Liability – Querin Law, LLC | Phil Querin | Oregon Real Estate Law Blog

[Note: This is the second in a two-part series in managing brokerage risk. In the first article [here] I discussed managing risk “from the top down,” i.e. identification of what aspects of real estate brokerage practice need the greatest attention, and proper evaluation and treatment of customer complaints before a potential claim becomes a real claim. – PCQ]

Where Do Claims Originate? Real estate brokerage claims come from three different sources: (1) The customer, (2) the customer’s lawyer, and (3) the Oregon Real Estate Agency.

Claims From Clients Themselves. If the client is presenting the claim on their own behalf, the real estate company is in the best position to have direct control over managing that risk. In fact, this may be the one and only time a managing principal broker has actual control over the outcome of the claim.¹ Here are some tips:
Continue reading “Real Estate Brokerage Claims Evaluation – Part Two”

The sad reality is that negative equity, short sales, and foreclosures, will likely be around for quite a while. “Negative equity”, which is the excess by which total debt encumbering the home exceeds its present fair market value, is almost becoming a fact of life. We know from the RMLS™ Market Action report that average and median prices this summer have continued to fall over the same time last year. The main reason is due to the volume of “shadow inventory”. This term refers to the amorphous number of homes – some of which we can count, such as listings and pendings–and much of which we can only estimate, such as families on the cusp of default, but current for the moment. Add to this “shadow” number, homes already 60 – 90 days delinquent, those already in some stage of foreclosure, and those post-foreclosure properties held as bank REOs, but not yet on the market, and it starts to look like a pretty big number. By some estimates, it may take nearly four years to burn through all of the shadow inventory. Digging deeper into the unknowable, we cannot forget the mobility factor, i.e. people needing or wanting to sell due to potential job relocation, changes in lifestyle, family size or retirement – many of these people, with and without equity, are still on the sidelines and difficult to estimate.

As long as we have shadow inventory, prices will remain depressed.[1] Why? Because many of the homes coming onto the market will be ones that have either been short sold due to negative equity, or those that have been recently foreclosed. In both cases, when these homes close they become a new “comp”, i.e. the reference point for pricing the next home that goes up for sale. [A good example of this was the first batch of South Waterfront condos that went to auction in 2009. The day after the auction, those sale prices became the new comps, not only for the unsold units in the building holding the auction, but also for many of the neighboring buildings. – PCQ]

All of these factors combine to destroy market equilibrium. That is, short sellers’ motivation is distorted. Homeowners with negative equity have little or no bargaining power. Pricing is driven by the “need” to sell, coupled with the lender’s decision to “bite the bullet” and let it sell. Similarly, for REO property, pricing is motivated by the banks’ need to deplete inventory to make room for more foreclosures. A primary factor limiting sales of bank REO property is the desire not to flood the market and further depress pricing. Only when market equilibrium is restored, i.e. a balance is achieved where both sellers and buyers have roughly comparable bargaining power, will we see prices start to rise. Today, that is not the case – even for sellers with equity in their homes. While equity sales are faster than short sales, pricing is dictated by buyers’ perception of value, and value is based upon the most recent short sale or REO sale.

So, the vicious circle persists. In today’s world of residential real estate, it is a fact of life. The silver lining, however, is that most Realtors® are becoming much more adept – and less intimidated – by the process. They understand these new market dynamics and are learning to deal with the nuances of short sales and REOs. This is a very good thing, since it does, indeed, appear as if this will be the “new normal” for quite a while.

[1] This discussion ignores two other additional factors, employment and confidence. We see the effect of this every day; notwithstanding record low interest rates, and record high affordability, there are many, many potential buyers still sitting on the sidelines.

Having counseled approximately two hundred Oregon homeowners drowning in negative equity, I have discovered that many, if not most, believe that somehow their lenders can literally swoop down and take not only their home, but all of their bank accounts, savings, retirement funds, and/or daily wages. In truth, the only real power most banks have over a borrower, is the ability to negatively impact their credit, and by extension, their future ability to borrow. On the other hand, one’s credit is a composite of many different data points, not simply a single “black mark” from one distressed property event. To that extent, a credit rating can be strengthened over time, and like a muscle, it builds up through consistent and prudent use over time. In today’s rental marketplace (which is populated by many former homeowners coming out of a distressed property transaction), a credit score impacted by a single distressed housing event has little or no bearing on whether a landlord will rent a home or apartment to them. In an effort to provide some peace of mind, listed below are certain “rights” that all home owners have under Oregon law. These rights cannot be taken away – they can only be voluntarily given away.

The following Bill of Rights assumes the following facts: (a) The home was used and occupied as a principal residence. A “principal residence” or “primary residence” in my vernacular, is the residence you occupy most of the time, and hold out to the city, state and federal governments (e.g. the post office, DMV, utility companies, etc.) as your “home.” A second home is not, by definition, a “primary residence.” (b) There is only one loan on the property and all of the borrowed funds were used to acquire the home. Second trust deeds can sometimes be problematic. If you have a second trust deed as well as a first, all is not lost – it just requires a little more planning, and some smart negotiations with the bank.

Caveat: This summary is not meant to be legal advice, as each person’s factual situation is different. No attorney-client relationship is sought or created by this post.– PCQ

Continue reading “Distressed Homeowners’ Bill of Rights”

The Oregon Legislature has recently passed, and the Governor has signed, House Bill 2916. Here’s a quick summary:

It applies to lenders who hold mortgage or trust deed on property consisting of one to four family dwellings, one of which the borrower occupies as their primary residence;

It applies to “Residual Debt” which is the remaining amount due to the lender after closing of the short sale;
It provides that if a lender files a 1099-C form with the IRS reporting that it has canceled all or a portion of the borrower’s remaining debt due under the loan, the lender (or its assignee) may not thereafter bring legal action for repayment of that deficiency.

Is this a good thing? Will it, as recently reported by the Oregon Association of Realtors©, “…protect sellers by eliminating the current uncertainty that is inherent in the short sale process, reducing the amount of time it takes to sell property and the number of foreclosures in communities throughout the state“? I certainly hope so. It is clearly a positive move forward, and anything that helps distressed home sellers (and by extension, their buyers) is a good thing.

But I have a couple of questions:

If I close a short sale in 2011, a 1099-C normally isn’t issued by the lender, if at all, until the start of 2012. The form goes to the IRS and a copy goes to the borrower. But how do I know, at the time of the short sale closing in 2011, whether the lender will file the form? Unless the lender expressly agrees to release me from all deficiency liability at the time of closing, I really have no assurance about what will happen the following year. Am I supposed to just trust that the bank will file a 1099-C? Remember, these are the same banks that repeatedly lost borrowers’ modification documents, promissory notes, and other paperwork.
According to the IRS instructions about the 1099-C form, certain pass-through entities are not required to file it. One such pass-through entity is a Real Estate Mortgage Investment Conduit, or “REMIC“. Many – if not most – loans were securitized into REMICs during the 2005 – 2007 credit bubble. If this is correct – although I hope I’m wrong – many distressed sellers who close short sales this year in reliance upon the belief/hope their lender will file a 1099-C may be disappointed to learn that the true owner of their loan – the REMIC – didn’t need to do so in the first place. Where does that leave short sale sellers?

Although perhaps we’ll know more after others weigh in, my initial reaction is that this new law may not be a silver bullet. In short, it appears that the most prudent course of action is to always insist upon a written release of deficiency liability at the time of closing the short sale. Then, regardless of whether a 1099-C is issued or not, the door has been forever closed to any future claims. – Q

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?”

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”