“Arizona legislators and real-estate advocates met Tuesday morning to try to work out a last-minute compromise on controversial changes to the state’s foreclosure laws.
Representatives from Gov. Jan Brewer’s office and the state banking industry were also part of the meeting. Other meetings continued throughout the day as real-estate lobbyists tried to explain the unintended harmful consequences of Senate Bill 1271. ”
Read the article: http://bit.ly/zURRa
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.
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.
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?
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?
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?
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?
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”)?
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?
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”)?
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”)?
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.
By Ralph Roberts
Hiring an attorney to negotiate a loan modification can be an expensive proposition, possibly costing thousands of dollars. It isn’t something that many homeowners feel they can afford right now. When you take a closer look at the numbers, however, the cost of a loan modification compared to the cost of foreclosure is a pittance:
• $151,000: estimated cost of a single foreclosure (Joint Economic Committee of Congress)
• Homeowner: $7,000
• Lender: $50,000
• Local government: $19,000
• Impact on neighboring home values: $75,000
• Estimated total cost of one foreclosure: $151,000
• $3.3 trillion total decline in property values in the U.S. in 2008 (Zillow)
• 1 in every 6 homeowners owe more on their homes than their homes are worth (Zillow)
• 11.6 percent reduction in the median home price to $192,119 (Zillow)
• 1 out of every 200 homes will be foreclosed upon (Mortgage Bankers Association)
• Every 3 months, 250,000 families enter into foreclosure (Mortgage Bankers Association)
• 1 child in every classroom in America is at risk of losing his or her home (NeighborWorks America estimate based on numbers from Mortgage Bankers Association)
• 43 percent of American households spend more than they earn each year (Homeownership Preservation Foundation poll of 60,000 homeowners)
• 52 percent of employees live paycheck- to-paycheck (The MetLife Study of Employee Benefit Trends)
• Nearly 42 percent of all American households do not have enough in liquid financial assets to support themselves for at least three months, and 46 percent of American households have less than $5,000 in liquid assets, including IRAs (Asena Caner and Edward N. Wolff, “Asset Poverty in the United States: Its Persistence in an Expansionary Economy,” Levy Economics Institute of Bard College).
Compare these numbers to the costs and benefits of obtaining a loan modification:
• $4,000 or less is the cost of having attorney who specializes in loan modification negotiate an affordable solution for catching up on missed payments and lowering the monthly payment
• 68 percent: the percentage of low- and moderate-income borrowers who are less likely to lose their homes when they enter a repayment plan (Dona Dezube, “Heroic Homeownership,” Mortgage Banking, June 2006, page 82)
Some may argue that we overlook the cost of a loan modification to the lender or investor who sees a loss in revenue as a result of lowering the homeowner’s monthly mortgage payment. This is true – no doubt about it, a single loan modification can cost a lender tens of thousands of dollars in lost revenue. A loan modification is not a profitable proposition for lenders – it’s a loss mitigation tool for paring down the lender’s potential losses.
If the lender does not agree to a loan modification and proceeds with foreclosure, there is no revenue to speak of, and the lender has to cover the cost of foreclosure (by some estimates $50,000 to $80,000 per foreclosure). This is the very reason that lenders are often willing to consider a loan modification – for cases in which the alternative would be worse (more costly). A loan modification allows the lender to transform a non-performing asset into a performing one and avoid the cost of foreclosure.
Homeowners also stand to benefit – by keeping their homes and paying less per month and over the life of the loan. Even if the homeowners were to pay $4,000 for a loan modification that lowered their house payment a modest $150 a month, the loan modification would pay for itself in a little over two years. Over the course of ten years, it would save them $14,000 over and above the cost of hiring a professional!
Anyone with a calculator can plainly see that the potential savings from a loan modification are well worth the cost – for both lenders and homeowners.
Reprinted with permission from Realty Times, March 23, 2009, realtytimes.com
The following is a statement by NATIONAL ASSOCIATION OF REALTORS® President Charles McMillan:
“NAR’s 1.2 million members are eager to help make President Obama’s Making Home Affordable plan a reality. We are pleased that the president released the guidelines today for refinancing and mortgage loan modifications and that the guidelines will be implemented immediately to help struggling homeowners as well as millions of eligible homeowners who have stayed current in their mortgage payments.”
“Housing stabilization must be the key component of any federal recovery plan. Helping families keep their homes is critical to this effort and for the health of our economy and communities across the country.”
“NAR has long called for a multipronged approach to address the housing and economic crisis. Allowing eligible homeowners to refinance or modify their loans will help millions of families avoid foreclosure. This in turn will support the housing recovery by slowing the growth in inventory due to foreclosures. Lowering unsold inventory will help stabilize home prices and values. We believe that the incentives the loan modification plan offers to borrowers and loan servicers will encourage additional loan modifications, reducing the default rate.”
“Moving forward, we must not only work to prevent foreclosures, but also bring financially healthy home buyers to the market to further reduce unsold inventory. Toward this end, we hope that the president and his administration will continue to look for new and creative approaches that will lower interest rates for all homeowners and buyers.”
The flood of foreclosure properties at all price points may be giving inexperienced buyers and real estate practitioners the impression that homes can be bought for a song, quickly fixed up, and flipped for enormous profits. That couldn’t be more wrong, said foreclosure expert Frank Mears, ABR®, CRB, GRI, of Augusta, GA.
Finding lucrative opportunities in the REO foreclosure market requires patience, diligence, and a lot of homework. “Some houses look OK from the street, but are disasters on the inside,” Mears said. “You and your buyers need to inspect these properties, especially because REOs are usually being sold ‘as-is’.”
After proper legal notices, the next step in a foreclosure is typically a courthouse auction. Interested real estate professionals should contact whomever is in charge of the auction and find out what documents a buyer must bring to the proceedings. It’s wise to have on hand an assortment of cashier’s checks in various denominations to cover bid amounts since most foreclosure auctions are cash only. “Don’t bid if you don’t have the money on you,” Mears said. It’s also important to visit auctions in your area several times before you bid to learn the procedures. If you are representing a buyer, make sure to have a written buyer- brokerage agreement that includes provisions for your compensation. “You don’t want to do this for free,” says Mears. “And the auctioneer isn’t going to pay you.”
If a property doesn’t sell at auction and joins the inventory owned by a lender, there are several important ways to position yourself to obtain that listing.
Reprinted with permission from REALTOR® Magazine Online, November 20, 2007.
By Richard V. Mack, Esq.
Short sales and foreclosures are becoming common place in our market. We are consistently asked questions by owners and agents alike about the Arizona anti-deficiency statutes and the tax consequences of a foreclosure or a short sale and deed in lieu. This article answers the two most common questions we receive.
When do the Anti-Deficiency Statutes Apply?
For the anti-deficiency statutes to apply, three requirements must be met:
A purchase money mortgage is one where the loan proceeds are used to acquire title to the property. A refinance of a purchase money mortgage is also considered a purchase money mortgage for purposes of the statute. A HELOC that is obtained after the close of escrow is generally not considered a purchase money mortgage.
Assuming all three of these requirements are met, the Arizona anti-deficiency statutes apply. What this means is that the lender’s remedy will be limited to regaining possession of the real property at issue through a foreclosure process or otherwise. If the anti-deficiency statutes apply, even if the amount due to the lender exceeds the value of the property, the lender may not pursue the borrower for the difference or deficiency.
What are the Tax Consequences of a Short Sale or a Foreclosure?
Generally, when a lender is unable to collect the full amount due on a note, this forgiveness of debt constitutes a taxable gain for the borrower. The theory is that the borrower is paying less than the full amount originally received when the loan was funded. Thus, where a lender is collecting less than the full amount due on the mortgage, either through a short sale, a deed in lieu of foreclosure or because of the anti-deficiency statutes, there will typically be a taxable gain for the borrower. The taxable gain is the difference between the amount owed to the lender and the amount received by the lender. Many lenders have been and will be issuing a Form 1099 to borrowers for this debt forgiveness. Under certain limited circumstances the Mortgage Forgiveness Debt Relief Act of 2007 may eliminate the consequences of this gain.
The information set forth in this article contains general rules only. It should not be construed as legal or tax advice. If you or your clients have any specific questions based on their specific circumstances, please consult your legal and/or tax advisor.
Richard V. Mack is a shareholder at Mack Drucker & Watson, P.C. He is a State Bar of Arizona Board Certified Real Estate Specialist and AV rated by Martindale Hubbell. Mr. Mack practices commercial litigation with an emphasis on real estate litigation.
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