode so were not going to have any call-in questions, but I figured what we might do is start off talking a little bit about what you’ve seen going on. You’ve been privy to some egregious infractions.
Jim: We have because we’ve had a newsletter now with about a 68,000-person database, that ranges from real estate licensees to mortgage brokers to politicians to other lawyers and to just plain old moms and pops. This newsletter has not only given them information, but has invited them to call back or write back if they had any questions. We’ve tried to be good about answering those at no charge, for these initial conferences, which are, essentially, just trying to get down to the truth, and just what it is that they really need.
When I say the truth, I don’t mean that they’re not telling the truth. I mean that the lending community is not telling them the truth. I hate to say it, but even the government is not telling the truth about what their rights might be. Somebody needs to tell them, and somebody that actually has been in the trenches for 30-some-odd years like myself, has certainly seen it all and heard it all.
I’ve had a very good range of input coming back about the whole panorama of things that the lending community and the government is doing wrong. We’ve had an opportunity to go back and challenge it, maybe more so than anybody else. This range of newsletters has gone out over about a nine-state radius, out of Arizona, but, in fact, we’ve had people call from states that we never sent it to. It’s obviously being forwarded all over the place because it tends to be the news of the moment. It’s one of the few places you can get some unbiased information.
Now, when I say I unbiased, I don’t mean that I don’t care how the chips land. I do. I am a consumer advocate. I really care about what happens to the people out here in the middle of this great crisis. What I do mean is, when I read the law, I don’t contort it in any other direction than where it appears already to be going. I don’t try to read it by putting my thumb on the judicial scale and bending it one way or another. The beauty of it is I don’t have to because if one researches far enough, often times, there really is a fairly good legal argument that can support entirely legitimate positions.
There’s one eternal test out there in law that seems always to be the case. That is, what I call, the "T’aint Fair Test," where it just "t’aint fair," it just doesn’t seem fair. Often, if you look far enough, it isn’t. It’s not lawful, either. It’s not only not fair, it’s not lawful. You have to look in the right places to find that. I’ll give you an example.
I’ve had cases where people come in and say, "The bank is lying to me. They’re telling me to go get all my Social Security, or go get everything out of my 401(k), all my retirement plan and give them the money, as a precondition for a short sale. I’ve read on a website, someplace that that’s exempt assets. They’re lying to me." You say, "That’s true. Did you raise that with them?" They say yes, but they said, "We’re not telling you to go get it or we’re not trying to execute on it. We’re not trying to take away from you. We’re just saying, ‘If you could just happen to go find $20,000, which just happens to be the amount in your 401(k), we would probably look favorably upon doing this deal.’" You say, "Well, that ‘t’aint fair.’ Is there something someplace that also says it’s unlawful? You go look for it in the regulations about what a creditor can ask a debtor to do. You don’t find it. You ask in the exemption laws, to say, "Well, since it’s exempt, can someone cast a shadow over it by saying they have the right to get it?" Ah, nothing there.
Then you start thinking, "Wait a minute, isn’t this an intentional interference with the government benefit of some kind?" Instantly, you start rushing over to the criminal statutes. You start finding statutes about interfering with benefits, like holding up somebody’s Social Security checks or something along those lines. That is unlawful. When you read the statute, it’s a class-four felony. Also, when you read about tampering or extorting in the criminal statutes, it fits perfectly. You don’t have to look and you’ll be looking in vain in the civil statutes or the statutes regarding a bank’s rights. You go to the criminal statutes and your sense that it "t’ain’t fair" bears fruit because it is indeed unlawful. You just have to know where to look.
Sean: I imagine their ears perk up pretty quick when you start…
Jim: They certainly do, when you start talking about class-four and five felonies. It goes further than that. It says that anyone who, after being so advised, continues the conduct increases the felony and those who attempt to push it, like lawyers, who are pushing it further with collection letters or a collection agency become an aider and abettor. Now they are in the middle of a felony.
Now, it’s not so much that if you went down to local law enforcement and said, "These people are committing felonies," that local law enforcement would immediately jump on it and say, "Then we’re going to prosecute." The fact is, the lenders, and I’ve said this before, have a lot of clout. They had dinner with that lender last night, most of the local law enforcement authorities down at the country club. They’re not interested in going over to Harvey and start prosecuting him for conduct that, if it was anybody other than Harvey such as you or me, they would prosecute.
What you can use those for is a civil action, because every criminal statute is a standard of care. It means that if you are a victim of a criminal action, it’s not just the authorities that can do something about it. It’s you personally. You can sue for consumer fraud on the basis of that, or you can pursue for the fact that you’ve been harassed, intimidated, or that somebody has attempted to affect an extortion upon you by use of these methods. That, then, becomes a standard of care for a civil lawsuit. On that one, you get punitive damages and a serious amount of money.
Now, the banks understand that threat. When you say, "I’m going to go down and tell your pal, the local prosecutor, your personal friend, the bad things that you’ve done," you’re not going to get a lot of action. When you go to that lender in say, "Oh, hell no. I’m just going to get a savage consumer lawyer who loves contingency cases to sue your shorts off, based upon that criminal violation. Boy, you’re going to get a lot of press on that one as well. There’s going to be a class-action right behind it, you can be sure, because many people have usually been hurt that way." That gets their attention, and it ought to, because people are starting to wake up and do this all across the country right now.
Sean: You’ve stung back and had some success with that.
Jim: I have. Like I say, most successes are those that you gain by knowing how to articulate the threat. No one really wants to go through a battle even if they think they’re going to win it. You’re not out there to pick fights. You’re out there to support victims. Victims are not benefitted by two and half years of litigation in most cases, even if in the end it becomes more financially rewarding for them or at least abates the terrible losses they’ve had.
You need to speak then in a language that the lenders understand. That language is the language of the law. Rather than saying it just "t’aint fair," which is good enough between you and me and Mom and Pop, you go out and find those statutes and put them in front of them.
Most of these lenders are represented by very qualified counsel. When they look at those statutes and the lender client says, "Is that what they really say? Could he really do that?" and they say, "Yeah. He could." Right behind him, you know what happens, these things become vogue. Once you file one, they become vogue and right behind them is a class action lawyer, a hungry one that makes money by virtue of chasing these on a wide national class. Then you’ve got the cloud over the top of you of a multibillion-dollar class-action alleging criminal misconduct. That has a way to depress stock prices on your bank. That has a way of damaging the reelection potentials of bank vice presidents. That has boards of directors, who are usually substantial folks in the community, wondering if they’re going to have exposure if this kind of conduct continues. Typically, it can correct it.
We’ve had our best successes, the ones that we feel the best about, not by winning in trial courts, but by putting the information in front of them, that after chewing on it for awhile and finding out that you’re serious, they reverse themselves and that victim is made whole or the oppression stops now. This has been our target.
Yes, we been to the Supreme Court three or four times and have prevailed on consumer issues. One of them, for instance, was the Lofts at Fillmore case. This was one not too long ago in which the community of builders attempted to pass a rule, essentially, through the Legislature, but also saying in the courts that warrantees on a home, for new homes, fitness and habitability would not pass beyond the first buyer. Even though the warrantees in the state are actually eight years plus one, if you discover the defect in the eighth year, they’re attempting to cut it off by building the home, selling it to buyer B, and then selling it to the consumer, meaning there were no warrantees. We took that up on challenge in the Lofts at Fillmore and won that one.
There is the Lombardo versus Albu case. This is the one that required full disclosure in real estate transactions, that real estate licensees couldn’t hold back information, even if the person who told it said it must be held confidential. If the information itself was so bad, it struck at the very basis of the bargain. For instance, if you had a slab crack and this was disclosed to the real estate licensee, he couldn’t say it was disclosed in confidence. He has to tell all the principals. Well, that was our case. We’ve been there before and done that before.
That was at a time when the lenders weren’t doing what they’re doing now. This was the world that radically changed in about 2006. Now, it’s the lenders that are being the bad boys and wearing a black hats. They need to be, again, repositioned under the T’aint Fair theory back to obeying the law.
Sean: This is just a tangential question but you’re painting kind of a bull’s eye on yourself, I would imagine, by sticking up for the little guy. Do you have any concern in going up against some of these big bullies?
Jim: I expect flak from every possible direction when you do these things. Let’s put it this way, I don’t think I’m going to be elected to anything if the establishment had much to say about it. Here’s what happens over time. Shame on those who do this and make is even necessary.
They always say that a hero is a matter of timing. What can be terrible one day, as society wises up, becomes enlightened the next, and we’ve certainly seen that. For instance, in 2004, 2005, we were telling the real estate community that the market was overheated and the best advice might be to scale back a tad. We felt, for instance, that increases of 15% and 20% in property values on an annual basis were unsustainable and that, at some point in time, they would deprive the entry-level person from even getting into the marketplace, young couples that are starting new families and having to have a place to live and finding their first step and the stepping stones of owning homes and building up over the their careers and their marriage. That opportunity was being lost because of the increase. We suggested that people batten down the hatches a little bit and not speculate so much.
I went to two sessions, said this, and the real estate community, who are typically my friends, didn’t want me around anymore. They thought I was the black cloud and that I dampened things, even though I was saying that we were hanging over the edge of a cliff. They virtually wouldn’t listen to me or even return my calls.
Fast forward two years, suddenly they were calling me up and asking me to speak everywhere because, of course, the cliff was approached, they went over the edge and now it was, "Help. Save us." One minute I was the guy with the black hat and the next minute I was the guy with the white hat. It’s a matter of timing.
I have that feeling, periodically, that I’m always going to get targeted because of my positions. As long as I feel as though those positions are well-founded in law or that they are a position that ought to be well-founded in law and law ought to be made to make them so, then I feel I’m doing what I went to law school for.
There are lots of options in your career. There are many things you can do than go to law school, that’s for sure. For instance, if I had it to do over again, I would’ve liked to have started a great air conditioning company. Air conditioning would’ve been a great contracting job that I would’ve loved to have done, but I felt too much of a pull. I looked around me and I saw a lot of things wrong. I noticed that there was only a minority of the legal community that was standing behind the majority of the people who were having wrong done to them. I thought I wanted to add myself to that rank.
Of course, a lot of people in the legal community have come to me and said, "Doesn’t that mean you’ve starved to death by doing that?" You say, "Actually, no." They’ve lost track of reality. When you have one guy who’s a bad guy and has a lot of power and he’s oppressing a thousand people, if I wanted to be the attorney for that one guy and throw little old ladies out on the street, then I’d have one client. He’d need me sometimes. What about the thousand he’s oppressing? I’d have a thousand clients. They don’t pay as much. A thousand times a very small amount ends up as a good enough living that I think it should attract other lawyers.
I wish other lawyers didn’t think of that as wearing sackcloth and rolling in the ashes by representing people that don’t have a lot of money. The reality is, they will stick by you and it’s a practice-builder that makes you feel good about going to work in the morning, that you done something right. Rather than becoming part of the problem, you’re part of the solution for a thousand people, not one nasty black-hatted character. I feel rewarded by it and I’ll take the flak and be okay with it.
Sean: Okay. Great. On this first one, we don’t have any call-in questions yet, but I figured what we might do is just go through some of the stuff that’s been submitted to our website.
Jim: I’d love to. Let’s see if I can answer some of this.
Sean: Well, before we get to that, something I’ve seen commonly is this notion of obligation and fulfilling. It’s something that’s commonly used as ammo against someone doing a short sale. They say, "You’re skipping out on your obligation. This is wrong morally. You can’t give up your debt like that." How do you respond to that?
Jim: Well, I think there is a difference between owing a debt and being unable or unwilling to pay it and vengeance. I believe there’s a distinction between the two. We’re not a country like England was 150 years ago. In fact, one of the reasons we left there 300 years ago and started another country is because of the oppressions of English law, which were very severe. Theft over a pound was a capital offense. Certainly, in those days, if a person owed a debt and didn’t pay it, they could be thrown into a debtor’s prison for a long time. Their family stripped of all their possessions. In some cases, they could even be put in stocks, and in other cases they could even be lashed until they died. That was very conventional wisdom clear across most of Europe during those days. We tried to escape, among other things, that kind of oppression.
The idea is, especially in a state where an instrument has no deficiency… Let’s use, for an example, Arizona. I don’t know how widely we’ll podcast out here, but Arizona is one of the six total non-deficiency states for qualifying home mortgages, but, actually, one of 14 in which there are quasi-non-deficiencies. There is truly more out there than what you hear in the news. There are more that will restrict how far a lender can go after one loses their home to get more money in addition to that. Let’s use Arizona as an example.
When you execute an Arizona deed of trust on a qualifying home, which is two and a half acres or less, that is capable of residential occupancy, that is a duplex or less, and that has used all, or substantially all, to purchase the home, then the deal that is made by statute in the state of Arizona under Ariz. Chapter 33, it’s the deal that must be made. It’s the one the creditor must conform to if the creditor says they want to conform to law. It says the creditor gets one of two things. They either get paid or they get the property back. If they get the property back, that’s the end of it. They don’t get both.
Now, that seems fair to me if it’s well-known in the law at the time you contract, especially the lender in a superior position. He would certainly know better what the law was even than the borrower. The latter has then the capability of abiding by the law by protecting his position. How would he do that? Well, for one thing, he can certainly detect how well the borrower has behaved, historically, in paying his debts. As we all know, when the economy changes, borrower’s positions can change overnight. A good borrower for the last 10 years can have financial shortfalls because of the economy or setbacks in their own life that can make them a bad one virtually overnight.
Property doesn’t move as quickly. Obviously, the second protection, in a state where the alternative is to take the property back, is to properly analyze the property and collateral before you make the loan. Who is more capable of doing that than the lender? He sets his own standards and policies about what it’s going to take. The lender decides what the loan-to-value ratio is. The lender decides who’s going to appraise it and what standards they are going to use to appraise, harsh, medium, or none. The lender decides how he is going to book that loan. Is he going to sell it to FHA? Is he going to turn around and sell it to Fannie or Freddie or Ginnie or one of those? They have their own standards. Then he’s going to have to look to make sure he complies to those standards.
By the way, I should go one step further. It’s not just a snapshot. True appraisals also trend. They talk about not just what it was worth at 5:00 on Tuesday, but they also have to look at what’s it going to be worth next month at 5:00 that same Tuesday next year. They have to trend. Most appraisals, if you look at the internal economics of them and the internal logic and arithmetic, it is a trend that is built into it. That’s why they look historically and look for a trajectory to postulate, then, where they will go in the future. They have the ability to manipulate that, then and there, and see what risk factor they will accept to assure that that collateral will come back to them equal or greater than the amount of the loan.
By the way, they have a whole economics department to talk about econometrics, where the whole world is going, where the leading economic indicators are going, what risk they are willing to take. They have the ability to protect themselves.
In a state like that, it seems to me, that if you say, "Look, I cannot pay you, therefore, I will give you the property back," all you’re really doing then is fulfilling the other part of the bargain because you, as the borrower, made two promises, I will either pay you or give you the property back. If they merely give back what they bargained for, which is one of the two options, then what harm has been generated? The contract has been obeyed and the law has been obeyed.
Is there then some need to have vengeance beyond that? There isn’t any. There isn’t any on the statute. The one vengeance that will be wreaked though is credit ratings are usually damaged and, in some cases, there can be tax ramifications, although not currently when there’s no deficiency. From that standpoint, the borrower goes away with penance that’s been levied on them for a period of time. They’re going to spend two to three years recovering from that penance of a bad credit rating. Also, they have other penance. They’ve lost their home. They’ve usually lost their place in the community. Their children are usually withdrawn from the school that they were at. They don’t have the friends that they had anymore. The economic stability they had before is now gone. They are paying penance. To go beyond that, as many lenders do…
I will tell you, that I have actually had depositions with lenders who have said that they actually believe that a person who doesn’t pay his debts is somehow morally corrupt. Now, we ask ourselves this question, "If I don’t have any money to pay you, and I would very much like to pay you, and that my own ambition is to pay my bills, and it always has been, then how am I morally corrupt if I don’t pay that bill, especially if the only deal I made was that I will either pay you or give my home back to you and I will be homeless?" You said, "I will do that." Haven’t you performed utterly, 100%, and in the most egregious suffering way under that loan? I think you have.
I cope with those people by saying, first of all, let’s take a look at what the agreement was. The agreement was that you either get the money or the property. The second one, I looked in vain in the statute to find anything that said that vengeance should be wreaked upon the party beyond that. There is no debtors’ prison anymore. Thank God we got away from that 300 years ago. That’s called barbarism. We are a little more enlightened than that. The fourth thing is, is there is penance that is paid. If we really want to look at the reality of it, they go away with a bad credit rating and they go away with the emotional burden of what has happened to them. They feel disgraced. I’ve seen these people. No one agonizes more over being unable to pay that bill than that borrower because to him it means something for real. That day, it means he’s on the street. For those who want to find some moral burden that borrower takes away, he’s got it. It’s there. It’s already built into the system. We have to also pursue them for the money, any deficiency states have said that once you’ve lost your homestead, your position in the community, haven’t you paid enough and isn’t there an end to the suffering as in all things?
I am also reminded of that story of the widow’s mite where Jesus walks into the square and here’s this poor widow, this poor lady who needs money and family and asks everybody to please empty and drop a little money in the box. The rich come in and drop the equivalent of a couple of bucks. A little widow comes in and drops in the equivalent of a tenth of a cent. Jesus says to everybody, "The person who gave the tenth of a cent gave more than all of you because you gave but a tiny piece of what you had and she gave everything she had."
I say the same thing. I use the analogy for the concept of losing your home. For the lender, it’s a drop in the bucket and they’ve got guaranteed programs that are going to pay them off for the shortfall, in many cases, anyway. They were the ones who set that economic scenario and they’re the ones who chose the instrument and the deal. They have actually come out of that deal exactly as the borrower agreed. The one who’s lost everything, gave everything that they had is the borrower. Now, if that’s isn’t penance, I don’t know what it is.
Sean: On that topic of getting reimbursed, what exactly happens there? They have programs on the back-end with the government to get…
Jim: They do. Actually, there are private ones and there are public ones. The private ones are where the instrument has been sold through some sort of a co-investment agreement.
What really happened is, in the late ’80s, a lot of lenders decided that it made no sense to portfolio their own loans. We had been through this banking crisis once before and it was nowhere near as tragic. In the ’80s we came across similar hard times. The lenders fell on hard times. As some people will remember, if they were alive and adult enough at that time to read the newspapers, many people lost their homes, but in the end, many of the lenders failed. As a result, the lenders reevaluated their own economics.
One of the things they concluded was it made no sense to portfolio a loan. Portfolioing a loan means that the lender loans money from the savings that have been deposited there by their depositors, and then keeps that loan and collects on it over a number of years, and gets its return by basis of that interest. Now, when the loans were deregulated in the ’80s, from 1982 on, the lenders then had the ability to not only take deposits from something other than their immediate depositors, but also to grant loans in places that were other than their immediate vicinity. That gave them some flexibility that they kind of liked and so they saw another option.
At one point in time, when we had Persian money and Chinese money, which was awash in the ’90s to the lenders, the lenders said, "Now we don’t even have to portfolio loans. We can actually just broker money. We’ll take the money from these investors and broker it for them. We’ll take some money on the flip, either as a brokerage commission or a couple of points in servicing or a couple of points in closing. We’ll seize on the mortgage and we’ll sell it to this investor community, typically foreign at that point in time, or run it through domestic entities, but with foreign money, that was just awash in those days. We won’t portfolio them anymore, so we’ll take absolutely no risk with them in the event that they go upside down."
A lot of them engaged in agreements with entities out there, that had endless bounds of money, to take their money, loan it out, take some money for brokering it, seize on the loan and add the loan back into large pools for these organizations because these were businesses and investors who were looking at 10-, 20- , and 30-year returns because they were so large with so much money. They didn’t need to make flips.
The bank got into the flipping business on loans and found out that it was incredibly profitable. They had very little at stake in the quality of those loans anymore. They flipped them downstream to new investors, many of whom assumed that the bank was doing due diligence. The bank thought that it wasn’t and didn’t have to, and it was just selling it downstream, saying, "Look…"
Sean: "Flush it. It’ll go somewhere."
Jim: That’s tight. This is as it is, where is. Well, it did. It flushed all right. It ended up in places where, finally, it backed up and now we’re all awash in the effluent of terrible loans.
Yes, in some cases, it’s private entities. Some of those private entities can be even other regulated entities like banks, governments, Sweden, Norway. A lot of them brought these when they collateralized these loans.
We’ve heard a lot about the MERS system, which was merely a system where lenders who were loaning across state lines and diversified in their loans, didn’t want to have a legal presence in every single community where they may have made a loan. They assign it over a MERS system. MERS essentially became the trustee. MERS was the one who supposedly had the legal presence in every one of these states to take action on behalf of the lender.
Then the lender would assign its MERS number, its account number, as opposed to assigning the beneficial interest. There even became a market in MERS assignments of account numbers. That was a vigorous market. Again, speculation being what it was, people were bidding on that. For instance, some people were saying, "We think that interest rates are going down, so a MERS account number that is currently bearing an accumulative 4.5%, we think that if they’re going to go down, this might be something worth buying right now and actually paying a premium for because we’re going to get a higher rate of return than we would on our money if we waited another three years." Others bet that it was going to go up. They would buy instruments that were at the bottom of the marketplace. Essentially, what they were doing is merely buying a MERS account number.
You can see, this was all the smoke and mirrors and tranks that were formed and blends that were formed where the actual ownership of these instruments was engulfed in an ocean of confusion, assignments, quasi-assignments, sub-interest, and sub- sub-interest, to where no one, in some cases, knew who owned what anymore.
Sean: We outsmarted ourselves.
Jim: Absolutely. Although, I would say, not so much we as the lending community who should’ve known better.
Then, of course, you have those that were sold to Fannie, Freddie, and Ginnie, so you have a government holder. Now, all of these, plus other programs that we haven’t even heard all of that are privy merely to lenders and the Federal Reserve Board and the local depository and regulatory institutions. They made certain deals with the lenders that if they took hits on some of these instruments, they would cover all or most of the hit. Between investors, a backroom crowd that owns and controls and manipulates all these collateralized mortgage obligations, they exist. In many cases, they have to take all, part, or most of the hit, and, in some cases they have to take a hit plus or they are insured by other indemnitors who have to make good on it. It may be not just for 100% of what they paid, but it could be for 105% to 110% because they are not only on for the principal they lost but for the interest they could have made. That makes these checks even bigger that could be written.
Also, when lenders close one bank and try to convince another to take it over, when they pick up those not usually very good loan portfolios and try to convince the next healthy lender to take it, they typically say, "We’ll insure the shortfall as an inducement." When lender B is approached by FDIC and they say, "We’re closing lender A. We’ve got a $500 million portfolio of mortgages that are slow and questionable." Then they say, "You can take those over for $200,000, and, as you collect them, if you have any shortfalls whatsoever, the FDIC will make it up, not only make it up, but pay you a service fee."
In those scenarios, the secondary bank that’s taking over the first bank’s bad loan portfolio can’t lose a nickel, not on any of it. They will tell the person that comes in and short sales for, say, a $250,000 face-value note on it. They short sale that for $125,000 and they will tell that borrower, "You’re terrible. You’re awful. You’re getting off without paying the balance of it. You’ve had a smoking deal." In fact, they turn around and turn that shortfall over to the FDIC or one of the other indemnitors or regulators and get every nickel back plus an average of, usually, between 5% and 12% for the loss of income and the service.
Sean: How do I become a bank?
Jim: They absolutely don’t lose. This is why the banks, other than people like B of A, who just engage in such terrible banking practices that they’re in deep mires legally with Attorneys General across the country and class actions, most of them have realized that short sale is a pretty darn good deal for them and they’re anxious. You will recall at the beginning of the short sale trend, banks were extremely reluctant, whereas now they get it. They’re going to go forward. It’s also why the banks that have done that have wonderful quarters of recovery. The bank profits are enormous right now.
Sean: Well, B of A, I know, devoted a whole special short sale unit for expediting the processing of short sales.
Jim: They’ve had to because B of A has had the biggest difficulty. They inherited a couple of lenders and allegedly bought one, Countrywide, which actually they didn’t really buy, they had deeply loaned to it as their warehouse, their wholesaler of money. When Countrywide couldn’t pay it back, they had no choice but to take it over. It’s had some steps that have exposed it to some great crisis. Plus, some of its early steps in digging out were not very satisfactory and were probably violations of law and so they’ve courted a lot of trouble from the Feds.
Also, they made non-conforming loans with Freddie and Fannie and then sold it to Freddie and Fannie. Freddie and Fannie may have recently gone out on their loan portfolios where they were supposed to be a 20% equity, let’s say, and found out that there were actually bandit seconds that were put on it at the very moment that these were sold into Fannie and Freddie originally. They were supposed to be 20% free-and-clear, 80% encumbered, but it turned out that they were 100% to 110% encumbered, so the borrower had absolutely no stake in staying there and paying those loans. They have recently recoursed billions of dollars of these back against B of A and other lenders saying, "These were nonconforming to begin with, so you pay us back all the money that we gave you when we originally bought them." I think that’s a powerful claim. I was wondering myself why it took so long to bring because it’s so obvious.
This is why you’re going to find that some should be a little faster. Frankly, I think, the ones that are deepest underwater ought to be the most amenable. Yet, it usually turns out that the ones that are deepest underwater are the ones that have been the most troublesome to deal with while the consumer in making short sales get through.
Sean: I know your time is extremely valuable, so let’s just take a few of these from the website. Here’s one that says, "Can I short sell a rental property that has a HELOC? I have a rental with the first of mortgage and a second mortgage that was placed at the time the home was bought. The second is a home improvement loan secured a year after the home was bought. Can it I still short sale to both lenders?"
Jim: Well, first I want to start off by saying that by answering these questions, I can’t be getting any direct legal advice to anybody. This has to be very general and it has to be something that’s almost educational in purpose, so that we can learn some of the details of how we look at these and how a lawyer might look at them so that people can understand their rights better. The next point is, I’m answering, currently, under Arizona law. Although this podcast may reach people in Michigan, you do have to remember that you always need to consult local law to determine where it might vary.
This particular question I’m going to answer in a fashion that has become quite common in Arizona because the very circumstance that this gentleman has written about is one that occurs many, many times. We see it probably 20% to 25% of the time.
Here we have to start out with some principles. This gentleman has two mortgages, the first, which assumedly was one that was used to purchase and a second which, as he said, was used to remodel or recondition. In any event, it was not used to purchase the property, per se. That’s important because the Arizona Anti-Deficiency Statute says that the debt has to be used all or substantially all to purchase the property. Well, we don’t know exactly what the ratios were here, but let’s just assume that it was obvious that the second one was not used to purchase the property. It was used for something else.
Now, in some states, if you take a second and put it back into the property, it too can be exempt. Arizona did not follow that rule. It said, "Yes. I understand. You put a pool in or you put some new floor covering in, or you put a new roof and definitely improved the property." As far as Arizona’s concerned, that was still a take-out.
A HELOC, of course, is a home equity line of credit. There is an issue there and it probably is one under the Beauvais versus Bank One case decided a couple of years back by the Court of Appeals. It’s probably one in which the lender, if they wanted to, that holds that second could pursue it and pursue it for more money, pursue it for the entire face value, for instance, by waving its security, meaning saying, "To heck with it, I’ll just release the lien," and then go in after it later for the entire amount on the note. That is the liability exposure there.
Now, the reality of it is, though, in 2011 and 2012, and more so in 2012, because the banks are getting a little more liberal on this, in most cases, you’re probably going to satisfy your second in your short sale closing. It doesn’t matter that it’s a rental property, as long as it’s capable of residential occupancy. At least your first loan is more than likely a non- deficiency loan. It’s that second that’s the problem. If we get into a short sale situation, usually it’s the lender that’s first entitled, that’s going to be the big purchase money mortgage guy, who’s going to really be calling most of the shots. They will say whether there is enough short sale proceeds that they find acceptable. In most cases, it’s been regulated by Hope for Homeowners, HAFA, 2MP, HAMP, or some of the other programs to where no more than $3,000 to $5,000 can be given to the second mortgage holder as a precondition of the short sale.
Now, the second holder does not have to take that, but what it means is that’s all they should be asking for. That’s a step in the right direction because, in the past, they were asking for all of it and asking that it be deposited as a precondition of getting out of the way for the foreclosure or for the short sale. Now, that’s all that can be offered out of the deal by regulation under these guideline-type short sales. They’re either going to take it or leave it.
If they leave it, they do, nonetheless, still have the right to raise that later. In other words, if they say, "I am going to leave it but I’m also going to remove myself from the lien of second position so it doesn’t have to be foreclosed on, go ahead and do your short sale." Some of them will do that but they do reserve the right to pursue that note a later date for up to six years after the date in which the last payment was made, technically when it went into default.
Or, they can say, "I’m going to sit right here and I’m going to kill your short sale." They actually can do that. They can virtually say, "I’m not removing my lien. I’m not going to ask for any money other than everything. If you can’t pay me one way or another and there is enough money in this deal, then to hell with it, I’m sitting here and I know your deal is going to die." They do that all the time. Less lately than what they used to.
Sean: Because it’s foolish.
Jim: Because it’s foolish. They realize, in the end, all are going to get is whatever money is typically on the table in that short sale. They’re not going to make it pursuing them. In most cases, the reason the borrower is in a short sale is because they have no more money. That’s the end of it. There is no gold bullion buried in the backyard someplace. This is it. They better take it while they can.
In the old days, when I say old days, I mean two or three years ago, the lender was absolutely sure that the borrowers were just ripping them off and actually had money buried someplace. They didn’t. Now, as they prosecuted them afterward, by suing on the note, they found out they had no money. They got bankrupted 85% of the time. They realized there was no more money. This pursuit was ridiculous. Now they’re trying to satisfy in the short sales. My suggestion there would be get your short sale written up, figure out to where several thousand can be allowed to the secondary, the HELOC, and put it in and make your argument in closing. You’re going to get one, but you never get there to find out what their argument might be until you get it at least that far.
In the old days, this was a 50-50 chance. In late 2011, and I predict into 2012, they’re going to be softer. It’s likely that 60% to 70% of these are going to go down. There is a good opportunity to do it now. Maybe the fact that he hasn’t done it before, his chances of doing it now have improved.
Sean: Okay. Great. Let’s take another one here. If a HELOC is rolled back into a first, can you get hit for the deficiency? Let me just read a little of the clarification. We took a HELOC to purchase a business in 2007 and rolled it into a first later that year. The business has since failed and we are getting divorced. The house is upside down approximately 80K. Is a short sale possible?
Jim: Well, let’s first assume that the home they’re talking about is one that would qualify as a qualifying mortgage, two and a half acres or less, duplex or less, all or substantially all of the money of the first mortgage, at least, went into it the first time around, and that it’s capable of residential occupancy. If we assume that, then we know that the instrument that they started out with was a non-deficiency instrument. Then later, they went out and got a HELOC for a business loan that clearly is a HELOC. That doesn’t even begin to argue that it would be stuck back in that property. Obviously they’re right. Their evaluation that it’s a HELOC is accurate. Then they went and refinanced it.
Now here’s where the Beauvais versus Bank One case comes back into effect. It’s a great case now for folks who are in this position. When they wrapped it back into the note, they blended it. It’s now become a blend with a non-deficiency and one that would have, had it stood on its own, been a deficiency. That very case came up in the Beauvais versus Bank One case. The question was, "Can this be foreclosed now as a deficiency instrument?" In other words, did HELOC contaminate the non- deficiency side, so that it’s now all deficiency or at least some sum of money up to the amount of the HELOC that was wrapped back in is deficient, or has this all become a non-deficient, meaning since there’s no way to segregate out which dollar was which, that now the infectious portion has been, that the non- deficient part has infected the deficient, so that now it’s a full non-deficiency instrument?
The Beauvais case, looking at the Legislature, and looking at some of the cases that were before that, Baker versus Gardner is a really good example that was decided in, I believe, 1988 and reviewed again in 1989, said that the basic purpose of the Legislature in the non-deficiency statute was trying to make it some mechanism by which the person who has lost everything, their family domain, their home. We’re not talking about a house. We’re talking about a home. There’s a lot more at stake in a home than there is in just the house. It means you’ve lost everything, your whole social and familial connection. When they’ve lost it, that’s all they ought to lose. The court looked at that and said, "It looks like the substantive policy, if we had to err on one side or another, is to err in finding it infectiously non-deficient rather than finding it infectiously deficient. Therefore, this was a non-deficiency instrument."
In addition, it was also a refinance and there was even a question that if I took a non-deficiency loan and refinanced it, is it still a non-deficiency loan? It answered that question saying yes. If it replaced a non-deficienct, it is a non- deficiency. California went the other way. This is significant.
If I went out and bought a house originally and I paid all the money to buy from the original owner or the builder and then I went out later, maybe to take advantage of an interest rate decrease and refinanced it, here is the trap for the unwary, then the new loan was a full-deficiency instrument. In California in 2010, the Legislature there passed an act to set that aside and essentially adopt the Arizona rule. Arnold Schwarzenegger vetoed that as one of his last official acts, so that still remains the rule.
It’s significant that the Beauvais case has said two things, not only that a blend will result in a non-deficiency loan if two are blended, deficient and non-deficient, but also that if you go out and replace a non-deficiency instrument with another loan, it too is non-deficient. That’s a significant improvement. The Beauvais case is one that even segregates the state of Arizona from the other six out there that have high non- deficiency preferences.
Sean: Again, talk to your local attorney.
Jim: If you’re going to be out there in one of these other states and you’re looking to apply some of these rules, you’re going to want to talk to your local council. Now, we have a website, EckleyLaw.com, on the FAQs Section, take a look there. We have several states that we do practice in. If you take a look there, your question might still be answered. I’m answering them about Arizona, but there are other states there, Washington, Oregon, California, Colorado, New Mexico, and Hawaii. There are a number of states there. You’ll want to take a look at it. It may very well answer your question.
Sean: Okay. Let’s just take two more here. Why is the lender still sending bills after our short sale successfully closed?
Jim: Well, there are two reasons that they might be doing that. One is that they’re attempting something which I think is wrong. I think it’s a violation of the Unlawful Debt Collection Practices Act. They’re attempting to suggest that you somehow owe that shortfall. Many lenders are of that opinion, or at least they would like to be of the opinion, that after a short sale, a short sale is somehow different than a foreclosure. Here’s their argument. The only time that the anti-deficiency statute applies is if there is a foreclosure, that if you engage in a short sale is somehow a creature that is different than a foreclosure and therefore there can be, indeed, a deficiency. After all, you didn’t go to foreclosure, you stopped well before and you compromised the debt. That’s the argument.
That is not supported by the law. Baker v. Gardner said exactly the opposite. It said no. It doesn’t matter how cute you get. If it’s a non-deficiency instrument, by definition, there shall be no shortfall. Some of the lenders still argue that there ought to be.
There is even the [Tank/Verdi 45:58] case that was sort of a short sale transaction which has been decided in the last couple of years, which essentially even agrees with that point. It brings up Baker versus Carr. I won’t go into the details of it except that it was one in which there was a non-deficiency instrument. There was some argument that since it didn’t go all the way to foreclosure and was compromised before then, there might still be a shortfall that somehow didn’t fall under the statute. The Supreme Court said that was absolutely wrong, that it did. In fact, with Tank/Verdi and Baker v. Gardner, it’s unquestionable that a short sale is no different than a foreclosure. If they couldn’t have gotten a deficiency of foreclosure, they don’t get one on a short sale.
As I say, many lenders don’t agree with that. Not that they have any case law to support them. They just don’t agree because they have found out that if they write boilerplate letters and send them out to a thousand people and threaten massive retaliation against them somehow that about 200 of them will write checks back and say, "Please don’t hurt me." They don’t get any legal counsel. They assume, "Well, gosh it’s the bank. Aren’t they almost like the government?" No they’re not. Shouldn’t they be regulated by the government? Yes they should and they should not be coming out.
15 USC of the US code says that if you threaten to write a remedy as a creditor that you really don’t have, that’s an unlawful debt collection practice. They are engaging in one and they should be liable for it. Some of them write those because they are just playing the luck of the draw. If you take the first 10 people that walk out of the grocery store and stick a gun in their ribs and say, "Stick them up. This is a hold up," two or three of them might give you the money and so you feel then that you somehow profited from it. Now, seven of them might just give you a fist in the mouth. If they see me, they certainly will. From the other standpoint, you’re just playing the odds.
Now, what other reason might they do it? The other reason they might do it is because they’re ignorant of the law. Ignorance doesn’t count. Under the Unlawful Debt Collection Practice if they’re threatening a right or remedy, it doesn’t matter that they know they have it or not or don’t have it or not. The very fact is, they’re making the threat from a position of power and so they are liable. It can be up to $25,000 per violation plus 1% of their net worth. That’s significant.
Now, how many times have people brought those claims? Not very often. I’ll tell you why. Remember my theory early on in this interview was a threat is best threatened as opposed to being executed? Usually when they get good counsel who knows where the press buttons are and they write back with some legal citations pointing out where the error of their ways are, these people evaporate.
Now, there has been a movement that has been afoot recently now that the lenders are well aware that they don’t have these rights to try to change the law retroactively, or otherwise, to suddenly give them the upper hand and make what was non- deficient deficient, to make liability exposure in short sales suddenly some new kind of risk or liability that does survive the closing of a short sale. This movement, I hope, is doomed. I can’t imagine being a congressman or a state representative and signing on to something like that, thinking that I’m going to be re-elected or very popular and especially at a time like this when what we need is clearing of obstacles rather than the making of more. That movement is out there and it does have some support. We all have to be vigilant that if we see something like that cropping its head up, not just as lawyers and his real estate licensees and mortgage vendors, but also as moms and pops.
They do listen to moms and pops. Write-ins do make a difference from a congressman’s district saying, "What in the heck are you doing even contemplating a bill like that?" We will have to be vigilant. The bank is powerful and has many lobbyists and they are down there saying, "Since we can’t win the game by the current rules, let’s change the rules so we can win."
Sean: Is it conceivable that they can do that and have it applied to deals that were already done?
Jim: It’s conceivable that they could try to pass that because it’s already been done in Arizona two years ago. In the Legislature, Steve Pierce introduced a bill, and he later recanted that bill saying that he had been misinformed about the mischief that it would work against the consumer, that set aside the non- deficiency statute and made it retroactive. Now, this was the tail end of a special legislative session convened by the then- governor Jan Brewer, who was looking to have taxes manipulated so that the state could meet its massive shortfall. At the tail end of that session in the summer, this bill got tacked.
The challenge was, constitutionally, that it had no business being on the end of a special legislative session called only for taxation issues, but also that it made it retroactive, meaning that the day it got passed, even that instrument that you signed six years ago at a time where, presumably, you bargained it to have non-deficient instrument, would suddenly become a deficiency instrument and the lender could get a second dip at the well. That was challenged constitutionally. It didn’t have to be because Steve Pierce, to his great credit, who’s our new president of the Legislature, of the House, came back, learned of the horrible ramifications of such a bill and immediately filed a bill to revoke it in full and it was repealed with his push in his credit and that was the end of that. We got back again to the clean slate of what we’ve had since 1971, and before that even, since 1932. We’re back where we are supposed to be.
Yes, these people come back to the legislature and if we don’t watch them, as unfortunately happened when that got added to the end of a tax bill, a very sneaky little step, these things can pass. I do believe, as you just asked, constitutionally, can you make a different rule which was not the rule at the time? The answer is that the Constitution prohibits the changing of rules after the fact. They are the non-ex-post-facto laws. In other words, you can’t make, in those typical applications, illegal today, and you’ll typically see this in criminal situations, what was not illegal yesterday and then prosecute for it. It passes over into other acts, official acts of legislatures and other governmental entities that they can’t make something unlawful or inappropriate or change rights today that were otherwise yesterday, and go back and take those rights away.
Sean: Good to know. All right. Last question here. This one talks about is there a secondary market. It says, "I’ve heard that lenders are selling the liability to speculators for pennies on the dollar and that those speculators can come back and pursue the seller for the difference at some later date. What is one’s liability after a short sale?"
Jim: Well, they only get what they bought. We have to remember there is a market for people who buy notes and trust deeds. It’s not just moms and pops who sign them and banks that own them, but banks can sell those. Now, in the past, the bank sold those through a regulatory channel that would also give them guarantees and warranties and indemnities like we’ve talked about earlier in this interview.
If you have a commercial instrument, a lot of these commercial instruments are actually being sold to private note buyers, people such as George Soros, a multi-bazillionaire, who buys these at a deep discount looking for a yield and some of the others. One West Bank, I think it’s called, has bought a lot of these, which is a bank that’s essentially controlled by four or five large investors. Their purpose was to use the bank and its position to buy instruments like this. Yes, there is a secondary market and yes there are public and private note buyers that are out there buying instruments. Remember, they only get whatever they bought. They don’t improve their position.
For instance, if you had a non-deficiency first mortgage against a residential property that was qualified as a non-deficiency and, let’s say, it had face value of $300,000 and some investor came to the bank and offered him $90,000 and bought it. Well, he has the right to go back and sue for the face value, but he doesn’t get a deficiency right that he didn’t have before. It’s still a non-deficiency instrument. If the borrower doesn’t want to pay and says, "I’ll give you the house instead," then that’s all that that buyer ends up with. He just stands in the position of whomever held it prior to the time that he bought it. He gets no better position under the note or deed of trust than the bank who originated it.
Now, many times, they’re buying it at a discount that is so deep that they feel one of two things is going to happen. Either A, that the property is worth still more than the amount of the note, so they buy it with the intent of foreclosing because they may feel that the properties worth $150,000 and they’re now buying the instrument for $90,000. Rather than going to an auction at a foreclosure and having to bid $150,000 or $140,000, they’re borrowed at $90,000 and then go in and credit bid all $150,000, all $200,000, or all $300,000 of the note. They can even credit bid the face amount. Obviously, nobody is going to beat them, so they will now, for $90,000, end up with a $150,000 value on that note. That’s their speculation. If people know how credit bidding works, and I won’t go into that, this is not the right forum for that, but there is one way for them to make money and that is for the underlying value of the property.
The other way is they believe that they can massage a portfolio that they buy and get out of the borrowers by being able to compromise with them in ways that the lender couldn’t, more money than what the lender would have gotten. They could go back and modify these. Some of them even come with guarantees, the same ones we were talking about earlier. If they short sale for less, they’re going to get some money from an indemnitor. They’re buying that position. Essentially, they’re arbitraging money. They’re paying one thing and hoping to arbitrage it for a higher amount and keep the difference. There’s another way of making money that way.
Yes, that market exists. It’s out there, it’s vigorous, and mostly in commercial, not so much in residential yet. Nobody is truly buying major defaulted collateralized mortgage bundles of residential property. Although, the likelihood is that if the market was right, they would buy them. That’s going to probably be about the time that those savvy market buyers see a buy sign where it looks like property is heading back up again, so that the collateral is going to improve, so the net value of that portfolio is going to improve. If the collateral improves, there won’t be so many defaults and people will continue to make their mortgage payments.
When they see that buy sign, it’s going to be when they see a curl in that marketplace and it’s headed up. At that point in time, I think, those same speculators will be buying a large pools of residential mortgages. To date, there isn’t much sign of that, other than regulators buying them.
Sean: Before we even got on the interview, you and I were talking about with this kind of liquidity provided by those investors, the lenders should have no hard feelings after the fact, saying, "Hey, I should’ve gotten another $20,000 out of that," because they didn’t take the risk that the investor took to give them that liquidity.
Jim: I think that’s right. Would’ve, should’ve, and could’ve. These are really a managerial problem. I would say that if you are a proprietorship, like a bank is, and you’re trying to make your hurt feelings feel better by saying we could have done this and we should’ve done that and we would have done this, then that’s a proprietorial problem. That has nothing to do with the borrower. The borrower would not have been down there borrowing that money if you didn’t give it to him and those were by standards that you had the sole authority to decide on yourself. Would’ve, could’ve, and should’ve means absolutely nothing.
Many of these lenders are being put in a position where the regulators are coming to them and telling them to sell these portfolios, saying, "In your hands, you are ill-liquid," because they were portfolioed and they own the entire note. They’re saying, for instance, "It may be better for you to go out and get 60% on the dollar and put it back into proprietorial capital or for loan-loss reserves than it would be for you to be hanging on to a saggy note, hoping for the 100 % that’s never going to come."
Sean: Yes. Great. Cool. Well, those were all the questions. I can’t thank you enough. I know your time is really valuable.
Jim: Well, it’s valuable only of we’re doing any good, Sean. I hope we are because I certainly think that your entity and your site are doing a lot of good. Let’s hope these kinds of questions get asked and people are there with answers and maybe we’ll be able to dig out of this mess.
Sean: Perfect. All right. Thanks for being on the show.
Jim: Thank you.