We’re lucky again to have Jim Eckley joining us to shed some light on legal questions and dispel misinformation for homeowners faced with short sale and foreclosure situations. Below are the time-stamped show notes so you can skip to those sections which are relevant to you. If you’d like to ask Jim a question for a future episode you can leave a comment below or call our answer hotline (615.SHORT.IT) and record your spoken question there. Major props to Jim for taking the time to speak with us. You can read more from Jim and engage him via his web site EckleyLaw.com.
Discussion of changes in legislation on anti-deficiency laws in AZ
How to secure “blends” where a single loan can have deficient and non-deficient components
Lenders asking homeowners to sign away “inalienable rights” and the implications
Owner carries as an instrument for breaking the current gridlock in the market
Implication of changes to Dodd-Frank Act on private deals (without an institutional lender)
Tax ramifications on deals with “phantom income” (where clients were excused of debt)
Bad practices by collections agencies and the inability to “launder” rights when a lender sells the deficiency
Ammo for agents to compel lenders to behave properly when getting ridiculous demands
Why aren’t homeowners credited for the amount that PMI reimburses the banks on debt?
Sean: Jim, welcome. Thank you for joining us on the third episode of this podcast.
Jim: Well, thanks very much Sean for asking me back again. That must mean either I’m not charging enough, which of course since I’m doing this at no charge I can see how that might be an issue, or the other reason might just be that you like coming back and talking to me because I might know something. I hope that’s how this turns out.
Noting today is June 17th, 2012. Fifteenth? Okay. Also, I always need to put on a little commentary before I start. That is, what we’re going to talk about today is not the direct giving of legal advice. I can only sought by independent counsel that you go to and tell them all of what it is that ails you and show them your facts and your positions so that they can deal specifically with you. All of this advice today, for the most part, is talking about Arizona, but when we talk about federal rules, those extend clear across the states.
As we speak about it today, we’re talking about the law as it stood on that date we just gave. I don’t think it changed much between the 15th and the 16th, at least I didn’t notice, so I guess we’re still all right. Remember that law can change. There could be a case that comes down tomorrow that could change what I say after this podcast but I’ll assume that Sean at some point would amend it if I came terribly out wrong because of some new case that came down next week. Having said that, let’s see if we can approach some of the questions that some people have written in.
Sean: Absolutely. Yeah. We have a lot to cover. Kind of the format that I wanted to do on this one because I saw you yesterday at the Arizona Academy panel… Excellent panel, by the way. For anyone listening, this was a really good event. I figure we’d talk about some of the stuff that came up on that panel, go through some of the questions that were submitted on our website, and if there’s anything you wanted to add on that. . .
Jim: Sure. That’s right.
Sean: Okay. Can you just start off talking about some of the changes to the anti-deficiency stuff that you’ve seen?
Jim: Yes. I’m not sure where you might post of some this information at some of the old conferences you and I had, prior to the time of some recent changes by case law, but let’s talk a little bit about where the statute stands now. Most anti-deficiency rules come from the statutes themselves, so we work with those to begin with. Then of course in the law the judges have a chance to take a shot at those statutes. The reality is that regardless of what the statute may say on its face, it’s what the judges say it says that actually binds to the parties that are before them in litigation and makes our law.
Well, that statutes say that in Arizona that a home that is 2.5 acres or less, and that’s either capable of or is being used as a residence, doesn’t have to necessary be your residence, doesn’t even necessarily have to have somebody living in it, but just that it’s capable of being used residentially or if it’s a duplex or less, then there is no deficiency in foreclosure if it was a purchase money loan on which it was foreclosing. If your money bought that kind of a property there is no deficiency. That’s what the statutes say. We thought that was pretty darn clear.
One of the things that has come up recently that has made a big difference is the question that we see out here on HELOC, the home equity line of credit, or blends, in which part of the mortgage is for purposes of purchasing the property and part of it maybe was to wrap some other obligation in there.
Here’s a real common one. You go down to the bank and you say, “I’d like to borrow some more money for buying a Hummer.” The bank that holds your current loan says, “Okay. We’ll be glad to do that. It’s currently $220,000. How much do you need?” You say, “Well, it’s about $20,000, $25,000 that I’m going to pay for this. It’s used.” I say, “Fine. Let’s just put it in your mortgage.” They actually refinance it and put it in the mortgage. Twenty to twenty-five thousand of that is not for purchase money. After that, 20,000 to 25,000 for it, in reality, went for that Hummer, and you’re driving it right now and you’ve got the title to it. Now, that’s called a blend.
There’s another kind of a blend and those are where you can have a prior debt that you owed on the home that was a purchase money mortgage that qualified. You go back to the lender for a refinance, and the lender refinances not only that but a second that you had placed on it originally. Maybe you took a line of credit and you were out there paying your bills with it and doing some other things with it. It wraps it around in a brand new instrument that incorporates the two prior debts against your property. Well, obviously, that final instrument, some portion of it was for purchase and some portion of it was for that second that you used as a line of credit and spent on other things. Those are blends. There are other kinds of blends but I think that gives us the point that I’m trying to make.
What has changed here in the last few cases, and these are called the Myers case, the Helvetica case, and the Stevens case, is that the court has started to say that they think that those blends should be broken down so that the portion that really did go into purchase is one on which there should still continue to be no deficiency in the event of a foreclosure or even a short sale, but that those portions of that loan that were something other than purchase money should be and remain a non-deficient debt on which recourse could be had and the lender could ask full payment and even sue for it in the event they didn’t get it out of a foreclosure. That’s quite a change in the law.
The law from 1988 up until about January of 2012 was if all or part of that mortgage or a substantial portion of that mortgage or trustee was for purchase, the belief was then the law would say, “Look, it’s impossible to split it up and trace what went to what, so what we’ll just do is we’ll just call it all non- deficient.” Sort of infectiously non-deficient. If you pour more money into a big non-deficiency mortgage, then it probably becomes non-deficient too. That’s the old Bill [Veyas 5:48] vs. Bank One case, which is a couple of years old, which we thought clarified and made that the case.
Now, recently, as of January 2012, we’re hearing otherwise with some of these cases. It seems a retreat. I sort of disagree with it, but our appellate courts have said they do feel it’s capable of being traced, that throwing your hands up and saying, “Well, you can’t tell what went to which,” we really can. That’s what they felt. We’re going to go right back to it. If it’s purchase money, every dollar of that’s purchased, no deficiency. If there’s a blend in it and some other dollars that went to something other than purchase money, then the lender could pursue those.
Now, this left unanswered some really good questions. The one right off the bat is, “When I close this and I start making payments, which one am I paying on? Am I paying on the deficient balance or the non-deficiency balance? When I go into a short sale, what part am I settling? Am I settling the non-deficiency balance or the deficiency balance? If it goes to foreclosure and there’s a payoff from a foreclosure sale, does the payoff go first to the deficiency balance or the non-deficiency balance?”
Now, they say that that could be traced. I’d be hard pressed to think how you could. There are some cases in Arizona, not of course ones that are talking specifically about deficiency and non-deficient because nobody ever thought the court would say something like that. In law, what you do if you can’t find a case directly on the point you’re trying to research about which balance it would go to first, you go out and you try to find cases that are analogous, so that they’re sort of metaphorically just about like what you’re looking at.
There are several cases in Arizona that are close. Here’s what they say and how they get to it. The cases that you’ll find are the ones where there are two or three notes secured by one deed of trust. The borrower went out and made several loans. He had them all secured by one debt or even two debts on the property. It doesn’t matter. The point is, he sends in one payment. He does not earmark that payment and the instruments are silent on where that payment goes. Those are a great case because then the question would be just like the deficient or the non-deficient. The guy sends in one payment. Apparently the courts think that there are two balances running here. Which one does it get applied to, the deficient or the non-deficient?
Here’s what the court said. The court said that if the instrument is silent as which it goes to, then the decision about which it goes to is the payer’s, in other words, the guy who wrote the check to make the payment. That means that from now on, we should always be sending with every payment coupon some sort of a letter, which we’re going to generate a form around here for, that says, “By the way. If you contend that there’s some part of my loan that’s deficient and some part that’s not, I want to make it perfectly clear that any payments I’ve ever made from day one until today and all the ones I make hereafter, no matter how this pays out in the end, when I pay this short sale and get foreclosed, should go strictly to that portion of the lane that is deficient.”
In other words, you’re satisfying that so it would leave the argument that if you ever lost the house, you’d be able to take that part of the loan that was not used for purchase price, take all of your payments, see how much you paid, and if it’s equal to or in excess of that then the only thing that would be left is the non-deficient instrument on which there would be no capability of pursuing you further than just the property alone.
That’s cast, of course, a lot of confusion in it about two different balances, but there is a case out there that appears to settle that. That means you have to give notice of how you want it applied.
Sean: Let me make sure, just to condense it, so I think I understand everything. It’s your recommendation that any homeowner that’s still paying even now, not even for new loans but on existing loans, to put this verbiage in their next payment coupon.
Jim: I think that’s true. I think we have to. I think that’s a new piece of law, but the courts are acting as though, “No, it’s always been that way. We just didn’t quite get ourselves clear.” That means it would apply all the way back at the beginning, so if the law applies all the way back to the beginning, then so also should the rule that it shall go as directed by the payer.
Yes, we should get some sort of a uniform document. We’re working on something like that now. We’d make it available for free to anybody that wants it. It’s going to be something where you fill in the dotted lines. The name and address. The bank. The reference to the account number and your name. Then it’ll have language in it that says, “Any payment you’ve ever gotten is going to go strictly to the deficiency portion and that is my directive.” As I say, I might be even citing a couple of cases in it, but I don’t think we want to make it very argumentative because the law supports that. Just send it in with one or two coupons. Probably by certified mail so that no one can say they didn’t get it.
Then you may never use it. It may never even come about. You may sell that property and even make money on it so that the mortgage is completely satisfied. You never have to worry about an issue where you’re going to worry what the distinction is between the non-deficient or deficient part.
Just in case and to be safe rather than sorry, this would be, I think, something everybody should do. It will not trigger some sort of adverse credit rating or anything else. It’s merely a directive that if I have some kind of two-balance system going on with you, I always want the supply to the balance that will do me the most good.
Sean: Yeah. That seems like a more massive implication because it can be retroactive and it applies to anyone to this situation.
Jim: I think it does. I think the banks right now don’t know what to say. They’re sort of confused and they really don’t know any more about this than anybody else, but you can take this position home, I think, and bank on it. I think they’re going to make the argument that it all went, of course, to the portion that was non-deficient so only the deficient portion remains. Otherwise they’d have no argument to ask you for any additional money. They’re going to look for one.
Sean: Would them cashing one of these checks with that in the memo field essentially bind them to agreeing to that?
Jim: It would help to have something. Essentially what you’d do is with this uniform notice I’m telling about, I’m probably going to put some language in there that says, “Negotiation of any and all payments hereafter to the extent any acceptances required by law will be deemed an acceptance.” Now, the reason I say negotiation to the extent that law might say you have to accept it, I’m just being careful. In reality, those cases out there on those two- note and three-note cases, none of them say that they have to agree to it. They say that’s absolutely the borrower’s right.
Sean: Yeah. This actually is a nice segue into another thing that came up yesterday regarding not being able to sign away your right. . . I forget exactly what it was. You’ll probably remember. The fact that lenders were attempting to get people to sign away certain rights that are kind of inalienable to them.
Jim: Well, that’s absolutely right. One of the responses that we got in this session that you’re talking about, Sean, is that session that we did with the commissioner and a number of other panelists, qualified lawyers, and others in Phoenix. I guess it was yesterday. One of the remarks I made there, and I also have a case that’s on point, was that commonly what the lender will say when you’re doing a short sale and they ask for additional money. Here you have what probably is a non-deficiency instrument under the laws we just talked about. In the course of a short sale, the lender says, “Okay. I’ll accept your short sale, but I want you to sign another $25,000 note, or I want you to sign this approval letter from the bank that says we can pursue you for more money afterward and you waive any arguments that you have,” or something along those lines. Those are very common in those approval letters.
The question has been, well, if I do sign one of them because I’m desperate and it seems like I’m saying share whatever. If you think I still owe more money, whatever, as the borrower on your way out. You’re the short seller. The argument has been, well, you waived it. Maybe you didn’t have to do it and maybe there were no shortfalls that you would be personally responsible for. The only thing that the bank would ever get is the property back under these non-deficiency laws. Well, you’ve revived it by agreeing you would stand liable for it, sort of gratuitously.
I don’t know what you’re getting out of it. Some people would say, “Well, you got the short sale!” You say, “What did I get out of that? I lost my shorts. What are you talking about? That’s not consideration!” Well, out there says if you give something up, you should get paid for it because that’s the only way you can determine that honesty and integrity is prevailing, especially if it’s a valuable right like them to pursue you. Now you’re out the house, and you still owe the debt. One of the whole reasons you went to do it was to try to get rid of the debt! It makes no sense, but I can see why people would think, “Well, gosh. I signed it away.” Most people feel the freedom of contract. Do you know what? That’s not the way the state of Arizona feels about it.
There’s actually an ancient case here, lawyers love to dig through this stuff, that has never been set aside. It has a really, really good point about this idea that you can contract away or agree away the protections that the law gave you. Now remember, this anti-deficiency statute that says the only thing that against the property and not the money is a consumer protection law by the legislature. They said, “We want,” and it’s totally substantive meaning it’s public policy. You are protected. You don’t have to file something to be protected like a homestead exemption or something. You just plain are protected.
Then the question is can you set aside a consumer right that the state law said is yours, per se? Here’s the answer. It’s the old case of Forbach vs. Steinfeld. I’ll give you a legal citation for it. I think this will bore most of you, but it’s there. 34 Arizona 519, Arizona 1928. 1928, I said, folks. Does that ring any bells to what was going on in 1928? There was a great depression that was starting. In Arizona, it started earlier than others because it started first in agriculture, cotton, cattle, and citrus. People weren’t buying as much anymore. The country was winding down. Arizona was one of the first to get hit by what ultimately in 1929, with the great crash in Wall Street, was then recognized as a crash. I guess in the eyes of the law, it’s not a crash until it hits the east coast. If it didn’t happen in New York, it didn’t happen. Well, it was happening in Arizona in 1928. Of course then there was great pressure. People were losing their houses and their farms to the bank, and they were signing off all their rights.
The court had an opportunity to look at this and say, “Is it possible for the borrower to be put into a corner by a lender and sign off rights he has?” Here’s what they said. “Statutes of limitation, exemption laws, the right of redemption, and other provisions that are for the protection of the debtor against the creditor cannot be waived. They are part of public policy and they are part of modern legislation. The wise man of old has well said, ‘The borrower is servant to the lender,’ and if the debtor, when he applies to the creditor for favors is always under a certain amount of moral duress, he will never be deemed to have voluntarily given up any of these rights. If the creditor has the right to demand of waiver of statutory rights, he will certainly do it every time. The farmer, the debtor, is really in no position to protect himself. For this reason, the law, in order to give the debtor effectively the protection which the public policy of this state says is his privilege, the state must deny him the right to voluntarily surrender it. He has no capacity to do, nor does the lender to demand it.”
Jim: That sounds pretty dispositive to me. Here’s what that means. You can sign it a million times and it can all be set aside because it’s a void. The law has taken away the borrower’s capacity to even sign it away. You can see why. That would be the hole in everything. If there’s exemptions like homestead exemptions and protections from deficiencies and so on, wouldn’t the lender, probably even in the original notes, have you waive it every single time so the legislature can sit down there and make laws trying to protect you and the lenders can take it away in a pen stroke? That obviously would defeat the law.
Jim: They said, “You can’t do it. You can’t do it as the borrower and the lender can’t ask you. When he does, it’s an unlawful debt collection practice act, which also has its own sanctions and fines.” That case is still good law. It’s the Supreme Court of the State of Arizona.
That’s the law we relied on recently in a trial court case in which the judge bought it entirely on one where the party had signed off and waived his right to be protected against a $500,000 short fall on his home. Very bad story there. I won’t go into it. The lender promptly pursued him for $500,000. Well, we raised the issue first that it was a non-deficiency instrument. Secondly, even if it wasn’t, he couldn’t waive it because of the Forbach case. The court agreed. That covers the issue, I think, of whether there is such thing as a waiver out there. Now, what was your next question, Sean?
Sean: That’s another good segue, talking about the Great Depression. I know that there have been some changes to the Dodd-Frank Law recently. I think there were two critical changes that were mentioned yesterday. I was wondering if you could talk about those and what implications they have for folks.
Jim: Well, one of my arguments has been this. In Arizona, we have a three- tiered system of crisis right now in the residential market. Even though we see articles in the newspaper talking about, “Well, the average net sale price is $139,000 or it’s $137,000 or it’s going up and down all the time,” that’s what they call a modal number. That means that there’s an equal number of incidences above it and an equal number below, meaning that there’s half again as many people who sold for more and half again as many people who sold for less. Sometimes it’s a kind of an interesting indicator and it suggests generally that the market is going up and down a little bit, but generally up if you looked over the last six to eight months.
It still kind of belies one other point. That is there are really three tiers here right now in this state, certainly in the valley. There’s the $350,000-below tier. That right now is dominated by investors, usually cash investors. Unfortunately, they’ve chased mom and pops out. That’s usually the entry level for new families. They come in, they’re dual income, and they buy their first home. That’s in $350,000 or less. Those now are being so competitively pursued by the investors who say, “Look, it’s all cash, no contingencies. I don’t even care to inspect it. I’ve made up my mind right now.” Sitting in the car. At the curb. Well, I’ll tell you, that gets deals done and it’s difficult to compete with that.
After you get past the investor money, there are really no further real programs that seem to help those of us who are looking for homes in excess of $350,000 but less than $729,000. That tier is sitting there with virtually not much action on it. It’s really a function of two things which I’ll mention in a minute.
Then there’s the third tier, which is the jumbo and super jumbo tier. Jumbo tier is considered $729,000 up to a $1,000,000. Super jumbo is beyond $1,000,000. Those are just common real estate parlances, by the way. There’s no real label out there.
Obviously in the super jumbo market there’s almost no movement. In the jumbo market there’s very little. The likely place where most people are going to buy is between $350,000 and $729,000. There’s no one there buying.
Here’s the reason. First of all, a lot of the people that want to sell cannot get the property to appraise out for enough to pay off their underlying mortgage. Even though they may want to move up or move out, they really have to sit on their home and they can’t do much about it until the market comes up. The market can’t come up until people start selling something at prices that bring it up at least to that equaling the mortgage or better. It can’t do that until appraisers start agreeing that there’s value out there. Appraisers are saying, “Look. I’m just relying on the comps up and down the neighborhood.” Of course, remember, those are the comps of bad times that we seem to be coming out of, hopefully. Those are pretty nasty comps. It just shows that there’s no value and no movement.
The second problem is, even if you are a ready, willing, and abled buyer and you can buy in the $350,000 to $729,000 market, if you come in the first thing that’s going to happen with a conventional mortgage, and let’s say you want to put 10% down, it’s a 90% finance. First thing that’s going to happen is they’re going to appraise. Now, let’s say you offered to buy the house for $500,000. The appraiser comes back and says, “It’s $400,000.” What are you in to? Well, first, it’s going to be 10% of $400,000. It’s $40,000 that you’d have to put down to qualify for that loan and you have to pay it down for the amount by which you offered over the amount at which it appraised. That means to close that deal, you’d have to come in with $140,000. Nobody has that kind of money and no one wants to put that kind of money in just to buy a house.
We’ve got a terrible situation out here where the lender’s underwriting policies mean those properties can’t sell and technically there really is no mortgage for them. That means no one can sell and no one can buy, and the appraisers are not going to add any value because they can’t get any comp started to see any greater value than what there has been historically.
Now, I think I have an answer for that. Of course, I’m one of those kinds of folks that are progressive in the real estate market, I hope. I really try to come up with answers and use my head on this. My theory usually is that if there’s blockade in one way, then try another. We’re obviously blockaded. Why don’t we go back and do something that we did all through the 80s and at one time was almost the only source of finance? Let’s do owner carries. Let’s let the seller carry it for a while. That means he sells it at the price they wanted.
Let’s take that example I gave. The guy wants to pay $500,000 and $500,000 will solve the problem for the seller. Maybe he’s got an underlying encumbrance of $370,000 or $380,000 that he owes to one of the banks, and $400,000 never would have done it anyway, but $500,000 which that buyer is perfectly willing to sign for will do it. That means that the owner’s going to carry some paper for a while. Now that doesn’t mean he carries it forever. Essentially the buyer is paying him for several years. In many cases, these contracts go in for five years or seven years and they usually have a balloon. In other words, okay borrower, we’ve waited five to seven years for the market to get a little better and for you to demonstrate that you’re capable and build some equity. It’s time for you now to go down and pay it off.
Those are very, very common. They were about 25% to 30% of the market place in the 1980s. Of course, prior to 1950, it was almost the only way. There just weren’t any mortgages and everybody did owner carries. If you get outside of town in Pinal County and Piedmont you’re going to find tons and tons of owner carries, and farms and bare land have almost always gone by owner carries, and so have business ops. Owner carries have been around for a long time.
Now, you would think you’d have the right to do an owner carry any old darn way that you wish. If you want to sell it to your uncle or your brother or you want a carry contract you should have the right to be able to do that because, after all, this is your home, this is your life, and you could put the numbers on it that you wish. That generally was the case until the passage of the Dodd-Frank Act.
Now, the Dodd-Frank Act came down about three years ago originally. It was an act that tried to put sense back into the lending system. Originally when all the Dodd-Frank appointees sat down, their idea was to go to the lenders and straighten them out saying, “Look. This crunch was produced by unsafe and unsound lending practices. It came from the banks primarily, so we’re going to regulate them. We’re going to go back and rethink this whole thing and regulate them.” That’s what it started as. When the Dodd-Frank bill finally came out… It’s dense. It’s very thick. It’s about 2,800 pages after you get through the addendums and so on and it has a lot of cross references to other departments, divisions like [Fensen 25:51] and FDIC and so on. It’s just a maze to get through. You really have to have a very boring or non-existent personal life to actually want to sit down and read this thing. Read it was, by very few.
When this passed, and it did get passed, we all then for the first time said, “This is the thing that’s going to get the bankers back on track. Let’s start reading.” Well, of course, I guess I’m one of those ones with no social life because I actually read the whole thing. Amazingly enough, buried about three quarters of the way back, it appears as though Dodd-Frank even attempted to regulate transactions between mom and pop buyers and sellers. In other words, that deal that you were getting ready to do with that buyer seems now to be regulated and regulated in this fashion. Did you get a financial statement? Is this borrower capable of borrowing? Are you charging a variable rate? Are you charging a flat rate? It applies to anybody that sells even their own personal residence. It seems to have no exemption whether it’s free and clear or whether it’s encumbered.
This was real confusing. The crazy part about it is most people haven’t read that far into Dodd-Frank to even find that. I’m not sure anybody even really cares. I would like to know how in the world would anybody even enforce that? Who would you call other than Ghostbusters, I guess, for someone to say, “Hey, I think this private contract I did with my brother-in-law down the street where I bought one of rentals, I think it’s a violation of the Dodd-Frank Act.” Well, who the heck would you call? It may be something that’s more bugaboo than teeth and there are certainly a lot of those things in life. We do have to take it realistically as lawyers because we want to draft the right thing that works for our clients.
Here’s what it has to be. Here are some of the things that kind of, I think, take some of the bugs out of it. One of them, if you look at the statute, is it has to be between consumers in order to apply. In other words, it really had to be a mom or a pop deal in which the buyer is going to personally occupy it. If it’s not a mom and pop deal between mom and pop sellers and buyers, and say the buyer is going to make it a rental or he’s going to finish it up, remodel, and flip it, then Dodd-Frank doesn’t apply because it only applies to consumer transaction and that’s more like a commercial transaction. You’re not looking so much at the seller as what is the buyer going to use it for.
Secondly, the Dodd-Frank Act says that it governs private mortgages and deeds of trust and contracts for deed. It does not say that it governs lease options or lease purchases. That works very well too as a method by which you can sell, especially if you as seller is going to have a person who’s going to come in with a low down payment. You might want to have them in a position where they don’t quite get as much equity so that if you have to toss them out you can do it under the Landlord Tenant Act as opposed to a formal foreclosure as you would have to do if they had equity.
On the other hand, so that you know, from the buyer’s standpoint, the buyer would say, “Well, look, I’d like to have all the accoutrements of home ownership. How do I get tax deductions on a lease?” The answer is you can actually take the election to treat it as an installment sale as far as IRS is concerned. You can call it something else under the state, but under IRS you can treat it as an installment sale. In that event, the amount of the lease, if this document is written right by a real estate attorney… Believe me, not a title company, not your realtor, not yourself, I hope. That’s asking for it. You know what they say. The person who represents himself has a fool for a client. That’s not a good idea. A qualified underwriter that can sit down and actually draft that document will write it in a way to fit all the exceptions and write it in a way that gives the buyer, if that’s what you’d like to do, all the feeling of buying a house. That makes it a great sale item. It’s a good sale argument then for that buyer, and it makes them want to get into it. Believe me, they’re out there and they’re not all empty-pocketed. There are a lot of very good ones.
Sean, a minute ago, was talking about, there’s a great trove out there now of people who have dual incomes. They’re making $300,000 or $400,000 a year and they can’t buy a house because their credit is tainted because they left that big jumbo house up on the hill that they couldn’t afford anymore and didn’t want to pay as it was sinking ship. They’ve been living in a rental for a while and now they’ve got money, they’ve got down payment, they’ve got full employment, they’ve got great credit, and all their credit cards are in good ship. That guy qualifies. He’s a good buyer. We have a huge number of those out there waiting to come in and buy houses as soon as we make that available. It opens up all new avenues for really good sales by those who need a sale that’s in excess of their mortgage and want to get their cash out of here, and really good buys by those who want to get back into the market and actually put some money down and not have to rely on some appraiser who doesn’t see value in anything.
Dodd-Frank does seem to have some restrictions, but those who know the restrictions know how to write around them and that’s why I encourage people that are going to do this to get professional people on this and allow them to draft documents that do that.
Sean: Can you talk a little bit about what Paul Valentin was talking about with the tax, and how he’s had to unravel some of these things that were done?
Jim: Well, in the session we did yesterday, there was a local attorney there who also has an advanced degree in taxation. Really, in every one of these deals if you’re talking short sales or even sales, virtually everything you do economically of course has a tax ramification to it. This fellow is one who has really specialized in it so it was helpful to hear him chime in and say pretty much what the better real estate lawyers have been saying in all along in Arizona. That is that though the Mortgage Debt Relief Act appears to be expiring in December this year, and I’ll go into what the Mortgage Debt Relief Act is in a minute, the likelihood is that that exemption against tax on phantom income, which I’ll explain in a minute, will continue on under IRC Section 108, which has been in the revenue code for 25 years. It’s today, and it’s going to last long after December 31st of this year.
Let’s go back first. I want to talk a little bit about what phantom income is. The law actually says, if you look at the revenue law, it starts out with a position that if you’re excused of any indebtedness, you go down, you owe $400,000, you do a short sale for $300,000, and the lender excuses you for $100,000. Then you have $100,000 of “phantom income.” They deem the being able to be relieved of debt almost the same as though someone paid it for you, and of course you got the benefit of that. It’s sort of a fiction, but it’s just as though you got the benefit of not paying $100,000 as though someone else paid it for you and that would be like income. Using that fiction, yes, folks, IRS even taxes loss, not just gain. Of course, that’s really terrible when you’re already in a bad position. You’re doing a short sale because you have no other options and very little money in most cases. Right behind that, the revenue services come in and tax you on the entire amount of the write off. That’s not good.
The tax mortgage reduction act was passed in, I think, it was about 2007 and added into the Internal Revenue Code. The idea was to give relief to people in a position like that. Here’s what it said. It said if it’s a purchase money mortgage and you’re a home occupier at the time that the write down occurred, or if it was mortgage that was put into improving the home like putting in a new roof or carpet or pool, then under the Mortgage Debt Relief Act they will not recognize any of this phantom gain up to the amount of $2,000,000 of phantom gain. Well, that’s a pretty good deal.
Now, of course, that’s expiring at the end of this year, and so far it looks like Congress is not going to extend it. I’m really surprised that they wouldn’t do that because this country still is not out of this terrible mess. If I had to say so and make a guess, my guess is they might do a last minute extension anyway because I think whichever party decides that that should not happen is probably the party that’s not going to win any elections for a long time. That’s for sure because we’re all in need and that has really been a life raft to many.
As was pointed out in the session yesterday by the attorney I mentioned, and this has been consistent with what we’ve said in the past as well, there’s always been Section 108 of the Internal Revenue Code, of which that Mortgage Debt Relief Act is part. Now, if it drops away at the end of this year, so be it, because here’s the balance. The balance of Section 108 also says this. If the mortgage was non-recourse by state law, and of course purchase money mortgages are not, then it doesn’t even drop into Section 108 and it’s not considered debt relief because it’s seen in the eyes of the law you never wrote the debt in the first place. It’s kind of a fiction that the property owed the debt, and all they do is get the property back, but you don’t personally owe the debt. If you didn’t personally owe the debt, how can you have income when it’s been forgiven? That’s the theory. Most of Arizona, these residential short sales do concern purchase money mortgages which do not have a deficiency and therefore you’re covered under Section 108 anyway. Always have been, doesn’t matter whether this thing expires or not.
Also, there’s another exception. Even if it was a non-purchase money, like you took a second out on HELOC to buy that Hummer I was talking about or go to Vegas for a wild weekend, and by the way you should have invited me, but anyway, go into Vegas for a wild weekend, so it would be a deficiency one. That one, of course, is still going to fall under deficiency rules. That’s still going to be outside of the Mortgage Debt Relief Act. It’s also going to be outside of Section 108.
If you got that second and put it into the house, then it is inside the Mortgage Debt Relief Act but it is not inside Section 108. You do have a risk then, that if that Mortgage Debt Relief Act expires in December and you have one of those types of loans, you could get into a situation where you’d be taxed on phantom income.
There’s only one other exclusion and that brings me to the second one. The second one is if, however, under Section 108, at the time that you gave up that debt and that property, if you were insolvent, meaning the fair market value of your assets less all your indebtedness was equal or zero, it was actually a minus figure, so you were technically insolvent under the formula in Section 108, you also do not have any phantom income treatment. After all, they figure, why beat a dead horse and try to tax someone who virtually has lost their shorts and is completely insolvent at the time is absurd. Now, obviously bankruptcy discharges you from this as well because it is a formal insolvency, but they also mean an informal one. If you merely can show on a balance sheet test that you were insolvent, that’s good enough.
Sean: At the time of the. . .
Jim: At the time of the consummate of the deed.
Sean: Yep. There are just two more and then we’ll go to our users’ questions. At some point yesterday came up this concept of laundering the responsibility. When it goes to a collection’s agency, they feel like they’re somehow not bound to same standard that the lender was. Can you speak a little bit about that?
Jim: Well, commonly, and this is really common, here’s what happen. The lender at closing maybe even is silent about what he’s going to do with the balance of the debt. Now, sometimes they tell you, “You realize we’re still going to pursue the debt?” Other times they’re just silent. They just take the money. They don’t ask you to put any more in or some will even ask you to put $2,000 more in or something at the short sale. They don’t talk about what’s going to happen to the rest. Now, some of them do. They say, “By the way, we’re still going to come after the rest. Just not now.”
Now, if you go ahead and agree with that, shame on you, but even if you do you may have an out under the Forbach case that I talked about earlier in this session. Let’s just say that we leave that as it is on the table and you go about your way. Well, the first thing the lender in the past used to do was send it over to their own lawyers and start a collection. Now they’ve got so many of them, they realize it’s probably better to wholesale them out to these freestanding collection companies.
Now, some of these collection companies are secretly owned by the lender from behind. Wells Fargo maintains a large one and so does Chase, but you’d be hard put to find out it actually is owned by them. They start a separate collection company. They get it off their books. That’s what they wanted to do. They either sell it or assign it. Most of the time, they sell it for very little money. It’s usually like a commission over to the collection company. That collection company is going to pursue you.
Now the lender doesn’t want to get into the dirty picture, you see, so they’re going to say this is disclaimability. They try to make it sound like, “Oh, you’re getting pursued for the money? Well, it’s not us anymore. It’s the XYZ collection company that’s chasing you. Boy, take it out on them.” Well, the XYZ collection company has no more greater right to come after you and cause you issue than did the original lender on the original loan. If that loan was one on which there was no ability whatsoever to come back at you, no matter what they said, then the credit collector does not get any better deal. It doesn’t wash off all of your defenses or wash off all your rights for him to sell it to the next guy.
This, by the way, is the same rule if you go down to buy a car. Let’s say you go down to a dealer, you buy a car, and it turns out to be a lemon. You go back to a dealer and say, “Hey, I want my money back,” and he says, “Too late. I already sold your note to GMAC Financing,” in the old days. Now GMAC’s become Ally. “I’ve already sold it out. Somebody else has it. I’m not responsible.” Actually, state law and all the statutes say yes he is. The seller of merchandise to a consumer is always responsible for the fatalities that may have come out under that sale and so is anybody that buys from them.
Why would they do that? Well, the reason is they want to make anybody who would want to buy the paper of the dealer leery of dealers who are sort of shady and are selling bad paper. They made the debt defense go right go with.
Well, it’s the same rule in mortgage. You are a consumer. That creditor gets no better deal, whether it’s a collection company or not, than the original one. If they made mistakes or if they’re not eligible to be repaid, neither is the collector. If you’re harassed by collectors, time to go see an attorney. Usually one letter will solve it and they’ll be gone.
Sean: Last question on here. Under the goal of giving more tools and ammo to agents to be able to get lenders who are giving them a hard time, basically backpedaling and stalling the deal. What are some things… I know this HARP acceptance binding them to guidelines. . . There was something that came up around that.
Jim: Right. What it really sounds like… I want to thank you Sean as you were listening mostly to my presentations, but you’re right, those are the ones that I brought up. First of all, I think probably the bigger question is, as a licensee, what kind of tools do I have to cope with all of this when the lender’s giving me a bad time, giving my client a bad time, stalling, stammering, and making ridiculous demands that can’t be met by anybody?
Well, let’s start out first by this. There’s no better protection than knowledge. Remember, knowledge is the spear in the darkness. When these folks are making these demands it’s not because they know so much, in fact they know they can’t. They realize this is a poker game. That’s what they think of it as. If they can bluff you out and get you to fold you on a hand on which you are strong, that you had four aces and they had a deuce, but they bluffed you, and you gave up your four aces and let them keep the pot, they’ll do it. They are not with scruples in this particular area. They think that all is fair in that game and that the stupid guy is you if you let them do it. That’s how they feel about these things. The first one is knowledge.
Know the difference of what a deficiency and non-deficiency is. Know of those rights earlier that we’ve talked about. Listen to sessions like this. Go to these educational programs so that you’re armed with knowledge and you can’t be fooled. That’s step number one.
Obviously, though, in any kind of dealing with a lender, at some points if you’re really having a crisis, it’s going to get “legal.” You probably don’t want to be the one that’s sitting on the phone quoting case law to the lender. Why do I say that? Well, I think first of all, they just don’t take it seriously. They think that only lawyers should be saying lawyer things. They think as long as you’re saying it, you’re not going to a lawyer. They know that the lawyer is the one that can really cause them some problems and actually can go down and file lawsuits and you probably aren’t in a position to do that. There may be a point you also need to keep in mind where you’ve exhausted the point where you’re effective and you really realize that maybe it’s time for the intervention of counsel.
Now, sometimes, of course, your short-selling client is going to say, “God. I can’t afford a lawyer.” Of course, the reality is no one can afford a lawyer. Not even lawyers can afford them. I was at a session one time where a judge was teaching a class on civil procedure and he was railing about the big bills he’s seen from lawyers. He asked for a showing of hands in the class of lawyers. His question was, “I would like to see a show of hands of the people who could afford the kind of bills they’re sending out if they’re being sent to them.” Two hands were raised. This is out of a class of about 120. Are lawyers expensive? They are. Usually the lawyers that are most expensive are the ones that don’t know the law because they have to look it up.
There are a cadre of lawyers out there, five or six of them I think here in Arizona, that really do know their stuff. The lenders know they know their stuff. It would be a good idea to maybe send them over there. It’s usually not very expensive because whether this is going to be the siege of Troy or a quickie on one phone call, maybe a couple of letters, it’s pretty well to be determined real early. Usually the lawyer gets on it, like we have letters that are like 20 pages long that have all been though out because we’ve seen just about every issue with every citation there is in the world that says that they’re crooks, they can’t do it, countersuits, and you name it. We put on the black hat. We don’t charge all those pages. We amortize those by charging less to a lot of people but using a lot of the same material, because the same material comes up again and again. Typically, our consultation fee and maybe generating a letter out the door to one of these, we usually charge an hour or less.
Here’s what it also does for the agent. It allows the agent to let somebody else take the hit on this thing and even the blame. If the lawyer can’t turn it around, at least the broker’s absolved. Also if there was some nook or cranny that could be explored by the broker that the broker just wasn’t aware of or if they feel unpleasant dealing with the lender that way, it makes sense to let the lawyer, the guy who does just that… That’s what they like to do is go out and pick those kind of fights if they have to. They know the law. Maybe it’s worth $250 to let them do it. Especially if you’re in one of those deals where your client says, “They’re already asking for $2,000, $3,000, $5,000 to close when they don’t have the right to ask for anything.” Would you advise your client to write the $5,000 check to the bank or write them a $250 check to the lawyer to make the $5,000 claim go away? It seems like it’s a better deal.
Now one of the things that Sean had brought up is that yesterday in our session, we were talking about other ways of handling this. One of the other ladies that came up to the speaker and asked questions towards the end of the class said, “Well, let me give you a kind of a problem that I had. I have a first and a second mortgage for a borrower on whom I’m representing on a short sale. The first is, we kind of got him straightened away about how much that they want, and it’s going to get a write down. The second is asking for a pile of money. The first is saying, ‘If you can’t pay that second and get him out of the way, we won’t take the deal either.’ I’m stuck! I’m going to second,” she says, “and I keep saying, ‘Why do you have to have so much money?'” By the way, it turns out the second is a non- deficiency instrument as well. It was actually an 80/20 loan on this property originally. I talked to her afterward and found this out.
The lender on the second is demanding large amounts of money on an instrument they couldn’t possibly collect that money on from that borrower in the first place. It’s just a bluff. They’re playing chicken with the borrower. Let’s just see what the borrower does. Is he really going to pay that kind of money? Well, one thing was made perfectly clear. He doesn’t have that kind of money to pay the second, so does the mean the whole short sale falls apart, they all foreclose, and that’s the end of it? Well, it could. There’s another answer to that and it’s the one I came up with. I will say I’ve talked with her since and it probably won’t fit her program, but it might fit one of yours so it’s worthwhile talking about.
Most of the lenders have participated in what they call the GSC programs. GSC programs are anything that is an entity like Fannie, Freddie, and the rest of them that have participated in federal funding and are federally held, where the feds are involved. There are also some federal programs then that relate to those lenders and to any lender who wants to sign on. It’s called HARP, HAMP, 2MP, and other programs which are work out programs, short sale programs and what not, that your licensee tries to get you through and those are the documents that are provided in the why you put as a hardship statement and a financial, and all those things are part of those programs to qualify for a write down like this. Every one of those programs has guidelines that are prescribed by the federal government. If the lender follows those guidelines, he actually gets some money on the back side.
In other words, you may have a short sale on which out of a $400,000 debt you only paid off $300,000. Don’t think they’re going away with only $300,000. They’re going to get money from PMI insurers. They’re going to get one from a government matching fund for losses. They actually come out pretty well on these. You’d be surprised. In fact, they come out better on these than probably the original loans. They’re very well taken care of. That’s where our tax money is going.
In return for this, to get that money, to be eligible for it, they have to sign that they will follow the federal guidelines. Now that 2MP program and HARP now has a provision in it that says that the second only gets a certain amount of money. There’s a formula there. Now, the last time I worked with that formula, it was $3,500 then it went up to $5,500. A fellow in the audience yesterday who does these all the time, and we don’t see HARPs all the time, said it’s up to $8,500. That’s the maximum amount that even a second, who is one that you have to pay because it is a deficiency one. This one it wasn’t, but let’s say it was. This one is almost a $40,000 second. The most they could ask for is $8,500 under the guidelines.
Even the first lender, they signed under the guidelines too. They can’t make demands that you satisfy the second for more money than what the second could possibly get under the guidelines. They’re both in violation of the guidelines.
What can you do about it? You can report them to the feds. Now let me mention why that didn’t work for that lady as we looked this after the session. It didn’t work for her because they weren’t in a HARP program. They were in a Hope for Homeowners program. Now, a Hope for Homeowners program is not a true federal program. That’s a proprietorial program. It’s owned by the big lenders. It kind of feels like HARP or HAMP. It feels like 2MP. A lot of the rules are the same, but it’s a proprietorial one where the lenders themselves run it and they are not under the guidelines. That means, in that case, they probably could have gotten away with making demands for more money than they would have gotten under the guidelines. They can get away with it, because after all, they own the guidelines. That’s their proprietorial program.
Now, Hope is not the majority of the sales out there lately. At one time, Hope was 65%. In other words, they used their proprietorial program and they didn’t use the federal programs. Now, the proprietorial programs have kind of dried up and more of the federal programs are coming in. There was a good chance this could have been. It just turned out that it wasn’t.
What would those parties do? They’re not inside the guidelines program. They don’t have any guideline defense. Both the first and the second are making demands they can’t meet. Well, I think the solution on that is very easy. First of all, you have a lawyer yell at them a little bit as a last ditch shot, a Hail Mary pass at the end of the fourth inning or you walk. I hate to say it, but some deals just plain don’t work.
What could they do to this guy? He’d like to do the deal. The broker would like to do the deal. She’s got a lot of money in this and she’d like to pick up a commission too. She needs to feed her family. Well, if it just can’t work any possible way and they’re not going to budge, then let them have the property. They can eat it. The buyer just sits in there and lets them foreclose. Does he deed it back to him? Not unless they offer. He just sits in there and saves his money and doesn’t them a dime and lets it go ahead and go to foreclosure. It’s not going to make any worse credit. It’s not going to make any worse Section 108 or Debt Relief Act or anything on him. In Arizona, it might even be the better way to go, especially if that’s all the money in the world they have. Let me tell you why.
What if that’s it? They don’t have any savings. They don’t have anything. If they go with a short sale deal, here’s what they’ve got. The park bench. Them and their two kids sitting in the park because they can’t get rich, they don’t have any money, they got credit cards clear up to the eyebrows. That’s probably a deal that shouldn’t have been done in short sale anyway. That’s probably one where you say, “In looking at how terrible you are, you need a roof over your ahead. If nothing more, if you just sit it out, you may get a roof over your head for free for the next eight or nine months.” Of course, it’s not for free. You’ve paid a ton of money for this and you’re losing a lot of money on this house. It cost you. For that, maybe you want to sit in it for eight or nine months until they foreclose. Save the money up that you would have made so at least when you’re out of here you have some money to start over again. That might have been the better decision. In that case, it’s probably how it’s going to turn out.
Sean: Yeah. Short sale is not always the right answer.
Jim: That’s true.
Sean: Jamming people into these deals, like you said, is not always appropriate.
Jim: It isn’t. I do think it’s fair. Remember, we all have a fiduciary duty. If you list it, and it’s a listed short sale, you do owe them a fiduciary duty. You might want to ask them a few more questions. After all, they’re going to give you a hardship letter. You can see the position they’re in. People come in here because they run into a little jam like we just talked about with the lender. Broker sends them over, thank you very much, we love to work with brokers and we do try to get answers. We try hard. Sometimes we’ll look at it and some deals are doomed to failure because the economics aren’t there.
If you’re a broker, for instance, and they want to do a short sale on this property and you look at their hardship statement and their financials, they haven’t got two nickels to rub together. Well, the man’s on unemployment compensation, the mom does some odd jobs, checks at a grocery store or something, barely makes any money. They’re underwater on their cars. They’re underwater on their credit cards. Those people shouldn’t be in a short sale. They should be sitting this out as long as they possibly can and getting what goods they can and working to get some money stored away so that months from now, when they’re finally relieved of this debt and on their way, they’ll have something to start with.
Sean: Yeah. Something you said, actually, before we jump to our user questions, you made me think of an instance on the topic of private mortgage insurance. We had a situation that was reported via our forums where a lender had purchased private mortgage insurance unbeknownst to the home owner after it was discovered that it was an at-risk property and that ended up blocking the short sale. What would the recourse be in that situation, if any?
Jim: Well, all of these things cost money when you’re talking about recourse. The bigger question on PMI is if the lender’s getting PMI, why don’t they use that to off-set the instrument? Why aren’t you getting credit for that? In other words, if you’re under one that does have PMI, and you can tell because you’re usually paying a premium for it in your monthly statement. They usually show that separately, give you statements at the end of the year. If you’re FHA or any of those, of course you are paying premiums. One of the things that everybody has asked is, let’s say I owe $200,000 and I have a short sale for $150,000. The PMI carrier is going to pay them up to $51,900 towards that loss. They’re going to get it tomorrow.
Sean: You’re not going to get. . . Yeah.
Jim: The question is why in the heck don’t I get credit against that mortgage? Just as though it all went to the mortgage and then some, they actually made a profit on it, as far as that means my debt got paid off. Why am I getting ill reported? Why should I have to worry about phantom income? Why should I have to worry about anything? It’s paid in full with insurance I paid for.
Jim: No. That is not what the big lenders are doing. They’re pocketing in both sides. See, that’s just part of what I was talking about. The double dealing and the play on the aces versus the deuces. They’re playing that with everybody, not just the borrower. They’re playing it with their own insurers and with the feds.
One of the questions then that you mentioned was, well, what happens if the PMI has been developed by the bank at a later date in a way that chokes up this whole deal? Obviously, the PMI insurer probably is rejecting making payment saying, “Hey, Peg. You don’t go out and buy insurance the day after your car got wrecked and then say it was the day you bought it that it got wrecked. It was already a wreck when you insured it and you told me it wasn’t.” That’s the precondition of PMI. There are no clouds in the sky when they buy PMI. Well there was already a cloud. Hell, there’s a thunderstorm going on. Obviously, PMI wanted to bail. Then the lender says, “Well, we can’t take that big of a hit, so we just can’t do this deal.” Since the lender is the sneaky party here and PMI actually is right. I think they have the right to do that. Then, of course, you can claim against them and also use that as a defense.
One of things we’ve not talked about today is what if I’m just caught cold, I can’t do whatever kind of deal it is they want me to do? What else can I do? Do I have to go to the guidelines? The answer is no. Sometimes these lenders have engaged in wrongful lender practices that give you a lender liability claim. Guess what? You can use that as trading stock.
Remember that poker game we were talking about? They’ve only got a deuce and you’ve got four aces. Well, two of aces might be that they engage in lender liability. That’s valuable to trade back. Here would be the liability. You defrauded people in a way that barred my ability on the short sale. Because of that, I now am in a worse position than I would have been on an insurance policy that I paid for. You say, “Well, you were paying the premium yourself. Even worse! Then I didn’t have any notice at all that this thing was buried in my transaction and I should have had some notice on that. That’s on your side of the equation. You set me up for failure and now I’ve got failure and I’ve got implied income. Now I’m going to have a worse credit rating than I would have had before. It’s all caused by you. Would you please write me a check for, how much it is you think I owe you, $50,000? Okay. Write me a check for $100,000.”
Now, do you want to play poker? That’s kind of how you do that. That’s what lawyers do, by the way. That’s a thing that as a broker you can’t do if you’re the licensee trying to handle the deal. You’re just not in a position to make lawsuit threats. That’s not how it works. That’s probably an unauthorized practice of law anyway for which you’re not licensed. It’s best to send it off to a lawyer and let them be the black hat. That’s how that works.
Sean: I want you on my poker team so I win. Let’s go to our user questions here and talk about some of these. We’ve got one submitted. What is the remedy if my name is mistakenly still on the mortgage when the house goes to short sale?
Jim: The answer about mistakenly on the mortgage is probably the big question here. How did it mistakenly get there? One example would be this. People think it’s a “mistake” but it’s not really, but it happens quite a lot.
Let’s say that you got married and you bought the house and you both sign the instrument together so your names are both on the deed and both on the loan. Then later there’s a divorce. Wife says, “Look, I’m out of here.” Husband says, “I’ll assume and continue to pay the loan.” They do a marital settlement agreement or the judge rules that. Now, judges don’t worry about HAMP, HARP, 2MP. The judge says, “There’s a decree and the decree says, ‘Husband owns the property free and clear of any interest of wife. Wife can deed it over to him or this decree can act as the deed and he will pay and defend and hold her harmless on the underlying obligation.'” She leaves.
A year and a half later, she goes down to get a credit card and she finds out that there’s a bunch of dings on her credit and it’s from the lender. The lender’s still dinging her because her idiot fool ex-husband is not making payments. In fact, he’s in foreclosure. It’s all being reported on hers.
Now there’s one where a lot of people say, “Well, it’s mistaken that I’m even on there. I shouldn’t be.” Well, here’s unfortunately the problem. The only way when you both signed it originally that you get your name off of it is not because a judge said so or because the two of you decided that your name should not be on it when you did your marital settlement agreement. The only way you can get it off is with agreement with the lender. Did anybody approach the lender? Nope. Probably couldn’t have got it refinanced and got you out in the first place anyway because the husband wasn’t personally strong enough to take over the entire debt because now your income is removed as wife, so he couldn’t have done it anyway.
There’s one where people say it’s mistakenly on it when in fact it’s going to stay there because, by operation of law, lenders cannot suddenly have someone approach them and say, “Me and my partner made a deal last night that he doesn’t owe you any more money and that’s binding on you now.” They go, “Wait a minute. You signed the note. You signed the deed. No. You need our consent to that. Where were we when you made that deal? The answer is no. We’ll just keep you on there.” As to the lender, you’re still responsible. This happens again and again and again.
There’s also a caveat to this I should note and that’s an example of “mistakenly” on the deed it feels like, but not in fact not mistakenly. It was the law. You stay there until the lender says otherwise. Yes, it can continue to go on your credit. We’re trying to talk about credit here in a minute. Yes, it can continue to go there. The foreclosure can go there. You’re going to get a 1099 for potential phantom income, etc.
Now, of course, if you’re a wife, the husband did make an agreement to indemnify you and hold you harmless. It’s probably a violation of your decree. It might a contempt to court. Husbands, before you stop making those payments or go sideways, if you’ve got an indemnity agreement just remember, wife can come back to court and tell the judge you are not playing according to what he said in his decree. Judges become very angry when you do not do what they say. They have the capacity to actually put you in jail, fine you, issue orders that you will bring it current by a given time. Beware of those things.
Sean: The lesson there is to make sure that you talk to the lender. Quick-claim deeds and things you do on title and all that is independent of the note and to make sure that you go to the lender.
Jim: Absolutely right. Any kind of time you’re going to make a transfer or something where you’re trying to absolve yourself from the title, you’ve got to get down to that lender and get their John Henry on the dotted line saying, “We’ll let you do that.”
By the way, say in my situation with the married couple, if the husband is capable of sustaining the debt, let’s say he was the provider all along which we see of course still, even in these modern times. A lot of times the husband is the provider of the income to the home and the wife stayed home, took care of the kids, raised them, and did her part. Wife typically doesn’t have much credit that she couldn’t have gotten anyway to make any assumption or otherwise, but the husband does.
Many times if the husband’s condition has not changed and he’s still financially strong because he’s employed and gainfully employed and there are no credit cards that are going sideways, he can go down and usually get them to sign off. They call it a novation. She’s essentially removed. It will feel almost like a new loan as to him. He has to fill out some forms and so on. They usually don’t go out and appraise again. They’ll just consider it a refinance. Often times, that’s possible.
In many cases, that divorce cost everybody a ton of money. Everybody’s in bad shape. Neither one of them has the ability to go down and carry that. Those are the ones where you’re going to get involved in a short sale. Everybody’s probably going to feel a little bit of a ding on that.
Sean: Good info. Let’s go to the next one here. How can I fix a short sale that was improperly recorded as a foreclosure on my credit?
Jim: There’s a great deal of debate on whether there’s much difference between a foreclosure and a short sale. Now, one of the ways that short sales are sold out there as an option by brokers is to say, “Well, you will get a different credit rating as opposed to going to a foreclosure.” Sometimes that’s true, sometimes not.
If you go to the original rules that FICO and the Trimerge learned by, these are the credit raters and one of them is the place where they report all adverse information and good information. That’s called the Trimerge. That’s your Equifax report, your TransUnion. These are the ones that actually effectively are your world of credit. Those folks have some rules that are essentially theirs. They play by them. Lenders can’t make a difference. Many times you can’t make a difference except by the method I’m going to suggest in a minute. If, under their standards, you get one credit rating, that’s pretty much it. You’re not going to get far by arguing with them on that. That means it is what it is as to those credit reporters.
The real problem is that when you start scoring these out as to how they’re going to turn out. You just started to go into default or delinquency and the credit report is going to start reporting you after 30 days anyway. That’s even just when you’re in delinquency or already getting reported and you’re already losing FICO score every single month. How long does this go?
I met one of the big FICO representatives for this district at a session I gave one time. She was a co-speaker. She traded some information with me because I wanted to get it right from the horse’s mouth. I don’t mean some lady that answers 1-800 line. This lady was the boss for this whole five-state district. I said, “What are your thoughts on that?” She says, “We do show it as a paid, satisfied charge off.” If it all happens at once as opposed to a foreclosure, there probably is a better rating on it.
For instance, if somehow magically the very day you go default they could somehow say, “You got a short sale that day, it’s a charge off, but paid as agreed.” Everybody knows that there’s a code for that that they actually use. Everybody knows that’s a little bit better than a straight foreclosure because it looks like you cooperated. You went along with one of these programs that the feds and the lenders are extending so you get a little bit better deal.
She says the problem is that they wait so long, they take so long to maybe ultimately get it sold and every month you’re getting another ding. She says on a mortgage they used to ding about 15 points a month after 60 days of delinquency and then get an extra ding for how it finally turned out either as a short sale or as a foreclosure or Cash for Keys or one of those.
Look at this. Let’s say if the average time you’re in a short sale was six months. By the way, it’s per mortgage, so if you have a first and a second on it, it’s per mortgage so it’d be a 30 point ding every month. Let’s say you go into six months. Ding, ding, ding while you’re sitting there waiting for the short sale. Then you finally get the short sale. That adds another 75 to 80 points. She says sometimes you can end up waiting so long that your score can be hurt worse than if you just went into foreclosure that very day. She says, “Foreclosures, we rate at over 100 points. It will come down.” It hurts one that had a high credit rating worse sometimes than even those that had a low credit rating to begin with. By the way, it’s logarithmically balanced.
You could be in there all those months, get all those dings, and then get a final modest ding because you went through the short sale. The collective dings could add up to 150 points because of all of all those delinquencies on those two mortgages for all those months. They don’t take it all back and then just show the short sale. They still keep it there and then report the short sale as a little bit less than a foreclosure. If you want to look at what your points are now, they add up all those dings. Those could get large. It’s a problem.
Maybe if your broker says it’s a better deal per se, it’s true. If it all happens simultaneously, you’re going to get a better rating. Not a ferociously better rating, but you’re going to get a better rating on a short sale that was accommodated quickly than you do on a foreclosure. If it’s a long, long, long dragged out deal, the likelihood is on a short sale you’d almost end up with the same score as you would with a foreclosure. In that case, if it was a long, long closure, your broker would be wrong.
What can you do about it? Well, one of the things you can do is if you look on your credit, you can go and get one free credit report a year on the real line for free credit reports. It’s a government line you can log to. You can find it on Google. You can also go down to credit reporter and pay $8 and get it any old time you want. You might want to get it and see how they scored it. It’ll also, for a few extra bucks, get you your FICO score. If you have any questions, they do have a 1-800 number. Because you’re a consumer, they have to answer it.
You might ask, “How is that finally scored? Give me the line-by- line scoring.” If you find out that you were dinged for all those months delinquent while you were in a short sale, I have been writing, as you can do, you have a right to do this, a letter of contest saying, “Look, the only thing I should have gotten is my short sale and all those interim dings are wiped out and merged into it because that’s what it took to get that short sale. That short sale is supposed to the final enunciation of what it is I did. The only reason you made it less than a foreclosure is to give me a better benefit on my credit report. Since you don’t get a short sale in one day and it takes some time, I ought to be able to just have only that and not months and months of dual delinquencies on what essentially was one account on one property. That doesn’t make any sense.” I’ve had them take it off sometimes.
Now, there are three addresses you have to write to and FICO makes the fourth. Those addresses are available for me but they’re also available online if you go out and start talking about a consumer credit complaint. It will usually give you those addresses. You have to write to them. You have to tell them who you are, your Social Security Number, what it is you’re objecting about. Give them the line. Demand for the FICO count from FICO, how they got there, and then look at it that way and make that argument.
Now, they may not go for it. Of course, then you could always make a claim. Wrongful credit reporting practices, there’s up to $25,000 violation per wrongful act against the credit reporters. Anybody who repeats the credit reporter also with the wrong credit. Maybe that’s the right way to go. So far, most of the folks that we’ve worked with have had such hardship anyway, that if we can’t get it with a nasty letter that kind of shakes the tree a little bit, that’s usually about the end of it and they’re just unable to go on from there. That’s just the reality of things.
Sean: Yeah. That’s interesting because we’ve seen pretty substantial benefit to doing a short sale credit-wise, but at the same time I think some of that might be our times. We typically get them done in two months versus. . .
Jim: Well, there you go. See, now, you guys are fast. That’s because you’re doing your short sales right. You’re thinking them out. See, the times that we’re seeing come into our office commonly on the issue like the reader wrote in about, six to eight months, and there have been offers and offers and they’re turned down or they’re asking for more money and they don’t want to pay. What it means is your organization is doing it the right way, so it’s a minimum amount of ding.
That is another point. Shop your organizations well. Go to those that have been there and done that. Don’t go to these people who are just now learning. They’ve done three of them or something, and wow, we’re going on number four. Hey, we’re getting experience now. You need to go to people who’ve done 100 or more. They know the drift.
Also, I will mention something else. Some of it has nothing to do with your broker, nothing to do with your short sale, nothing to do with you particularly. It has to do with your lender. There are some lenders out there who just will not play ball. It takes six to eight months of jerking them around and them jerking you back and whatnot to get the deal through that they should have taken immediately, just because that’s the way they are. There are like three of them out there that any time we see them come with these names we know, “Oh boy. Here we go. Get ready. Get on the gloves and get the ones with the spikes on them. Get a big clothespin and put it on your nose because this is going to stink to fight with these people because they’re stinky.” Fight. That’s, of course, again, what lawyers do. Sometimes you have to make that fight.
In some cases, if there’s not enough money to do it I really regret it, but that goes back then again to just using good short sale brokers from the first get go so that you don’t get into that in the first place. Most of them also know who the troubled lenders are too, so they know what to tell you. If there’s one of them I’m thinking starts with an M, if they came in, they would know immediately, “Yep. Get ready. You’re getting ready for a big fight.” They’ll tell you so at least you know what you’re biting off.
Sean: I have to inject a little personal story here, an anecdote. Just along the lines of how dysfunctional it can be. We had an instance where a lender that will remain nameless, we had faxed them the approval forms and everything repeatedly. They kept saying, “No. We didn’t get it. We didn’t get it.” We finally certified FedExed it, had the certified delivery thing, we knew who had got it, who had signed for it. They came back to us and said, “No, we don’t have it.” We said, “What do you mean you don’t have it? We got the signature here.” They said, “Oh, we threw it out.” “Why’d you throw it out?” “Well, it was incomplete. It was missing something.” “Well, what was it missing exactly?” “Well, we don’t know. We threw it out.”
Jim: Because we threw it out, yeah.
Sean: It’s Catch-22, the [inaudible 1:12:10].
Jim: There you go. By the way, that’s a difficult one for the lawyer to play with as well because, like I say, it goes on these… They’re supposed to be getting better. Maybe they are.
Sean: The Equator system is improved and it seems like that’s. . .
Jim: That’s right. The Equator system is the computer system now that asks the right questions and you put things in the right box and it processes it. What Sean’s talking about, about this endlessly losing everything you send, that’s not unusual. Even lawyer letters. They don’t seem to care there either. In fact, maybe they like to throw those away more. I don’t know.
I can assure you that there are only two causes for it. One of them is that they’re in massive inefficiency on the other side, which should have you deeply concerned. The other one is they actually intend to do all of it, which should have you even more deeply concerned. Either way, it puts you in a bad and precarious position.
Then it really boils down to this. Who are the professionals that are working for you? If you’ve got the good guys, they’re going to get you the best deal you’re going to get. It may not be a sensational deal, but they’re going to get you the best you’re going to get especially from the wily lenders. Some of them really are wily. That again argues for getting into the best hands you can from the very beginning of these.
Sean: Yep. All right. We’ve got three more and we’re already up more than an hour of your time so I appreciate it. I have already had a bankruptcy. Should I still consider a short sale over a foreclosure?
Jim: Well. Good question. It comes out a lot. I don’t know how long ago your bankruptcy was. If you had this loan during bankruptcy, it was probably discharged. Then the question becomes in bankruptcy, did you reaffirm it? At the tail end of a bankruptcy, the court will ask you or there’s a group of forms that you’re supposed to use and volunteer if you reaffirm a debt. Now, some people do. If you reaffirm it in the bankruptcy court, that means okay, I’ve discharged everybody else, but you, Mr. Creditor, I agree, I will continue to owe you money.
Now sometimes the lenders demand this. They say, “Look. I let you go all the way through bankruptcy without paying. Yes, you discharged me, but you’re still on the house. Now, if you want to pick that loan up and pay for it, I want a reaffirmation so I know you’re back on the hook on that loan. If you don’t sign it, then I’m just going to go into foreclosure because you haven’t paid me. I’ll just take the property away from you.”
The next question that comes about is did you sign a reaffirmation? If it’s a reaffirmation, it’s a new debt all over again. It’s still there. Now, some lenders don’t even do that. They just say, “Look. You went through the bankruptcy. You brought us current or you’re still in delinquency, but we’re going to let you stay in the house. We just don’t want to get around to it right now.” That happens. That changes it a little bit. The reason is that if you were discharged in a bankruptcy and never reaffirmed the debt, you don’t owe them money anyway. It’s over. You might still own the house until such time as there’s a foreclosure, but you don’t owe any money.
After that, the next question you go to is what would be the difference then if I went to short sale or just let it go? Well, not much, because at that point the bankruptcy has done about as much harm as it can to you.
In the old days when they had what they called the unified credit reporting system, and it got turned later into FICO, they had a 0 to 9 scale. Zero meant you had never had any credit. One meant that you paid everything before it was due and you paid more than what was due when it was due. Two meant you paid things as due and you paid whatever was due on the very date they were due. Well, if you could see that numbering system, like four was you missed a payment once, and then finally got to nine. Nine’s a bankruptcy. Bankruptcies last a long time on your credit rating, as much as 10 years, whereas other credit dings could last only seven. The likelihood is if that bankruptcy was recent, you haven’t got any credit to repair. You are toasted. You’ve got some pretty bad credit.
What would be the difference on a short sale from a credit reporting standpoint or anything else? Not much. If you reaffirm the debt, it may be a wise way to go because that’s the one crucible and the one moment where you can get back off that debt and make some kind of a deal that you can live with and start yourself getting fresh again. If you’ve been discharged from the debt, I think it’s one of those things that doesn’t make a dime’s worth of difference.
Then after that, it’s just a matter of your preference. If you feel morally obligated to enter a short sale program and get your lender paid as much as possible, then that’s fine. I’m not going to argue with that. Other than that, from a very aseptic, legal reasoning, there would probably be no reason to fight for that unless you were fighting for reinstatement to just stay in the house. That probably would be more worth it if it was financially feasible. There you go.
Sean: Good deal. All right. Cash for Keys, is that considered a short sale, foreclosure, or something else?
Jim: Well, Cash for Keys in an acronym that just means, usually comes at the tail end of the HAFA program. That’s the one that’s trying to avoid foreclosures. Essentially, usually what happens is you’re in a short sale scenario. The lender says, “First we have X months that we approve you to go ahead and try to short sale it. See what you can get. If that doesn’t work, then we’ll give you another number that you can short sale it at that’s lower that would satisfy us. If that doesn’t work, we might go into one of two things. We might still end up just foreclosing or we might make a proposal to you to give you some, usually $3,000, $2,500 to $3,500, to just give us the keys. Give us a deed in lieu of foreclosure.” It’s not just keys. You have to deed it back to them. “Give us a deed in lieu of foreclosure and go your way and we’ll give you some money to move.”
Those are part of the HAFA program. It’s called the last ditch solution. It goes down as a deed in lieu of foreclosure. That’s what it goes down as on your credit. A deed in lieu of foreclosure is just about as bad as a foreclosure. I don’t think there’s any difference. Now, so far, some people say, “Well, there might be a difference in Cash for Keys in the future.” I’ll tell you what that is in a minute because it also goes back to an earlier question. From the standpoint of, if you’re at the Cash for Keys in the abstract, they’re going to treat it the same as a foreclosure because you’re going to execute a deed in lieu at the same time. You can’t just say, “Here are the keys.” That doesn’t transfer ownership. It’s kind of just a slang to say, “It’s yours. Here’s the deed. I’m out of here.”
One thing though that I want to talk about on some value in short sales as opposed to just walking away or sitting on it until it gets foreclosed. There is another value. It’s about credit rating. It’s something that we do have to consider because it may make sense to you or it may not. It also helps a little bit in why you might short sale when there are a lot of reasons maybe economically that we’ve talked about that wouldn’t make any difference to you particularly.
Well, there is one difference it can make. The government is giving you one last reward. It says this, “If you walk from your property and we just have to take it back the hard way, then as far as we’re concerned you are not going to be capable of getting a loan from Fannie and Freddie for up to, say, five to seven years.” They lowered it recently to three. “You’re not going to be able to get another loan. You’re just completely disqualified. We don’t even care what your credit rating is. You can walk in the door with a million bucks in the bank. We won’t give you a loan. That’s because we’re mad at you. If you go along with one of our programs and follow it all the way through, then we will reconsider you for eligibility in as low as two years for Fannie and Freddie.” It used to be one year for an FHA loan. Now they tell me they’re considering them in 90 days.
What it does get is maybe one other element and maybe it’s important. That is, it gives you another shot to go back and get a loan. Remember, they’re still going to run you through the rest of the qualifications. It just means you won’t be boycotted. You cooperated with the program. Didn’t turn out very wonderful for you, but now you want to be able to get into another house which means you’d better be capable financially of doing it. It might be an FHA, 3.5% down, 665 or 670 or something on FICO scores. That might be the one you get into. They want to see that you do have the financials to qualify otherwise. It’s just that they’re not going to boycott you per se, because you walked on it.
Cash for Keys still qualifies if it was done under HAFA and they said, “Give us the deed in lieu. Give us the keys.” Then you’ll have a shorter qualification time for those loans and you will not be boycotted.
Sean: Cool. This last one, I think we may have actually already covered. Is there any way to avoid having the mortgage insurance company demand a large sum of cash at the close of Escrow?
Jim: The mortgage insurance company has no right to make any demand on you at all for the money. The reason is all you are is the payer is but the beneficiary is the lender. That’s the end of the end. They have no right of what they call subrogation.
Think of it like this. Let’s say that you’re buying insurance on your car and the purpose of it is to cover it in the event someone crashes into it and destroys your car, so you’re paying the premium. Now, remember, I didn’t pay you anything unless you own the car. Let’s say there’s a mortgage on the car. Big mortgage, you just bought it. You drive down the street and somebody comes out of nowhere and smashes your car and takes off. It turns out they’re uninsured. Fortunately you’ve got some good insurance. You’ve paid the premiums on it. That insurer steps up to the plate. You owe $21,000 to the bank on the car. They pay the $21,000. There’s about $1,000 left maybe on its fair market value at the time of the collision that gives you the thousand. Well, they don’t turn around now and sue you for the $21,000 they paid out.
Sean: That’s why you bought the insurance.
Jim: That’s why you bought the insurance. Again, this is the thing about the poker game. See, if the system was played legitimately, then there would be legal intervention by the state and federal governments to make sure these people play according to Hoyle with the lenders. Remember, the lenders drop big bags of big dough every place. Really, all the cops that should be on the beat making sure these people play kosher are looking the other way. They’re all on the payroll, the political payroll. The lobbyists out there are working like crazy. It shouldn’t be that you’re just alone when they violate the rules and make these ridiculous and unlawful demands. There should be somebody that comes down and raps these guys alongside the head with their nightstick and drags them off some place and puts them in the crowbar hotel. Unfortunately, they’re paid to look the other way by the very lenders you’re dealing with. Since the fix is in, unfortunately it’s every man for themselves and that’s not the way it should be.
From the standpoint of people making unlawful demands, to come back and ask you to subrogate and repay what you just bought insurance to cover, and the only one that got covered was the lender in most cases, then it’s ridiculous to think that that’s the kind of insurance that they can come back and say, “We covered it. Now you have to pay us back everything we did.” What the hell was that insurance good for? Hence, the law says it can’t do that. Now, of course, remember, since the policeman isn’t there with his whistle, the state is not doing anything about that. It’s pretty much you, your broker, and probably your lawyer are going to have to take that position.
Sean: Yep. As we’ve discussed, as long as it’s economically viable for them to keep bluffing and keep pulling these shenanigans, I guess. . .
Jim: That’s true. What Sean’s talking about is a conversation we had just before we went online today. That was this issue where people are rolling over where they probably shouldn’t. Of course, it’s hard when you have all the odds stacked up against you to have the gumption to keep on going on and fighting the system. I know what that feels like. As a lawyer, I’ve been fighting this system for many years and so I do know. Believe me. I’ve got plenty of bumps and bruises to prove that periodically the system got the best of me. For the most part, I have learned this. If you don’t fight, you can’t win. You’ve got to put up a fight.
Let’s be realistic. If everybody put up a fight and the lenders got nada everywhere. All the brokers and all of us got on the same page, you’re not going to get PMI. Don’t even try. It isn’t going to happen. Frankly, the bank, who’s a how-much-ventured and how-much-gained kind of guy, they will not play that chess piece anymore. They’ll pull it back and say, “Ah, looks like that ruse has been exposed. Nobody’s going to do it anymore.” Everybody that rolls over finances the bank and encourages it to do the same misconduct next time. In other words, you don’t teach a dog anything when every time he makes a mistake you give him another dog bone. That’s essentially what they’re getting. You’ve got to just stop giving them.
Sean: It’s the veritable blood diamonds of this century.
Jim: It is. That’s exactly true.
Sean: Jim, we can’t say how much we appreciate your time. You’re an advocate of the homeowners and we really respect that so thank you for being on.
Jim: Thank you very much for asking me.
Sean: Yep. Cheers.
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If you’re a homeowner with a distressed property it can be overwhelming to get your head around all the available options (a short sale is just one of them). Here’s an eight-minute plain-english explanation of the five basic options you can pursue:
If you want to dig deeper on these topics here are a few threads from our Q&A site with peer-reviewed answers from experts in the real estate industry:
Provided people find these video explanations useful we’ll be publishing more videos like this to help demystify the process. Let us know what topics you’d like to see covered in future videos by leaving us a comment below.
Jim Eckley joins us again for another podcast episode. You’ll find the time-stamped show notes below. If you’d like to ask Jim a question for a future episode you can leave a comment below or call our answer hotline (615.SHORT.IT) and record your spoken question there. Big thanks to Jim for taking the time to speak with us. Jim can be reached via his web site EckleyLaw.com.
Understanding the Federal False Claims Act and how homeowners can use it as a negotiating instrument
Discussion on new developments in short sale regulations
Fed gov suing five major banks for non-conforming loans
Attempts to modify law in AZ to enable banks to go after deficiency retroactively on closed deals. Here’s the proposed legislation.
Sean: Jim, welcome back. Thank you for being on our second episode.
Jim: Thanks for asking me, [Sean]. I’m glad to be back, and I hope that we can be as productive this time as we were last time.
Sean: Good deal. I figured we’d dive right in. You had sent me something about the Federal False Claims Act. What is that, and what’s the relevance for homeowners?
Jim: Well, before I answer that question, I should start out again by saying that what we talk about today is general and educational. When we speak about these claims and statute of limitations and facts that might generate liability or not, those are general and not specific to a given case.
They’re no substitute for someone, if they find themselves in one of these predicaments, contact a lawyer and have them look specifically at their case, the facts and documents. Then make a judgment call there.
I always like to say that, just so everybody knows where they’re standing and how far they can use these kinds of sessions. Of course, these sessions are really good because they get us down to what the law really is.
Also, one other thing. When we talk about federal matters, those apply to all states. When we talk about state level matters, like statute of limitations and other things, those are typically state level. Today we’re talking about just Arizona.
If I’m going to add any other state, I’ll mention that I’m saying if it’s in California or Colorado if we happen to get to that.
Talking about your first question, which is, what is the False Claims Act, and how might that actually fit into any of these claims that homeowners and others have, and how they’re treated by lenders?
Let’s start out by telling what the False Claims Act is. Actually, the Federal False Claims Act first came around in the early part of the Civil War, passed during the Lincoln administration. It was to prevent war profiteering.
At that point in time, it was typical for the government to go to private vendors to buy all of their things. We’re still doing that today. They needed weapons, musket balls, powder. They needed clothing, they needed wagons. All these things had to be made by private vendors.
The government contracting section would go out and make contracts with private vendors. The idea was that the vendors sometimes were padding their bills. The feds wanted to of course make that unlawful, because it was public money that was being misspent by padded bills. It was a fraud on the public.
Since the feds then hadn’t really been in a war recently as of 1861, never had that kind of experience, there was nothing on the books that prohibited that or gave the feds any cause of action.
The feds passed that, and essentially what it said is this. If you’re getting federal money under some false pretense, no matter who you are, then you can be liable to the federal government for that recovery. If a whistleblower comes in and knows of someone misusing federal funds, and the whistleblower informs the feds, if the feds do something about it, the whistleblower gets a percentage of it.
If the feds don’t do anything, the whistleblower can actually sue in the name of the federal government the party to whom all those ill-gotten gains went and recovery in some cases as high as 40 to 50% of what was overpaid them.
This can be very, very large amounts of money. You’ll see these kind of claims typically used against, of course, government vendors, but as the years went on it turned out there was other possible uses. It seemed that it applied to government officials that were misspending.
It seemed that it applied to people like Boeing. It applied to people that took money for the government in any ways, like people who vended food stamps, people who provided healthcare services that were sending padded bills to ERISA, to the Social Security Administration, Medicare and Medicaid.
In a sense, they were profiteering from the federal government by padding bills. They wanted to encourage whistleblowers, so this was dusted off in the 1960s and suddenly they started using the False Claims Act and making these kinds of applications.
The courts were surprised to see that in use, an ancient bill like that, but all proved that it really did apply.
Again, taking the essence of the False Claims Act, here’s what it says. If the government is paying money because of padded bills or misinformation being given to it by some vendor to the government, or somebody regulated by the government, then anybody can blow the whistle and get a percentage of those by having blown the whistle if they’re ever collected.
If the government forces themselves will not prosecute, then they can prosecute themselves in the name of the United States of America.
How would this apply to homeowners and lenders? Well, here’s how it would apply. Remember, lenders are insured by FDIC, FSLIC. They are insured by the federal government through indemnities behind the scenes that pay them for shortfalls in their mortgage lending and any kinds of short sales, foreclosures or modifications.
In other words, they’re getting money from the federal government, and they’re getting it by providing the federal government with information about what their losses are and what caused their losses. The point though is, many times, we’re seeing it on the receiving end for the consumer, and we know that the lender is generating their own losses.
They’re generating by refusal to modify, by a refusal to do an entirely reasonable short sale, by an election to go to foreclosure on certain properties that could have been rescued and solved under existing guidelines.
By making demands that homeowners do things they don’t have to do, and one of the typical things in Arizona might be that the homeowner comes up and pays additional cash, or writes an additional promissory note for the shortfall on a short sale to the lender, because the lender demands it on pain of denying the short sale.
That, on a loan that calls for no deficiency. In other words, there is no personal liability. The lender couldn’t possibly ask for that money. The very act of asking for it and the borrower declining to do it, and having it go into foreclosure, the lender then turns that whole loss over to the government and gets compensated for most of it.
The idea is, that’s false information. The lender has a duty to do their best to follow the rules to try to mitigate that loss. In that case, the lender generated the loss in order to turn it over to the federal government to get coverage for it, which it did.
There went federal money, our money, to a needless rat hole, a needless loss that didn’t have to be generated. That means the lender arguably is making false claims on the government. The question would be, would we have standing as homeowners out here, or homeowners in a group, or someone, anyone, doesn’t even have to be homeowners, to go in and say . . . We don’t even have to be a victim, remember, of it. We just have to know of it.
Say, "The lenders are doing this," make a demand on the U.S. government that they do something about it. If they don’t actually file a false claims act in our own regard against Bank of America or JP Morgan or Chase or whomever we can say is engaging in this kind of activity with truth.
That of course is a matter that would always have to be determined. That would be a tremendous type of claim. It would be one which they have to take seriously, because it isn’t on a single case basis.
It would mean if they were found to have done that, they would have disgorged all those monies back to the government. The person that brought this up would get a significant percentage. That means clear across the United States. That’s a lot of money.
Sean: Has anyone brought this . . .
Jim: There are claims out there that have been, as classes, brought these kinds of claims. There has not been as yet an award that I know of, because most of this activity has only started in probably the last two years.
When the borrowers of the world have finally decided they’re not going to have fairness generated for them, and there’s little risk coming down the pipe for them unless they act on their own and start hiring the lawyers.
Then of course you need a group of class action lawyers that are familiar with these kinds of claims and are willing, since they take them on a contingency basis, which means they only get paid if they collect. They’re going to have to put out all the money that it takes to finance these, and it’s an incredible sum of money to finance these all the way up to resolution.
My guess is that many of them are going to be successful in this regard. No lender can afford to be in court on a False Claims Act type of claim. I suspect those are all going to get settled before they ever get to that point.
Now remember, False Claims Act also has a criminal edge to it, which means if they ever were found civilly liable for having padded their bills, that terminology I’m using, or padded the information it gave the government in order to get money, then that would also be criminally actionable because it means that they’ve essentially extorted or stolen money from the government with false information.
That’s always a crime. I’d say that most of these are going to end up getting settled, and most of them are in their infancy, but it’s an entirely legitimate claim.
I wouldn’t be surprised to see it being used very effectively over the next couple of years.
Sean: Good deal. It sounds like a really useful stick.
Jim: It is a big one. It’s probably the biggest one in the quiver. As we all know, just fighting a bank on a deal by deal basis, if it’s engaging in inappropriate activity, it’s a hardship on that poor, independent borrower that usually is unbearable.
The bank has a lobby of lawyers that get paid to do nothing but fight these kinds of issues. The poor borrower’s just caught in a bad moment in his life, usually at his financially weakest. That’s why he’s there, doing a short sale or modification, or even involved in a foreclosure.
He’s hardly in a position to get a group of lawyers together to fight for him on that issue. Although fortunately there are some that will do that.
Sean: Before we dig into questions from our users submitted from our site, what are you seeing lately? Is there any new developments that homeowners should be aware of other than this act that we just talked about?
Jim: An interesting part about the guidelines that have been prescribed out there for purposes of rewriting loans, modifications, short sales and so on, these seem to change almost daily. Interpretations of them seem to change almost daily.
There’s been a great deal of disarray, I think we’ll all agree, coming out of Congress, federal government, and coming from the new financial communities that have been formed by the federal government to look out for us.
Like the Federal Trade Commission, which had prescribed some rules protecting consumers against untrue information coming down about modifications and loans, and modification companies from misrepresenting to them what they were capable of doing, and taking upfront fees that were large and then doing nothing.
There were some rules that came down, and then suddenly part of them were suspended. In other words, it looked like we were heading down the right trail, and then they get suspended.
Then there was another set of rules that seems to have come out that really isn’t particularly relevant to the moment. Seems like they’re more relevant to a couple of years ago. I guess what I’m saying is that when they say "Washington DC, the DC must stand for Darkness and Confusion," because that’s all we’ve seen coming out. No real leadership.
Now, you do see a couple of movements out there generally that are encouraging about the lenders, but is not going to bring the cavalry to you and me very fast, or to most of the people that are listening to this tape today.
The changes for instance are that the federal government now has come back and asked for recourse on some loans that were improperly underwritten by the lender. In other words, they had paid the lenders large amounts of TARP funds, and they’ve paid them from Fannie Mae, Freddie Mac and Ginnie Mae funds to insure mortgages.
It’s turned out that the mortgages that were sold to them which, now they’re taking losses on, were not in compliance with the rules on how you underwrite mortgages. That’s why they’re defaulting.
Rather than the U.S. government’s taking our tax funds to pay for all those shortfalls, they’ve now decided to sue the big lenders. All five of them have been sued to recourse all these loans back to them, and make them write checks back to the U.S. government, because these were non-conforming loans.
An example. If you were going to put a loan into Freddie Mac for instance, it may be that the portfolio that you put in was supposed to be that every borrower in there only had an 80% loan, and at 20% equity.
The banks were writing these with no equity. They’re writing 100% loans, in two different mortgages, and they’re booking them with Fannie as though it was only one loan.
There’s a good example of a false claim. They’re asking for money from a federally insured entity, a GSE, to buy a loan at the face value as presented as an 80%, in which the borrower probably had 20%, so it would be a good, solid loan, when in fact it was 100% and the borrower had nothing into it, so it ultimately failed, was doomed to fail to begin with.
They’ve been collecting on those.
Now the feds are saying we’re not going to take those anymore. You’re going to buy them back for every nickel that we’ve lost.
That’s a big development. That’s going to certainly encourage these lenders to be a bit more careful.
On the state level now, we’re talking about Arizona, the developments for the borrower have been progressively fairly good on the very fact that most borrowers for what they call qualifying purchase money loans, residential type loans, will have no shortfall that they’re going to have to worry about after a foreclosure or a modification.
There’s a lot of information out there that has suggested that if I buy a home and I can’t pay the loan, and I go into a short sale or a modification or even a foreclosure, that somehow there’ll be a deficiency after that if the property was short sold or sold into foreclosure for less than what I owed.
That argument is false. There’s case law directly on point, and I would lead people to my website, which is eckleylaw.com, and look under "Articles." Type in such things as short sale, or anti-deficiency rules.
You’ll find there the real rules, which are in Arizona, anything of two and a half acres or less, a duplex or less, where all or substantially all loan money was used to buy the property and is primarily for residential use, even though you don’t live in it, there is no deficiency. The lender has no way to ask for more money.
That’s intact so far. Now, there has been some legislative attempt to change that by what I refer to as the "dark forces." The organized lenders of course have just been furious about this in this state, because they want to be able to get the property back and get their money. They want to double dip on this.
Even though they knew at the time they executed these instruments that was entitled to them. They’re trying to go back and change the rules retroactively, and make it able for them to go back and collect on short sales they did years ago, to insist that you pay more money, and to make these instruments generally deficiency-oriented instruments that were not to begin with.
They’re essentially trying to change the law.
Now, our office and a couple of others that are consumer-oriented offices have been taking a stand against that. At this point, and today we’re talking about January 19th of 2012, that has not passed. It has been dropped into the hopper with the Arizona legislature, and it needs to be watched closely.
Consumers need to make sure that people know that we don’t want any changes to that statute. Not as consumers. Now, of course if you’re a commercial borrower, you of course could still owe that money because you’re not a residential borrower.
Or if it’s a fourplex you’re talking about, it could be that you would be liable on that loan, both for foreclosure and for an action against you for money.
Also, I should mention if it’s a pure second, if you took a second out and took the money and bought a Hummer or something like that, a second mortgage, that isn’t covered, never has been. That means if you took money out of the property, then you’ve got a benefit.
In the event they ever foreclose, they’ll still have an action on that note. Those however are a great minority. The greater majority is that the only reason there’s two mortgages on is because the lender decided to do two of them, an 80/20, so they could get you the money to make 100% finance.
In that case, the second was used to buy the property, it meets all the other criteria. There’s absolutely no deficiency on that one either.
The big point here locally is that we’ve been able to hold the line, and that the lenders have not advanced in their ongoing movement to try to change the law after the fact to make borrowers liable on things they were not liable on before. Other than to potentially just plain lose the property.
Sean: This bill that you’re referring to that’s in the hopper right now, if someone listening wanted to look that up and read it themselves, what would they search for to find it?
Jim: I actually have a website address for that, and I don’t really have that in hand. What I will do is after we speak today, I’ll provide it to you and you can publish that.
Sean: Okay. We’ll put it in the show notes.
Let’s dive into some questions here submitted from our users. The first one we have is actually asked by a realtor, but it will be relevant to any homeowners listening.
It says, "If divorce is a hardship, does one actually have to file papers to prove his or her hardship?"
Jim: We’re talking about, obviously, the federal and bank guidelines to either do a modification, a short sale, a deed back, or just to agree that the property ought to be foreclosed. These are the work out programs we’re talking about.
Those are covered by HAMP, 2MP, HAFA, and there’s another program out there now called HARP, which is actually a refinancing program, and I would qualify that also as one of the modification programs. All of these are on my website that I mentioned a minute ago.
I’m going to assume that when he’s talking about hardship, that’s one of the magic terms under these modification and short sale programs. What that means essentially, for those that aren’t aware, in order to qualify for one of these programs, the borrower is required to demonstrate hardship.
Hardship can be shown in one of two ways. One, if they are completely unable, without the use of all or pretty much more than 30 to 33% of their income, to service their debt on the home, that would be a hardship.
It could be because of divorce, death, the loss of a job, sickness, many things could produce their inability then on the basis of what percentage of their income services their underlying debt that sometimes, when it gets past 33, some of these people are paying 65, 70% of their whole disposable income just to service the mortgage.
That’s obviously a hardship. Some of them of course don’t have any money at all, and obviously that’s a hardship.
The other type of hardship is what they call imminent default. One of them is called "current default," the other one’s called "imminent default." Imminent default means I’m still current, I’m still making my payment, but I just got, for instance, the notice from my employer that he’s closing the shop down, he’s going bankrupt. I won’t have a job after next month.
That means I can be current today, but I’m in imminent default next month. Under the programs, they’re supposed to talk to you now rather than waiting for the imminent default.
The reality is, many of the lenders just wait until you’ve stopped making payments and are completely upside down before they even consider it a hardship. They consider the [indicia] of hardship. That’s too bad, because that’s not what the programs say, but that’s how the lenders have tended to interpret it.
Now, divorce is considered a hardship. It’s one of the enumerated hardships. If it has a financial effect that, going back to those criteria, reduce you below the criteria that they consider stable.
Now the question that this reader has asked about was, well, do you actually have to file the divorce papers to be considered in the divorce hardship?
That actually really ranges between lenders and how they apply it. Let me give you an example of one that wouldn’t work. Let’s say husband and wife both signed the mortgage. Now, they decide they want a divorce.
When they were both together, they had enough. They had enough to pay that mortgage, they’re in good shape. They’re not necessarily getting rich, but they’re doing okay. They’re stable.
The only thing that’s going to make them unstable is if they get a divorce, but in the divorce they’re just talking about dividing up the debts and dividing up the assets. Collectively, between the two of them, they still make enough to qualify as being within that 33 or less percentage debt service.
In other words, they can still pay the debt under the guidelines. They haven’t got to the hardship level collectively.
The way the banks would look at it is since you’re both on the note, and you’re both obligated, that means you can’t just take one of them off by a divorce. The bank has to agree to that. They’re saying you’re not going to agree, you’re both on the debt.
Then they add your incomes together, and unless it meets the hardship level, you’re still on that note.
Now, it’s true that some of them will say that well, we do see that if you’re going to divide households, and each household is going to have its own maintenance expenses which it didn’t have before, now it’s two maintenance expenses not one, they will look at that.
If that brings you down below that collective percentage, then that could be a hardship. I wanted to clarify that, because a lot of people think that mere divorce alone is the difference. Or divorce, the lender has to recognize it.
A divorce decree says the husband will take all the debt and the wife will take all the property, the fact is the wife is still on any note she signed. The lender still has the right to go after wife because they didn’t get joined in the divorce. They still have the right to stick with the paperwork they’ve got signed.
That’s the main point. Now let’s get to the actual filing.
Most lenders want to see you at least maintaining separate households at the time, so they’re not dealing with a hypothetical about whether you’re going to be underwater after this divorce. They’re dealing with the reality that you’re currently underwater because of the situation.
Such as you both split, now one’s living in another household. They’re paying each other to help each other support. That would be one.
The other thing is, about divorce, we recently ran across a lender in the Hope for Homeowners program, which is the proprietorial one owned by the lenders, it’s not really a government program, in which they said we don’t believe you unless we see the papers.
In that case, it was important because a substantial IRA and 401 was likely to be lost, making the person who stayed with the home, who in that case was the wife, probably incapable of being able to maintain that home. The status of the husband, who was going into retirement, was going to change.
That dynamic was one in which they really didn’t even have to wait for a decree. They knew that was going to happen, and so the lender worked with us.
Absent that, a lot of lenders say, "Show me." Because they get all kinds of stories, and they don’t know if they’re correct or not. Lots of time a lender will say you’re going to get a divorce, and you want to know hypothetically. Sorry, no banana on that one.
If you’re getting a divorce, let me see the decree and we’ll work with the realities of where you are now.
Sean: This isn’t so much it sounds like a legal question as it is just a business question.
Jim: I think you’re right. That’s the name of that. It really is a business question, and that’s a matter of them believing you, and wanting proof merely of what it is you’re saying.
They ask for proof of other things, like for instance, if you’re going to lose your job, they want to see the termination certificate. If you’re going to have to move to keep your job, then they want to see the directive from your employer that says you have to move.
Or if you just got into a car crash and you’re getting sued and you can’t pay your bills anymore, they’d like to see a copy of the lawsuit. I can see those things, in that respect, I don’t think the lenders are being hardnosed by saying, "Just show us . . ."
Sean: Substantiate it.
Jim: Substantiate this. We have to, because we’re talking real money here as the lender, and we have to know that when we make a change, we’ve made it on the basis of sound data.
Sean: I think what’s a key thing that I just recognized about what you said when you said it, there’s nothing sacred about the divorce itself. It’s what results from it, your incapability to afford something, right?
Jim: It is. The other thing too to remember is usually when parties are married, of course they both sign that note. The lender can hold both of them accountable.
A lot of people think that just because a judge says that is between the two spouses that they’re going to allocate the debt, that somehow that’s binding on the creditors to whom they owe the money. That’s not.
It’s not binding on those creditors. They have the right to say, "I’m sorry you got a divorce, I’m sorry you reallocated your income because it’s made a hardship for you, but the fact is you’re still liable on the note, and we have the right to go by that." Now, what are we going to do about that?
I see that point completely, and that’s missed.
Now, here’s a typical trap in divorce that I need to mention. I see this again and again. Husband and wife get a divorce, and it says on the decree that, for instance, husband will take all the household debt and hold wife harmless. Then they go into a short sale.
Here you’ve got a problem. Now, as between the two parties, the husband is under a duty to keep the wife completely out of this, even though she’s on the note. The wife says absolutely, I’m going to stick to that decree. That’s what we agreed to, that’s what the judge ordered. I’m out of this, you will hold me harmless.
Which means when he stops paying that debt, remember the lender’s going to adversely report the credit of both parties. Both of them are going to get stink on their record.
She would have every right in the world to call up and say you’re in contempt of court. You’ve got a direct court order that says I’m out of this, you’re going to satisfy that debt, you’re going to pay it according to this [tenor], you’re not going to do something where they’re coming after me, or making bad credit reports on my credit.
Now they’re starting to do it, so you are not obeying the decree of the court’s bearing at least on you, and you’re in contempt.
Those are really spooky deals, and usually I say shame on the divorce lawyer that did that, not thinking ahead to say something like, "But if the parties’ financial status changes such that they’re incapable of making that payment by their collective resources, and it makes better sense to engage in one of the work out programs on some of their debt, both parties agree to work together to solve that problem."
Then that way, nobody’s in contempt, and we’re more realistically being capable of dealing with things as they come up. The reality is, that creditor is going to take all their remedies against all the signatories. That’s just a fact.
Husband can’t hold them off in my scenario. Husband doesn’t have any more money to pay them in my scenario. What’s he to do? How realistic is it for the wife in my scenario to make demands that can’t be done?
They are going to have to cooperate. Rather than suing each other, going back to the divorce and trying to say they’re in contempt, then fight this whole thing out again, they should work together.
Sean: Got you.
All right, let’s move onto the next question. Is there a statute of limitations after which banks can’t pursue you for the deficiency?
Jim: That’s actually a two part question. That’s okay. It’s why people like me need to answer things like this.
Sean: Yeah. It just seems that there can be a deficiency, I guess.
Jim: It does. It assumes there can be a deficiency, and let’s just, right off the bat, go back to the earlier comments on what generates a deficiency and what doesn’t.
If you’re in other states, there may not be deficiencies there either, or they may not be qualified. If you’re in California, there’s some anti-deficiency statutes there. Some of these are on my website. If you go to FAQs on my website, you’ll find some other states.
First we have to assume there is one. If there isn’t one, they shouldn’t be making any claims against you at all.
If you ever hear from a collector or anybody even making a written demand or calling and harassing you about a shortfall on a modification or a foreclosure where there was no deficiency by law, then you should contact a lawyer, because that’s an unlawful debt collection practice. Start sending nasty email or write back to them when they do that. You can actually claim against them for that kind of activity.
Let’s assume that maybe it was an instrument where maybe there was a deficiency. The first question is, did they file a lawsuit?
Remember, there’s two kinds of statutes here that we’re talking about. One is the statute that covers the time after a breach of contract, such as you were supposed to pay me money and you didn’t, before you file a lawsuit. That’s one.
The other is, after you get a judgment, how long does the judgment last? Because that’s another issue. Let’s say that they file. How long do they have? In most states it’s between four to six years.
Why do I say four to six in a range like that? Because sometimes it differs based up on what they’re filing for, and how they’re filing for it. If they’re filing for action for instance on a promissory note, note actions can be up to four years in some states.
If they’re filing an action for foreclosure and a judgment after foreclosure because of a shortfall after a property went to auction, then in that case, they would typically have up to six years. That’s usually an action on lien, and many states will give them six.
It ranges from state to state, and it’s usually pretty easy to find that out by checking right on the website, going and typing in your state and saying "statute of limitations contract" or "real estate contract." It’ll tell you, but that’s pretty much the range.
Now, let’s assume that they do take a judgment. They file a lawsuit, take a judgment with or without your participation, because it’s possible they could take it by default. In Arizona, when they file that judgment, it only lasts for five years before it dies. They have to re-docket it every five years to keep it alive.
In a hypothetical basis, you could have a deficiency taken against you in which the lender does nothing, files the judgment, sits on the judgment, five years go by, they don’t refresh a docket by the method that’s provided by the Arizona revised statutes. That judgment pretty much falls away. It’s gone.
You can have people that have virtually out-waited the time limit not just only on the note or land sale, action that could even produce a judgment on a deficiency. Also, even if there was one, sometimes they outlast execution on the judgment and it dies under its own power.
Some states it’s longer. Oregon is an example, it can be as long as ten years. It does vary state by state.
The long and short answer of it is, first be sure that it’s one that even has a deficiency. It may not have one, so you really aren’t under the gun. Secondly even if it does, it’s four years inside, six years outside.
You may even have some defenses by them sitting on it so long, such as what they call latches or waiver. These kinds of things. You may get more defenses because it sat there so long that you didn’t have the first time, before they took action.
Even if they take it, then they have to start execution on it. They have to find you and do something about it, within five years in Arizona, sometimes longer in other states. Or else it can waived if it isn’t continuously re-docketed, and they very often forget to do that.
There are several escape routes there.
Sean: Yeah. Sounds like a lot of variables. Maybe on this one it’s definitely best for people to consult a local . . .
Jim: Yeah, that one really counts. You really need to know, because one of the big questions on this is when did the breach occur? If you’re under a modification or a moratorium, and let’s say it was an instrument that could have a deficiency, and you’re under one for a year.
Then finally they say, "Well, you didn’t comply." Is your breach then, or is your breach at the time you went into the modification? Technically, most of those modification agreements say you are in breach, but we’re giving you a waiver or a forbearance for a period of time.
Technically you are in technically in breach. Sometimes you end up with really specific questions to a specific deal like that one.
You’re absolutely right. On issues like this, it’s always best to go to your lawyer and get some specific data in front of them so they can make a judgment call on it.
Sean: Great. Good deal.
Next one. Is it possible to hedge your bets by simultaneously pursuing a loan modification and a short sale?
Jim: In a sense that may be what you’re doing anyway, let’s say, is it provided by the guidelines? Again, I’m referring to those ones I mentioned earlier in this interview.
The ability to dual-track you, both loan modification and short sale, isn’t really there. It’s an option. It’s really a sliding scale, like HAMP and HAFA. They want you to try first a loan modification. Then if that doesn’t work, go to a short sale or a deed back or some other remedy.
In other words, they want it in sequence. They don’t want it simultaneously, and that’s what the plans anticipate. It’s going to be sequential.
Why do they do that?
Here’s why. The federal government and the lenders are required to first try to modify it so that the party will stay in the house, and will somehow rehabilitate themselves by a modification program that works out for them and their circumstances.
The idea is, let’s make a shot at that before we ever get to a short sale that removes the borrower entirely from the house and finally ends up in a resulting loss, where he walks out on the loan. The way that they indemnify that, and the way that they ensure it from behind and fund these banks, and the way it’s supposed to work, is they want it in that sequence.
In reality, so that you know, most modifications fail. They fail because they were never intended to succeed by the lenders. They just had to go through that process as a mitigation before they got into the bigger money, which was to take you to a short sale or a foreclosure, where they’re actually going to get some money on the back side to cover their losses in addition to whatever they got out of the deal.
Sean: Sorry to interrupt, but from what we were talking about earlier about the False Claims Act, it seems like if it was never intended to work in the beginning, then isn’t that almost grounds to say hey, you basically defrauded the federal government out of whatever they gave you in the short sale?
Jim: I think that would be one of the areas that would be the most volatile. Because the modifications have not worked. Nationally, there’s about 15 million applications for modification that were granted. Interim ones were granted, not full term ones. There’s very great limits.
What’s interesting is the original bill that’s still out there that allows for these modifications, also allows for modifications of a principal. In other words, you owe $400,000 on your house. It’s now worth $250,000.
The lender has the option, they have the full ability, to not just change interest rate, and not just change the length of the loan, but also to go down and knock principal off.
In reality, in all those 15 million claims, they’ve done that in less than 2% of the deals. What the borrower really ends up with is just a longer term, lower interest loan that is way, way over the value of the property. Sooner or later, he’s still going to get to that nut to crack. He either sells it or he wants to buy it.
He’s still going to be paying $400,000 for a $250,000 house. He still suffers an enormous loss.
The reality of it is, after you get past all these low interest and the other gimmicks and stretch the loan out longer, to 40 years. It can go as high as 40 years you owe money on that house.
The reality is that that’s no solution at all, because you have to assume that all the homes are going to re-inflate. Like in my example, they’re going to re-inflate $150,000 back up again, to even be worth what the note is. Then to be worth staying there it should even inflate some more, so you made some money out of it.
The government’s already taken the position, they’re not going to allow a housing bubble like that to ever grow again. It’s a complete contradiction in terms.
What benefit is it to just suspend payments, but still leave a 200% loan in place? Saying also, we’re going to make darn sure that bubble never happens again. It means we’re guaranteed failure on that analysis.
That’s why only 2% of them do they grant it, because in reality they know, even the lenders know that isn’t going to work. They’re ultimately going to end up with the property. They’d much rather go through the motions of trying to modify for you, knowing you’re going to fail.
Most of them do, 65 to 70%, for the very reasons I’m talking about. They can then kick you into a short sale or foreclosure, where for them, the big money is at. Counting what they get on the front end and what they get on the government back.
Yeah, that sort of smells like a scam. It is. The terrible part about it, it’s taxpayer’s money. Remember, the borrower’s not getting off on anything when he walks out that door. He’s lost everything he had. He’s walking out with a bad credit rating, he might even walk out with a tax effect under section 108.
He’s been completely stripped of his credit reputation for many, many years, and as a taxpayer, he’s going to pay all that back. All through his taxes forever and ever, back to the lenders anyway. Nobody’s getting off on anything on these deals.
These things are really, I think, I hate to say it, but for most borrowers, they just plain don’t work. We know nationally it hasn’t worked, because we were trying to get this market back up off the ground and it’s just plain not happening. This is after $4 trillion being dumped into it of our tax money, and it’s still not working.
That’s got to tell you something. That is, there’s got to be another way that’s got to be thought out.
I’ll tell you the way it should have been is, we should have been capable of giving reductions of principal so folks can stay in their homes. Communities can stay intact, kids can stay at their school, they can stay at the same job because they don’t have to move 25 miles away.
They remain in the neighborhood to keep it stable and cohesive, and we take our one time hit, swallow it, and move on in our marketplace and in our country.
That’s not happening. In fact, the only new bill that’s come out, the new one that the President’s just unveiled for what he called the brand new, brilliant rescue. It’s not so brand new and it’s not so brilliant.
That’s the HARP program, and that’s the one that says this. You know what? You’re right, Mr. Homeowner. If you’ve been current in all your payments, you have a Fannie or a Freddie type mortgage, and if your house is worth far less than the mortgage, here’s what we’re going to do for you.
We’ll refinance you at the full amount of the existing mortgage. What that means is, the solution is, on my example, the $400,000 house that’s now worth $250,000, we’ll just give you a brand new $400,000 loan on your $250,000 house.
Where does that get us? That’s not a solution. That would be an enormous problem. That means, now we have a brand new loan pushing down the stream that we still owe all that money on.
By the way, since it’s a new type of government loan, who even knows what rules might apply to that. It might be a deficiency type instrument where there wasn’t one before.
I see trouble in those clouds. I don’t think it’s an answer at all.
Again, looking back on hedging your bets, the reality is they’re going to do it in sequence because they are required to by the program. The reality is a lot of those sequences are phony. A lot of those modifications don’t typically work.
They only give a principal reduction in 2% or less of 15 million applications. You’re probably going to be in a short sale scenario.
Here’s what I usually suggest. I suggest that at the same time you’re talking modification, list the property. In the end, that may be where you’re at. At least by listing the property, it is hedging your bets, because you might get an offer.
Which you then turn to the lender and say you know what? I’ve got a deal that really works for me.
That’s how you hedge it. Not with the lender’s permission or not part of the program, because it’s not part of the program and you don’t need the lender’s permission. You just list the property with a good, reliable real estate person that knows what they’re doing in short sales and modification and all these scenarios we’re talking about. See if you get a bite that you’d like to take.
If you do, now you’ve got an option. Now you have hedged your bets, and you can make your decision then.
Sean: Yeah. But you’re being proactive about it, versus sitting back and just waiting for the loan modification process to just run its course. It sounds like in 99% of the cases it’s just a stalling tactic.
Jim: It is a stalling tactic until they’re ready to put you in a pipeline, because you’re going to protect that home. You’re going to water the grass, pay the electricity, keep the vandals out of it, probably pay the insurance on it and the HOA dues or something, that whole period.
You become a caretaker of the property for them, which otherwise would cost them thousands and thousands and thousands if they took that house over and held it until they were ready to foreclose.
I’m sorry. I know I sound like a real negative situation here, but you know what? It is the experience people are having. I can’t place a lot of faith in modifications as they have been applied by the lenders.
Sean: Good to know.
We’ve got two more left. Are there any legal methods available to keep a short sale from foreclosing?
Then just a real quick, because this was a long one that was submitted from a guy in Colorado. This was a situation where it said I felt like I got some bad advice, was told to stop making payments, deal fell through, etc. etc. It sounds like it’s now going to foreclosure, and he just feels like he’s left out in the cold.
Jim: Okay. That’s happening all over the place, whoever it was that asked that question, not just in Colorado. That’s almost the protocol virtually clear across the company.
By the way, in Colorado, you can get some deficiency, so it’s important for this gentleman in Colorado. Again, the Colorado law is up on our eckleylaw.com website. Look under Colorado under FAQs and it will tell you what the current rules are.
To everyone out there, there are legal methods to keep a short sale from foreclosing. First let’s go to the non-deficiency states.
You might ask what you would have to gain either way. In other words, if you’re in a non-deficiency state where they can’t get any money judgment against you anyway, it doesn’t really matter. A short sale or a foreclosure is both going to remove you from the home.
You may feel better about doing the short sale. Maybe that makes you feel better, help the lender mitigate their damages. It keeps you in the house a little longer. That’s good, there may be some value to that.
However, in the end you’re still out of there. Now, some short sale programs will also say currently that you will be rehabilitated in your credit capability in the future.
For instance, Fannie and Freddie and Ginnie have said that if you cooperate with a short sale and don’t just walk on the house, that if you are otherwise credit worthy, within three years they’ll be inclined to make another loan to you.
Whereas they’ve said, and FHA has recently said, within one year they’d be willing to make a loan to you. Really, FHA loans are the best loan in town right now.
That’s a good thing, but that means you have to have cooperated and gone through the short sale process. Sometimes they’ll even still agree to make you a loan in that process if you cooperated, no short sale was ever offered, and in the end the lender asked for the deed.
Under the HAMP and HAFA programs, if you do that, they will give you a loan sooner.
Whereas the rule is if you didn’t cooperate, you walked, you just sent the keys in or you just abandoned the property and didn’t cooperate with them at all. Then in that case, they can deny you in some cases five years, and as long as seven.
That’s just those lenders. There’s others, conventionals and so on that may not. There might be some value in staying there as far as future credit potential. Other than that, in a non-deficiency state, there’s no value to be derived particularly, no leg up, that you would have by either short sale or a modification.
Now let’s talk about those in deficiency states. Obviously there would be a value. In other words, let’s say we think we have a really great prospect on short sale. By the way, short sales do get more money than foreclosures.
Foreclosures are fire sale. They go to an auction, they’re the luck of the draw, and you don’t have any opportunity to vote there and somehow try to work that value up. You don’t have any control over what it sold at.
However, up until that point in a short sale, you do. Because you have a right to decide, your realtor and you go out and work with the marketplace of buyers and try to get somebody to make a top pitch.
In you come with a higher value that you think is good. You present it to the lender. If they take it, you’ve actually reduced any potential deficiency by that act.
In some cases, some of the lenders will even say we will even waive pursuing a deficiency after this. Not all of them. This is talking about deficiency states. Not all of them, but many of them will. There can be some value there.
If you want to stop the short sale, stop the process to foreclosure. Let’s say you’re in the middle of this and it looks like it’s just not working out with the bank. Well, I’m going to tell you first of all that there has been some consent orders entered with Wells Fargo, Bank of America and several others.
Those are where the government approaches them and says you’re doing something we don’t like. Will you consent to stop doing it? They sign after they can see that the government’s going to pursue them, they sign an order and they say sure. These things get filed where they all agree.
One of them, there’s even one in Arizona right now from the Attorney General’s office. An agreement that they can’t dual-track you. By dual-track, what that means, some of these lenders do it. They start the foreclosure, it’s going on, they’ve got a sale date, and they say sure, try to get a modification in the mean time.
They put you under terrible pressure. There’s a tremendous threat. It puts them in a top position on the modification, because they’ve got you in a sense double whammied. They told you you’d better get a modification. If you don’t get it by the sale date, too bad.
That kind of pressure would tend to make you maybe go out and get less offer on a short sale than what you otherwise could get, because you have no time. Also, when buyers come in and see that it’s also likely to go to a sale at any time, that chases buyers away.
They realize they don’t have time to do their due diligence and make offers back and forth, because you’re on the verge of a foreclosure.
Since they know that they go to foreclosure cheaper than they do on a modification, or cheaper than a short sale, typically it’ll encourage buyers to wait at that auction, and they’ll go bid at the auction and get it for thousands of dollars cheaper than what they would have, for instance, on your short sale.
Knowing that that tends to dampen short sales, they entered in consent orders and said look, it’s got to be one track or the other. You’re either in a foreclosure track, you’ve got a foreclosure date and that’s the end of it, and you don’t give a darn if they come in with a modification or a request for a short sale.
If they come in, you might listen to them, but you’re not giving them that option.
Or you’re putting them in a program where they’re now working through it, and they need to have time to do that. If they’re in a short sale situation, don’t have a foreclosure that has a certain foreclosure date because it’s going to kill that deal. It’s inappropriate to do that.
They need peace and quiet to get that property sold, not to have the Sword of Damocles holding over their head at that time.
That is inside the program. That’s one way that it’s supposed to stop it, those consent orders.
The other way, if the lender won’t do it any other way, is really a litigative way. Let’s say that the lender just is not going to bite. They’ve got you under that, and they’re heading to foreclosure. You think you even have a short sale possibility, but the lender just isn’t going to bite.
Two potential options. Of course, this really only makes sense, I think, in a deficiency state.
One of them is you can certainly file a bankruptcy. Bankruptcy’s going to stop them. Soon as bankruptcies are filed, stays are issued by the court, and that’s a federal court, the bankruptcy court, that tell all the lenders and all the creditors to leave you alone until this is sorted out in bankruptcy.
That stops them right then and there, and now everything goes to the bankruptcy court to be sorted out there. That’s one way.
The other way is, you could actually file a lawsuit against the lender. Let’s say the lender has misbehaved. Let’s say that this loan was originally procured in fraud. They did an 80/20 and they couched it as an 80.
Let’s say they did a false appraisal. Let’s go back to my example, they valuated it at $400,000 in 2008 when it probably was only worth $300,000, but their appraisal said $400,000 because they just wanted to make that loan.
That would be a defense. Over-appraisal is a defense in all the states. In other words, they did fibs in their own underwriting, and that would be a defense.
In most states, when you file a lawsuit and you say "hold the horses," you have to move for a temporary restraining order against the trustee, in a trust, deed, or any other sale, shared for anybody, going to the auction and finally selling the house out from underneath you.
In most cases, if they grant you that, you also need to post a bond. In the event you’re wrong and you don’t win the case, and they had every right to go to foreclosure, their costs in being held up that long are capable of being recovered.
That’s not a very preferable route. That can be very expensive. Unless you have some really, really good claims, that’s not the way to go.
Bankruptcy, it’s no harm no fault. If you are eligible for it, you file it, that stops and now you can start dealing. One of the first things you might tell the bankruptcy court is, hey, I’ve got a short sale offer that will make them at least 80%. I don’t understand why they won’t take it.
Now, do remember this. All of the programs, with the exception of Hope for Homeowners, have a proviso. Some banks even say this under Hope for Homeowners, remember, that’s the one that’s owned by the banks. Hope is run by them, not by the feds.
In most of these programs, they say this. If you file bankruptcy, or if you file a lawsuit, all bets are off. We’re not going to deal with you under these programs anymore, you’re outside the program.
If you did that, you probably would not be under what you call the official modification, short sale or foreclosure program. You’d be out essentially trying to do a deal by mutual bargaining, because you have filed a suit or you are in bankruptcy. Maybe they should talk to you.
It has kicked you out of the official program in most cases by doing that.
Those are really the limitations. I would say to those in deficiency states, here’s what we do when we handle one of those, if somebody comes with this as a defense. We take a look, we fly speck.
We look at everything, through all that material and paper from the time they first generated the loan to how they’ve been treated since then. We look for places where the bank didn’t do it according to [Hoyle 51:22]. Remember, the banks are supposed to remember how to do it right. There’s not much patience for when they do it wrong, because they’re supposed to be the experts on this.
Usually, since the bank is the one that draws the paperwork up, failures or ambiguities in the paperwork are construed against the bank as a matter of law.
The one element we’ve found again and again and again on these is either that the bank qualified them for a loan which, with a truthful application they were not qualified, or the bank went out and appraised it, or hired an appraiser to go out, and came back with a fictitious or imaginary number, so they could loan them all that money.
They wanted to book that loan, they wanted to get all those commissions, they wanted to get that points up front. That’s what they were looking for.
Now with market collapsed, probably wasn’t even that good when they made the appraisal. They’re now coming after you for the shortfall that’s only a shortfall because they misappraised it in the first place.
Typically, the courts have said well, they’re getting everything that they bargained for back, because they thought it was worth $400,000. Their appraiser said it was. It wasn’t worth that at the time. The guy that should take the hit on that is the guy who generated the fiction in the first place.
Routinely, the borrower is getting off owing nothing, even in a deficiency state if we can find those facts. We look for those facts, we apply them, we start talking to the lender about defenses, counter-claims, things like that.
It becomes a bargaining process.
Sean: Good deal.
Jim: Let me talk about agents. You had a question, do I feel like I’ve been ripped off by my agent? I want to talk about that a little bit.
It says in the question that came into your very fine website, I might add, I think it’s a tremendous help to everybody. It says my agent told me I had to stop making payments in order to get into one of these programs.
It’s not the agent that has misstated that. In fact, the agent is right, but not because the programs even call for that. It’s because that’s the way the lenders are enforcing them.
For instance, if you go to Bank of America, typical example, and say I’m in trouble. I don’t think I’ll be able to make the payments anymore. They’d say, even the bank will say, we can’t talk to you as long as you’re making the payments.
Remember, we’re only here for the money. If you’re still making them, you’re getting them somehow, and we’re going to use that as the proof is in the pudding. We’re still getting them. We’re still getting our money. You’re not in default, why are we talking hardship?
The bank has even counseled people, stop making your payments. Then we can talk to you.
When the real estate agents have been relaying that on, they’re actually relaying what the banks are saying. Now, they should probably be saying at the same time, however, even though they’re telling you to do that, that is going to corrupt your credit right now. It’s going to get you in a terrible mess.
That is what you’re demanding. Maybe you should go see a lawyer, because the programs mostly don’t say you have to do that, especially for imminent default. In other words, they’re supposed to be able to work with you today, when you just got your pink slip from your employer and he’s giving you six more months and that’s it.
They’re supposed to deal with you today. They’re not supposed to wait until you’re so terrible, when you’ve run out of money, you’ve used up all your money and you’re about ready to sit on a park bench before they start helping you.
You’re supposed to get ahead of that injury, not always insist that you have to injure yourself and then they’ll come to the rescue.
That’s what the agent probably should say, but I will tell you, agents are saying they’re going to insist that you default before you pay. By golly, I want to tell you, the agents are telling you like it is.
You do have some defenses, but it’s not for the agent really to do that. He can’t help you. Only a lawyer can help you at that point.
Now, one other thing I was going to mention. Under an act that was passed by the FTC called the MARS Rule, in MARS, it is considered inappropriate for the work out specialist to tell you to stop making payments. What they’re supposed to do is tell you the risks of stopping payments and let you make your own decision.
Now, that application of that rule was suspended as to real estate licensees in July of 2011. It has not been reinstated. It would currently be acceptable in most states for the agents to tell you that reality.
It’s never right for the agent to demand that you stop making payments. They should say they’re not going to talk to you until you stop making payments. That is their current policy. You should see a lawyer.
Now, what can you do if you think your real estate licensee has not handled your case correctly, or giving you disinformation or misinformation? I always say the first thing out of all honesty is to go back to the agent and say hey, this is wrong. What are you going to do about it?
Or to the agent’s broker. In all states there’s usually a designated or managing broker, the licensee’s licenses. He’s not the designated broker that’s in charge of the office. You need to find out who that is and go them next, and say, what are you going to do about it?
In other words, I always say if somebody’s stepping on your toe, give them a chance first to try to fix it. That’s only fair.
Then let’s just assume that maybe they don’t. What are your recourses after that? Well, you could file a complaint. In all states, real estates licensees are regulated. You can file with their regulator. Typically called the commission of real estate. California commission of real estate, Arizona department of real estate.
You can file there a complaint. If they are a realtor, and remember, not all real estate licensees are realtors
By the way, that’s not "real-a-tor" as people say. There is no "a" in it. It’s realtor.
A realtor is one who joined a professional association after getting a real estate license that tries to establish itself as a cut above the average licensee, because they’re more concerned about education. They use a series of forms that are better written and things like that.
That’s what that group says, that’s why a lot of people become members, and they’re typically the ones who run the [Molto 57:21] list. If you’re in an area where there’s a multiple list, obviously to get into the marketplace you’re going to typically be dealing with a realtor.
What I’m talking now, I’m not just talking about realtors. I’m talking about real estate licensees. All of them are licensees, all of them you can go to the licensing organization.
In most cases, the licensing organization, even as a recovery fund, if a licensee won’t pay you can make a claim against the recovery fund. The opportunity to make that claim is usually short.
Many states are limited, like two years or four years or five years past the time that it happened. If you don’t say anything to them, they can’t help you very much.
The next place is you can go to the realtor organization, for people who are actually realtors. They do have a committee, which tries to supervise their professional ethics to be a realtor. It’s serious to them, because that’s their license to market.
By being a realtor, it allows them into the multi-list and gives them access to all those benefits. You can, as a customer or client, go in and make a complaint there.
You have to contact either your state or local association of realtors, ask for the forms, they’ll give them to you, you can file there. Hearing will be had. You can pretty much be assured of that. Many times that will bring that licensee back when they see how serious you are, and that can solve it there.
Then of course if none of that works, you can actually file a lawsuit. Lawsuit goes to the civil court.
You have to be careful about statute of limitations. In many cases it can be as low as two years. Quite often it’s three years, it’s considered a form of negligence, let’s say, and typically negligence is determined between two to three years, depending on what state you’re in. That’s state by state by state.
Those are the three remedies. Hopefully one of those will typically solve it.
Sean: Great. Cool.
That’s the last question. I think we’ve probably eaten into enough of your work day. I know you’re a busy guy, but I can say on behalf of all the listeners, thank you so much. We can’t thank you enough for your time on this. I know it’s really valuable.
Jim: Thanks, Sean. I think the time is always well-devoted. This goes without saying that you’ve certainly devoted ten times more time than I have for the same pay, zero, because we care about what happens out here.
This site is one that is all too much needed to be able to get the truth out, and also to be a site where people can go and get some information from those who are really in the trenches and just tell it like it is.
Thanks for asking me again today.
Sean: Absolutely. Just last thing, if someone listening wants to get in touch with you and engage you for their services, how do they best go about doing that?
Jim: The better way I think is to maybe give us a call. Although you can also reach me directly by writing to firstname.lastname@example.org. Our national number is 1-800-999-4LAW. LAW on the keypad. 1-800-999-4LAW.
A cute little idea that one of our secretaries came up with. I’ve been happy with it. It’s even one I can remember when I’m trying to call the office and I can’t remember the local number.
We’ll talk about it, and we’ll see it’s something we can help you with.
Sean: Great. I should just say this as an aside. We’ve set up a hotline for people that have questions too now, so you can call 615-SHORT-IT. That’s 615-746-7848, and leave a question. Jim has graciously agreed to help answer questions as we go.
Thanks for listening, and we look forward to chatting with you guys soon.
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Welcome to our first episode of the Shortsaleopedia podcast. Our guest is Jim Eckley, an accomplished trial attorney in Phoenix, AZ.Â Jim is well-versed in the legal issues surrounding short sales.
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).
Intro, Jim’s credentials, background & philosophy
The “t’ain’t fair” test. slapping lenders for intentional interference with government benefits
“Flak from every possible direction” & “black hat one minute, white hat next”
Response to “skipping out on one’s obligation”
Shortfall reimbursement programs for the banks and MIRS assignment smoke & mirrors
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.