Legal Update

Take a Tax Deductible Weekend!

2012-01-04T13:04:00.000-08:00

A great way to make your business travel more enjoyable is to combine it with a tax deductible weekend getaway! You can end your business meetings on noon Friday, and then enjoy that afternoon, Saturday and Sunday at the location where your business was.

Assuming, of course, that it is a location where you would enjoy spending the weekend.

All you will need to do is have another business related meeting on Monday morning and then go home. It can be a meeting with a business associate, a prospective new customer or even an educational event that ties into your business. The key is that whatever it is that you are doing on Monday must have a direct relationship to your business.

For example, if you are a real estate agent and are going to a convention that ends on Friday, you can arrange to meet with a real estate agent in that area for the purpose of being able to exchange referrals in the future. If you are a salesperson and are meeting with a client on Friday, make arrangements to meet another potential client on Monday (or even make a cold call).

You can also bring a spouse or significant other with you. You won't be able to deduct his or her meals or travel expenses (unless you are driving), but you meals and 100% of the hotel costs will be deductible. Of course, if your spouse or significant other works with you in business, all of the expenses can be deductible. Having your spouse work for you is whole other topic, but there are significant tax savings to be had by having your spouse work for you part or full time.

If you are self employed, you are paying all of your own Social Security and Medicare taxes, rather than having one half of them paid by your employer. That means that for every dollar you can deduct, you are saving up to 49 cents in taxes, depending on your State tax structure. You might as well have some fun while you are taking your deductions.

The main thing is to keep good records of the purpose of your business both before and after the weekend, and keep all receipts. There is nothing that will prevent an audit, but by maintaining good records, it will end up with a handshake and a good-bye with the auditor, and all of your money in your pocket.

So, enjoy your tax deductible business trip with a little vacation mixed in.

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A New Christmas Tradition

2011-11-08T10:10:00.000-08:00

I cannot claim originality on this, but it meant enough to me to share.

As the holidays approach, the giant Asian factories are kicking into high gear to provide Americans with monstrous piles of cheaply produced goods -- merchandise that has been produced at the expense of American labor.

This year will be different. This year Americans will give the gift of genuine concern for other Americans. There is no longer an excuse that, at gift giving time, nothing can be found that is produced by American hands. Yes there is!

It's time to think outside the box, people. Who says a gift needs to fit in a shirt box, wrapped in Chinese produced wrapping paper? Here are some ideas:

Everyone -- yes EVERYONE gets their hair cut. How about gift certificates from your local American hair salon or barber?

Gym membership. It's appropriate for all ages who are thinking about some health improvement.

Who wouldn't appreciate getting their car detailed? Small, American owned detail shops and car washes would love to sell you a gift certificate or a book of gift certificates.

Are you one of those extravagant givers who think nothing of plunking down the dollars on a Chinese made flat-screen? Perhaps that grateful gift receiver would like his driveway sealed, or lawn mowed for the summer, or driveway plowed all winter, or games at the local golf course.

There are millions of owner-run restaurants -- all offering gift certificates. And, if your intended isn't the fancy eatery sort, what about a half dozen breakfasts at the local breakfast joint. Remember, folks this isn't about big National chains -- this is about supporting your home town Americans with their financial lives on the line to keep their doors open.

How many people couldn't use an oil change for their car, truck or motorcycle, done at a shop run by the American working guy?

Thinking about a heartfelt gift for mom? Mom would LOVE the services of a local cleaning lady for a day.

My computer could use a tune-up, and I KNOW I can find some young guy who is struggling to get his repair business up and running.

OK, you were looking for something more personal. Local crafts people spin their own wool and knit them into scarves. They make jewelry, and pottery and beautiful wooden boxes.

Plan your holiday outings at local, owner operated restaurants and leave your server a nice tip. How about going out to see a play or ballet at your hometown theatre.

Musicians need love too, so find a venue showcasing local bands.

Honestly, people, do you REALLY need to buy another ten thousand Chinese lights for the house? When you buy a five dollar string of light, about fifty cents stays in the community. If you have those kinds of bucks to burn, leave the mailman, trash guy or babysitter a nice BIG tip.

You see, Christmas is no longer about draining American pockets so that China can build another glittering city. Christmas is now about caring about US, encouraging American small businesses to keep plugging away to follow their dreams. And, when we care about other Americans, we care about our communities, and the benefits come back to us in ways we couldn't imagine.

How about just taking the time to make your own, personal Christmas card with your words from your heart to show how you appreciate your friends and loved ones.

THIS needs to be the new American Christmas tradition.

Feel free to share this with anyone you want.

Lessons on Life | Lessons on Life

2011-09-10T11:39:00.000-07:00

Lessons on Life | Lessons on Life

New California Anti-Deficiency Law

2011-07-18T09:48:00.000-07:00

Last week, on July 11, 2011, California governor Jerry Brown signed into law a new law to combat deficiency judgments by holders of non-purchase money junior mortgages (second or third mortgages) when the lender has accepted funds during a short sale transaction. This law protects homeowners who refinanced a loan after the original purchase loans. This was Senate Bill 458, and amends the language to the California Code of Civil Procedure §580e.

Previously, a junior mortgage holder of a refinanced loan had the right to collect on any balance unpaid after the sale of the transaction. In many cases, they specifically stated in their short sale approval documents that they retained the right to seek collection of any deficiency.

In January of 2011, a similar law went into effect that eliminated the right of a first lender of a refinanced loan to seek a deficiency judgment after a short sale. However, it did not affect secondary loans after the short sale transaction. As with all laws aimed at stemming the tide of foreclosures and distressed property sales, there is bound to be some confusion in the interpretation of these laws.
The new law only affects real estate of one to four units, and will have no impact on short sale transactions with bare land or commercial property, such as apartments, office buildings or retail locations.

In essence, the law states that if a junior lender accepts any money to release its lien against the property, it will be deemed to have executed a non-judicial foreclosure of the property. Since a California has what is known as a “One Action” rule, a non-judicial foreclosure bars any further attempts to collect on a deficiency. Therefore, if the lender accepts any money during the short sale transaction, it is the only “action” that they can take.

The law also prevents the lender from slipping in a piece of paper in the documents being executed by the sellers in which the sellers “waive their rights” under this law. Any such document will be void as against public policy.

What is going to be the result from this new law? I believe that there are three possible directions that lenders will take.

1. The first possibility will be that the junior lenders will take a stronger stand during the short sale transaction, and demand more money at the time of the sale. I have already seen situations where Chase, when in first position, will offer a second no more than $3,000-$5,000. However, when they are in second position, they are demanding $15,000.00! This could get even worse in the future.

2. The next possibility will be that they refuse to release their lien, and let the first go ahead with foreclosure. The first lender will be stuck with the property and no recourse for any deficiency, but the junior lender will only lose its security (which was probably already worthless) and still have the right to obtain a deficiency judgment.

3. The other possibility is that the junior lender will simply release its lien, without receiving anything of value to do so. As in the situation where they allow the first to foreclose, the junior lender will be free to pursue its deficiency remedies.

This is going to put real estate agents in a very dangerous position, and I will explain why. Whenever anyone approaches a lender requesting a short sale, what is the first thing that the lenders say? They say, “We need the last 2 years of tax returns and three months of bank statements.” I often wonder why they need these items, because in most cases they were not requested when the original loan was made. Te question is, do they really NEED this information, or do the just WANT this information?

When this information is provided to the lender or servicer, they are given all of the information that they need to decide if the seller has enough assets to warrant them pursuing the owner with a lawsuit. If a lender refuses the short sale, and instead sues the homeowner for a money judgment, would the real estate agent who gave the lender the information, or recommended to the seller that they do so be liable for a breach of fiduciary duty? It is a possibility that such could be the outcome.

In my opinion, and I have done this many times with lenders, the lender and servicer needs to know only a few things. They are, a) the Fair Market Value of the Property, b) the offer that has been obtained to purchase the property, and c) that the owner does not intend to make any more payments. The real estate industry has been caving in to the lenders demands for too long, and it is time to take control back.

Help your California clients know their rights and obligations under the law before you start on the short sale route. Check out the video at http://www.lawken.com/ss.htm . These are serious times, and everyone needs to know where they stand.

The Rest of the Short Sale Story

2011-05-01T12:00:00.000-07:00

I read a story about short sales in today's local newspaper. Although it was accurate, it told only half of the story. As a real estate and tax attorney, I have consulted with about 300 homeowners regarding the legal and tax ramifications of short sales and foreclosures.

What is missing from the story is 1) why we went from zero distressed properties to 45% of the properties being in that situation, 2) why the banks (in reality servicing companies) drag out the short sale procedure, sometimes without a sale being made, and 3) how they are still defrauding the government and taxpayers with the after sale or foreclosure documents they file with IRS after the transaction. I cover the first two in my book, “Greed-American Dream Becomes the Global Nightmare.” The last one is a new twist to the puzzle.

1. The reason that the number of distressed properties has increased is solely attributable to the actions of the Federal government and the lending institutions. The problem could have been nipped in the bud had different actions taken place in 2007. The banks, which created the problem with their weapons of mass destruction (easy credit, subprime loans, and mortgage-backed securities), handled the problem like they had for 100 years: foreclose and sell the property quickly at below market value, just to get it out of their portfolio. That worked fine in the past, when there were down payments and verification of income required on home loans. However, there were millions of loans that had been made in which there was no equity.

If someone then needed to sell their home in the same neighborhood, they were facing a fair market value of less than what they owed. At that time, getting a short sale through was next to impossible because the banks were not staffed with anyone to handle them, and they failed to look at the problem logically based upon the lack of equity in property, and that the manner in which they addressed the problem would simply make it worse.

2. In the vast majority of short sale transactions, the banks are not the lenders. The scheme that they put together was to make loans, package them into trusts, turn them into securities which they would get rated as AAA by Standard & Poor’s or Moody’s, then sell them to unsuspecting investors throughout the world. They made money creating the loans, selling the loans, and after the sale had maintained the right to service the loans, which provided them with ongoing income.
When a mortgage goes into default, the fee charged to the investor by the servicer is higher than when not in default. The longer the property is in default, the more money the servicing bank makes. If there is a modification of the loan, the banks do not get paid in a lump sum, but must wait for their payment, just like the investor. When there is a short sale or a foreclosure, the servicing bank gets paid immediately from the funds at the sale of the property, with the balance going to the investor. They have built in their own profit structure.

3. The latest fraud is that they are issuing fraudulent 1099’s to the previous owner, in such a manner that benefits the lender or the servicing bank at the expense of the taxpayers or the homeowners. I am in the process of preparing a lawsuit against Chase Mortgage based upon a fraudulent 1099-A. Chase foreclosed on a property and reported to San Luis Obispo County that the fair market value was $143,000.00. This reduces the property taxes that would be required to be paid to the County. When they issued the 1099-A, it showed a fair market value as $345,000.00! They then sold the property for $120,000.00. By doing this, they created a fraudulent $225,000.00 capital loss to offset other capital gains that they might have had, all at the expense of the taxpayers and the property owner, who was actually entitled to that capital loss, because it was investment property.

Although demand has been made to correct the 1099-A, and it has been reported by me to both IRS and the County Assessor’s office, nothing has been done.

I think it is important that people start demanding an investigation these issues by our elected representatives, Democrats and Republicans, why they are allowing our country and its people continue to suffer for the benefit of the stock market, which in no way truly reflects the health of the nation.

The Latest Bankster Tricks

2011-02-26T13:14:00.000-08:00

I thought the banks had gone as far as possible to take money from the taxpayers and the government through their TARP funds and the manner in which they paid it back, enabling them to pay bonuses to their executives without government interference. They did not make the money by doing what banks are supposed to do, which is lend money. Instead, they invested it in the stock market, driving it up, and then selling and reaping the profits.

Of course, that results in capital gains that is taxable income with no offsetting deductions other than capital losses. God forbid the banksters should pay tax to the government (and the taxpayers) who bailed them out. They had to come up with a way to create more capital losses.

Of course, for these brilliant people, this was an easy task. Here is what they did, and I have the proof, which I am forwarding to the Internal Revenue Service this week. This was a JP Morgan Chase Bank transaction.

1. When they foreclose on a property, they report the "transfer value" to the county recorder. I am not sure how this affects the property taxes in other states, but in California the property taxes are assessed based upon the transfer value, as are the transfer taxes. The property for which I have the proof was reported to the county as having a transfer value of $143,000.

2. Chase then issued to the previous owner a 1099-A, as required by Federal law, to report the amount of the obligation and the fair market value of the property. In this case the outstanding principle was $283,000.00. In spite of the fact that they had shown a transfer value of $143,000 to the county, Chase reported that the Fair Market Value of the property was $345,000, more than $200,000 higher!

3. Chase then put the property on the market for $147,000, even though they had already turned down a short sale offer of $150,000 cash. They ultimately sold the property for $130,000.

What this means is that they now showed a capital loss of the difference between what they reported as the Fair Market Value ($345,000) and the final selling price ($130,000). Using those numbers, their capital loss was $215,000 which they could now offset against the capital gains from their stock dealings, saving them $32,250 in Federal taxes, and who knows how much in state taxes.

Doesn't seem like all that much for a big corporation such as Chase, but multiply that by 100,000 foreclosures and you come up with something like $3 billion dollars in fraudulent tax evasion.

In the mean time, our government leaders ignore these facts and have allowed the big banks and the rest of the financial markets to run our country because they have all of the wealth. They continue to drive down the prices of homes through the foreclosure process, while the government sits on the side lines making meaningless gestures regarding helping homeowners, while allowing the banksters free reign in destroying the fabric of America.

For more, read my book ... The American Dream Becomes the Global Nightmare

Tom Miller: 'We Will Put People In Jail' For Foreclosure Fraud

2010-12-16T09:59:00.001-08:00

I would suggest that they start at the top, meaning Wall Street and Bank Executives who created the loans programs in the first place for the sole purpose of increasing profits in order to receive enhanced bonus checks and to increase stock prices that would increase their personal wealth at the expense of others. Many of these Banksters still have high positions within the Federal Government. The little guys may go to jail, but the Big Fish will keep on swimming because they can afford the high priced lawyers and have the political connections (aka, campaign contibutions).
Read the Article at HuffingtonPost

Jerry Brown Turns Back on California Home Owners

2010-10-23T13:24:00.000-07:00

Jerry Brown has, once again, used his position in government to make himself look like a champion of the people, and once he accomplished that goal, he turned his back on them.

In June, 2008, in his position as Attorney General of California, Jerry Brown filed suit against Countrywide Home Loans and its officers alleging various acts of fraud, predatory lending and deceptive lending practices. The suit alleged (and I know it to be true) that Countrywide would pay incentives to mortgage brokers when they put borrowers into risky adjustable rate mortgages with pre-payment penalties.

Eventually, Countrywide and Bank of America (BofA acquired Countrywide) entered into a Stipulated Judgment whereby Bank of America and Countrywide would voluntarily modify mortgages on specific types of loans without all of the normal mounds of documentation that the lenders required for loan modifications.

The problem with the Judgment was that it did explicitly stated that the judgment did not provide a private right of action by the homeowner if Countrywide and Bank of America did not abide by the judgment. In essence, the only right of enforcement was left to Jerry Brown and the Attorney General's office.

I tried helping many of the people to save their homes through modifications, but Bank of America never followed the terms of the Stipulated Judgment. They demanded tons of documentation, would never provide an answer, and failed to modify the very loans that were the subject of the judgment. When I mentioned the terms of the Judgment to employees of of Bank of America, they had no idea that it even existed. They had the script that they worked from, and that was the end of it. They continued to foreclose on homes, and then resold them at below market value prices, continuing to drive prices down.

Jerry Brown never took any further action to enforce the terms of the Judgment.

Jerry Brown got the publicity he needed to start his new run for Governor of California, and now he needed to appease those who could provide campaign contributions ... the banks who had fresh TARP money.

Jerry Brown states that he is a "seasoned servant of the people of California." The truth is that he is a professional politician who loves nothing better than to spend the taxpayer's money on his pet projects and supporters. California does not need another 4 years of Jerry Brown.

2010-08-10T10:10:00.001-07:00

Most of us would be upset if we were accused of being "silly." But the word "silly" comes from the old English word "selig," and its literal definition is "to be blessed, happy, healthy and prosperous."

Join me in mourning the passing of Jaime Escalante

2010-04-02T14:04:00.000-07:00

Who was Jaime Escalante, and why should we mourn his passing? If you know who he was, then you know why we should be mourning. If you do not know, then it is time that you find out and demand that your elected representatives, children, grand children, teachers and school administrators also learn about this remarkable man.

Jaime Escalante was a math teacher in the failing high school, Garfield High, in East Los Angeles in 1981. The school was close to losing its accreditation, and many of the teachers blamed it on the economy and the economic status of the surrounding community. His response was the “Kids will rise to the level of expectation that you set for them.” He went back to his class, which was Math 1-A, and told them that he was going to teach them Algebra. He told them that all they needed was “Ganas” …. DESIRE!

He made them work hard and learn. He took a group of 18 students, made them attend summer school to learn Trigonometry and Math Analysis. Then, during their senior year, he taught them Calculus in preparation for taking the Advanced Placement Exam, which would have entitled the students to college credits. Eighteen took the test in 1982, and all 18 passed.

But wait … the testing organization that monitored the exam suspected that they had cheated, causing an uproar in the school and the community against Mr. Escalante. All of the students agreed to take the exam again, probably a harder version this time, under the supervision of the two investigators of the alleged cheating.

They all passed again. More students passed the AP Calculus Exam that year than any other high school in Southern California. By 1987, there were 87 students passing the AP Calculus Exam from Garfield High School.

This story is chronicled in the movie “Stand and Deliver” which was released in 1988. If you have never seen it, you can rent it on DVD. If you have seen it, then see it again. We as a society have forgotten what education is really about.

Everyone is complaining about a lack of money for education, which is a serious problem. The real problem is lack of discipline and desire to learn. Unfortunately, we do not make education mandatory in the United States, only attendance at classes. Students earn a failing grade, but are given enough to move on to the next level in order for teachers and administrator to look good, and to keep parents of failing students from complaining about how their innocent children are being treated.

Our education system needs to start demanding performance from students, parents, teachers and administrators. It amazes me how a freshman high school class starts with 600 students, but only 400 graduates. Somehow the drop-out rate is mathematically calculated to be “less than 10%.” Whoever establishes these make believe numbers either were in the mortgage banking business before, or were products of our school system. Pressure, and perhaps some penalties, should be assessed against parents who do not maintain proper control over their students.

Teachers must be given more ability to discipline students and administrators must make parents and students accountable for their own results. Furthermore, we should not be having “standardized tests” for students, or having teachers create the exams for the courses they are teaching. The schools system (state and federal) should decide what courses will be required, what books should be used, and the publisher or writer of the books should design the exams that test what was expected to be learned.

Finally, we must recognize that some children were meant to go on to higher education, and some are not. We must be providing some vocational training to those who are not, so that they actually have a reason to go to school and can be productive in their lives. If there is hope in the future, there is power in the present.

For many people, it takes only one or two positive role models to shape their lives in a positive direction. Fortunately, I had some when I was younger, and many of the students of Jaime Escalante were fortunate to have him. Education is the ticket to freedom. Our students can become the true Champions.

How to Fix Education in America

2009-08-08T13:39:00.000-07:00

We constantly hear about how the education system has deteriorated in America, especially for those of us in California. Our government, of course, thinks that the cure to the problem (as it thinks is the cure to any problem) is to through more money and bureaucracy at education efforts. Isn’t it funny how our governments do the same thing time after time, and yet expect a different result?
Here are some simple solutions to the education problem, which will also have a dramatic impact on other trouble areas.
1. Everyone becomes an adult at the age of 18 for everything. That means we reduce the drinking age to 18, and raise the driving age to 18! One other provision, however, will be that you cannot obtain a driver’s license until one has received a high school diploma.

The impact will be that a) we will not need parking lots at the high schools for anyone except teachers, b) high school aged people won’t be driving around for fun, and can spend more time studying, c) there will be fewer deaths caused by reckless driving by teenagers, and d) there will be an incentive to stay in school to get their diploma, rather than drop out.

If they do not get their diploma, they cannot obtain a driver’s license until age 21, which means they cannot consume alcohol until that age, or upon obtaining a high school diploma, whichever is earlier.

2. There should be a uniform dress policy in every school until college. Too much emphasis is placed on image and popularity, and not enough on results. If the children want to dress differently after school, and their parents do not have the backbone to maintain some form of discipline in how their children dress, they can do so outside of school hours.

3. Eliminate “Standardized” testing. Our schools are like automobile assembly plants … crank them out as fast as possible. Teachers, many times at the insistence of school administrators, pass kids on to the next level, even though they have not earned that promotion. Teachers make exams simple, so the kids can pass them and not be held back (or damage their fragile self confidence).

The writer and publisher of the textbooks should include exams that are to be used in conjunction with the textbook so that all students are being tested in the same manner, and so the exams actually test to see if the students have absorbed the material that is being presented. If they do not pass, then they repeat the class. Remember … no diploma, no driving.

4. Allow teacher to teach and administrators to administrate the day to day workings of the school. Parents may not interfere with these people as long as they are following all of the rules that are created for all schools. Instead, hold the parents responsible for the conduct of their children, and give the schools more authority to discipline those who require it.

5. Finally, let’s move to a year round school calendar. Coordinate all of the local schools to the same calendar so families can plan vacations, but keep the school year moving with no more than 4 weeks off in any one stretch.

These three simple suggestions will resolve numerous problems in addition to those already mentioned. There will be less truancy, meaning less crime committed by teens. This will ultimately lead to a reduction in other crimes and help reduce the long term prison population. Furthermore, our children will actually become educated and be able to obtain better jobs, and be more productive to our society, which will result in more American initiative and ultimately more tax revenue. We will no longer need to import educated people from India and China to fill the highly skilled jobs.

Our children will rise to the level of expectation that we set for them. Let's raise our level of expectations now!

Jerry Brown Rides Away Again

2009-07-23T15:38:00.000-07:00

Once again, the illustrious Jerry Brown has grandstanded on behalf of the little people in order to get some headlines, and then turns his back on them while running for governor.

More than a year ago, as attorney general for the state of California, Mr. Brown filed a lawsuit against Countrywide Home Loans and its subsidiaries for its unlawful predatory lending practices, which was shown in great specificity in the complaint that was filed. Countrywide and Bank of America agreed to settle the lawsuit by agreeing to spend $8 billion dollars to modify those predatory loans.

Once that agreement was put into place, Mr. Brown pounded his chest and told everyone who was listening that he brought Countrywide to its knees, and that thousands of people would have their homes saved and the crash in real estate values would end. Countrywide/Bank of America announced their home retention program through which they would address all of these loans.
Fast forward one year, and we discover that foreclosures still take place, the value of property had continued to plummet, and realistic mortgage modifications are few and far between.

I have worked with many victims of these predatory loans, and my experience has been that they either say “You don’t qualify,” or they come up with a “modification” that is meaningless and unworkable. That allows the lenders to say, “Most of the modifications that are made are defaulted on again.”

Furthermore, Countrywide is a small percentage of the problem. Why didn’t Brown sue the others, such as World Savings (now, Wachovia and Wells Fargo) and Washington Mutual (now Chase)? There are dozens of others that continue to use government bailouts, while allowing the victims of these predatory loans to wallow in despair, destitution and continued unemployment.

Oh, I forgot. He needs to concentrate on another run for governor.

As Rome Burned

2009-05-22T13:27:00.000-07:00

What is happenening in the United States?

The national debt has almost doubled since 2000 from $5.3 trillion to almost $10 trillion, and climbing daily. What does that mean? That means that every man, woman and child living in the United States today would need to write a check in the amount of almost $80,000 to bring us to zero?

Why and how has this happened?

The number one reason is that we have become lazy, and those "in charge" promote and encourage that laziness. Our standard of living has rapidly increase, while our production has plummeted. We are a nation of consumers rather than a nation of producers. Then, when all of the jobs go to Japan, then Korea, then China and Mexico, everyone complains and screams "Buy American Made Products!"

Of course, when they go to buy American Made products they learn that the price is much higher, and in some cases, the quality is less. Then, instead of trying to work together, labor wants higher wages so they can afford the American Made products, while business tries to get the government to reduce its tariffs against products that it has manufactured overseas.

The legislators (local, state and federal) have much more important things to consider ... like re-election. While the signs of imminent disaster regarding the collapse of the housing market, and therefore, the banking industry, the government officials went merrily along throwing mud at their opponents and getting donations in order to win election or re-election. In the mean time, Rome started burning while they played their fiddles.

There are some difficult decisions and actions that need to be taken in the years to come, and it is going to hurt. The world is smaller because of the Internet and the time for travel and shipping.

And we cannot depend on "The Government" to make it all better. They are the ones who helped screw it up in the first place. It has to come from each of us. It starts with education. Turning off the television, dumping the X-Box and making ourselves more valuable to the world economy as producers, rather than consumers.

Watch for my upcoming book: GREED: The American Dream becomes The Global Nightmare.

Mortgage Crisis - The Rise

2008-04-04T07:30:00.000-07:00

Oh what a mess has been created in the real estate market. Foreclosures, short sales, job losses and no end in sight. What caused this situation?

The cause can be summed up in one word: GREED!

The residential real estate market was doing well. Prices were going up, interest rates were down, people were moving up and in many cases, keeping their old homes as investments. Homes were appreciating at a slightly above normal pace, but nothing out of the ordinary. So what happened?

1. Where there is money to be made, people will flock to the source. In this case, thousands of people became real estate agents and mortgage brokers. Some of these people had no idea what they were doing, and did not go to work for brokers who would properly train them.

2. Low Doc, no doc and stated income loan programs came into being. Oh, they have been around for many years, but normally required significant down payments. These loan programs allowed for nothing down. Anyone could get a zero down, stated income loan if their FICO scores were high enough. While many mortgage professionals understood the meaning of "stated incomes", others used it to mean that they could write in anything they wanted in order to get a loan approved.

3. Lenders representatives, including some of the big name banks, actually coached mortgage brokers on how to prepare the loan package in order to get the loans through. Some of the things that they were teaching were outright loan fraud.

4. Mortgage brokers not only received a commission for putting a loan together, but could also receive what was known as a "yield spread". What is a yield spread? Well, if you can get the borrower to accept a certain program that benefited the lender, an additional fee would be paid to broker! Often, these fees were as much as 3% of the loan amount, on top of the fees the broker was already collecting. What would trigger these fees? Loans with higher interest rates after the start rate. Adjustable loans instead of fixed loans. Prepayment penalties that would lock in a borrower so they could not refinance for a certain period of time without paying the penalty, even if the rates went down. Didn't these need to be disclosed to the borrower? Of course, but it was just another piece of paper in the midst of dozens, which in many cases were never explained or read.

5. Real Estate agents started doing loans as well as represent buyers and sellers. A real estate agent representing a seller of property could end up representing 5 transactions! Think about it. An agent represents the seller, and meets a buyer at an open house. He gets the buyer to make an offer, using the agent's services as a real estate agent and as a mortgage broker. He is going to represent the seller in the sale of his house, as well as when purchasing a new home and taking care of the financing on that one, too. A transaction like this could amount to $100,000 in commissions to the agent. Where are that agent's loyalties?

6. Prices were too high in California for investors, so mortgage people who could do loans in other states began forming investment groups. They would have meetings, present properties and actually take a bunch of people to places like Las Vegas, Arizona, New Mexico, Florida and North Carolina for the sole purpose of making offers on property in those states. How did they get the money for these purchases? Why, they would refinance their primary residence to make the purchases. Appreciation was now spreading across the country.

7. Finally, the crooked people learned that they could manipulate the paperwork to literally steal from the lenders and from uneducated or naive people. I have worked on cases where a broker literally stole almost $2 million from 22 homeowners, and ruined the credit of those he recruited under the guise of helping people get out of trouble. Another case that I worked on involved identity theft, where an individual ended up owning 5 houses which he did not know he owned. The list goes on.

Yes, there were legitimate reasons for much of the appreciation in the real estate market. Unfortunately, due to the fraudulent loans and easy credit (aka, subprime), part of the increase was an illusion. The "bubble" that everyone predicted for 6 years grew from these illusionary loans, and those loans have created the downfall that is now being experienced in the real estate market place.

There are other reasons for the depth of the downturn. Just as there was artificial appreciation, there is currently artificial depreciation. More on that, next time.

Ken Koenen, LLM
Attorney at Law
Law Offices of Ken Koenen
6200 Stoneridge Mall Rd., #300
Pleasanton, CA 94588
Office: 925-924-0100
Fax: 925-397-3044
Email: ken@lawken.com
Web Site: http://www.lawken.com/
Blog: http://lawkentoday.blogspot.com/