“You warn that the other shoe is about to drop when it comes to foreclosures in Arizona. What are you referring to?

Goddard: Billions of dollars of payment-option adjustable-rate mortgages(ARMs) were originated in Arizona, particularly near the end of the housing bubble. These loans allowed many consumers to buy homes and make a minimum payment that is only a fraction of the interest due on the mortgage. More than 120,000 payment-option ARMS are expected to reset in Arizona in the next 12 months. According to experts, a large percentage of payment-option ARMs could default once the reset is made…”

Read the article: http://www.azcentral.com/arizonarepublic/opinions/articles/2009/08/24/20090824aztalk-newsmaker24.html

“What’s keeping troubled homeowners from getting mortgage help? Start with the fax machine.

Most loan servicers taking part in the Obama administration’s mortgage modification initiative require that borrowers fax in their applications and supporting documents. And because faxes can be problematic, aid can be delayed or denied.

The fax isn’t the only source of complications. Borrowers and housing counselors complain of endless waits on hold, lost paperwork and incorrect information from customer service representatives.”

Read the article: http://money.cnn.com/2009/08/11/news/economy/dumb_reasons_no_mortgage_modification/index.htm?postversion=2009081110

“The Obama administration, scrambling to get its main housing initiative on track, extracted a pledge from 25 mortgage company executives to improve their efforts to assist borrowers in danger of foreclosure.

In an all-day series of meetings Tuesday at the Treasury Department, government officials reached a verbal agreement with the executives for a new goal of about 500,000 loan modifications by Nov. 1 and stressed the program’s urgency.

The sessions came amid concerns that the Obama administration will fall far short of its original goal of helping up to 3 million to 4 million troubled borrowers with modified loans.”

Read the article: http://bit.ly/BM2yo

“U.S. Housing and Urban Development Secretary Shaun Donovan today announced an expansion of the Obama Administration’s Home Affordable Refinance Program to include participation by borrowers who are current but up to 125 percent underwater on their mortgage. Under authorization provided by the Federal Housing Finance Agency, borrowers whose mortgages are currently owned or guaranteed by Fannie Mae and Freddie Mac will now be allowed to refinance those loans according to the terms of the Home Affordable Refinance program established earlier this year.”

Read the release: http://bit.ly/W6VxP.

By Ralph Roberts
Ralph R. Roberts, consumer advocate and spokesperson for Federal Loan Modification Law Center, LLP, recently released his list of the top ten steps homeowners can take in order to negotiate an affordable loan modification. The following steps apply to homeowners working directly with a lender as well as to those teaming up with an attorney or alternative third-party representative.

1. COME CLEAN
It can be tempting to bend the truth when you are trying to convince a lender to approve a loan modification. Only by laying all of your cards on the table and disclosing the truth can you begin to develop and implement solutions that will put you back on the path to long-term financial health.

2. UNDERSTAND YOUR LENDER’S POINT OF VIEW
As far as your lender is concerned, it all boils down to money. You are most likely to be approved if you can show modifying your loan will cost the lender less than a foreclosure.

3. KEEP A COOL HEAD
Expressing anger toward your lender puts you in an extremely disadvantageous position. For example, your lender may decide that you are unreasonable and that foreclosing would be less costly overall.

4. GIVE THEM WHAT THEY NEED
In order to expedite the situation, find out exactly which forms you need to fill out and which documents your lender needs to process your application. Make sure you provide everything to your lender or representative in the manner specified.

5. ASK FOR WHAT YOU WANT
Before meeting with your lender, make sure you spend some time figuring out what you want and need. For example, how much can you realistically afford to pay each month?

6. LET THEM DO THEIR JOB
Loan modifications typically take between 30-90 days from start to finish. During this time, avoid the temptation to micromanage the process. To alleviate unnecessary anxiety, ask your lender for an anticipated timeline.

7. GET YOUR FINANCIAL HOUSE IN ORDER
Put a tracking system in place today and start developing a budget to ensure you are not spending more money than you are earning.

8. KEEP EVERYONE POSTED OF ANY CHANGES
If anything changes related to your financial situation, be sure to keep your loan modification representative or lender in the loop.

9. MAKE SURE THE LENDER’S OFFER IS TRULY AFFORDABLE
If the loan modification is unaffordable or makes your budget so tight that you are only one car repair or medical bill away from defaulting again, head back to the negotiating table to try to work out a better deal.

10. HOLD UP YOUR END OF THE BARGAIN
The key to success is discipline and commitment. All the effort you spend setting up a plan is of no use if you don’t follow the plan you created or agreed to.

To read Ralph’s full article on this and other topics, please visit www.keepmyhouse.com.

Ralph R. Roberts, GRI, CRS is an award-winning author and REALTOR® who has penned several successful books, including his latest book, Loan Modification for Dummies (Wiley), slated for publication in summer 2009. For more information about Ralph please visit www.keepmyhouse.com.
The Federal Loan Modification Law Center, LLP, is a law firm dedicated to preserving the American dream of homeownership by successfully renegotiating loan agreements between homeowners and lenders. For more information please call 1-877-39-HOUSE (1-877-394-6873) or visit www.fedmod.com.

Making Home Affordable part of President Obama’s comprehensive strategy to get the housing market back on track. Through this program, up to nine million American families may be eligible to refinance or modify their loans to a payment that is affordable now and into the future.

Eligible borrowers who are current on their mortgages but have been unable to take advantage of today’s lower interest rates because their homes have decreased in value, may now have the opportunity to refinance. Through the Home Affordable Refinance Program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they own or that they placed in mortgage backed securities.
 
Borrowers who are struggling to keep their loans current or who are already behind on their mortgage payments may be eligible to modify their existing first mortgages to avoid foreclosure, regardless of who owns or services the mortgage. Borrowers who qualify for a Home Affordable Modification will never be required to pay a modification fee or pay past due late fees.

Phony “mortgage rescue” and “home foreclosure prevention” schemes are a rapidly growing problem in Arizona. Desperate home owners who have fallen behind on their mortgage payments and are on the verge of foreclosure may turn to these companies hoping to prevent the loss of their home. Be very careful. These schemes are designed to take your home…

WAYS TO AVOID BEING A VICTIM  OF A FORECLOSURE SCAM
• Contact your lender immediately to implement a “work out” program or plan if you fall behind on your mortgage payment.
• If you cannot bring your mortgage payments current, think about selling your home and keeping the equity you have built up.
• Enlist the services of a reputable licensed real estate professional.

By Christopher A. Combs

Find answers to the questions and more Hotline questions and answers addressing the following topics by clicking on the category in italics above each question. Visit AARonline for more hotline topics.

Loan Modifications

Homeowner Can Remove Personal Property Prior to Foreclosure

Q: The homeowner is delinquent on the monthly mortgage payments. A foreclosure sale is scheduled. Prior to the foreclosure sale the homeowner wants to remove the refrigerator, built-in microwave oven, and the electric stove from the home. Is the homeowner legally entitled to do so?

Loan Modifications

Homeowner Must Leave Foreclosed Home

Q: A foreclosure sale has been scheduled. On the day of the foreclosure sale an investor outbids the lender and obtains the title to the home. The investor demands that the homeowner vacate the home the next day. Must the homeowner vacate the foreclosed home the next day after the foreclosure?

Loan Modifications

Lender Must Obtain Judgement Before Garnishing Wages

Q: The homeowner cannot make their monthly payments on the home equity line of credit (“HELOC”). Can the lender garnish the homeowner’s wages or bank account after the HELOC is delinquent the first month?

Loan Modifications

Homeowner Is Personally Liable For Homeowner’s Association Fees

Q: The homeowner did not make the monthly mortgage payments and lost the home at a foreclosure sale to the lender. The home-owner also did not pay the HOA fees for the previous six months. Can the HOA sue the lender (the new owner of the home) for the delinquent HOA fees?

Loan Modifications

Investor Will Not Qualify for the Government’s Loan Modification Program

Q: An investor hired a general contractor to construct a home with the intention of selling the home after completion of the construction of the home. The investor must now begin making payments on the $800,000 construction loan because the home is completed. The investor wants to lower the payments through a loan modification and wait until the housing market improves to sell the home. Will the investor qualify for the new Home Affordable Modification Program (“Program”)?

Loan Modifications

Government’s Loan Modification Program Does Not Include Principal Reductions

Q: The homeowner cannot make the monthly mortgage payments and a foreclosure sale has been scheduled. The home is worth $100,000 less than the mortgage. If the homeowner qualifies for the Home Affordable Modification Program (“Program”), will the lender reduce the mortgage balance to the current value of the home?

Loan Modifications

Government’s Loan Modification Program Does Not Require Homeowners to Be Delinquent

Q: The homeowner is current on the adjustable mortgage loan. In two months the interest rate will adjust higher, increasing the mortgage payment by $200 per month. The homeowner will then be unable to make the increased mortgage payment. Must the homeowner be late on the mortgage payments to qualify for the Home Affordable Modification Program (“Program”)?

Loan Modifications

Homeowner May Qualify for Refinance

Q: The homeowner is current on the mortgage loan and has money in savings to continue making payments. The value of the home, however, is less than the current mortgage loan amount. Will the homeowner qualify for the Home Affordable Modification Program (“Program”)?

Loan Modifications

Listing Broker Must Disclose Loan Modification To Potential Buyers

Q: The seller and the buyer have signed a Contract with the Short Sale Addendum and they are waiting on the approval of the lender. The seller now wants to do a loan modification with this lender. If the lender agrees to the loan modification, the lender will obviously not approve the short sale and the seller will remain in the home. Does the listing broker need to inform the buyer of the seller’s attempt to do a loan modification?

Christopher A. Combs, Phoenix attorn­­­ey, is a partner with the firm of Combs Law Group, P.C., and is on the AAR Legal Hotline team.

Note: The following is for informational purposes only and is not intended as definitive legal or tax advice. You should not act upon this information without seeking independent legal counsel. If you desire legal, tax or other professional advice, please contact your attorney, tax advisor or other professional consultant.

Note: Q&As are not “black and white,” so experienced attorneys and brokers may disagree. Agents are advised to talk to their brokers/ managers when they have questions

National, state and local resources for assistance

• Arizona Mortgage Trouble Assistance line or call 877-448-1211
• Office of the Arizona Governor
• Arizona Foreclosure Prevention Task Force
• Arizona Department of Housing
• Neighborhood Housing Services of Phoenix, Inc. or call 602-258-1659
• Maricopa County Community Legal Services or call 602-258-3434, 800-852-9075, or Rescue Foreclosure, 602-682-3410
• Association of Community Organizations for Reform Now (ACORN) Housing Corp. or call 602-253-1111 (Phoenix)
• Federal Deposit Insurance Corporation
• Homeowner’s HOPE Hotline: 888-995-HOPE

By AAR General Counsel Michelle Lind, Esq.

AAR members have been receiving numerous solicitations from loan modification companies offering fees for referring homeowners in distress or offering to pay fees for assisting in modifying the homeowner’s loan. These programs raise numerous questions about the licensing required and the risks involved. Unfortunately, there are few clear answers. 

Whether an individual must be licensed by the Arizona Department of Real Estate (ADRE), Arizona Department of Financial Institutions (DFI) or admitted to the Arizona State Bar to perform loan modifications depends on what activities will be involved in the service. Further, these programs may involve potential legal risks and liability. 
 
Real Estate Licensing Requirements
“Any act, in consideration or expectation of compensation, which is included in the definition of a real estate . . .broker, whether the act is an incidental part of a transaction or the entire transaction, constitutes the person offering or attempting to perform the act of a real estate broker” within the meaning of the statute. Thus, a real estate license is required to:
• Sell, exchange, purchase, rent or lease real estate
• Negotiate or offer, attempt or agree to negotiate the sale, exchange, purchase, rental or leasing of real estate 
• Advertise or hold out as being engaged in the business of buying, selling . . .or leasing real estate or counseling or advising regarding real estate 
• Assist or direct in the procuring of prospects, calculated to result in the sale, exchange, leasing or rental of real estate 
• Assist or direct in the negotiation of any transaction calculated or intended to result in the sale, exchange, leasing or rental of real estate
• Incident to the sale of real estate negotiate or offer, attempt or agree to negotiate a loan secured or to be secured by any mortgage or other encumbrance upon or transfer of real estate
See, A.R.S. §32-2101(47). Loan modification alone does not fall within the definition of a real estate broker and thus no real estate license is required. However, if the activities are incident to the transfer of real estate, a real estate license would be required.    

Mortgage Broker Licensing Requirements
A mortgage broker must be licensed by the DFI. A “mortgage broker” is defined as a person . . . who for compensation or in the expectation of compensation either “directly or indirectly makes, negotiates or offers to make or negotiate” a mortgage loan. A.R.S. §6-901 (8).  A.A.C. R20-4-102 defines “directly or indirectly makes, negotiates, or offers to make or negotiate” as:
• Providing consulting or advisory services in connection with a mortgage loan transaction…
• Providing assistance in preparing an application for a mortgage loan transaction…  regardless of whether the person providing assistance directly contacts any potential investor or lender
• Processing a loan
However, “directly or indirectly makes, negotiates, or offers to make or negotiate” does not include modifying, renewing, or replacing a mortgage loan…already funded, if:
o the parties to and security for the loan are the same as the original loan immediately before the modification, renewal, or replacement, and
o if no additional funds are advanced and
o no increase is made in the credit limit on an open-ended loan.
Replacing a loan means making a new loan simultaneously with terminating an existing loan.

The DFI reports that some companies offering loan modification rapidly move into areas of activity that do require a license. Each case must be evaluated to determine if the activities of the modifier are really directly or indirectly negotiating a new mortgage loan. The DFI is contemplating revisions to R20-4-102 to increase the agency’s jurisdiction over loan modification companies, but all Rule change packages are currently on hold. Therefore, the DFI does not currently have jurisdiction over loan modification companies if the activity involves modifying, renewing, or replacing a loan if the parties to and security for the loan are the same as the original loan immediately before the modification, renewal, or replacement, and no additional funds are advanced and no increase is made in the credit limit on an open-ended loan. The DFI, however, is accepting complaints regarding loan modification companies in order to evaluate the conduct of these companies. Also, the DFI is working with the mortgage and real estate industries to draft legislation that would take precedence over the rule and require that loan modification companies be licensed.

Additionally, pursuant to A.R.S. §32-2155(C), a real estate licensee may not collect compensation for rendering services in negotiating mortgage loans unless the real estate licensee has a mortgage broker’s license or is an employee, officer or partner of a corporation or partnership that holds a mortgage broker license.

The “Practice of Law”
Arizona Supreme Court Rule 31 prohibits the unauthorized practice of law. The “practice of law” is defined in part as providing legal advice or services to or for another by:
• Preparing any document in any medium intended to affect or secure legal rights for a specific person or entity
• Preparing or expressing legal opinions
• Negotiating legal rights or responsibilities for a specific person or entity
• Providing legal services by “preparing any document in any medium intended to affect or secure legal rights for a specific person or entity” 
• Negotiating legal rights or responsibilities for a specific person or entity 
Thus, if the services provided in the loan modification program involve services affecting legal rights within the scope of Rule 31, the activity could constitute the practice of law. ¹  

Lawyers are also being solicited by non-lawyers with loan modification business opportunities.  A recent article warns that a lawyer going into a loan modification business with a non-lawyer is ethically dangerous. ²

Civil Liability
A broker or salesperson risks potential civil liability arising from participation in loan modification programs. A homeowner who was directed to a loan modification company or represented in a loan modification by a broker or salesperson may thereafter bring a claim if the loan modification fails, resulting in foreclosure or other damages, or if the homeowner determines that a mortgage loan could have been obtained at a lower rate or at a lower cost. 

Generally, the designated broker is vicariously liable for a salesperson acting within the scope of the salesperson’s employment. See e.g., A.A.C. R4-28-301(H). However, when a salesperson is acting solely on the salesperson’s own behalf, and not acting on behalf of the designated broker, the designated broker should have no liability for the salesperson’s actions. See e.g., Pruitt v. Pavelin, 141 Ariz. 195, 206, 685 P.2d 1347, 1356 (App. 1984). However, because of the potential liability and the possibility that loan modification activities on behalf of a homeowner could be construed as being within the scope of the salesperson’s employment, many employing brokers, as a matter of policy, limit or prohibit a salesperson’s involvement in these programs.

In addition, a broker’s errors and omissions (“E & O”) insurance will likely not cover any claims by a homeowner arising out of the acceptance of fees in connection with a loan modification program. E & O insurance coverage is generally limited to conduct as a real estate salesperson or broker. Thus, any real estate broker or salesperson becoming involved with a loan modification program should obtain additional E & O insurance to cover these activities.

Fraud and Deceptive Practices
Finally, brokers need to be aware that there are reports of an increasing number of complaints that some loan modification companies are engaged in fraudulent activities or other deceptive practices.  The FBI has reportedly received hundreds of reports of suspicious activities and the Better Business Bureau is warning consumers to thoroughly research any loan modification company they are considering.  Obviously, a broker or salesperson who becomes involved in a fraudulent enterprise risks criminal charges as well as civil liability. 

¹ Article 26 provides that: “Any person holding a valid license as a real estate broker or a real estate salesman regularly issued by the Arizona State Real Estate Department when acting in such capacity as broker or salesman for the parties, or agent for one of the parties to a sale, exchange, or trade, or the renting and leasing of property, shall have the right to draft or fill out and complete, without charge, any and all instruments incident thereto including, but not limited to, preliminary purchase agreements and earnest money receipts, deeds, mortgages, leases, assignments, releases, contracts for sale of realty, and bills of sale.”

²  “Loan Modification: The not-so-golden business opportunity for lawyers” by Patricia A. Sallen, Ethics Counsel for the State Bar of Arizona, and Lynda Shely, of The Shely Firm, P.C.  http://www.myazbar.org/eLegal/archives/090317/LoanModBizEthicsAlertFinal.pdf
 

Conclusion
When considering solicitations to become involved with a loan modification program, a real estate broker or salesperson must first determine the scope of the program and whether the activities require a license. Investigate the company’s background and find out how long the company has been in business.  The broker or salesperson should also inquire about the availability of appropriate E & O insurance to cover the risks involved. Finally, a salesperson should discuss the loan modification program with the designated broker to determine whether the brokerage company permits its salespersons to engage in these activities.

AAR General Counsel Michelle Lind is a State Bar of Arizona board certified real estate specialist and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice. 

This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.