There was a time, not so long ago, when a high percentage of the residential closings that we were doing were short sales. Short sales really ramped up following the bursting of the housing bubble and then peaked during the foreclosure crisis.  We all know how we got there and we remember the no doc, no review teaser loans.  Short sales were a fact of life.  We represented both buyers and sellers in short sales.  In both cases, we were at the mercy of the lenders in addressing the ridiculous number of requirements for approvals and then waiting for months on end for the approvals to come back.

Fortunately, those days are behind us. Short sales are rare, but not completely gone.  So, if you are selling you’re house, how do you know if a short sale is right for you and what will a short sale mean for you?  I haven’t thought much about these questions for a while, but like most of my blog posts, I am inspired to write about this now because recently, a new client inquired about short sales.  The client was transferred from South Florida to Atlanta, leaving behind a house with an outstanding mortgage balance (combined 1st and second) of over $800,000.  The house is not yet listed for sale, though the client has already relocated.  The agent expects that the house will sell for under $700,000.  The client wanted to know what to do and what will happen.  His first question was whether we should apply for short sale approval with the lenders now.

The answer is no. Obviously, if the agent is correct, there will be a short sale.  However, until a contract is signed, there is no approval to obtain from the lenders because we don’t know the amount of the deficiency.  And, because there are 2 lenders, the contract might be enough to satisfy the 1st mortgage leaving the 2nd unpaid.  If the 1st insists upon full payment, the dynamics of the negotiations would change completely.

In addition, in order to approve a short sale, lenders require an appraisal of the property. The appraisal must be by an approved appraiser and can’t be too old.  So, we couldn’t submit an appraisal yet.  The appraisal might be stale by the time a contract is signed.

Another factor is the client’s ability to pay the deficiency. If the client is liquid or has net worth or otherwise has income, lenders are less willing to write off the deficiency.  Where 2 lenders are involved, the client has a bigger hurdle, especially if the 1st mortgagee takes all of the sales proceeds.  Attempting to obtain pre-contract approval would bring attention to these issues far too early in the process.

At this point, I suggested to the client that it would be a bad idea to have any conversation with either lender until there was a contract in place. Once a contract has been signed, it should be submitted to each lender for approval and a case made for the short sale.  Here, the arguments have to be made that the client is unable to pay the deficiency.  I explained that lenders are supposed to make this decision on a primarily objective basis, but we can give subjective reasons for an economic hardship.  But, since we are not in the crisis mode any more, it is now difficult to predict how lenders will lenders will react and that the client needs to be prepared to address the deficiency.

Short sales can’t be counted on as escape routes for home owners or as a simple alternative to the foreclosure process any more. Lenders are less willing to write off deficiencies without a compelling economic hardship.  Because there isn’t a back log of short sales to approve, lenders will carefully review every request for short sale.  If you have other options, you should consider them as well.

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        In the recent decision of Ober v. Town Of Lauderdale by the Sea, No. 4D14-4597 (2016) (See Copy of Case Here) issued by the Fourth District Court of Appeal, the Court held that real property liens arising after a final judgment of foreclosure are not discharged by Florida’s lis pendens statute.

            The sequence of events giving rise to this case were as follows:  In November, 2007 a mortgagee recorded a lis pendens on a residential property as part of a foreclosure proceeding. In September, 2008 the foreclosing bank obtained a final judgment of foreclosure. However, the foreclosure sale was not held until September, 2012, more than 4 years after entry  of the judgment of foreclosure. Meanwhile, between the time the final judgment of foreclosure was entered and the foreclosure sale was held, the Town of Lauderdale by the Sea recorded a total of seven liens on the property related to code violations occurring after the final judgment of foreclosure was entered in September, 2008.

            When the house was finally put up for foreclosure sale in September, 2012 along came James Ober who purchased the property at clerk’s auction. Shortly after the certificate of title was issued, the Town of Lauderdale by the Sea imposed 3 more liens on the property. At some point after receiving the certificate of title to the property, Mr. Ober discovered the true status of title and filed suit to quiet title in order to strike the Town’s liens against his newly purchased property. The Town of Lauderdale by the Sea counterclaimed to foreclose its liens and both parties moved for summary judgment.

            Both the trial and appellate courts agreed with the Town of Lauderdale by the Sea’s position that the lis pendens applied to only liens existing or accruing prior to the date of final judgement and that the lis pendens did not continue until the date of the judicial sale.

            This decision is of great importance to secured lenders of every stripe including banks and mortgage holders.  In order to avoid the possibility of intervening liens attaching to the property to be auctioned at a foreclosure or clerk’s sale, secured creditors should be prepared to proceed with the foreclosure sale once judgment has been entered. This entails requesting the earliest sale date possible and including the details of the sale date in the final judgment of foreclosure.  Otherwise, liens recorded within 30 days of  the date of entry of the judgment of foreclosure (i.e., when the judgment becomes final) could become a cloud on title and necessitate the filing of a separate action in an effort to foreclose these “gap period”  liens. For the same reasons noted above, the prior common practice of allowing the foreclosed borrower to remain in possession of the property under a consent judgment after entry of the judgment of foreclosure but before an agreed upon delayed foreclosure sale date will need to be reconsidered in favor of an alternate means of settlement.

            Clearly, the foreclosure landscape has been altered as a result of the recent Ober decision of if you could benefit from our assistance in helping you better adapt your own practices and documentation  to  these important changes, please do not hesitate to contact us.

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        The Justice Department has reached a settlement with Goldman Sachs related to Goldman’s behavior in packaging, securitization, marketing and sale of Residential Mortgage Backed Securities (RMBS) between 2005 and 2007. Goldman has agreed to pay $5.06 billion to settle the case.  The settlement requires Goldman to pay a $2.385 billion civil penalty under the Financial Institution Reform, Recovery and Enforcement Act (FIRREA) and to provide $1.8 billion in relief to under water homeowners and distressed borrowers in the form of loan forgiveness and financing for affordable housing.  In addition, Goldman will pay $875 million to resolve other claims brought by federal and state agencies including the New York and Illinois attorneys general and he national Credit Union Association.

             In its Statement of Facts, Goldman admitted that, although it told investors that loans in RMBS pools were generally in accordance with underwriting guidelines, in fact, Goldman was aware of information that for certain pools, significant percentages of reviewed loans did not conform with representations.  Samples of reviewed loan documents indicated potential problems and that larger samplings should be taken but never were.  Further, Goldman approved every RMBS pool it reviewed between 2005 and 2007 notwithstanding knowledge of high numbers of loans that had been dropped from many pools and knowledge of “high risk” underwritten pools.

             The Goldman settlement marks the fifth institution that the Justice Department and its team have settled with since 2012.  Though the amount is high, it only ranks 4th on the list following Bank of America ($16.6 billion), JP Morgan Chase ($13 billion) and Citibank ($7 billion).  Only Morgan Stanley has settled for a smaller amount than Goldman ($3.2 billion).

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        HR 3700, The Housing Opportunity Through Modernization Act passed its first major test, clearing the House of Representatives, 427-6, on February 2, 2016. The Senate will now consider the Bill and has referred it to the Banking, Finance and Urban Affairs Committee.

        I have previously written about this legislation (see post Congress Gives Attention to Antiquated FHA Policies). The legislation, proposed by Representative Blaine Luetkemeyer (R, MO), will modernize FHA policies and will more families buy homes.  The legislation is supported by the National Association of Realtors.

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I was sad to read 2 different newspaper articles in the last few days about an increase in foreclosure rescue scams. Both The Daily Business Review (November 9, 2015) and The New York Times (November 7, 2015) featured stories about an old scam that has been on the up rise in both South Florida and New York. The scam targets home owners in danger of losing their homes to foreclosure. So-called foreclosure rescue consultants approach these homeowners offering a sure fire way out from under the crushing mortgage debt. The scammers offer to pay the delinquent mortgage, provide for housing and pay a lump sum equity payment to the home owner. In return the homeowner is asked to dee their home to the rescue company. The sales pitch goes that the homeowner will be a tenant for a period of time and, when his/her credit is restored, buy back the house.

Meanwhile, the scammer now owns the house, falsifies loan paperwork and appraisals and, sometimes through a straw buyer and sometimes simply through their shell corporation, takes out one or more new loans on the house. The home owner may or may not get some of the loan proceeds of the new loan per the initial promise to keep up the façade that the scammer is working for the home owner. However, in all likelihood, the homeowner’s original loan has never been paid (nor have any subsequent loans taken by the scammer) leaving the now dispossessed homeowner on the hook for the original debt and all subsequent lenders in a junior position.

These scammers continue to find new marks despite the amount of publicity they generate. Unfortunately, there is little protection for homeowners. In 2008, Florida enacted F.S. 501.1377 to protect consumers from unfair practices in home sales and equity transfers in foreclosure related rescue transactions. While some protections were put in place which would require foreclosure rescue consultants to provide disclosures to consumers the Act has almost no penalty provisions for violations and has no criminal enforcement provisions or penalties thereby giving scammers a free ride to target vulnerable consumers.

As attorneys, we can only warn clients and consumers that if it sounds too good to be true, it is. If you are behind in your mortgage, deal directly with the lender or servicer, not an intermediary, particularly an unsolicited intermediary, other than an attorney who you select and retain. Do not deed your home to anyone without consulting your attorney, particularly to a 3rd party. If a deed in lieu of foreclosure is right for you, do so only in exchange for a release from personal liability directly from your lender. Remember, no lender is going to allow you to live in your house rent-free after you deed it to the lender for more than a couple of days. Any deal otherwise is probably a fraud.

Until laws with strong penalties and enforcement provisions are passed which will act as a deterrent to scammers and fraudsters, diligence and vigilance is required to protect consumers.

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