Cal Foreclosure Consultants Must Now Register & Post $100K Bond

As the mortgage crises began, I received a number of unsolicited inquiries from people who were interested in starting a business to help borrowers in distress by purchasing and leasing back their residence or negotiating a loan modification. I explained to these callers that they would be acting as "foreclosure consultants" and would be subject to statutes in the Civil Code that regulate foreclosure consultants. Invariably, the callers were not aware of these statutes and were not interested in paying a lawyer to advise them how to follow the law. Apparently budding foreclosure consultants fancy the idea of a new business with no start up costs.

As the mortgage crises became worse, there stories in the news about unscrupulous people who would take a fee up-front to negotiate a loan modification (this is illegal unless an exemption applies) and then do nothing for the fee. The California Legislature was apparently moved by these stories to amend Civil Code sections 2945, et seq. effective July 1, 2009 so that "foreclosure consultants" are now require to register with the State and post a $100,000 bond. To learn more about the changes to the laws governing "foreclosure consultants," and the consequences if the laws are violated, click here or here.

LOAN MODIFICATION UPDATE -- Help for Owners Who Are Upside Down?

This Blog began on in late 2006 with the mortgage debacle on the horizon. A number of posts have been devoted to mortgage fraud, foreclosure consultants, home equity purchasers, loan modifications and the like. Recently, the Federal Government has launched new initiatives to promote loan modifications.

Today the Los Angeles Times ran an article on page 1 of the Business Section with a good but very general overview about mortgage modifications. The author advises borrowers to look for free help from federal programs or non-profit legal services. The article is entitled, "IS IT HOPE OR HYPE FOR HOMEOWNERS?"

The advice to look for free loan aid is worth considering. Many "opportunists" have entered the loan modification business as a way to make a quick buck from distressed homeowners. As we have discussed in other posts, it is very difficult to provide mortgage modification assistance for a fee in California under to State laws regulating "foreclosure consultants." In a future post, we will discuss how the laws governing foreclosure consultants will change effective July 1, 2009.

After the Fall -- What Now?

On December 26, 2006, I wrote a post entitled "'Creative' Financing -- The Slippery Slope in 2007."

On December 28, 2007, I wrote a post entitled "Non-Traditional Mortgage Products -- The Slippery Slope Became an Avalanche."

Now it is time for my third year end post. I read an insightful column in today's the Wall Street Journal about the global economic reversal. It is entitled, "The Economic News Isn't All Bleak" by Zachary Karabell. In the last paragraph of his column, Mr. Karabell observes:

"The rush to declare the future bleak has obscured the fact
that no one knows the outcome of an unprecedented event.
No one. The worst course in the face of uncertainty is blind
faith in conventional wisdom and past patterns. The best is
to stay humble in the face of the unknown, creative and
unideological about solutions, and open to the possibility
that as quickly as things turned sour they can reverse."

To the loyal readers of CalRealEstateLawBlog.com, watch out for wolves in sheeps' clothing and have a productive and healthy 2009!

New Foreclosure Hurdles in California Helping Distressed Homeowners

Section 2923.5 of the California Civil Code went into effect on September 6, 2008. This statute, which applies only to owner-occupied, residential real property, was enacted to help distressed California homeowners. Section 2923.5 requires a lender seeking to foreclose to contact the borrower "in order to assess the borrower's financial situation and explore options for the borrower to avoid foreclosure." The statute applies to all loans made from January 1, 2003 through December 31, 2007.

Section 2923.5 is complicated and sets up a number of requirements that must be satisfied by the foreclosing party or its authorized agent. The contact requirements of section 2923.5 are very specific. The foreclosing party must contact the borrower, in person or by telephone, to assess the borrower's financial situation and explore options to avoid foreclosure. If contact is not made by phone or in person with the borrower, the foreclosing party must send a certified letter to the borrower with a return receipt requested. If the foreclosing party is unable to contact the borrower, it must fulfill certain due-diligence requirements outlined in section 2923.5. In addition, the statute imposes a 30‑day waiting period after the foreclosing party fulfills the contact or due-diligence requirements.

After the foreclosing party has met the requirements of section 2923.5, in order to ensure compliance, the foreclosing party must submit a declaration along with the recording of any notice of default or its notice of sale, if the foreclosure proceedings were initiated prior to September 6, 2008.

The foreclosing party does not have to meet the statutory requirements in certain limited situations: (1) if the borrower surrendered the property; (2) the borrower contracted with an organization, person or entity whose primary business is to advise people who have decided to leave their home and seek to extend the foreclosure process and avoid their contractual obligations; or (3) the borrower filed for bankruptcy and the proceeding has "not been finalized."

A foreclosing party must be well versed in the detailed requirements of section 2923.5 and follow them to the letter to avoid further delays in the foreclosure process. A distressed homeowner should also study the new statute to gain the benefits of its protection. In addition, a distressed homeowner should consult with a CPA about the tax consequences of a foreclosure or loan modification.

More changes in California's foreclosure laws are in the offing. Governor Schwarzenegger has proposed a 90 day foreclosure moratorium to pressure banks to modify loans. The California Legislature has not yet acted on the Governor's new proposals.

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LOAN MODIFICATION SERVICES & ADVANCE FEES -- Foreclosure Consultants Revisited

Millions of homeowners nationwide want to modify the terms of their loans but do not know how to go about it. This has created growing business opportunity for people who want to provide loan modification services for a fee. Many of these people are new to this business and may not be aware of the law in this area. In California, for example, there are rigorous legal requirements for real estate licensees who want to earn fees by helping homeowners modify their loans.

In an earlier post, I discussed the California statutes (California Civil Code sections 2945, et seq.) that regulate foreclosure consultants; these statutes apply when a real estate license attempts to negotiate a loan modification for a homeowner after he or she has received a Notice of Default recorded under Civil Code section 2945. A foreclosure consultant is prohibited from accepting payment in advance, even if the foreclosure consultant is a licensed California real estate broker. (In contrast, licensed California lawyers are exempt from these statutes.)

But what if a real estate licensee agrees to negotiate a loan modification for a homeowner who has not yet received a Notice of Default and the licensee wants to be paid in advance? The California Department of Real Estate has created a procedure for a real estate licensee to accept advance fees for loan modification services when a notice of default has not yet been recorded. First, the licensee must apply to the DRE for its approval of an advance fee agreement. Once this approval is obtained, the broker must enter into the agreement with a borrower/homeowner who retains the broker and pays a fee in advance for loan modification services. It appears that very few California real estate licensees have obtained approval of an advance fee agreement yet.

In summary, a homeowner who has not received a Notice of Default commencing a foreclosure should only pay fees in advance to a broker who presents an agreement that has been approved by the DRE (the homeowner should call the DRE to confirm the agreement has been approved).

If the homeowner has received a Notice of Default, he or she should not pay any fees in advance. The homeowner should confirm that the foreclosure consultant has the bond required under Civil Code section 2945.11. If these requirements are not met, the homeowner has extensive civil remedies under Civil Code section 2945.6, and the foreclosure consultant may be subject to criminal penalties under Civil Code section 2945.7.

HOME SWEET HOME --The Price of a Great Love Affair

On June 13, 2005, TIME magazine reminded us that Americans were at the height of a great love affair with residential real estate. On October 3, 2008, we learned that every American taxpayer, now and in the future, would share in the cost of mortgage defaults and the rescue plan through the Troubled Assets Relief Program (TARP). The recent federal "rescue" legislation and the government's takeover of Fannie Mae and Freddie Mac make the United States the largest mortgage company in the world.

Two maxims of California jurisprudence provide food for thought in assessing the fallout from the messy aftermath of the latest residential real estate binge: "He [or she] who takes the benefit must bear the burden"; and, "He [or she] who consents to an act is not wronged by it." California Civil Code sections 3521 & 3515.

With that said, let us acknowledge the participants who benefited from and consented to the questionable transactions in the United States that have resulted in extraordinary actions by governments around the developed world:

Buyers who used "creative financing" while they were in denial about the consequences of a variable interest rate loan readjusting and the inevitable decline in housing prices;

Mortgage brokers and real estate brokers who did not adequately warn buyers about the credit risk of buying a home without a down payment or a fixed rate loan;

Appraisers who, in some cases, participated in the validation of inflated prices or worse; i.e., mortgage fraud;

Mortgage companies and banks who defied reality by making loans without following reasonable underwriting standards;

Investment bankers who "securitized" pools of loans ("mortgage backed securities") that were not properly underwritten or backed by capital in the event of widespread defaults;

Rating companies that bestowed their pedigrees on the mortgaged backed securities at they same time they were compensated by the investment bankers;

Hedge funds, insurance companies and investment bankers who wrote contracts ("credit default swaps") to pick up the losses on the mortgage backed securities without the financial ability to do so in the event of widespread defaults;

And the United States government which failed to warn, regulate and control the participants before it became the world's biggest mortgage company.

Loan Modifications -- The Federal Housing Bill

Congress has passed Federal housing legislation to address the housing downturn, the subprime crises, and the problems confronting Fannie Mae and Freddie Mac. Once signed by the President,this legislation will impact the ability of homeowners to modify or renegotiate their mortgages. Any reader who was interested in the last post about negotiating a loan modification should read the overview of the new legislation in the July 25, 2008 New York Times entitled, "A Housing Bill That Has Something For Everyone." To read the article, click here.

9 Hurdles for a Borrower to Negotiate a Loan Modification

With the increase in pending foreclosures and mortgage defaults, many borrowers are feeling squeezed and are looking for relief from their lenders. The following checklist may be be helpful in approaching a lender about a loan modification:

1. A loan modification is may be available to a borrower who was unable to make regular payments for several months due to exigent circumstances such as an illness, the loss of a job, or a divorce, but who has now solved that problem. The lender will want to see a "hardship letter" and detailed financial information that demonstrates the borrower can resume regular payments on modified terms. The modified terms may include a lower, fixed interest rate with the delinquent amounts added on to the principal of the loan. In a few cases, the borrower may persuade the lender to "write down" (decrease) the principal balance.

2. If a borrower is delinquent, the lender will probably require a "good faith" payment of a substantial part of the delinquency when the loan modification is consummated. A borrower who has put their mortgage payments in the bank while trying to work out a loan modification has a much better chance of success than a borrower with no money to put on the table.

3. The borrower will have to get past the financial institution's collection department and to a person is a position of authority in the loss mitigation department to negotiate a loan modification. This is one area where a lawyer can be helpful.

4. When a borrower is trying to convince the lender that he or she can now make payments on new terms, the lender will want to see historical financial information. If the borrower provides information that contradicts their original loan application, the borrower may be unwittingly creating a record that will give rise to an action for mortgage fraud. (See my January 14, 2007 post.)

5. If a non-lawyer offers to perform the services described above and asks for the payment of their fees in advance completing the services, ask them if they are licensed by the State of California and, if so, how they are licensed. Can the consultant demonstrate to you that they are exempt from the laws regulating "Foreclosure Consultants"? If not, can they demonstrate to you that they are providing the disclosures and documents required of Foreclosure Consultants. (See my January 30, 2007 post.)

6. If the borrower has more than one loan secured by their property, it will probably be necessary for all lenders to agree to the terms of the loan modification before it is finalized. If the modification of the first trust deed loan puts the holder of the second trust deed at greater risk of a default under the first deed of trust, the holder of the first will lose its priority without the consent of the holder of the second to the modification agreement.

7. It will take months, not days, to negotiate a loan modification with a lender, so start as soon as possible after you go into default. Once the borrower is served with a Notice of Default to commence a non-judicial foreclosure, he or she should begin the process of contacting the lender about a loan modification -- do not wait until you receive a Notice of Trustee's Sale.

8. Keep all your loan records well organized, including all communications with the lender about the loan.

9. Consult your CPA or tax adviser to determine if the modified loan will result in any adverse income tax consequences.