Contra Costa, California Real Estate

Calling all mortgage lenders!  In the new world of appraisals - in which you are no longer allowed to actually speak to the appraiser - what is the procedure for challenging erroneous information or erroneous values?

As if mortgage lending wasn't crazy enough in today's market, here we are dealing with another flawed law to address lenders and appraisers who "conspired" to inflate values. Loan officers and their managers are no longer allowed to have direct contact with appraisers in order to prevent any "undue influence" on the appraised value.  While protecting consumers is unquestionably important,  the question of the day is what is the procedure to challenge a clearly erroneous appraisal - erroneous in the information or the market value?  Let me provide a recent example:

A property was on the market for less than 10 days and received multiple offers.  Multiple, multiple offers.  The lowest offer was $725k and the highest offer was $750k.  The lender for the accepted buyer ordered the appraisal through their centralized appraisal system as required.  The appraised value of the property per the out-of-area appraiser was $600k.  Seriously, if you were an idiot and did nothing but search the MLS by square footage, bedroom and bathroom count - completely ignoring location and amenities - it would be impossible to derive a value less than $715k.  When the lender was contacted, the response was, "We're sorry and terribly frustrated too." 

What is the procedure allowed by the current law to challenge inaccurate appraisals?

I read the entire California Foreclosure Prevention Act, every section, paragraph and sub-paragraph. Who will this really help?

Existing California law requires mortgage lenders to file a Notice of Default as the first step in the foreclosure process.  After the Notice of Default has been filed and a time period of not less than 3 months has elapsed, the mortgage lender may post a Notice of Sale specifying the time and place of the foreclosure sale.

The California Foreclosure Prevention Act adds an additional 90 days to the timeframe between Notice of Default and Notice of Sale....

If the loan:

• is a first mortgage
• was recorded between January 1, 2003 and January 1, 2008
• is serviced by a loan servicer that has not implemented a "comprehensive loan modification program"
• is not made, purchased or serviced by a California state, or local public housing agency or authority and the loan is not collatreral for securities purchased by any such agency

and If the borrower:

• occuppied the property as their principal residence at the time the loan became delinquent
• has not surrendered the property as evidenced by a letter confirming the surrender or the delivery of the keys to the lender
• is willing and able to pay under the modification agreement
• is not currently in bankruptcy (court mandated foreclosure delays apply in the case of bankruptcy)
• has not contracted with "an organization, person or entity whose primary business is advising people who have decided to leave their homes regarding how to extend the foreclosure process and avoid their contractual obligations to mortgagees or beneficiaries."

and If the 90 day moratorium won't "require a servicer to violate contractual agreements for investor-owned loans."

So what are the significant loopholes that I see? 

The first loophole is that the loan is not serviced by a lender offering a "comprehensive loan modification program" defined as one that includes some combination of the following features:

• An interest rate reduction for a fixed term of at least 5 years
• An extension of the amortized period for the loan term, to no more than 40 years from the original date of the loan
• Deferral of some portion of the principal amount of the unpaid balance until maturity of the loan
• Reduction of principal
• Compliance with a federally mandated loan modification program

Most lenders are currently offering note modifications to homeowners in distress that meet the "combination of features" requirement.  They provide an interest rate reduction for a fixed period of 5 years with an extension of the amortization period (from 30 to 35 years, for instance).  I have yet to see a lender offer a principal reduction but they aren't required to if they offer the combination of the first two items.  While encouraging these note modifications is the entire intent of the law, does this combination of features really help California homeowners or just delay the pain?

Since many homes have lost 40% - 50% of their value, it would require an appreciation rate of more than 10% per year starting immediately to have viable options to refinance or sell in 5 years when the modified payment ends.  Given the fact historical appreciation is 8% per year, it is fairly clear that the 5 year fixed period for the payment reduction simply delays the pain in many cases.

The second loophole is that the 90 day moratorium won't be enforced if it requires a servicer to violate contractual agreements for investor-owned loans.  Perhaps it is my lending background that made this particular item jump off the page for me.  A large percentage of California mortgages were securitized and sold to investors with the originating company/bank acting only as the Servicer (i.e. they are paid for the accounting functions on the mortgage such as collecting the monthly payments and paying the property taxes from impound accounts). 

The Servicers ability to offer note modifications on those loans is limited by the contractual agreement with the investor.  Some investor contracts prohibit note modifications and some allow note modifications only to a certain percentage of the loans sold with that specific "pool" of mortgages.  Even if the Servicer wants to offer a note modification, they are often limited or prohibited by their contractual agreement.


And then there is an important item that isn't even addressed.............

Extending the timeframe from 3 months to 6 months between the Notice of Default to Notice of Sale doesn't guarantee a modification.  During that time, the homeowner is increasing the balance on which they could ultimately pay State and Federal income taxes unless they qualify for the Mortgage Forgiveness Debt Relief Act or are Insolvent per IRS guidelines.


To answer my original question "Who will this Act help?".  In my opinion, the Act will help homeowners who have:

• A lender that retained the mortgage in their portfolio versus selling it in a pool to investors
• Been struggling to reach the Note Modification department to no avail OR
• Submitted their Note Modification paperwork and have been waiting for an answer
• Willingness and ability to pay the monthly mortgage payment at 38% of their Gross Income
• Current property value that has declined 20% or less 

A link to the Foreclosure Prevention Act in its entirety can be found on my website.

If you are from out of the area and would like to view a visual tour of our wonderful Clayton community, click here.

Events in The Grove park and Downtown

Saturday, June 6:    
     Farmers Market, 8:00 a.m - noon

Saturday, June 13:  
     Farmers Market, 8:00 a.m. - noon
     Concert In The Grove, 6:00 p.m. - 8:00 p.m.
          Mamaluke:  Classic Rock Dance Band
          This is a FREE community concert!

Saturday, June 20: 
     Farmers Market, 8:00 a.m. - noon

Saturday, June 27: 
     Farmers Market, 8:00 a.m. - noon
     Concert In The Grove, 6:00 p.m. - 8:00 p.m.
          The Sun Kings:  Beatles songs
          This is a FREE community concert!

Events at the Clayton Community Library

Monday, June 8 (through August 17):
     Summer Reading Program

Thursday, June 11, 11:00 - 12:00 p.m.:
     Z-Man's Paper Airplane Workshop
      Ages 6 and up, please sign up in advance

Thursday, June 18:
     Father's Day Stories and Crafts
     Ages 3 - 8, please sign up in advance

Thursday, June 25, 11:00 a.m. (through August 13):
     Picture Book Time! Ages 3 - 5 years
     Child may attend without caregiver

Saturday, June 27

     Tip a Cop Fundraiser to benefit
       Special Olympics!

      Location:  Ed's Mudville Grill

City of Clayon Events

Tuesday, June 2, 7:00 - 10:00:
     City Council meeting, Clayton Community Library

Tuesday, June 9, 7:00 - 10:00:
     Planning Commission meeting, Clayton
     Community Library

Tuesday, June 16, 7:00 - 10:00:
     City Council meeting, Clayton Community Library

Friday, June 19 - Monday, June 22:
     Fourth of July Parade Entries are due! 
     The Parade Entry Forms must be postmarked
     by June 19th or faxed by June 22nd.

 Tuesday, June 23, 7:00 - 10:00:
     Planning Commission meeting, Clayton
     Community Library

Clayton, California is a small but wonderful city located just 7.5 miles east of Walnut Creek.  Please enjoy this visual tour of Clayton which also includes several additional community links.

Note:  This blog pertains to the state of California.  Lending laws and regulations may differ in other states.

Many sellers proceed with a short-sale prior to consulting a CPA and attorney.  Don't make this mistake! There is a significant amount of erroneous information about short-sales and the ultimate impact on you, the seller. 

There are three major items to consider before listing your home as a short-sale:

• Recourse or Non-Recourse mortgage(s)
• Income Tax Liability
• Personal Liability after the sale

Recourse or Non-Recourse mortgage -

Recourse is the lender's right to collect the mortgage deficiency for up to four years.  If your current mortgage(s) were the loans obtained when you purchased your home, then it is a Non-Recourse mortgage.  If you refinanced your original loan (even if you didn't take cash-out) or obtained a 2nd mortgage / Home Equity line of credit after the purchase, they are now Recourse loans.

Let me walk you through an example -

Mr. and Mrs. Seller purchased their home with a $600,000 original mortgage.  They later refinanced the mortgage and obtained a Home Equity Line of Credit for $150,000.  Total combined finanncing = $750,000.  The current fair market value of the home is $525,000.

In a typical short-sale transaction, the 1st lender pays the 2nd lender 10% of the 2nd lender's balance to release the lien and allow the sale to close.

Sales Price:     $525,000
Selling costs:   $ 32,970
Payoff to 1st lender:   $477,030 ($122,970 short)
Payoff to 2nd lender:   $15,000 ($135,000 short)

Since these are not the purchase loans, both lenders have the right to Recourse (the right to collect on the unpaid balance) for up to four years unless they waive that right.

Potential outcome #1:  Both lenders waive their right to Recourse

Each lender will send you a Form 1099 (Miscl Income) for the portion of the mortgage that was "forgiven" (i.e. unpaid).  In this case, the sellers will have an additional $257,970 "income" on which they will have to pay State and Federal income taxes.  Assume they are in a 25% effective Federal tax bracket, this will represent an additional Federal income tax bill of $64,500 +/- plus an additional State tax bill of $23,00- +/- for a total additional income tax liability of $87,500.

Important note:  the requirement for lenders to issue Form 1099 for the forgiven debt occurs whether the home is a short-sale or a foreclosure, but in the case of foreclosure the seller has no control over the price and ultimate loss.

I know of two methods allowed by the IRS (there could be more) to legally avoid paying Federal income tax on the forgiven debt:  if you are Insolvent at the time of the sale OR if you qualify under the Mortgage Forgiveness Debt Relief Act.  It is important to discuss your potential personal income tax liability with your CPA in advance.

Potential outcome #2: The 1st lender waives their right to Recourse but the 2nd lender doesn't.

The 1st lender will issue Form 1099 for $122,970.  Using the same effective tax bracket as the previous example, this will result in additional Federal taxes of $31,000 +/- plus an additional $11,000 +/- State taxes for a total additional tax liability of $42,000.

The 2nd lender retains their right to collect on the balance due of $120,000 ($135,000 less $15,000 paid from the short-sale).  Remember, unless the lender waivees their right to recourse, they retain that right and typically utlize the services of a collection agency or a deficiency judgment.

When faced with the potential post-sale Recourse, sellers have said, "If they try to collect the balance, I will file bankrutpcy." BUT due to changes in the bankruptcy laws, sellers may not have the option to file a Chapter 7 bankruptcy after selling the home because they no longer pass the "means test" and will be forced in to a Chapter 13 bankruptcy (5 year repayment plan).

There are numerous other "potential outcomes" but, in the end, this is the truth:  Regardless of our "short-sale expertise", Realtors' are not attorneys.  For some sellers already dealing with a serious financial hardship, a bankruptcy or foreclosure may be the better option than a short-sale.  The only individual qualified to help you evaluate your options is an attorney who specializes in Bankruptcy, Short-Sales and Foreclosures.  Many attorneys offer a free half-hour consultation. 

Please, take the time to meet with a CPA and attorney.  Learn your options and potential ramifications in order to make educated decisions for your future.

I recently attended a meeting with 30 experienced Realtors who were bemoaning the lack of Jumbo financing and the negative impact on real estate sales over $1 million.  Soon thereafter I went on Broker Tour and heard much of the same conversation.

Since I have not run into the same problem and wondered why this was such a common belief, I started asking questions.  I received two primary answers:  1) This is consistently reported in the press and 2) is proven by the fact that their preferred loan officer now offers only one and maybe two Jumbo programs compared to the huge array they previously offered.

Since I used to be a mortgage lender and maintain my lending contacts, I decided to devote a day to "financing homework" and give my associates a gift of the truth:  the Press is WRONG and plenty of Jumbo financing is available. 

Every lender has a specific level of risk they are willing to take and evaluate that risk differently.  In order to minimize their risk, lenders have pared down their jumbo products to the bare minimum.  Each lender appears to have chosen different products which they consider the lowest risk.

At the end of my "financing homework" research day, I had two full pages of Jumbo loans listed by company, loan officer, product, downpayment, credit score and interest rate.  Every single product previously available to our clients is still available, just not with a single lender.

Survival Strategy - expand your network of qualified, professional Loan Officers in order to get the full array of financing options available.

California Association of Realtors now  offers FREE Mortgage Protection Insurance to 1st Time Buyers through the Housing Affordability Fund!

The Mortgage Protection Program provides a combination of involuntary unemployment, accidental disabillity and accidental death protection for qualilfied 1st Time Buyers.  Through this program, 1st time buyers who lose their jobs or become accidentally disabled may be eligible to receive $1,500 per month for up to six (6) months to help make their mortgage payments.

Mortgage Protection Program Frequently Asked Questions (FAQs)

Mortgage Protection Program Application

I just received an interesting email from another Realtor's buyer - a complete stranger - through my website.  This buyer purchased a bank-owned home using VA financing and the bank to agreed to pay for Section 1 repairs.  That's the good news.  This buyer is having second thoughts because there are other "equivalent" homes available in the same market for less money.  He wrote to ask my opinion.

Let me preface my response with the following information:  I am located in Contra Costa county (northern California) and VA financing hasn't been used in this market for close to 10 years.  So the fact that his realtor got a bank to accept $0 down VA financing AND pay for Section 1 repairs says that this buyer should genuflect at his realtor's feet for accomplishing a minor miracle.

From a buyer's perspective, I totally understand his concern.  Did he pay too much?  When he pops in on the internet and views "equivalent" homes (in bedroom/bathroom count and square footage) that are significantly less expensive, you really can't blame the guy for worrying that he paid too much and seeking an independent opinion.

So, for all buyers with the same concerns, here is my answer:  the PRICE of bank-owned homes is typically related to the CONDITION of bank owned homes when the homes are located within the same market area.  Banks prefer to sell the home As-Is which means YOU pay for any repairs after you own the home.  The more repairs that are required, the lower the price.  It is a rare bank that will agree to ANY repairs prior to closing.  Many bank-owned homes need repairs that are structural and should be repaired immediately or risk further damage to the property.  Upon reviewing the property inspections, it is VERY IMPORTANT for buyers to honestly assess whether they have the cash to immediately complete the repairs after they purchase the home OR consider buying a higher priced home that is in better conditon.

I'm flummoxed.  Perhaps I naively hold the belief that a receiving a commission inherently implies that that the job for which you are paid is actually conducted.  Call me crazy.

I received several phone calls on my listings this week that caught me by suprise.  I will share the two common themes of those conversations.

#1:  "I would like you to arrange a time for you to meet me and my buyers at your listing."  When I respond "The home is vacant and has a lock box so you can arrange to visit the property any time that works for your schedules." I am told "I only about sell one house a year as a favor to my friends and family so I don't have a lock-box key."

In the big scheme of things, scheduling an hour to have my listing viewed isn't a problem since I was hired to get the home sold.  But think of the big picture.  I think it is safe to assume that this Agent has a full-time job outside of selling real estate.  What if, best case, the potential buyers LOVE the home?  Will he then expect me to be "on call" for the buyer's home, pest, chimney and/or roof inspector? 

#2 from Realtors who work anywhere from 80 - 400 miles away:  "My clients want to write an offer on your listing at [address] but I'm not a member of your Multiple Service.  Could you please send me a copy of the MLS printout, the comparables you used to price the house and your Agent Visual Inspection Disclosure so I can review the conditon of the home?"

Is this Realtor providing top notch (or even average) service to his buyers?  What if I was bad at my job and provided old comparables substantiating a higher-than-current market price?  What if I did a poor job completing my Visual Inspection? This out-of-area Realtor has no idea about my professional standard of conduct! 

The question again arises as to who will meet with the buyer's home, pest, chinmey, roof, sewer inspector? Since I make it a business practice to avoid double-ending my listings, I sure the heck DON'T want to create ostensible agency by attending them in lieu of their out-of-area Realtor.  In short, it appears this Realtor anticipates receiving a full commission just for writing an offer.

Wouldn't these buyers be better served by a referral to a local, full-time, professional Realtor who knows the area, can research the price, can personally view the home and can schedule and be present at all of the buyer's desired inspections?