by attorney steven a sokol halling sokol llp 310 277 2080 818 222 4994 ssokol@hallingsokol com l.
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Real Estate in Troubled Times: Short Sales, Foreclosures, Bankruptcy, Tax Effects. By: Attorney Steven A. Sokol Halling + Sokol LLP 310-277-2080 / 818-222-4994 ssokol@hallingsokol.com. INTRODUCTION. Loans in Trouble The Basics. Ancient concept. Loans Securing by “pledge” of property

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loans in trouble the basics
Loans in TroubleThe Basics

Ancient concept

  • Loans
  • Securing by “pledge” of property
  • Debtor protection
  • Rules to limit how creditor takes or sells pledged property
slide7

Condition of Properties

  • Often damaged, in need of repair
  • Vacant, not lived in for some time
  • May be unmarketable in present condition
slide8

Sale During Foreclosure

  • Owner can sell to anyone at any time, up and until actual date of foreclosure sale
  • Home Equity Sales Contract rules may also apply (see below)
homeowner in default
Homeowner in Default
  • Slow economy – decrease Fed funds rate
  • Sound and profitable economy – inflation-threatened, raise Fed funds rate
  • Mortgage rates – increase/decrease in advance of actual adjustment by the Fed
slide10
Employment and personal income thrive between two extremes
    • Mortgage interest rates higher
      • Home prices and rate of appreciation stabilize
slide11
Steady employment and increasing income
    • Promote new home ownership for many
    • Continued home ownership for most
    • Ability to pay mortgage
slide12
Cyclic transitions affect personal households
    • Fed steps in to assist improving economy
    • Mortgage interest rates begin dropping
loss of household income
Loss of Household Income
  • Slow economy may result in reduced personal income
    • “Two-income family” nation
    • Loss of partial income difficulties
    • Job loss devastating
financial mismanagement
Financial Mismanagement
  • Debt ratio affects ability to pay more than allowable minimum monthly payments
  • Home highly leveraged with little available equity
  • Poor payment discipline, even with ability to pay
history of deeds of trusts as california s preferred security instrument
History of Deeds-of-Trusts as California’s Preferred Security Instrument
  • Loans secured by mortgage, not trust deeds
    • Mortgages subject to California debtor protection laws
    • Trust deeds were not
    • California lenders switched to using trust deeds
slide16
California Supreme Court held:
    • Debtor protection applied equally to mortgages and trust deeds
    • Trust deeds being used by then
    • Lenders continued doing so
types of security instruments
Types of Security Instruments
  • Trust deed
  • Mortgage
  • Installment land contract or contract of sale
    • Each must be recorded in county where property located
slide18
Trust deed – most common California debt instrument
    • Borrower or “Trustor”
    • Lender or “Beneficiary”
    • “Trustee” receives “bare legal title”
      • Power of sale to reconvey and foreclose
slide19
Mortgage – seldom used in California
    • Lender or “Mortgagee”
    • Borrower or “Mortgagor”
    • New form gives trustee additional powers
slide20
Installment land contract or contract of sale
    • Seller retains fee title until buyer performs contractual obligations
    • Buyer-vendee receives equitable title
    • Recorded to protect against fraud or bankruptcy
    • Vendor recourse a “quiet title” action
lender s desire to avoid foreclosure
Lender’s Desireto Avoid Foreclosure

Mortgagelender

Working to avoid foreclosure and loss possibility

Defaultingborrower

lender s evaluation process to assist the borrower in default

Questionnaire and financial statement

Lender’s Evaluation Process to Assist the Borrower in Default
  • Cause or contribution to delinquency
  • Reasonably beyond control of borrower
  • Likelihood of resolution within reasonable time period
  • Access to additional funds
  • Sufficient equity to pay off loan if sold
  • Short-pay acceptable
assistance options offered by the lender
Assistance Options Offered by the Lender
  • Temporary relief:
    • Special forbearance
    • Permanent modification of existing mortgage
    • Combination of both options
slide25
Normal monthly payments over period of time
  • Past due amounts added to loan balance
  • New and higher payments repaid over remaining life of loan
  • Due date extended until paid in full
slide26
Balloon payments of past due amounts
  • Monthly payment same
  • Monthly payment reduced for period of time
slide27

Forbearance

  • Interest only payment
  • Payment plan on arrears
  • Partial mortgage payments
  • Payment on moratorium
slide28

Loan Modification

  • Reduce interest rate
  • Change mortgage product type
  • Extend term of mortgage
slide29

Additional Player-Mortgage Insurance

  • MGIC Investment Corporation
  • Private Mortgage Insurance
  • Only Lender can make a claim
slide30

Homeowner Benefits

  • Reported as “deed-in-lieu-foreclosure”
  • Less derogatory item on credit report
slide31

Homeowner Risks

  • Move sooner than if in foreclosure
  • Negative impact on credit report
  • Tax consequence
slide32

Lender Benefits

  • Save costs and time of foreclosure
  • Obtain property earlier to expedite resale
slide33

Lender Risks

  • Assume liability if secondary financing in place
  • Clouded title
lender agrees to accept less than amount owed
Lender Agrees to AcceptLess than Amount Owed
  • “Short-sale” – lender accepts less than full amount due from sale
    • Homeowner already delinquent
    • Comparison of short-pay loss to anticipated foreclosure loss
approaching a short pay
Approaching a Short-Pay
  • Review/research borrower documents:
    • Income documents
    • Bank statements
    • Financial statement or Fannie Mae 1003 loan application form
    • Recent credit report for all borrowers on loan
    • Explanation letter and reason for request
slide37
Review/research lender documents:
    • Competitive market analysis, or BPO
    • Copy of listing agreement, Multiple Listing Service “print-out”
    • Purchase contract and escrow instructions, if already sold
    • Estimated settlement statement from escrow
    • Current preliminary title report
lender s decision making process
Lender’s Decision-Making Process
  • Circumstances beyond homeowner control
  • Sufficient financial reserves for short-sale deficiency
  • Reduction of fees charged
  • Reduce or eliminate buyer concessions
  • Buyer sale price in relation to competitive market analysis or BPO
risks of a short pay to the homeowner
Risks of a Short-Payto the Homeowner
  • Adversely affects credit report
  • Tax consequences
  • Recorded junior loans cause difficulties with senior lender
slide41

Home Equity Sales Contracts

  • Owner-occupied 1-4 residential property
  • Special requirements:
    • Name, business address, telephone number of purchaser
    • Address of residence in foreclosure
slide42

Total consideration given by purchaser

  • Complete description of terms of payment or other consideration
  • Time of possession
  • Terms of rental agreement
slide43

Notices required on contracts

  • “NOTICE REQUIRED BY CALIFORNIA LAW UNTIL YOUR RIGHT TO CANCEL THIS CONTRACT HAS ENDED.
  • (NAME) OR ANYONE WORKING FOR (NAME) CANNOT ASK YOU TO SIGN OR HAVE YOU SIGN ANY DEED OR ANY OTHER DOCUMENT”

Immediately above “cancellation notice”

slide44

“YOU MAY CANCEL THIS CONTRACT FOR THE SALE OF YOUR HOUSE WITHOUT ANY PENALTY OR OBLIGATION AT ANY TIME BEFORE (DATE AND TIME OF DAY). SEE THE ATTACHED NOTICE OF CANCELLATION FORM FOR AN EXPLANATION OF THIS RIGHT.”

Immediate proximity to space for seller’s signature

slide45

Rescission timeline:

    • Midnight of the 5th business day following day on which seller signs contract, or
    • 8:00 a.m. on day scheduled for sale of property under power of sale in Deed of trust,
  • whichever occurs first
slide46

“TO CANCEL THIS TRANSACTION, PERSONALLY DELIVER A SIGNED AND DATED COPY OF THIS CANCELLATION NOTICE, OR SEND A TELEGRAM TO (NAME OF PURCHASER), AT (STREET ADDRESS OF PURCHASER’S PLACE OF BUSINESS) NOT LATER THAN (ENTER DATE AND TIME OF DAY). “I HEREBY CANCEL THIS TRANSACTION (DATE). (SELLER’S SIGNATURE)”

Attached to contract in duplicate, easily detachable

slide47

Two Year Right to Cancel

  • Seller may rescind up to 2 years after deed to buyer is recorded IF Seller was taken “unconscionable advantage” of by Buyer
  • If court action to enforce rescission right, prevailing party is entitled to costs of suit/reasonable attorneys’ fees
slide48

Exceptions

  • Purchased for personal residence
  • Seller gives buyer deed in lieu of foreclosure of voluntary lien or encumbrance of record
  • Trustee transfer acting under power of sale in deed of trust or mortgage at foreclosure sale
slide49

Sale is authorized by statute

  • Sale is by order or judgment of court
  • Sale is from/to spouse, blood relative, blood relative of spouse
  • Property other than 1-4 family residential
  • Not seller-occupied
broker s position
Broker’s Position
  • “Purchaser representative” requirements as of January 1, 1991
    • Must provide
      • Written proof of valid current California Real Estate Sales License and bond
      • Written statement of valid California Real Estate Sales License and bond, compliance with above
    • Failure to comply can render contract void and purchaser liable to seller for damages

Civil Code §1695-1695.17, 1691

slide51
Purchaser’s “Representative” -

“A person who in any manner solicits, induces, or causes a property owner to transfer title or solicits any member of the property owner’s family or household to induce or cause any property owner to transfer title to the residence in foreclosure to the equity purchaser.”

Civil Code §1695.15(b)

slide52
Finding information about foreclosure properties
    • County Recorder’s Office
    • Research services
    • Local newspapers
    • Classified ads
deeds in lieu of foreclosure
Deeds-in-Lieu-of-Foreclosure
  • Voluntary deed of from borrower to lender
  • No completed foreclosure by lender
the borrower s default
The Borrower’s Default
  • Promise to perform required by trust deed is broken
    • Monetary – failure to pay loan payment or balance when due
    • Non-monetary –
      • Failure to pay homeowner’s insurance or property taxes
      • Failure to maintain property
      • Failure to pay senior lien holder
notice of delinquency
Notice of Delinquency
  • Loan delinquent for at least four months
  • Sent within 15 days after end of 4th delinquent month
  • Loan secured by 1-4 unit residential property
  • Current Request for Notice of Delinquency
  • First-class mail or in person
notice of balloon payment
Notice of Balloon Payment
  • If 1-4 family residential property, written notice 90-150 days before due date
  • Applies to both seller- and non-seller-carried financing
  • Notice of payment due required
notice of default
Notice of Default
  • Occurs day after loan payment missed unless note contains grace period
  • Most lenders choose not to file until 2 or 3 payments missed
  • Options:
    • Judicial foreclosure process through Superior Court
    • Action under power of sale provision of deed of trust
slide67
Lender notifies Trustee to prepare and record NOD
  • Trustee prepares and records NOD
  • Within 10 days of recording NOD, Trustee mails copy to Trustor and persons who have recorded “Request for NOD”)
slide68
Within 30 days of recording NOD, Trustee mails copy to junior lien/interest holders having recorded interests in property
  • NOD must be mailed to each person
    • Certified or registered mail, and
    • Regular first class mail
  • Trustor can reinstate loan up to 5 days before Trustee’s sale
the trustee s sale
The Trustee’s Sale
  • Notice of Sale published within 3 months (89-92 days) following NOD recordation
  • Publication once a week for 3 weeks
  • First publication at least 20 days before Trustee’s Sale
  • Trustee’s Sale 21+ days after Notice of Sale published
slide70

Trustee’s right to reinstate loan up until 5 business days prior to sale date

  • 25 days before Trustee’s Sale date, Trustee sends copy of NOS to IRS
  • 25 days before Trustee’s Sale date, Trustee sends copy of NOS to State Controller
  • 20 days before Trustee’s Sale date, Trustee posts copy of NOS on property
slide71

20 days before Trustee’s Sale date, Trustee posts copy of NOS in public place in city or county where property located

  • 14 days prior to sale date, Trustee records NOS
  • 5 business days prior to Trustee’s Sale, Trustor’s right to reinstate expires
slide72

Trustee’s Sale Date

  • Bidding opens
  • Type of funds required specified
    • Beneficiary lender makes 1st bid
    • Lender money deposit not required unless making overbid
    • Overbid of lender permitted
slide73

Trustee’s Sale Date

  • Property sold to highest bidder
  • IRS has 120 days after Trustee’s Sale to redeem property if lien recorded
slide74

Timing

Requirement

90-150 days before balloon payment due

Mail Notice of Balloon Payment, if required

starts 3 month [89-92] day period

Record Notice of Default (NOD)

10 days or sooner after recording

Mail NOD to Trustor and persons who recorded Request for Notice

30 days or sooner after recording

Mail NOD to recorded junior lienholders, lessees, etc., who did not record Request for Notice

25 days or more before Trustee’s Sale

Mail Notice of Sale (NOS) to IRS and CA State Controller, if required

Typical Trustee’s Sale Foreclosure Timeline

START

slide75

21 days or more before Trustee’s Sale

Publish, Post, and Mail NOS

  • Publish in newspaper of general circulation
  • Post on property
  • Post in public place in city/county
  • Mail to Trustor and interested persons

Timing

Requirement

14 days or more before Trustee’s Sale

Record NOS

5 business days before Trustee’s Sale

Right to Reinstate Ends

Date in NOS or postponed date

Trustee’s Sale is held

Varies

Trustee’s Deed is delivered/recorded

120 days after Trustee’s Sale

IRS redemption period ends (Trustor, junior lienholders, lessees, etc., do not have redemption right after Trustee’s Sale

FINISH

judicial foreclosure
Judicial Foreclosure
  • Lender’s Choice whether to use Trustee’s Sale or Judicial Foreclosure
  • Pursue collection of deficiency
    • California law prohibits certain deficiency judgments
    • Property sold at judicial foreclosure subject to Right of Redemption
  • Defective Documents
deficiency judgment
Deficiency Judgment
  • Lender prohibited from pursuing:
      • 1-4 unit family residence, borrower occupied as residence
      • Note and deed of trust seller financing
      • California’s “One Form of Action” rule
  • Special environmental contamination exception
guarantors and deficiency judgments
Guarantors and Deficiency Judgments
  • Not protected by anti-deficiency judgment laws
  • Can be sued for personal liability or deficiency judgment
maximum deficiency judgment allowed
Maximum Deficiency Judgment Allowed
  • Equal to amount by which total indebtedness owed to lender exceeds FMV of property on sale date
borrower s right of redemption only judicial foreclosure
Borrower’s Right of Redemption(only Judicial Foreclosure)
  • Only exists for judicial foreclosure
  • No post-foreclosure redemption if lender used Trustee’s Sale OR if lender is prohibited from obtaining deficiency judgment against Borrower
  • If judicial foreclosure is used, redemption period:
    • 3 months after sale if proceeds are sufficient to satisfy indebtedness
    • 1 year after sale if proceeds not sufficient to satisfy indebtedness and lender obtains deficiency judgment (personal liability)
justice department report on scams
Justice Department Report on Scams
  • Fractional interest transfer scam.
  • Serial filings by related debtors
  • Voluntary dismissals of Chapter 13 cases
  • Involuntary petition scams
  • Phony alias amendments to petitions
tax effect of short loan payoffs
Tax Effect of Short Loan Payoffs
  • Facts:
    • Mortgage balance = $900,000
    • FMV = $645,000
    • Selling costs = $45,000
    • Proceeds from sale = $600,000
    • Adjusted basis of property = $450,000
  • Tax effect:
    • No gain if client insolvent at time of sale
    • Tax disaster if client solvent at time of sale
slide85

Method of Conveyance

Foreclosure

Voluntary

Type of Loan

Recourse

Non-Recourse

Recourse

Non-Recourse

Loan Balance

$ 900,000

$ 900,000

$ 900,000

$ 900,000

Proceeds

600,000

600,000

600,000

600,000

Sale Price

600,000

900,000

600,000

900,000

Basis

450,000

450,000

450,000

450,000

Gain or (Loss)

150,000

450,000

150,000

450,000

Amount Due Lender

300,000

0

300,000

0

Total Income

$ 450,000

$ 450,000

$ 450,000

$ 450,000

Sale Price =

FMV

>Debt or FMV

<Debt or FMV

Debt

slide87

Chapter 7

  • Chapter 11
  • Chapter 13
  • Automatic Stay
  • Relief from Automatic Stay