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.
Monday, July 18, 2011
Sunday, May 1, 2011
The Rest of the Short Sale Story
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.
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.
Saturday, February 26, 2011
The Latest Bankster Tricks
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
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
Thursday, December 16, 2010
Tom Miller: 'We Will Put People In Jail' For Foreclosure Fraud
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
Read the Article at HuffingtonPost
Saturday, October 23, 2010
Jerry Brown Turns Back on California Home Owners
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.
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.
Tuesday, August 10, 2010
Friday, April 2, 2010
Join me in mourning the passing of Jaime Escalante
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.
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.
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