Foreclosure Not Always All Bad

Widespread foreclosures of homes and other real property can have a devastating effect in the life of a family.  But good things can occur even as a result of foreclosure and financial loss.

According to the websites maintained by the California Department of Education and the United Farm Workers, a son was born on March 31, 1927 to a Mexican-American family in Yuma, Arizona. The family named the son Cesar.  This son grew up in a small adobe home, and his family owned a small grocery store and ranch.  But the family home and ranch were lost as a result of the economic downturn in the Great Depression of the 1930’s.  The father agreed to clear 80 acres of land in exchange for a deed to 40 acres of land that adjoined the family home, but the agreement was later broken. The father then borrowed money to buy the land, but then could not pay the interest on the loan, and as a result the land was sold to the original owner.  The family’s home was lost because they could not afford to keep it.

The family moved to California in order to find work, and they became migrant farm workers along with other workers who had lost their homes. They moved from field to field and from farm to farm picking and harvesting crops and vegetables.  Cesar didn’t have much education; he only graduated from the eighth grade.  His father could not work because of an accident, and Cesar did not want to see his mother go to work in the fields as a farm worker.  Cesar therefore chose to not attend High School but to instead he chose to become a migrant farm worker.  In 1944 he joined the military for two years.  After he was discharged from the service, he married and began raising a family.  He lived in very difficult circumstances.

Though his own formal education was very limited, Cesar became passionate about the need for education.  He felt the only way for him to break the cycle of poverty was to work hard so that he could send his children to college. He not only saw education as the road to a better future for himself and his family, but he also saw education as a basis for improving the entire community around him.  He is reported to have said that “The end of all education should surely be service to others.”

Concerning the need for justice, he is reported to have said “The love for justice that is in us is not only the best part of our being but it is also the most true to our nature.”  For more details on his life, point your browser to the website of the United Farm Workers at

Cesar Chavez experienced discrimination and unfair treatment first-hand.  He worked long and hard advocating fair treatment of farm workers.

The State of California has declared March 31 as a state Holiday in honor of Cesar Chavez.  In March of 2011, the President of the United States declared March 31 of each year as “Cesar Chavez” day for the entire United States. In his Presidential Proclamation concerning the establishment of the day, President Barack Obama declared : “Our Nation’s story of progress is rich with profound struggle and great sacrifice, marked by the selfless acts and fearless leadership of remarkable Americans.  A true champion for justice, Cesar Chavez advocated for and won many of the rights and benefits we now enjoy, and his spirit lives on in the hands and hearts of working women and men today.  As we celebrate the anniversary of his birth, we honor Cesar Chavez’s lasting victories for American workers and his noble methods in achieving them. . . . I call upon all Americans to observe this day with appropriate service, community, and educational programs to honor Cesar Chavez’s enduring legacy.”

Short Sale Defined

So what exactly is a “Short Sale?”

There’s really nothing mysterious about this phrase. A “Short Sale” is simply a sale where the sales proceeds are “short” of the amount needed to pay off the loan.

The concept is actually quite simple.  If a house is worth more than the loan against it, then the borrower can sell the property at any time, pay the lender the amount due on the loan, pay the closing costs and commissions, and pocket the rest.

But what happens when the house is worth less than the amount of the loans against it?  There’s not enough to pay off the lenders, the commissions, and the closing costs.  So how can a house sell if there’s not even enough to pay off the lenders?

In a “Short Sale,” either one or both of the lenders will often agree to accept less than the amount due on their loan.  Therefore, the sales price is “short” of what would otherwise be needed to pay off the loan.

So why would a lender agree to accept less than the amount due?  There can be good reasons.

If the lenders won’t agree to accept less than the amount due, then the property will probably end up in foreclosure.  And foreclosure sales prices can sometimes be 20 or 30 percent less than fair market value.  If the lender can get fair market value, then the lender can actually end up with more money in their pocket than if the property goes to a foreclosure sale.  This explains why a senior, or first, lender will often allow some of the sales proceeds to go to the second lender, even if the first lender will not be paid off in full.

Nothing obligates a lender to accept a “short” sales price.  And if the lender thinks the sales price is too low, then such a lender will sometimes refuse to approve a short sale.  But these days, many short sales prices are being approved by the lenders, and short sales are still being done in large numbers.

Legal Statutes Can Be Lengthy

            I was an English major in college.

I remember getting multiple assignments for 500 word essays.  These essays would generally fill two typewritten pages, double spaced.  500 words is a comfortable length for an essay.  It doesn’t take too long to write a 500 word essay, which means it also doesn’t take too long to grade a 500 word essay.  The length is well suited for the development of one or two ideas, but such a paper isn’t so long that you end up writing a book in order to express yourself.

Brevity is one of the hallmarks of powerful, effective writing.  Take too long to get to your point, and you’ll lose your audience.  Get in, get out, and  move on.  If you’re brief, your audience will be more interested in what you have to say.  Be concise.  Get to the point.  Don’t dawdle.

That all changes when you get to law school.  Keeping things interesting is not a hallmark of legal writing.  The law is concerned with razor sharp precision – and not with brevity.  Sure, take all the time you need to make your point.  But make it carefully, precisely, and thoroughly.

California foreclosure law is complex.  Detailed. Exhaustive. And the legal writing involved in foreclosure is, well, cumbersome.

Here’s an example.  Most promissory notes, or loans, provide that if the borrower misses a payment, then the lender can “accelerate” the loan.  When a loan is “accelerated,” all of the past and future payments are due now.  This means that a borrower can miss a single payment, and then the lender can “accelerate” the loan so that the entire loan balance is due and payable now.  The law allows for such acceleration in most instances.

But the law also provides borrowers with a safety net.  If a borrower pays all the past due amounts, then in most cases a borrower can “reinstate” a loan.  This means a borrower can usually reverse any “acceleration” so that a loan resumes the same payment schedule that existed before the borrower defaulted.  This principle is true both for home loans as well as many other types of loans.

The law that allows a borrower to “reverse” an acceleration is found at California Civil Code section 2924c.  The full text of that statute can’t be reprinted here – it’s too long.  If you doubt that, then try reading it.  You will find – and this is true – that the very first sentence of that statute consists of 375 words.

375 words!  Think of it. And that’s only the opening sentence.  The entire statute is much longer than that.  Plowing through that statute requires a substantial amount of time, a trained mind and a skilled eye.  In everyday writing, most sentences are something like ten or fifteen words at the most.  Fifty words is a really long sentence.  And a hundred words seems like a book.  Lawyers refer to “legal briefs” with good reason.  If you’re summarizing something like this foreclosure statute, then anything shorter is a complete bonus.

Some Lenders are Contacting Borrowers Following Short Sales

            It’s happening.

After all these months of approving short sales, some lenders are now referring borrower accounts to collection departments for collection of unpaid amount due on the loans.

This is coming as a complete surprise to some borrowers.  Confronted with papers to sign for a short sale, not all borrowers necessarily fully understood or read all of the “fine print” in such documents.  In approving short sales, some lenders have issued letters that approved short sales but reserved to the lender the ability to pursue the borrower for any deficiency.

What this means is that some borrowers have completed their short sale, and then several months after the short sale they’ve received a letter from a debt collector that says the borrower owes a hundred thousand dollars or more to the lender on the unpaid home loan.

These collection letters may be getting sent to borrowers who have no obligation to pay the lender anything further on the loan.

This is a difficult situation for borrowers who sold their home through a short sale and thought that they were done with the process.  If the lender, or the lender’s debt collector, sends a letter asking for payment on the unpaid amount of the loan, then the borrower might think that the borrower is liable to the lender for that amount.  If the borrower negotiates directly with the lender, then the borrower might end up believing that he or she has personal liability when there is none.

The lender’s letter might be accurate.  There might be an unpaid balance due on the loan.  And the lender might be asking for it to be paid.  But under California law, some loans carry no personal liability.  On such loans, the lender must look solely to the property for repayment.  Lenders who lend money in California do so under the framework of existing lender laws.  This means that lenders who lend money in California either know, or should know, that for non-recourse loans the borrower will in most cases never be personally liable, and the lender will have to look solely to the property for repayment.

Lending and foreclosure laws are complex. Unpaid loan balances following a short sale or foreclosure can be hundreds of thousands of dollars.  Advance planning prior to short sale or foreclosure can make an enormous difference on the outcome of a foreclosure or short sale.  Borrowers are prudent if they seek competent legal counsel before they conduct either a short sale or before they allow their property to be sold in foreclosure.  But if a short sale or foreclosure occurred without advance planning, then borrowers are still wise to seek competent legal counsel if the bank or a debt collector contacts them for payment following the sale or foreclosure.

Notice Required When Loans are Sold

            Last week’s column discussed the ability of lenders to buy and sell home loans.  Some borrowers find that after they receive a home loan, their lender sells the loan to a different lender.  As a result, a borrower who expected to make payments to a single lender for 30 years might find themselves making payments to a number of different lenders, one after the other.  This process can sometimes be confusing or frustrating to borrowers.

In order to provide borrowers with some clarity in this process of buying and selling loans, Congress has passed Federal legislation concerning the purchase and sale of some home loans.  This legislation requires lenders who deal in some types of loans to provide certain information to borrowers.  For example, each person who makes a “federally related mortgage loan” is required by law to disclose to each loan applicant at the time the loan is applied for that the loan may be transferred to another lender.

If a loan is actually sold, then federal law requires that such existing lenders (or servicers) give notice to the borrower of such sale at least 15 days before the sale.  Such notice must include the name, address, and toll-free number for the new lender.  The notice must also give the last date on which the current lender will accept loan payments, and the date on which the new lender will accept payments.  In addition, the law requires certain new lenders (or servicers) to also give the borrower a notice that the loan, or the servicing of the loan, has been sold.  The new lender must give this notice at least 15 days after the sale is made.  The Federal law that requires these notices to be given is found at 12 United States Code section 2605.

By requiring both the old and the new lenders to each give notice to the borrower, Congress in effect provided a second “layer” of notice.  If notice from one of the lenders fails to reach the borrower, then ideally the notice from the other lender will make it to the borrower.  This means that in some situations a borrower will receive two notices, with one coming from the former lender and one coming from the new lender.

Sometimes lenders hire other companies to “service” their loans.  Companies who “service” loans collect payments as they become due.  These servicers also communicate with the borrower, even though such “servicer” may not actually own the loan.  The notification requirements discussed above specifically apply to loan “servicers.”

Copies Available of Notice of Default

            I moved to California in 1987.  Those who lived here at that time might remember that real estate prices were escalating rapidly in the late 1980’s.  We bought our first house in 1989 – and we paid our seller almost exactly double the price he had paid 5 years earlier.  It was a heady time – real estate prices were on the rise, and it looked like there might be no end in sight.

With such rapid price escalations, few people thought about foreclosures – except the lawyers.  Two of the first legal matters I ever worked on were judicial foreclosures on real estate investments that had gone bad in the early 1980’s. But after working on those foreclosure matters in the late 1980’s, I never even touched another foreclosure matter until now.  In the past, a borrower who couldn’t make their payments wouldn’t foreclose – instead, they would sell at a profit.  Frankly, it was difficult to not make money.  It seemed for a time that anybody who could manage to get a hold of property would make money – and everybody on title looked like financial wizards.

Those days are over – for now.  In the late 2000’s, foreclosure became a common reality.  And as a result, public interest in foreclosure law grew exponentially.  Ten years ago, very few people had any interest in foreclosure law or proceedings.  But that changed.

Foreclosure law is complex.  There are many, many fine points involved in foreclosure law and proceedings, and even some of the major points of law are not well understood.  As a result, borrowers do well to obtain competent, qualified legal advice when they are faced with a foreclosure prospect.

The document that starts a formal non-judicial foreclosure proceeding is known as a “Notice of Default.”  This Notice is recorded in the county records of the county where the property is located.  California law requires specific language to be included in the Notice of Default.  The law that contains this language is known as California Code of Civil Procedure 2924c.

One of the fine points about foreclosure law that is not widely know is that anybody can request and receive a copy of a recorded Notice of Default.  California law requires that a person who borrows money and signs a Deed of Trust must receive a copy of any Notice of Default in the mail.  But anybody else who wants to receive a copy of such Notice of Default can request one.  Any person can record a Request for a copy of any Notice of Default in the County Recorder’s Office.  If this Request is properly prepared and recorded, then a copy of the Notice of Default is supposed to be sent to such a person when a Notice of Default is recorded.

Why, you may ask, would anybody other than the borrower want to know that a foreclosure is starting on a given parcel of property?  There can be several reasons.  For example, California law allows one person to guarantee the debt of another.  Such a “guarantor” may want to know if the loan they have guaranteed has gone into default.  Also, there can be other creditors who may be interested in knowing if the holder of a certain Deed of Trust is commencing foreclosure proceedings.

In order to be effective, a request for a Notice of Default must be recorded before the Notice of Default is recorded.  But if such a request is timely and properly recorded, then the person who recorded such a request is supposed to receive in the mail a copy of any recorded Notice of Default.

The California statute that provides for requesting copies of Notices of Default is known as California Civil Code 2924b.  But persons wanting to receive copies of Notice of Default would do well to consult legal counsel in connection with the preparation and recording of such a Notice.

Loans Usually in Writing

My uncle owned and operated a small farm.  That’s what he did his entire adult life.  He farmed.

As a boy of 8 or 10 years of age, I remember sitting in his living room in his rural farming community.  He was talking about the kinds of things grownups talk about, and he made one comment that has always stayed with me.  He said that he and my aunt had made a decision early in their marriage that they would always pay cash for everything, and that if they couldn’t afford something, then they would wait to buy it until they had the available cash.  But then my other relatives asked him “What about your house? Didn’t you borrow money to buy your house?”  And my uncle replied that of course he had borrowed money to buy his house – but for everything else he had always paid cash.

This exchange occurred many years ago.  But it illustrates a common fact.  While it’s possible to pay cash for a home, most homeowners end up getting a loan to help them pay for either part or all of the purchase price.  As a practical matter, it’s usually just too expensive for most homeowners to pay all cash for a home.  Many homeowners, and especially most first time homebuyers, simply don’t have the kind of economic resources they would need in order to be able to pay cash for a home.

There can be several potential loan sources for a potential homebuyer.  One of the most common sources is institutional lenders, such as a credit unions or a bank.  Family members can also sometimes contribute to the cost of buying a home.

A loan agreement can be either verbal or written.  But verbal loan agreements can create a lot of difficulties, including but not limited to proof as to the amount of money that was loaned and the time for repayment.  Small, informal loans between friends or family might be done on a handshake, but larger or more formal loans are almost always reflected in a written agreement or promissory note.

One of the most basic forms of loan is an “unsecured” loan, where a lender loans money in exchange for a simple written contract, or promissory note.  If the borrower doesn’t repay the loan, then the lender has certain legal remedies available that usually require the lender to go to court.  This can result in a court “Judgment” against the borrower.  But if the borrower has no money or other assets, then the lender might find that the judgment can’t be satisfied.

In order to protect the lender’s interest, sometimes lenders require a borrower to put up “security” or “collateral.”  The word “security” sometimes refers to security consisting of real estate; the word “collateral” is often used to refer to security consisting of personal property other than real estate.  The purpose of such “security” is to give the lender a specific asset that can be sold to satisfy and pay off the loan. This can be valuable if the borrower has no other assets which can be sold to repay the loan. If the lender does things properly, then the lender may be able to acquire a “lien” against the security so that the lender’s claim for repayment will be paid first.  This can be useful if other creditors might also be seeking repayment from the borrower.

It would be easy for lenders or creditors to misunderstand or misapply the legal principles and requirements involved in lending.  Many state and federal laws apply to loans. Violation of these laws can lead to liability and many different problems.  It’s generally not a good idea for persons to lend money unless they spend the necessary time and resources to make sure that their loan complies with all of the applicable laws.  Persons who are considering making loans should consult with competent, qualified legal and tax professionals to ensure that they fully understand all of the tax and legal considerations involved in making loans.

Early Advice Can Be Important

Everybody understands the concept of a sale.  Whether it’s a purchase of services, or groceries, or hardware, or whatever, everybody understands how the system works.  For a price, sellers will part with something of value when a buyer pays cash (or uses a check or a credit card).

But few people are aware that many legal rights can also be bought and sold.  For example, a business can sell its receivables, or its rights to be paid for goods or services it has sold to customers.  And a lender who remains unpaid can often sell its loan, or its repayment rights.  The right of a lender to be paid can still exist following a foreclosure.  For example, some homeowners buy their homes using both a first and a second loan.  If such a homeowner defaults on their loan payments, then either of the two lenders can foreclose.  If the first lender forecloses, then the second lender’s mortgage will probably be eliminated.  However, the elimination of the mortgage does not eliminate the loan.  In some cases, a second lender who loses their mortgage may still have the right to collect on the loan.  But some lenders aren’t interested in pursuing collection efforts on the loan.  In these circumstances, such lenders may elect to sell their loan rights to a third party, such as a debt collector.  If this happens, a homeowner who loses their home in foreclosure may find themselves dealing with a debt collector following such foreclosure.  This can be a difficult and expensive situation.

How can homeowners avoid such a situation?  In part by being proactive.  Homeowners may be able to avoid dealing with debt collectors if they take proper or appropriate steps before or early in the foreclosure process.  When homeowners find themselves in foreclosure, or unable to make their payments, they do well to seek skilled, competent, professional advice early.

Foreclosure Timing Can Be Important

            The real estate market downturn was a fact of life for several years. There appear to be many homeowners who are still having a hard time making their mortgage payments.  Sometimes this difficulty is due to losing a job.  Sometimes it’s due to other reasons.

Sometimes there’s just no viable alternative for homeowners other than foreclosure.  But even though California is sometimes referred to as a “non-recourse” state, borrowers can still be personally liable following some foreclosure sales.

Borrowers with only a single loan are at risk when they don’t or can’t make their payments.  Single loan borrowers can also be at risk in connection with a short sale.  Borrowers who have two loans are particularly at risk, especially if the second loan is a recourse loan.  In these situations, a borrower can be personally liable for the unpaid balance of the second loan even after the first lender forecloses.  It’s sometimes tempting for homeowners to think that their liability ends with a foreclosure or short sale. But that’s not always the case.  Sometimes the homeowner realizes too late that personal liability may still exist after such a sale as to one or more of the loans secured by their property.

Many homeowners who are having trouble making their monthly payments find it difficult to spend even more money consulting professionals as to what they should do about their financial problems.  But tax and legal issues can result in hundreds of thousands of dollars of borrower liability in some situations.  The law concerning short sales and foreclosure is complex, and the tax consequences of a foreclosure or short sale can be severe.  Homeowners who can’t make their regular payments act wisely when then seek out competent, qualified, and capable tax and legal advice with respect to their inability to stay current on their loans.

Borrowers Can Get Information About Their Loans

            Most loans, including mortgaged loans (or mortgages) can be bought and sold. Home loans are often “serviced” by a company that has been hired by the lender to collect payments for the lender from the borrower. Such companies are often known as “loan servicers” or more simply as “servicers.” Federal law requires certain loan servicers to provide notice to borrowers when a borrower’s loan is bought or sold. This notice requirement also applies when the lender hires a new company to “service” the loan.  When certain loans are bought or sold, or when the servicing of such loans is transferred to a new servicer, the servicer who transfers such loan must provide notice of the sale or transfer to the borrower at least 15 days before the loan is sold.  Such notice must contain the name, address, and toll-free number of the new lender or servicer.  In addition, many times the new servicer must also provide a notice to borrowers that the loan has been sold or the servicing has been transferred.

Even though Federal law requires that two notices be provided to certain borrowers when their loan is sold or when the servicing is transferred, it’s possible that borrowers could still be uncertain as to who their actual lender is.  Borrowers could become confused if they receive multiple notices after their loan is sold multiples times.  Some borrowers may have incomplete paperwork if the notices they received from their lenders are lost or destroyed.  Also, borrowers may not know who their actual lender is if such borrowers receive notice from loan servicers when the loan servicing is being transferred. (Loan “servicing” occurs when a lender hires a different company to collect payments as they become due and to otherwise communicate with the borrower about their loan.)  Since borrowers are entitled to receive notice when their loan servicing is transferred, it would be possible for borrowers to be uncertain whether or not their loan “servicer” is also the owner of their loan.

Fortunately, Congress has provided a method for borrowers to obtain information from a loan servicer as to the identity of a borrower’s lender.  Federal law obligates certain loan servicers to respond to requests for information from borrowers.  Borrowers can send their servicer a “Qualified Written Request” which obligates such servicers to acknowledge this request within 20 days and to then to fully respond to the request within 60 days (Holidays and weekends are not counted in the calculation of these time periods, so the servicer’s response is  not due in 60 calendar days – it’s 60 business days).  Servicers are only required to respond to a “Qualified Written Request,” which consists of a written request that is not made on a payment stub, coupon, or other payment item supplied by the servicer.  A “Qualified Written Request” must enable the servicer to identify the borrower’s name and account, and must include a statement of the reasons for the borrower’s belief that the account has an error, or the request must describe the other information requested by the borrower.  The law that provides for these items is located at 12 United States Code section 2605(e).

What does this all mean?  If a borrower receives a payment coupon from a loan servicer, and if the borrower writes on the coupon something like “Who owns this loan?” or “Did you give me credit for my last payment?” and then mails the coupon back to the servicer, then this question is not a “Qualified Written Request” because the request was made on a payment coupon supplied by the lender.  However, if the borrower wrote those questions in a separate letter, then such a letter may constitute a “Qualified Written Request.” Persons seeking details about making a Qualified Written Request should contact an appropriate legal professional.

The Federal Trade Commission (“FTC”) indicates at its website that it protects “America’s Consumers.”  The FTC’s web address for certain mortgage loan information is located at