Z's Legal Experience Blog

IRS announces a new tax receipts form 4506T-EZ

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Wed, 28 Oct 2009 22:06:18 -0500

Michael Lampert Esq., the tax attorney who is Of Counsel to my law office has alerted me that on October 21, 2009 the IRS issued a new form, 4506T-EZ, entitled "Short Form Request for Individual Tax Return Transcript". This new form will make it easier for homeowners trying to short sale, modify, refinance or finance their mortgages to obtain their tax return transcripts.

A transcript is a computer print out that includes most line items on the original return. Many lenders accept the transcript as a substitute for a copy of the original tax return for income and other verification purposes.

Many of you that do short sales or loan modifications are familiar with the old 4506T form usually requested by lenders as part of the request documentation. This new form is a simplified ("EZ") form of the 4506T, Request for Transcript of Tax Return. It is only for obtaining copies of 1040 series (including 1040A and 1040EZ) individual income tax returns. It can be filled out online, printed, and then submitted by fax or mail. Upon the taxpayer's request, the transcript can be sent directly to a third party, such as a lender. It is expected that a request will take 10 days to process.

As a reminder, taxpayers still should keep copies of their original return in a safe place. Copies of the actual tax return can be obtained by filing form 4506, Request for Copy of the Return, usually at a cost of $57 per return and a two month time frame.

Taxpayers also should be careful to fill out all parts of the form, including the years requested and who is to receive the information. Remember that once the IRS sends the information to a third party, such as a lender, the IRS has no control over what a third party does with the information.

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.

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

SHORT SALE LENDER CANNOT REDUCE COMMISSION TO BROKER

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Mon, 12 Oct 2009 20:25:57 -0500

One of the great drawbacks to a broker taking on a short sale listing is the fear and often the reality that the short sale lender will demand a reduction in the broker commissions. This has created all sorts of contraptions to make the broker whole.

I have seen contracts that have inflated commissions designed to make the lender reduce it; I have seen deals to have the buyer guarantee the broker commission short fall. There are more and some not yet invented - I wrote about one 2 years ago in BUYER AGENT REMORSE - PREVENT A COMMISSION REDUCTION ATTACK!

This summer a case was decided in Iowa (and reported by the NAR) where the appellate court said the short sale lender could NOT renegotiate the commission and it is worth noting.

The case of Stewart v. All States Quality Foods decided May 29th has specific facts but I have seen this type of scenario several times and it is worth noting if you are a short sale broker.

In simplistic summary (you can read the case by the link above and it is not too complicated to understand even on a first read!), the broker brought a contract to the lender and in the contract the lender knew that the seller was to get a commission of 10%. The lender said it needed more money and made a counter offer of a specific amount. The broker got that counter offer. Then the lender said it needed to net more and the broker offered to cut its commission to help get part of the way to that number. The lender balked and denied the sale.

The broker sued on its contract for the commission based on bringing a buyer ready, willing and able who met the counteroffer price asked by the lender. The legal theory that won was interference with advangeous business releationship - the listing agreement.

The key issue here is that the lender actively participated in the transaction by making the counter offer request and it being met. Also important is the knowledge by the lender of the existing listing agreement.

In all short sales that we handle we provide a copy of the Exclusive Listing Agreement to the lender, so knowledge in our situations would be met. If the lender makes a counteroffer then the lender is bound to accept it or it has violated at least one legal theory - if you are in Iowa. However the law and doctrines cited by the Iowa appellate court are in comport with many other states caselaw, Florida included.

Be aware of the rights and obligations of the parties to a short sale - especially when the lender oversteps its position as a lender and becomes an active participant.

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

MORTGAGE LENDER (MIS)USE OF MANPOWER?

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Sat, 10 Oct 2009 08:19:18 -0500

Is my mortgage lender guilty of misuse of manpower?

I just received a Saturday morning telephone call from GreenPoint Mortgage wondering why my mortgage payment was late. I asked when it was due and of course was told that it is due the 1st of the month and I have a "grace period" until the 15th of the month.

I realize that if I get the money to the lender on the 1st of the month or the 15th of the month there is no difference. I get no gold star for getting it to the bank before the 15th. In fact the amount of interest I am charged is no different whether I get the money to the bank before the 1st or after the 1st of each month. It is a 15 year amortizing mortgage and in 10 years I have never been late (past the 15th).

So why is GreenPoint Mortgage having precious personnel calling me instead of using that manpower to deal with people actually late on their mortgages or needing and waiting endless months for modifications?

Grrrrr!

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.

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

Mortgage Delinquencies - The Coming Storm

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Thu, 01 Oct 2009 09:26:37 -0500

Jeff Georghan a Realtor in Pennsylvania put together this detailed analysis of mortgage delinquencies and why the problem is going to get WORSE before it gets better -- I felt this was well worth my bringing it to your attention. -- Richard Zaretsky

Via Jeff Geoghan MBA - Lancaster PA Real Estate Expert (The Jeff Geoghan Realty Group, Coldwell Banker Lancaster PA):

This is one of those posts where I wish I didn't have to write it, but felt it was so important to my readers that I would be remiss not to at least talk about it.

Everyone out there probably knows somebody who is behind on their mortgage payments, looking for alternatives and likely also just finding out that their home's value has dipped below what their loan amount is. I know some within my own personal circles. It's a tough situation for me to advise them as a professional because it's such a personal challenge to their pride and self-worth, not to mention their plans and dreams for the family. The question we're asking is "when is this going to stop and where are we heading?"

I'm going to put up a few graphs that show the trends nationally with regards to mortgage delinquincies:

This chart is by quarter - Single-family mortgages set a new record delinquency rate in the second quarter of 2009, according to a quarterly survey by the Mortgage Bankers Association. Those of us in the real estate business see the foreclosure process (just visit the local Sheriff Sale docket to see the current numbers) but the looming delinqency-to-foreclosure issue is far, far larger.

The Wall Street Journal on 8/3/09 reported the following quote: “While subprime mortgages sparked the first round of housing problems two years ago, now "troubles are lurking further up the food chain," says Joshua Shapiro, chief U.S. economist at MFR Inc. White-collar job losses have accelerated while more adjustable-rate loans to prime borrowers are resetting to higher payments. ‘You put all that together, it leads me to believe that the next leg down on home prices is going to come from the top,’ he says.”

The first objection someone may have would be to say "yes, but historically those who are delinqent usually get their act together and come current on the mortgage after a while". That WAS true, but not anymore! We call that the "Cure Rate", that is the rate of delinquencies that go back to current. The Wall Street Journal reported on 8/24/09 about a Fitch analysis that found that the Cure Rate from 2000-2006 was 45% (which means about half of people fix their delinquency). However, as of July 2009 the rate had dropped to just 6.6%! That means that over 90% of delinquent customers are going to foreclosure. Take a look again at the above chart...

The next thing someone will say is "well, that's the 'sand states' and not my area". Here's the chart for all 50 states showing the same breakdown of delinquencies and foreclosures. Guess what - most states have a significant problem, especially compared to historical figures.

Now the next thing someone may say is "aren't those loans going to get 'fixed' by a loan modification?" I know several people right now who are applying for a Lancaster County loan modification but are waiting and waiting. I hope it works out for them...

In reality, loan modifications are hardly making a dent. To me, that's a burning question. Why arent banks being more aggressive in giving customers the option to extend their loan and/or reset to a lower rate? Why are they being SO difficult? The people I know don't want to be foreclosed. They CAN make payments. They just need the terms redrawn to allow them to catch & keep up. Loan modifications are not helping us get this crisis under control.

What are the causes of all these delinquencies? Here's a chart that is enlightening:

We hear a lot about adjustable rate mortgages being the culprit, but the reality is that it's the loss of jobs and the tanking real estate market that's the perfect storm. See my previous post on unemployment in the nation, the state and Lancaster County.

Keep in mind, this post is not intended to give us "good news". You may be experiencing good things in your market and that's great. My intent is to get us thinking about the challenges that aren't going away and how we're going to address them as homeowners, agents and professionals. I'd love to hear your ideas!

MORTGAGE FRAUD and SELLER FRAUD = WE PAY THE BILL

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Sun, 27 Sep 2009 09:28:40 -0500

Does anyone in Versailles have any decency? Two years ago a potential client working as a mailroom clerk for 35 years - came into my office regarding a mortgage modification. He and his wife each made $35,000 annually and he purchased a new Versailles Wellington Florida home costing $1,400,000 for his family and in-laws to live in. He already had a home in Miami with a $170,000 mortgage that he wanted to keep. The 100% financing mortgage was a 1.4% pay-rate negative amortization and had no escrows.

Taxes alone on the house were more than either of their salaries, not to mention insurance, homeowners' association fees and maintenance costs.

His desire was to keep the home and although he was unable to pay my modest legal fee, he came to me 3 times - each time I told him he had been swindled. On top of that, we was about to have mandatory retirement from his long time job.

It seems that this community - the swankiest looking over the top community in the Wellington community in Palm Beach County - is not littered, but now choked with foreclosures with buyers with similar stories. Over 15% of homes in this relatively small community of under 450 homes built beginning in 2005 are in foreclosure. Many of these foreclosure homes never saw a single payment of the mortgage - yet it took lenders 9 to 33 months to file a foreclosure action. Many of these foreclosed homes have never been lived in (buyers take note!).

Now it comes out that most of these buyers all came from areas in the Miami area and many purchased not one, but more than one home - each time qualifying for a mortgage financing while keeping their already mortgaged modest home in the Miami area.

Who benefited? The builder sold the homes at double today's prices as if they each had $10 million dollars hidden in the attic. The mortgage broker fees were significant on the loans. And the poor purchaser sitting in front of me was still dreaming that this home was going to be his retirement paradise.

The Palm Beach Post newspaper this morning has an investigative article on the development "How Foreclosures Hit Versailles" with names, mortgage amounts, addresses of the buyers' modest home and foreclosed home, and lots of pictures. This is the beginning of a valuable investigative effort by the newspaper well worth reading.

The frightening issue is not just that this potential client - and all the others - "qualified" for these mortgages. I could understand if these were "flips that flopped" - but this buyer at least expected that he could afford to keep the house!!! This expectation was not from an insane person, but he had been convinced by an apparently slick sales person that he could achieve an impossible dream and ensconce his family for their retirement in a palace - all on $70,000 a year. I would bet that a good percentage of his co-foreclosed neighbors (that never even moved into their new home - probably because they could not afford the move) had that same dream.

Who pushed these buyers to purchase homes that they absolutely could not keep? What were these buyers thinking? What was the seller thinking? And what was the mortgage broker thinking? Did none of these people have any decency to see what they were participating in was wrong?

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

DISTRESSED HOMEOWNERS DEFRAUDED BY ATTORNEYS - EXPOSED IN CALIFORNIA

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Wed, 23 Sep 2009 21:54:09 -0500

I have previously written about how attorneys can be great and how they can be bad in the field of helping distressed homeowners. Now the California Bar Association has published the preliminary results of an investigation into those attorneys supposedly offering services to help distressed homeowners in one of the hardest hit states.

Attorneys, especially real estate attorney, but also divorce and family law, criminal and commercial law practitioners have had a few dismal years. Finding a new niche appeared easy to some attorneys, especially with promises of "loan modification experts" telling them to just refer the business their way for a referral fee.

As stated in my previous blog articles, the problem is several fold. For one, attorneys to get this business were paying illegal referral fees to non-attorneys. Another is that they were practicing law in states without a license in that state. And yet another is that they were fronting for loan modification firms but not really doing any work for their "client". And the "client" actually was the loan modification firm and not the distressed homeowner.

In my practice, which includes extensive work on short sales and loan modifications as well as foreclosure defense (whatever that means), we have people coming in showing us examples of: Attorneys sending non-legal "salesmen" out to solicit business for a company that the attorney then gets a "legal fee" from; giving false information - I can't say it is "wrong" information because it just isn't; and attorneys offering "delays" as a solution to a distress homeowner - typically saying, "we will delay and delay (for which you will pay me a monthly fee) while you don't pay your mortgage (and stay in the house for free, or collect the rent from your tenant) and then when the bank finally gets through the delays we will offer to settle with them for a modification or whatever". Sound lilke a plan to you?

Distressed homeowners should seek help -- BUT: 1. Be realistic in expectations; 2. If it is too good to be true, it isn't. 3. If you are being pushed to sign up, DON'T! 4. Get recommendations and actually check them out!

TENANT EVICTION LAW AND FORECLOSURE PROBLEMS

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Fri, 07 Aug 2009 05:44:12 -0500

In March I wrote about the problems tenants faced when the landlord was in foreclosure. See TENANT RIGHTS AND FORECLOSURE - A DISCUSSION OF SAFEGUARDS. Some, but not all, issues have been addressed in new legislation that went into effect May 20, 2009 called the Protecting Tenants at Foreclosure Act of 2009 (note: it is Title VII in this link). There is still the advance rent and security deposit issue as the ACT does not address how the tenant can protect itself from the loss of those monies.

New new Act is very broad and effectively covers every residential mortgage in every state. It does NOT apply to tenancies that are not "bona fide" - and that definition is also very broad. For example, if you are in foreclosure and the tenant is your child, the Act will NOT apply.

The key is when was the lease entered into - was it before or was it after the foreclosure was filed? If it was before the lease was signed, then it takes precedence over the mortgage foreclosure and the tenant cannot be evicted because fo the foreclosure - provided the tenant does not breach the lease. The ONLY exception is if the buyer is purchasing the property as its PRIMARY RESIDENCE, in which event the 90 days.

If the lease was after the foreclosure, then the tenant can be evicted 90 days after notice to vacate is given by the NEW owner after the foreclosure sale. In essence, any lender must give any bona fide tenant 90 days to vacate the premises AFTER the lender or any other buyer at a foreclosure sale acquires title to the property. Of course some state tenant laws still apply, for example, if the prior Landlord (the foreclosed owner) had given a notice to vacate prior to the foreclosure sale occuring (because of a tenant breach) in which event that notice start date would remain applicable.

The HUD explanation is simple regarding the notice to vacate:

(1) The advance notice applies to tenants in any foreclosed dwelling or residential real property, regardless of the type of loan or other security interest on the property.

(2) An advance notice of 90 days is the minimum period of notification. A longer period may be provided, for example, if greater protections are provided by state or local law.

(3) Responsibility for providing the advance notice to tenants falls on the immediate successor in interest of the property, which will generally be the purchaser.

(4) The notice must be given to anyone who, as of the date of the notice of foreclosure, is a bona fide tenant, whether or not there is a lease.

A detailed analysis of the Act is found at: PROTECTING TENANTS AT FORECLOSURE: NOTICE OF RESPONSIBILITIES PLACED ON IMMEDIATE SUCCESSORS IN INTEREST PURSUANT TO FORECLOSURE OF RESIDENTIAL PROPERTY.

Remember that during the remaining term of the lease or the 90 days notice period, the terms of the lease still apply - the tenant obligations to maintain the premises, pay rent, etc. must still be adhered to by the tenant or they can be sued and evicted by the new owner! This new law is NOT a free ticket for tenants!!!!

It is important to recognize that the new law is only a starting point - STATE LAWS that provide greater protections are still in place and will override the new federal law. I would also note that if the lease term was finished before or during the 90 day period, the lease term is NOT extended by this law and normal state remedies for holdover tenancy would be in effect.

MISSING SECURITY AND ADVANCE RENT PROTECTION FOR TENANTS -

The ACT does not provide any monetary protections that I spoke about in my previous article and therefore the game plan in that article still applies. The problem is that most tenants gave to the original landlord last month's rent and a security deposit. The new owner has no responsibility to the tenant for those monies!! So what to do - see my suggestions in TENANT RIGHTS AND FORECLOSURE - A DISCUSSION OF SAFEGUARDS.

There can be other more imaginative ways to proceed - but remember that because the old landlord that lost the house isn't the owner anymore does not mean that you get a free 90 day pass to live in the house (althought that is how it is likely to pan out for new owners). The new owner can sue the tenant for unpaid rent for the 90 days. That leaves the tenant in a conumdrum of how to recover the deposit and advance rent and that is why participation in the foreclosure suit with a request to the court to deposit monies to the court registry is going to be the best legal route a tenant can take to demand and get fair treatment regarding its financial obligations. My suggestion is to get involved as a tenant in the foreclosure suit when served with the foreclosure summons and complaint. You may want to seek the advice of an attorney in your State when doing so.

Richard P Zaretsky PA- Palm Beach County Real Estate Attorney

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Thu, 06 Aug 2009 19:30:28 -0500

Via Nestor & Katerina Gasset Realtors® Wellington Florida Luxury Homes (International Properties and Investments, Inc.):

Richard P. Zaretsky - Palm Beach County Real Estate Attorney- Residential and Commercial- opened up his law office in West Palm Beach Florida in 1978.

Nestor and I had lunch last week with Richard and his son Max who runs their short sale division. Richard Zaretsky is also an Active Rainer. He writes great articles on the particulars of short sales and foreclosures. Reading his blog will keep you busy and learning for hours.

We talked about the short sale business and how they run their short sale division and foreclosure defense divisions and how we run our company. It never ceases to amaze me that when we meet fellow Active Rainers it is like meeting long time friends you have not seen in a while. Of course no meeting with fellow short sale experts would be complete without exchanging war stories.

I was impressed at the level of knowledge of both Richard and Max. We feel comfortable in referring our clients who need foreclosure defense or loan modifications to Richard Zaretsky. They are professional and put their clients first.

Richard and his wife Esther who is also an attorney moved to Palm Beach County Florida in 1975. He was an assistant attorney general of Florida before he opened up his practise in 1978 and he has been in the same building ever since. He graduated Cum Luade from Deleware Law School Widener University. Mr. Zaretsky is AV rated by Martindale-Hubbell, their highest rating for attorneys.

Richard Zaretsky is a member of Temple Emanuel and the Palm Beach Orthodox Synagogue. He has been a board member of the Jewish Community Day School, a past member of the Professional Advisory Committee of the Foundation of the Jewish Federation. He has participated in a lot of community service work.

His expertise in law includes all aspects of Real Estate Law including:

residential and commercial real estate transactions,

loan modifications,

short sales,

foreclosure defense,

lending and mortgage transactions.

Here are some of the posts that Richard has written that are very imformative:

Foreclosure is NOT a Remedy - 2nd in a Series

Foreclosure? When is the Best Time to See an Attorney?

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES -

LOAN AUDITS - FORECLOSURE DEFENSE FALLACY?

WALK AWAY FROM THE PROPERTY - STRATEGIC MORTGAGE DEFAULTS GROW TO 26%

Richard Zaretsky can be reached at:
The Forum
1655 Palm Beach Lakes Boulevard, Suite 900
West Palm Beach, Florida 33401
Map and Directions

Telephone: 561-689-6660 | Fax: 561-683-1559

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Foreclosure is NOT a Remedy - 2nd in a Series

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Tue, 28 Jul 2009 06:30:25 -0500

In the preceding blog article I addressed the issues when a borrower waits until they get before a judge to determine that they may want an attorney to represent them. Foreclosure is NOT a Remedy deals with the issues when a borrower has been served with a foreclosure complaint (sometimes mistakenly called a "lis pendens") and more than the time allowed for a response to be filed with the court has come and gone, and no attorney is involved on the borrower's behalf to pursue any available defenses to the foreclosure proceeding. But don't lose sight of the caveat that the borrower should always be looking for alternatives to foreclosure.

These articles discuss:

1. "I have a hearing next week before the judge to tell him my story."

2. "I was served with a foreclosure complaint (lis pendens) months ago".

3. "What does this ‘Final Judgment of Foreclosure' mean?".

This article addresses the 2^nd item on the list - I was served with a foreclosure complaint - months ago.

The time to see an attorney is ideally when the borrower realizes that a financial distress problem is likely on the horizon. As for delaying that meeting - it all depends on what threshold events are occurring or have already occurred. Planning and defenses can take time to put into effect or to create, and alternatives to foreclosure take time to establish and put into effect. Any block of time taken off the timeline by procrastination or delay can create a loss of the ability to use that alternative or raise a particular defense to the foreclosure.

The Initial Response

The first thing to realize when you get a foreclosure (lis pendens) complaint served upon the homeowner is that it MUST be responded to within the time stated on the Summons - usually 20 days from the date it was handed to you or posted on your door. Sometimes service is accomplished by "Notice of Action" publication and special rules apply to that type of "substituted" service of process. A "must read" to understand this process is A LAWYER'S EXPLANATION OF THE FORECLOSURE PROCESS.

The Type of Response - Motion to Dismiss / Answer / Affirmative Defenses

The type of response depends on the strategy of the borrower. If there are defects in the complaint then a Motion to Dismiss should be filed. Failure to file a Motion to Dismiss can be a waiver of the defects in the complaint. Defenses should not be confused with defects. Defenses can be pleaded in the Answer as Affirmative Defenses. Failure to plead Affirmative Defenses are waived if not plead. There are specific time restrictions when a defect or defense can be plead (filed). An untimely motion or defense will not be allowed by the court, even if it has merit. For a discussion on the effect of defenses, see FORECLOSURE DEFENSE FALLACY for what may or may not be a valid usable defense.

The Foreclosure Complaint Motion for Default

The key event if the borrower has not responded to the Complaint in a timely manner is whether or not the lender's attorneys have filed a Motion for Default against the borrower. The granting (sometimes by the Clerk of Court instead of the Judge) of a Motion for Default or Entry of Default, prevents the borrower from filing any responsive or defensive pleading for the rest of the case! A default can be set aside by the Judge, but only in certain situations for good cause and it is completely within the Judge's discretion.

The Amended Response

What happens when the borrower filed a letter or some other inadequate pleading in response to the Complaint before retaining us? If we can show that there are likely viable defects in the Complaint or arguable defenses to the Complaint, usually the Judge will allow an amended Answer and the filing of amended or first time defenses. Less seldom is a Motion to Dismiss allowed, unless we can show that the Motion raises good grounds for a jurisdictional defect or significant inadequacy in the Complaint.

After the initial pleadings the case will usually proceed to a Motion for Summary Judgment. This was discussed in the previous article Foreclosure? When is the Best Time to See an Attorney? (click on this link).

Foreclosure is NOT a Remedy

During this process the borrower should be pursing other remedies. Our policy is that Foreclosure is NOT a Solution. That is why I just didn't use the term "alternative remedies". Foreclosure is NOT a REMEDY for the borrower - it is a RESULT of unfortunate events.

Foreclosure? When is the Best Time to See an Attorney?

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Thu, 23 Jul 2009 06:43:29 -0500

First in a series:

My law practice encompasses assisting and guiding many borrowers that are in financial distress and we take the position that Foreclosure is NOT a Solution. Most borrowers come into the office for guidance and if they are lucky, planning for solution options once they realize that financial distress is a likely scenario. However there is a significant trend this third quarter of the year where we are seeing many more people coming to us with foreclosure suits that were filed many months ago, and now it may be too late to discuss all of the solutions that may have been available to the borrower had they come into the office for a consultation before or at least at the beginning of the process. Unfortunately, some lender representatives encourage their borrower to NOT seek the advice of an attorney or have attorney representation for a short sale or loan modification process - and the borrower often listens to that clearly self-serving advice.

These late comers fall into 3 categories:

"I have a hearing next week before the judge to tell him my story."
"I was served with a foreclosure complaint (lis pendens) 4 months ago".
"What does this ‘Final Judgment of Foreclosure' mean?"

This article will address the first category.

"At the hearing I am going to tell the Judge my story."

I am amazed at the number of borrowers that call or come in and tell me that they have a time to speak to the judge in just a few days. They are usually under the impression that this is a meeting, or maybe a hearing, where they can tell their story to the judge of how the lender promised them a loan modification. Usually part of their story is that the lender also told them to not pay their mortgage for 60 or 90 or more days (see SHOULD I PAY MY MORTGAGE?) and now they have a foreclosure pending.

These people usually also have no clue that they are going into what is 99% of the time, the one and only time they will have the opportunity to see the judge in their foreclosure proceeding. What they also do not realize is that this hearing is NOT an opportunity to present evidence to the judge.

The hearing is almost always a Motion for Summary Judgment. This type of motion allows the judge to only look at the existing court file and consider (a) the legal pleadings (the complaint, exhibits and testimony such as a deposition) that are in the court file. Often there are rules (depending upon the state your case is filed in) that require and limit the consideration of the judge to papers that made it into the court file a certain minimum number of days before the hearing. In Florida, the Lender must have their side of the file complete 20 days before the hearing (see MOTION FOR SUMMARY JUDGMENT OF FORECLOSURE - DEFEATED! AND HOW I DID IT ). NO TESTIMONY is taken at these hearings, which means the court cannot listen and consider any testimony of facts at this hearing - all it can do is see what is in the court file and then listen to argument from the lender and borrower based on and limited to what is in the court file. (A corporate lender needs an attorney but an individual borrower doesn't and can appear without one).

So, the client "telling my story" concept usually does not end up helping the borrower, and frankly, coming in to my office at such as late stage will probably result in my tuning away the potential client unless it is clear that there is some benefit that my representation will possibly bestow upon the potential client

When a person comes into the office and they show me a piece of paper that says that they already had their day before the judge (whether or not they went to the hearing does not matter) and it is a Final Summary Judgment of Foreclosure, it usually is too late to bring into discussion most of the alternative solutions that would have been available if the client came to me months earlier. Now all that is available are fast solutions - a short sale for example, but at a price that will move the property within the next two weeks. The problem is that the low price may not be conducive to the lender approving a sale at that price. In the meantime, the clock is ticking on the date for the foreclosure sale to occur. That date will be stated in the Final Summary Judgment of Foreclosure. We have certainly been successful in getting the foreclosure sale delayed. [Right now I am fighting to further extend a sale from occurring because the lender is actively determining if a short sale contract that was submitted to them 4 months ago at their suggested price is in fact acceptable - the original foreclosure sale was to have occurred 4 months ago.] However, a borrower should proceed with caution such that it is an uphill battle to have a lender cancel an already scheduled foreclosure sale and delaying it is something that cannot be relied upon. Chances are about the same as an amateur playing Roulette.

The sooner a borrower seeks help, the more solutions that may be available. One thing should remain clear - Foreclosure is NOT a solution - it is a result that often times can be avoided.

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Wed, 15 Jul 2009 06:27:19 -0500

Richard Zaretsky's Short Sale and Modification Blog Articles

A Periodic Listing of Articles by Richard P. Zaretsky, Esq.

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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

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SHORT SALE LENDER CANNOT REDUCE COMMISSION TO BROKER One of the great drawbacks to a broker taking on a short sale listing is the fear and often the reality that the short sale lender will demand a reduction in the broker commissions. This has created all sorts of contraptions to make the broker whole.
MORTGAGE FRAUD and SELLER FRAUD = WE PAY THE BILL

DISTRESSED HOMEOWNERS DEFRAUDED BY ATTORNEYS - EXPOSED IN CALIFORNIA

TENANT PROTECTION LAW AND FORECLOSURE PROBLEMS

In March I wrote about the problems tenants faced when the landlord was in foreclosure. See TENANT RIGHTS AND FORECLOSURE - A DISCUSSION OF SAFEGUARDS. Some, but not all, issues have been addressed in new legislation that went into effect May 20, 2009 called the Protecting Tenants at Foreclosure Act of 2009. There is still the advance rent and security deposit issue as the ACT does not address how the tenant can protect itself from the loss of those monies.

Foreclosure is NOT a Remedy - 2nd in a Series

Foreclosure? When is the Best Time to See an Attorney?

First in a series:My law practice encompasses assisting and guiding many borrowers that are in financial distress and we take the position that Foreclosure is NOT a Solution. Most borrowers come into the office for guidance and if they are lucky, planning for solution options once they realize that financial distress is a likely scenario. However there is a significant trend this third quarter of the year where we are seeing many more people coming to us with foreclosure suits that were filed many months ago, and now it may be too late to discuss all of the solutions that may have been available to the borrower had they come into the office for a consultation before or at least at the beginning of the process.

LOAN AUDITS - FORECLOSURE DEFENSE FALLACY?

The concepts of foreclosure defense preparation have started a cottage industry, unregulated as with most of the home saving concepts, called "loan audits".

WALK AWAY FROM THE PROPERTY - STRATEGIC MORTGAGE DEFAULTS GROW TO 26%

A mortgaged homeowner is likely to "walk from the property" or "give it back to the bank" based more on loss of equity than the ability to make the mortgage payments, a recent research paper emanating from the University of Chicago says. The paper researches and analyzes when American homeowners are likely to "walk away from their mortgages" These actions by mortgaged homeowners when the indebtedness substantially exceeds the equity value of the property, is called a "strategic default". The study found that 26% of all homeowner defaults today are strategic defaults.

SHOULD I PAY MY MORTGAGE?

This seems to be THE NUMBER ONE question I get. Unfortunately there are several answers and which is correct for you depends on the Circumstances. I will address the common scenarios in this article.

Your Property is Underwater - What is the solution?

The Distressed Property Owner's "Goal" is an interesting situation for each individual and for each individual experiencing this event, it is different. I like to help my client visualize creating a solution or "goal" by telling a visualization story.

SHORT SALE FLIPS - TITLE INSURANCE PROHIBITED

The short sale flip apparently is alive and well for some investors - and it is causing havoc with title insurance underwriters. Now the title insurance underwriters are making their case simply by declaring that they won't insure such transactions.

BUYING A FORECLOSURE - DUE DILIGENCE AND STATUS OF TITLE

More and more I have been receiving telephone calls and emails wanting me to discuss issues relating to buyer foreclosures and short sales and REO properties. Everyone (both qualified but usually unqualified) seems is writing or buying books on the process, so I figured it may be time to put in my two cents and talk about title issues and due diligence

MOTION FOR SUMMARY JUDGMENT OF FORECLOSURE - DEFEATED! AND HOW I DID IT

Today I used a new technical defense to successfully defeat a motion for summary judgment for foreclosure and I wanted to pass it on to other attorneys (or those who know attorneys) helping homeowners in foreclosure.

SHORT SALE BUYER CANCELLED CONTRACT EPIDEMIC - DIAGNOSIS AND CURE

This past week my office had 5 short sale buyer's walk from their contracts! Although I use an exclamation mark, it is not an unusual occurrence. In fact it seems that it takes 4 contact buyers to make a short sale finally happen. If that was an average for a traditional sale situation, Realtors and title agencies would be climbing the walls.

MORTGAGE FORECLOSURE RESCUE - THE BAD GUYS DON'T WEAR BLACK!

In last week's New York Times an article focuses on how Home Savers Consulting is accused of committing fraud and profited handsomely at the expense of the former homeowner. Worse, the former homeowner thought she still owned the home - she did not.

FORECLOSURE RESCUE AND MORTGAGE MODIFICATION FRAUD - ALERT ISSUED

This week the Florida Bar made public the outlandish and misleading representations that have recently plagued the mortgage modification industry in this state and probably nationwide. The mortgage modification industry has sprung up faster than mushrooms - mostly through mortgage brokers that have seen their ability to make loans dry up in this recession and are applying net office sales techniques to the mortgage modification boom. The problem is that many states have enacted new laws to put them out of business.

SHORT SALES PRIMER - BACK TO BASICS UPDATED

Short Sale Primer For Brokers, Sellers and Buyers - A Primer -

Since I wrote the Short Sale Primer the short sale methodology used by lenders has morphed several times. It is a different animal than it was almost 10 months ago. The passage of time requires that the original article, which was very popular (thank you) be revised to reflect new policies by the lenders. I have also added several pertinent links to more detailed discussions on the various subjects in this article.

SHORT SALE AND FIRPTA TAX WITHHOLDING - IRS ISSUES PRIVATE GUIDANCE

Back around Christmas, 2008 I co-authored a blog with Miami tax attorney Shawn Wolf, Esq. on the issue of a FIRPTA transaction coupled with a short sale. The analysis showed that there were no specific IRS regulations and no rulings regarding a short sale transaction that was subject to FIRPTA. See FIRPTA and SHORT SALES - DANGEROUS LIABILITY TO BUYER AND CLOSING AGENT.

Last month a communication came through from the IRS that confirmed the conclusion made in that article. I am providing to you the question that was posed to the IRS and the answer received from the IRS for those of you that meet this type of situation

TENANT RIGHTS AND FORECLOSURE - A DISCUSSION OF SAFEGUARDS

The unintended victims of the foreclosure process are often the occupant of the home that is a tenant. The landlord is a borrower under a mortgage that has gone into default and is now being foreclosed. What is going to happen to the tenant as a result of the foreclosure? How can a tenant or future tenant be protected from the ill effects of a foreclosure? This article will attempt to address these issues.

MORTGAGE MODIFICATIONS TEND TO FAIL

Here is an interesting article from the Washington Post that describes the difficultiy many homeowners have with modified mortgages.

LENDER SHORT SALE ACCEPTANCE LETTER EXAMPLES - READ WITH CAUTION!

What is a short sale? When giving lectures I like to use the definition as follows: The sale of a real estate property for a price that is less than the total amount necessary to fully satisfy the actual present encumbrance (mortgage) indebtedness on the real estate property. Often I see a different description, one that says, The sale of real estate when the lender accepts less than its mortgage amount and forgives borrower from paying the deficiency.

MULTIPLE SHORT SALE CONTRACTS AND HOW TO AVOID THEM

Why does it take 3.8 contracts to sell a short sale property? Why do Realtors insist on spinning their wheels and getting nowhere selling short sale properties?

FORECLOSURE DEFICIENCY JUDGMENT or SHORT SALE PROMISSORY NOTE or BANKRUPTCY - REVISITED

Whether to agree to a negotiated promissory note in a short sale or allow the house to go to foreclosure is one of the most discussed topics around. It deserves a simple comparison

FLORIDA REAL ESTATE MARKET CONDITIONS RELEASED TODAY

Today one of the state's largest title insurance underwriters release its 2009 Real Estate Forecast and Southeast Florida focus. To those of us that live here it is no surprise that the numbers are grim. To those outside of Florida the numbers are shocking! The report, issued by Attorneys Title Insurance Fund, makes several projections and findings.

FIRPTA and SHORT SALES - DANGEROUS LIABILITY TO BUYER AND CLOSING AGENT

It is critical for Realtors, Buyers, Closing Agents and Lenders to understand the important issues of the short sale when applied to the Internal Revenue Code's Foreign Investment in Real Property Tax Act of 1980 or FIRPTA transaction because disregard for following the FIRPTA rules will make the Buyer and Closing Agent and possibly the Lender liable to the IRS for the Seller's Tax Liability!!!!! The problem is that right now there is NO RULE by the Internal Revenue Service ("IRS") for FIRPTA Short Sales.

Hope For Homeowners Act a Failure

I have many desperate homeowners coming to my office begging for ways to save their homes. Often times the homeowners qualify under the published criteria for the hyped Hope For Homeowners program also called H4H by the FHA. The program, passed by Congress in July 2008 was to save the homes of 400,000 homeowners. So far only 300 or so have applied! Why?

A LAWYER'S EXPLANATION OF THE FORECLOSURE PROCESS

As an attorney I often consult with homeowners that are in distress along with the Realtors that represent them in trying to accomplish a short sale. Often a detailed explanation of the foreclosure process would be very worth while for my client to have a thorough understanding of what they may be facing as the lender seeks to enforce the promissory note and mortgage. We usually don't have enough time to explain the process in full, so here is an article that should help non-lawyers understand what is happening according to rules of procedure in the court system and what options lenders have for enforcing the money they loaned to the homeowner.

IS THE FORECLOSURE FINAL? - AND HOW DOES IT AFFECT MARKETING A SHORT SALE?

As an attorney involved in the procedure of foreclosures and short sales I have been asked this question an increasing number of times - which tells me the legal process is confusing when it comes to the full run of the foreclosure process. So this article will set it out from way in the beginning to the very end and hopefully it will answer your question.

WHAT'S WRONG WITH THE FAR SHORT SALE LISTING AND CONTRACT ADDENDA - AND HOW YOU CAN FIX IT

The Florida Association of Realtors took the lead in making some semblance of consistency, order, and standardized forms for use by Realtors for Short Sale transactions. I doubt many Sellers or brokers realize the draconian conditions of the documents they are using. If you are among them, this article may open your eyes. Because the evolution of Short Sales in 2007 and 2008 has been so dramatic, the forms became problematic at the outset.

FORECLOSURE DEFENSE FALLACY

If you are a listing Realtor or a person who has just gotten foreclosure notice from your lender(s), no doubt you have heard about a myriad of "Foreclosure Defense" firms that promise to delay or prevent foreclosure or even prevent the enforcement of the mortgage because if irregularities in the loan. What in fact are foreclosure defenses?

SHORT SALE DEFICIENCY DEMANDS AND DEFENSES - The Interstate Highway Analogy

"What chance is there that the bank is going to make me pay the difference (or deficiency) when we are through?" This is the most often asked question I get as an attorney that specializes in residential mortgage loan workouts and (avoiding foreclosure through short sales or modification). If you need basic information to understand the short sale and deficiency issue, see Back to Basics - a Review on Short Sales.

BAILOUT BOGDOWN

It is only 3 weeks since the new bailout programs "started" but don't ask for any testimonials from any homeowner whose home has been saved.

BANK REJECTS SHORT SALE OPPORTUNITY AND MAKES BIGGER LOSS

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.

BAILOUT MISREPRESENTATIONS AND MISCONCEPTIONS

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

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!

ARE WE IN SHUT DOWN MODE?

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).

TOP TEN LIST OF SHORT SALE OBSERVATIONS

For 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.)?

YOUR Ticket to Normalcy? THE BAILOUT BILL

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.

EMERGENCY ECONOMIC STABILIZATION ACT - WHAT IT MEANS FOR YOU

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

NUTSHELL VERSION - EMERGENCY ECONOMIC STABILIZATION ACT

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.

BAILOUT 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".

FLORIDA FORECLOSURE FRAUD BILL - UPDATE

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

Second Mortgage Short Sale - Holding Up the Railroad Loot

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?

BANKS CREATE BILLIONS (MORE) IN LOSSES -

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?

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

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

Back to Basics - a Review of Short Sales

Short Sale Primer - Back Room Lender Decisions - Short sales are nothing new. When I represented a national lender for all of their foreclosures in the State of Florida several years ago, we negotiated "loan workouts" which are now called "short sales". Since they have been around so long, I did some digging with my old pals that were the executives I worked with in the loan workout and REO department of this national lender (the lender has since been merged into Bank of America).

THE BANK CHANGED THE LOCKS! -

There is discussion on Active Rain from time to time on whether in a short sale it is advisable to move out of the house. The real issue is the clause in the mortgage that says the bank can change the locks on the house if it is "abandoned".

A-T-T-O-R-N-E-Y Spells T-R-O-U-B-L-E in Short Sale -

Sad Facts about Attorney Misconduct in a Short Sale

FLORIDA FORECLOSURE FRAUD BILL - MY LETTER TO GOV. CRIST

See UPDATE to this blog and how it was resolved - at FLORIDA FORECLOSURE FRAUD BILL - UPDATE

SHORT SELLER STILL MUST DECLARE INCOME ON SALE! -

The Mystery of income you can't spend - but do you have to declare it? When DON'T you have to report forgiven debt (from a short sale, deed in lieu or foreclosure with release from the lender) as income?

CALLING ALL ETHICAL LOAN OFFICERS - HELLO? ANYONE THERE?

CREDIT REPORTING AND SHORT SALES / FORECLOSURES - REVISITED -

I received an email on my quest to find the real answers to the incessant question of how a foreclosure vs. short sale vs. deed in lieu all affect the credit report of the borrower.

1099 REPORTING - IT'S THE LAW! - OR IS IT??? -

1099 SHORT SALE REPORTING - IT'S THE LAW! - OR IS IT??? Since I have developed my SHORT SALE law practice I have a lot of clients that are in foreclosure or close to it. They all ask me about 1099 reporting and if the bank can forgive the debt and not issue a 1099. Now let's see what the law really says.

DIVORCE - CHAINS TO THE UPSIDE DOWN HOUSE VALUE CAN BE BROKEN!!! -

Chained to your home and can't get a divorce? You are not alone!

SHORT SALE FLIP - QUESTIONABLE METHODS -

SHORT SALE FLIP - QUESTIONABLE METHODS - This article is a follow up to an issue discussed in December titled Short Sales and Title Insurance - Critical Look at Hybrid Closing Schemes.

FORECLOSURE DEFICIENCY ORDER VS SHORT SALE NEGOTIATED PAYBACK -

I was negotiating on a very large problem mortgage today with a high-up executive at the servicing firm. He made a comment that I thought peculiar and I called him to task on the matter. The comment was that "after the foreclosure sale, lenders seldom bother to get a court ordered deficiency judgment". I knew this to be false, because lenders today - more than in the past - are investing a few hundred more in attorney fees to get a deficiency judgment. I will tell you why.

REAL QUESTIONS - HOW DOES A SHORT SALE AFFECT CREDIT SCORES???

In a discussion today with a client we addressed the question of credit scores and short sales. This is a hot topic and there is information everywhere on what happens and when and for how long.

FORM RELEASED BY IRS FOR DEBT RELIEF ACT FILING -

New IRS Form for Filing for Debt Relief

No-Conflict Considerations in Short Sale Fees

As short sales and pre-foreclosure assistance servicers proliferate, the type, style and amount of fees that these individuals and companies charge has become ingenious and varied. This article discusses the rights and wrongs regarding the most popular of the charging methods.

TOO MUCH MONEY IN THE BANK TO DO A SHORT SALE? - ECONOMIC LOGIC -

This week I spoke with several people that wanted to do a short sale of investment property that is upside down in value. They are sick and tired of the short fall on rental income (if they are lucky to have a renter that actually pays rent) vs the mortgage payment, taxes, insurance and maintenance costs.

Who Says Owner Doesn't Have Time To Do a Short Sale? -

Some writers to my blogs have commented that "they don't have time to do a short sale".

WHAT DO I DO? -- I'M UNABLE TO PAY MY MORTGAGE -

As an attorney, I receive plenty of telephone calls and visits from people that are no longer able to pay their mortgage on their home or investment property. They all have endless questions and usually tell me they are getting all sorts of advice that they don't like. They come to me to find their BEST solution.

SHORT SALE TRILOGY -

It is really amazing how many people - professionals as well as potential sellers - do not even know what the term "short sale" means. This blog assumes you have actually worked a short sale already -- if you have -- or if you are curious -- read on!

Mortgage Forgiveness Debt Relief Act of 2007- Another Look -

I have been getting a lot of calls and emails about the Mortgage Forgiveness Debt Relief Act of 2007. The new law became effective today, and applies to 1099's on short sales or foreclosures retroactive to January 1, 2007.

MORTGAGE RELIEF ACT - CHRISTMAS PRESENT TO PRIMARY HOMEOWNERS -

On Thursday the President signed into law - effective New Years Day, the Mortgage Forgiveness Debt Relief Act of 2007.

Underwater - The Cycle Repeats Itself -

I cannot be surprised at the stories in the newspapers about homeowners, investors and even commercial property owners being "Underwater" with today's depressed real estate market values. Many people that own real estate today were just pre-teens when the last deep cycle occurred. Or if they are older, they were not in the real estate market at that previous time.

Short Sales and Title Insurance - Critical Look at Hybrid Closing Schemes -

Recently I have seen various schemes for streamlining the short sale process for the buyer/investor. Some discussions have been somewhat heated and involved concepts like dual contracts or even insolvent borrower creating a Land Trust for use by the investor/buyer. At best, the agreement amongst the blog commentors has been to agree to disagree.

WHO CONTROLS THE SHORT SALE? -

In this environment of the short sale it seems apparent that the bank controls the sale. Some might say the buyer controls the sale. My opinion is that both statements are primarily incorrect. The seller owns the house. The seller must sign the contract. The seller must sign the deed.

TAX DEEDS - COURT DEVELOPMENTS NIX SALE! -

Tax Deed purchases are popular in many states as a way to acquire real estate at truly rock bottom prices. Generally a tax deed purchase is first in line after just a few significant "super" lienholders: (1) God, and (2) Code Enforcement Liens. Practically all others having an interest in the property are wiped out in a tax deed sale.

LOW BALL SHORT SALES - PLAYING THE ODDS? -

Short Sales are the buyer road to riches - if you believe the promo advertising that is all over the place. But the road is not a short one nor is it a smooth one. It is best covered with professional help and guidance.

BORROWERS FACING FORECLOSURE OFTEN OVERPAY - STUDY FINDS

Is our system of foreclosure out of control? Are the banks acting fiduciarily to their borrowers in the loan management process - are they requred to?

Beware the White Knight! -

Apparently there are lots of "White Knight Claims" being made against title insurance policies. Here are some of the fact patterns:

SHORT SALES AND IRS LIENS -

In my law practice we see a lot of short sales. Indeed, we offer a service to Realtors and Sellers to process their short sale material with the lenders (without the downward pressure and lowball influence from an investor handling the process). I have worked statewide with lenders - visiting their loss mitigation departments and sitting in on committee meetings. Knowing the process is key knowledge to improving the percent of short sale lender approval.

TRUE STORY - Renter forges deed, then conspires to sell house and pocket mortgage proceeds -

It is a day past Halloween, but here is a scary TRUE story

Some Sellers Think They Are ENTITLED To A SHORT SALE -

I had just too many borrowers that "should have known better" in the office this week - so I feel very conservative just now.

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LOAN AUDITS - FORECLOSURE DEFENSE FALLACY?

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Tue, 14 Jul 2009 08:33:54 -0500

The concepts of foreclosure defense preparation have started a cottage industry, unregulated as with most of the home saving concepts, called "loan audits".

A loan audit is supposed to be a "forensic analysis" of the loan origination and closing. I get calls every week from a few sales people trying to get me to use their "expert loan auditor" for the foreclosure defense / loan modification / short sale work we do.

About 8 months ago I wrote about the misconceptions that the public has regarding Foreclosure Defenses and what they can and can't do for a distressed homeowner. See that article for an explanation of Foreclosure Defenses.

Loan Audits can be a good thing - if there is some solution to which it will economically create a positive result for the distressed homeowner. The problem is almost every loan closing is going to show up something of a problem and many will show up multiple problems. If that is the case, how can all these mortgages be enforceable?

A recent article in the Daily Business Review here in South Florida titled "Loan Auditors Seek Errors That May Delay Foreclosing" focused on this issue and said, "Ultimate proof that the audits are successful will come in stopping the foreclosures. That hasn't happened yet but lenders have been required to substantiate fees and the investigations have resulted in other findings. Several of the cases are being litigated and are currently in discovery".

The article also said some professionals call the loan audits a "new gimmick" that can be construed to be helping people but also capitalizes on the financial crisis.

Another issue is whether auditors are "foreclosure-related rescue services" that come under the new Foreclosure Rescue and Fraud Prevention Act (Florida). The Act prohibits collecting fees up front - which is why such firms are aggressively seeking to be providing services directly to attorneys, who have some exemptions under the Act.

There may be a place for the loan audit if it shows significant issues that would damage the lender financially. The key however is how much would the damage be compared to the cost to the lender of a modification or short sale?

For example, on a $300,000 loan that is collateralized with a now valued $200,000 home, the bank is short at least $100,000. If you are in foreclosure and you mediate with the bank and show them a loan audit that could make them responsible for $50,000 in refunds and penalties, that is not much incentive to give relief to the homeowner that is still in default. If you want to use it to unwind the loan and put the parties back into the position they were in before the loan was made, the homeowner is going to have to return the $300,000 less the $50,000. Where the homeowner is going to get $250,000 is the million dollar question - and why this usually does not produce real solutions to the distressed homeowner.

When the housing market was right side up there was no real issue with foreclosure defenses since the homeowner could almost always return the funds to unwind the loan (less damage credits) through a refinance or sale. That cannot be done now. Attorneys then also charged based on "savings" to the homeowner. Today the fee is almost always up front to get started and monthly thereafter. I question the philosophy of "monthly" as long as the litigation continues - and what it implies (keeping the house while not making payments to the lender but instead making lesser payments to the attorney). To me that just is not a "solution" to the homeowner as it eventually ends up in the same place - a judgment of foreclosure, unless a modification or short sale is the ultimate and realistic goal.

If your client asks you about a loan audit, you need to look at the total picture and determine together what the end goal for the homeowner is or needs to be, and then see if the expense is worth the investment, or if it is just going to create unnecessary expense and false hope.

WALK AWAY FROM THE PROPERTY - STRATEGIC MORTGAGE DEFAULTS GROW TO 26%

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Mon, 06 Jul 2009 06:19:13 -0500

A mortgaged homeowner is likely to "walk from the property" or "give it back to the bank" based more on loss of equity than the ability to make the mortgage payments, a recent research paper emanating from the University of Chicago says. The paper researches and analyzes when American homeowners are likely to "walk away from their mortgages". These actions by mortgaged homeowners when the indebtedness substantially exceeds the equity value of the property, is called a "strategic default". The study found that 26% of all homeowner defaults today are strategic defaults.

The paper preliminarily released through the University of Chicago and Northwestern University in June, titled, "Moral and Social Constraints to Strategic Default on Mortgages", examines the likelihood and reasons for an indebted homeowner to either pay or default on its mortgaged property and makes for fascinating reading. It is also an excellent background source to my recent blog SHOULD I PAY MY MORTGAGE?

Key findings in this study include:

- 1 out of every 4 mortgage defaults is "strategic", meaning the borrowers are intentionally not making payments based upon valuation of the property, rather than personal finance.

- When negative equity reaches 10%, strategic decisions to default begin.

- Significant defaults begin when the negative equity reaches 15%.

- 17% of homeowners will default even is the home payments are affordable, when the negative equity reaches 50%.

Neighborhood and demographic environment plays a multiplication or magnification effect on the statistics. In fact the study found that besides relocation costs, the most important variables in the prediction process are moral and social considerations. For example, if a homeowner lives in a community where there are several foreclosures, or has acquaintances that are in foreclosure, the homeowner is more likely (82%) to have a predisposition to strategically decide to allow a foreclosure. If the homeowner finds it immoral to default, they are 77% less likely to default.

The study also takes into consideration the morality of purposely not paying the mortgage, which summarily is only(?) 20% of all mortgageors.

People under 35 years and over 65 said were less likely to say it was morally wrong to default, compared to middle-aged respondents.
People with a higher education and African-Americans are less likely to think it's morally wrong to default, while respondents with higher incomes were more likely to think it's morally wrong.
Republicans and Democrats showed little difference in moral views of strategic default, while independents were less likely to say defaulting is immoral.
People who supported government intervention to help homeowners were 12 percentage points less likely to say strategic default is immoral.

The study also takes into consideration the possibility of recourse versus non-recourse mortgages and deficiency judgments in its statistical analysis. See also FORECLOSURE DEFICIENCY JUDGMENT or SHORT SALE PROMISSORY NOTE or BANKRUPTCY - REVISITED. There is an analysis of this issue (which applies to some mortgages in California or example) that is very interesting - as there is not the impact one would think on the determination of the homeowner.

This study makes an interesting juxtaposition to the federal government's moves to address the problem of foreclosures in our nation through addressing the cash flow and affordability of payments, rather than the equity value losses of homes. It is a must read for those involved in short sales and mortgage modifications.

SHOULD I PAY MY MORTGAGE? WHEN SHOULD I STOP PAYING MY MORTGAGE?

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Tue, 23 Jun 2009 07:25:11 -0500

This seems to be THE NUMBER ONE question I get. Unfortunately there are several answers and which is correct for you depends on the Circumstances. I will address the common scenarios in this article.

Policy in my office is to never "tell" - as in "instruct" - our borrower client to pay or not to pay their mortgage. Paying or not paying has a lot of collateral effects and the borrower needs to know what they are before making the decision. We don't make the decision for the borrower (our client) because the effects of paying or not paying are not going to affect me - but they will affect the client, so it is the client that must make the final decision.

Let me make one issue clear - when we are hired to help facilitate a short sale or loan modification it is far easier for us to negotiate with the lender if the payments are late, but it is almost never a requirement. The exceptions to which will be discussed later in this article. Additionally, internal rules change at the banks constantly. A new client came in totally frustrated. They called their bank to help with a modification and the bank said they could not address their situation until they were at least 60 days late. So the near perfect (800+) credit score couple stopped paying for 60 days and then called the bank back. Now the bank says that because they are 60 days late they cannot speak to them about a modification! The point is, if you don't have to be late then why voluntarily create a late payment credit history that will adversely affect your credit-dependent life almost immediately and for years to come?

SO LET'S GET INTO IT - Danger - this is a long article and it covers a lot of ground!

Short Sale:

A borrower that is current and contemplating a short sale wonders if they should stop paying their (first) mortgage. They are upside down and until now they have been current. However they are paying the mortgage at a cost of not paying other bills. (Other or different facts may be that they are paying all their bills but taking the money from savings or a pension fund to make those payments, or they are borrowing money from another equity loan).

Generally, it is not a good idea to get into debt to pay your mortgage, unless you have a solid plan to both (i) keep the mortgage current and (ii) repay the additional indebtedness you are creating. It is not like taking from one pocket to put into another - it is more like taking from someone else's pocket to pay your bills. This would include credit card loans as the source of funds. It all has to be paid back, so if you don't have a plan to pay it back, don't borrow it in the first place! You are only digging a bigger hole for yourself and making it harder to get out of the hole.

If you are taking from your pension or savings money, again you better have a rock solid plan to get that money back into those accounts, or there is no sense in giving up that hard earned and usually irreplaceable retirement money, especially considering these are monies that are usually protected from creditors' judgments including those your mortgage lender could obtain (deficiency judgment)..

Of course the "amount" of money you have "in reserve" comes into consideration. If you have 2 million dollars in reserve and you decide to spend 10% of it to keep the loans current until you can short sale the property, that plan has a basis that the 10% is not going to make a difference in the way you run your life over the remaining time you have left as a mere mortal.

Sometimes, but rarely, we run into a lender that says they won't approve a short sale or modification because the borrower is current with his payments. When we have encountered this it is in most cases associated with a government backed loan, (but later on we will show you why this may be motivated by plain greed on the part of a loan servicer). A properly compiled financial snapshot of the borrower should show why they are current and what will happen if the short sale or modification is not approved.

Your decision on how to proceed should be based on what goal you are trying to accomplish and how you plan to get to that goal (see how to determine your goal).

Mortgage Modification:

Apart for some voluntary government programs regarding (Fannie Mae or Freddie Mac) government involved mortgages, I know of no lender that absolutely will not deal with a borrower who is current with their mortgage payments. Lenders deal with all sorts of situations and "absolutely not" is just not in the vocabulary. A typical borrower calling a lender may hear that they must be late, but that is more of a "vetting" statement than an absolute policy.

The exceptions are some government program guides for modification. The first step to seeing if your loan comes within this exception is to see if it is a Fannie Mae or Freddie Mac loan. You can do this online at the Making Home Affordable site. Many servicers and lenders whose loans are not "government backed" are now choosing to follow this government plan (known as the Home Affordable Modification plan or more affectionately called the "Obama Plan" - see below) for the simple reason that they are being compensated by the government for each successful modification they execute within its guidelines, and either the servicer or lender receive a residual bonus for the loan staying current under the modification. In these cases we have seen non-government backed loans insist on the borrower being late to qualify for modification as well. What is confusing on this point is that when the plan was introduced it included modifications (and compensation for such) for current loans as well. However, we are told time and time again from the lenders directly that they must be late to qualify. There is no such rule in the guidelines.

While this is contrary to what has been published by the government about the plan, keep mind that following the plan and any of its various aspects is entirely voluntary and up to the Lender or servicer. They can pick and chose from this plan as they see fit for their own internal reasons. Here is a more interesting twist - a servicer that modifies a delinquent loan is paid more under this incentive plan than if the borrower were to modify while the loan is current! If the borrower is current, the servicer can receive up to $3,500 in incentive fees from the government. If the borrower is delinquent, the servicer can receive up to $4,000 in incentive fees from the government. Thus it seems that it pays ($500 to)the servicer to encourage a borrower to be delinquent!

We often see a client that fits the profile for modification under this government plan. Some of these plans are said to require that to be qualified the borrower must be late 60 days (see Guidelines page 5 at bottom). But in fact, being late is not a requirement, but only one factor of many (see Guidelines page 16 at the top - "However, a NPV (net present value) positive result is not necessary to qualify a loan for a Home Affordable Modification"). If the goal is to qualify under such a plan as put in place by the lender at that time, then to accomplish that qualification the borrower may need to make themselves late, but that cannot be determined in a 2 minute telephone call with a lender representative. I cringe when we go this route because just like these "plans" came into existence, I can see them change the plan thus leaving the now 60 day late borrower with ruined credit scores that occurred needlessly.

Generally about a quarter of our modification clients never go late and still get a modification offer from the lender. However, keep in mind that nearly all lenders put up as their first line of defense the policy that going late is a necessity to qualify. We can only speculate this is done to deter the enormous inflow of loan modification requests from borrowers that would come in if this was NOT said to be a requirement. It also helps address those in the most dire amount of need first.

The Pro's and the Con's:

The general rule of thumb we use is if you can pay your mortgage and maintain your life's necessities, you may consider keeping the loan current, taking the points in this article into account. However, if you need to choose between buying food or medications and paying the mortgage, the decision that should be made is clear: your life necessities take precedent.

Here are the pro's to consider when in the short sale or modification process. Keeping the loan CURRENT has the following benefits:

a) Your credit score is not dinged until the short sale transaction occurs (and not at all in most loan modifications) and your overall credit score reduction will be minimized, and b) You will remain in good standing with your lender without worry of penalties, fines, or a foreclosure.

The "con's" of keeping the loan current are that:

(a) You will be out of pocket for the monthly mortgage payment (monies which you may or may not need to survive), and

(b) Your lender may question the sincerity of your claimed hardship, and you may be spending funds that would otherwise be potentially (but rarely) forgiven by the lender. In addition, occasionally the lenders in a short sale may require a lump sum payment above the sale amount from the borrower to forgive the debt. Coming up with that money is sometimes the difference between a deal or no-deal. If you can put your mortgage payments aside and stockpile them, it will help you cover that potential lump sum.

A similar pro/con approach applies to GOING DELINQUENT with your mortgage. In favor of going late is being able to keep the unspent mortgage payments in your pocket (or applied towards other necessities as the case may be) in which event your hardship may appear more sincere to the lender. On the other hand, there are very real consequences to going late with your mortgage payment:

a) You WILL incur late fees and other penalties on the late interest. Usually this is not a large issue as it is part of the forgiven debt in a short sale and usually forgiven in a modification, but it is something to consider,

b) Your credit score downgrade will be harder as you will compound the short sale hit with a 30 day late, 60 day late, etc, (and if this is a modification you will make a non-negative credit score event turn into a negative credit score event), and

c) You will eventually cross a threshold (typical industry standard of 90 days late) where the lender will initiate a foreclosure action in State court.

Going Late on Your Second Mortgage:

Often a borrower comes to us and says that they are late on the first mortgage but current on the second mortgage. The second mortgage is almost always totally upside down with no equity left in the property to secure that financial obligation. The borrower says they paid the second mortgage because they had the money for the smaller payment (second) mortgage but not the larger amount first mortgage. Our answer - if you don't pay the first mortgage they are going to foreclose it and then paying the second mortgage is not going to save your house.

Lately we have seensecond mortgage lenders with 90 day late mortgages skipping the foreclosure process (since if they cause a sale of the house it is sold subject to the first mortgage, and thus any buyer still has to pay the first mortgage, which usually makes no economic sense). Instead the second mortgage lender sues the borrower on the promissory note only and gets a money judgment that they can keep for a long time (20 years in Florida).

So if a client says they are paying the second mortgage but not the first mortgage, we usually suggest they look at the common sense approach and what are they likely to gain or lose by doing so.

Effect of Non-Payment / Late Payment on Credit Score:

This is a big question and nowhere is the answer clear cut. Definitely if you get a report on your credit that you were "late" (in mortgages that means 30 days or more late) then your credit has been "dinged" and your credit score is adversely affected.

Credit scores are used for many purposes, including the amount of credit you can get on a credit card, the interest rate you get on credit cards, car loans and mortgages, your ability and price of life and disability insurance and even car or house liability insurance, your ability to get a certain type of job, or to establish business relationships, and your ability to rent a place to live, to name a few. So credit scores are important. If you want to better understand credit scoring you can see the Federal Reserve Board's Report to Congress from April 2008.

How much your credit score is affected by a 30, 60 or 90 day late report depends on a lot of other factors about your financial well being, your past credit history and myriad other issues. Generally though we have our clients reporting drops of as little as 50 points for a no late payment short sale or up to 150 points for a short sale with multiple late payment reports. We have seen an 800 go to 720 and we have seen a 740 go to 500. It all depends on too many uncontrollable credit issues to be able to give a formula that works for everyone. For a discussion on credit scores this our past article.

Confused?

Rightfully so. The fact of the matter is that we are in uncharted waters and there is no industry standard for Short Sales or Loan Modifications, which makes pinning down exactly what the Lenders may do near impossible. Pile on the fact that there are a large number of lenders out there and each have their own internal policies which change as readily as the tides. The best anyone can hope to do is make an educated decision, set a plan, and be ready for anything.

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. See our easy to find articles at SHORT SALE AND LOAN MODIFICATION TABLE OF CONTENTS

Your Property is Underwater - What is the solution?

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Mon, 22 Jun 2009 20:18:39 -0500

Imagine you are in a dark tunnel and you can only go in one direction - forward. It costs you for every inch you move forward in the tunnel. The cost is the amount of "short fall" or loss you incur every day on the property that is giving you financial problems. No one knows where the end of the tunnel is, and no one knows how long it will take to get to the end of the tunnel. Your job, as the one paying the mortgage, is to "forecast" or predict where the end of the tunnel may be.

Once you forecast where the light at the end of the tunnel could be, you can measure how much it is going to cost to get to there. (The "end of the tunnel" is where you can either sell the property and recoup your loss or at least the mortgage you owe, plus the amount you spent to get to the "end of the tunnel". It may be where the property cash flow turns profitable).

Now you have at least a predictive cost to "see the light" at the end of the tunnel.

Of course there are plenty of variables - like you may have under-predicted the time factor, or over-predicted the cost because you eventually get a rent income that helps you carry the property at less cost. These differences are your tolerance for risk.

Next you find out what it costs to get out now, at a loss. This is your "escape pod cost". The escape pod could be a modification, short sale or bankruptcy.

You try to anticipate the cost to have the short sale, including possible deficiency payments. If you want to see how you compare in your philosophy compared to others in distress, see a recent Wall Street Journal blog on walking away from property.

Measuring the "today" escape cost versus the "tomorrow" light at the end of the tunnel cost, should give you a measure of how to proceed with the property, be it short sale, modification, or bankruptcy.

SHORT SALE FLIPS - TITLE INSURANCE PROHIBITED

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Mon, 08 Jun 2009 20:31:43 -0500

This decision is not surprising. As pointed out in SHORT SALE FLIP - QUESTIONABLE METHODS, some investors have seen the reluctance amongst knowledgeable (and ethical?) title insurance agencies to question and usually refrain from being involved in such transactions. The result was the new "twist" of using one title closing agent (and underwriter) for the initial sale and another title closing agent (and underwriter) for the higher sale.

These transactions are also being examined by the shorted lenders - but the current safeguard of having the parties sign affidavits and "disclosures" is seriously not going to stop any investor that sees dollars at the end of the transaction.

Attorney Title Insurance Fund (in Florida) just today released an Alert and directive to its agents and it is reproduced below. They are not the first nor will they be the last to take this position.

FUND ALERT: SHORT SALE PROGRAMS

The Fund has become aware of several "short sale programs" advertised on the internet and elsewhere that promise to make the investor lots of money with little or no work by purchasing and selling property through short sales. The programs involve the investor entering into options or similar contracts with the homeowners for the exclusive right to purchase their property for a period of time. The investor negotiates a short sale with the lender, convincing the lender that the price they are offering is the market value of the property. The investor then finds a buyer for the property at a much higher price. Once the buyer is lined up, the investor buys the property from the seller, pays off the seller's mortgage at the short sale rate, and simultaneously sells the property to the buyer at the higher price, pocketing the difference. In most cases the original lender is not told that the buyer is flipping the property on the same day for thousands more than the lender has been told is the market value of the property.

In the cases we have seen, the investor has not put any of his own money into the transaction, and uses the new lender's money to fund the entire deal.

A variation of this program involves the investor having the seller convey the property into a "trust" with the investor as "trustee".

The Fund has made a business decision not to insure these types of transactions.

Before you insure any kind of transaction involving a short payoff to the existing lender, or a simultaneous closing, make sure that the following requirements have been met:

•1. There are no violations of any restrictions listed in the short sale payoff letter or closing instructions.

•2. There have been no misrepresentations as to the value or ownership of the property to the existing lender, the new lender, or the purchaser.

•3. All disbursements must be made exactly as stated on the HUD-1 settlement statement, and only to parties involved in this specific transaction.

•4. Each half of the simultaneous closing must be kept separate and stand on its own. The sale from A to B must be fully funded and disbursed with money coming from and going to all appropriate parties. The sale from B to C must also stand on its own. The money from C's lender must not be used to fund any portion of the A to B transaction.

If the circumstances of your transaction do not meet the above requirements, you must contact a Fund underwriting attorney for approval prior to insuring the transaction.

Attorneys' Title Insurance Fund, Inc. 6545 Corporate Centre Blvd., Orlando, FL 32822
1-800-336-3863 www.thefund.com

THIS IS AN AUTOMATED EMAIL LIST -- This email address is not monitored. Please do not reply to this message.

©2009 Attorneys' Title Insurance Fund, Inc. The Fund is a registered trademark of Attorneys' Title Insurance Fund, Inc.

BUYING A FORECLOSURE - DUE DILIGENCE AND STATUS OF TITLE

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Wed, 13 May 2009 05:37:31 -0500

A writer emailed me about the research and especially the title search costs associated with determining to bid upon a foreclosure property. He was upset that he would incur title search expenses and still not get the property. Apparently the seminar he went to did not fully disclose the inherent dangers to making millions from foreclosures. This was an excellent observation by the writer and so it deserves mention here.

Status of Title -

The status of title is one of the most important aspects of buying a property, whether it is privately, in a traditional sale, or on the courthouse steps from a forced (foreclosure or sheriff's) sale.

Just knowing that the seller is the owner (the person losing the property) or has a right to sell (the clerk of the court) is totally inadequate information. Although a court ordered sale MAY remove inferior liens from the title, you must ascertain if all inferior liens were properly named in the lawsuit (unless they arose after the filing of the lis pendens - if the lis pendens was indeed filed along with the complaint for foreclosure).

Lis Pendens -

[Here is some lawyer background on the lis pendens: see the link A LAWYER'S EXPLANATION OF THE FORECLOSURE PROCESS for a full explanation of the foreclosure process and lis pendens - Suffice it to say that the "lis pendens" is popularly and incorrectly referred to as the foreclosure complaint (ie: "I was served with a lis pendens"). The key document is the complaint, not the lis pendens. The lis pendens means "pending litigation" and is directed to the real estate and provides notice in the public records to the public that there is litigation pending regarding that real estate. By error some foreclosure complaints get filed without there being a lis pendens and that will result in a title issue at the end of the case. Any claim against the real estate that arises after the filing of the lis pendens is usually wiped out by the foreclosure without naming that claimant in the law suit. Any claim arising before the filing of the lis pendens must be named in the complaint if it to be removed via the foreclosure process.]

The problem is there are liens that cannot be foreclosed, such as unpaid real estate taxes and code enforcement liens. As to the latter item, in Florida at least such a lien on any property owned by the property owner extends not only to the subject violated property but to all property owned by that owner and located in that county. Such liens can be very large and are difficult to reduce through a local administrative hearing procedure. If the property was owned by the common owner at the time of the code enforcement lien, then the foreclosure (or even a tax deed sale) will not eliminate that code enforcement lien.

Unrecorded Issues -

Then you also have the issues of items that are not even recorded liens but can still become a problem after the sale. A prime example is an improvement that was never permitted with the government, or a property line encroachment that a neighbor now seeks to enforce. The improvement could be required to be removed. Usually this problem can be resolved by backward engineering of the improvement - but that can be expensive since you need to hire an engineer to inspect the unauthorized improvement, prepare plans for it and then certify that the improvement as it exists is in compliance with all building codes presently in effect.

You will find that buyers of foreclosures generally have on staff persons that understand the title priority law and know how to research it efficiently on their own. If there is no staff, then the individual professional buyer has that knowledge. Understanding and having the knowledge to research the liens avoids the costs but not the time to research before you bid. Understanding the building codes is also helpful but in a foreclosure sale it is almost never an option to be able to inspect the property on site prior to the actual bidding process. Due diligence is a cost of being in the foreclosure purchasing business and must be considered the number two priority in your list of whether to buy a property or not - with number one being does it makes economic sense to make the purchase.

MOTION FOR SUMMARY JUDGMENT OF FORECLOSURE - DEFEATED! AND HOW I DID IT

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Tue, 14 Apr 2009 08:11:52 -0500

This happened in Florida, but other states' rules could provide the same type of relief.

The bank filed its foreclosure some months ago and the homeowner tried to represent himself and did a poor job of it because there were several deficiencies in the pleadings filed by the bank. Then I came into the picture just 8 days before a scheduled court hearing to grant the bank's Motion for Summary Judgment of Foreclosure, at which time the public sale date for the house would have been set.

As with most foreclosure suits the promissory note could not be produced so the bank was going to produce at the hearing an Affidavit of Lost Promissory Note. This is permitted under a special state statute that creates a mechanism to prove up a financial instrument that was lost by the holder.

However, the Rules of Summary Judgment say that any pleading to be used by the moving party (here, the bank) must be filed with the court and provided to the other parties at least 20 days prior to the hearing.

The bank complied with the lost note statute (they had the lost note affidavit to give to the judge), but not the court rule about the 20 days, I argued -- and the judge agreed and denied their Motion for Summary Judgment.

This whole exercise was not to create a delay so the client can live in the house for free -- it was obtained so the client can complete a short sale (he still needs a buyer) and avoid a foreclosure deficiency judgment that will haunt him for the next 20 years.

I pass this on in the hope that this customary practice by the lenders will be recognized by attorneys and used to help out those needing more time to find a better solution than foreclosure.

SHORT SALE BUYER CANCELLED CONTRACT EPIDEMIC - DIAGNOSIS AND CURE

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Sun, 29 Mar 2009 18:41:54 -0500

The general failure of short sale buyers to not close is the fault of the system created by the current finance and real estate sales market - but it needn't be. Just consider:

1. In a traditional sale, if there is a lien on the property does the Realtor negotiate to make the lien go away? Of course not. If there is a lien then the seller should get an attorney to clear the lien.

2. In a traditional sale the buyer is required to make a good faith reasonable deposit to escrow. Why on earth do we see buyer's making a deposit conditional on the lender accepting the "contract" (or whatever it is since there is no deposit). Why do we see $1,000 deposits for $300,000 contracts - that makes no sense either.

3. In a traditional sale the buyer makes inspections within a short period of time. In short sale contracts the "Effective Date" is when the Buyer is told the bank approved the contract for short sale. This encourages multiple contract offers by one buyer on several properties since any can be canceled for no reason shortly after lender approval. Inspections should be done in the traditional way - the cost is a risk to the endeavor by the buyer and the price offered should be part of the consideration of the offering being a "hard contract".

Lenders should encourage a change in conduct by rejecting outright any contract with post lender approval contingencies. That would vastly decrease the number of short sale buyer contracts that will never close - but increase the percentage of short sale contracts that indeed close!

REALTOR GETS NAILED ON MORTGAGE RESCUE SERVICE

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Wed, 25 Mar 2009 22:59:02 -0500

Florida Attorney General Begins Enforcement of Mortgage Modification Firms

I just received an email from an ActiveRain Realtor member that stated basically the following:

"The Florida Attorney General office has set up "spot checkers" to find people/companies accepting up-front fees for negotiating loan modifications. When I was called, I answered yes to the question (do I get paid up front).

I had only 2 clients.

After what ended up being an interrogation, I agreed to refund the money of the 2 clients even though they never complained! I agreed to cease & desist for which there will be an agreement in writing. Here is the kicker - I have to pay a fine of $5,000 plus costs! A portion of the text of the Attorney General letter says, "As we discussed, you will be responsible for the attorneys fees and costs and investigative costs of this action. Our office will be seeking $15,000.00 as a stipulated payment with $10,000.00 of that amount being waived due to your refunds to the affected consumers. The remaining $5000.00 will need to be paid unless you can provide documentation of your inability to pay."

The message here is that the Economic Crimes Unit of the Attorney General is now actively investigating anyone undertaking activities that would come under the definition of Mortgage Foreclosure Consultant or activities that come under the umbrella of the Florida Fraud Prevention Rescue Act. I reported on the position of the Florida Bar in their Ethics Alert and now the matter was written up on the Daily Business Review at FORECLOSURES: STRICT RULES FOR LAWYERS.

EVERONE furnishing mortgage modification or foreclosure rescue services to Florida residents must be vigilant to the terms of this legislation!

FORECLOSURE RESCUE AND MORTGAGE MODIFICATION FRAUD - LAWYER ALERT ISSUED

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Tue, 17 Mar 2009 17:31:22 -0500

The situation is important enough that an "Ethics Alert"was issued by the Florida Bar on March 15th.

Typically, the mortgage modification firm - which often uses "net offices" just like in the good old lending days and are just where a sales person hangs out - will recruit an attorney to "watch" the modification process and they will advertise that there is an attorney "representing" the client's (the borrower's) interests. Typical language is, "our attorney will represent you in the modification process and review all of your documents," or similar. In reality the attorney does almost nothing or works under the direct control of a non-lawyer.

Florida passed a Mortgage Rescue Consultant law in 2008and many firms have sought to stay in the lucrative Florida mortgage assistance market by trying to skirt that law by using a letter opinion by the Florida Attorney General that exempts attorneys from work they doing in defending a client in a foreclosure. The result however is a plethora of ethics violations for the lawyers that get involved and Unauthorized Practice of Law (UPL) violations for the mortgage modification firm if they give any type of legal service.

Usually these firms charge between $1,500 to $3,500 for modification services - the price is often set by the salesman (who is not an attorney). The salesman gets an commission (anything above the set fee) and the attorney gets a nominal review fee - or something up to 10% of the total fee if special services are provided, such as using the attorney trust account to deposit the fee for clearance and then disbursement to the loan modification firm. The Bar also issued an instructive articleon how one modification firm was prosecuted, saying, "Florida lawyers are being approached about working with nonlawyers offering foreclosure-related services to consumers, but the proposals present a veritable minefield of ethical problems."

MORTGAGE FORECLOSURE RESCUE - THE BAD GUYS DON'T WEAR BLACK!

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Tue, 10 Mar 2009 10:22:23 -0500

You can see the article at this link: http://www.nytimes.com/2009/03/08/nyregion/08scam.html?_r=1&ref=realestate

In many states, including Florida, mortgage rescue fraud laws have been enacted. More often than not the new laws do not do anything more than tie the hands of legitimate professionals trying to help distressed homeowners - while those intent on pure profiteering evade the law or flaunt it outright. The states' problem is that there is no money to enforce the new law. The distressed homeowner problem is that they are living in the Wild West when it comes to these firms - and the bad guys seldom wear black.

Another problem is mortgage modification firms that "say" they have an attorney review the file. They typically pay the attorney anywhere from $100 to $600 for this service - but the attorney actually gives no advice and does not legal service - they use the attorney to try to thwart the intent and sometimes the language of the mortgage rescue fraud laws, which often have a carve out provision for attorneys.

Hopefully the state legislatures will quickly address these issues and give the new laws some way to be enforced.

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

SHORT SALES PRIMER - BACK TO BASICS UPDATED

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Sat, 07 Mar 2009 16:57:28 -0600

Short Sale Primer For Brokers, Sellers and Buyers

A Primer -

Short sales are nothing new. When I represented a few national lenders for all of their foreclosures in the State of Florida several years ago, we negotiated "loan workouts" which are now called "short sales". Since loan workouts have been around so long, I did some digging with my old pals that were the executives I worked with in the loan workout and REO department of these national lenders (one of the lenders has since been merged into Bank of America).

I found one in Atlanta, one in Texas and another in Washington. Our discussion about short sales showed that nothing was new under the sun - the formulations and decision making processes were unchanged from 15 years ago - and only some of the terminology had changed. Another executive of that lender was found in Florida and she now works with me in the client management and lender negotiation of our client's loan workout situations.

Short Sale Defined -

First, understand that there are two elements to a mortgage. The first is a promissory note. The promissory note is a financial instrument that is an of itself an enforceable contract to repay a debt for money loaned to the borrower. A mortgage is a security instrument. It acts as the security or collateral for the promise to repay the money loaned which is described in the promissory note. Usually it cannot be enforced if the promissory note is paid off or cancelled. We are seeing 2^nd mortgage lenders that whose mortgages have no equity value in the home skip foreclosing on the mortgage and instead just sue the borrower on the promissory note. For a more detailed discussion of this process and results see link A LAWYER'S EXPLANATION OF THE FORECLOSURE PROCESS.

Short sales are a process of "shorting" the debt (the mortgages) encumbering a parcel of real estate (the house or investment property). Shorting the debt means that the person holding the debt (the lender) agrees to release its lien on the real estate for less than the amount the lender is due according to the promissory note. Last week I sent a fax to the Associated Press because they keep writing that a short sale includes the forgiveness of the deficiency on the note and mortgage. That statement is completely false. A full explanation of the various types of short sale scenarios - some with and some without forgiveness of debt - is in my article link LENDER SHORT SALE ACCEPTANCE LETTER EXAMPLES - READ WITH CAUTION!

The explanation is simple. The execution and the details of a short sale are highly complicated. The chemistry of each short sale situation is not identical and quite often the goal you want to achieve is a moving target seemingly and frustratingly impossible to reach. More detail in some of the methodology to a short sale is in a previous article (see link - What do I do? - I can't pay my mortgage).

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 current market 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) a liability 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 accelerate 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 even if it is "current" in payments.

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. I call this "quantifying the economic cost of ownership of the property".

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. This is also a "short sale" but it does not involve the lender making any concessions - the property owner has to pay the shortage at the closing.

Financial Indigestion -

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" or "real estate rich - but cash poor"), 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. Depending on the financial circumstances and the lender -borrower relationship, interest can be at market or even at zero.

Where the borrower is experiencing extreme financial hardship and there is no horizon (projected end) to that hardship a third alternative can occur - actual forgiveness of the unpaid amount due the lender.

Short But Important Reminder On The 1099 -

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.

As a short reminder, the big deal about 1099's is really an illusion. 1099 or no 1099, if the debt is forgiven the borrower has income to report to the IRS. No exceptions! Too many people come to me and say they want me to negotiate with the lender so that they don't get a 1099. I ask them why? They tell me that if they don't get a 1099, they don't have to report the income they would get on the debt they did not pay. The next question is why does the bank get to decide what the IRS usually has jurisdiction to decide? The answer is of course that the lender giving a 1099 means squat - unless the borrower is intent on committing tax fraud by not reporting income. There is relief available to the borrower are two opportunities to not recognize up to all of the income. These are discussed in detail in my article called (see link) Sellers Always Have Income and include the 2007 Mortgage Debt Relief Act.

Loan Modification -

Beginning in March 2009 a new government incentive involves "financial encouragement" to lenders to reduce the principal obligation of a mortgage under certain circumstances. This reduction in principal will trigger a 1099C cancellation of debt. However, since the program targets primary homes, those whose borrowing qualify under the 2007 Mortgage Debt Relief Act will be able to use the exemptions in that Act to exclude the income generated by the debt forgiveness.

Modification of a mortgage loan is a fast developing part of the housing recession resolution solution. Not everyone is entitle to a modification and even someone with a high interest rate that cannot refinance in this current financial market may not be qualified for a loan modification. Numerous factors are in play in determing if a loan modification is justified and chief among them is ability to pay - not desire to pay. Generally speaking, if your total housing expense is more than 38% of your household income, you should speak to a professional to discuss if you are a modification candidate. Yesterday an attorney who has a housing expense of $25,000 called me to modify his mortgage. He told me the $25,000 was about 10% of his household income, but the mortgage debt was about 110% of the value of the home. That lawyer is not a modification candidate.

Short Sale "Bookends" -

Note that these are the general parameters that we have seen over several years of dealing with loan workouts. There are always exceptions where the decision of the lender is simply without logic.

Illogical example #1 - The borrower is without a job, has moved out of the house and is living with one of the spouses' parents out of state. The house is now valued at $190,000 to $210,000 and the loan is at $350,000 and has been on MLS at $200,000 for 3 months. One quarter of the homes in the neighborhood are in some kind of pre-foreclosure or distress. The lender refuses to accept a contract at $178,000.

Illogical example #2 - The borrower owns two businesses and shows annual gross income of $500,000. Borrower has 4 homes all investment and lives in another (5 altogether). Lender accepts a short sale on one investment home at 10% under value, leaving $70,000 short on the mortgage payoff. Borrower asks for a letter of release from the lender that it will not pursue the shortage on the promissory note and the bank gladly provides that letter, letting the borrower off from every having to worry about the shorted promissory note.

I call these the "bookends" to the short sale definition of what fits the parameters of the banks. As you can see, even the bookends can be moving targets, since neither makes any sense. Fitting everything else in the middle leaves a really big gray area on the fringes of the middle! For more examples of how it is impossible to reliably predict the determination of the lender on the status of the shortage, see link SHORT SALE DEFICIENCY DEMANDS AND DEFENSES - The Interstate Highway Analogy

No Science To The Short Sale -

There is no set course to the successful short sale presentations to the lender. We have seen 5 page packages and 50 page packages get approved. Sometimes it takes 12 days (we have done it twice so far) and sometimes it takes 6 months (don't ask!). It depends on the lender. It depends on the borrower's situation. It depends on the property. It depends on the contingencies and price in the purchase contract. Notwithstanding, we find that the best opportunity for a short sale to be successful is to provide a simple yet complete package to the lender - keep it simple - but back up the assertions made in the presentation.

You have probably heard about the one, two or even three months to get the bank to even start to move on a short sale application. Again, this is hit and miss. This winter we made two presentations to the same lender, one in early March and one in mid April. Same neighborhood. The April package got a BPO call from the lender in only 2 weeks. We are still waiting on the March package! (Yes, we confirmed that the lender has it and they confirm that they are working on it).

Lender Overload -

When I first wrote this article it appeared that most lender loss mitigation department personnel are carrying 500 to 600 files per person. Some lender loss mitigation departments have cut that down to 200 files per person. We feel the best opportunities for success should be on the packages that are clear cut, summarized, and organized. But each package must be accompanied by someone that will call the lender to get status reports on the package at least weekly. I was amazed with one lender when we called them to ask why the lender had not even acknowledged that they received the package. Incredibly, the answer was that they take no action on any package received until someone calls to find out the status on the file!

Short sales have a long history of being in the arsenal of lenders for loss mitigation and loan workout issues. Used properly, the short sale can be a tool to the lender and the borrower and an opportunity for a buyer with patience to obtain a relative bargain in the marketplace.

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

SHORT SALE AND FIRPTA TAX WITHHOLDING - IRS ISSUES PRIVATE GUIDANCE

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Thu, 05 Mar 2009 21:29:37 -0600

From: CPA
Sent: Wednesday, February xx 2009
To: IRS
Subject: short sale question

Dear IRS,

I am interested in the FIRPTA consequences of a short sale. The Regulations do not specifically discuss this type of transaction, limiting the withholding discussion to foreclosures and deed in lieu. In short, a short sale is where a property owner sells his property to a third party buyer at (usually) a price that is "short" of the debt owed. Thus, the bank that is involved usually receives all of the sales proceeds in repayment of the existing mortgage. The bank may or may not forgive the debt that is not satisfied by the sale, and a decision on this issue may not be made for several months or even years after the sale.

For example, assume someone (an NRA) bought a home for $500,000 cash and thereafter borrows $800,000 when the value increased to $1,000,000 (80% LTV). Due to the market conditions, the owner short sells the property and the sale is consummated for $750,000.

Would the FIRPTA withholding in a situation like this be based on:

•1. the $750,000 sales price, noting that the bank may or may not forgive the $50,000 of additional debt; or

•2. The "amount realized" of $800,000 (the sale price PLUS the potential debt forgiveness)?

Would the IRS grant a withholding certificate in a situation like this? If so, what needs to be explained about the short sale and the debt?

If the answer is 1., above (i.e., withholding is based on $750,000), if the $50,000 debt is later forgiven is there any FIRPTA withholding requirement at that time? Consider that the debt would then be an unsecured promise to pay (as the U.S. real property interest was sold).

I would like to think that the "right answer" is that withholding would be based on the $750,000, that a withholding certificate could be obtained based on gain of $250,000 (i.e., $750,000 less the $500,000 purchase price), and that the forgiveness of the debt does not trigger any additional FIRPTA withholding obligations. This would seem to be a result that is consistent with the Regulations on foreclosures and on deed in lieu, but is clearly neither of these transactions. Of course the bank would not be happy to hear it is not getting $750,000 but $750,000 less the withholding.

The response received from the IRS was:

From: IRS
Sent: Thursday, February xx 2009
To: CPA
Subject: RE: short sale question

CPA,

When the regulations do not specifically address an issue, general law applies. The answer to short sale questions is clearly set forth in the definition of the "Amount Realized" per Treas. Reg. 1.1445-1(g)(5). This regulation section defines Amount Realized as follows:

The cash paid or to b paid,
The FMV of other property transferred or to be transferred, and
The outstanding amount of any liability assumed by the transferee or to which the US real property interest is subject immediately before and after the transfer.

As you know, the withholding is based on the Amount Realized. Therefore, in the example you set forth, the withholding would be based on $800,000 (Sales price plus outstanding liability assumed).

Also, as you correctly alluded, Foreclosures and Deed in Lieu of Foreclosure are different from short sales.

Take care,

Senior Program Analyst

Foreign Payments

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TENANT RIGHTS AND FORECLOSURE - A DISCUSSION OF SAFEGUARDS

Richard Zaretsky, Florida Real Estate Attorney (Richard P. Zaretsky P.A. ) — Tue, 03 Mar 2009 20:50:19 -0600

Landlord Tenant relationships are governed by State statute

The landlord tenant relationship is governed by statutes of the state in which the real estate is located. Generally for the rental of a home there is a written lease, although some leases can be oral. Usually any lease for a year or more must be in writing to be enforceable.

Most tenants obtain possession of a rental home once there is already a mortgage on the property, and this article presumes that is the case with the scenarios discussed. If a tenant is in possession of the home before a mortgage is put on the property, the rights of the lender may be materially different than discussed in this article.

The foreclosure process and the "unknown tenant"

The mortgage is a lien upon the home. The right of a tenant is almost always inferior, or subject, to the lien of the mortgage.

In a foreclosure action, the tenant always gets served with process (the summons, lis pendens and foreclosure complaint) and is usually called the "unknown tenant". The complaint is going to say that the rights of the tenant are "inferior to" and "subject to" the claims and rights of the lender holding the mortgage. This means that the lender came first and has a superior interest in the property ahead of the tenant. It does not matter that the tenant has already paid the last month's rent or a security deposit because the interest of the tenant and the payment by the tenant of those monies came after the lender was given the mortgage by the landlord.

Tenant can be removed from the rental property

The tenant gets served with the foreclosure complaint because the court is going to be asked to rule that the lender and its mortgage is superior to any rights of possession of the tenant to the property being foreclosed. This is a requirement so that when the mortgage foreclosure sale occurs, the new owner of the property can get possession. Of course this also means that the tenant is going to be kicked out. This process is called dispossession or eviction. It usually is effectuated with a writ of possession issued by the Clerk of the Court at the end of the foreclosure action. This event happens after the foreclosure sale of the property - usually several months or even a year after the tenant was served with the foreclosure lawsuit.

Tenant gets served - should the tenant continue to pay the rent?

Let's assume that a tenant gets served with a foreclosure action because the landlord did not pay its mortgage. The tenant paid first, last and security and those monies were all paid to the landlord. The lease has 9 months to run. Who does the tenant pay the rent to? What happens to the last month's rent and what about getting a return of the security deposit?

The tenant has to make a decision about the rent. The best course of action is for the tenant to respond to the foreclosure complaint by bringing to the attention of the court and the lender that tenant paid first, last and security, who is holding those monies, and what the monthly rent amount is being paid, when it is being paid and to whom. The Tenant should ask the court to give it instruction on what to do with the rent still due.

In most courts the judge can determine to have the rent still due to be paid into the court registry so the landlord nor the lender has access to it. I like this position for a tenant because it creates a fund out of which the last month's rent and security deposit can be recovered without having to chase the now possibly insolvent landlord, thus answering the two remaining questions.

The alternative of continued paying of the money to the landlord likely will result in an eventual financial loss to the tenant of those monies. In addition, at the end of the foreclosure action, there is a theoretically better chance that the lender will make arrangements with the tenant to at least stay in the property for the duration of the lease, provided the remaining term is not long term.

The landlord can still evict for non-payment of rent

On the flip side, the tenant has a contract with the landlord. The tenant promised to pay to the landlord rent in return for the landlord's obligation to provide quiet enjoyment of possession of the property to the tenant. Obviously if the tenant gets served with a lawsuit to dispossess the tenant from the home, the landlord has breached its obligation of quiet enjoyment. But, if the tenant stops paying rent to the landlord the tenant can be evicted.

The only protective measure for a tenant is to have the foreclosure judge make a determination of who the rent should be paid to. See my recommendation above.

Be careful in advance - new leases

Getting into a lease in the first instance in this market is one where you really cannot protect the tenant from some eventuality of foreclosure in the future. Obviously if a title search shows that the home is already in foreclosure, be sure the tenant understands that this is likely a short stay!

More important is how to protect a new tenant's advanced rent paid and security deposit in this uncertain market. We suggest to our clients that some third party hold the advanced rent and security deposit and that those monies not be paid to the landlord except pursuant to the lease contract terms. The third party can be an attorney or title company or Realtor trust account. Frankly no one can say that these accounts are 100% safe. Reasonable judgment must be exercised.

There is a tremendous need to rental homes in this market - but tenants are urged to be careful in the lease terms and flow of money and remain diligent on the payment of each month's rent, advance rent and security deposits.