Summary of Oregon’s 2021 Real Estate Arbitration Disputes

Introduction. As most Oregon Realtors® know, the OREF Sale Agreement provides that, subject to certain exclusions, all disputes that cannot be otherwise amicably resolved must be first mediated. If that isn’t successful, recourse is through mandatory arbitration. The filing of legal actions in court is not permitted except in cases seeking “provisional process” e.g., for injunctions, restraining orders, and similar matters requesting immediate and extraordinary relief.

The Portland Metropolitan Association of Realtors® (“PMAR”) has its own mandatory mediation process, where disputes involving transactions handled by one or more PMAR Realtors® must first be filed. If mediation is unsuccessful, the only other venue for resolution is through Arbitration Service of Portland, Inc (“ASP”). ASP administers all other non-PMAR mediations for disputes arising under the Sale Agreement.

In some of these seller-buyer disputes, one or both Realtors® may be named because a claimant feels their broker, or the other broker, or both brokers, engaged or participated in activity that caused them damage.

The Sale Agreement’s mediation/arbitration dispute resolution process involving Realtors® is not available to resolve claims for violation of the NAR Code of Ethics. Those are handled at the local Realtor® association level. Similarly, claims against brokers for violation of Oregon’s licensing laws and rules (ORS Chapter 696 and OAR 863) must be filed through the Oregon Real Estate Agency

The 2021 ASP Statistics. Annually, ASP provides PMAR with its arbitration statistics to assist in helping the industry better understand the type of property disputes that end up in arbitration. What follow is a summary of those disputes and Realtor® tips to avoid them.

Seller Misrepresentation Claims. Caveat: This discussion relates only to the topics, not the outcomes. Having several of these claims end up in arbitration does not mean they all resulted in awards for the buyer against the seller.

Unquestionably, over the years, this has been the largest source of claims ending up in arbitration. Moreover, they often include the seller’s broker. This joinder of parties, i.e., naming the seller and their listing agent as co-respondents, should not be a surprise. Oftentimes, it is the listing agent to whom the seller confides, and (unfortunately) the listing agent wittingly or unwittingly, acquires information that provides the basis for a buyer’s claim against that broker.

For example, in completing the Sellers Property Disclosure Statement (“Disclosure Form” or “Form”), sellers turn to their agent to better understand how to answer particular questions: Below are some examples of Disclosure Form questions[1] – coupled with a typical inquiry the seller might have of their broker before finalizing the Form:

Are there problems with settling, soil, standing water or drainage on the property or in the immediate area? “I had some problems last year, but they all got resolved. Do I need to answer “Yes”?
Are there any pending or proposed special assessments? “There have been some recent owner complaints to the HOA about ceiling leaks in their units – but not mine. Contractors are looking at things right now. So far, there have been no assessments proposed, nor assessments made. How should I answer?”
Are there any encroachments, boundary agreements, boundary disputes, or boundary changes? “My neighbor told me he thought my fence was on his land, but he never asked me to move it. We have no dispute. Do I need to answer ‘Yes’”?
Are there any moisture problems, areas of water penetration, mildew or moisture conditions (especially in the basement)? “There are some leaks in the basement during the winter months, but they all go away when the rains stop. Do I have to answer “Yes” even though they are not really a ‘problem’ and are just temporary?”

The “Situational Ethics” Problem. Each of the above property disclosure questions might be answered differently if asked of a seller versus asking the prospective buyer. The seller who does not disclose (or “under-discloses”) may believe they are answering appropriately by strictly interpreting the scope of the question subjectively. E.g., “Yes there was a problem, but it was repaired”; “No, there is no ‘dispute’“; “No, it has not been a problem.”

But how would the seller respond to the following: “If you were a buyer wouldn’t you want to know these things – i.e., letting the buyer decide whether the issue is important in their purchasing decision?”

The minute the listing agent becomes involved in salving the seller’s conscious for not disclosing an issue because the framing of the question didn’t strictly require it, the agent has, figuratively speaking, left their “fingerprints” on the Disclosure Form, which provides a basis for including them in the claim.

The Take-Away. Buyer claims of nondisclosure against sellers and their brokers are primarily – but not exclusively – the result of information the seller could have disclosed but elected not to.

To be fair, however, some fault can be placed on the spectacularly poor and inconsistent drafting of the Disclosure Form – keeping in mind that the text is a product of legislative drafting, not OREF drafting. Time does not permit examples, but there are many.[2]

Also, sometimes seller nondisclosure claims can be traced back to other, less culpable, factors: E.g., (a) Information that was beyond the scope of the Form’s questions; (b) The seller made a good faith error;[3] (c) The buyer already knew or should have known of the defective condition; or (d) Any number of other reasons unrelated to an effort to intentionally conceal information from the buyer.

For listing agents and their sellers, there is One Rule: “If in doubt, disclose.” There is no such thing as saying too much. Or to put a finer point on it, sellers should make the same level of disclosure in answering the form as they would want if they were buyers reading the form. This approach is also known as The Golden Rule. “Disclose, Disclose, Disclose.” Let the buyer decide what is important to them.

Specific Performance Claims. The second largest category in ASP claims relate to buyers asking the arbitrator to require the seller to complete the transaction. This is called “specific performance” which is really the name of the remedy sought for the seller’s breach of contract in refusing to close the transaction.

Since money damages are not really sufficient to fully compensate a prospective buyer, specific performance is the preferred remedy – especially in times of limited inventory when a suitable replacement property is not available. These claims do not normally include the listing broker.

In many specific performance cases, though not all, the reason a seller declines to close the transaction is because they believe they underpriced the property, and/or have a back-up buyer for a better price. Occasionally, sellers decline to sell because they cannot find a replacement home and refuse to close under the misguided belief they can unwind their first transaction.[4]

If the Sale Agreement is clear on its face, the buyer has complied with its terms, and is ready, willing and able to perform, there is a potential claim for specific performance against the seller.

Earnest Money Disputes. The third largest area of contested cases involve earnest money disputes. These situations arise because either the seller or buyer believe the other side breached the pre-closing terms of the Sale Agreement. Examples include the failure to timely deposit (or provide proof of ) funds; the failure to timely secure financing; and untimely rejection of the property inspection report. There are many others.

Although these claims do not normally include a party’s broker, there are things agents can do to reduce such disputes: (a) Know all deadlines; (b) Discuss them with the buyer and seller; and (c) Make sure both agents agree on the same deadline dates.

Why Are There No Seller vs. Buyer Damage Claims In Arbitration? The answer is found in the OREF Sale Agreement – and almost all other contracts for the sale of real property. The earnest money deposited by buyer into escrow is expressly intended to serve as the seller’s agreed-upon “damages” in the event buyer fails to perform. This pre-agreed sum is known as “liquidated damages” i.e., it is stipulated to be the amount the parties have agreed upon in advance, as representing seller’s damages caused by buyer’s default.

This can be a two-edged sword. If the buyer breaches early in the transaction, the earnest money deposit may far exceed seller’s actual damages (assuming seller can quickly resell the property); but if the buyer breaches late in the transaction and the seller had moved out of the property and relocated elsewhere, their actual damages may far exceed the stipulated damages represented by the deposit. In either case, since the sum has been agreed to in advance, with the proper recitals in the Sale Agreement it is the maximum amount seller may recover for buyer’s nonperformance – nothing more.

Conclusion. Are the number of disputes that end up in mediation and arbitration going up, down, or staying the same? That question cannot be answered as it is framed. The reason is that, there should be an inverse relationship between the numbers in mediation and arbitration. That is, the more mediations there are, the fewer arbitrations there should be. To put it another way, mediations, if properly conducted, should have a prophylactic or lessening effect on the number of arbitrations. That has been the case ever since the mandatory mediation clause was instituted in the OREF Sale Agreement circa 1997.[5]

~ Phil

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[1] There are too many to list here. The failure to include them is not to minimize their importance.

[2] Drafting of legislation is often the product of committees composed of stakeholders. How many iterations the final product went through – how many drafters reviewed each one – or how many last-minute changes were made with little or no oversight, is unknown. Clearly, the Disclosure Form contains inconsistent and conflated language. [See discussion at: https://q-law.com/oregon-sellers-property-disclosure-conundrum/]

[3] To be clear, the statute, ORS 105.464, provides that the seller’s answers are based upon their “actual knowledge of the property at the time of disclosure.” Technically, if that knowledge is the result of a good faith error, it cannot (or should not) form the basis of a claim against seller. The representations in the Form are not warranties.

[4] In these situations, sellers should include a well-drafted contingency making the sale transaction subject to the purchase and closing of the replacement property. However, this requires careful drafting; some buyers may not want to wait for the seller’s purchase to close before allowing the contingency to expire. Sellers should be encouraged to consult with qualified legal counsel before entertaining offers.

[5] The reason is because for over 20 years, the mediation clause in the OREF Sale Agreement has contained a provision that if a party failed or refused to mediate first, they could not recover attorney fees later in arbitration, even if they prevailed. This became a significant incentive for recalcitrant parties to first try to settle their disputes in mediation. It worked.

Discussion. The short answer is “Yes.” But the longer answer requires more explanation. First, a caveat: By “review” I do not mean by the listing agent for the purpose of substantively changing a seller’s answers. Rather, by “review” I mean “review for completeness.” Oregon’s property disclosure statute, ORS 105.464, instructs sellers to:

“Please complete the following form. Do not leave any spaces blank.” (Emphasis added.)

Accordingly, it is my belief that brokers for both sellers and buyers should routinely review disclosure forms to confirm they are complete in two respects:

To make sure there are no unanswered questions. The choices are “Yes,” “No,” “Unknown,” or “Not Applicable;” and
To make sure that if an asterisk (*) appears next to a question, the requisite written explanation is attached.

The disclosure statutes provide that buyers have five business days[1] after their seller’s delivery of the form to “revoke” (i.e., withdraw) their offer, based upon a “disapproval” of the seller’s information provided in the form. The buyer’s notice of revocation must be written and delivered, but there is no required wording. “I disapprove” will suffice, if timely made.

Questions:

What if one or more questions are left unanswered or the required explanation is not attached?
Has the form been “completed”?
And if not completed, does the buyer’s five-business day period for revocation still commence on delivery?
If the revocation period does not commence, does that mean buyer’s to withdraw from the transaction runs all the way to closing?[2] See, ORS 105.475(3).

The statutes are silent on these questions.

This discussion is more than hypothetical. I have seen critical questions left unanswered and unexplained; sometimes unintentionally, and other times, likely on purpose. (I will defer for another day the discussion on whether fraud by omission, e.g., silence, is any less venal than fraud by an outright misrepresentation.)

Review By Listing Agents. Most sellers and listing agents would agree that expiration of the buyer’s right of revocation is an important event. Why? Because revocation requires no explanation; it is easy – like buyer’s remorse. Secondly, only after the revocation period expires can the parties get down to the serious business of focusing on due diligence issues.

Accordingly, anything that can prolong the five-business day period, such as delivery of an incomplete disclosure form that gets returned, is a disservice to the seller. For this reason, listing agents should review their client’s disclosure form for completeness before delivery to the buyer or buyer’s agent. The failure to catch an incomplete form before delivery can result in unnecessary delay.

Review By Buyer Agents. Conversely, buyer agents should review the disclosure form for completeness immediately upon receipt. If there are critical questions left blank, or written explanations that have not been attached, the disclosure form should be promptly returned. If that occurs, it should be made clear to the listing agent that the five-business day right of revocation will not commence until the “completed” form is delivered.

However, for buyer agents another critical function exists. In some cases, a seller may answer a question in the affirmative, e.g., that the roof has leaked, or there was water in the basement, but the buyer fails to follow up. Equally problematic is when a seller responds “Unknown” to questions that demand further inquiry. In both instances, buyer agents should encourage their clients to alert the inspector to these issues. This is another reason for review – to be a second set of eyes for the buyer; it is useful for developing a due diligence checklist. If necessary, the seller should be contacted for more details.

The Take-Away. Accordingly, both agents should, at the earliest possible time, review the seller property disclosure form for completeness. Not doing so creates a risk of unnecessarily prolonging the revocation period. Again, this is not to say listing agents should become involved in answering the questions, checking boxes, or authoring explanations. Those responsibilities belong exclusively to the seller. ~ Phil

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[1] The statutory form found at ORS 105.464 is wrong. It should say “five business days.” The original legislation at Section 1, Chapter 547 of the 1993 Oregon Session Laws provided “five business days.” Why this error has remained ignored and uncorrected for nearly 20 years is a mystery. We changed the OREF Disclosure form years ago to be consistent with ORS 105.475(1).

[2] This is not to suggest that a buyer could accept a disclosure form, realize it was incomplete, say nothing and retain the right to revoke all the way to closing. A buyer’s failure to act promptly under those circumstances would likely operate as a waiver or estoppel against them.

Introduction. Oregon’s property disclosure law was first created in the 1993 Legislative Session – nearly 30 years ago. This was back when the idea of sellers having to “disclose” any information about their homes was a foreign concept. Short of outright fraud, caveat emptor[1] was the rule of the day. Of course, if a seller intentionally misrepresented the condition of their property, it was actionable – but sellers were not then required to make any disclosures, thus leaving buyers to learn as much as they could about the property on their own, before making an offer.

In fact, the concept of “disclosure” was so foreign at the time, that the Oregon legislature gave sellers the right to select between it and “disclaimer”. Thus, residential sellers had a choice between using one of two forms: (a) They could either answer a series of statutory questions about the property (“Disclosure”), or (b) tell their buyer nothing (“Disclaimer”). To lawyers advising their seller-clients, this was a no-brainer – always disclaim.

Both forms permitted buyers a fixed period of time following delivery of the disclosure of disclaimer form to withdraw from the transaction (called the “right of revocation”). This will be examined more closely in Part Two.

It was not long before the Disclaimer option eventually disappeared. Today, the law provides that unless exempted (e.g., new construction sales; sales by court-appointees; foreclosure sales, etc.), all sellers of one-to-four family homes (including condominiums and townhomes) are required to give their buyers a Seller’s Property Disclosure Statement (“SPDS”).

Seller Property Disclosure Today. Fast-forwarding to today, we see that some things have not changed. Most of the questions in the SPDS remain the same; many are poorly worded and suggest that each section was drafted by a separate group, each relying upon their own specialty, such as plumbing, heating, cooling, electrical, land use, title, condominium, etc. There appears to have been no effort to follow uniform style and syntax. Inexplicably, after nearly three decades, most of these questions remain unchanged today.

Some require knowledge of the law: “Is the property being transferred an unlawfully established unit of land?”;
Others require land use knowledge: “Are there any governmental studies, designations, zoning overlays, surveys, or notices that would affect the property?
Some questions refer only to the time of the sale: “Are there any sewage system problems or needed repairs?” This question ignores past problems.
Others refer to conditions that could have occurred at any time over the duration of a seller’s ownership: “Has the roof leaked?”

And perhaps the most open-ended of questions comes out of the blue at the end of the form:

“Are there any other material defects affecting the property or its value that a prospective buyer should know about?”[2] Not only does this question ask how a defect affects the home’s value (while all other questions relate solely to its condition) it requires the seller to know what issues are important to each buyer – metaphoricaly, it asks sellers to become mind-readers.

I do not suggest these topics are unimportant – but believe that many questions are simply beyond the ability of most sellers to answer with certainty. I suspect that less than 20% of sellers can answer all the questions with any degree of confidence.

The only saving grace in the legislation is that it expressly provides that sellers’ answers are based only upon their “best knowledge”- they are not guarantees or warranties. Thus, being wrong is permissible; it does not automatically make a seller liable; liability may only attach if the buyer can establish (through clear and convincing evidence[3]) that their seller knew an answer was false.[4]

And since most real estate listing agents try to avoid having their fingerprints on the SPDS,[5] many balk at answering their clients’ questions seeking direction or interpretation. This leaves sellers on their own.

Lastly, the SPDS form and its enabling legislation contain one glaring 28-year-old error. While the language of the form dictated by ORS 105.464 states at the beginning and end of the document that buyers have “five days” from delivery of the disclosure statement to give notice of their intent to exercise their right of revocation, the text of ORS 105.475(1) says that right commences after “five business days” following delivery.

The 28-Year-Old Mystery. How is it that for over a quarter of a century the Oregon real estate industry has ignored the admitted sloppiness of a form it had a major hand in creating?

The oft-quoted meme used to explain this anomaly is that doing so would open up the form to other stakeholders and consumer advocates (e.g., environmental, zoning, fair housing, conservation, noise pollution, etc.) who would expand the list of required disclosures into an unwieldy amalgam of questions – akin to California’s approach to seller disclosure.

Based upon this rationale it’s a wonder the U.S. Constitution was ever amended. Perfect has become the enemy of good. ~ Phil

[To be continued.]

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[1] “Buyer Beware”

[2] This is like asking a witness on the stand before stepping down: “Is there anything else you have not told the jury that they would want to know?”

[3] The burden of proof for fraud and misrepresentation.

[4] Liability can also attach if the seller “recklessly” made a statement without any basis. This is a more complicated analysis but can be a trap for the unwary seller.

[5] For fear of being brought into a buyer vs. seller claim and accused of having recommended the seller’s answer.

What Must Sellers Disclose? Oregon’s Property Disclosure form asks sellers whether they have had any additions, conversions or remodeling to the home. If the answer is “yes” the form asks three follow-up questions; (1) Was a building permit required? (2) Was a building permit obtained? (3) Was a final inspection obtained?

Seller and buyer agents should always be mindful of the fact that a seller’s answers to these questions can vary greatly depending upon how the question is interpreted:

Since the seller’s answers are provided upon the basis of his/her actual knowledge at the time of disclosure, Sellers who have lived in the home for a comparatively short period of time may have little or no knowledge about what additions, conversions or remodeling occurred prior to their ownership;
Even if they are aware of such work having occurred either prior or during their ownership, they may have no knowledge as to whether a permit was legally required for the work to be done;
If work was performed, the seller may regard it as merely “cosmetic” and therefore not qualifying as an “addition,” “conversion” or a “remodel;”
If the work was performed by a contractor, the owner may incorrectly assume that permits were pulled and the work inspected for compliance with the building codes.

For all of the above reasons, Realtors® should be alert to the distinct possibility that a seller’s answers to questions concerning remodeling may not always be totally reliable, even when made in good faith.

While Oregon law does not require that real estate brokers be “experts” on the issue of code compliance, it does not permit them to close their eyes to the obvious. The same is true of buyers. Here are some warning signs:

The home’s garage or attic has been converted to a sleeping area;
An older home is advertised as having been “updated” or words to that effect;
The style of the kitchen or bathroom obviously post-dates the home’s original construction;
There is a finished basement with electrical and plumbing installed.

In cases such as these, and many others, the following questions must be asked:

Who performed the work?
Was a permit required?
Was one obtained?
And did it go through a final inspection?

These questions should be asked regardless of the seller’s answers in the property disclosure form – in other words “trust but verify.”

There are several reasons for following this practice:

From the listing broker’s perspective, learning this information in advance can avoid a possible sale-fail late in the transaction when it is discovered;
For both brokers it reduces the risk of being accused of being complicit in a cover-up;
From the buyer broker’s perspective, checking with the building department early on can eliminate buyer claims after closing , since then the problem will have to be cured before the buyer can seeking permits for any further work and before placing the home on market to re-sell; and
Most importantly, verification and curing (where necessary) reduces the danger that illegally or poorly performed work might result in a catastrophic fire or other disaster causing injury or death to a buyer or buyer’s family.

When is a Permit Required?¹The answer to this question is not always clear and is oftentimes confusing. And sellers’ answers in the property disclosure form can vary dramatically.² It is true that generally owners themselves may perform work on their own home without hiring a licensed contractor.³ However, homeowners performing their own work are nevertheless subject to the same permit requirements as if they hired a qualified contractor. That is, they all must apply for and obtain the necessary permits and have the work inspected for code compliance. Work performed by a seller does not eliminate complying with the building codes.

If the work involves interior plumbing, such as repair, replacement, or relocation of lines, chances are a permit is required. The same holds true for new plumbing fixtures, such as toilets, sinks, tubs, etc. Even replacing an existing fixture, such as a tub or shower, can require a permit, if it involves concealed plumbing connections. A permit is generally not required to replace accessible plumbing fixtures or to make certain emergency repairs. If a bathroom is added to a home, this may involve obtaining not only a plumbing permit, but a building permit, an electrical permit and mechanical permits (defined below).

Work involving exterior plumbing such as sewer lines, septic systems, cesspools and drywells can require a permit. In some instances, the contractor must also be licensed by the Oregon DEQ.

Repair, replacement or installation performed on heating, cooling or ventilation systems is known as “mechanical” work for which a permit may be required. This can include installing or changing any part of a home’s heating or cooling systems, wood stoves, fireplace inserts, gas piping or fuel oil tanks.

When electrical work is done on a home by the owner, he/she must also be the occupant – otherwise a state licensed contractor must perform the work. A permit is required to install, change or repair any hard-wired electrical system. This includes installing additional wiring, adding an electrical outlet or light fixture, or changing a fuse box to circuit breakers. Even installation of low voltage systems, such as phones or security systems, may require a permit.

Building permits are required almost any time a dwelling is enlarged or altered in any material way. Examples would include finishing an attic, garage, basement, moving or adding walls, some deck and porch construction, etc. When building permits are not required, but there are concerns about how the site is used, a zoning permit may be required. For example, enlarging a driveway or paving a parking area, may require the owner to obtain a zoning permit.

Permits, if required, must be purchased before the work is performed. Any work performed under a permit must be inspected for code compliance. The permit expires after 180 days if it has not been inspected. If the city or county becomes aware that work has been performed without the necessary permit(s), the homeowner will be notified by mail to either purchase the necessary permit(s), or in the case of more complex work, to submit plans to the proper authorities. If the requested action is not obtained, the matter is turned over to code compliance authorities for follow-up. If necessary, the authorities have the power to take administrative action or issue fines against the owner of a home if the necessary permits were never issued. Since the enforcement action is against the record owner of the home, in those cases in which the home has been sold, this means the innocent buyer is now saddled with the consequences of their seller’s noncompliance.

Verification. There are many reasons why homes may not be code compliant, ranging from a failure to realize the need to obtain a permit, to acquiring a home that had alterations performed by the prior owner. The Portland Bureau of Development Services, which is charged with responsibility for ensuring that construction is properly permitted and code compliant, has a website that permits anyone to check into the permit history of a property by simply entering the address. For further information, go to: https://www.portlandoregon.gov/bds/34154

Conclusion. After a home has been sold, the new owner may become financial responsible for the expense and responsibility in making a home code compliant. In some cases, the time and cost can be substantial. Now that seller property disclosure is required to be given, owners have very little “wiggle room” to avoid addressing the issue of whether any remodeling was ever performed, whether a permit was ever issued and whether the work was ever inspected and passed. The longer the owner owned the home, the greater the likelihood he/she knows its remodeling history.

ORS 696.822(2) provides:

A real estate licensee is not liable for an act, error or omission by a principal or an agent of a principal that is not related to the licensee unless the licensee participates in or authorizes the act, error or omission. This subsection does not limit the liability of a principal real estate broker for an act, error or omission by a real estate licensee under the principal broker’s supervision. (Emphasis added.)

This provision appears to insulate real estate licensees from their clients’ misstatements, whether intentionally or negligently made. However, in this litigious society, brokers cannot rely in blind faith on their clients’ word. Listing agents should make sure their sellers understand the risk in giving untruthful answers, and buyer agents should make sure their clients understand the need to verify with the local jurisdiction exactly what work has (or has not) been permitted, inspected and passed. It is this type of value that Realtors® can bring to the transaction, and in so doing, justify their commissions. ~ Phil

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ENDNOTES

1 Much of the following information was obtained from the Portland Bureau of Development Services. Their website is http://www.bds.ci.portland.or.us/. It can be a very useful resource for Realtors® and their clients.

2 Remember, the form only requires that the seller’s answers be based upon his/her “actual knowledge.” If the seller truly doesn’t know whether a permit was required, or truly believed one was not required, it will be very difficult for a buyer to prove that the seller knew they were not telling the truth at the time they completed and signed the disclosure form.

3 The “owner” is the person named on the title – not a family member or friend of the owner.

In a recent Housingwire.com article (here) by Kathleen Howley, we learn that the current average 30-year mortgage interest rate of 3.24% is within one basis point[1] of its all-time low of 3.23%. According to article:

Fannie Mae projected last week the average this quarter would be 3.2%, followed by 3.1% in the third quarter and 3% in the fourth quarter.

Fannie Mae is forecasting an average of 2.9% for every quarter of 2021.

Continue reading “Interest Rates Dropping – Again!”

In a recent Reuters article (here), authors Ann Saphir and Lindsay Dunsmuir note that the Federal largesse of trillions of dollars currently being spent to address the inevitable fallout from sidelining millions of employees and businesses is far different from 2005 – 2009 when the financial and real estate markets fell into the abyss, causing the Great Recession.

Back then, the government, the press, and many in the public, measured deservedness for bailout funds by the metric of “moral hazard” – i.e. whether giving financial assistance to certain groups would be viewed and encouraging “bad behavior”.

For example with the advent of “no-doc loans” and “liar loans”, borrowers were able to qualify for home loans priced far beyond their ability to repay. At the time, the lenders and mortgage brokers were able to convince borrowers to “bite off more than they could chew” because if they got into trouble, they could either refinance the home, or resell it. Of course, this advice was based upon the theory that real estate does not go down in value.

But in 2007+ that is exactly what happened. Values tanked, thus resulting in borrowers being unable (a) to refinance – because they had no equity, and (b) to resell – because they were “underwater” i.e. their mortgage exceeded the value of the depreciated home. When that occurred, it meant that to convey title, the seller had to bring money to the closing table. This is what came to be known as “negative equity”. Thus, entered the era of the short sale.

So when the Great Recession hit, federal bailout funds were not available to borrowers who had engaged in “moral hazards” i.e. they had fudged their numbers to lenders (or were viewed as having done so), and ended up with a home that could not be refinanced or resold. To make matters worse, banks were now chastened, and having seen the light, immediately began to raise their lending requirements to a point that few folks could qualify.

In the end, however, it appears that the yardstick of “moral hazard” was never really applied to the Big Banks, even though they were patently culpable by disregarding common sense underwriting and instead making loans to anyone who could fog a mirror.

The reason for the frivolous lending was simple; lenders sold their loans into the private secondary market, where investors, hungry for higher returns, bought these securities as if they were spun gold. So the Big Banks no longer cared about the financial bona fides of their borrowers, since they no longer carried the loans – borrower defaults became someone else’s problem. And the rating bureaus, like Moodys and S&P, became enablers in the ruse, by telling investors they were buying “investment grade” products, when they weren’t. See articles here and here.

And what became of the Big Banks who created this Ponzi Scheme? Well, the political decision was made that “moral hazard” would have to take a backseat to financial stability. In other words, the perps were bailed out for the good of the country.

But today, the picture is far different. The only fault that can be assigned to the travails of the American people is an errant virus, and it is wreaking havoc to consumers and businesses alike.

It remains to be seen whether Main Street will receive the same help from the government as Wall Street. Unfortunately, even though “moral hazard” is absent this time, the calculus ultimately remains the same: The loss of a Big Bank may still be viewed as more worthy of a bailout than the neighborhood Mom & Pop grocery. ~Phil

Introduction. The term “specific performance” is not, as commonly believed, a form of legal action that may be brought for enforcement of a contract. Rather, it is a remedy for a breach of contract claim because the underlying agreement has not been performed.

In other words, before reaching the issue of the remedy, a court or arbitrator must first conclude that the contract was breached. If monetary damages for the breach can be awarded, there is no need to award specific performance. For example, if a supplier promised to deliver me 25,000 widgets on July 1, but only delivered 20,000, the most appropriate damage would likely be to obtain a judgment against the supplier for my cost obtain another 5,000 widgets elsewhere. Continue reading “Specific Performance in Oregon Residential Real Estate Transactions”

These guidelines require the consent of third parties, e.g. sellers, buyers, tenants, buyer brokers, inspectors, appraisers, property managers, contractors, plumbers, and others involved in the home purchase/sale transaction. Accordingly, they should be provided with a copy of these requirements. Any questions or concerns expressed should be directed to the Supervisor where appropriate.

Screening: All prospective visitors to the home should be screened in advance. Brokerages should create a screening process to be used uniformly for every visitor. See PMAR COVID-19 “Suggested Visitor Screening Questionnaire” below, for example. Continue reading “COVID Protocols For Showing Homes Listed For Sale”

Introduction. Almost as soon as the COVID pandemic flared up, I began to receive calls asking whether the virus could constitute the basis for refusing to perform under a pending Sale Agreement. One broker reported that the buyer wanted out of the contract because of “uncertainty”.

These are not altogether unreasonable reactions to performance; after all, we’ve never experienced anything like this pandemic before. However, over the years, comparable issues have arisen, the most obvious being wars, strikes, and natural disasters. So let’s take a look at how the courts have dealt with these events in the past. Continue reading “Is COVID-19 a Defense to Breach of the Oregon Real Estate Sale Agreement?”

Mortgage rates have just dropped to the lowest level in almost 50 years, compelling both homeowners and home buyers to get off the couch to take advantage of record-level savings on their mortgage.

“The average 30-year fixed-rate mortgage hit a record 3.29% this week, the lowest level in its nearly 50-year history,” said Sam Khater, chief economist of mortgage giant Freddie Mac. “Meanwhile, mortgage applications increased 10% last week from one year ago and show no signs of slowing down.”

To put this record rate in perspective, 3.29% even dips below levels seen during the housing crisis. The average 30-year fixed-rate mortgage dropped to 3.31% in 2012. [More: Go to link here.]