January 30, 2007

FORECLOSURE CONSULTANTS --The Risks in Bottom Feeding

The Sacramento Delta is known for its fishing... and for tides that can rise and fall as much as six feet. The residential real estate market goes through similar cycles. A rising market can lift all boats, and a declining market can cause some property owners to run aground.
Some people view this as a business opportunity and look for homeowners facing foreclosure who have equity in their homes but lack the ability to refinance. They may offer to rescue the homeowner from foreclosure and salvage their credit in exchange for title to the house. The distressed homeowner may also be granted an option for a fixed time period to re-purchase their home if they have a reversal of fortune.
But dealing with homeowners in foreclosure may be a trap for the unwary if they are ignorant of the Cal statutes that protect homeowners facing foreclosure. This is not a case where ignorance is bliss -- the violation of the statutes carry both civil and criminal penalties. (Civil Code 2945.6 & 2945.7)
The legislative findings in Civil Code 2945 explain why property owners of 1-4 residential units facing foreclosure need special protection. Civil Code 2945.1 broadly defines the term "foreclosure consultant" to include a variety of dealings with distressed property owners. Although the statutes contain specific exemptions, a 1997 California case holds that a licensed broker can be regulated as a foreclosure consultant.
A foreclosure consultant is required to prepare and enter into a written contract with the owner which discloses the nature of the services to be performed, the total amount of compensation and the terms of compensation. (Civil Code 2943) Foreclosure consultants must provide a statutory notice concerning the homeowner's legal rights under Civil Code 2943.5, including the right to terminate the contract within 3 days. An additional notice is required if the foreclosure consultant will assist the property owner in obtaining the release of any surplus funds after a completed foreclosure sale under Civil Code 2945.3(h).
Following the laws to the letter can protect both the foreclosure consultant and the property owner in California.

January 14, 2007

MORTGAGE FRAUD--Playing with Dynamite

There is an epidemic causing harm in the billions to the real estate industry -- mortgage fraud. This fraud is often a violation of both civil and criminal laws. That is why the FBI is actively involved in the investigation and apprehension of the perpetrators.

Mortgage fraud can take many forms: a homebuyer inflates his assets or income on a loan application or conceals liabilities; an investor falsely represents that she will live in a condominium to obtain a better loan rate; a con artist uses someone else's good credit to borrow money to buy a residence at an inflated price; or an organized crime ring hatches a complex scheme to defraud a lender using a dishonest appraiser and an insider employed by the lender.

Each of these transactions is governed by Federal Law. Form 1003, the Uniform Residential Loan Application that every buyer signs when he or she applies for a loan, references Title 18, United States Code section 1001. Under that code section, buyers, appraisers, agents, loan officers and other parties are prohibited from lying on a loan application or any other document related to the transaction.

The "straw buyer" is the most pathetic character in the annals of mortgage fraud--the pig in the cartoon. For example, a con artist persuades a straw buyer to take title to a residence that is being leased, using their good credit to obtain a loan. The straw buyer is promised by the con artist that he will make all the mortgage payments, sell the residence in one year and split the profit 50-50. The deal is "too good to be true." The con artist may, in cahoots with the seller, inflate the price of the house with a false appraisal and get cash back at the closing for repairs that are never made. The con artist then disappears with the kickback and the straw buyer finds herself saddled with an inflated mortgage and a house with no equity in a declining market. The straw buyer stands to suffer a foreclosure and ruin her credit, unless she sells the house short for a loss and compensates the lender for the loan deficiency. Perhaps worst of all, the straw buyer has unwittingly engaged in violations of Federal Law that carry criminal penalties.

To read more about mortgage fraud and the types of schemes used by the culprits, click here.

January 3, 2007

EMINENT DOMAIN -- "The Times They Are A Changing"

The Supreme Court's decision in Kelo v. City of New London set off shock waves among property owners. In Kelo, the Court upheld the City's taking of Ms. Kelo's well maintained home City so that a Fortune 100 corporation could build a new office complex. In response, legislation has been passed across the country that makes it more difficult for private property to be taken by eminent domain for private, not public, use.

On January 1, 2007, several new laws went into effect in California which will impede a redevelopment agency from taking private property for development for a private use. Under Health & Safety Code 33031, a city or county can declare urban property to be "blighted" as the first step in the process of eminent domain. The primary purpose of such a taking is the generation of increased property tax revenues through redevelopment. But what if a parcel of property in the project area is already improved with a building that is in fine condition and is being put to a productive private or public use. Why should a government agency be able to force the sale of that property so it can be transferred to a private developer for a private use (for example, the development of a new shopping center)?

These questions have been addressed in part by Health & Safety Code 33320.1(b)(2). That code section prohibits the inclusion of nonblighted parcels in a redevelopment project area for the purpose of obtaining property tax revenue without "substantial justification." In other words, the taking of private property by a city for private use is no longer justifiable on the basis that the city will generate more property tax revenue after the shopping mall opens for business.

So let's say a city wants to take a medical clinic to be part of a parking lot or retail store for a new shopping mall. If the medical clinic is not blighted, there must be a substantial justification for its taking. Increased property tax revenues for the city is no longer a relevant factor, and it is unlikely that a court will find substantial justification from the opportunity for shoppers to purchase a pair of designer jeans or a caffe latte in a new mall.