Real Estate Finance

SUING YOUR LENDER

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    First, it should be noted that lawsuits are not fun. The process is costly and consuming. For this reason alone, only cases that have merit and a likely payoff should be brought. Not only is this a good idea, it is also the law. Frivolous lawsuits are not just disfavored; they can result in a vexatious litigant paying the other side’s attorneys’ fees, and for the lawyer, disciplinary action. Now, with that out of the way, here are some frequent claims that give rise to successful lawsuits.
    Federal lending laws are the primary source that governs lending institutions with respect to mortgage transactions. A well publicized example is 15 U.S.C. § 1601 et seq. better known as Truth In Lending Act (“TILA”). TILA was passed in 1968. Joseph Barr, then Under Secretary of the Treasury, noted in testifying before a Senate subcommittee that “such blind economic activity is inconsistent with the efficient functioning of a free economic system such as ours, whose ability to provide desired material at the lowest cost is dependent on the asserted preferences and informed choices of consumers.”
    TILA “was designed to remedy the problems which had developed.” (Mourning v. Family Publications Svc., Inc. (1973) 411 U.S. 356, 364). Many would argue that TILA has not exactly “solved” the problem as was originally hoped. What is helpful about the law is that it creates strict liability for specific compliance issues for lenders. Particularly, a lender must provide accurate material disclosures. Failure to do so gives a borrower various forms of relief which can include, monetary damages, rescission of their loan, and attorneys’ fees. Many suits have sought relief under TILA, but the results have been largely mixed. TILA claims are relatively easy to bring, but difficult to maintain in state or federal court. Successfully litigating them requires a complete understanding of TILA, the mortgage business, and the associated case law.
    State law claims are also available in lending disputes.  Essentially, a mortgage transaction involves a contract, and as such certain contract laws apply. Additionally, claims for the torts of fraud and negligence are common in these cases.  In the event the borrower utilizes the services of a mortgage broker, claims against the lender can be difficult.  A plaintiff must show some connection to invoke agency principles and this connection must be beyond the mere relationship status of a lender and a broker. Still, the conduct that has taken place in the mortgage industry has created many instances where a lender can be directly liable for the conduct of the broker.  Additionally, the California Department of Real Estate has setup a recovery fund that will provide a source for relief if a Plaintiff successfully proves a claim of fraud against a licensee.  
    Regardless of the claim, the most important time in a lawsuit is before it is filed.  A lawyer must exercise great diligence in ascertaining the facts and corresponding potential claims. The client must contemplate the effects of a lawsuit and the commitment that is required.
    A borrower should be cautious of a lawyer that anxiously encourages bringing suit. Zealous representation is important, but prudence is critical.  Discussing your case with several lawyers is a great way to gain perspective on your options. A client should also be willing to pay for a consultation. It is far better to have a lawyer that can provide objective sage advice, rather than one who views the consultation as a sales opportunity. Sometimes the best advice a lawyer can give you is to not hire a lawyer.

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POST FORECLOSURE LIABILITY – WILL MORTGAGE LENDERS GO AFTER BORROWERS?

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    Despite the record numbers of California homeowners losing their upside down homes due to foreclosures and short sales, there is a lack of accurate information about what happens when a home is lost to foreclosure or short sale. California law offers some unique protections to people who lose their primary residences to foreclosure through its anti-deficiency statutes (CCP § 580 and § 726).
    California’s “one action” and “security first” rules are just part of California’s anti-deficiency laws. These laws are not only complex but currently in a state of flux. Thus, an experienced mortgage lawyer should be used when facing potential problems with a lender “coming after you” for the difference between the sale price and what was owed.
    The anti-deficiency laws were written to prevent: (1) multiplicity of actions; (2) overvaluation of the security; (3) worsening an economic recession by holding debtors personally liable after losing their homes; and (4) allowing creditors to low-ball bids at the foreclosure sale to acquire property below market value and then going after the borrower for money.
    Under CCP § 580(b) deficiency judgments are barred for purchase money loans of a primary residence. CCP § 580(d) specifically bars deficiency judgments after a non-judicial foreclosure. Thus, whether a primary residence (that has not been refinanced) is lost to trustee’s sale or non-judicial, all a lender can do is foreclose on that home.
    Furthermore, California’s one-action rule (CCP § 726) means that a lender should go after the security first – that is, before going after the borrower for money, a lender should foreclose. Thus, in certain circumstances, foreclosure on the security is a lender’s exclusive remedy and no deficiency judgment can be obtained afterward.
    While many primary homeowners should have no worries about deficiency judgments, those property owners who refinanced, own investment property, or own commercial real estate may have reason to fear personal liability. The one-action rule and the anti-deficiency statutes might not be applicable to these property owners. In these cases, a lender with a deed of trust may initiate either a trustee’s sale or a judicial foreclosure.
    Unlike a trustee’s sale, a judicial foreclosure is a lawsuit where the lender must sue all parties having subordinate interests in the property in order to extinguish their interests upon the foreclosure sale. When successful, the lender will obtain a judgment ordering sale of the property and the sale will be conducted by a court-appointed officer. The proceeds of the sale are then paid out to the beneficiary, and thereafter in the same manner as a trustee’s sale.
    The principal advantage to a lender in pursuing a judicial foreclosure is that the lender can obtain a deficiency judgment provided: (1) the loan is a nonrecourse obligation and (2) no anti-deficiency laws apply. Lenders are often apprehensive of judicial foreclosure, because like any other lawsuit, a judicial foreclosure is an adversarial proceeding and involves considerable time and expense. Furthermore, the borrower retains a statutory right of redemption whereby he or she can regain ownership of the property by paying the foreclosure sale price plus certain other fees for up to one year following the judicial foreclosure sale.
    Fortunately, judicial foreclosures are very rare in actual practice, and most first mortgagees accept whatever they get through trustee’s sale as satisfaction of the debt.

WHEN IS A SHORT SALE BENEFICIAL?

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    As was covered in another F&M’s post, in California purchase money loans on primary residences are considered non-recourse which means that in certain instances, the only thing a lender can do to a nonpaying borrower is take the home, and that borrower faces no personal liability for the debt. However, many California homeowners have taken cash out of their homes through refinancing and home equity lines of credit. Such cash-out borrowers do not enjoy complete immunity from personal liability.
    California law also provides that, in certain circumstances, a foreclosing lender cannot hold a homeowner personally liable for the debt after foreclosure. A short sale is not a foreclosure. Thus, personal liability for a debt may exist when a home does not foreclose but instead goes to through short sale.
    In a short sale, a homeowner may face personal liability for the difference between the sale price and the sale price. Because brokers and agents get paid only if a sale goes through, these persons may not provide unbiased advice as to whether a short sale is in the best interests of a cash-out borrower. The problem gets more complex when there is are 2 or even 3 loans on a home, or the property is commercial.
    The foreclosure process in California generally takes no less than 6 months from the first missed payment. Thus, a homeowner can potentially be forced to move about 6 months after failing to pay. However, it can take 3, or even 4, months for a lender to approve a short sale. Thus, if a purchase offer is made 5 months into foreclosure, and the lender takes 3 months to approve the sale and another month to close, the nonpaying homeowner may get to stay in their home for a total of 9 months without paying the mortgage, property taxes, or insurance.
    To be clear, lenders get a benefit from short sale as homes sold at short sale often net the lender more than a bank-owned property sale. Bank-owned properties drive down prices in entire neighborhoods because they are often run-down and have brown lawns. Thus, the banks can benefit through short sales as opposed to foreclosure.
    An unbiased opinion as well as solid advice about the advantages and disadvantages of short sale versus foreclosure can be obtained from a knowledgeable and experienced real estate attorney. Because attorneys are paid hourly, their advice can be considered unbiased as opposed to people who are paid only “when the deal closes.” If a foreclosure, but not a short sale, would eliminate personal liability, the homeowner needs such information to make the right choice.
    When dealing with potential liability for hundreds of thousands of dollars, the price of an hourly consultation with a local attorney is a great investment.

CREDIT SCORES – WHY SHOULD YOU CARE?

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    For the last decade the media has pounded into the heads of American consumers that having a high credit score is the key to financial success. It should come as no surprise that the funding for all those commercials and PSA’s came from lenders, both mortgage companies and credit card providers. Of course lenders want people to pay their debts, and by creating a false pride in the “scores,” those debts have a better chance of getting paid.
    When faced with overwhelming debt, a person faces a moral choice about how far to go in trying to pay creditors. Many agree that people should pay their debts, but not if payment means not having food on the table or a roof overhead. Creditors know that many borrowers will default, and the losses are figured into the cost of doing business as a creditor.
    To be sure, scores were very important in the last decade as creditors would lend to anyone with a high score, whether or not that person had the ability to repay. However, to obtain a loan now, the two most important things a borrower must prove are stable income and sufficient assets. Thus, a “good borrower” is someone with a job and assets. The score is no longer the most important qualifying factor.
    Creditors make money by loaning money. If they refuse to loan money to people with jobs and assets just because those people have low scores, they will not be providing many loans. What is important is the reason a score is low. If due to a one-time foreclosure, a lender may be more willing to lend to someone with a job and assets. Likewise, landlords will rent to someone with a job and assets over someone without a job and assets, no matter what the score. Scores are important, but just not that important.

WHEN COUPLES DIVORCE, WHO HAS TO KEEP THE HOUSE?

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    The major battles for divorcing couples used to be custody of children and possession of community assets. That was the rule for as long as people remember. However, in today’s economy, the only valuables in many marriages are children. Prior to the real estate meltdown, divorcing couples would litigate over ownership of the family home, and such a fight was worth every penny spent, because ownership in real estate was a great investment.
    Such courtroom battles are rarely seen today, because the family home is an economic liability; a hot potato that will likely burn whoever is left holding it. When a home is upside down (that is, worth much less than is owed to the lender), neither spouse wants the house. Each spouse’s goal becomes getting off the loan and walking away. The problem is the lenders are not willing to let either spouse off the hook for the debt.
    If a mortgage is barely affordable for both spouses, there is no chance of either spouse qualifying for a loan modification on his or her own. The end result is that neither spouse will get to keep the home. Before spending time and money trying to refinance or modify the mortgage on a family home, divorcing couples should consult with their family lawyers about whether there is any real possibility of keeping the home.
    Out of necessity, many experienced family lawyers have become skilled practitioners of mortgage law and debt law as they guide their clients through loan modification, short sale, foreclosure, and bankruptcy. Though facing life after divorce is extremely stressful in and of itself, facing overwhelming debt at the same time can push one past the breaking point. When starting anew with regard to family and romance, it may be the time to get a fresh financial start. If a family lawyer is uncomfortable with mortgage problems, debt issues, and bankruptcy, that lawyer should work with a lawyer who handles such matters. Filing for Chapter 7 bankruptcy protection has the potential to wipe away unsecured debts such as attorney should be able to determine whether the Chapter 13 plan can be modified to lower the planned payments or converted into a Chapter 7.
    Another reason to specifically seek out legal advice on both bankruptcy and debt issues when considering a divorce is that divorce lawyers are not inexpensive. While lawyer’s fees may be well-earned in a case of large assets, a thorough understanding of what assets are worth protecting and knowledge of debt protection  will save the time and expense of litigating over “nothing.” Legal fees can then be spent on what is important, custody and visitation.
    At Fransen & Molinaro, LLP Marie Gray has been a family lawyer for 19 years and Gregg Eichler has been a bankruptcy attorney for over 30 years. They can work together to provide the fresh start many people need.