DEAR BENNY: We’re badly underwater in our house. Our business is hurting and we are struggling to make the house payment. We owe $340,000 on a house that would maybe sell in today’s market for $200,000. We think the only way it makes sense to stay in our house would be if our mortgage holder would take a significant principal write-down, which they won’t do.
Is it legal for us to let our house fall into foreclosure and have a friend of ours buy it for us at the foreclosure price? Then he sells it back to us using a private mortgage via Virgin Money or similar organization. We’d pay him a premium over the rate he is currently earning on his $200,000 so that he even makes a little money and we maybe "keep" our house. We realize that there is no guarantee our friend would be able to buy the house; someone else might beat him to it or the bank might set an unreasonable price, but we don’t see any other choice except walking away completely. –Cathy
DEAR CATHY: First, I am not familiar with Virgin Money and am not in any way endorsing or supporting them.
How is your credit rating? You indicate that you are having trouble making your mortgage payments, but my assumption is that you are still current. You should understand that even if your scheme is legal (which I will discuss shortly), once you let the property go to foreclosure, this will significantly impact on your credit standing — and it will take a long time before you can get it restored.
Have you explored the many federal and state programs that are now available to help homeowners who, like you, are having financial problems? For example, in mid-May of this year, President Obama signed into law the Helping Families Save Their Homes Act, which may be beneficial to you. My bottom line: Foreclosure should be the absolute last resort.
But if all other avenues fail, I see no legal reason why your friend cannot try to buy the house at the foreclosure sale. What he does with the house after taking title is his business. And as you suggest, that may not even happen, if the bank’s starting bid is too high, or if there is a higher bidder.
However, there is one issue that should be explored, namely whether the lender can go after you for the difference between what the house sells for at the sale and the amount of your outstanding mortgage. This is known as a "deficiency," and in many states, lenders can go to court and seek a "deficiency judgment."
To my knowledge, only 10 states (Alaska, Arizona, California, Hawaii, Minnesota, Montana, North Dakota, Oklahoma, Oregon and Washington) have enacted laws completely barring deficiency claims. If you are not in one of these states, the lender, especially if it learns that you once again own the house, may want to sue you for that deficiency. (Note: A full listing of all state foreclosure laws can be found in the "Foreclosing a Dream" report at the Web site of the National Consumer Law Center.)
DEAR BENNY: I am on the board of a large condo association with many absentee owners. Recently the board decided to fund an insurance payment out of reserves with the intention to pay it back later. In order to do this a majority vote of the owners was needed. The management company sent all the ballots/proxies out with a date to have them returned and with a set date for the meeting. I couldn’t attend the meeting, and was told that not enough votes/proxies had come in.
About 10 days later I received an e-mail from our property manager saying more proxies are in and we have over 50 percent yes. I was confused but was told that not enough board members showed up for the meeting so there was no quorum. At that time I thought that the motion to fund the insurance premium had failed.
I was told "not so" and that the proxies are good for 90 days and that we probably needed an emergency board meeting to pass the vote. An emergency board meeting was called, and the issue was approved.
Is this legal? I thought if you follow procedure and you do not have enough votes on the set date the vote fails.
I must add that our board president is also working for our management company. They hired her after she became board president. The whole issue of conflict of interest has put additional strain on our board relations. –Lothar …CONTINUED
DEAR LOTHAR: Once again, I can give you only a general answer, as your state law (or your legal documents) may be different.
This is a common problem, not only in associations where there are absentee owners, but even in communities where the majority are owner-occupants. People just don’t want to get involved, although they typically yell and scream when they believe things are going wrong.
You did not have a quorum at the meeting where the vote was to take place. Some state statutes provide that in such cases, the board can hold another meeting, as long as proper notice is provided to all owners, while some statutes require that a notice of the renewed meeting actually be published in a local newspaper.
Read your proxy form. Does it allow a period of grace?
In some cases where a quorum is present but there are not enough votes to enact a proposal, the board can adjourn the meeting, rather than end it. This way, the meeting remains open and will allow for proxies to be used beyond the meeting date. You should consult your association attorney for specific advice, and you should do this before you pay the insurance bill out of your reserves.
But I am more concerned that the president of your association works for your management company. In my opinion, this is a clear conflict of interest.
DEAR BENNY: I recently read your article regarding federal protection from due-on-sale clauses for those who’ve inherited homes with outstanding mortgages on them. Do you know if this protection also applies to inherited homes with home equity lines of credit? My mother passed away last month and I will inherit her home, which she held in a living trust. –Peter
DEAR PETER: First, let’s explain "due on sale." This is a concept that is incorporated into most mortgage loans. Oversimplified, if you sell or otherwise transfer your house, your lender has the right to call the entire loan due, even though it still may have many more years to go. Why? The concept started years ago when rates were low, although not as low as they currently are. Let’s say you have a 6 percent loan, but when you sell it, rates are hovering around 8 or 9 percent. Your lender does not want you to sell your home to a third party who will just take over that low-interest-rate loan.
But in 1982, Congress enacted a law called the St. Germain Federal Depositary Institutions Act. This law prohibits a lender from calling the loan due under certain circumstances, one of which is when you inherit a house.
I just reviewed the law, and it applies to all loans secured by a lien on residential real property containing fewer than five dwelling units. This also includes cooperative and condominium units, as well as residential manufactured homes.
So, since the home equity loan (called a "HELOC") is a loan secured on your residential property, it is my opinion that the lender cannot call that loan due just because you inherited your mother’s house. You should, however, advise all your lenders that you are (or will soon be) the new owner of the property. You should also make sure that your local real estate taxing authority lists you as the new owner.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.
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