Month: July 2011

Gov’t in Talks to Rent Out Foreclosures


The Obama administration is considering a plan that would take foreclosed homes off the market and rent them out–in a move aimed at clearing the glut of unsold foreclosed homes and preventing home values from falling any more, The Wall Street Journal reports.

The talks come at a time when national rents are on the rise and home prices have been falling. By taking advantage of these higher rents, lenders would be able to cover the costs of holding the properties until the homes can be resold once the market stabilizes, and maybe even make a profit on it later, experts note.

Nationally, sales of distressed homes, which are often sold at steep discounts, continue to pull down home values. Removing some of the high number of foreclosed homes for sale is “worth looking at,” Federal Reserve Chairman Ben Bernanke said last week in testimony to Congress.

Just reducing Fannie Mae and Freddie Mac’s foreclosed property sales from its current rate of 50,000 each month to 30,000 could lessen total distressed sales by one-third and help avoid a further 3 percent to 5 percent decline in home prices, analysts at Credit Suisse estimate.

However, turning foreclosed homes into rentals could place lenders and the government in an unknown role of playing landlord.

Another idea being tossed around, according to The Wall Street Journal: Federal officials selling thousands of foreclosed properties to private investors who would agree to rent them out, and who could then work with property management firms and handle the day-to-day tenant demands.

Source: “Uncle Sam Weighs Landlord Role to Ease Housing Slump,” The Wall Street Journal (July 22, 2011)

New California Bill Fixes 2010 Law On Short Sales

July 18, 2011
California Bankers Association,

This Bulletin was prepared for CBA by Peter Munoz [1], partner with Reed Smith and member of the CBA Legal Affairs Committee. 

California Senate Bill Number 458 (“SB 458”) signed into law on July 15, 2011 and effective immediately as an urgency statue, corrects the major defects in CCP 580e which was enacted by SB 931 in 2010 and treats a short sale consented to by a lender more like a non-judicial foreclosure sale. The new legislation should encourage the use of short sales both by borrowers and by lenders.

SB 458 is the product of intensive negotiations among the various interest groups involved in consumer real estate lending: consumer real estate lenders, mortgage banks, commercial banks, realtors and consumer advocates.

SB 458 revises and restructures prior CCP 580e. First, it divides consumer short sales into two categories: (i) those where a note is secured solely by a deed of trust/mortgage on a dwelling of not more than 4 units; and (ii) those where a note is secured by a deed of trust/mortgage on a dwelling of not more than 4 units but is also secured by other assets. The provisions applicable to the two categories are similar but not identical.


Note Secured Solely By A Dwelling

As for the first category the statute, CCP 580e section (a)(1) provides with unequivocal clarity that:

“No deficiency shall be owed or collected and no deficiency judgment shall be requested or rendered for any deficiency upon a note secured solely by a deed of trust or mortgage for a dwelling of not more than four units in any case in which the trustor or mortgagor sells the dwelling for a sale price less than the amount of the indebtedness outstanding at the time of the sale in accordance with the written consent of the holder of the deed of trust or mortgage, provided both of the following have occurred : (A) the title to the property has been voluntarily transferred to a buyer by grant deed or by other document of conveyance that has been recorded in the county where all or part of the real property is located, and (B) the proceeds of the sale have been tendered to the mortgagee, beneficiary or the agent of the mortgagee or beneficiary in accordance with the parties’ agreement.”

This section has certain interesting aspects. First, it applies to any holder of a deed of trust/mortgage who agrees to receive proceeds from a short sale and, in fact, tendered proceeds as agreed. Prior 580e applied only to holders of first-priority liens.

Second, this provision would exclude loans secured by a dwelling of more than four units. Prior 580e has been criticized by lenders which make loans for the construction of residential developments secured by multiple dwelling units. The new language in SB 458 now makes it clear that if there were more than one dwelling unit held as collateral, subsection (a)(1) would not apply (but subsection (a)(2) would apply).

Third, by using the words “outstanding indebtedness,” SB 458 resolves the confusion that existed under prior 580e which used the words “indebtedness…due”. As lenders are award, the obligations which are “due” under a loan are often understood to mean those that are currently “due and owing.” However, the obligations which are “outstanding” means all amounts which have been advanced on a loan and includes those amounts which are currently due and those amounts which are not currently due but would be due in the future if the note should be accelerated.

Fourth, prior 580e required that the holder of the deed of trust/mortgage receive all the proceeds of the sale. Under SB 458 the parties are free to agree on how the sale proceeds are to be distributed (including use of such funds to pay senior debts).

Fifth, the new language of Section 580e would allow for dismissal on demurrer of any complaint for a deficiency filed by a lender in violation of this section. As such it would give the borrower a right to attorneys’ fees to the extent that attorneys fees are provided for in the deed of trust/mortgage.


Other Notes

As for the second category of notes, revised CCP 580e provides in subsection (a)(2) that if subsection (a)(1) does not apply:

“No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage for a dwelling of not more than 4 units, if the trustor or mortgagor sells the dwelling for a price less than the amount of the indebtedness outstanding at the time of the sale in accordance with the written consent of the holder of the deed of trust or mortgage.”

This section goes on to expressly preserve the continuing rights and obligations of all parties to the loan upon completion of the short sale.

“Following the sale, in accordance with the holder’s written consent, the voluntary transfer of title to a buyer by grant deed or by other document of conveyance recorded in the county where all or part of the real property is located, and the tender to the mortgagee, beneficiary, or the agent of the mortgagee or beneficiary of the sale proceeds, as agreed, the rights, remedies and obligations of any holder, beneficiary, mortgagee, trustor, mortgagor, obligor, obligee, or guarantor of the note, deed of trust, or mortgage with respect to any other property that secures the note shall be treated and determined as if the dwelling had been sold through foreclosure under a power of sale in the deed of trust or mortgage for a price equal to the sale proceeds received by the holder.”

As with subsection (a)(1), subsection (2) applies to all lienholders that consent to the sale not only to lienholders with first priority liens. This subsection also uses the term “outstanding indebtedness” not indebtedness which is “due.”

In addition, subsection (a)(2) expressly preserves all rights, remedies and obligations of all parties and treats all parties as if a non-judicial foreclosure sale had been conducted by virtue of the secured party’s consent to the short sale. This effectively incorporates by reference the long history of caselaw interpreting CCP 580d. It makes that case law applicable to interpreting the legal effect of a short sale consented to by the secured party. This language and the incorporation of this case law resolves the most serious problem of prior CCP 580e which expressly required the consenting secured party to accept the sale proceeds in satisfaction of the secured obligation. SB 458 makes it clear that if a secured creditor holds any additional collateral or any guaranty to support the secured obligation, the secured obligation is not deemed satisfied. The secured creditor will retain all rights to foreclose on such additional collateral and all rights to collect from any guarantor following completion of the consented short sale.

Another interesting point is that the caselaw of CCP 580d is incorporated only into subsection (a)(2) and not into subsection (a)(1). A punctilious and literal interpretation of SB 458 could support an argument that the incorporation of the caselaw of CCP 580d into CCP 580e, applies only to category (a)(2) loans (i.e. notes secured by more than a single dwelling) and does not apply to category (1) loans (i.e. notes secured solely by a single dwelling unit.

However such a narrow interpretation is not logical and could be said to lead to absurd legal results that could not have been intended by the Legislature.


Exclusions from Scope of 580e

SB 458 also preserves and expands upon the exclusions set forth in prior CCP 580e. First, revised CCP 580e provides that the protections: “shall not limit the ability of the holder of the deed of trust or mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.” This provision is not entirely necessary since the case law of CCP 580d already excludes any claims and damages for fraud or waste.

SB 458 expressly provides that it “shall not apply to any deed of trust or mortgage or other lien given to secure payment of bonds or other evidence of indebtedness authorized or permitted to be issued by the Commissioner of Corporations, or that is made by a public utility subject to the Public Utilities Act…”

SB 458 also adds another major limitation. Prior CCP 580e excluded situations where the trustor/mortgagor was a corporation or a political subdivision of a State and has been criticized on the grounds that it could be apply to too many non-consumer residential transactions where trustors/mortgagors were limited partnerships and limited liability companies. Revised CCP 580e has been amended to expand the exclusions and now shall not apply to situations where the trustor/mortgagor is a corporation, limited liability company, limited partnership or political subdivision of the state. This additional language will go a long way toward excluding most commercial loan transactions and narrowing the scope of CCP 580e to consumer residential transactions where an individual is involved or such individual’s estate planning trust is involved.

However it is important to note that revised CCP 580e does not exclude all non-residential loans. If there is a commercial loan made to a borrower who is an individual or a trust, and if that loan is secured by a dwelling of 1-4 units either by itself or as part of a collateral package, that loan would be subject to CCP 580e if the Lender should agree to a sale of the dwelling for payment of less than the outstanding secured obligation. So the Lender must be careful in how it deals with its collateral.

Attempts to Avoid Applicability and Waivers

To insure that the protections of CCP 580e are not too easily avoided, language was added that:

“A holder of a note shall not require the trustor, mortgagor or maker of the note to pay any additional compensation aside from the proceeds of the sale in exchange for the written consent to the sale.”

Further revised CCP 580e expressly provides that any purported waiver of the protections shall be void as against public policy.


Finally to expedite the effectiveness of the SB 458, it provides that it is enacted as an “urgency statute” and will be effective immediately.

Kevin Gould, Director of State Government Relations, is CBA’s lead lobbyist on SB 458.

  1. Peter Munoz is based in San Francisco and can be reached at 415-659-5964

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.


Posted with permission from Leland Chan, California Bankers Association

July 2011 U.S. Economic and Housing Market Outlook

Soft Patch or Double Dip?

MCLEAN, Va., July 18, 2011 /PRNewswire/ — Freddie Mac (OTC: FMCC) released today its U.S. Economic and Housing Market Outlook for July showing the housing market, buffeted by a recovering rental sector, is unlikely to experience a “double dip”, and will likely follow the performance of the overall economy for the remainder of 2011. Additionally, home sales are still projected to be up over 2010’s pace by 3 to 5 percent.

Outlook Highlights

  • Nonfarm payroll employment rose a scant 18,000, following a downward-revised 25,000 in May. In June, private sector job growth had slowed to a 57,000 gain for the month, largely offset by the continued downsizing of state and local payrolls.
  • The unemployment rate ticked up for the third consecutive month to 9.2 percent, the highest in six months.
  • The sluggish job update likely reflects a temporary “soft patch” in the economy rather than foreshadowing an inflection point in gross domestic product (GDP) growth.
  • Despite record levels of home buyer affordability and historically low mortgage rates, households remain concerned over their financial futures and are holding off on major purchases, particularly homes.
  • The rental housing market, continued to show the clearest signs of a turnaround with the Apartment Property Price Index showing a 15.2 percent gain over the year through the first quarter of 2011.
  • After clear weakness in national price metrics through the first quarter, the FHFA Purchase-Only House Price Index for the U.S. was up 0.8 percent in April compared with March, and the S&P/Case-Shiller 20-city composite index registered a monthly gain of 0.7 percent (not seasonally adjusted) in April, the first positive monthly sign in eight months.


Click here to view the complete July 2011 U.S. Economic and Housing Market Outlook [PDF]. Freddie Mac compiles data on major economic and housing and mortgage market indicators and offers forecasts based on those indicators.


Attributed to Frank Nothaft, Freddie Mac, vice president and chief economist.

  • “Following June’s labor market report, households are naturally concerned about their financial futures which is being reflected in the housing market. Yet, the single-family market will likely improve over the balance of 2011, in keeping with positive GDP forecasts for the United States. Home sales are expected to be up over 2010’s pace, perhaps by 3 to 5 percent. And after clear weakness in national price metrics through the first quarter, there are glimmers the second quarter will likely show gradual improvement over time.”

Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.



Investors to the rescue of housing market

Real estate investors will outnumber traditional borrowers 3 to 1 during the next two years, a new survey says, helping clear millions of repossessed properties from banks’ books and pave the way for a recovery

By Lew Sichelman July 10, 2011 LA times
Reporting from Washington—

Who is going to lead the housing market out of the doldrums?

Certainly it won’t be move-up buyers. People who already own homes are not likely to be venturing forth to find another one until they can sell their current residences. And with all those foreclosures gumming up the works, it’s tough to stand out in the crowd unless you’re willing to give your place away.It probably won’t be first-time buyers, either. Despite the most affordable prices and loan rates in ages, rookies have shown a marked propensity to remain on the sidelines. After all, why rush? Who wants to buy a house, only to see its value go down? Why not wait until we know values have hit bottom?

That leaves investors. According to a new survey from the California outfit that operates the official website of the National Assn. of Realtors, real estate investors will outnumber traditional borrowers 3 to 1 over the next two years.

Investors are sometimes thought of as bottom feeders who pick off properties from financially troubled sellers who see no other way out. And while there most likely will be a bit of that going forward, this time around the main prey will be banks, not strapped consumers.

That’s a good thing. The overwhelming consensus is that before the sinking housing market can right itself, banks must rid themselves of millions of houses and apartments they’ve already taken back or will repossess in the future. Get them off their books and into the hands of users. Only after houses under duress are cleared from the decks will housing find its footing.

Investors often are in and out in a flash, buying a place, splashing some paint on the walls, maybe updating the appliances and then reselling at a good, if not huge, profit. Again, while there will be some “flipping” in the future, the survey by Move Inc. found that most investors will buy and hold for at least five years, long enough for many neighborhoods to stabilize.

Moreover, nearly half say they plan to invest their own time and energy to repair, maintain and improve their properties. And 30% say they’ll hire a contractor to do the work.

These would-be investors still expect to reap decent returns. Nearly half of the 200 investors queried — a statistically relevant sample — expect to make a profit of 20% or more when they sell after their five-year or longer hold. In the meantime, most will put their investments to work as rentals. Some may even live in their properties until they jettison them sometime down the road.

In other words, says Move Chief Executive Steve Berkowitz, today’s investors, many of whom are new to real estate, are not your stereotypical deal-driven sharks. Rather, he says, they are mostly entrepreneurial individuals who “will make vital contributions to local communities by investing their own money and sweat equity [that] over the long run will help improve housing stocks, home values and property tax bases in thousands of local communities.”

Banks gearing up to fill looming gap in jumbo loans

Fannie Mae, Freddie Mac and the FHA are facing an upcoming cutback in mortgage limits, but banks say they’re planning to expand their jumbo loan business in high-cost housing markets.

By Kenneth R. Harney, LA TimesJuly 10, 2011

Reporting from Washington—

How big a deal is the upcoming cutback in mortgage limits for Fannie MaeFreddie Mac and theFederal Housing Administration? Will buyers and sellers who depend on jumbo-sized loans find themselves in a financing squeeze after Oct. 1, when the limits plunge in key markets around the country?

Housing and realty lobbies are pushing hard on Capitol Hill for a continuation of the $729,750 high-cost area maximum, but one industry is delighted by the prospect and is gearing up to fill the gap.From small community banks to megabanks, the message is the same: Bring on the switch to lower limits. We plan to expand our jumbo loan business wherever market demand requires. There will be no financing squeeze for anyone who needs a mortgage too big for Fannie, Freddie or the FHA, provided the applicant is creditworthy and has enough of a down payment.

Congress raised the conventional and FHA limits during the economic crisis to ensure access to capital for buyers and refinancers. Those limits are scheduled to adjust downward Oct. 1, unless lawmakers agree to an extension — a move that would run counter to calls from Republicans and the Obama administration to reduce the federal footprint in the mortgage arena.

Federal guarantees support loans purchased, securitized or insured by Fannie, Freddie and the FHA, putting taxpayers’ dollars at risk in the event of foreclosures. Fannie and Freddie together have sopped up more than $150 billion in direct taxpayer assistance since being placed in federal conservatorship three years ago because of mounting losses from loan defaults.

On Oct. 1, the maximum loan at each of the three federal mortgage giants will fall to $625,500. Though the upper-limit decline is only $104,250 below where it is today, some realty and business analysts worry that buyers who need big mortgages — especially in California, New York, New England, Florida and Washington, D.C. — will be forced to make much heftier down payments, pay higher interest rates or be prevented from purchasing the house they want.

Bankers say those worries are way overblown. Cam Fine, president and chief executive of the Independent Community Bankers Assn., says his 5,000-plus members plan to take up the slack in the jumbo arena and have the financial capacity to do so. Community banks, which generally range in size up to $20 billion in assets, “are very adept at creating products that fit the needs of customers,” Fine said.

Matt Vernon, national mortgage sales executive for Bank of America — the country’s largest by assets — said his institution has been aggressive in the jumbo segment for more than a year, and is planning to pick up the pace even more in the coming months. Bank of America funded $4.1 billion in jumbos during the first quarter of this year alone.

Meanwhile, interest rates on jumbos are near their lowest levels ever — in the 5% range for 30-year fixed-rate loans, around 3% for some hybrid adjustables. Spreads between conventional-sized loans and jumbos have narrowed from 200 to 250 basis points (2% to 2.5%) three years ago to just above half a percentage point today. On loans of $400,000, Bank of America is offering “5/1” adjustables at 3% plus 0.875 point. A 5/1 loan’s interest rate is fixed for the first five years, then converts to a one-year adjustable. A 5/1 loan of $800,000 goes for 3.5% with 0.875 point. Other big banks have competitive rates.

Noah Wilcox, CEO and vice chairman of Grand Rapids State Bank in Grand Rapids, Minn., says community banks such as his can essentially tailor jumbo mortgages for individual customers because they retain all the loans in their own investment portfolios.

“We’ve seen jumbos with 10% down payments” and other exceptional terms for clients, he said. Based on the borrower’s income and assets and the value of the house, “if it makes sense” his bank will try to do it — or at least consider it.

Bankers’ aggressive expansion plans and big promises notwithstanding, there are sobering realities that home buyers seeking jumbo loans are likely to confront when Fannie, Freddie and the FHA no longer are in the picture. Tops on the list: If you thought underwriting standards are strict already, be prepared for even tougher evaluations by community and national banks.

Also, unlike at nondepository mortgage companies, banks prefer to do jumbo loans primarily — or solely — for applicants who are their customers and have some sort of account established. So if you haven’t deposited money or established some sort of relationship with the bank, don’t expect to see its best deal.

Home prices rise, snapping 8-month drop streak

By Les Christie June 28, 2011 LA Times

NEW YORK (CNNMoney) — The downward cycle in home prices broke in April after eight consecutive months of decline, according to a survey released Tuesday.

According to the S&P/Case Shiller 20-city index, prices rose 0.7% compared with March, although they fell 0.1% when adjusted for the strong spring selling season. Prices were down 4% year-over-year.

“In a welcome shift from recent months, this month is better than last — April’s numbers beat March,” said David Blitzer, S&P’s spokesman, in a statement. “However, the seasonally adjusted numbers show that much of the improvement reflects the beginning of the spring-summer home buying season.”

“It is much too early to tell if this is a turning point or simply due to some warmer weather,” Blitzer added.

Any hint of good news in the troubled housing market will likely bring cheer to the industry, and there are some signs that market conditions are not quite as dire as some of the other statistics may indicate. Foreclosures, for example have been falling.

That has translated in a decline of 16% in the sales volume of distressed properties this year, while volume of non-distressed sales rose 11%, according to Joseph LaVorgna, chief economist for Deutsche Bank.

That’s good news because much of the price drop over the past year can be blamed on severe price slashing for homes in foreclosure, as Federal Reserve chairman Ben Bernanke pointed out in a press conference last Wednesday. Prices for homes sold by regular sellers have held up much better.

“That suggests,” said Bernanke, “if we can reduce the current number . . . maybe 40% of home sales, which are on a distressed basis, that would do a lot for stabilizing the market and helping give people confidence that they can buy and not be buying into a falling market.”

Still, the fact that prices perked up in April is not necessarily something to write home about, said Mike Larson, a housing market analyst for Weiss Research.

“It happens every spring,” he said “It’s very clear there’s a seasonal component. Even non-statisticians can see that. The report was, however, better news than what people were expecting.”

Metropolitan Washington continued to be the strongest of the 20 cities covered by the report. Prices rose 3% in April there and have been on the plus side year-over-year, up 4%.

The worst performing market for the month was Detroit, where prices fell 2.9%. The biggest year-over-year drop was recorded by Minneapolis, where prices have plunged 11.1% since last April.

The big picture is that a housing market recovery has yet to gain any steam, according to Larson.

“We’re not falling off a cliff anymore, but we’re only going sideways,” he said.

The year-over-year price comparisons could start to become more favorable, according to LaVorgna. For many months, price changes have looked worse than they might actually have been because they were being compared to months when the home buyer tax credit was in effect, which boosted prices.

“[W]ith the homebuyer tax credit having expired in June 2010, we will soon be getting “clean” housing data unencumbered by artificial distortion,” he said.  To top of page