Z's Legal Experience Blog

BANK REJECTS SHORT SALE OPPORTUNITY AND MAKES BIGGER LOSS

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Mon, 13 Oct 2008 08:42:25 -0500

Here is more proof that the loss mitigators used by some banks just don't quite "get it".

In an article this morning in the Palm Beach Post, by staff writer Eve Samples, Wells Fargo is targeted for its botched handling of a short sale opportunity, resulting in a loss to the bank of at least $40,000 more than it would have experienced in the short sale opportunity. The article goes on to say,

Behind on their mortgage and forced to move to Miami-Dade County for work, Reggie and Noelvis Capiro this summer petitioned their lender, Wells Fargo Home Mortgage, and its servicing company to allow a short sale on their three-bedroom, three-bath house. They found a buyer who was willing to pay $400,000, about $40,000 less than they owed on the mortgage.

The bank countered at $520,000, and the deal fell apart, according to the Capiros' agent, Dave Derrenbacker, owner of Water Pointe Realty Group in Stuart.

The Capiros lost the home to foreclosure in June, and the bank this month sold the house to a new buyer. The sale price this time: $360,000, according to Multiple Listing Service data.

The writer does not realize that the loss to the bank is even greater, since the costs of taking the property into the REO department of the bank needs to be added to the simple math loss in the selling price. My guess is the loss is more like over $50,000.

This example goes to the heart of the issues that the Federal Government is facing if they want to get into the loss mitigation business, and confirms that this situation is not isolated and that the real number in aggregate losses is enormous. See Banks Create Billions More In Losses.

To understand how and why lenders should do short sales in a declining housing market, a review of the short sale philosophy is in order. I wrote about this about six months ago in BACK TO BASICS - A REVIEW OF SHORT SALES and an excerpt seems appropriate:

Who Qualifies - And Why A Lender Would Want The Loan Paid Off -

You can read discussions on who qualifies for a short sale in a previous article (see this link Some Sellers Think They are Entitled to a Short Sale and Economics 101). Technically, everyone can qualify for a short sale. To understand this we need to become more, well, "technical".

Logically, a lender is not going to want to keep a secured loan on its books where it has evidence that the security has decreased in value dramatically and the loan to value ratio under which the loan was originally made is now "upside down", meaning the value is less than the amount of the loan. The portion of the loan that is not in compliance with the original loan to value ratio is, for bank auditing purposes (or investment valuation purposes if the loan is not a portion of a mortgage backed collateralized security) and therefore is not considered secured. That is bad since it makes the lender set aside reserves of cash for the lack of value in the loan. The lender needs to do something to change that situation.

Depending on the language in your mortgage or your promissory note, the valuations being upside down could be reason to put your loan into breach and call the promissory note. I have not seen this done as of yet by any residential lender. But technically, if a property is in this upside down situation, the loan could already be technically in default.

Often, the desire to unload the upside down property is made based on economic calculations made by the owner of the property. Those calculations usually show that it is better to take a loss now of a known amount of money rather than continue to pay interest, insurance and taxes in excess of the income from the property for an unknown period of time until rental or property values increase so the economic cash drain is reversed.

In any event, the lender would prefer to have the loan right side up or off its books. In some cases the property owner has excess cash laying around and can just sell the property (if that is their plan) and pay the amount to the bank that they are "short" at the closing so the loan is paid off in full.

In other cases, usually where the borrower has become financially distressed but also where the borrower is asset rich but presently is lacking liquidity (I call it financial indigestion), other arrangements satisfactory to the lender can be accomplished.

These other arrangements usually come in two flavors: (1) providing alternative secured collateral to the lender, such as a first or second mortgage on another borrower owned property that has equity value, or (2) having the borrower sign a new or modified promissory note that is unsecured and payable over a fixed period of time, usually 3 to 10 years from the date of the short sale.

Where the borrower is experiencing extreme financial hardship, a third alternative can occur, which is actual forgiveness of the unpaid amount to the lender.

This leads us to the issue of the unpaid portion of the short sale. Many lenders will not provide a release of the balance due. This causes some good and some bad issues for the borrower. The good part is that without a final disposition of the unpaid portion, the borrower has not received any phantom income (i.e.: that 1099 stuff). This good news does not last forever. Once the statute of limitations on enforcement of the promissory note expires, then the borrower has that income to report to the IRS. The bad news is that the lender very well may sell the unpaid promissory note to some investor for 5 or 10 cents on the dollar and then that investor will definitely come after the borrower for as much as they can get above that 5 or 10 cents on the dollar. The small element of good news here is that as long as they are trying to collect on the unpaid portion, that unpaid portion is not income that the borrower has to report to the IRS.

Why mistakes are made by lenders in the short sale process.

I am going to be conservative and say that Wells Fargo in this case had incorrect information on the market when undertaking their valuation and "potential" for the property. At my firm we have come across this situation several times - often when there are two lenders and one approves the short sale price while the other says they need it "much higher". The reason for the mis-valuations can be several, but some common ones are size of the property (one lender used the property appraiser size calculations, which were overstated by 30%), condition of the property (most lenders do not do an inside inspection and none do an inspection of the mechanicals of the home), liens or other property associated obligations being assumed by the buyer (thereby lowering the stated price, but raising the value price), rapidly declining values for the neighborhood (and determining where in the cycle this sale might occur - ie how much further to bottom for this neighborhood), and certainly others.

Short Sale consultants and attorneys should make it their business to be aware of the valuations for similar homes in that neighborhood so they can counter erroneous arguements for a higher price - when none is justified.

How will the additional loss affect a foreclosure deficiency judgment?

When a foreclosure occurs, the lender may be entitled to the dreaded foreclosure deficiency judgment. How does the court determine the amount the lender is entitled to if the lender screwed up an opportunity for mitigation of that loss to the ultimate detriment for the borrower? I know of no reported case law on the subject, but surely if one makes it to the appellate courts, equity will have the judge decrease the deficiency judgment by the amount of the additional loss created by the mistake or stubbornness of the lender. I say here that equity will cause that to occur because as a matter of law, the lender had no obligation to entertain a short sale at all. For a more detailed discussion on the deficiency process see my article Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios.

In the past I have often stated that the short sale process is like living in the Wild West - this is still true, but slowly we are spiraling into some focal point (like a tornado drawing into its core all it touches or gets near) where some common means of accomplishing loss mitigation will be standardized. That time probably will be accelerated if the Federal Government steps in to be the loss mitigator.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com

BAILOUT MISREPRESETATIONS AND MISCONCEPTIONS

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Sat, 11 Oct 2008 17:09:27 -0500

The government bail out of the housing crisis has created wonderfully conceived programs to keep homeowners in their homes with re-negotiated mortgages or refinanced mortgages. The specific programs for the home saving legislation are the HOPE for Homeowners (H4H) and FHASecure programs.

I spoke about these programs in my recent blog articles NUTSHELL VERSION - EMERGENCY ECONOMIC STABILIZATION ACT and YOUR Ticket to Normalcy? THE BAILOUT BILL.

The H4H program is a voluntary program for lenders. Essentially for the lender with a non-performing loan (ie: a mortgage about to go into or already in foreclosure) the effect is potentially better than a short sale solution to avoiding foreclosure expenses. In a short sale, the lender gets all of the net sale proceeds and has the option to seek the difference (the shortage) from the borrower. In a H4H program refinance, instead of selling the home, the owner is refinanced with an FHASecure mortgage. The advantage to the foreclosing lender is that it will get about 85% of the current appraised value of the house, but that amount is all it will get and it cannot later seek the shortage against the borrower. As a sweetener, the foreclosing lender will participate with the government (FHASecure) if there is any "appreciation" realized upon the later sale or refinance of the borrower's home.

Great deal you may think - but there is a Catch-22. The whole concept hinges on the participation of lenders to fund the FHASecure program of FHA insured mortgages to these borrowers - and not a single lender in the nation has stepped up to the plate to make the first loan. The FHA website merely says, "List of Participating Lenders Coming Soon".

One would think that since this program was announced over two months ago to be effective October 1^st, that the participating lenders would already be there to start taking applications - but no, homeowners who are to be served by this program have found that so far it is an empty shell of well meaning and promising regulations.

For the homeowner then, the short sale is the primary vehicle available to personally mitigate the loan liability situation, which adds inventory to the available housing list and thus drives prices down as supply further exceeds demand.

Loss mitigation through the borrower lender allowing the borrower to stay in the home and writing down the loan as would be the case under the H4H program, is a event that we seldom see in our daily lender discussions and negotiations. This is not to say it does not exist, but it is an exceptional event unless there are factors involved that go to lender misconduct or other technical issues regarding the origination or servicing of the loan.

So until the lenders begin participation in the H4H program and FHASecure, the hype and glory emanating from our governmental finance gurus is just an empty bag.

I THOUGHT IT OUTRAGEOUS THAT ANYBODY HAS TO STEP IN TO BAIL OUT A BUNCH OF 29 YEAR OLDS DRIVING MASERATIS

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Fri, 10 Oct 2008 08:07:37 -0500

Sometimes you get a frank speaking knowledgable person that sums up the day's thought succintly and in one sentence. Speaking on the Financial Crisis, legenday investor Jim Rogers, in an interview reported on CNBC this morning said the irresponsible people need to go bankrupt if necessary. Here is the quote - you'll love it since it is So True!

"I thought it outrageous that anybody has to step in to bail out a bunch of 29 year olds driving Maseratis," he said

The whole interview is on CNBC with a video clip too.

I have some articles on the bail out that may be helpful to you at these links.

EMERGENCY ECONOMIC STABILIZATION ACT -WHAT IT MEANS FOR YOU

BAILOUT FOR HOMEOWNERS - WITHOUT WALL STREET

A word of caution - to make the homeowner bailout work you need to have lenders participating in the HOPE program and FHASecure program -- to date I have not heard of a single one! So much for voluntary programs.

It appears the politicians think the only ones that vote are people losing their homes?

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com Website www.florida-counsel.com

ARE WE IN SHUT DOWN MODE?

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Wed, 08 Oct 2008 07:37:16 -0500

The stock market is at equivalent lows to times dating back to the Great Depression (which for those of you needed date measurements is almost 75 years ago).

In 1987 there was a stock crash but not like now. Now there are other more compelling issues regarding the financial trust between banks and their customers and between banks that have money and banks that need money.

Typically there is a daily operation by your bank where at the end of the day they take their extra money and invest it in overnight depositories which go to distribute money to other banks that need money to fund new loans or to cover short term contraction of deposits. The money loaned out overnight is always back the next day - well that's the problem apparently, since now it is not always back the next day.

With this uncertainty, banks with money want to hoard it, leaving banks needing money to beg for it from the public by offering higher than normal short term interest teasers. That's why you see those advertisements popping up in the newspapers. Ever wonder why two banks on the same street offer short term interest rates varying as much as 25%?

So here is the housing problem -

1. Buyers qualifying for a mortgage have a Herculean task in this market. If banks don't want to lend to each other, imagine them giving a loan to a complete stranger to buy a new home! Home loan applications were up last week as rates begin to dip (below 6%) but will the loan applications end up as successfully closed loans?

2. Even cash rich buyers are reluctant to buy - investor buyers don't buy when the market is dropping and don't buy until the market begins to recover. Why? Investors want liquidity. There is no liquidity on the way down to a market bottom and little liquidity at the bottom. It is on the way up, no matter how slow that is, where a sale of an asset can occur, even if it is at the same price at which the asset was purchased. But at least it is not lower.

There is hope -

Fortunately, there is always someone out there that needs a roof over their head and has the ability to find the cash or mortgage to purchase the home. And there is always the investor that sees opportunity when others see gloom.

Our government is trying to address the tight fisted mindset with cash injections and even offering to make loans directly to large borrowers and homebuyers and offering refinancing opportunties. But consumer confidence is falling to depths unknown, and with continued employment on most peoples' minds there is not going to be a lot of spending going on (except at neighborhood bars).

The end result - we are in right now probably one of the worst quarters for home sales and even commercial transactions in the past 20 years. So sit tight, plan your strategy for survival and use the time wisely to re-invent yourself to grow with what will eventually be a new day.

TOP TEN LIST OF SHORT SALE OBSERVATIONS

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Sun, 05 Oct 2008 12:56:42 -0500

OK all you short sale Realtors - Here is my list of the top ten short sale rules when dealing with sellers and buyers. What is your top ten list for YOUR favorite category involved in the short sale process (lender, buyer, seller, buyer Realtor, Seller Realtor, processor, loss mitigator and servicing agent, etc.)?

My TOP TEN BUYER / SELLER observations regarding Short Sales are:

10 - A Short Sale is a tough place for a buyer looking for personal housing.

9 - A Short Sale is not for people that just want to move.

8 - A Short Sale is an option for people legitimately in trouble - it is not an entitlement.

7 - Borrowers need to take responsibility for their decisions.

6 - A hardship is not a desire.

5 - Borrowers often mistakenly think foreclosure or bankruptcy is a better route.

4 - A Short Sale is not a Short Cut.

3 - As a rule, Lenders accept Short Sales based on Economic Reality .... Sometimes

2 - If you don't ask for relief you won't get relief.

1 - Lenders forgive those not entitled to relief ... more often than you can imagine.

YOUR Ticket to Normalcy? THE BAILOUT BILL

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Sun, 05 Oct 2008 10:27:07 -0500

The Emergency Economic Stabilization Act just passed on October 3rd is not the cure-all you might hope for. The Act authorizes the creation or expansion of governmental entities and departments to deal with the housing crisis. Implimenting these provision is what will create the "cures". Assuming the "cures" are in place, there are going to be effects upon Realtors, Mortgage Brokers and Distressed Homeowners. This is how I see the Act helping each group.

Realtors -

Opportunity is the catch-all phrase. Opportunity to take a part of the disposition and management of loans purchased by the government through loss mitigation services of property management of abandoned properties. Opportunity to service REO properties. Opportunity for disposition (sale) of REO properties. I don't see a huge opportunity short term for the re-establishment of any strong new home or re-sale market in the traditional sense. But the programs introduced could reduce inventory of unsold homes and REO at an accellerated pace, and free up limited amounts of funds for traditional (ie: conservative) acquisition financing once again.

Mortgage Brokers -

What a huge opportunity!!! Refinance Opportunity is for the placement of FHASecure loans under the HOPE program. The HOPE Program enhances FHASecure - A possible Opportunity for brokers to negotiate restructuring of the existing loan under the new Act that mandates reductions of principal and recasting of interest and term of loan. Key to making this easy is who is owning the paper that needs modification or refinance. If it is the government entity it would supposedly be easier to negotiate and structure. But I am not so sure on this supposition since the pricing of the purchase of non-performing paper by the government will theoretically involve the same loss to the lender as doing the write-down through a refinance. The REALLY BIG news is that lenders are encouraged to renegotiate principal amounts and keep the owner in their home!!!!!

Distressed Homeowners -

Primary Homeowners have the most options, which include the Hope program as well as renegotiation of the existing terms of your mortgage so that the mortgage again becomes affordable. This is NOT designed to be a windfall and you can expect the government program to have strict guidelines for qualification so there is no "profiteering".

Investor Homeowners should expect limited help, but there is no distinction in the Act for the renogiation of existing loans to make them more affordable and allow cashflow from what were to be income producing rental properties. Expect some "shared appreciation mortgage" concepts to be used where the government lender shares with you the "upside" profits on the sale or refinance of the property in the future.

The goals of the Act are two-fold. One is to create some economic stimulus through "freeing up" locked illiquid assets held by investment firms and lenders, so theoretically they can again extend credit or buy up "safer" mortgage backed paper. The other is to create a slow down in the rates of foreclosure by giving alternative plans to homeowners and lenders that were to foreclose, and thereby reduce the inventory of homes on the market because of the need to unload properties that homeowners cannot afford and lenders have to re-sell.

How this will actually occur is going to be created in the next few months - there will be a flurry of activity and we all need to keep a keen eye on this developing opportunity.

What is your opinion on how the Act might affect you and your business or personal problem?

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com Webpage www.florida-counsel.com

EMERGENCY ECONOMIC STABILIZATION ACT - WHAT IT MEANS FOR YOU

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Sat, 04 Oct 2008 09:51:45 -0500

My wife asked a very important question this morning - so what does this new Act do for the housing market?

I then read the entire Act and wrote a blog of the Act in a NUTSHELL. Then realized that I have not discussed what the Act will do for Realtors and distressed homeowners. The Act is not the cure-all. The Act authorizes the creation or expansion of governmental entities and departments to deal with the housing crisis. Implimenting these provision is what will create the "cures". Assuming the "cures" are in place, this is what I see:

Realtors -

Opportunity is the catch all phrase. Opportunity to take a part of the disposition and management of loans purchased by the government through loss mitigation services of property management of abandoned properties. Opportunity to service REO properties. Opportunity for disposition (sale) of REO properties.

Mortgage Brokers -

Refinance Opportunity is for the placement of FHASecure loans under the HOPE program. A possible Opportunity for brokers to negotiate restructuring of the existing loan under the new Economic Stabilization Act that mandates reductions of principal and recasting of interest and term of loan.

Distressed Homeowners -

The goals of the Act are two-fold. One is to create some economic stimulus through "freeing up" locked illiquid assets held by investment firms and lenders, so theoretically they can again extend credit or buy up "safer" mortgage backed paper. Two is to create a slow down in the rates of foreclosure by giving alternative plans to homeowners and lenders that were to foreclose, and thereby reduce the inventory of homes on the market because of the need to unload properties that homeowners cannot afford and lenders have to re-sell.

How this will actually occur is going to be created in the next few months - there will be a flurry of activity and we all need to keep a keen eye on this developing opportunity.

NUTSHELL VERSION - EMERGENCY ECONOMIC STABILIZATION ACT

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Sat, 04 Oct 2008 08:04:53 -0500

The BIG news this week is the passage on Friday of the Emergency Economic Stabilization Act of 2008 - or more formally called "Secure Rural Schools and Community Self-Determination Act of 2000". Yes, that is how it started and it is known as H.R. 1424. What it says will change our economic horizon for decades and this article will discuss its major imports for the real estate buyer and seller and homeowners.

The full text of H.R. 1424 is found through this link. The discussion below includes pertinent parts of the legislation as passed and signed by the President. Note that the President signed the bill based on the speed limit in Washington DC - 35 miles per hour - the time it took to drive it over to the White House from Capitol Hill. It is important to know that although not discussed in this article, there is almost as much text in the bill directed to energy legislation as to the mortgage bail out provisions.

First here is the nutshell version:

1. It establishes TARP - the Troubled Asset Relief Program to purchase and to make and fund commitments to purchase, troubled assets from any financial institution. Note that this is not limited to troubled residential loans. The Secretary of the Treasury is supposed to create guidelines that outline the mechanism for purchasing the troubled assets, procedures for selection of asset managers, and create criteria for identifying troubled assets for purchase, all while making sure that no financial institution is "unjustly enriched" or makes a profit from the sale of troubled assets to the TARP program.

2. Creates a management mechanism for the management and disposition of the troubled assets purchased by TARP, including the resale of those assets in the marketplace. All proceeds from the sale of TARP assets shall be paid to the Department of the Treasury general fund for reduction of the public debt.

3. Creates Residential Mortgage Loan Servicing Standards to mitigate foreclosure effects. To the extent the TARP acquires mortgages on residential properties, there is supposed to be implemented a plan that seeks to maximize assistance to distressed homeowners and "encourage" servicers of those mortgages to take advantage of the HOPE for Homeowners Program (discussed in my linked blog) or other available programs to minimize foreclosures and get new financing at a reduced principal amount for the existing homeowner/borrower. The Act allows flexibility in providing incentives to lenders / servicers guarantees and other enhancements for participating in the program. This incentive portion of the Act is going to be ultra important because otherwise the program essentially is a voluntary program where the government is merely asking the lenders to "please" help the homeowners.

4. Gives assistance to residential renters in homes or multi-family properties acquired by foreclosure so that the renter may be able to stay in the home or apartment under the full term of their lease. This is a very important part of the Act, which has not been discussed, as often the foreclosed house is occupied by a tenant paying rent, who is then forced to leave before the lease is over. Proviso - the rent must be current.

5. Allows the government (as owner of a residential mortgage) to recast an existing mortgage to a lower principal amount (based on present value) and include in the modification term extensions (making the amortization longer), interest rate reductions, and principal write downs. This is a key point as this one aspect will keep a very large proportion of homes from being lost to foreclosure. Whether this will be used for investment properties as well as primary residences is something that we will have to watch.

6. The expiration of the Mortgage Forgiveness Debt Relief Act of 2007 (and notably the tax relief given to a homeowner that gets a principal reduction of mortgage) is extended to 2013.

7. Expands the limit of the public debt of the United States to $11,315,000,000,000, which is a meaningful number to all of us.trillionaires.

Opportunities are Coming:

There are plenty of opportunities for Realtors with their services of property management and property disposition coming down the pike! Watch the regulations discussed in the Act that are to be written in the next severa weeks to see how this will affect your ability to gain more business.

The Full Text of the Nutshell Version:

I have provided the link to the full bill above. But for those of you that want information now, below is a cut and paste of the pertinent provisions relating to real estate homeownership.

____________________________________________________

SEC. 101. PURCHASES OF TROUBLED ASSETS.

(a) Offices; Authority-

(1) AUTHORITY- The Secretary is authorized to establish the Troubled Asset Relief Program (or `TARP') to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary.

(2) COMMENCEMENT OF PROGRAM- Establishment of the policies and procedures and other similar administrative requirements imposed on the Secretary by this Act are not intended to delay the commencement of the TARP.

..........

(d) Program Guidelines- Before the earlier of the end of the 2-business-day period beginning on the date of the first purchase of troubled assets pursuant to the authority under this section or the end of the 45-day period beginning on the date of enactment of this Act, the Secretary shall publish program guidelines, including the following:

(1) Mechanisms for purchasing troubled assets.

(2) Methods for pricing and valuing troubled assets.

(3) Procedures for selecting asset managers.

(4) Criteria for identifying troubled assets for purchase.

(e) Preventing Unjust Enrichment- In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. This subsection does not apply to troubled assets acquired in a merger or acquisition, or a purchase of assets from a financial institution in conservatorship or receivership, or that has initiated bankruptcy proceedings under title 11, United States Code.

SEC. 106. RIGHTS; MANAGEMENT; SALE OF TROUBLED ASSETS; REVENUES AND SALE PROCEEDS.

(a) Exercise of Rights- The Secretary may, at any time, exercise any rights received in connection with troubled assets purchased under this Act.

(b) Management of Troubled Assets- The Secretary shall have authority to manage troubled assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Troubled Assets- The Secretary may, at any time, upon terms and conditions and at a price determined by the Secretary, sell, or enter into securities loans, repurchase transactions, or other financial transactions in regard to, any troubled asset purchased under this Act.

(d) Transfer to Treasury- Revenues of, and proceeds from the sale of troubled assets purchased under this Act, or from the sale, exercise, or surrender of warrants or senior debt instruments acquired under section 113 shall be paid into the general fund of the Treasury for reduction of the public debt.

(e) Application of Sunset to Troubled Assets- The authority of the Secretary to hold any troubled asset purchased under this Act before the termination date in section 120, or to purchase or fund the purchase of a troubled asset under a commitment entered into before the termination date in section 120, is not subject to the provisions of section 120.

SEC. 109. FORECLOSURE MITIGATION EFFORTS.

(a) Residential Mortgage Loan Servicing Standards- To the extent that the Secretary acquires mortgages, mortgage backed securities, and other assets secured by residential real estate, including multifamily housing, the Secretary shall implement a plan that seeks to maximize assistance for homeowners and use the authority of the Secretary to encourage the servicers of the underlying mortgages, considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.

(b) Coordination- The Secretary shall coordinate with the Corporation, the Board (with respect to any mortgage or mortgage-backed securities or pool of securities held, owned, or controlled by or on behalf of a Federal reserve bank, as provided in section 110(a)(1)(C)), the Federal Housing Finance Agency, the Secretary of Housing and Urban Development, and other Federal Government entities that hold troubled assets to attempt to identify opportunities for the acquisition of classes of troubled assets that will improve the ability of the Secretary to improve the loan modification and restructuring process and, where permissible, to permit bona fide tenants who are current on their rent to remain in their homes under the terms of the lease. In the case of a mortgage on a residential rental property, the plan required under this section shall include protecting Federal, State, and local rental subsidies and protections, and ensuring any modification takes into account the need for operating funds to maintain decent and safe conditions at the property.

(c) Consent to Reasonable Loan Modification Requests- Upon any request arising under existing investment contracts, the Secretary shall consent, where appropriate, and considering net present value to the taxpayer, to reasonable requests for loss mitigation measures, including term extensions, rate reductions, principal write downs, increases in the proportion of loans within a trust or other structure allowed to be modified, or removal of other limitation on modifications.

SEC. 110. ASSISTANCE TO HOMEOWNERS.

(a) Definitions- As used in this section--

(1) the term `Federal property manager' means--

(A) the Federal Housing Finance Agency, in its capacity as conservator of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation;

(B) the Corporation, with respect to residential mortgage loans and mortgage-backed securities held by any bridge depository institution pursuant to section 11(n) of the Federal Deposit Insurance Act; and

(C) the Board, with respect to any mortgage or mortgage-backed securities or pool of securities held, owned, or controlled by or on behalf of a Federal reserve bank, other than mortgages or securities held, owned, or controlled in connection with open market operations under section 14 of the Federal Reserve Act (12 U.S.C. 353), or as collateral for an advance or discount that is not in default;

(2) the term `consumer' has the same meaning as in section 103 of the Truth in Lending Act (15 U.S.C. 1602);

(3) the term `insured depository institution' has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813); and

(4) the term `servicer' has the same meaning as in section 6(i)(2) of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2605(i)(2)).

(b) Homeowner Assistance by Agencies-

(1) IN GENERAL- To the extent that the Federal property manager holds, owns, or controls mortgages, mortgage backed securities, and other assets secured by residential real estate, including multifamily housing, the Federal property manager shall implement a plan that seeks to maximize assistance for homeowners and use its authority to encourage the servicers of the underlying mortgages, and considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures.

(2) MODIFICATIONS- In the case of a residential mortgage loan, modifications made under paragraph (1) may include--

(A) reduction in interest rates;

(B) reduction of loan principal; and

(3) TENANT PROTECTIONS- In the case of mortgages on residential rental properties, modifications made under paragraph (1) shall ensure-

(A) the continuation of any existing Federal, State, and local rental subsidies and protections; and

(B) that modifications take into account the need for operating funds to maintain decent and safe conditions at the property.

(4) TIMING- Each Federal property manager shall develop and begin implementation of the plan required by this subsection not later than 60 days after the date of enactment of this Act.

(5) REPORTS TO CONGRESS- Each Federal property manager shall, 60 days after the date of enactment of this Act and every 30 days thereafter, report to Congress specific information on the number and types of loan modifications made and the number of actual foreclosures occurring during the reporting period in accordance with this section.

(6) CONSULTATION- In developing the plan required by this subsection, the Federal property managers shall consult with one another and, to the extent possible, utilize consistent approaches to implement the requirements of this subsection.

(c) Actions With Respect to Servicers- In any case in which a Federal property manager is not the owner of a residential mortgage loan, but holds an interest in obligations or pools of obligations secured by residential mortgage loans, the Federal property manager shall--

(1) encourage implementation by the loan servicers of loan modifications developed under subsection (b); and

(2) assist in facilitating any such modifications, to the extent possible.

(d) Limitation- The requirements of this section shall not supersede any other duty or requirement imposed on the Federal property managers under otherwise applicable law.

SEC. 115. GRADUATED AUTHORIZATION TO PURCHASE.

(a) Authority- The authority of the Secretary to purchase troubled assets under this Act shall be limited as follows:

(1) Effective upon the date of enactment of this Act, such authority shall be limited to $250,000,000,000 outstanding at any one time.

(2) If at any time, the President submits to the Congress a written certification that the Secretary needs to exercise the authority under this paragraph, effective upon such submission, such authority shall be limited to $350,000,000,000 outstanding at any one time.

(3) If, at any time after the certification in paragraph (2) has been made, the President transmits to the Congress a written report detailing the plan of the Secretary to exercise the authority under this paragraph, unless there is enacted, within 15 calendar days of such transmission, a joint resolution described in subsection (c), effective upon the expiration of such 15-day period, such authority shall be limited to $700,000,000,000 outstanding at any one time.

(b) Aggregation of Purchase Prices- The amount of troubled assets purchased by the Secretary outstanding at any one time shall be determined for purposes of the dollar amount limitations under subsection (a) by aggregating the purchase prices of all troubled assets held.

SEC. 120. TERMINATION OF AUTHORITY.

(a) Termination- The authorities provided under sections 101(a), excluding section 101(a)(3), and 102 shall terminate on December 31, 2009.

(b) Extension Upon Certification- The Secretary, upon submission of a written certification to Congress, may extend the authority provided under this Act to expire not later than 2 years from the date of enactment of this Act. Such certification shall include a justification of why the extension is necessary to assist American families and stabilize financial markets, as well as the expected cost to the taxpayers for such an extension.

SEC. 122. INCREASE IN STATUTORY LIMIT ON THE PUBLIC DEBT.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting `$11,315,000,000,000'.

SEC. 124. HOPE FOR HOMEOWNERS AMENDMENTS.

Section 257 of the National Housing Act (12 U.S.C. 1715z-23) is amended--

(1) in subsection (e)--

(A) in paragraph (1)(B), by inserting before `a ratio' the following: `, or thereafter is likely to have, due to the terms of the mortgage being reset,';

(B) in paragraph (2)(B), by inserting before the period at the end `(or such higher percentage as the Board determines, in the discretion of the Board)';

(i) in the first sentence, by inserting after `insured loan' the following: `and any payments made under this paragraph,'; and

(ii) by adding at the end the following: `Such actions may include making payments, which shall be accepted as payment in full of all indebtedness under the eligible mortgage, to any holder of an existing subordinate mortgage, in lieu of any future appreciation payments authorized under subparagraph (B).'; and

(2) in subsection (w), by inserting after `administrative costs' the following: `and payments pursuant to subsection (e)(4)(A)'.

SEC. 136. TEMPORARY INCREASE IN DEPOSIT AND SHARE INSURANCE COVERAGE.

(a) Federal Deposit Insurance Act; Temporary Increase in Deposit Insurance-

(1) INCREASED AMOUNT- Effective only during the period beginning on the date of enactment of this Act and ending on December 31, 2009, section 11(a)(1)(E) of the Federal Deposit Insurance Act (12 U.S.C. 1821(a)(1)(E)) shall apply with `$250,000' substituted for `$100,000'.

(2) TEMPORARY INCREASE NOT TO BE CONSIDERED FOR SETTING ASSESSMENTS- The temporary increase in the standard maximum deposit insurance amount made under paragraph (1) shall not be taken into account by the Board of Directors of the Corporation for purposes of setting assessments under section 7(b)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1817(b)(2)).

(3) BORROWING LIMITS TEMPORARILY LIFTED- During the period beginning on the date of enactment of this Act and ending on December 31, 2009, the Board of Directors of the Corporation may request from the Secretary, and the Secretary shall approve, a loan or loans in an amount or amounts necessary to carry out this subsection, without regard to the limitations on such borrowing under section 14(a) and 15(c) of the Federal Deposit Insurance Act (12 U.S.C. 1824(a), 1825(c)).

(b) Federal Credit Union Act; Temporary Increase in Share Insurance-

(1) INCREASED AMOUNT- Effective only during the period beginning on the date of enactment of this Act and ending on December 31, 2009, section 207(k)(5) of the Federal Credit Union Act (12 U.S.C. 1787(k)(5)) shall apply with `$250,000' substituted for `$100,000'.

SEC. 303. EXTENSION OF EXCLUSION OF INCOME FROM DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.

(a) Extension- Subparagraph (E) of section 108(a)(1) of the Internal Revenue Code of 1986 is amended by striking `January 1, 2010' and inserting `January 1, 2013'.

(b) Effective Date- The amendment made by this section shall apply to discharges of indebtedness occurring on or after January 1, 2010.

_______________________________________________

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com

BAILOUT FOR HOMEOWNERS - WITHOUT WALL STREET

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Tue, 30 Sep 2008 20:55:42 -0500

BAIL OUT FOR HOMEOWNERS - WITHOUT WALL STREET

149 years ago today, Abraham Lincoln stated an important fact for today's financial crisis. But first a word of hope. It is human to think that when times are good, they will stay good. And when times are bad we all hope for good times. King Solomon went on a quest to find one item that would remind him to realize that good times or bad times, neither is permanent and to be prepared for the other. He found a ring imprinted with the saying, "this too shall pass".

"This too shall pass"

Wikipedia has some comment on this phrase: Many versions of this folktale have been recorded by the Israel Folklore Archive at the University of Haifa. Heda Jason recorded this version told by David Franko from Turkey: "King Solomon once searched for a cure against depression. He assembled his wise men together. They meditated for a long time and gave him the following advice: Make yourself a ring and have thereon engraved the words "This too shall pass". The King carried out the advice. He had the ring made and wore it constantly. Every time he felt sad and depressed, he looked at the ring, whereon his mood would change and he would feel cheerful."

The phrase "this too shall pass" and the associated ring story were made popular in America by Abraham Lincoln in his 'Address Before the Wisconsin State Agricultural Society, Milwaukee, Wisconsin' on September 30, 1859: "It is said an Eastern monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: "And this, too, shall pass away." How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction!"

The opposite is also appropriate. When times are good, look at the ring and be humble and prepared, for sad times are coming. Such is the way of the human existence forever in the past and forever in the future.

2008 Bailout Options without Wall Street

Our Congress is having a hard time on a "bailout" of the housing and intertwined financial markets. I won't even bother to become political at this point (I have put myself on a very very short leash). The purpose of this article is to give professionals and consumers some resource material to help in this troubled time.

Usually my articles are about short sales. This article touches on short sales but it is really about preparing the distressed homeowner for the various options and alternatives to foreclosure.

FHASecure

Beginning today, October 1, 2008, a new program is initiated by special funding from the Federal Government of up to 300 BILLION dollars for additional funding to the FHA program called FHASecure and related foreclosure avoidance programs. The FHASsecure program is for homeowners that meet certain criteria, such as having a financial distress situation and housing (debt) expenses that are greater than 31% of the household income. A Frequently Asked Questions sheet is available through the hud.gov website or the link at the beginning of this sentence. The program essentially requires the existing lender(s) to allow a reduced payoff of the mortgage and then FHA comes in and provides a refinance with a government guarantee. The existing mortgage lender can be the new lender under the program or you can use an entirely new lender. The catch is that this is essentially the same as a short sale - but the homeowner does not sell the home and instead (theoretically at least) gets a reduced principal mortgage with (theoretically) a lower mortgage payment.

Hope for Homeowners

Distressed homeowners should also be aware of the Hope for Homeowners program - this is the program that was specifically passed by Congress this summer and goes into effect October 1^st. The Hope for Homeowners program website says the following:

Families should not wait to seek mortgage relief. Right now, homeowners can determine if they are already eligible for mortgage assistance through FHASecure, FHA's existing refinancing program. They can obtain information through either of the following options:

1. Contact a local, HUD-approved housing counseling agency at HUD.gov;
2. Contact the HOPE NOW Alliance at 1-888-995-HOPE

Hope for Homeowners maintains FHA's long-standing requirement that new loans be based on a family's long-term ability to repay the mortgage. FHA only allows owner-occupants to be eligible for FHA-insured mortgages. Borrowers must also meet the following eligibility criteria:

Their mortgage must have originated on or before January 1, 2008;
Their mortgage debt-to-income must be at least 31 percent;
They cannot afford their current loan;
They did not intentionally miss mortgage payments; and
They do not own second homes

Features of FHA-insured loans under the new program include:

30-year, fixed rate mortgage;
Maximum 90 percent loan-to-value ratio;
No prepayment penalties;
$550,440 maximum mortgage amount;
Extinguishment of any subordinate liens; and
New home appraisals from FHA-approved appraisers.

FHA will continue to offer lenders an alternative to foreclosing on borrowers. Similar to FHASecure's recent expansion, lenders will be encouraged to write-down the outstanding mortgage principal balances to 90 percent of the new value of the property. In many cases, reductions in principle will cost lenders less than the losses associated with foreclosure.

HUD also provides suggestions on Steps to Take If You Cannot Pay Your Mortgage at the hyperlinked website.

And there is the Hope Now Mortgage Servicing Guidelines - the Hope Now Alliance (via HUD) which shows an alliance of the top 27 mortgage lenders (see the list for your lender) and provides a timeline (of 45 days) for a loss mitigation (such as a modification or short sale) resolution. Our experience is that almost none of the lenders on that list have provided anything close to a 45 day turnaround - most are more than double that amount.

A Word of Caution - Pitfalls

Distressed homeowners should be wary of mortgage scams and "save your home" scenarios promoted by investors, mortgage brokers and attorneys. The homeowner should not give away the title to their home, or enter into a scenario that will ultimately cost them more monthly payment than the current amount that cannot be afforded anyway. And delay of foreclosure without a definitive plan for daylight and resolution is not a plan, it is a way to pay an attorney for needless work.

Find a Solution - Not a Band-Aid

Distressed homeowners need a solution, not a band-aid. Consult with a knowledgeable credit counselor. Consult with a knowledgeable attorney. Don't accept being forced into anything - examine and understand the options. If you the borrower is married, this should be a mutual decision. Find out if one or both spouses are on the promissory note. Understand the mortgage obligations.

Do whatever makes sense to find a solution and avoid foreclosure and bankruptcy. Bankruptcy should be reserved to the absolute last resort when all other possible solutions have been tried and failed or worked temporarily and now cannot be fulfilled (like a repayment plan or residual promissory note after a short sale).

Remember, provided a distressed homeowner works to find solutions to the problems and challenges immediately being faced, this too will pass and the sun will once again shine on those that try to help themselves.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com

BILLIONS (MORE) IN BANK LOSSES - NEEDLESSLY

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Sun, 21 Sep 2008 05:07:52 -0500

Short Sale Buyers are increasingly investors seeking to buy and flip or buy and rent for positive cash flow. Missing from the field are homebuyers seeking a place to live. Why?

Banks Encourage Short Sale Investors and Discourage Retail Buyers

Let's look at the basic premise of a short sale. The lender generally has a loan in or near foreclosure and likely it is non-performing. The owner determines that continuing to make the payments has become financially irresponsible or impossible. The owner also determines that avoidance of a foreclosure by attempting a short sale is the preferable method of disposition of the property - if the lender holding the mortgage lien(s) agrees.

The lender generally will agree to a short sale provided it will realize an amount from the sale that meets or exceeds the amount it would realize from a foreclosure, netting out the associated costs of a foreclosure and resale of the property from its REO holdings. [Note - the costs associated with a foreclosure sale have been reported as about $58,000 for the average FannieMae loan.] In actuality, the selling process is a trilogy - a three party (or four party if there is a 2^nd mortgage) arrangement involving the buyer, the seller and the mortgagee (lender). For detailed comment on this issue see The Short Sale Trilogy.

Next, let's look at the goals of the buyer of a short sale. There are two types of buyers.

The Retail Buyer - this buyer is buying to find a place to live. The retail buyer is looking for value, may be a first time buyer or may be coming out of a mortgage foreclosure, divorce or other situation. But value is not primary in the list of selection of the residence and other parameters such as neighborhood, number of bedrooms, condition, age and amenities are also important considerations. Likely the retail buyer is renting the present home, be it a house or apartment or condominium. Each of these retail buyer profiles have a common thread, usually a factor of time. The retail buyer needs to acquire the new housing within a certain defined timeline, usually because the lease will otherwise have to be renewed, or other family or financial issues mandate the new housing be acquired by a certain date.

The Investor Buyer - this buyer is buying to make money. The investor buyer is looking for value too, but much more value than the retail buyer. Usually the investor has one of two goals - or both. One is to resell the property (sometimes immediately) upon its acquisition. The other is to acquire the property at a price that allows a positive cash flow when the property is rented. [Note that this calculation takes into consideration the actual cash income AFTER expenses such as realtor fees, vacancy rate (time rented vs. time it is vacant), cost to maintain the property, insurance, property taxes, and cost of capital or value of capital.] Based on our experience representing retail buyers and investor buyers, the investor price is going to look like a bargain compared to the retail price the retail buyer is willing to pay, and it is not unusual for the price differential to be 30 to 80 percent lower for the investor buyer compared to the retail buyer.

A government study on the valuation of foreclosed properties published in 2004 called "The Value of Foreclosed Property: House Prices, Foreclosure Laws and Appraisals" if you are interested in the formula.

So it makes perfect sense for the lenders to encourage sales of properties the lender is willing to short sell so that they are attractive to retail buyers.

But that is not what is happening. Just the opposite, the lenders discourage the participation of retail buyers in the short sale process and instead encourage transactions with investor buyers at prices as much as half what the retail buyer is anxiously willing to pay.

Why the retail buyer is blocked from the short sale marketplace.

As stated before, the retail buyer is on a timeline. It has a start and a finish and usually the finish is a definite date at which time the retail buyer must make a financial decision and a housing decision. When the retail buyer enters into a contract to purchase a residence the time to close (approval time) is a most important factor. Other property offerings are likely going to come and go during the time the short sale process moves through the lender and there comes a time when the buyer terminates the contract for another opportunity. When a retail buyer contract is submitted to a lender for a short sale approval we typically see a time to process of 90 to 170 days. Timelines like that completely discourage a retail buyer from continuing with the contract and thus, we generally see the same property put to contract several times - frustrating the lender, the brokers and the sellers. Usually (but not always) the final sale price is lower than the original contract price submitted in the first go around with the lender.

Lenders are taking a loss on short sales that are literally breaking the bank. Bank failures are on the rise and some analysts say that there will be several medium size bank failures in 2008 and early 2009, with one report from a major news organization citing sources that there will be at least one more major lender go bust. FannieMae and FreddyMac are serious contenders for national takeover (and the resultant loss of equity to all of their shareholders) because of the billions of losses they are experiencing. This is too serious a problem to just talk about. The lenders need to immediately address the problems with their short sale procedures.

Short Sale Lenders create an obligation to conduct themselves responsibly.

Lenders are always telling me, "We don't have to do this short sale, we are doing it as an accommodation to the borrower". But, that statement reminds me of an old and true adage that says, "if you are going to do something you might as well do it right." Another more legal approach is, "if you undertake to perform a duty or service, you create an obligation to perform the duty or service in a manner that is not negligent or irresponsible." At this point in time, with few exceptions we have found that the short sale lenders have created "loss mitigation departments" or short sale negotiators whose sole purpose is to handle and process applications for modification of loans and short sale transactions. We have also found that within the same lender the practices and timelines are wholly inconsistent, even if the lender has distributed procedure outlines and timelines to those that represent the borrowers seeking the services of these departments.

A prime example is one major lender we dealt with this spring. We sent in two short sale contracts on the same day. The seller and the lender was the same in each transaction and the financial documents submitted were identical. The neighborhood was the same in each transaction - in fact the properties were within 500 feet of each other and both were multi-unit rental properties. We started calling to follow up the contract submissions within 10 days of submittal.

On property A we were contacted by the lender's representative the next day, the appraisal was ordered and within 24 days we had the approval for the sale, which then closed within 30 days. Total time was less than 60 days from contract submittal. We had asked that lender representative to takeover the property B file but it was not in his control to do so.

On property B, by the time property A had already closed we were still awaiting the appraisal from the lender, then the file was transferred and the process began again. 120 days later the buyer withdrew from the contract. Around the same time the lender's representative said the seller (not the property) was not qualified for a short sale. 180 days later the broker is still looking for a new buyer. This example may be extreme, but certainly it is not uncommon and in fact, it is probably more the norm than the exception.

In conclusion.

Realtors must do short sales to keep a flow of business in this market, especially in depressed markets like Florida, Nevada, and California. But many rightfully cringe at the prospects of having to endure the work and frustrations that usually accompany working with the mortgagees, including multiple contracts and multiple buyers.

There is talk within lenders of procedures and timelines and some even publish these procedures and timelines. Regardless of published procedures and timelines, the lender representatives are working on individual standards (which may be interpretations of the lender's procedures) and there is no norm by which consistency can be promised by any lender.

Until there is a recognition by the lenders that if they are undertaking programs to allow the short selling of properties, they should structure programs specifically for end purchasers and for investor purchasers, the market will naturally settle to the lowest value because of long drawn out uncertain results.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com

FLORIDA FORECLOSURE FRAUD BILL - UPDATE

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Sat, 13 Sep 2008 22:17:07 -0500

Government can react positively when enough people raise their voice - and the law is clearly against public policy. This post updates my article on the Florida Foreclosure Fraud Bill.

The Florida Foreclosure Fraud Bill, which I reported was written in such a way that borrowers could be barred from access to legal representation has been corrected - but not by the legislature.

The attorney general has certain interpretative powers and expressed them in a letter to John White, President of the Florida Bar in early January.

This clarifies an important aspect of the regulation of "foreclosure rescue" firms proliferating our landscape.

Second Mortgage Short Sale - Holding Up the Railroad Loot

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Mon, 08 Sep 2008 22:47:08 -0500

The Second Mortgage Dilemma can ruin your short sale -

Like the old West, the stagecoach holding the railroad's payroll was always getting held up by the bad guys - at least in the movies. Has much changed in the Wild West environment of short sales and the fight between primary and secondary mortgage holders?

Remember the old adage, "the tail that wags the dog"? Second mortgage lenders are experiencing percentage losses probably beyond the losses of first lenders. In mortgage foreclosure proceedings the second mortgage typically ends up with little if any dollars from an overbid on the first mortgage judgment, and if there is no bidding because the property is worth less than the foreclosing mortgage, the first lender typically receives the property for a nominal bid and the second mortgagee loses its collateral entirely.

Second mortgages and their short sale resolution have a whole different set of rules vs. short sale with only one mortgage.

Issue #1 - the "under the table" payment.

In the short sale transaction where there is a second mortgage encumbrance that must be cleared, we are increasingly seeing the second lenders "hold-up" the transaction in an attempt to flush out more money. If the seller has no more money to give up and the first lender has no more money to let loose, then sometimes the brokers or the buyer will contribute to pay the second mortgage lender. The problem is the payments to the second mortgage lender are not authorized by the first lender and thus are literally "under the table". By this I mean that the payment is outside of the settlement statement. That being the case the second lender is creating a fraud upon the first lender. I have not researched whether this practice is a violation of banking or other laws. As Realtors and attorneys we know that the settlement statement is to properly and accurately reflect the actual residential transaction. Dual and different settlement statements or non-disclosed transactions part of the closing are prohibited. Yet, without this practice a significant number of transactions would fail to close. Although it is not easy to swallow, the best practice is to get the 1^st lender to approve the payment. It takes longer but with a smart loss mitigator for the lender it will get approved. Making the loss mitigator "smart" may take patience and information, and of course more time. But honesty can pay big dividends not only for the pending deal but for future deals as well (provided you get the same lender loss mitigator).

Issue #2 - the failed contract.

Sometimes opportunity knocks. You go through the whole deal and the first mortgage lender is in approval for the short sale and the second mortgage lender is also in agreement. The buyer walks from the deal. Or maybe the first lender has some problem with the deal. You still have an approval from the 2^nd lender. We have become successful in simply advising the 2^nd lender of the problem and asking them if they will take the money as if the sale went through. So far our experience is that they usually will take the money and issue a release of the mortgage and typically a release of liability of the borrower... This can put the owner is a seriously better position than before and possibly even allow the owner to keep the property.

Issue #3 - the conflicting appraisals

For the most part, serious 2^nd lenders have a problem with the short sale when there is an appraisal or BPO in possession of the 2^nd lender that is materially higher than the appraisal of the 1^st lender. Recently we had a 2^nd lender that said that the sale price was unrealistically low (at $165 per sq. foot) when other sales in the neighborhood were no lower than $240 per sq. foot. After careful examination and discussion with the first lender and the selling broker we determined the tax assessor as well as the 2^nd lender's BPO (which used the tax assessor's information) showed the home to be 45% larger than it actually was! This was precisely the difference in the valuations. The 1^st lender got it right because they used an appraiser that actually measured the home. 7 weeks later the deal is closing this week.

Dealing with 2^nd mortgages in short sales takes time and timing. Don't leave the 2^nd mortgagee for the end of the process with the assumption that they will fall in line and go away. They don't and they are growing smarter. Keep every lender in the loop and the deal will go smoother.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com

BANKS CREATE BILLIONS (MORE) IN LOSSES

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Sun, 24 Aug 2008 22:00:15 -0500

Short Sale Buyers are increasingly investors seeking to buy and flip or buy and rent for positive cash flow. Missing from the field are homebuyers seeking a place to live. Why?

Banks Encourage Short Sale Investors and Discourage Retail Buyers

Next, let's look at the goals of the buyer of a short sale. There are two types of buyers.

So it makes perfect sense for the lenders to encourage sales of properties the lender is willing to short sell so that they are attractive to retail buyers.

Why the retail buyer is blocked from the short sale marketplace.

Short Sale Lenders create an obligation to conduct themselves responsibly.

In conclusion.

Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios

Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.) — Tue, 10 Jun 2008 22:56:29 -0500

Basic Primer - the Mechanics of a Mortgage Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios-

We get so many questions about having a "deficiency judgment" entered and how it differs from other possibilities in a deed in lieu of foreclosure or short sale, that a refresher article seems appropriate for Activerain. If you are unsure of what a Short Sale is, then first read the Back to Basics - a Review on Short Sales .

This article is written based on Florida law, but most state laws are similar. Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

The Law of a Mortgage Foreclosure:

A mortgage foreclosure (some incorrectly call it a "Lis Pendens") is filed by the lender when the Promissory Note that is secured with a Mortgage on some real estate (usually the home) has not been paid on time (the "default").

Let me clarify an important issue that will have meaning later. A "Mortgage" is NOT the obligation to pay the bank. The obligation to pay the bank back the money it loaned along with interest is called the "Promissory Note". The bank makes two types of loans. Secured loans are when the bank wants the Promissory Note to be collateralized with something of value. In real estate that "something of value" is usually a "Mortgage" and it collateralizes or secures the Promissory Note with the house or other real estate. So when we say only the word "Mortgage", technically you are referring only to the security document and not the Promissory Note. Likewise when we say the words "Promissory Note", we are referring only to the obligation to repay the bank.

If there was only an "unsecured" Promissory Note and there was no Mortgage, the suit would demand payment of the Promissory Note and then the judge after hearing the evidence, would likely issue a Final Judgment against the borrower and in favor of the bank for the amount of the unpaid Promissory Note along with accrued interest, late fees and court costs and attorney fees. The Final Judgment would also be entitled to interest (in Florida that rate is now 11% a year) until the Final Judgment is paid in full.

A mortgage foreclosure is actually a four step process.

The first step is to file suit (called the "Complaint") on the non-payment of the Promissory Note. (Yes, there are other reasons for a foreclosure suit to be filed, like an unauthorized transfer of the real estate, or non-payment of the real estate taxes, but we are going to focus on not paying the Promissory Note). An action (the suit) is filed at the courthouse and it consists of 3 documents. The first is a Summons, which directs you to answer the Complaint. The second is the Complaint, which describes why the bank is entitled to the relief it is asking for - the payment on the Promissory Note. The third is the Lis Pendens, which puts the public at large on notice (since the lis pendens is filed in the public records where the property is located) that anyone dealing with the property should know that a claim has been made against the property in the Mortgage. (Lis Pendens literally means "pending litigation" and is one of those fancy Latin words that we lawyers banter about).

Step One: The Complaint will describe that there was a Promissory Note signed by the borrower to evidence that it was to repay the bank the money, and that to induce the bank to make the loan the borrower also signed a Mortgage on some real estate that promised that if the Promissory Note was not paid, the real estate could be sold and the proceeds would be used to pay the Promissory Note. It will also say how much is unpaid and what additional money the bank may want for the non-payment of real estate taxes, for example. It will finally make a "demand", which will ask that if the borrower does not make payment on the Promissory Note to the bank, then the real estate should be sold under court supervision at a public auction, and if there is insufficient money bid for the real estate, the court should give to the bank a judgment for the shortfall (the "Deficiency Judgment")

Step Two: After statutory time periods have run (for example, 20 days to answer the Complaint, the bank can more for a final judgment. This is usually accomplished (in Florida) with a Motion for Summary Judgment, or similar name. Another 20 days must elapse before this hearing can take place, once the motion is filed. In reality (at least in Palm Beach County right now) that time period can be several months before a court date on the Motion for Summary Judgment can take place.

At the Motion for Summary Judgment hearing the bank must prove that there is a valid Mortgage securing a valid Promissory Note and that it is unpaid. The judge will then issue a Final Judgment of Foreclosure that says (1) if the borrower does not pay the bank the amount the bank proved is due to the bank within usually 30 days, the real estate is ordered to be sold by the clerk of the court to the highest bidder, and if the highest bidder bids less than the amount due to the bank then the bank can come back to court and request a Deficiency Judgment. It is important to note that the Final Judgment of Foreclosure is NOT a money judgment against the borrower! However, depending on step three below the bank can move to obtain a money judgment later on.

Step Three: Assuming that the borrower has not paid the bank to the bank's satisfaction during that 30 day period, the public sale (the "foreclosure sale") will occur. It is conducted by the Clerk of the Court and it usually occurs "on the courthouse steps", but more usually in a courtroom or meeting hall or even in a large hallway in some courthouses. The property is announced and bidding starts at $100 and goes up from there. The bank is able to bid for the property and it will do so to "protect" the collateral up to the amount (and usually beyond) the bank has determined the property is worth. Usually the bank will bid up the amount of the judgment it received from the judge. (This is great news for the borrower, but that is another article I need to write). More often than not the property gets sold to the bank for a mere $100 and there are no other bidders at the foreclosure sale.

Step Four: I am now again making as assumption. The assumption is that the bank ended up with the property at the foreclosure sale by bidding one hundred dollars. In that event the borrower still owes the bank money to satisfy the promissory note. The amount of the remaining balance is what is in question.

To figure get the balance of the monies the bank must go back to court to ask the court to award it a "Deficiency Judgment". The amount is what is in question and the amount is measured using various rules. In our example the bank bid $100. The court is not going to say that the house was worth $100 and $324,900 is still owed. For our assumption and as an example we will say that the property is worth $200,000 and the foreclosure judgment is for $325,000. That means the court will ask for an appraisal of the property as of the day of the foreclosure sale and the judge will likely give it that value. So it will be the appraisal value less the judgment amount which will equal the Deficiency Judgment. If the appraisal is $250,000, the Deficiency Judgment would be $75,000. Now if there was real bidding at the foreclosure sale the judge could consider that bidding and instead adopt the selling price under the competitive bidding process that occurred at the foreclosure sale. Then the Deficiency Judgment would be the difference from the foreclosure judgment and the winning bid amount. If the competitive bid was $240,000, then the Deficiency Judgment would be $85,000.

A little issue that comes up is how long the bank has to get the deficiency judgment. The Florida Statute of Limitations (time to enforce) the Promissory Note is 5 years from the time it went into default.

There is also a rule on how long a plaintiff can keep open a lawsuit that has no activity. That rule says after 1 year of inactivity, the lawsuit can be dismissed by the court. The rule is referred to the "Failure to Prosecute Within One Year" rule. IF the court dismisses the lawsuit after one year and before the bank asks for a deficiency judgment, the bank cannot again seek to enforce the promissory note. So the answer is generally 5 years from the time the Promissory went into default (some argue it starts when the bank makes a demand to accelerate the Promissory Note), and it can become shorter.

Deed In Lieu of Foreclosure:

Almost every client I meet with first starts out wondering if they should "just give the property back to the bank". I tell them first off that, "it ain't so easy."

A Deed In Lieu has many prerequisites. The first is that the property cannot reasonable expect to be able to be sold within a reasonable period of time. The second is that the bank to receive the Deed In Lieu must be the only lienor. This means there can be no second mortgage and the borrower must be clean of any claims or judgments from other creditors. In other words the title to the property must be "clean" except for the bank's mortgage. (Note that if the bank with the first mortgage also has the second mortgage or HELOC, the Deed In Lieu is still a possibility.)

The issue becomes what becomes of the disposition of the Promissory Note? There is documentation in a Deed In Lieu that is very important to the borrower. This documentation can be an agreement in conjunction with a deed to the bank, or it can be written right into the deed to the bank from the borrower for the subject property. In any event the document(s) must provide that as part of the consideration for the giving the property to the bank the Promissory Note is satisfied in full. If this language is included, then there is no further liability of the borrower to the bank and no lawsuit to enforce the Promissory Note can occur. Most of all, banks don't like to have to sell your property so they don't like taking property to have to manage and sell. It is expensive to take in your property and unless your property is worth more than the amount the bank loaned to you, the bank is likely to only loose more money than if you sold it for them. That is why the do short sales and deeds in lieu.

Short Sale Negotiation:

A short sale by its nature does not encompass a law suit to foreclose the Mortgage or a lawsuit to enforce the Promissory Note and that is one of the primary advantages of this method of loan workout. On the other hand, there is often a Mortgage Foreclosure Suit already in progress when a short sale is attempted to be negotiated. [It is important to realize that a short sale "attempt" does NOT stop a Mortgage Foreclosure Suit. The bank may instruct its attorneys to delay acting on certain aspects of the suit - usually getting the Foreclosure Judgment or if one is issued, then delaying the actual conducting of the Foreclosure Sale].

The short sale does often times result in a "Release" of the lien of the Mortgage but not a "Cancellation" or "Satisfaction" of the Promissory Note. It is this remaining financial obligation that is the crux of so much discussion about "1099's" and forgiveness of debt. Sellers Always Have Income is a comprehensive article on the subject and also deals with recent legislation on how income does not have to be recognized.

Unless a release or satisfaction of the entire Promissory Note or in the case of a property with more than one loan, then each Promissory Note is obtained, there remains the ability of the bank or banks to sue the borrower for the balance of the unpaid promissory note. In the case of a 2^nd Mortgage, this might be the entire amount of that loan if the 2^nd Mortgage bank took nothing so the short sale could succeed.

The documentation regarding a short sale is very important. The borrower needs to know what further obligations could be in the future as a result of the short sale. Like the Deficiency Judgment statute of limitations, the balance of the Promissory Note must be enforced within 5 years of the default or the demand for payment by the bank. The rule about the one year dismissal for lack of prosecution does not apply to the short sale scenario.

If the unpaid balance of the Promissory Note is enforced by the bank, then it can file a lawsuit against the borrower (if done within that 5 year period) and the result will likely be a Judgment for the payment of money in the amount of the unpaid portion of the Promissory Note. Many persons that short sell and do not get a release of the Promissory Note utilize an offer to pay back all or a portion of the Promissory Note balance with a new unsecured promissory note. This new promissory note replaces the old Promissory Note. The new promissory note can also be enforced by the bank in the same way as the old Promissory Note, but the time to enforce it will be based on whatever new default might occur if the terms of the new promissory note are not followed by the borrower.

The Second Bite from the Apple

An interesting twist is being used by the banks. They take the now unsecured remaining balance of the promissory note, or the new negotiated promissory note, and sell it to investors for 5 to 10 cents on the dollar. Then the new investor tries to collect on the promissory note. This is mentioned in my article on Negotiated Paybacks. Obviously this represents an opportunity to negotiate the remaining balance a borrower may have on the old loan - sort of a second bite at the apple.

Opportunity abounds for finding solutions for those that need a short sale or find themselves in a foreclosure action. No solution is a panacea for the borrower's troubles, but the solutions present an ability for a borrower to make a bad situation a little less bad, and it gives some control to the borrower over what is otherwise a nightmarish situation.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com