SRCAR Connect

LOS ANGELES (Aug. 15) – California home sales fell in July but were up from the previous year, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today.

Closed escrow sales of existing, single-family detached homes in California dropped 4.1 percent to a seasonally adjusted 458,440 units in July, according to information collected by C.A.R. from more than 90 local REALTOR® associations and MLSs statewide. July home sales were up 4.5 percent from the 438,850 units sold in July 2010. The statewide sales figure represents what would be the total number of homes sold during 2011 if sales maintained the July pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.

“Although July sales improved over last year, they were somewhat weaker than expected, given current prices and mortgage rates,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. “Economic uncertainty and recent developments in financial markets have caused hesitation among buyers, the effects of which we may see in the coming months. We must see sustained job and income gains along with an increase in consumer confidence before we can expect to see consistent improvement in the housing market,” Appleton-Young added.

The statewide median price of an existing, single-family detached home sold in California dipped 0.3 percent in July to $294,230 from a revised $295,210 in June. July’s median price was down 7.6 percent from the $318,550 recorded in July 2010.

“Despite the uncertain outlook, interest rates are at near-record lows, and home prices are favorable,” said C.A.R. President Beth L. Peerce. “Well-qualified, motivated buyers who expect to own their home for more than a few years should carefully study their options now.”

Other aspects of C.A.R.’s resale housing report for July 2011 include:

• The Unsold Inventory Index for existing, single-family detached homes was 5.5 months in July, up from 5.0 months in June, but essentially unchanged from July 2010′s 5.6-month supply. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.
• Thirty-year fixed-mortgage interest rates averaged 4.55 percent during July 2011, virtually unchanged from 4.56 percent in July 2010, according to Freddie Mac. Adjustable-mortgage interest rates averaged 2.97 percent in July 2011, compared with 3.73 percent in July 2010.
• The median number of days it took to sell a single-family home was 52.1 days in July 2011, compared with 42.4 days for the same period a year ago.
• View Unsold Inventory by price point.

Note: The County MLS median price and sales data in the tables are generated from a survey of more than 90 associations of REALTORS® throughout the state, and represent statistics of existing single-family detached homes only. County sales data are not adjusted to account for seasonal factors that can influence home sales. Movements in sales prices should not be interpreted as changes in the cost of a standard home. Median prices can be influenced by changes in cost, as well as changes in the characteristics and the size of homes sold. Due to the low sales volume in some areas, median price changes in June may exhibit unusual fluctuation.

Leading the way…® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States, with more than 160,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.

# # #

July 2011 County Sales and Price Activity
(Regional and condo sales data not seasonally adjusted)

July 2011 County Unsold Inventory and Time on Market
(Regional and condo sales data not seasonally adjusted)

BY: KELLY A. NEAVEL
ORANGE COUNTY OFFICE

Social networking is increasingly popular in the real estate world. Many real estate agents, REALTORS®, and brokers are using social networking websites to notify their “friends” and “followers” of property listings. Surely this act seems innocent enough, but the agent, REALTOR®, or broker could be violating state law, NAR’s Code of Ethics, MLS rules, and possibly federal law. Several issues arise when using social media sites to post listings, whether it’s the agent’s, REALTOR’S®, or broker’s own listing, or that of other brokers.

The first issue is stale postings. A stale posting results when an agent, REALTOR®, or broker posts a listing on his or her blog, Facebook or Twitter page and then the house sells, the listing expires, or the owner withdraws the property, and the listing is not removed or updated. Very few agents, REALTORS®, or brokers remember to go back and delete these postings from their sites. Postings on the internet do not have a shelf life. A person can search for a property on the internet and these old postings that are now inaccurate and misleading can come up. The problem with these old postings is that they do not automatically update as changes are made in the MLS to reflect a change in price or status. In Article 12 of the 2011 Code of Ethics and Standard of Practice of the National Association of REALTORS® (NAR Code of Ethics), Standard of Practice 12-8 requires REALTORS® to promptly take corrective action when they become aware that information posted on one of their websites is no longer current or accurate. This means that REALTORS® have an obligation to go back and remove any postings on their blogs, Facebook or Twitter accounts, or at least to update the information to reflect the current status of the listing.

The second issue is another possible NAR Code of Ethics Article 12 violation. Article 12 requires agents to present a “true picture” of the advertisement and to include their license number and contact information on every page of their advertisement. It is virtually impossible to comply with Article 12 in a 140 character tweet as allowed on Twitter. Standard of Practice 12-5 does provide for an exemption from this disclosure requirement but only when the advertisement is linked to a display that includes all required disclosures. When agents, REALTORS®, and brokers post one of their listings on a social media site, they must include all of the required information in order to be in compliance with Article 12.

The third issue is the fact that postings on social media sites are considered advertising. Advertising is defined as any activity that is intended to attract potential customers, including websites, social media sites, and blogs. Basically, any communication between a broker and the public is advertising. However, there are factors that could possibly allow a posting on a site like Facebook to fall outside the realm of advertising, such as: (1) if the post consists of only a link to the actual listing on the IDX site; or (2) if the Broker’s privacy settings on Facebook allow only a small number of “friends,” consisting of only clients, to receive the listing. Either of these scenarios could be seen as delivering information in the context of the brokerage relationship. However, there is a fine line. It is safer to assume that any listing on any social media site is considered advertising and all state laws and rules must be followed.

Lastly, Article 12 of the NAR Code of Ethics and the NAR Model MLS Rules and Regulations prohibits advertising of another broker’s listing without permission. Pursuant to state licensing law, a person can only list or advertise the property if he or she has a contract with the seller. As such, only the listing broker can advertise his or her own listing. NAR has recognized these issues with social media sites and has indicated that they will be addressed at the next meeting. Until then agents, REALTORS®, and brokers need to be careful when they post another broker’s listing on their Facebook, Twitter or blog, or they could be the subject of an ethics complaint filed with their local Association for advertising without authority.

Social media is a fast way for the busy agent, REALTOR®, and broker to disseminate information. Brokers need to make sure their agents are not violating any state real estate laws or the NAR Code of Ethics. All brokers need a social media office policy in place that defines how agents and REALTORS® can specifically use social media sites and to ensure that expired or sold listings are removed from any social media site.

Biography
Kelly A. Neavel manages the Orange County Office of The Giardinelli Law Group, APC.

The Federal Rules of Evidence and the Uniform Rules of Evidence generally allow for electronic records and their reproductions to be admissible into evidence. This includes electronic signatures stored in a computer or server. Are your digitally signed documents safely stored?

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According to statistics compiled by the California Association of REALTORS® (C.A.R.), short sales comprised 19% of all California home sales in April, and bank-owned, foreclosed properties (REOs) comprised 28% of sales (see www.car.org/marketdata/data/distressedsales/). Thus, 47% of all sales in April involved distressed properties (down from 51% in March 2011). In marketing such properties, some REALTORS® and sellers, including banks, have instituted the practice of setting an artificially low price on the MLS in the hope of encouraging a bidding war among multiple potential buyers. Their goal, of course, is to benefit their clients by selling the property at the maximum possible price.

Lest anyone think that nobody is harmed by this, or that the benefit to the client outweighs the minor moral and ethical implications of telling such a “little white lie,” it should be noted that husband and wife brokers in the State of Washington face a 10-year license suspension for just such a practice. (See www.inman.com/news/2011/06/10/washington-short-sale-brokers-could-lose-licenses.) Among the findings in the Washington case is that the brokers engaged in a “pattern and practice” of listing homes at artificially reduced prices that didn’t accurately reflect what the owner was willing to accept, in the hopes of generating multiple offers. While the 10-year license suspension is based on multiple claims of wrong-doing, the Washington Department of Licensing suggested that listing homes at artificially low prices was a serious enough violation that it, alone, might have resulted in a 10-year revocation.

In an effort to help REALTORS® avoid the entanglements faced by the Washington brokers, this month’s newsletter addresses the violations of the Code of Ethics, Multiple Listing Service (MLS) rules and applicable California laws that are implicated when a REALTOR® lists a home for substantially less than its value in order to garner more offers.

CODE OF ETHICS

As all REALTORS® should know, Article 1 of the Code of Ethics requires them “to protect and promote the interests of their client.” In doing so, however, REALTORS® must “treat all parties honestly.” Deliberately listing a property in the MLS for an artificially low price arguably violates the requirement of dealing honestly with all parties.

Article 2 of Code of Ethics requires REALTORS® to “avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction.” Listing an artificially low price constitutes an exaggeration or misrepresentation. Standard of Practice 2-4 prohibits REALTORS® from “naming a false consideration in any document.” Listing a price that is substantially lower than what the seller is willing to accept would constitute “false consideration.”

Article 3 requires REALTORS® to cooperate. Standard of Practice 3-10 relates the duty to cooperate with “the obligation to share information on listed property.” Listing a price on the MLS that is lower than a seller will accept does not fulfill the obligation to share information.

Code of Ethics, Article 11 requires Realtors® to “conform to the standards of practice and competence which are reasonably expected in the specific real estate disciplines in which they engage.” Standard of Practice 11 4 establishes that the required competency necessarily involves complying with duties imposed by the Code of Ethics, which require treating all parties honestly (see Article 1).

Article 12 states that “REALTORS® shall be honest and truthful in their real estate communications and shall present a true picture in their advertising, marketing, and other representations.” Standard of Practice 12-4 requires that REALTORS® “not quote a price different from that agreed upon with the seller.” By listing a property for significantly less than what the seller will agree to accept in an effort to create a bidding war, REALTORS® could be found in violation of this standard. Additionally, Standard of Practice 12 8 references “the obligation to present a true picture in representations to the public. . . .” Thus, representations of price communicated to the public must be accurate.

These ethical requirements raise issues for a REALTOR® when the seller refuses to list the property at or near its actual value. In such a situation, a REALTOR® may have no choice but to withdraw from representing a seller in order to avoid violating the Code of Ethics.

MLS RULES

MLS Rule 8.3 requires the listing broker to only input accurate information into the MLS computer database and specifically states that a listing broker “shall not submit or input information which the listing broker knows to be inaccurate.” An artificially low listing price is not accurate if it misrepresents what the seller is willing to accept for the property.

MLS Rule 10.5 states, “[I]f the seller(s) of any listed property filed with the MLS refuses to accept a written offer satisfying the terms and conditions stated in the listing, such fact must be transmitted immediately to the MLS and to all participants. This Rule creates a risk to REALTORS® of being reported if a low price is listed and an offer at that price is not accepted. It should be noted that the Washington brokers mentioned above were the subject of numerous complaints regarding pricing to the Northwest Multiple Listing Service where the properties were listed.

MLS Rule 12.10 states that participants and subscribers may not engage in false or misleading advertising. A deflated listing price for the purpose of creating a bidding war is misleading in that it leads potential sellers into believing that they can purchase a home at below-market levels. While the purpose of Rule 12 and its subparts specifically targets publishing MLS data on the internet, as drafted it could be interpreted to include listing prices below what a seller would accept.

APPLICABLE LAW

The duty of honesty is also codified in California Business and Professions Code § 10176, which makes a real estate license subject to suspension if a licensee makes “substantial misrepresentations” (subdivision a), “false promises” (subdivision b), or engages in “any other conduct . . . which constitutes fraud or dishonest dealing” (subdivision i). Additionally, Civil Code § 1088 makes a real estate licensee liable for the truth of any information placed in the MLS. The fact of the misrepresentation or dishonest dealing itself is enough for disciplinary proceedings, irrespective of whether anyone was harmed.

California’s Unfair Competition Law (Business and Professions Code § 17200, et seq.) prohibits unfair and deceptive business practices. Further, Business and Professions Code § 17500, et seq. prohibits false advertising. As interpreted by the California Supreme Court, Business and Professions Code § 17500 “prohibits advertising property or services with untrue or misleading statements or with the intent not to sell at the advertised price.” (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 52.)

Violation of Business and Professions Code § 17500 is a misdemeanor punishable by imprisonment in the county jail not exceeding six months, or by a fine not exceeding two-thousand, five-hundred dollars ($2,500), or by both. Furthermore, in order to recover under § 17500, it is necessary to show only that members of the public are likely to be deceived. Actual deception or confusion is not required, nor is actual harm. The court may order relief without individualized proof of deception, reliance, and injury if it determines that the remedy is necessary to prevent the unfair practice. People v. Dollar Rent-A-Car Systems, Inc. (1989) 211 Cal.App.3d 119; see also Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 52.

While it may seem innocent enough to list property at a significantly below-market price on the MLS, REALTORS® potentially face severe consequences for doing so. Even if “everyone is doing it,” or everyone expects to pay more than the listed price, the fact remains that is dishonest to list a price lower than what a seller is willing to accept. This “little white lie” could cost a REALTOR® his or her license, could result in criminal penalties, and could result in civil liability.

According to statistics compiled by the California Association of REALTORS® (C.A.R.), short sales comprised 23 percent of all California home sales in February 2011; that number was 20 percent in March 2011 (see www.car.org/marketdata/data/distressedsales/). Because of the high percentage of short sales, almost every REALTOR® in California will participate in a short sale transaction at some point. This month’s newsletter addresses what every REALTOR® should know about a new Federal Regulation applicable to REALTORS® involved with short sales.

Effective January 31, 2011, a new Federal Law (Title 16, Code of Federal Regulations, Part 322) imposes certain requirements on anyone who provides Mortgage Assistance Relief Services (MARS). Many REALTORS® may incorrectly assume from the title that this new regulation applies only to those who assist homeowners with loan modifications. As written, however, this regulation also applies to REALTORS® involved in short sales. This new law defines Mortgage Assistance Relief Service to include any service “to assist or attempt to assist” a person with “Negotiating, obtaining or arranging: (i) A short sale of a dwelling, (ii) A deed-in-lieu of foreclosure, or (iii) Any other disposition of a dwelling other than a sale to a third party who is not the dwelling loan holder.”

By this definition, any REALTOR® who lists a short sale property is a provider of Mortgage Assistance Relief Services and must comply with the MARS rule. Further, under a strict reading of the MARS rule, even a REALTOR® who represents a buyer of a short sale property may be required to comply with the rule. For example, a REALTOR® who makes a phone call to the seller’s lender in order to provide information to assist the lender in approving the short sale has arguably assisted the seller with obtaining the short sale. Thus, a buyer’s agent who actively participates in the short sale approval process should be aware of and consider complying with the MARS rule. In general, REALTORS® need to be aware of three primary provisions of the MARS rule: 1) Prohibition Against Advance Payments; 2) Prohibited Representations; and, 3) Required Disclosures.

Prohibition Against Advance Payments

The MARS rule prohibits anyone who performs covered services from receiving any advance fee for the services. This does not usually apply to a REALTOR® who agrees to a commission, since commissions are generally not paid until escrow closes, when most services have already been performed. This may be a problem, however, for any REALTOR® who retains a short sale negotiator. Requiring the short sale negotiator’s fee up front probably violates the MARS rule. Further, the MARS rule prohibits a person from assisting or facilitating someone who violates the rule. Thus, a REALTOR® could be held in violation of the MARS rule if he or she sends a client to a short sale negotiator who collects an up-front fee. Of course, as reported in our June 2010 and July 2010 Courtside Newsletters, there are other potential serious issues related to the use of short sale negotiators (past issues of our Courtside Newsletter may be found on our website at www.glawgroupapc.com).

Prohibited Representations

Any REALTORS® who provide services covered by the MARS rule are prohibited from making certain representations. First, REALTORS® may not tell the sellers to avoid contact or communication with the lender or servicer. Second, REALTORS® may not represent to sellers any specific benefits or anticipated results of a short sale negotiation unless the REALTOR® is able to support the representations with reliable information. Finally, REALTORS® may not make any misrepresentations related to the short sale. The MARS rule lists 12 categories of misrepresentations, but makes it clear that misrepresentations which fall outside of these categories are also prohibited. Included in these categories are statements regarding the likelihood of success, time estimates for accomplishing results, affiliation or compliance with government programs, whether or not the seller should continue making payments, the possibility of refunds, the conditions that create the right to compensation for the service, and whether the seller is obligated to accept the relief offered.

Thus, for example, unless statements are true and can be supported by reliable documentation, REALTORS® should not tell sellers that they are likely to get an answer in three to four weeks, or that the lender is likely to approve a particular purchase offer from a buyer. REALTORS® should not tell sellers that a particular transaction complies with government regulations, or is part of any government program designed to help homeowners. REALTORS® should not tell sellers that they are required to pay for the services of a short-sale negotiator, or that the REALTOR® is entitled to a commission even if the sale does not close. This last issue is problematic for REALTORS® who use the standard C.A.R. Listing Agreement, which entitles the Broker to damages if the seller terminates the agreement early. The Federal Trade Commission (FTC) is currently reviewing this and other REALTOR® specific issues. According to the National Association of REALTORS® (N.A.R.), the FTC is not likely to strictly enforce some of these provisions against real estate practitioners until such conflicts are addressed and resolved. The MARS rule is essentially designed to protect homeowners from any sharp sales tactics.

Required Disclosures

Probably the biggest trap for the unwary REALTOR® arises from the disclosure requirements. A REALTOR® who advertises short sale services must make specific disclosures, as does a REALTOR® who assists a single client in a short sale transaction. The MARS rule sets forth what disclosures must be made, and under what circumstances.

1. General Commercial Communications.

If a REALTOR® represents to the general public that he or she can help short sell a residential property, disclosures are required to be part of every communication. All written communications, such as advertisements, flyers, brochures, newsletters, and even business cards, (if they identify the REALTOR® as knowledgeable in short sales), must contain the following disclosures:

IMPORTANT NOTICE (in bold-face type that is two points larger than the font size of the disclosure) (Name of company) is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.

If the REALTOR® orally communicates his or her ability to assist with short sales, these same disclosures must be made, and must be preceded by the statement “Before using this service, consider the following information.” In any telephone communication, this wording must be used at the beginning of the call.

If the REALTOR® makes any statement regarding whether a seller should stop making mortgage payments, the following disclosure must be added:

If you stop paying your mortgage, you could lose your home and damage your credit rating.

2. Specific Commercial Communications.

REALTORS® who handle short sales without generally advertising this fact are also required to comply with the MARS rule disclosures. In such cases, the following disclosures must be made at the moment the REALTOR® becomes aware that the transaction will be a short sale:

IMPORTANT NOTICE (in bold-face type that is two points larger than the font size of the disclosure) You may stop doing business with us at any time. You may accept or reject the offer of mortgage assistance we obtain from your lender or servicer. If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us (insert amount or method for calculating the amount) for our services. (Name of company) is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.

If the REALTOR® makes any statement regarding whether a seller should stop making mortgage payments, the following disclosure must be added:

If you stop paying your mortgage, you could lose your home and damage your credit rating.

As noted above, the part of the required disclosure stating, “If you reject the offer you do not have to pay us,” causes a conflict with the standard C.A.R. Listing Agreement. Both C.A.R. and N.A.R. are awaiting clarification from the FTC on this and other issues unique to REALTORS®.

3. Fee Disclosures.

As stated above, the MARS rule prohibits all up-front fees. It also requires that fees be disclosed before the seller signs the listing agreement (if it is a known short sale at that time). More importantly, the fee must be disclosed once again before the seller completes a transaction. The MARS rule requires that the stated fees be the same on both disclosures.

This creates a problem when, as commonly occurs, lenders reduce the amount of commissions that will be paid to listing agents before closing. In such a situation, it may be impossible for REALTORS® to comply with the requirement that the fee disclosed to consumers be the same on the two required disclosures. This is another of the issues that N.A.R. has addressed with the FTC, and for which a resolution is expected.

C.A.R. Forms

The California Association of REALTORS® has created two forms to help REALTORS® comply with the MARS rule. If the REALTOR® knows at the time the listing is taken that the transaction will be a short sale, the REALTOR® should use form MARSSN. This form should be part of the Listing Agreement. If the REALTOR® later learns that the sale proceeds will not cover the amount owed on the property, the REALTOR® should immediately present form MARSMRN to the seller. These forms contain the required language set forth above.

It is important to be aware of two potential pit falls. First, these forms are specifically drafted for listing agents. As stated above, circumstances may arise where the buyer’s agent contacts the seller’s lender in an effort to facilitate negotiation of the short sale. Under a strict reading of the MARS rule, the buyer’s agent in such a situation would also be providing Mortgage Assistance Relief Services, and therefore would be required to make disclosures to the seller. If that occurs, it is recommended that the buyer’s agent modify form MARSMRN and provide it to the seller’s agent for the seller’s signature. This matter has been discussed with the C.A.R. legal department, which is likely to review it further depending on how the FTC clarifies the MARS rule as it applies to REALTORS®.

The second and more important pit fall arises for REALTORS® who think that using the standard C.A.R. forms will assure that they have complied with all of the requirements of the MARS rule. This is not true for any REALTOR® who publicizes the fact that he or she can handle short sales. If the words “short sale” occur in any communication to the general public (such as advertisements, flyers, brochures, newsletters, business cards, or even conversations), that communication must contain the required disclosures for General Commercial Communications (above). Simply using the standard C.A.R. forms does not fulfill the disclosure requirements for commercial communications.

This article has discussed the MARS rule only in the context of short sale services. There are many other provisions of the MARS rule that could create exposure for a REALTOR®. For example, if a REALTOR® gives any general advice about loan modifications or foreclosures, or advises clients regarding whether or not to continue making mortgage payments, that REALTOR® could be found to violate the MARS rule. As with any legal issue, it is important to receive guidance from qualified legal professionals.

This Newsletter is a copyrighted publication and may not be reproduced or transmitted in any form or by any means without written permission. This article does not necessarily reflect the point of view of the Giardinelli Law Group, APC, or other person or entity who publishes it. This article provides legal information abridged from statutes, court decisions, and administrative rulings and contains opinions of the writers. Legal information is not the same as legal advice, which is the application of law to an individual’s specific circumstances. Although every effort is made to ensure the information is accurate and useful, it is recommended that you consult with a lawyer to obtain professional assurance that the information provided and your interpretation of it is appropriate for a particular situation. To request further information or to comment on this newsletter, contact us at (951) 244-1856 and visit our website at www.glawgroupapc.com.

Click here to download the full newsletter in Word Doc format.

By: Ryan D. Miller
Riverside County Office

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Last July, our newsletter article focused on the Garcia case, where a lender promised not to foreclose, but did anyway.  The borrower was able to maintain a lawsuit against the lender because as the borrowers relied upon the lender’s promise, to their detriment.  In January of this year, our newsletter article focused on the landmark case in the Massachusetts Supreme Court, also related to overcoming foreclosure.  Recently there was another case in the California Courts of Appeal, 2nd District, Aceves v. U.S. Bank, N.A., Cal. App. 2d Dist. Jan. 27, 2011, where another homeowner was successful at maintaining a lawsuit against a lender for allegations of fraud and promissory estoppel.

While the cases illustrate that lenders often violate laws in pursuing non-judicial foreclosures, many do not know that in order to even bring a wrongful foreclosure case, the borrower likely must first offer to tender the full amount of the loan, where the trustee’s sale already occurred, or cure any default, where the trustee’s sale has not yet occurred, in order to get a court to set aside a foreclosure sale.  This “tender rule” is not limited to cases where the homeowner seeks to set aside a foreclosure sale, cancellation of a trustee’s deed or quiet title.  It is also applied to causes of action related to a foreclosure, including negligence and fraud.

The tender rule was set forth in Arnolds Management Corp. v. Eischen (1984) 158 Cal.App.3d 575,579-580.  It is based on the notion that one who seeks to set aside the foreclosure sale must first comply with any requirements they are obligated to first.  This rule tends to be the biggest hurdle for the wrongfully foreclosed to fight against wrongful foreclosures, and it is a big hurdle.  If borrowers had the money to tender to the lender, they would not need a loan in the first place.  Additionally, if a borrower could get a loan through another lender, they could use that money to tender.  However, once a borrower is in default, their credit is such that they can no longer obtain additional financing.

There are ways around the tender rule.  One of the most successful ways to avoid having to tender the entire amount of the loan is to show that because the lender lacked the authority to foreclose, the sale was void.  Dimock v. Emerald Properties (2000) 81 Cal.App.4th 868, 876.  That means the trustee’s sale was a complete nullity with no force or effect as opposed to one which may be set aside.  Indeed some cases have held that it is not “equitable” nor does it make sense to require a homeowner to tender the amounts owing because of a lender’s actions.  One can certainly see the problems that could arise with a rogue lender wrongfully foreclosing, where the borrowers were helpless to fight the foreclosure because they could not tender the full amount of the loan.

Other cases have held that notice defects void a trustee’s sale so tender would not be required.   Bank of America, N.A. v. La Jolla Group II (2005) 129 Cal.App.4th 706, 715-716 and Little v. CFS Service Corp. (1987) 188 Cal.App.3d

However, despite these decisions, local courts have sometimes been reluctant to entertain these arguments.  I speculate that the reason for this reluctance is that many homeowners filed wrongful foreclosure actions against the lender, when they had no basis for doing so, simply to stay in the home one more month.  It is possible that the courts want to discourage this type of behavior, and therefore require tender.

Additionally, I have seen that where a homeowner has the ability to pay all arrears, the court seems more likely to allow a wrongful foreclosure action.  And usually, it is more persuasive to the court if a homeowner can provide proof of their ability to pay all arrears, fees, etc.  Additionally, when an unlawful detainer is also pending, the court may ask that the homeowner provide a bond, in the event the homeowner loses and must pay the fair rental value of the foreclosed-upon home.

When a lender’s actions are egregious and fraudulent activity is apparent, a court may not focus so much on the tender rule.  However, when the facts come short of showing fraud, the tender rule may bar the average homeowner from pursuing a wrongful foreclosure case.

A foreclosed upon homeowner should consider the tender rule before committing to the time and expense associated with a lawsuit.  Additionally, if a lender is engaged in conduct that is obviously fraudulent, a foreclosed upon homeowner should know they should not have to tender the full amount of the loan.

By: Kelly A. Neavel
Orange County Office

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Two new, pivotal foreclosure cases were decided this month by the Massachusetts Supreme Court that could have an impact on foreclosure cases here in California.

In U.S. Bank N.A. v. Ibanez and Wells Fargo Bank NA v. LaRace, the lenders foreclosed on the mortgages secured by the properties owned by Ibanez and the LaRaces.  Both properties reverted back to the lenders.  The lenders brought an action to perfect title in order to sell the properties.  Both Ibanez and the LaRaces argued that the lenders did not have the authority to foreclose.  Under Massachusetts foreclosure law (as in most states, including California) only the present holder of the mortgage is authorized to foreclose, and the statutory law must be strictly followed because there is no judicial oversight.  If the Notice of Sale does not identify the current holder of the note at the time of the notice and sale, the Notice of Sale is void.  In Ibanez and LaRace, the Court noted that this often occurs when the party is identified as the “beneficiary” in the Notice of Default or the Notice of Sale, but later it is learned through Fannie Mae and Freddie Mac that the beneficiary as stated is not the real owner of the loan.

The Massachusetts Supreme Court held that the lender must prove that it has authority to foreclose.  In both Ibanez and LaRace, U.S. Bank and Wells Fargo Bank were assignees of the original mortgages only.  Therefore, they had authority to exercise the power of sale contained in the original mortgages if they were the assignees at the time of the Notice of Sale and foreclosure sale.  The court went on to discuss what is required to prove ownership of securitized loans (loans that are pooled with other loans and assigned to a securitized trust), as was the case in Ibanez.  The court held that an executed agreement that assigns the pool of mortgages, and contains a schedule of the loans clearly identifying the mortgage at issue may be sufficient.  However, the court stressed that there must be proof that the assignment was made by a party that itself held the mortgage.  U.S. Bank and Wells Fargo argued that because they held the notes, they had sufficient financial interest in the mortgages to allow them to foreclose.  The Massachusetts Supreme Court rejected this argument stating, “Where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment.”  The court went onto note that in most cases there is never any proof that the securitized loan trustee ever has the original note properly endorsed and assigned.

Ultimately, in Ibanez and LaRace, the court held that, “the Plaintiffs (U.S. Bank and Wells Fargo Bank) did not demonstrate that they were the holders of the mortgages at the time they foreclosed on the properties and therefore, failed to demonstrate that they acquired fee simple title to these properties by purchasing them at a foreclosure sale.”  The court also held that the foreclosure sales were void.  To add insult to injury, the court further held that because U.S. Bank and Wells Fargo Bank failed to abide by well-established case law and statutes, this holding would apply retroactively to all previous foreclosures conducted by both banks.  This ruling could affect to thousands of properties foreclosed upon by U.S. Bank and Wells Fargo Bank.

Even though Massachusetts law is not controlling in California, California courts can look to this ruling when addressing similar issues, which may impact California foreclosure cases.  Here is the Massachusetts Supreme Court standard that may impact California law in the future:

1. Foreclosures must be done by the real party in interest;
2. Chain of title must be perfected, meaning all assignments of the mortgage must be in order;
3. All documents have to be proper at the time of the foreclosure proceedings or the foreclosure can be deemed improper, and
4. Mere possession of the Note is not enough – lenders must demonstrate that they have proper standing to foreclose.

It should be noted that currently in California, the courts have rejected the argument raised by borrowers that lenders have to produce the original note in order to have standing to foreclose.  However, it will be interesting to see how this new ruling by the Massachusetts Supreme Court, will affect future foreclosure cases in California and other states.

Application to REALTORS®:

1. If this ruling is applied here in California, foreclosures will be harder to complete, which will impact the REO market with less inventory;
2. REALTORS® may see an increase in short sales and loan modifications; and
3. REALTORS® should always advise their buyers to obtain their own owner’s title insurance policy to protect themselves in the event it is later proven that the property had defective title at the time of the foreclosure sale.

By: Ryan D. Miller

The “Benefit of the Doubt Program” as it has been called, represents the California Real Estate Commissioner’s latest efforts to encourage the reporting of real estate professionals who violate the law.  The Benefit of the Doubt Program was a pilot program now set to become law effective January of 2011.  The Benefit of the Doubt Program seeks to provide a safe harbor for reporting brokers as well as motivation for brokers reporting misconduct in the future.  Prior to the Benefit of the Doubt Program being implemented, reporting an associate for violating the law was a risky proposition as it would automatically lead to the broker being named as a respondent.   This led to investigation of the broker automatically.  The new program seeks to remedy any reluctance on the part of brokers to adhere to reporting laws.

The Benefit of the Doubt Program employs two new features to motivate a broker to report misconduct on the part of an associate.  One is a carrot, the other a stick.  The carrot is a safe harbour provision so that reporting a “bad agent” does not automatically lead to the broker being named as a respondent.  The stick is that an investigation going back two years may be conducted if a “bad agent” is later discovered.  For example, if a “bad agent” is disassociated from Broker A for violating DRE rules and subsequently associates with Broker B, but no report to the DRE was made, and then that “bad agent” is disassociated by Broker B for violating DRE rules, the DRE may go back two years to investigate, including investigating Broker A.

These two motivators are expected to increase reporting of “bad agents.”  However, they do not completely resolve the problems faced by brokers.  First, if a broker reports a “bad agent” to the DRE, that broker has to assume he or she will be investigated.  It’s like asking for the IRS to find something wrong with your taxes or asking a highway patrolman to find something to ticket you for.  Brokers may try to comply with every law, but the DRE may still find something.   Who wants to open up that can of worms?

Additionally, if a “bad agent” violates the rules, what broker wants to risk being sued by buyers or sellers who later learn that their agent fudged their transaction.  Plaintiffs, please line up!  Furthermore, it is rare that a broker has to disassociate a “bad agent.,” It is more likely that a broker must decide what to do with a pretty good agent who makes a mistake.

Remember that the law requires two things to obligate a broker to report to the DRE: (1) disassociation of the “bad agent”, and (2) for violating a rule/law.   This means that if there is a violation, but no disassociation, the reporting requirement is not triggered.  Or, it means that if there was a disassociation for something other than violation of a DRE rule/law, again the reporting requirement is not triggered.  Some brokers may think this creates the perfect loophole.  Threaten the “bad agent” who violated a law with disassociation, or let them quit.  If they quit, the reporting requirement is not triggered.  While this may appear to some as a good solution to comply with the letter of the law, it may still lead to liability later.  If the stick provision (the two-year period for investigating) kicks in later, the fact that the broker did not disassociate the “bad agent” and report it to the DRE won’t look good.

What about the agent who is a great producer, but occasionally breaks a rule?  Can a broker help rehabilitate the agent instead of disassociating and reporting that agent?  A broker must know that he or she risks liability for continuing to associate an agent when it is known that agent violates laws.  The broker’s good judgment needs to be employed with care in this situation.

So what is a broker to do to prevent the problems associated with a “bad agent?”  The best solution is a thorough vetting process prior to associating an agent.  I have heard it said that the main questions asked an agent prior to association have to do with production.  A wise broker will be more thorough in the questions asked.  One brokerage counsel indicated they use a similar form to that of the DRE licensing application when vetting potential associates.  This strategy seems reasonable as one could argue that to hold a broker to a higher standard than what the state requires would be unreasonable.

The Benefit of the Doubt Program is not a perfect solution, but it would be difficult to say it isn’t better than the process currently employed.  Since it will be the law starting in January of 2011, brokers should examine their association policies and procedures, as well as their disciplinary policies and procedures, to prepare themselves for this upcoming change.

Please see attached.

September Courtside Newsletter

This month we provide a brief overview of whether a property owner facing foreclosure should consider giving the property back to the lender through a deed in lieu of foreclosure.  If the property owner is willing to let go of the property, the lender may be willing to accept a deed for the property from the owner instead of going through with a foreclosure sale.  This is known as a “deed in lieu of foreclosure.”  Property owners facing foreclosure should be aware that it may be possible for them to avoid some negative consequences of foreclosure if they are willing to give the property to the lender before the foreclosure sale.

A deed in lieu of foreclosure is a transfer of title in real property from the property owner/borrower to the lender in order to avoid foreclosure entirely or to stop the foreclosure process.  The deed in lieu of foreclosure consists of an agreement between the borrower and lender that is negotiated after the possibility of a foreclosure arises.  Such an agreement cannot be part of the original loan documents.  That is, the lender cannot agree in advance that it will accept a deed in lieu of foreclosure.  Thus, borrowers cannot create a contractual obligation at the time they borrow money that would allow them to force a lender to accept the property instead of going through the foreclosure process.

Lenders cannot force borrowers to surrender a deed in lieu of foreclosure, as this would infringe on a borrower’s rights.  An agreement to accept a deed in lieu of foreclosure must be negotiated between the borrower and the lender.  The HAFA program provides for a deed in lieu process if a loan modification fails.  However, a borrower faced with losing property through foreclosure cannot simply execute and record a deed granting the property to the lender.  If a borrower attempts to do this, the lender will record a “Notice of Nonacceptance,” which provides legal notice that it has not accepted the deed in lieu of foreclosure.

A senior lienholder may not want to accept a deed in lieu of foreclosure.  If the property owner has other liens against the property, such as a second mortgage or judgment liens, a senior lender who accepts a deed in lieu of foreclosure accepts the property subject to those other liens.  A foreclosure, on the other hand, will wipe out any junior liens (a junior lien is one that is recorded after the lien foreclosed upon).  It may be more economically advantageous, therefore, for the lender to go through the foreclosure process.  Other reasons that a lender may not wish to accept a deed in lieu of foreclosure include the risk that the borrower may seek to set the deed aside and the risk that a borrower’s creditors may claim that the deed constitutes a fraudulent conveyance.  Lenders generally do not face these risks if they proceed with the foreclosure.

Even if the lender is willing to accept a deed in lieu of foreclosure, it may not be in the borrower’s best interest to execute the deed.  If the property is worth more than the amount owed to the lender, a deed in lieu of foreclosure results in the borrower waiving any right to the excess proceeds from the sale of the property.  It is rare in this economic climate that a property is worth more than what is owed on it, but there is another situation where a borrower may benefit from a foreclosure.  If a borrower has more than one loan against the property, for example, a foreclosure sale may result in a junior lien holder receiving part of the money owed. In some situations, payment through foreclosure of part of the money owed to a junior lien holder may prevent that lien holder from seeking a deficiency judgment.

To illustrate, assume that a borrower owes $150,000.00 on a first mortgage and $50,000.00 on a second mortgage.  Assume also that the property that secures these mortgages is worth $175,000.00.  If the property sells for $175,000.00 at the foreclosure sale, the second mortgage holder will receive $25,000.00 (for purposes of this illustration, assume that foreclosure costs are negligible).  The fact that the second mortgage holder receives some payment through the foreclosure will prevent it from obtaining a deficiency judgment.  Of course, if the second mortgage is a purchase-money mortgage no deficiency judgment is available anyway.  (See the September 2009 Courtside Newsletter for further discussion of purchase-money and non-purchase-money loans at www.glawgroupapc.com.)  Nonetheless, there may be circumstances under which the borrower benefits from a foreclosure sale.

A deed in lieu of foreclosure, however, may create a significant benefit to a borrower.  If the lender agrees to accept a deed in lieu of foreclosure, a borrower can minimize the injury to his or her credit.  Further, a lender may agree to cancel the debt and forego any claims to recover a deficiency in exchange for a deed in lieu of foreclosure.  The lender benefits by avoiding the costs of foreclosure, including costs associated with a delay in recovering the property.  Under the right circumstances, a deed in lieu of foreclosure can be a win-win situation for both the borrower and the lender.

As discussed above, a number of factors must be considered in determining whether to execute a deed in lieu of foreclosure.  As with all legal issues, it is important to consult a qualified legal professional in order to understand all of the risks and benefits associated with such action.

The author of this month’s newsletter is J Niswonger, an attorney with The GIARDINELLI LAW GROUP, apc.  Mr. Niswonger may be reached at jniswonger@glawgroupapc.com or 951/ 245-9163.