Miscellany – Page 42 – Querin Law, LLC | Phil Querin

Recently, Fannie Mae (FNMA), the giant secondary mortgage market purchaser, declared war on borrowers who engage in “strategic defaults.” In their view, these are the borrowers who can afford to pay, but voluntarily choose not to. It appears that in some instances, these decisions stem from reliance on some states’ laws that say a lender may not pursue personal liability against borrowers for certain loan “deficiencies.” A deficiency is the difference between what the lender recovers in a foreclosure, and the remaining amount due under the borrower’s promissory note.

In some states, such as Oregon, lenders are prevented from recovering a judgment against their borrowers for deficiencies arising after foreclosure of a first mortgage used to acquire their primary residence. These anti-deficiency laws arose out of the 1930’s depression era, when banks pursued borrowers for repayment even after taking the home in foreclosure. In 2010 Oregon passed another law (House Bill 3656) that extended anti-deficiency protection to borrowers who also took out second mortgages to pay the remaining purchase price. These loan programs, sometimes known as “piggy-backs,” were designed by lenders to provide 100% of a borrower’s purchase price. In the vernacular, borrowers had no “skin in the game.” But that was OK to the banks. They believed, like most, that if they ever had to foreclose, they could simply resell the home, perhaps at an even higher price. Piggy-backs were not only offered, they were actively promoted, by many lenders during the 2005 -2008 period. This was when credit was cheap, interest rates low, and real estate prices were skyrocketing. Piggy-backs often came in the form of two simultaneous loans, the first mortgage (or in Oregon, the “trust deed”) for 80% of the purchase price, and another – the second mortgage or trust deed – for the remaining 20%. Continue reading ““Strategic Defaults” – Making Borrowers the Bad Guys?”

General – Today, credit scores are more important than ever. Yet, many, many owners of distressed properties are at a loss to know what will happen to their credit score if they complete a loan modification, short sale, a deed-in-lieu-of-foreclosure (“DIL”), or are foreclosed. This is an unanswerable question, because everyone’s credit history is directly a function of their own specific circumstances. There are no cookie-cutter answers. In the final analysis, a credit score is a number that calculates the level of risk a lender or creditor will be accepting if they make you a loan, sell you a car, or do any number of things that would result in an extension of credit. And many businesses such as phone and insurance companies rely upon your credit score in deciding whether, and upon what terms, they will provide their services or products to you. In short, the better your score, the better the rate, terms, and pricing of the product or service you are seeking.

Credit Scoring – Here are some of the factors that go into determining your credit score:

The number and type of credit accounts you have;
How timely you pay your bills;
The existence of any prior collection action taken against you;
Your outstanding debt;
The age of your accounts (that is, the number of days from date of invoice to date of payment – 30, 60 90 days, etc.)

This type of information is put into a statistical program and your information is compared to that of other consumers with similar profiles.

Credit Reports. According to the Federal Trade Commission (“FTC”), you have a right to a free copy of your credit report from each of the three national consumer reporting companies once every 12 months. Under the Fair Credit Reporting Act (FCRA) you also have a right to obtain your credit score from the national consumer reporting companies. They are permitted to charge a “reasonable fee,” which is generally around $8.00.

Seeing your credit report and your credit score is essential, since it is the first step you must take if you are to improve it.

HyperLynx: For more information on improving your credit, go the FTC Website.

HyperLynx: To order your free annual report visit AnnualCreditReport.com.

Real Estate Owned (“REO”). The abbreviation “REO” means “real estate owned.” In banker-speak, it means that the lender has taken the home back from the defaulting borrower – voluntarily or involuntarily – and must now try to sell it to recover the unpaid balance on the loan.

The Bank Addendum. It has been my experience that when banks sell their REO properties, they do so in the following manner: Upon receiving a purchase offer, they counter it with an “addendum.” This document is usually several pages in length, replacing many of the customary terms of the buyer’s offer. While there may be some differences among these bank forms, the one characteristic they all have in common is their attempt to reinforce the notion that the property is being sold “AS-IS.”

Having reviewed a number of bank addendums (technically “addenda”) over the last several months, I have concluded that if we read them at another time, say three, four or five years ago, we would likely have been offended that anyone would think us foolish enough to agree to such harsh terms. But this is today – banks have been taking properties back in droves. These properties must be placed back on the market quickly, and with the least amount of expense. In an effort to reduce future liability, banks have stretched the concept of an “AS-IS sale” to the breaking point. Why? Because they can. Even though it is a buyer’s market in Oregon and elsewhere, banks are selling some of their REOs at very attractive prices. As a result, buyers are generally willing to accept the AS-IS terms in the bank’s addenda.

But Is It Legal? To me, this approach is of dubious legality. Saying so does not make something so. While I cannot presume to know the thinking of those who draft these documents, I suspect some of the AS-IS language is inserted more for psychological affect than substantive effect. As far as I know they have yet to be legally tested in Oregon. Perhaps that means they are working….

Here are a few of the provisions I’ve seen in bank addenda that buyers (and the real estate agents representing them) should be aware of: Continue reading “Bank REOs And Property Disclosure”

A quick note on what appears to be a source of confusion among consumers and others about their personal liability on home loans that go into foreclosure.

Before the credit and housing boom and bust, Oregon protected homebuyers on their first mortgage if there was a shortfall in loan repayment (a “deficiency”) following foreclosure. The law said nothing about such protection if there was a second mortgage.

During the boom times in Oregon and elsewhere, “piggy-back” loans were not uncommon. Piggy-backs were two loans, that is, a first and second mortgage, say, for 80% and 20% of the purchase price.

When Oregon real estate values collapsed in the third quarter of 2007, this left many lenders unpaid…and borrowers fearful of collection action being filed against them personally. The lender on the first mortgage could not recover for the deficiency, but the lender on the second could. Continue reading “Making Sausage – Observations on Some Recent Oregon Legislation”