By: Attorney Steven A. Sokol Halling + Sokol LLP 310-277-2080 / 818-222-4994 ssokol@hallingsokol

1. Real Estate in Troubled Times: Short Sales, Foreclosures, Bankruptcy, Tax Effects By: Attorney Steven A. SokolHalling + Sokol LLP310-277-2080 / 818-222-4994ssokol@hallingsokol.com

2. INTRODUCTION

6. Loans in TroubleThe Basics Ancient concept • Loans • Securing by “pledge” of property • Debtor protection • Rules to limit how creditor takes or sells pledged property

7. Condition of Properties • Often damaged, in need of repair • Vacant, not lived in for some time • May be unmarketable in present condition

8. Sale During Foreclosure • Owner can sell to anyone at any time, up and until actual date of foreclosure sale • Home Equity Sales Contract rules may also apply (see below)

9. Homeowner in Default • Slow economy – decrease Fed funds rate • Sound and profitable economy – inflation-threatened, raise Fed funds rate • Mortgage rates – increase/decrease in advance of actual adjustment by the Fed

10. Employment and personal income thrive between two extremes • Mortgage interest rates higher • Home prices and rate of appreciation stabilize

11. Steady employment and increasing income • Promote new home ownership for many • Continued home ownership for most • Ability to pay mortgage

12. Cyclic transitions affect personal households • Fed steps in to assist improving economy • Mortgage interest rates begin dropping

13. Loss of Household Income • Slow economy may result in reduced personal income • “Two-income family” nation • Loss of partial income difficulties • Job loss devastating

14. Financial Mismanagement • Debt ratio affects ability to pay more than allowable minimum monthly payments • Home highly leveraged with little available equity • Poor payment discipline, even with ability to pay

15. History of Deeds-of-Trusts as California’s Preferred Security Instrument • Loans secured by mortgage, not trust deeds • Mortgages subject to California debtor protection laws • Trust deeds were not • California lenders switched to using trust deeds

16. California Supreme Court held: • Debtor protection applied equally to mortgages and trust deeds • Trust deeds being used by then • Lenders continued doing so

17. Types of Security Instruments • Trust deed • Mortgage • Installment land contract or contract of sale • Each must be recorded in county where property located

18. Trust deed – most common California debt instrument • Borrower or “Trustor” • Lender or “Beneficiary” • “Trustee” receives “bare legal title” • Power of sale to reconvey and foreclose

19. Mortgage – seldom used in California • Lender or “Mortgagee” • Borrower or “Mortgagor” • New form gives trustee additional powers

20. Installment land contract or contract of sale • Seller retains fee title until buyer performs contractual obligations • Buyer-vendee receives equitable title • Recorded to protect against fraud or bankruptcy • Vendor recourse a “quiet title” action

21. RESTRUCTURING LOANS

22. Lender’s Desireto Avoid Foreclosure Mortgagelender Working to avoid foreclosure and loss possibility Defaultingborrower

23. Questionnaire and financial statement Lender’s Evaluation Process to Assist the Borrower in Default • Cause or contribution to delinquency • Reasonably beyond control of borrower • Likelihood of resolution within reasonable time period • Access to additional funds • Sufficient equity to pay off loan if sold • Short-pay acceptable

24. Assistance Options Offered by the Lender • Temporary relief: • Special forbearance • Permanent modification of existing mortgage • Combination of both options

25. Normal monthly payments over period of time • Past due amounts added to loan balance • New and higher payments repaid over remaining life of loan • Due date extended until paid in full

26. Balloon payments of past due amounts • Monthly payment same • Monthly payment reduced for period of time

27. Forbearance • Interest only payment • Payment plan on arrears • Partial mortgage payments • Payment on moratorium

28. Loan Modification • Reduce interest rate • Change mortgage product type • Extend term of mortgage

29. Additional Player-Mortgage Insurance • MGIC Investment Corporation • Private Mortgage Insurance • Only Lender can make a claim

30. Homeowner Benefits • Reported as “deed-in-lieu-foreclosure” • Less derogatory item on credit report

31. Homeowner Risks • Move sooner than if in foreclosure • Negative impact on credit report • Tax consequence

32. Lender Benefits • Save costs and time of foreclosure • Obtain property earlier to expedite resale

33. Lender Risks • Assume liability if secondary financing in place • Clouded title

34. SHORT PAYS

35. Lender Agrees to AcceptLess than Amount Owed • “Short-sale” – lender accepts less than full amount due from sale • Homeowner already delinquent • Comparison of short-pay loss to anticipated foreclosure loss

36. Approaching a Short-Pay • Review/research borrower documents: • Income documents • Bank statements • Financial statement or Fannie Mae 1003 loan application form • Recent credit report for all borrowers on loan • Explanation letter and reason for request

37. Review/research lender documents: • Competitive market analysis, or BPO • Copy of listing agreement, Multiple Listing Service “print-out” • Purchase contract and escrow instructions, if already sold • Estimated settlement statement from escrow • Current preliminary title report

38. Lender’s Decision-Making Process • Circumstances beyond homeowner control • Sufficient financial reserves for short-sale deficiency • Reduction of fees charged • Reduce or eliminate buyer concessions • Buyer sale price in relation to competitive market analysis or BPO

39. Risks of a Short-Payto the Homeowner • Adversely affects credit report • Tax consequences • Recorded junior loans cause difficulties with senior lender

40. HOME EQUITY SALES CONTRACTS

41. Home Equity Sales Contracts • Owner-occupied 1-4 residential property • Special requirements: • Name, business address, telephone number of purchaser • Address of residence in foreclosure

42. Total consideration given by purchaser • Complete description of terms of payment or other consideration • Time of possession • Terms of rental agreement

43. Notices required on contracts • “NOTICE REQUIRED BY CALIFORNIA LAW UNTIL YOUR RIGHT TO CANCEL THIS CONTRACT HAS ENDED. • (NAME) OR ANYONE WORKING FOR (NAME) CANNOT ASK YOU TO SIGN OR HAVE YOU SIGN ANY DEED OR ANY OTHER DOCUMENT” Immediately above “cancellation notice”

44. “YOU MAY CANCEL THIS CONTRACT FOR THE SALE OF YOUR HOUSE WITHOUT ANY PENALTY OR OBLIGATION AT ANY TIME BEFORE (DATE AND TIME OF DAY). SEE THE ATTACHED NOTICE OF CANCELLATION FORM FOR AN EXPLANATION OF THIS RIGHT.” Immediate proximity to space for seller’s signature

45. Rescission timeline: • Midnight of the 5th business day following day on which seller signs contract, or • 8:00 a.m. on day scheduled for sale of property under power of sale in Deed of trust, • whichever occurs first

46. “TO CANCEL THIS TRANSACTION, PERSONALLY DELIVER A SIGNED AND DATED COPY OF THIS CANCELLATION NOTICE, OR SEND A TELEGRAM TO (NAME OF PURCHASER), AT (STREET ADDRESS OF PURCHASER’S PLACE OF BUSINESS) NOT LATER THAN (ENTER DATE AND TIME OF DAY). “I HEREBY CANCEL THIS TRANSACTION (DATE). (SELLER’S SIGNATURE)” Attached to contract in duplicate, easily detachable

47. Two Year Right to Cancel • Seller may rescind up to 2 years after deed to buyer is recorded IF Seller was taken “unconscionable advantage” of by Buyer • If court action to enforce rescission right, prevailing party is entitled to costs of suit/reasonable attorneys’ fees

48. Exceptions • Purchased for personal residence • Seller gives buyer deed in lieu of foreclosure of voluntary lien or encumbrance of record • Trustee transfer acting under power of sale in deed of trust or mortgage at foreclosure sale

49. Sale is authorized by statute • Sale is by order or judgment of court • Sale is from/to spouse, blood relative, blood relative of spouse • Property other than 1-4 family residential • Not seller-occupied

50. Broker’s Position • “Purchaser representative” requirements as of January 1, 1991 • Must provide • Written proof of valid current California Real Estate Sales License and bond • Written statement of valid California Real Estate Sales License and bond, compliance with above • Failure to comply can render contract void and purchaser liable to seller for damages Civil Code §1695-1695.17, 1691