Strategic default, that is, stopping payments on a mortgage for reasons other than an inability to make the payments, has become a trend nationwide for homeowners who own properties with values that have significantly decreased.  The consequences for walking away from your home vary depending on the state you’re located in and the type of loan you have taken out.  In California, generally, property owners who have taken out a purchase-money loan in a primary residence are not liable for a deficiency judgment by the lender.  The laws on deficiency judgments vary state by state. 

Although you can generally find out what your liability and tax consequences might be for walking away from your mortgage by contacting a real estate attorney and CPA, it is difficult to know what future effects the strategic default will have.  Specifically, will a homeowner be able to purchase a property again, and when. 

FannieMae has released two underwriting guidelines recently describing what waiting periods must be in effect after preforeclosure events, like short sales, a deed-in-lieu of foreclosure, or a foreclosure.  FannieMae has now altered their policy to encourage borrowers to work with their mortgage servicer to avoid foreclosure, and has instituted guidelines on how long Fannie Mae will wait before they might lend to a borrower who has a “credit event” like a foreclosure on their record.   FannieMae is encouraging borrowers to attempt modifications by communicating with their lenders.  Borrowers who have extenuating circumstances, and those who communicate with their lenders to work towards a modification solution, may be able to qualify for a FannieMae backed mortgage in as little as three years.  Borrowers who don’t will be penalized, as the current five year waiting period requirement has been increased to up to seven years. 

 Interestingly enough, FannieMae is also encouraging servicers to provide recommendations in the future on whether the borrower is a “strategic defaulter” and whether the borrower is a good candidate for a deficiency judgment. 

 A deficiency judgment is a judgment secured at the conclusion of a foreclosure lawsuit by your lender, for the difference between the mortgage and the amount received at the foreclosure sale.  The lender must file a lawsuit against you, where you receive notice and have the right to defend yourself.  If you do nothing, the lender will automatically receive a judgment.  If you are sued by your lender, it is important to contact a real estate attorney who can advise on whether the lender had the right to sue, and whether there are any statutory protections in place that you can use as a defense.  An attorney can also help you negotiate a settlement if you do not have a legal defense.

A. Loan Modification or Refinance

Are you considering a home loan modification or refinance to make your monthly residence mortgage payments affordable? If so, consider the following tips:

Some important basic requirements for a loan modification are that 1) the home is your primary residence; 2) you have experienced a financial hardship, such as a job loss; and 3) your first mortgage (including principal, interest, taxes, insurance and homeowners association dues, total more than 31% of your current gross income (pre-tax monthly income.) There are, of course, other relevant criteria. Further, some financial institutions and loan servicers have authorized modifications when not all the above criteria are met.

Lenders are inundated with requests for modifications or refinancing. Thus, don’t be surprised if it takes an extended period of time for the financial institution or loan servicer to tell you whether you qualify for a modification or refinancing and/or provide you with new terms.

In order for the financial institution or loan servicer to determine your eligibility, you will be requested to complete forms and provide information about you and your finances, such as account balances and monthly payments on debts other than your mortgage, such as car loans. Even though it will require time and effort on your part, it is important that the forms be completed fully and accurately.

You will be requested to provide documents. You can expect to be requested to provide your two most recent pay stubs and/or documentation from other sources of income. You can also be asked to provide your two most recent bank statements and your most recent tax return. In the alternative, you may be asked to complete a form authorizing the lender to acquire your most recently filed tax returns.

Every document you submit should have your loan number written on it somewhere. Of course, keep copies of everything you submit, including copies of any cover letters or faxes.

Once you have submitted all the necessary documents, you will need to make regular calls to the financial institution or loan servicer inquiring into the status of your request for modification or refinancing. You should call approximately once a week. Always keep a log of your calls, recording the date and time of the call. Get the name of the person you speak with and record what the person told you about the status of your application. You may wish to discuss it with a loan modification representative you speak with in a future call. You can expect to speak with a different person every time you call.
You can expect to be requested to provide updated documentation during the process. However, as you proceed thorough the process, keep in mind that Perseverance and Persistence Prevails.

B. Short Sale

If you find you do not qualify for, your lender will not approve a modification or refinance, or modification terms are not ones with which you can live, a “short sale” might be a viable alternative. A short sale is selling your home for less than the amount owed on the mortgage. It can avoid a foreclosure and possibly does less damage to your credit score. A short sale requires the approval of the lender(s). Any short sale contract includes a contingency provision providing that the lender must approve the sale. The proceeds from the sale of the property go to the lender(s).

A consideration in deciding whether a short sale is right for you is whether your loan is a “recourse” or “nonrecourse” loan. If the loan is a nonrecourse, the sale is treated as if the property was sold for the balance of the mortgage, and your loan is paid.
If the loan is a recourse loan, although the loan is secured by the residence or property, you are personally liable for the difference between the sales price and the balance on the loan unless the lender forgives the difference in writing.

In California, most loans or mortgages used to purchase a residence are nonrecourse loans. However, if the loan was taken out to refinance your mortgage, it is probably not a nonrecourse loan. If you do not know if your loan is a recourse or nonrecourse loan, an attorney can advise you.

If your loan was not used to purchase, build or substantially improve your principal residence (a nonrecourse loan), the lender may still forgive the balance of the loan. For tax purposes, the balance forgiven is treated as income. However, the Mortgage Debt Relief Act of 2007, which has been extended to include the 2012 tax year, provides some tax relief. When the lender forgives the balance or cancels the remainder of a nonrecourse loan on your principal residence, any amounts over the amount of the old mortgage principal just before refinancing may not be taxed as ordinary income by the federal government. In other words, it is possible the amount forgiven will not be taxed as ordinary income.

On April 12, 2010, Governor Schwartzenegger signed SB 401 (Wolk), which is relief legislation for cancellation of loans on a qualified principal residence. The legislation is called the Conformity Act of 2010 and conforms California law, with some modifications, to the federal mortgage forgiveness debt relief act. It too applies thorough 2012. A significant modification or difference between the federal act and the state act is that the debt relief that can be excluded from taxable income is limited to $250,000 for married individuals or registered domestic partners filing separate returns and $500,000 for individuals, rather than the amount of the qualified principal residence indebtedness of the federal exclusion.*

With a short sale, borrowers eligible for the federal Home Affordable Modification Program, but who did not qualify for a modification or were unable to sustain payments under a trial period plan or modification, may qualify for up to $1,500.00 to cover relocation expenses

A real estate agent or broker experienced in short sales should handle the short sale transaction for you. However, you should arrange for an attorney to review all the transaction documents to be sure that you are protected. Provisions required by the lender, resulting in some unpleasant surprises, can be found in the documents of some transactions. For example, provisions providing that you agree to pay deficiencies and/or fees can be included in the transaction documents.

C. Deed-in Lieu of Foreclosure

A deed in lieu of foreclosure transfers ownership in the property to the lender, thereby avoiding a foreclosure. In exchange, the lender cancels the loan. You should make a written offer to negotiate a deed in lieu of foreclosure. Any agreement reached should result in a written agreement in which the lender promises not to initiate foreclosure proceedings or to terminate any existing foreclosure proceedings. If the loan is a recourse loan, an attempt to negotiate a forgiveness of the amount of the loan that isn’t covered by the proceeds from the sale of the property should be made. The agreement to forgive any deficiency should be included in the written agreement.

One of the reasons the lender would agree to a deed in lieu of foreclosure is the lender can avoid the costs of a foreclosure. For you, a deed in lieu of foreclosure can result in more favorable terms than a foreclosure, and arguably, the deed in lieu has a less adverse impact on your credit rating.

Also, as with the short sale, borrowers eligible for the federal Home Affordable Modification Program, but who did not qualify for a modification or were unable to sustain payments under a trial period plan or modification, may qualify for up to $1,500.00 to cover relocation expenses

D. Walk-Away

A walk-away allows the foreclosure process to run its course. Interestingly, although called a walk-away, you may remain in the home, paying nothing until the foreclosure process is complete and you are compelled to leave.

However, a walk-away is a poor option if the loan is a recourse loan. If the loan is a recourse loan, you will owe the difference between the foreclosure proceeds and the amount owed on the loan. Additionally, if you have an expectation of purchasing another home in the future, if you have walked-away, you can expect it to take a significantly longer period of time before you will qualify for another mortgage, longer than a deed in lieu and even longer than a short sale.

* This discussion is not intended to give tax advice and you should always consult a tax expert to evaluate your particular circumstances.

I bought a property at a trustee sale, and the former owner refuses to get out!

Many real estate investors are taking advantage of great deals in the housing market when a property is being sold at a trustee sale. Unfortunately, some of these investors are unknowingly buying more than just a house at a great price; they might be buying a lawsuit.

What happens when the former owner refuses to vacate the property after you purchase it at a foreclosure or trustee sale? In California, you are not allowed to do any “self-help”, meaning, you’re not allowed to do something like change the locks, cut off the power, or cut off the electricity to the property to force somebody out of the house.

You must take appropriate legal action to remove a former owner or tenant from the premises.

1. Provide the proper written notice for the person to vacate the premises. If it’s the former owner, a three day notice is appropriate. If it’s a tenant of the former owner, you must determine whether they stay in the property on a month-to-month basis or if they have a lease.

2. If the tenant refuses to vacate after the notice period is up, you must file an unlawful detainer action in the superior court of the county your property is located in. There are strict technical rules to follow when filing and serving the lawsuit. You must ensure you follow the appropriate service and notice periods in order to succeed.

3. The unlawful detainer action is an expedited proceeding. This means the defendant will have approximately five days to respond to your complaint. If they don’t, you can request a default judgment taken against them in order to remove them from the property. If they do answer, you should request a trial date and work on gathering evidence for the trial by requesting documents and sending discovery requests for anything you need to prove as part of your case.

4. The tenant is not allowed to file a cross-complaint, but they may say you have done something badly as an affirmative defense. If the tenant says there was a problem with the foreclosure itself, that is a case against the foreclosing lender, not you. Unfortunately, it is up to you to show this to the judge. If the tenant has filed for bankruptcy, that will generally just delay things, but not stop the eviction itself. If your unlawful detainer action is against the former owner, they do not have a legal right to remain in the property.

5. After you prove your case at trial, the tenant will have a number of days to vacate the property. If they still refuse to do so, you may now have the sheriff assist you based on the information in the “judgment for possession” that you should have received at your trial.

The good news about unlawful detainer actions is that they are very quick. From start to finish, it generally will take about 30 days for a standard unlawful detainer action. A regular civil action, like a quiet title action or an action for ejectment can take up to a year or more.

Under a law enacted in 2009, a tenant has the right to stay in a property, even when purchased at a foreclosure sale, through the remainder of their lease term. However, there are exceptions to this general rule. First, if you purchased the property in order to reside in it, then the tenant must leave after you provide them with a 90-day notice. Second, the rental value must be in line with the fair market value. Clearly, the tenant must provide you with a copy of the lease for you to review to prove their right to occupy the property.

If it is the former owner who resides in the property and refuses to leave, you need to only provide a 3-day notice to quit. If they do not leave at the end of the 3-days, you may serve them with an unlawful detainer action.

If the tenant refuses to pay you any rent, you may serve them with a 3-day notice to pay or quit. If the tenant does not provide you with the rental balance by the end of the 3-day timeframe, you can initiate an unlawful detainer action in order to evict them.

The unlawful detainer action that may be initiated at the end of the 3- or 90-day term is a limited jurisdiction action in the superior court of your county. Your complaint requests the court enter a judgment in your favor for immediate possession and any back rent you may be due. If the lease provides for it, you may also request attorney’s fees as part of your damages.

There are strict technical rules to comply with when initiating an unlawful detainer action. Violation of them may force the judge to rule that you start the notice process all over again. Ensure careful compliance with the requirements, or contact an attorney who can guide you through the process.

Getting a group of interested parties together to purchase real estate can provide great advantages. You can purchase real estate of higher value that what may be available to you individually. It can also be a great way to get started with real estate investing. However, there are some steps you should follow to avoid having problems down the line.

First, ensure your mortgage contains a non-recourse clause. This provision keeps the personal property of each group member from being at risk in the event of a default. The lenders recourse is limited to foreclosure and acquisition of the property. This means your personal property, other real property, and income are out of the lender’s reach.

Second, ensure you have a clear agreement between the parties on how you will split mortgage payments, property taxes, insurance and maintenance on the property. Include dates to comply with things like maintenance, and the possibility that unexpected repairs may need to be made.

Third, agree on how and when you will sell the property, including the possibility of a loss and how the loss will be apportioned. Although real estate investment is historically sound as a long term investment, short term real estate investors have faced problems in our current economy.

Fourth, consider setting up an entity such as a limited liability company for holding the real property. This will provide further liability protection and provide a clear way to spell out the parties responsibilities in the investment.

Lastly, make sure you do your due diligence in deciding who your investment partners will be. Many friendships and families have been in turmoil because of the financial issues surrounding a real estate investment. Understand your intentions, your exit strategy and your responsibilities before you make a decision.

My friend asked me to qualify for a real estate loan for them a few years ago because they were unable to do so. The plan was to have them purchase/refinance from me in two years when the value had gone up and there would be some equity in the property. We’re both on title, but only my friend is on the loan and now they want off. What can we do?

Unfortunately, unexpected repercussions for this type of situation are very common right now. Many people had a third party qualify for a purchase loan on their behalf in order to “buy” a property for their benefit. Since property values have gone done, the friend with the good credit is now on the hook for this loan because it can be near impossible to receive a loan to purchase the property from them. Even worse, many times, the “friend” stops making payments because the property value has dropped, or because they’re having financial problems themselves. There are a few different options in this situation:

1. Draw up an agreement between yourself and your friend indicating how and who will make mortgage payments. You don’t want your credit affected anymore than it has been. You want to allocate who will receive what percentage of any increase in value, and who will be responsible for a potential loss as well.

2. Agree to sell the property now and determine who will end up paying a deficiency judgment if there is one and/or who will pay any potential tax consequences for a short sale, if the property has lost value.

3. Make sure that title is held the way you want; you want the loan holder on title for their protection if you’ve altered that since loan origination.

For a complicated real estate situation such as this one, contact a real estate attorney to go over the points that should be included in the contract. You may realize that if that happened in the first place, you wouldn’t have to deal with this unfortunate situation and circumstance now.

If you were a condo owner in a community governed by a homeowners association (HOA) and your condo was sold at a foreclosure auction, you might think you’re off the hook for any delinquent payments to your HOA. Unfortunately, the fact that the bank, your lender, did go through with a foreclosure doesn’t necessarily mean your HOA received the delinquent association dues through the sale.

Today, as the market value for many properties has fallen, there often isn’t enough money “left over” to pay your HOA. Most associations have governing documents that allow them to collect from a property owner personally, after the home has been lost to a foreclosure.

Bottom line – don’t just ignore your association fees because you’re in active foreclosure. You could pay for it later.

First, you should review your deed to see if your neighbor’s property has an easement, or a legally recorded right to use your property for some reason. Many times, an easement might be recorded and included in your deed to allow neighbors to use part of your driveway to access their property, allow the public access to cross through, or even more frequently, allow utilities companies like PG&E the right to check meters.

If your neighbor has been using your property and there is no recorded easement, it is called a prescriptive easement. This means that your neighbor’s use of your property is without your permission. In California, in order to acquire legal title to the property, the neighbor would have to not only use that portion of the property for five years, but also pay property taxes on this portion of the property. However, you must be careful if you wish to just block their access by putting up a fence.

Assuming your neighbor is using part of your property without your permission, you should assert your rights. Before you do so, it is important to review your deed to determine what rights they may have, and than review the circumstances regarding the use. If you would like to discuss whether an easement has been created by your neighbors’ use, contact attorney Elena Rivkin Franz at (408) 369-0800.

If you owe a contractor money, and a lien has been recorded on your property, you can remove the lien by settling with the contractor. However, make sure that you receive a lien release in exchange for your payment. The mechanics lien release must actually be recorded on your property to nullify the lien.

What can you do if a contractor records a mechanics lien on your property to recover payment for labor and/or materials which you do not really owe? Let’s say the contractor you hired to remodel your house did not complete the work, or performed the work in a substandard manner. To make matters worse, the contractor has encumbered your property by recording a mechanics lien. Another common scenario is that you have paid the general contractor, but he/she has not paid a subcontractor or supplier on time, and the subcontractor or supplier has filed the lien. First, check to see that the contractor is licensed. An unlicensed contractor is not entitled to be paid, or to place a lien on your house.

One way to remove a mechanics lien is to file with the court, in the county where your property is located, a “Petition to Remove Mechanics’ Lien.” There are very specific procedural requirements which a contractor must follow to enforce a mechanics lien once it is recorded. One of those requirements is that the contractor must foreclose on the mechanics lien within 90 days after it is recorded. If the contractor does not foreclose on the mechanics lien, the lien becomes void. However, it will still remain as a cloud on the title to your property, which shows up in title searches and affects financing and sale of your property. Therefore you will want it removed and you may petition the court to remove it if the contractor will not voluntarily remove it.

Prior to filing the petition, you must send the contractor a letter, by certified mail, return receipt requested, demanding execution of a lien release. Should the contractor fail to execute a lien release, you may file a verified petition, requesting that the court remove the mechanics lien.

After the petition is properly served on the contractor, you will have a hearing before a judge, which will ordinarily be set within 30 days of filing the petition.

Since you must allege several specific facts in your petition, you may wish to retain an attorney to handle the petition process for you. If you retain an attorney to file the petition for you, attorney fees of up to $2,000.00 are recoverable by the prevailing party.

If you’re considering buying a place with your boyfriend, girlfriend or significant other, you can take advantage of the great real estate deals that out there right now.  You might fall in love with a great house, but as sometimes happens, fall out of love with your honey.  Many couples don’t think ahead to this unfortunate outcome and are forced to sort out what they’re going to do with their house down the line.  If you’re married, there are plenty of California laws out there that will help protect you.  If you’re not, you won’t be so lucky.

In the event you’re ready to take the plunge, consider an agreement to document who is responsible for what and what you’ll do with the house if you split up.  Important things to consider are who will pay for things like the mortgage, property taxes, insurance and maintenance.  More importantly, you should consider how you can realistically afford to sell or maintain the property in the event you do split up.   Allowing for concrete time frames to secure new financing and allocating responsibility for who will take care of the payments when the house is still in both your names are the big issues.

If you’re looking to make a big purchase like this with someone, consider drafting an agreement to protect yourselves now and down the line.