Bankruptcy Can Be an Issue

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Clients file Bankruptcy for all kinds of reasons.  Many times Bankruptcy is the inevitable end result when borrowers experience a negative change in their financial situation.

But there can also be situations where a borrower ends up in Bankruptcy due to surprise.  And one of these surprises can result from foreclosure.

With respect to personal liability, California has two general types of homeowner loans—“recourse” and “non-recourse.”  When a loan is a “recourse” loan then the borrower can have personal liability if the loan is not fully repaid.  When a loan is “non-recourse” then the borrower will generally not have personal liability if the loan isn’t repaid.

Many homeowners don’t know whether their loan is “recourse” or “non-recourse.”  If these homeowners default on their loan, then the nature of their loan can be very important.  If a loan is “recourse” and the borrower defaults, then the borrower may be exposed to personal liability following foreclosure.  If the lender files suit against the borrower following foreclosure, then insolvent borrowers may have little option other than Bankruptcy.

Negotiations with lenders can be greatly influenced by whether a borrower’s loan is “recourse” or “non-recourse.”  Some lenders appear to be very willing to make demands on borrowers for repayment even when a loan is “non-recourse.”  And the “non-recourse” nature of a loan can be lost or damaged if a borrower doesn’t act prudently. A lender on a “non-recourse” loan is generally limited to the value of the property.  Situations can vary, and a borrower’s personal liability isn’t always clear. For these reasons, borrowers should always seek competent, professional legal counsel when trying to determine whether their loan is “recourse” or “non-recourse” or before signing any promissory note in favor of their lender.

Home Sweet Home – or Not

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            A legal matter can be an unusual sort of business.

Most people are accustomed to dealing in economic, interchangeable types of transactions.  For example, if someone wants to buy a pair of running shoes, they know where to do so.  They can walk into a mall, or into a large retail store, or into a sporting goods store and before long they can find what they are looking for.  If they prefer online shopping, then it won’t take long to find a pair of shoes for sale online.  Yard sales, online auctions – there are lots of possibilities for buying a pair of running shoes.  And if the shopper doesn’t like the terms of sale, or the price, or the quality, or anything else, then they can just say “Thanks – but no thanks” and move on to the next seller.  Buyers usually aren’t tied to any particular store or any particular seller.  They can just look around until they find what they want, at a price they are willing to pay, from a person or store they like, and then they can make a purchase.

Legal matters are different.  A person involved in a legal matter can’t always choose who they do business with, or how or when their legal matter will end.  Sometimes people get involved in a legal matter, and it just ends up costing more, or taking more time, or causing more frustration that was originally expected.  There can be a great temptation to say “I’m just ready to be done.  Just finish this. By Tuesday if possible.  And I don’t want it to cost me very much.”  Sometimes that kind of an approach might work.  But other times it might be just wishful thinking.

A legal matter can be long, drawn out, uncertain, complex, and emotional.  This can be especially true when the stakes are high.  For most people, the biggest purchase they’ll ever make is their home.  Even after the market downturn, many homes cost hundreds of thousands of dollars, and people obligate themselves to payment terms for a lifetime – 30 years or more.  Plus a home is often a centerpoint of life – people are often invested in their homes.  A home can be a center of family life, and a lot of effort, sweat and thought can go into getting a home “just so” or just how the owner likes it.  So it’s no surprise that homeowners can frequently feel like their home is almost an extension of themselves.

When the condition or the status of their home becomes threatened, people’s defenses can go up.  This can happen for any one of a number of reasons.  But one of the most common threats these days is the threat of foreclosure.  Everybody knows that in most cases you have to make your monthly mortgage payment or you’ll eventually lose your home.  But if a borrower can’t make their monthly payment because of illness, job loss, or other circumstances, then it can just sometimes feel like events are getting to be too much.  In these situations, the borrower can often feel like they are in an adversarial relationship with their lender.

And it doesn’t help that borrowers sometimes feel like their lender is unresponsive.  There are still many experiences where borrowers are trying to get a loan modification so that they can stay in their homes, but they sometimes find that the lender loses their paperwork, and that it has to all be re-assembled and submitted.  Or sometimes there can be a substantial delay in getting information, approval, or agreement back from a lender.  This can occur both in situations where borrowers seek loan modifications, as well as in situations where borrowers seek to cure their past loan defaults and bring their loans current.

It can be a difficult – and trying – time.  And because there is usually only one – or two -lenders involved, the borrower usually can’t just say “I’ve had enough – I’m ready to be done – I’d prefer to deal with someone else.”  No, it’s a legal matter and most borrowers have little option other than to deal with the lender they already have.  If the lender’s slow to respond, or difficult to deal with, then the borrower may not be able to realistically end their relationship and just deal with someone else.

In these situations, borrowers sometimes find they are in over their heads.  They often find they could use some good professional coaching, training, or advice.  When dealing with these loan situations, or loan defaults, or risk of foreclosure, or similar items, it’s often a great idea for borrowers to consult with skilled, professional legal counsel.  Borrowers who do so often find they feel much better after such consultation, because they are able to better explore their available options.

Laws Can Vary from State to State

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Nevada.  It’s not California.

I recently had the opportunity of driving from Salt Lake City to the San Francisco Bay Area.  Our trip took us on Interstate 80.  At Elko, one of the locals told us some people feel Nevada should be cleaned off the map, but this person told us that such people feel that way only because they never get off Interstate 80.  We took this person’s advice, and at Battle Mountain we took Highway 305 south to Highway 50.  Except for the view of Lake Tahoe from Highway 50, this detour showed us the most beautiful views of Nevada I’ve ever seen.  We’ve never viewed so much green in Nevada, and the mountain vistas were breathtaking.

But landscape and rainfall aren’t the only things that distinguish Nevada from California. The laws concerning lending and foreclosure are also different.  I know of a lender who used to make loans in California.  This lender moved their operations to Nevada, with no further business being done in California.  This was because this lender felt that the Nevada lending laws were much simpler than the California lending laws.  Simpler laws can sometimes allow greater flexibility in business transactions, and this lender found California lending law too restrictive and too regulated.

Those same regulations that make lending more difficult in California can actually provide a benefit to borrowers.  California has lending laws that protect borrowers that some other states don’t have.  Several months ago I had occasion to call an attorney in Nevada about Nevada’s foreclosure laws.  This attorney advised me that in Nevada, lenders can foreclose non-judicially on most loans and then as a routine matter file suit against the borrowers for any deficiency.  That type of situation most frequently happens in California only when a property is encumbered by two loans and where foreclosure by a first results in the second lender becoming a “sold-out junior.”   As a result, some California borrowers experience foreclosure without resulting personal liability, whereas the results would apparently be different in Nevada.

Few people go into a real estate transaction expecting that they will default on their loan payments.  If people had such expectations, most of them probably wouldn’t make their real estate purchase.  Because they don’t expect to default, and because California lending and foreclosure laws are complex, most homebuyers don’t spend the necessary time and money to fully understand the consequences of a default before they purchase a property.  But in the present market, many of these homebuyers find they are taking a crash course in finance and lending law.  What some of them find out after the fact is that the information they get can significantly vary from state to state.

It’s About Time

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I recently saw a foreclosure notice that gave the date, time and location of a foreclosure sale for some commercial real property.  The foreclosure sale date was set in December.  The location of the sale was in Oakland on the Alameda Courthouse steps.  But the time of the sale was listed as “12:00 p.m.”

That seems straightforward enough.  “12:00 p.m. means . . .”  well, it probably means noon, right?  Probably.  But what if it didn’t?  What if it meant some other time?  Was that even possible?

I knew that “p.m.” meant “post something” but I wasn’t sure what.  So this notice sent me first to my Law Dictionary and then to my desktop College Dictionary.  My Law Dictionary contains tens of thousands of legal definitions.  Sure enough, I found “p.m.” in my Law Dictionary.   I found it right after “Piepowder Court” (which was a court in medieval England that had jurisdiction over a fair or market). So what is the legal meaning of  “p.m.”?  According to my Law Dictionary, “p.m.” is an abbreviation for “post meridiem.”  That’s it. Not too helpful.  So I went to the Law Dictionary definition of “post meridiem” and found the meaning, which is “After noon.”  That’s it.  My College Dictionary?  It had nothing for p.m.  But the College Dictionary definitions of “post meridian” and “post meridiem” generally mean “after noon.”

So now I was really confused.  If 12:00 noon occurs at noon, and if you have 12 hours after noon, does that mean midnight?  If so, then 12:00 p.m. could literally mean 12 hours after noon had passed, which would be midnight.

Lacking adequate clarity on my situation from either of my two dictionaries, I accessed a very accessible encyclopedia —- which was Wikipedia.  I’ve heard that some people may not like Wikipedia.  But for quick accessibility on a topic of general interest, it’s hard to beat.

According to Wikipedia, “post meridiem” means “after midday.”  Conversely, “a.m.” means “before midday.”  Still no clarity – 12:00 p.m. could still logically mean either “noon” or twelve hours after noon.

Wikipedia neatly wrapped this up by suggesting that 12:00 can be viewed as “zero” which would mean that 12:00 p.m. would be “noon” and 12:00 a.m. would be “midnight.”  But then Wikipedia specifically observed that confusion can exist with the use of “12:00 a.m.”, “12:00 p.m.” and the word “midnight.”  If the date changes at exactly midnight, then it’s unclear which time “midnight” may refer to. For example, if a legal notice referred to “midnight on June 12″ then there’s a very real question as to whether the appointed time is at the end of June 11 and the beginning of June 12 in the very early morning hours, or late on June 12 at the latest possible hour just before June 13 begins.  It’s just not clear.  Likewise, 12:00 p.m. on June 12 could mean noon, or it could also mean 12 hours after noon, which would be the moment when June 12 ended and June 13 began.

So much confusion over such a little thing!

Wikipedia suggested a neat little remedy for avoiding such confusion.  Wikipedia noted that some legal documents use 11:59 p.m. as the end of one day, and 12:01 a.m. as the beginning of a second day.

A foreclosing person can choose the time at which the foreclosure sale will be held.  Why not choose 11:59 a.m.?  Or why not choose 12:00 noon? Or why not just choose 10:00 a.m. so everybody can go out to lunch afterwards?

Timing Can be Everything

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Some time ago, a lender made a loan to the owner of commercial real property.  The property owner defaulted on his loan payments.  The lender foreclosed, and the property was sold at a foreclosure sale.

So far, so good.

But after the foreclosure sale, the property owner hired an attorney and filed suit against the lender for wrongful foreclosure.  The lawsuit contained a laundry list of every possible defect in the foreclosure proceedings.

A review of the claims in the lawsuit made it clearly apparent that the attorneys filing the lawsuit had simply taken every single procedural step involved in a foreclosure proceeding and claimed that the foreclosing lender had incorrectly followed every one of them.  It was equally clear that the foreclosing lender had properly followed all of the necessary steps involved in the foreclosure.

Except one.  Before a property can be sold at foreclosure, a notice of the date, time and location of the sale must be published in a newspaper of general circulation.  Oftentimes these notices are published as a routine matter, and after the foreclosure sale is completed nobody may ever take the time to review such published notices.

Unfortunately for the foreclosing lender in this case, the time of the foreclosure sale was published as “20:00 a.m.”  That’s a problem.  Potential buyers who might have shown up at the sale may not have received proper notice – and so the sales price might have been lower than it otherwise should have been.  Whether or not such a defect is adequate grounds to set aside a foreclosure sale and conduct it a second time is a matter for the courts to decide.  But the technical details of the published time for a foreclosure sale can be critical.

Loan Guidelines May Not Always Make Sense

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Many people are having difficulty with their home loans these days.  Some homeowners are attempting to obtain “loan modifications” that will allow them to repay their loans on terms which will allow them to stay in their homes.  For example, a homeowner with a loan term of 30 years may seek to extend their loan term to 40 years.   Such a modification could have the effect of lowering a homeowner’s monthly payment by extending the term of the repayment.  Other homeowners may be seeking to lower their interest rates, either permanently or temporarily.  Others may be seeking to have the principal amount of their loan reduced.

These efforts have met with mixed success.  Some homeowners actually have succeeded in having their loan balances reduced down to market value.  But these situations seem to be the exception.  Far more homeowners seem to have been able to obtain a reduction in their interest rate.  Lenders are understandably hesitant to reduce loan balances. And some homeowners seem to be unable to obtain any kind of modification at all.

Sometimes it can seem like a lender’s refusal to modify a loan makes no sense.  But in reality, many lenders are faced with the prospect of holding a large number of loans where the homes are worth less than the mortgage loan balances.  Borrower’s situations can be unique, and lenders may find it difficult to commit the resources that would be necessary to effectively process and negotiate each loan modification request in a way that makes the most sense for both the lender and borrower.  In an effort to process large numbers of loan modification requests, the lenders may find it necessary to adopt rather inflexible guidelines, and these guidelines may not always lead to results that yield the most sense for the borrower and the lender.

For example, some homeowners may want to stay in their homes even though their home is worth less than the amount of their loan.  But these same homeowners may find that their lenders claim that a borrower makes too much – or too little – money to meet the lender’s criteria for a loan modification.  If the lender refuses to reduce the loan balance, and also refuses to reduce the interest rate, then the borrower may find it necessary to foreclose or short sell their property.  In a short sale situation, the best result that the lender can hope for is to receive market value for the property.  But market value may be far less than the loan balance.  If the lender approves a short sale, then the lender will receive less than the loan balance.  Borrowers can wonder why the lender won’t simply reduce the loan balance to fair market value.  It seems like it would make sense for the lenders to reduce loan balances to market value because the lenders only receive market value if the property is sold through foreclosure or short sale.  But even though it might make sense in some situations, lenders seem to be hesitant to reduce most loan balances to the market value of the property.

The most sensible and logical result may not always be the most available result.  In some ways, this is similar to my daughter’s driving situation.  Some time ago my daughter received a commercial driver’s license.  She planned to drive a fifty passenger motor coach bus one summer.  This is a bus that is forty or forty-five feet long, and weights thirteen tons.  This bus has 8 wheels, and each wheel is nearly as tall as I am.  It’s a formidable vehicle.  After extensive training, she finally received a state-approved commercial driver’s license that allowed her to drive such a vehicle on any road, highway or freeway in the United States.   Her license was granted to her because she demonstrated that she possesses the necessary skill, training and expertise to safely and properly operate such an enormous vehicle on public roads.  Presumably the Department of Motor Vehicles and the State believes she also possesses the necessary judgment and maturity to operate such a vehicle.

At the same time, my daughter was unable to operate a rented two-door subcompact economy car that seats four or five passengers.  Why was that?  Because she was less than 25 years old.  And due to some car rental company guidelines, she was presumed to lack the sufficient skill, training, judgment and maturity to safely and responsibly operate such a vehicle.  I find it interesting that on the one hand she was fully and legally qualified to safeguard and protect the well-being of 50 passengers, plus herself, plus untold motorists and pedestrians while she operated one of the largest vehicles on the road, but at the same time she was deemed to lack the necessary skill, maturity and expertise to responsibly operate a rented subcompact two-door coupe.  These two perspectives on my daughter’s ability are completely inconsistent, and yet they exist.  On one hand, this makes no sense.  But the reality is that she is subject to car rental guidelines which have been prepared for addressing a large number of potential car renters, and these guidelines aren’t specifically tailored to individual situations.   In other words, guidelines don’t have to make sense in a given situation – they just have to be what they are.

Loan Modifications Can Make Economic Sense

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Years ago, before the recent market downturn, loan payment problems between lenders and borrowers were often referred to as “loan workouts” or simply as “workouts.”  These were situations where the lender and borrower worked toward a realistic resolution of the borrower’s inability to pay their monthly loan obligations as they became due.  In more recent months and years, these types of negotiations have become known sometimes as “loan modifications” or “short sales.”  A “loan modification” is part of a workout process where a lender agrees to restructure the loan, with possibly a reduction or deferral in interest payments, and possibly even a reduction in the principal balance due.  However, many lenders seem to resist principal reductions, and they seem much more interested in deferral or reduction of interest.

This makes economic sense for the lender.  If the lender were to foreclose at a low property value, then the lender may give up a hundred thousand dollars or more in lost principal that it would never recover.  However, if that same lender reduced the loan’s interest payment by a thousand dollars a month, then over a period of three years, that lender would only lose $36,000 because it would receive $36,000 less in interest payments than if the loan hadn’t been modified.  If the market improves so that the property is worth the amount of the loan, then the lender is in a very positive position.  Any reduced interest rate could be adjusted back to where it was before, and then the borrower could repay the loan at the higher interest rate.  If the buyer can’t make the payments, then the lender can foreclose.  If in three years the property is worth at least $36,000 more than it is today, then the lender is ahead. This is because the lender would receive either more at the foreclosure sale, or if the lender bought the property at the foreclosure sale, then the lender could turn around and sell the property for more than it could if it foreclosed today.   If in three or five years the property is worth $100,000 more than it is today, then the lender is far, far ahead because it will recover much more when it forecloses in a few years.  If a lender can defer interest payments instead of reducing the interest, then the lender is also ahead if the market improves and the borrower elects to keep the property.  So the current lender reduction in interest rates may be an indication that lenders are hoping that the real estate market will improve so that lenders can foreclose, if need be, in the future with smaller losses.

Honesty Is Still the Best Policy

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Some years ago, a Northern California newspaper recently ran a story about a police officer who had been charged with felony mortgage fraud.  According to the article, the officer took out two loans on two different residential homes at approximately the same time.  That’s certainly not a crime.  But the officer has been charged with applying for each loan as an “owner-occupied” loan. What’s more, the officer was apparently charged with substantially overstating his income on his loan applications.  The police officer denied any wrongdoing.

If true, these charges would amount to lender fraud.  Lenders want to know the economic status of the borrowers they deal with.  That’s the reason lenders require Borrowers to fill out loan applications.  A good credit score isn’t enough.  The lender wants a true snapshot of the borrower’s financial condition.  The lender wants assurance that the Borrower has the financial resources to repay the loan – with interest.  And the lender wants further assurance that the Borrower will be motivated to repay the loan.

Borrowers who use a loan to buy their principal residence may be more motivated to repay a loan than borrowers who are purchasing investment property.  If a borrower runs into financial trouble, that borrower may be more likely to default on an investment loan than on a loan on the home where they live.  Thus, an “owner-occupied” loan may have less risk than a loan on an investment property.  The simple reality is that a borrower’s home is often the last, and possibly most important, asset that most borrowers will ever have.  Lenders can gain some assurance from knowing that a borrower is accepting a loan for a home where they plan to live.

Borrowers receiving an “owner-occupied” loan can often can get a loan on better terms than they could on a loan for purchasing investment property.  There can be a substantial economic incentive for borrowers to claim that they intend to live in the property when they actually don’t intend to.  If borrowers falsely represent they intend to live in the home they are buying, then the borrowers commit a fraud on the lender when they make such a representation.

The officer in the story referred to above apparently overstated his income by a significant amount.  This can be a problem because a lender relies on income information in determining whether or not a borrower can repay the loan.  Without sufficient income, the borrower may not qualify for the loan  There can be a significant incentive for borrowers to overstate their income in order to qualify for a loan.  Again, such a practice constitutes lender fraud.

In the story above, the officer reportedly refinanced both loans within a few months of receiving initial loans.  He reportedly pulled cash out of the properties through refinance loans, and he then allegedly defaulted on the loans.  The defaults probably spurred the investigation that resulted in his being charged with felony lender fraud. If loans are fully paid as agreed, then lenders may not have any incentive to confirm whether or not any misrepresentations were made on the loan application.  But once loans go into default, and especially if a lender will suffer a loss, then a lender has an economic incentive to carefully review the borrower’s application to determine whether or not all of the representations were truthful.

What a terrible risk to take.  When borrowers take out loans on investment property in a hot real estate market, misrepresentations on a loan application can seem to be a minor thing.  But when the lender loans hundreds of thousands of dollars on those representations, and if the market turns downward so that there’s a foreclosure, then a borrower who is less than honest can end up facing criminal charges.  Nobody expects this when they fill out a loan application – but it’s a real possibility.  The end result?  Honesty truly is the best policy – even when it’s more expensive.

Security First Rule Can Be a Protection

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With the 2006 downturn in the market, lots of homeowners found their home was worth less than they owed on it.  Sometimes these owners ran into financial trouble due to illness, divorce, or loss of employment.  When this happened, those owners often couldn’t make their monthly mortgage payments.

When the market was good, these homeowners had several options.  Because of rapid and significant market appreciation, owners often had substantial equity when trouble arose in their home after holding it for a short period of time.  If they couldn’t make their payments, such owners could sometimes refinance their home and borrow against their equity, which would provide them with cash for living expenses and mortgage payments.  If they couldn’t qualify for a refinance loan, then they could sell their property and cash out their equity.

When the market went down, all that changed. Because of the economic downturn, many owners found themselves “upside down” in their properties, with their home being “under water.”  The terms “upside down” and “underwater” are commonly used to refer to properties where the mortgage debt is more than the property value.

California has a “Security First” rule.  In most cases this means that a lender can’t ignore a mortgage and sue directly on a loan.  When a property is “underwater,” then if a borrower has assets other than real estate, a lender might prefer to ignore the mortgage and sue directly on the promissory note.  When borrowers take out a mortgage loan, they sign a promissory note whereby they agree to make monthly payments.  If there is little or no equity in a property, the lender might prefer to just ignore the mortgage and sue the borrower on promissory note.  But California law usually won’t allow this, because of the “Security First” rule.  California requires a lender to foreclose on a mortgage before looking to a borrower’s other assets.  This rule can help protect a borrower’s other assets by requiring a lender to first foreclose a mortgage on real property before looking to a borrower’s other assets.