Our tax dollars are bailing out banks and other financial institutions from their greedy, shoddy practices, but those same lenders are, in many cases, harming, not helping, buyers and sellers in the current housing crisis. As a director, I heard this point illustrated time and again by Realtors from across the state at our first, 2009 meeting of the California Association of Realtors (C.A.R.) in Monterey recently.
When a lender agrees to accept less than is owed, in lieu of foreclosing, this is known as a "short sale." In reality, a large percentage of short sales end up in foreclosure. Knowing this, and that you, as a buyer, may wait months only to find out your offer was not accepted, many agents advise their buyers to avoid short sales.
If, for instance, the house has a first and second loan with different lenders, both banks must agree to a lower payoff. Often, this does not happen and the short sale is dead.
Under California law, home loans are categorized as either "non-recourse" or "recourse." A mortgage to purchase a one-to-four-unit, owner-occupied property is considered non-recourse, i.e., the lender can recover the property, but is prohibited from looking to the purchaser for any deficiency. Recourse loans, conversely, do not limit the lender to repossessing the home; the borrower may also be personally liable for a deficiency judgment. A refinance of an existing loan is an example of a recourse loan.
Even when the sale seems to be proceeding, the "release" can be a poison pill for the seller. According to a veteran, East Bay real estate attorney who has seen innumerable bank releases since this debacle began, virtually all have language that say, in essence, "Lender has the right to collect remaining debt from seller."
This verbiage is appropriate for recourse loans, but the seller may veto the short sale rather than approve the repayment restriction. Clearly, non-recourse loan releases should not include this terminology, yet they do. Many consider this unconscionable.
A beleaguered seller, already under much stress, might not notice this onerous lender condition. Prior to signing the short sale listing, the seller must be advised to consult with legal and tax counsel. This suggestion is covered in the C.A.R. "Short Sale Listing Addendum." If the seller did not receive and acknowledge the form, and is later burdened with a large, unexpected lien, it could lead to legal action that includes his agent.
After foreclosure, or a deed in lieu of foreclosure, when the home is now owned by a lender, it is called "Real Estate Owned," or an REO. Some banks mistakenly believe they are exempt from all state disclosure requirements. As an example, if, during the listing period, the listing agent notified the REO about needing to repair a burst water pipe that flooded a room, this would have to be disclosed in writing by both the bank and its agent, yet the former may not think it necessary.
The lack of adequate disclosure is a huge issue regarding REOs. This includes not only property condition, but items such as liens for water and utilities. Realtors at the C.A.R. meeting shared horror stories of buyers forced to pay thousands of unexpected dollars to turn on their water or other services. Neither the lender nor the agents had disclosed this to the buyers. The agents usually did not know about the liens, but neither had they checked to eliminate the possibility.
Another problem involves language in lender contracts that negate the protections in our standard, C.A.R. purchase agreements. An egregious example is a provision for "passive" removal of all contingencies in a short time period, e.g., seven days. This means that, unless the buyer submits an addendum changing the passive stipulation and time frame, his right to withdraw from the contract will have been automatically removed.
REO buyers should be advised to review lender paperwork with an attorney. That suggestion is incorporated in a C.A.R. "REO Advisory."
At our meeting, numerous Realtors complained about how lenders are forcing buyers to use their (the bank’s) title company. Unless the lender is paying for the title insurance, which is rarely happening, preventing the buyer from choosing his own title company is a violation of a Federal law called RESPA (Real Estate Settlement Procedures Act).
Two big problems mentioned about lender’s title companies: 1) some are providing a less comprehensive policy than the one indicated in the C.A.R. contract and, 2) there have been numerous cases where buyers, upon canceling an escrow for valid reasons, have not received prompt return of their good faith deposit from the title company. I heard of one situation where the title company gave the buyer’s deposit to the REO, which subsequently sold the loan to another lender.
Listing agents are also being taken advantage of by REOs. Written agreements between the bank and agent require the agent to pay many fees up front, on behalf of the bank. These include utilities, cleaning/maintenance and "blight ordinance" fines. At our sessions, Realtors who worked as listing agents for REOs told of being stuck with bills despite the lender's agreement to reimburse. The prospect of future business from the same lender caused some agents to accept this abuse
Notwithstanding some hopeful rhetoric to the contrary, many lenders are exacerbating, rather than alleviating, our current mortgage mess. Space does not allow amplification on how bank policies are making it more difficult than ever for even fully qualified, solid citizens to obtain a purchase loan or refinance. Bottom line: when dealing with banks, be careful to cover your assets.
