Category Archives: Law

Mortgage Disclosure Improvement Act: New Waiting Periods on Mortgage Transactions

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In an early post, Ardell wrote about the significance of a buyer being able to close quickly…new regulations may put a damper on that.   With mortgage applications taken after July 30, 2009, waiting periods will go into effect with regards to when and how disclosure forms are provided to the consumer.   The Mortgage Disclosure Improvement Act (MDIA), which modifies the Truth in Lending Act (TILA), was originally going to become effective on October 1, 2009, however the effective date was moved up two months which may catch some real estate professionals by surprise.

Here are some of the details:

Good Faith Estimate and Truth in Lending Disclosures….required waiting periods.

Under MDIA, early disclosures are required for “any extension of credit secured by the dwelling of the consumer.”    Three business days from application, the consumer must receive an initial Good Faith Estimate and Truth in Lending (unless the borrower is denied at application).   

The earliest a transaction can possibly close is seven days after the initial disclosures have been issued by the lender (delivered in person, mailed, emailed, etc.).    This is assuming no re-disclosure is required.

Re-disclosure (waiting periods after the early disclosure and corrected disclosures) of the GFE/TIL are triggered if the fees and charges are more than 10%; if the APR is more than 0.125% or a change in loan terms.   Three business days must pass in the event of re-disclosure.   Re-disclosing is nothing new, it typically happened at closing–this will no longer be acceptable.    Mortgage originators “should compare the APR at consummation with the APR in the most recently provided corrected disclosures (not the first set of disclosures provided) to determine whether the creditor must provide another set of corrected disclosures”.   Double check those APRs prior to doc!

From MortgageDaily.com:

“The Commentary added by the MDIA Rule expressly provides that both the seven-business-day and three-business-day waiting periods must expire for consummation to occur.  The seven-business-day waiting  period begins when the early disclosures are delivered to the consumer or placed in the mail, and not when the consumer receives the disclosures.  The three-business-day waiting periods begin when the consumer actually receives or is deemed to receive the corrected disclosures.  If corrected disclosures are mailed, the consumer is deemed to receive the disclosures three business days after mailing.  If a creditor delivers corrected disclosures via email or by a courier other than the postal service, the creditor may rely on either proof of actual receipt or the mailing rule for purposes of determining when the three-business-day waiting period begins to run.”

Consumers have the right to waive or shorten the MDIA if “a consumer determines that an extension of credit is needed to meet a bona fide perosnal financial emergency”.  

No monies may be collected from the borrower with exception to a “bona fide and reasonable” credit report fee until they receive the initial disclosures.   This may cause a delay of when an appraisal is ordered.  Most lenders require an upfront deposit to cover the cost of the appraisal.    The collection of fees rule may also cause potential issues if a borrower is doing a certain type of lock (some with float down or extended lock periods require an upfront deposit).   NOTE:  HVCC requires the borrower receive a copy of the appraisal at least three days prior to closing.

Tim Kane can attest that there is nothing worse than a borrower learning at signing their final loan papers that the fees are significantly higher than what was originally disclosed.  I’d like to think that all mortgage originators redisclosed WHEN modifications to the transaction/fees take place…obviously, this has not been the case.  

DFI covers MDIA here. 

Re-disclosures could become a “holy hand grenade” to quick closings.

New Condo Buyers Seeking Out of the Contract: “Whiners” or Respectable Citizens?

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There’s been some “buzz” lately about buyers of new construction condos who purchased pre-construction now wanting out of the deal with a return of their earnest money. Motivations vary: they are no longer able to get financing (“WHAT? I need a down PAYMENT!? Since when??”); their life situations have changed (baby + one bedroom condo = problem); or they simply don’t want to be under water the moment they close (those 2007 prices are not so attractive now…). Regardless of the motivation, though, the developer’s response is almost always the same: “Go pound sand. The earnest money is mine.”

Luckily for buyers, there are various federal and state laws designed to protect consumers that may give the buyer a right of rescission (and thus the right to a full return of the earnest money). For example, several decades ago the federal government enacted the Interstate Land Sales Full Disclosure Act (known to its afficionados as “ILSA”), 15 USC 1701 et seq. specifically to protect buyers of new construction. Generally speaking (its a complex statute), a developer must register the project with the Dept of Housing and Urban Development (HUD) and provide buyers with a comprehensive set of disclosures. However, the developer is exempt from the registration and disclosure requirements if it contractually obligate itself to complete the building within two years.

For reasons unknown, many of the new condo developments in the area decided to structure the purchase and sale agreements to fall within this “two year” exemption. Unfortunately for the developers, it is more difficult than first appears, and most of the contracts at issue at least arguably fail to qualify for the exemption. Thus, the buyers of those condos arguably have the right, under ILSA, to rescind the contract and receive a full return of their earnest money. (My partner Marc Holmes and I recently prevailed in an action against WA Square on this basis, so in at least one case its no longer “arguable” — the developer failed to comply with the statute and the buyer had a right of rescission.)

All of this raises an interesting question: Is it unethical for a new construction buyer to seek a legal basis for getting out of the contract with a full return of the earnest money? Our very own Ardell has argued that, if a buyer simply changes her mind about the purchase, the buyer should lose her earnest money. Other people have voiced a similar opinion. Is that right? Is it morally wrong for a buyer to seek a return of the earnest money? Does the buyer’s motivation in seeking to get out of the contract even matter?

I think the answer to that question can be determined by flipping it around. New condo developers are large entities typically owned by sophisticated multi-millionaires. What if one of those multi-millionairre owners signed a contract that required her to perform her contractual obligations two years later, and when the date for performance arrived she stood to lose substantial money if she performed? What if the owner just changed her mind for some other reason? In either case, I think its safe to say that the owner would not perform her obligations. Rather, she would hire a lawyer to identify each and every possible basis for avoiding her contractual obligations. The lawyer would then approach the other party to the contract and see if the parties could reach a compromise. Rich people got rich for a reason: they don’t intentionally make a bad business decision, and when faced with a situation that will cause them to lose money, they hire an attorney to negotiate their way out of it. They use the law in every way possible way to protect and advance their interests.

Which is, of course, the purpose of the law. It only works when it is applied to a particular situation. ILSA was designed to protect consumers. Developers should comply with this law. If they don’t, the law gives consumers the right to avoid their contractual obligations. There is nothing immoral or unethical in using the law to protect and advance your interests. It’s what is expected of every citizen, and its certainly what is done by every citizen who can afford legal counsel. If you’ve decided to not buy that condo –for whatever reason — then you should determine whether the law is on your side. It’s what every person should do — and what wealthy people do all the time.

I just bought a new high-end condo! Nothin’ but air!

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There’s been a lot of buzz lately about buyers of high end new condos looking to get out of a deal they signed at the height of the bubble. My firm has been lucky enough to be able to help out some of these buyers (my next post will focus on whether small buyers are entitled to use any legal leverage necessary to extricate themselves from a bad business deal — like any big developer would — or whether buyers should “accept the consequences” of their actions and just write off the earnest money).

In handling these cases, we’ve come to appreciate the “new” model for high rise condo development. First, though, some background about the “old” model for condos (and you condo experts please forgive me for a general discussion of the issue that does not apply to all condos — there are many variations — but which provides background for my larger point). When you purchase a condominium, you are buying the exclusive right to use a particular unit. You typically own this unit exclusively from “the paint in” — i.e. the unit and all its fixtures are yours to use as you please.

However, the walls, the structure, and even the land itself is owned by ALL of the owners as a common element. In other words, if your unit constitutes 1% of the total building, then you also own 1% of the whole common building (i.e. excluding other units) AND the dirt on which the building sits. The remaining owners own the remaining 99%, with each ownership share correlating to the size of each individual unit. So, even though you bought a condo and not a house, you still own — with others — real property, dirt, your own very small piece of planet earth. Because every piece of real property is unique — there is no other one exactly like it anywhere — and because humans are earth-bound (generally speaking, at least in terms of everyday living) real property has always been considered a good long term investment.

So what’s new? For various reasons (to allow for a hotel within the building, to allow the developer to retain an ownership interest in the property, etc.), large condo towers these days (such as Washingto Square Towers in Bellevue, Olive 8, and several others) are built “on” air, detached from the earth. If you bought one of those condos, you don’t own any dirt at all — only the building and airspace above the ground. Say WHAT?

Here’s how it works (again speaking generally — every project differs in the details, I am sure). The developer will create two parcels: a parcel on the ground, up to a certain height, and an “airspace” parcel above that. These are separate legal parcels, each with their own Parcel Number. The condo will be built in the “airspace” parcel. Owners will have an easement across the “land” parcel to guarantee access to their home in the “airspace” parcel above. I guess this could be described as a “man’s castle in the sky”.

I own a condo, and I take some comfort in knowing that I own dirt. The dirt will have value (unless/until we arrive at some “Mad Max” style future) regardless of what catastrophe strikes my condo. Presumably, my fellow owners and I will always have the option of selling that dirt to someone else (it would probably require 100% agreement and so its very unlikely, but it is at least theoretically conceivable). But what if you own only air detached from the dirt? Well, it seems to me you’ve got something much less valuable. And kinda weird too — who wants to live in an “airspace” home?

A Small Window of Opportunity for Washington State Unlicensed Loan Originators (Correspondent Lenders aka CLAs)

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June 1, 2009 Update:  I just got off the phone with someone in the licensing department at DFI.   They hope to have more information available soon for mortgage originator licensing.  Some details are still being worked out.   From what I could gather from my conversation this morning, the main advantage for licensing now vs. later is that you will have more time to complete the clock hours, take the exams and to be able to spread out the costs for said classes and exams.  I sincerely apologize for misinterpreting DFI’s site on the requirements for LO licensing…I wish I could line out my title of this post!

In April, SHB 1621was signed by Governor Gregoire requiring loan originators employed by correspondent lenders/consumer loan companies to obtain a Washington Loan Originator License  by July 1, 2010.   The State passed SB6471  last summer which had “unintended consequences” causing some loan originators who were regulated by the Mortgage Brokers Practices Act (and therefore licensed) to become defined under the Consumer Loan Act–allowing those LO’s to be “unlicensed”.    With the passage of the SAFE Act, the State is stepping up to National laws which include CLA loan originators.

So my fellow mortgage professionals who are employed at correspondent lenders, here is an opportunity for you:  if you submit your application to become licensed by July 30, 2009; you’ll reduce your education requirements by 12 hours and pass one less exam. 

Here are the requirements to apply for a Washington Loan Originator Licenese from DFI.

All applicants (regardless of when you decide to sumbit your license) must complete Form  MU4 via the Nationwide Mortgage Licensing System and Registry (NMLSR) and submit one fingerprint card, pay $155 licensing fee and…

LO Applications Submitted by July 30, 2009 (in addition the above):

  • Pass the PearsonVue Loan Originator test
  • Complete 8 hours of approved continuing education by December 31, 2009.

Or you can wait until after July 30, 2009 to submit your LO Application and in addition to the above requirements:

  • Pass the State and National exams.
  • Complete 20 hours of approved continuing education by December 31, 2009.

Do you really like to procrastinate?  Opt to delay this process until January 1, 2010 and you still get to pass both exams and complete the 2o hours of CE prior to submitting your license prior to the July 1, 2010 deadline.   (DFI ask that you submit license no later than April 1, 2010 to allow processing time).

Deb Bortner of DFI will be speaking about the SAFE Act and Washington State Loan Originator Licensing at two upcoming events:

  • June 4, 2009 from 4:00 – 8:00pm at The Venue on South Union in Tacoma.   $50 includes dinner and wine from The Three Chicks.  
  • June 19, 2009 from 12:30 – 5:00pm at Safeco Field – Ellis Pavilion in Seattle.  $50 includes a ticket to the Mariner’s Game and lunch.

Both events include presentations on social media for mortgage professionals.  I’ll be one of the speakers at Safeco Field along with David Gibbons from Zillow.   🙂    If you’re interested, you can get more info or register for either event with the Washington Association of Mortgage Professionals (membership to WAMP is not required).

As someone who’s gone through licensing, I can tell you it’s (an important) chore.  Classes will fill up as the deadlines approach and I had the pleasure of being fingerprinted three times before I had a print that was acceptable.   If you fail your exam three times (I wonder how often this happens); you’ll have to wait six months before you can try your luck at the exam again which means no loan originating for you until you have successfully passed your exams.

If you are originating mortgages in Washington State, I would not delay getting your Loan Originator License.

Distressed Property Law Changes Pass the Legislature

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Proposed changes to the Distressed Property Law have passed both branches of the Washington State Legislature and the bill is headed to Governor Gregoire’s desk for her signature.  You can read the changes here. Real estate agents and Realtors are now exempt “from the definition of “distressed home consultant” when the broker or salesperson is providing services governed under the real estate brokerage laws and the services do not result in a distressed home conveyance.”

I have mixed feelings about the passage of the exemption. Real estate agents and Realtors were raging mad last summer when their liability increased under the original Distressed Property Law.  All through the summer and fall of 2008, agents swore up and down that they were going to avoid listing or selling short sales in order to limit their liability.  In a way, the Distressed Property Law had some good consequences: Only experienced agents were allowed to take short sale listings at some firms, and it became extremely important to make sure the homeowner was referred to legal counsel.  Short selling homeowners are often better served when their listing agent knows what they’re doing.  The home buyer is also better served when the seller’s listing agent is short sale-competent.  The Distressed Property Law brought this to everyone’s attention.  There were many agents who were very, very worried about increased liability.  So far, I haven’t heard about any lawsuits.

Something interesting started happening toward the end of fall, 2008.  November and December of 08 saw a remarkable increase in the number of real estate agents attending the Short Sale class.  Attendance went from, say, 15-25 agents all summer to 50-70 by December of 2008.  When I asked why they were in class, agents all agreed: “Short sales are becoming more and more of the percentage of available inventory.  We don’t have a choice anymore; we HAVE TO take these listings, even with the added liability. We need to pay our own mortgage and we also like to eat, Jillayne.”

So now real estate agents are exempt from the DPL (provided they’re not going to engage in a distressed home conveyance.)  This means we will see an increase in agents listing short sales left and right, whether or not they are short-sale competent. 

KLK and other agents have said that foreclosures would increase because of the Distressed Property Law.  I argued that it’s not the DPL that will result in more foreclosures but the normal unwinding of mortgage lending gone wild and that higher foreclosure rates will be with us for some time as homeowners who cannot afford their home loans sell or default and return to the housing market as renters.  As time moves forward through the rest of 2009, it will be interesting to see if, in fact, foreclosure rates decline.

Sellers Leaving The Mess Behind

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Cleaning up after yourself is in the contract…

Recently, there seems to be some confusion as to item number 5 of the NWMLS form 22D (optional clauses addendum to the purchase and sale agreement).  Maybe the sellers are deciding that the buyer already got a good deal and they shouldn’t leave the home in decent condition?  ARDELL recently mentioned that some sellers are feeling disenchanted with this market and as a result the houses are not being exhibited in their best light.  This is definitely happening and unfortunately is being carried forward to when the sale closes and home ownership is transferred.

Item #5 on the NWMLS Form 22D:

“Items Left By Seller.Any personal property, fixtures or other items remaining on the Property when possession is transferred to Buyer shall thereupon become the property of Buyer, and may be retained or disposed of as Buyer determines. However, Seller agrees to clean the interiors of any structures and remove all trash, debris, and rubbish on the Property prior to Buyer taking possession.“

Plainly stated: Take all your belongings and clean the property prior to handing over the keys. Clear enough? One would think, but what about when you line item #5 up to item #4 in the very same Form 22D and apply it to a seller who never had their home clean to begin with and had trash all over the place while the home was being shown?

Item #4 of 22D addresses the issue of “Property and Grounds Maintained

What Happens When The Equity Isn't There, But The Contract Is?

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Responsibility on the listing side…

Last week’s Rain City Guide discussion on Short sales got me thinking about some of the other things that are occurring in this market as well. Many homeowners have taken out a ton of equity and are either maxed out or upside down at this point, but some may not be aware of exactly how much they owe. When it comes to listing these properties – or any property, the listing agent should pull title, but also talk to the title rep and find out how much the property is monetarily encumbered by liens. Merely relying on the seller’s information is not enough to be truly diligent.

Take a seller who thought he owed X amount of dollars on his home. After being on the market for a while, the seller’s agent relied on that information to help when it came to reducing the price. A buyer came along and a contract was executed for the purchase of the property. One week before closing the listing agent calls the buyer’s agent and drops the bombshell: The seller actually owes quite a bit more than they thought. Instead of getting a nice chunk of change from their seller net proceeds, the seller will be short X amount of money to close.

Does this really happen?

You bet! Twice I have seen this happen personally and both times the listing agent had not bothered to check the actual amounts owed on the properties. Yes, a listing agent should be able to rely on the seller’s information, but as a matter of diligence shouldn’t they go ahead and take the extra step to get the full accurate information? Title has already been pulled in most cases anyway.

Sellers, you still have signed a contract:

It is helpful to know what you actually owe on your property before you sign a purchase and sale agreement to sell it. In order to stay within contract, a seller will have to come up with the short fall dollar amount to bring to the closing table.The NWMLS Form 21 Residential Purchase & Sale Agreement clearly states: “ Monetary encumbrances or liens not assumed by Buyer, shall be paid or discharged by Seller on or before Closing.

Virtual Discrimination by Real Estate Brokers

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A real estate broker who operates in 23 states has filed a complaint with Federal authorities against the local MLS for “restraint of trade” practices, according to Inman News. Ryan Gehris, who is a broker of record for flat-fee real estate company Housepad.com in 10 of those states, alleges that the North Carolina MLS’s requirement to physically attend specific MLS orientation classes discriminates against non-traditional web-based brokerages. I think he has a point.

handcuffed to laptop

Do I have to be here?

While I can see an argument for the advantages of attending specific events, I think that the mandatory requirement of attendance takes it too far. I think of it like networking – It makes sense to do it, but if you don’t it’s your business that is likely to suffer and that’s your choice.

In this age of WebEx, Skype or UStream.TV online meetings, it just isn’t necessary to physically go somewhere for most types of training, especially computer training. And the cost and time concerns associated with attending far away events can make it prohibitive, especially for agents that have other obligations and commitments.

The spokesperson for the MLS said the training is “not intended to be a burden to participants and is required because of the substantial changes in technology.” But if people can get a college degree with online training, it’s hard to imagine why basic MLS user training requires someone’s physical presence to be effective.

The real reason may be that the MLS would like to make it hard for non-brick-and-mortar business models because they do not like the competition. I say let their business model succeed or fail on it’s own merits, not because of discriminatory road blocks put in their way.

Is Excise Tax Payable on Short Sale Debt Forgiveness?

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The Washington State Department of Revenue (DOR) seems to think so.  Background: At an Escrow Association of Washington (EAW) meeting on Nov 13, 2008, Mel Kirpes and Steve Bren from  WA DOR spoke at a regional dinner meeting where it was announced that when there is a short sale, the DOR considers the debt forgiven as additional consideration above the contracted sales price between the parties and that the DOR will be pursuing the home seller for payment of the excise tax. (Reference is a EAW letter dated Nov 25, 2008 from EAW Director Cindi L. Holstrom)
Naturally this had a chilling effect amongst escrow officers.  The DOR responded on Dec 12, 2008 in a letter from Gilbert Brewer, Assnt Director of the DOR:

RCW 82.45 imposes an excise tax on the sale of real estate unless specifically exempt from statute. “The measure of the tax is based on the total selling price of the property conveyed. The incidence of the tax is usually on the seller.  However, if the tax is not paid in full, the tax (together with any interest and penalties) becomes a lien on the real property. This is mandated by RCW 82.45.030 …which defines “selling price” as the “true and fair value of the property conveyed.” If a property has been conveyed in an arm’s length transaction between unrelated persons for a valuable consideration, a rebuttable presumption exists that the selling price is equal to the total consideration paid or contracted to be paid to the transferor, or to another for the transferor’s benefit….”total consideration paid or contracted” to be paid as including “money or anything of value, paid or delivered or contracted to be paid or delivered in return for the sale, and shall include the amount of any lien, mortgage, contrat, indebtedness, or other incumbrance, either given to secure the purchase price, or any part thereof, or remaining unpaid on such property at the time of the sale.”

Since there is an exemption from real estate excise tax in the event of foreclosure or a deed in lieu of foreclosure (see WAC 458-61A-208) this DOR opinion may unfortunately motivate homeowners to consider foreclosure a more viable option. Perhaps the home seller’s Realtor can negotiate with the lender to pay for the additional excise tax lien as well.  However, then that extra amount paid by the lender may also be subject to excise tax.
The Seattle King Co Assoc of Realtors and Washington Realtors believes DOR’s position is incorrect and problematic.  On Jan 8, 2009, The Northwest Multiple Listing Association posted a notice to their real estate agent members as follows:

“RCW 18.86 requires agents to advise their clients to seek expert advice on matters relating to the transaction that are beyond the agent’s expertise.  This duty exists in every transaction but is particularly important in short sale transactions where unique legal and tax issues exist.”

We’ve been saying the same on RCG for many years now. Short sales are way more complex for real estate agents than the average transaction and homeowners are best served when they have retained their own legal counsel to help them understand the lender paperwork as well as this current DOR trainwreck. You may be thinking, “homeowners in financial distress can’t afford an attorney.” However, some attorneys offer low cost options for homeowners facing foreclosure.

UPDATE
January 13, 2009
Department of Revenue: “After receiving extensive input from interested stakeholders and industry representatives about the nature of these transactions, we have carefully reconsidered how real estate excise tax statutes apply to these unique transactions [short sales]….we now see that these short sales are distinguishable from other transactions involving the forgiveness of debt because the seller negotiates separately with the lender for any debt reduction/forgiveness, apart from the actual purchase and sale of the property.  As a result, the loan forgiveness is not “paid or delivered in return for the sale” of the property, as required by RCW 82.45.030.”   Margaret J. Partlow, Senior Policy Counsel, Dept of Revenue. 

(Hat tip Rhonda Porter and Kary Krismer.)

Translation: We are not going to require sellers to pay excise tax on the debt forgiveness  with a short sale.

40 representatives from escrow, title, real estate, attorney, and short sale faciliator companies showed up in Olympia to help educate the Dept of Revenue. Thank you, Escrow Association of Washington, for bringing this to our attention and taking on the state head to head.

Government Intervention in Foreclosure

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This is Part Four of a series of articles on foreclosures.
This article does not constitute legal advice.
Foreclosure laws vary from state to state.
Homeowners in financial distress should always hire legal counsel. Call your local state bar association for a referral.  Reduced or free legal aid may be available in some states. Ask for a referral from your state Bar Association or through a LOCAL HUD-Approved Housing Counseling Agency.

In this article we will address current government intervention as well as discuss possible future intervention programs. For other preventative measures, check out the other parts of this series:

Part one: Foreclosure; Losing the American Dream
Part two: Options for Homeowners Facing Foreclosure
Part three: Loan Modifications
Part four: Government Intervention in Foreclosure
Part five: Foreclosure; Letting Go and Rebuilding

Current government intervention in the foreclosure process has taken many forms. Some states such as California, Florida, New York, New Jersey, Massachusetts, Philadelphia, and Illinois have discussed, proposed, or passed legislation in favor of a foreclosure moratorium.  In order to avoid state mandates, some companies placed a temporary halt on foreclosures over the holidays. These companies include Indymac, Countrywide, WAMU, and loans held in the Fannie/Freddie portfolios.  Recall that during the real estate bubble run-up, government backed loans fell out of favor. Many subprime loans are held by lender/servicers in pools of mortgage backed securities. The foreclosure moratorium didn’t reach those homeowners.

State moratoriums give homeowners more time to possibly refinance into a Hope for Homeowners loan or complete a short sale and the moratorium also gives banks more time to get caught up on all the backlog of foreclosure paperwork. 

Financial Economics Analyst Edward Vincent Murphy, in his Sept 12, 2008 report “Economic Analysis of a Mortgage Foreclosure Moratorium,