2013 Fiscal Cliff Legislation And Its Impact On The Real Estate Industry

If the politicians in Washington today were instead the CEOs of private industry, they’d all have been fired by now.” Anonymous [sort of]

Introduction. At the end of 2012 we all went over the Fiscal Cliff like Wile E. Coyote. But unlike Wile E., we were able to grab a hold of a small scraggly branch on the way down, and eventually climb back onto terra firma…for the time being. The next looming crisis – the Debt Ceiling negotiations – is the second feature in this macabre satire called “Your Government at Work,” so don’t go away just yet![1]

Leaving a discussion of who’s to blame for another day [there’s enough blame to go around], how did the real estate industry fare in the Fiscal Cliff legislation [technically known as H.R. 8, American Taxpayer Relief Act of 2012], that was moved, seconded and passed on January 2, 2013? Well, considering what was at risk, it appears we dodged a few bullets, albeit temporarily. So here’s what the scorecard looks like right now: Continue reading “2013 Fiscal Cliff Legislation And Its Impact On The Real Estate Industry”

Background. In 2007 Congress passed the Mortgage Forgiveness Debt Relief Act. The gist of the law is that for those taxpayers who have had debt cancelled as the result of a principal write-down, short sale, deed-in-lieu, or foreclosure, the ordinary income tax that would normally be assessed is forgiven. There are two primary qualifications: (a) The cancelled debt only applies to loans used to buy, build, or substantially improve a primary residence, and (b) The home must have been used as a primary residence for two of the last five years. Specifics of the law can be found in an IRS Bulletin, here. The law is set to expire December 31, 2012.

Until now, Congress, suffering from chronic ADD and being unable to multi-task, could not focus on anything but the 2012 election. Now that the election is over, Congress is dealing with other items, such as the “Fiscal Cliff,” Dodd-Frank, and everything else they ignored for the past 11 months. Continue reading “Will The Mortgage Forgiveness Law Be Extended?”

[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”

This is the second installment of my article looking back over the past five years at Portland housing statistics. Part One examined the real reason for the housing crisis which officially commenced in 3Q 2007, and looked at the historic numbers for average and median (i.e. “mean”) sale prices according to the RMLS™. The link to Part One is here.

The Rest of the Story. Besides pricing over the past five years, what about time on the market? Available inventory? Number of listings? Closed sales? Let’s look at each one:

1. Time on the Market. Until 3Q 2007, an overheated real estate market was still burning through inventory. In August 2007, the average time on the market was 56 days – less than two months from listing to “pending sale.”[1] The following month, September, 2007, banks began realizing that the drumbeat of subprime defaults was not going away. They tightened their underwriting requirements almost immediately. Over time, they began to even restrict borrowers from tapping their HELOCs based upon ZIP code. As short sales and REOs began to fill the real estate marketplace, buyers and appraisers began viewing the sales figures as legitimate comps by which to gauge present value. All the while, many potential buyers remained on the sidelines, waiting for prices to hit bottom.[2] Many sellers who were fortunate enough to have equity during the following five years had to decide whether to wait until the market turned, or sell their home and recover far less equity than they had earlier.[3] Continue reading “Portland Metro Housing Prices – The Last Five Years [Part Two]”

Background – 3Q 2007. Looking back, August 2007 was a memorable month, filled with good news and bad. Based upon RMLS™ numbers, it was a statistically impressive month for closed residential transactions in the Portland Metro area. The bad news was that it was the last such month we were to see. From that point forward, in almost every meaningful category, the local housing stats just kept getting worse.

The Credit Crisis – 3Q 2007.[1] Quietly, and with little public fanfare, in the third quarter of 2007, worrisome cracks began to appear in the country’s financial system. They were first noticed by those who monitor these things, such as the Federal Reserve. They were also noticed by some who actually had a hand in causing the cracks to occur.[2]

In short, the credit markets began seizing up; access to short term borrowing engaged in by companies was drying up. Normally, large businesses financed their daily operations through the sale of commercial paper, i.e. secured and unsecured short term loans. The Federal Reserve recognized the crunch, and in September 2007, cut interest rates by 50-basis points, or one-half of one percent. The purpose in so doing was to provide liquidity for financial institutions and investment houses so they could continue to survive. Bloomberg explained it well in its September 27, 2007 article titled “U.S. Commercial Paper Drop Slows After Fed Cuts Rates (Update5)”: Continue reading “Portland Metro Housing Prices – The Last Five Years [Part One]”

Question [Hardship Letters]. I am trying to do a short sale. The bank is asking me for a “hardship letter.” What is it they are looking for? Do I have to have some life changing event to qualify for help, such as divorce or some financial calamity?

Answer. I rarely, if ever, have seen a borrower’s “hardship” – or lack thereof – become an impediment to their securing a resolution of their distressed housing event through short sale or deed-in-lieu. I view the hardship letter as a sort of “price of admission” in order for the banks to “justify” their providing assistance. Despite what they might say to the contrary, many banks simply won’t help borrowers unless they are in some form of payment default. For those folks who may be making a respectable living, but are so strapped on a day-to-day basis because of a large mortgage payment, I believe this fact alone is a valid “hardship.” If this financial pressure is coupled with a desire or need to downsize, relocate, or other legitimate reasons, it should be included in the hardship letter. In most cases, folks who got their loans in 2005, 2006, or 2007, were in far stronger circumstance than they are today. That should be addressed. For example “When we first got our loan in 2005, we were both fully employed and our combined incomes could support the mortgage payments. That is not the case today.” Continue reading “Distressed Housing FAQs”

Introduction. Recently there have been some anecdotal reports that real estate licensees, presumably with the knowledge and consent of sellers and buyers, have engaged in some practices that could be regarded, at best, as “sketchy.”

Here is the issue:

In some short sale transactions, there have been apparent instances of brokers not submitting repair addenda to the lender/servicer whose consent is being sought. This would most likely arise in situations where sellers – who may not contribute funds to the transaction without their lenders’ consent – enter into a side agreement with buyers to make certain nonessential[1] repairs. This side agreement, usually memorialized on an addendum to the Sale Agreement, is concealed from the seller’s lender. In some cases, this omission may also include the mortgage lender who is funding the buyer’s purchase of the short sale property.

Discussion. What follows is a list of reasons[2] why this practice should be avoided: Continue reading “Realtor Alert – Short Sale Fraud”

As a follow-up to my last post on difficult short sales (here), it occurs to me that I should mention the small, but persistent complaint of some seller-clients, who are under the mistaken belief that their Realtor® can and will handle the entire transaction for them. “Two liens? No problem! We’ll negotiate everything!” But in fact, if the property is encumbered by two liens with two separate lenders or servicers, it can be a big problem – and if it comes down to a seller/borrower paying a “contribution,” this is something the Realtor® cannot negotiate; it’s up to the seller/borrower to decide if they can afford a contribution, or if they are willing to go on the hook by signing a promissory note.

If the short sale transaction has gotten all the way to closing, and the seller/borrower is having their first discussion with their agent about this, something is wrong. At the first hint that a seller/borrower contribution may be demanded, the real estate agent should immediately discuss with their client what the options are – and they can be somewhat limited.

How is a short sale agent to know, in advance if there may be a problem? Answer: Do the numbers. Will there be enough money from the net sale proceeds to pay off the first lienholder? If not, this means that the first lender has complete control over how much it will contribute to the second. And the first lender will not permit the borrower/seller contribute anything to the second. In most cases, the first lienholder will allocate not more than $3,000 or $6,000 to the second, usually depending upon the net proceeds from the short sale.

The next question is “How much is owed to the second? If it is $100,000 or more, $3,000 or $6,000 may not be sufficient to satisfy the second lender. This means there could be a deadlock, unless the buyer is willing to bridge the gap by paying the shortfall to the second if the first lender will allow it. Will the Realtor® contribute? Remember, these payments must be disclosed on the HUD-1 settlement statement, and it is far better to address a “bridging the gap” solution on an Addendum to the Sale Agreement early on in the transaction. Unfortunately, some real estate agents focus on the obtaining the first lender’s consent before ever contacting the second.

Short sellers are fearful enough. They don’t like surprises. So for those real estate agents offering their services as “short sale experts,” they must first do the numbers, try to foresee the problems in advance, discuss them early on with the client – and never, never, never promise more than you can deliver!

“Language and speech are the means by which people communicate with one another. However, with the Big Banks, their silence conveys the loudest message.” [Anonymous – sort of.]

In Part One, I analyzed the recent Oregonian article, titled: “Lenders not engaging in Oregon foreclosure mediation program.” The gist of my post addressed the process under SB 1552 by which borrowers were intended to be helped under the law. However, it seems that the Big Banks are refusing to participate in a major component of SB 1552 – the part dealing with “at risk” borrowers who have applied for mediation in an effort to find a “foreclosure avoidance mechanism” such as a modification, forbearance, short sale, deed-in-lieu or some other method to avoid foreclosure. Continue reading “SB 1552 – Why Don’t The Big Banks Wanna Play? [Part Two]”

“It’s one thing to be stubborn when relying on well-reasoned principle; it’s quite another to be stubborn relying on no principle.” Anonymous [Sort of.]

An interesting, though not surprising, article recently appeared in The Oregonian, titled: “Lenders not engaging in Oregon foreclosure mediation program.” Before discussing what’s behind the banks’ decision, it is necessary to understand that SB 1552, Oregon’s mandatory mediation law, is essentially focused on the following two groups:

Folks whose trust deed is being foreclosed non-judicially. That is, a Notice of Default has been recorded in the public records. This event triggers the mandatory mediation law, and requires lenders[1] to offer the borrower an opportunity to meet and mediate, to see if an agreement can be reached on a specific “foreclosure avoidance measure” [e.g. modification, deed-in-lieu, short sale, or any other such mechanism that avoids the foreclosure]. If the borrower timely responds, complies with other criteria, and pays a $200 filing fee, the foreclosing lender must participate. If the lender does not participate, or fails to do so in good faith,[2] it cannot receive the coveted “Certificate of Compliance” from the mediator. This Certificate must be recorded on the public record before the sale can occur. No Certificate, no foreclosure.[3]
Folks who are not in a formal non-judicial foreclosure, but due to their economic circumstances, are “at risk” of default under their note and trust deed. The law does not define at “at risk” borrower. Thus, it could be someone who is still current, but is on the cusp of defaulting due to the high cost of their mortgage payments; or it could be someone who hasn’t paid for a year, but the bank has not yet commenced any foreclosure. Thus, even if a bank routinely forecloses judicially, such as Wells Fargo, before the foreclosure is filed in court, an “at risk” borrower could request that Wells enter into mediation to see if the parties could agree on a foreclosure avoidance solution. But the sticking point in “at risk” mediations is that SB 1552 contains no sanction for lender non-compliance.[4]

The recent Oregonian article focused largely on folks in category No. 2, since clearly, banks that commence non-judicial foreclosures in Oregon must comply. So, with that preface, herewith are some snippets from the Oregonian article:

“The state’s contractor charged with running the mediation program told an advisory committee in Salem on Wednesday that 132 eligible homeowners applied for the program on the grounds that they are at risk of foreclosure. The law allows at-risk borrowers to request a meeting with their lender even before they’ve missed a payment. *** But none of the mortgage servicers responded to the requests within 15 days as required under the law that created the program.”
“When asked by The Oregonian for the reason, the answer was simple: ‘They just don’t want to play,” said Jonathan Conant, who is managing the state mediation program on behalf of the Florida-based Collins Center for Public Policy. He added that the five largest lenders operating in the state have indicated they won’t participate in the mediation process under any circumstances.’”
“Meanwhile, lenders have also stopped filing out-of-court foreclosures. More are proceeding with court-supervised foreclosures, avoiding the mediation program altogether through the traditionally slower and costlier judicial foreclosure process.”
According to the article, here’s what the Lender’s Lobby and Lackeys say:
- “There is just so much coming at these folks in terms of new requirements,” Markee[5] said. ‘Many of them are talking to their legal counsel and other learned people trying to make rational decisions about how to proceed with this issue.’” [Hmm. “Legal counsel and other learned people….” Now there’s a phrase that begs to be parsed. Hopefully, at least one such “learned” person will include someone schooled at the College of Common Sense. Just a small dose would hopefully convince the Big Banks that totally ignoring Oregonians’ pleas for help will backfire. More about this later. – PCQ]
- Markee and Kenneth Sherman Jr., general counsel for the Oregon Bankers Association, both told the advisory committee they couldn’t explain why mortgage servicers hadn’t responded to the requests for mediation. [Sorry guys – But as a fellow lawyer, I don’t believe that for a minute. First, you wouldn’t even talk to The Oregonian without your clients’ OK. Secondly, you wouldn’t be quoted saying anything without first having it vetted by your clients in advance. Third, to say you “don’t know,” really means that your Big Bank clients told you to say you “don’t know.” Fourth, you do know. The real reasons are pretty clear. But if struggling Oregon homeowners were told the real truth, they’d quickly decide that your industry should never be permitted to conduct business in this state again. More about this later. – PCQ]

Before moving on, let’s look at the actual text of the law. What follows is taken from Section 2(7)(a) of SB 1552, the “at risk” provisions. The references to “grantor” refer to the borrower; the “beneficiary” is the lender or servicer that is foreclosing; the “trustee” is the foreclosure trustee who actually conducts the non-judicial foreclosure process; and the “mediation service provider” is The Collins Center for Public Policy, which has been designated by the Oregon Attorney General to coordinate all mediations arising under SB 1552.

“A grantor that is at risk of default before the beneficiary or the trustee has filed a notice of default for recording under ORS 86.735 may notify the beneficiary or trustee in the trust deed or the beneficiary’s or trustee’s agent that the grantor wants to enter into mediation. Within 15 days after receiving the request, the beneficiary or trustee or the beneficiary’s or trustee’s agent shall respond to the grantor’s request and shall notify the Attorney General and the mediation service provider identified in subsection (2)(b) of this section. The response to the grantor must include contact information for the Attorney General and the mediation service provider.” [Emphasis mine.]
“A grantor that requests mediation *** may also notify the Attorney General and the mediation service provider of the request. The Attorney General shall post on the Department of Justice website contact information for the mediation service provider and an address or method by which the grantor may notify the Attorney General.”
“Within 10 days after receiving notice of the request *** the mediation service provider shall send a notice to the grantor and the beneficiary that, except with respect to the date by which the mediation service provider must send the notice, is otherwise in accordance with the provisions of subsection (3) of this section.”
“A beneficiary or beneficiary’s agent that receives a request under paragraph (a) of this subsection is subject to the same duties as are described in [the remaining applicable provisions of SB 1553].”

So when the 2012 Oregon Legislature said that when an “at risk” borrower requests mediation, “…the beneficiary or trustee or the beneficiary’s or trustee’s agent shall respond to the grantor’s request and shall notify the Attorney General and the mediation service provider….” [Emphasis mine.] – what did it mean?

As lawyers, we were taught that when certain legislative action is called for, it can be divided into those that are required versus those that are only permissive [or in legal parlance, those that are “precatory”]. For example, words like “shall” and “must” are mandatory. Compliance is compulsory. Words such as “may,” “should,” “can,” etc. are permissive. An example of a permissive statement in a will, might be: “I hope that my son and daughter will keep the house in the family.” It is purely a wish or desire; it is not a requirement. The will does not say that the son and daughter cannot sell the family home; to the contrary – they can do so without violating the terms of their inheritance.

However, as any sixth grader knows when his parents tell him that he “must do his homework before being allowed to play outside with his friends,” there is little room left for negotiation. So it is with the use of mandatory words such as “shall” in the “at risk” provisions of SB 1552. Had the Oregon Legislature intended for banks to have a choice in deciding whether or not to respond to an “at risk” borrower’s request to mediate, it could have easily said so by using permissive rather than mandatory words. By changing a single word, the mandate for how Big Banks are to deal with mediation requests from “at risk” Oregon homeowners would be entirely different. For instance, it could have said:

“Within 15 days after receiving the request, the beneficiary or trustee or the beneficiary’s or trustee’s agent may respond to the grantor’s request by notifying the Attorney General and the mediation service provider identified in subsection (2)(b) of this section.”

Clearly, such a simple change was within the power of the drafters of SB 1552. To put a finer point on all this, let’s look at other portions of the “at risk” provisions quoted above:

“A grantor that is at risk of default before the beneficiary or the trustee has filed a notice of default for recording under ORS 86.735 may notify the beneficiary or trustee in the trust deed or the beneficiary’s or trustee’s agent that the grantor wants to enter into mediation. [Emphasis mine.]
“A grantor that requests mediation *** may also notify the Attorney General and the mediation service provider of the request.” [Emphasis mine.]

Clearly, the use of the word “may” in these two instances, is because not all “at risk” borrowers” may want to mediate. And if they choose to mediate, they may not elect to notify the Attorney General. Those that do, can, and those that don’t, need not. These are voluntary choices; not mandatory imperatives.

Voilà! Now we know that the drafters of this legislation understood the difference between “shall” and “may”! They were used differently for a reason. Now was this all that difficult?

Remember, that both the lender and consumer lobbies were at the table when SB 1552 was negotiated. The Big Banks and their high paid lawyers could have pushed back on the choice of “shall” or “may” – but they didn’t. And so, when I hear lawyers, lobbyists and lender lackeys say that the Big Banks need to consult with “legal counsel and other learned people *** to make rational decisions about how to proceed…” I want to gag. Why the handwringing? “Shall” means “shall.” “May” means “may.” It’s not like we’re trying to interpret the First Amendment to the Constitution.

So when the mandatory mediation law says that banks “shall” respond, there is no room to rationally argue that they have a choice of not responding. Ignoring “at risk” Oregon homeowners who want to mediate a foreclosure avoidance solution clearly violates the spirit and intent of the law. And like so many other legal positions taken by Big Banks over the last five years, this too will come back to haunt them. [Continued in Part Two]

[1] This law does not apply to individuals, financial institutions, mortgage bankers, and consumer finance lenders that commenced 250 or fewer foreclosures in the preceding calendar year.

[2] In Big Bank lexicon, the term “good faith” is noticeably absent, so we can expect an argument from the lenders’ lobby and lackeys, as to exactly what that term requires of them.

[3] Note that 1552 only applies to non-judicial foreclosures. Thus, a lender could decide to avoid the mandatory mediation process altogether, and simply file the foreclosure in court, and proceed judicially.

[4] Lest someone say that this was a bonehead mistake, I think not. Legislative negotiations on such a volatile issue can result in an impasse, where the consumer lobby must say to itself, better to have the provision included, even without a built-in enforcement mechanism, than to have nothing at all. I agree. The fact that mandatory mediation is in the law at all, is a minor miracle. I’m comfortable with leaving it up to a judge to determine if it’s OK for the Big Banks to thumb their noses at Oregon’s distressed homeowners. So far, the courts have been lining up pretty consistently behind the Little Guy – Niday being the most recent example.

[5] Jim Markee, a lobbyist representing the Oregon Mortgage Lenders Association.