An increase in short-sale attempts has resulted in an uptick in short-sale lawsuits, while the recent increase in loan-modification attempts could result in future litigation, according to a presentation at the San Diego Association of Realtors Expo earlier this month.
Additionally, the wave of bank-owned (REO) real estate sales in California has contributed to a rising volume of disclosure-related lawsuits.
For more than a year California has consistently ranked in the top four among states with the highest foreclosure rates.
During this time, homeowners looking for a possible alternative to foreclosure have often turned to short sales and more recently loan modifications as a solution.
Rise in short-sale lawsuits
Shannon Jones, owner of Shannon Jones Law Group in Danville, Calif., a keynote speaker at the expo, said, "We’re seeing an increase in short-sale (litigation) … this is probably the biggest area of the lawsuits I have (on my desk) right now."
The lawsuits in some cases stem from agents attempting to give legal advice, she said. "Be careful giving advice, because it really is legal advice."
She added, "We’re also running into problems of agents telling sellers to go ahead with a short sale. Then, after closing, the lender sends a big bill for deficiencies."
Jones recommended that agents document all client communications in writing, and advise clients to seek advice from a lawyer prior to making a decision on whether to pursue a short sale as an alternative to foreclosure.
For California agents looking to practice "safe short sales," the use of the California Association of Realtors’ short-sale addendum form is recommended. The addendum includes buyer termination agreements and outlines how to handle multiple short-sale offers.
Besides short-sale-related litigation, Jones said her office has also seen an increase in deposit-dispute-related cases.
"In the last six months I’ve seen an enormous increase … these are not REOs, these are buyers and sellers fighting for deposits," Jones said, recommending that an agent whose client is fighting for a deposit step out of the transaction and refer the client to a lawyer.
Disclose, disclose, disclose
While there has been a rise in short-sale and deposit-dispute-related litigation, the majority of lawsuits Jones’ office receives deal with disclosure issues, she said.
"Eighty-five percent of lawsuits we see arise out of nondisclosure … it’s still the number one reason why agents get sued," she said.
She cited the example of a nondisclosure case in which an agent does not disclose to a buyer that the home the buyer is purchasing is located near a future freeway bypass.
Other nondisclosure cases can result from issues surrounding water shortages and water restrictions; neighbors; and recent deaths on the property, she said.
Jones said agents who brand themselves as "local community experts" should take caution, as someone who has local knowledge could be held to a higher legal standard in disclosure-related cases. …CONTINUED
Looking ahead, a relatively large amount of disclosure-related lawsuits are likely to stem from REO sales, she said.
"By the end of the year my office will be flooded (with REO disclosure-related cases)," Jones said, explaining that lenders typically don’t provide a buyer with enough property-related information and buyers typically don’t request inspections.
Agents can protect themselves by sending an e-mail or document to their client stating that the lender didn’t provide them with the required property information.
Give the client the option to cancel or continue the transaction, and make sure the decision is documented, Jones said.
The surge in load-modification attempts, as an alternative to foreclosure, is likely to result in future lawsuits, she said.
Attorney Robert Muir presented statistics showing the amount of complaints to the California Department of Real Estate (DRE) regarding loan-modification companies had risen from just a few six months ago to nearly 240 in February.
The California State Bar Association reported receiving more than 1,800 calls regarding loan modifications from January to February.
Muir gave some brief advice to those considering involvement in the loan-modification services market: "Get independent legal advice before becoming involved in any questionable program or attorney-affiliated arrangement. Proceed cautiously and ethically."
Loan mods a risky business
Eric Ginder, an associate with the firm White & Bright, agreed with Muir that performing loan-modification services can be risky.
"A lot of people just don’t know what the law is and they see it (loan modification services) as a very lucrative area right now," Ginder said, citing the state Mortgage Foreclosure Consultants Act (MFCA) as a common law those involved in loan modifications run afowl of.
The MFCA applies when a "foreclosure consultant," basically anyone who has performed loan modification services, is dealing with the owner of residential real property in foreclosure. The property must be one to four units, owner-occupied, and have an outstanding notice of default recorded.
In order to comply with the MFCA and avoid the possibility of lawsuits, fines and other penalties, a foreclosure consultant must have a written contract with the owner that discloses the exact nature of the consultant’s services, and total amount and terms of compensation, Ginder said.
The contract must also contain language that states it would be a violation for a foreclosure consultant to claim or demand any compensation until after that consultant has fully performed every service they said they’d perform.
"If they (loan modification companies or foreclosure consultants) are taking money (upfront) from somebody who has a reported notice of default, they are violating the MFCA," Ginder said, cautioning those in attendance that the DRE preapproved form for loan modifications doesn’t apply when a notice of default has been filed.
Unfortunately for foreclosure consultants, the inability to receive upfront fees means they may not get paid, as a significant percentage of loan-modification attempts — 58 percent — fail after eight months.
In the contract with the homeowner it is also important to attach a notice of cancellation stating that the owner may cancel the transaction at any time prior to midnight of a specific day after the date of the transaction. …CONTINUED
Ginder said foreclosure consultants must register with the state and submit all related advertising.
Mortgage and real estate legislation
With the increase in short-sale and loan-modification activity in California, a significant volume of mortgage-related legislation has been proposed at the state level during the recent legislative year, and one real estate-related bill approved during 2008 will soon be effective.
Starting July 1, California real estate agents must disclose their Department of Real Estate license numbers on all solicitation materials intended to be the first point of contact with consumers, according to Gov Hutchinson, California Association of Realtors assistant general counsel and staff vice president.
Examples include business cards, stationery, advertising fliers, and other materials designed to solicit the creation of a professional relationship between a licensee and consumer.
"They’re (DRE) doing this because they’ve given up enforcing another law that says your name must appear exactly like it is on your license," Hutchinson said.
Excluded from the law are advertisements in print or electronic media, "for sale" signs, and classified rental ads reciting the address or phone number of the rental property.
There are 81 mortgage-related bills making their way through the California state Assembly and Senate, said Dave McDonald, president of the San Diego chapter of the California Association of Mortgage Bankers.
These bills include Senate Bill 94, SB 239 and Assembly Bill 260.
SB 94 would outlaw all upfront fee agreements regarding mortgage loans and loan-mod services. The Senate Judiciary Committee is scheduled to hear the bill April 21.
McDonald cited the fact that most loan-mod attempts fail within eight months as a reason for the removal of upfront fees.
SB 239 would make it a felony, with automatic 2-year to 4-year prison sentences, for borrowers and industry participants who commit loan fraud.
The no-wobble room of this bill is due to growing moral backlash regarding those committing loan fraud, he said. The Senate Public Safety Committee is scheduled to hear that bill April 21.
Lastly, AB 260 would prohibit brokers from soliciting their clients for refinances for a period of one year and prohibit Realtors from getting a listing for which they conducted a broker’s price opinion. The Assembly Judiciary Committee considered this legislation on April 14.
Erik Pisor is a freelance writer in California.
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