Some people only associate the subprime lending meltdown with the residential real estate market. However, any loan to any borrower can be “subprime” if the debt to equity or income ratios are to high. This applies to the commercial real estate market as well.
Over the past several years, the market for commercial property has enjoyed the very best conditions. In fact, by early 2007, delinquencies on commercial loans fell to all-time record lows. However, commercial lenders were no less foolish than residential lenders making loans to home buyers with questionable credit and/or finances. Is there any reason to believe that commercial lenders will not suffer the same fate as residential lenders?
There are factors that may soften the blow to commercial lenders. Commercial real estate is a smaller market than residential real estate. Commercial landlords often have a diversified group of tenants with different income streams. A commercial landlord also has the advantage of being able to more easily reconfigure available space to meet the needs of new occupants. Also, the supply of commercial buildings has not increased dramatically over the past several years. Most owners of residential property do not have these advantages.
With all this being said, industry leaders have intimated that that lenders are set for a collision in the years to come. Banks have already recognized an estimated 60% of cumulative losses, or about $50 billion. Recent indicators suggest that the commercial real estate market may have hit rock bottom despite a cascading drop in the price of apartments, office buildings and industrial properties nationwide in 2009. According to Moody’s/REAL Commercial Property Price Index, commercial property values have increased 1% in 2010 after 13 months of consecutive declines. However, some commercial real estate industry experts believe that the problems will get worse before they get better. High-priced commercial spaces will soon feel the same pinch considering the nation’s unemployment rate remains at 10% with consumer spending levels continuing to slide.
Thousands of community and regional banks nationwide that hold approximately $860 billion in commercial mortgages and construction/development loans are bracing for implosion. Banks have been slow to recognize potential losses on these loans since many borrowers are still current on their payments despite being upside down on their loans; thus, foreclosures are not on the books. With a subtle nudge of industry regulators, many banks have extended the terms of a majority of their commercial loans in hopes that property values and occupancy levels will improve in 2011. Unfortunately, the consensus is that neither prices nor occupancy rates will improve anytime soon. And, borrowers will find it even more difficult to refinance their existing loans considering an approximate $1.4 trillion in outstanding commercial real estate paper is expected to come due over the next three years.
By Stuart Miller, Esq.
Wednesday, February 10, 2010
Monday, February 1, 2010
Recent Dismissals
Associate Niria Arvizu recently persuaded a Judge to dismiss a case at the pleading stage that had been filed against a mortgage broker by a former client that was attempting to prevent foreclosure. Although Judges are often reluctant to dismiss a case at the very begining, Ms. Arvizu was able to to establish that all of the loan documents were in order and that there was no Legal obligation to translate them into Spanish as the plaintiff had claimed.
Associate Stuart Miller obtained an order dismissing a case he was handling after the plaintiff failed to file an amended complaint as was previously ordered by the Judge. Mr. Miller had previously convinced the Judge that Plaintiff's original complaint was defective and should be amended. Apparently, the plaintiff believed that he would be unable to cure the defects in his original complaint as he did not file an amended complaint as ordered.
Associate Stuart Miller obtained an order dismissing a case he was handling after the plaintiff failed to file an amended complaint as was previously ordered by the Judge. Mr. Miller had previously convinced the Judge that Plaintiff's original complaint was defective and should be amended. Apparently, the plaintiff believed that he would be unable to cure the defects in his original complaint as he did not file an amended complaint as ordered.
Short Sales
Unfortunately, short sales or short pays are more common every day. The following are a few items that agents and brokers should either learn about or remind themselves of prior to handling a potential short pay transaction.
Pre-Listing Considerations - A seller shonld know the ramifications of a successful short-pay agreement with the lender. An agent considering taking a
listing on a short-pay should advise the seller, in writing, to seek tax and legal
advice before signing the listing agreement.
o Taxes - The seller likely will be obligated to pay taxes on any debt forgiven by
the lender. The IRS considers debt forgiveness as ordinary income. Consequentially, the difference between the loan amount and the short-pay agreement will be taxed at the seller's ordinary incom tax rate.
o Credit Score - A lender may handle a short-pay in a number of different ways. It can report the loan as paid in full which would have no adverse credit consequences. A lender may also report the loan as being "satisfied." Future lenders and credit reporting agencies may consider a "satisfied" loan as being similar to a deed in lieu of foreclosure. This may have a devastating impact on the seller's credit score.
o Financial disclosures - A seller should know that a lender will likely require detailed financial statements from the seller as a condition to approving a short-pay. Often, less-than-accurate information from the seller was used to obtain the loan the seller now cannot afford. This may cause a seller to refuse to divulge accurate fmancial statements. An agent probably will want to refuse to take a listing in this situation. At the very least, a listing agent should add a term in the listing agreement obligating the seller to cooperate with the lender's requests.
Multiple Listing Service - The listing should clearly be shown as a short sale. Additionally, provided the local MLS allows for variable commission, there should be a statement that the commission offered to the cooperating agent is subject to lender approval. Often, lenders will require that the agents reduce their commissions before they approve a short-pay.
Considerations of the Buyer's Agent - A buyer's agent should run a property profile to determine the amount of outstanding indebtedness. A recent notice of default is a good indicator that a short-pay might be necessary. A buyer's agent should also calculate likely commissions and closing costs to determine if an offer below the listing price will trigger a short-pay.
Working with the Lender - Prior to negotiating with a lender, an agent should obtain the seller's written consent to keep the lender informed as to the status of the transaction. An agent should also send a letter to the lender confirming that the agent is not acting on behalf of the lender. This will be helpful in avoiding any claims that the agent is also a fiduciary for the lender.
Marketing Considerations - An agent should be careful when marketing to attract short-pays. No promises or guarantees should be included in any advertisements or flyers. All advertisements should be reviewed by a broker. An agent should be careful when accepting referrals from credit counseling services. Any referring source should be investigated to determine ethics and business practices before taking any referrals.
Contract Formation - When a short-pay appears to be necessary, the CAR Short Sale Addendum should be used. The offer or counter offer should contain a
provision making the execution of the Short Sale Addendum a condition of the transaction.
Pre-Listing Considerations - A seller shonld know the ramifications of a successful short-pay agreement with the lender. An agent considering taking a
listing on a short-pay should advise the seller, in writing, to seek tax and legal
advice before signing the listing agreement.
o Taxes - The seller likely will be obligated to pay taxes on any debt forgiven by
the lender. The IRS considers debt forgiveness as ordinary income. Consequentially, the difference between the loan amount and the short-pay agreement will be taxed at the seller's ordinary incom tax rate.
o Credit Score - A lender may handle a short-pay in a number of different ways. It can report the loan as paid in full which would have no adverse credit consequences. A lender may also report the loan as being "satisfied." Future lenders and credit reporting agencies may consider a "satisfied" loan as being similar to a deed in lieu of foreclosure. This may have a devastating impact on the seller's credit score.
o Financial disclosures - A seller should know that a lender will likely require detailed financial statements from the seller as a condition to approving a short-pay. Often, less-than-accurate information from the seller was used to obtain the loan the seller now cannot afford. This may cause a seller to refuse to divulge accurate fmancial statements. An agent probably will want to refuse to take a listing in this situation. At the very least, a listing agent should add a term in the listing agreement obligating the seller to cooperate with the lender's requests.
Multiple Listing Service - The listing should clearly be shown as a short sale. Additionally, provided the local MLS allows for variable commission, there should be a statement that the commission offered to the cooperating agent is subject to lender approval. Often, lenders will require that the agents reduce their commissions before they approve a short-pay.
Considerations of the Buyer's Agent - A buyer's agent should run a property profile to determine the amount of outstanding indebtedness. A recent notice of default is a good indicator that a short-pay might be necessary. A buyer's agent should also calculate likely commissions and closing costs to determine if an offer below the listing price will trigger a short-pay.
Working with the Lender - Prior to negotiating with a lender, an agent should obtain the seller's written consent to keep the lender informed as to the status of the transaction. An agent should also send a letter to the lender confirming that the agent is not acting on behalf of the lender. This will be helpful in avoiding any claims that the agent is also a fiduciary for the lender.
Marketing Considerations - An agent should be careful when marketing to attract short-pays. No promises or guarantees should be included in any advertisements or flyers. All advertisements should be reviewed by a broker. An agent should be careful when accepting referrals from credit counseling services. Any referring source should be investigated to determine ethics and business practices before taking any referrals.
Contract Formation - When a short-pay appears to be necessary, the CAR Short Sale Addendum should be used. The offer or counter offer should contain a
provision making the execution of the Short Sale Addendum a condition of the transaction.
Friday, January 8, 2010
Foreclosure Consultants
The law relating to loan modifications has changed rapidly in 2009. In July, the legislature required that any real estate brokers providing loan modification services must register with the Department of Justice and obtain a surety bond. On October 11, 2004 SB94 was passed prohibiting attorneys and real estate licensees from collecting advance fees when providing any foreclosure relief services.
The new legislation effectively removed any exemptions to the Mortgage Foreclosure Consultants Act (“Act”) in California Civil Code section 2945, et seq. As a result, any real estate licensee that helps a client avoid foreclosure, obtain a loan modification or provide any similar service must comply with the terms of the Act.
The law used to be that if no notice of default has been filed, then a real estate licensee may conduct a loan modification and collect advance fees. It appears that SB 94 has eliminated that exception.
Under the Act, any person who solicits, represents, or offers to any owner of real property that they will stop or postpone a foreclosure sale, or save the owner’s residence from foreclosure, is considered a “foreclosure consultant.”
According to the Act, and as clarified by SB 94, real estate licensees are exempt from compliance if the broker:
(a) Engages in acts whose performance requires a real estate license,
(b) Is entitled to compensation for the acts performed in connection with (1) the sale of a residence in foreclosure or (2) with the arranging of a loan secured by a lien on a residence in foreclosure,
(c) Does not claim, demand, charge, collect, or receive any compensation until the acts have been performed, and
(d) Does not acquire any interest, either directly or indirectly, in the residence in foreclosure.
Therefore, helping a client obtain an extension of a trustee’s sale or obtain a forbearance agreement with a bank in connection with a listing of a house probably does not fall with in the Act so long as no advance fees are charged.
However, if there is no listing agreement with a homeowner, then providing loan modification services will fall within the Act.
There are several disclosure requirements when performing such services. As a foreclosure consultant, the real estate licensee must provide the owner of a residence in foreclosure with a contract that fully discloses the “exact nature of the foreclosure consultant’s services and the total amount and terms of compensation.” The contract must also include various terms as outlined in the Act, including language regarding the owner’s right to cancel the contract within a specified amount of time. (See Civil Code § 2945.3).
SB 94 also requires that the following written disclosure be provided in at least 14 point bold type:
“It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly to ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these and other forms of borrower assistance free of charge. A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from your local HUD office or by visiting www.hud.gov.”
Again, a real estate licensee acting as a foreclosure consultant must register with, and maintain a certificate of registration from, the Department of Justice. The real estate licensee will also be required to obtain and maintain in force a surety bond in the amount of $100,000.
Violations of these prohibited practices, or any other sections of the Act, are subject to civil and criminal penalties, including a fine up to $10,000 and imprisonment for not more than one year.
The new legislation effectively removed any exemptions to the Mortgage Foreclosure Consultants Act (“Act”) in California Civil Code section 2945, et seq. As a result, any real estate licensee that helps a client avoid foreclosure, obtain a loan modification or provide any similar service must comply with the terms of the Act.
The law used to be that if no notice of default has been filed, then a real estate licensee may conduct a loan modification and collect advance fees. It appears that SB 94 has eliminated that exception.
Under the Act, any person who solicits, represents, or offers to any owner of real property that they will stop or postpone a foreclosure sale, or save the owner’s residence from foreclosure, is considered a “foreclosure consultant.”
According to the Act, and as clarified by SB 94, real estate licensees are exempt from compliance if the broker:
(a) Engages in acts whose performance requires a real estate license,
(b) Is entitled to compensation for the acts performed in connection with (1) the sale of a residence in foreclosure or (2) with the arranging of a loan secured by a lien on a residence in foreclosure,
(c) Does not claim, demand, charge, collect, or receive any compensation until the acts have been performed, and
(d) Does not acquire any interest, either directly or indirectly, in the residence in foreclosure.
Therefore, helping a client obtain an extension of a trustee’s sale or obtain a forbearance agreement with a bank in connection with a listing of a house probably does not fall with in the Act so long as no advance fees are charged.
However, if there is no listing agreement with a homeowner, then providing loan modification services will fall within the Act.
There are several disclosure requirements when performing such services. As a foreclosure consultant, the real estate licensee must provide the owner of a residence in foreclosure with a contract that fully discloses the “exact nature of the foreclosure consultant’s services and the total amount and terms of compensation.” The contract must also include various terms as outlined in the Act, including language regarding the owner’s right to cancel the contract within a specified amount of time. (See Civil Code § 2945.3).
SB 94 also requires that the following written disclosure be provided in at least 14 point bold type:
“It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly to ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these and other forms of borrower assistance free of charge. A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from your local HUD office or by visiting www.hud.gov.”
Again, a real estate licensee acting as a foreclosure consultant must register with, and maintain a certificate of registration from, the Department of Justice. The real estate licensee will also be required to obtain and maintain in force a surety bond in the amount of $100,000.
Violations of these prohibited practices, or any other sections of the Act, are subject to civil and criminal penalties, including a fine up to $10,000 and imprisonment for not more than one year.
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