THE ONGOING REAL ESTATE DISASTER, PART I:

Eckley & Associates Video Article“YOUR LIABILITIES AND RIGHTS IN DEBT WORKOUTS -
The Banks are Not Telling You ‘Straight (And It’s Far Worse Than You Thought)!’”

REPRINTED FROM “COUNSELOR’S CORNER”,  Ed. 41


BY:  J. ROBERT ECKLEY
© ECKLEY & ASSOCIATES, P.C., 2010
SEPTEMBER 1, 2010

CURRENT WORK-OUT PROGRAMS:

The U.S. is swamped with defaults on real estate mortgages. It is a tragedy that has often been in the front pages of the news. As a result, the government and many lenders have designed their own approved workout options. Most of these programs do not apply to loans in excess of $729,000, but this does not mean the lender or investor will not “deal” on amounts beyond that—only that the federal programs do not for the most part apply after that amount. If you are seeking to do a debt work out or modification, there are several kinds: (1) a “modification” in which the loan is changed in terms (principal, interest, payments) to try to be more affordable to the borrower. Rarely will permanent principal reductions be granted, but some new programs will permit it under certain conditions. Under “modification” the borrower keeps the property and remains liable on the modified debt; then (2) the “short sale” which is a process in which the property is offered for sale to another (the borrower will not remain in the property) for less than what is owed on the debts against it and any resulting offer must be approved by the lender. These can be long and somewhat frustrating (and the lender has no duty to approve any offer), but this process is getting better defined; then (3) the “deed in lieu of foreclosure” in which the borrower simply deeds the property to the lender and move out. In many cases, the lender will ask that the borrower try each of these attempts to mitigate the debt in the order just given. In any of these options, there will be tax and credit ramifications not covered here.

THE DEBT INSTRUMENTS:

In this Edition of the Report, the most common Bank debt instrument is explained and then, for the first time in print, the Bank’s “dirty little secrets” in enforcing these—three (of many) astoundingly unlawful acts against the consumer--are revealed. Future editions will tell more! Throughout this discussion, thought, remember that the only way to be certain of your legal position is to directly contact and consult a competent real estate and finance attorney! THE LAW IN THIS EDITION IS FOR PROPERTIES IN ARIZONA, ONLY. More information is available about other states will appear in later editions or may be seen by logging to eckleylaw.com and going to “FAQS.”.

THE REMEDIES GENERALLY, FOR DEFAULT:

Most Arizona home purchase loans are made to the borrower on Trust Deeds or Mortgages and in most of those, there is no deficiency in the event of a default. That is to say, THE ONLY REMEDY THE CREDITOR HAS IS TO TAKE THE PROPERTY BACK. THEY HAVE NO RIGHT TO COLLECT THE DEBT FROM THE BORROWER PERSONALLY! THIS IS AN IMPORTANT NOTE, SINCE MANY OF THE LENDERS ARE FRAUDULENTLY TELLING THE BORROWERS THAT THEY ARE PERSONALLY LIABLE FOR THE DEBT, “MUST” AS A MATTER OF LEGAL OBLIGATION PAY ALL OR SOME MONEY TOWARDS IT AND THAT EVEN AFTER LOSING THEIR PROPERTY THEY CAN BE PURSUED ON THE BALANCE OF THE DEBT. THAT’S A LIE. THEY CANNOT.

ANTI-DEFICIENCY STATUTES:

Arizona law has two "anti-deficiency" statutes that will often apply to loans secured by single residential real estate and will apply whether or not the home is occupied by the borrower or at all. Where these statutes apply, a lender's remedy will ONLY be a foreclosure, with NO RIGHT TO DEMAND OR SUE FOR MONEY OR INSIST ON A NEW LOAN COMMITMENT beyond the amount received from the foreclosure sale. These two "safe harbors" are as follows:

One applies to mortgages, which must be foreclosed judicially, or deeds of trust if foreclosed judicially (that means by the creditor suing the debtor in a court) which are “qualifying residential purchase money loans” (see below). It is A.R.S. ' 33-729(A). It limits the claim to the proceeds of a sale of the property; that is to say, the lender is limited in remedy to only what it gets from auctioning the property at a trustee’s or sheriff’s public sale and if the lender gets more than what is due the lender, the debtor gets the balance. If the lender gets less than what is due, the lender still has no other recourse against the debtor.

The other "anti-deficiency" statute applies again only to “qualifying residential purchase money” deeds of trust or mortgages when foreclosed via a trustee sale (sold at a private auction and not through a suit in the court). It is A.R.S. ' 33-814(G). Same rule: The creditor only gets the amount from the sale of the property and no more.

THE TEST FOR WHETHER THESE EXCEPTIONS APPLY TO YOU:

For either of the anti-deficiency statutes to apply, the mortgage or deed of trust must be a “qualifying residential purchase money loan” which means on that is secured by real property that: (1) consists of 2 1/2 acres or less; (2) and is restricted to and utilized for a single-family or dual-family dwelling; and, (3) the proceeds of the loan had to be used to pay all or part of the purchase price of the property (better that all of it was). If all three of the foregoing apply, there is no deficiency due in a modification, a short-sale, a foreclosure or otherwise and the Bank cannot ask for further compensation either through the courts, collection , or by making the borrower sign some kind of new obligation or by simply telling the borrower that the Bank “reserves the right” to pursue the borrower. The Bank has no such right, flatly and simply. And to threaten otherwise is a fraud, a false and extortionate threat and certainly a wrongful debt collection practice and possibly even a separate crime (see below)! Moreover, the people who help the Bank do this, from agents to title and escrow companies, have some exposure here, as they are supposed to know better. The following sets out the three main ways the Banks are currently attempting to pilfer money

BANK BIG LIE NO. 1: THE BANK ASSERTS THAT A REFINANCED PURCHASE MONEY RESIDENTIAL LOAN, A RESIDENTIAL HELOC OR A SECOND-POSITION RESIDENTIAL LOAN IS EXCLUDED FROM THE BAN AGAINST PERSONAL LIABILITY. THAT’S A LIE!!

If the current loan is not the original one that purchased the house, but a refinance of one that purchased the house, or is a second loan such as one called a “Home Equity Line of Credit,” but was, in fact, used to purchase the home or refinance the purchase of the home (those 80/20 and 70/30 loans that were essentially 100% purchase money loans), this is still a non-deficiency purchase money loan in the eyes of the law. See the above definition of a purchase money loan; see also Bank One v. Beauvais, 188 Ariz. 245, 937 P.2d 809 (App. 1997) and Mid-Kansas Federal Savings and Loan Ass'n v. Dynamic Development Corp., 167 Ariz. 122, 804 P.2d 1310 (1991). Loan funds used solely to reinvest in the home such as to upgrade it or put in a pool after the original purchase, are not purchase money debts and would likewise give the creditor in most cases the right to sue directly on the debt or foreclose and take a deficiency. In fact, most of these “split” 100% loans still violate the lender’s own underwriting standards, were designed in two parts instead of one to qualify the unqualified buyers with no down payment as though they had “equity” for the first loan to close the 80% or 70% loan and were thereafter, a fictional second later, then fictionally deemed to be “borrowing on the equity” of the remaining 20% or 30% for the second loan as though the 80% or 70% loan was “pre-existing”. A complete “bootstrapping” to violate underwriting standards and pump up CMO ratings and all invented by lenders and their brokers. In this way lenders also defeated the rules requiring the transaction to pay mortgage insurance to Fannie Mae, Freddy Mac, FHA and others and could book and sell the 80% and 70% loans as separate high equity-based loans into the secondary markets, fooling the Raters such as Standard & Poor’s and Moodys.. In all of this scheming, it appears that the lenders were equal and consistent in at least one trait: They know how to lie to and cheat virtually everyone in the financial chain.

BANK BIG LIE NO. 2: THE “TRIAL MODIFICATION” THAT NEVER BECOMES PERMANENT. THE LENDER KNEW THAT WAS GOING TO BE THE RESULT ALL ALONG AND JUST DIDN’T TELL UNTIL ITG WAS READY TO PUT THE BORROWER IN THE PIPELINE TO FORECLOSE! THEY LIED FROM THE BEGINNING HAVING ABOUT ANY INTENT TO WORK THE DEBT OUT. THE BORROWER WAS ON HIS WAY OUT OF THE PROPERTY FROM “DAY ONE”.

Some lenders, either through disorganization or planning, have twisted some of the workout rules and laws to give themselves an advantage at the cost of the consumer. Here is another lender scam:

LOAN MODIFICATIONS: Under the HAMP, 2MP, HAFA and some other programs, the lender grants a “trial period” loan modification in which monthly payments are significantly reduced with the inference given by the Bank that a permanent reduction will likely come about after the “trial period.” In fact, no long-term reduction is ultimately granted. On a national basis as of July 1, 2010, fewer than 10% of all trial loan modifications end up with a permanent reduction and those which were “reduced” still had a “re-delinquency rate” of better than 65%, meaning that the frustrated borrower finally “took for the time being what the Bank offered,” but in the end what was offered was still too much to fit what resources the borrower had. Thus, at the end of the trial period, the loan goes back to its original amount automatically and along with that the lender sends a bill for all of the payment shortfalls during the trial period, along with interest and penalties on the reduced payments, a huge total, and demands payment within 30 days. WARNING: If a consumer goes on one of these trial modification programs, the consumer is advised to save the money that would otherwise be payable plus interest and penalties, for the 90% national statistical likelihood that no affordable permanent program will be offered. In less than 2% of all loan modification applications nationally is a permanent principal reduction (reducing it to at least not exceed fair market value) granted, and therein is the ultimate doom of the work-out: A “modification” that still ends up with a loan that is beyond any present or any foreseeable home value, thus requiring the borrower to engage in the economic waste of throwing what is left of his already-impaired recourses into a financial black hole is not a “recovery” or even a prescription for one. If anything, it is an economic absurdity. As it routinely works out, this is all a well-vetted Bank scam to keep the borrower (whom the Bank has already determined is statistically unlikely to make it) into continuing to make at least some kind of payments on the debt, to continue residing in the home (protects it from vandalism) and to continue to pay the power and water on the false hope of rescue until the Bank can simply get around to the foreclosure it always knew was statistically inevitable. All the Bank did was have the borrower pay the Bank to watch over and maintain what it knew was soon to be its property!

BIG BANK LIE NO. 3: TRICKING OR EXTORTING THE BORROWER INTO PAYING ON AN OLD LOAN OR SIGNING A NEW ONE TO COVER A DEBT FOR WHICH NEITHER PAYMENT IS LAWFULLY PERSONALLY COLLECTABLE. THEY TELL YOU THAT’S THE LAW. THEY ARE LYING. IT ISN’T.

This lie is particularly odious and evident in more and more SHORT SALES. Under any of the short sale programs, the lenders will often direct that the consumer pay or “sign a new note” for any balance remaining after application of the short sale proceeds (usually on the second loan, but is also being tried on first-position loans, too). In the rare cases where the second loan is a true deficiency instrument (see true “HELOCS” above), this is a lawful practice at this time. BUT IT IS NOT A LAWFUL LENDER PRACTICE WHEN THE LOAN ON WHICH EXTRA MONEY OR A NEW NOTE is asked is itself a NON-DEFICIENCY LOAN! See the definitions of what is and what is not a deficiency loan, above. There is no consumer duty to pay all or part of a non-deficiency loan as a precondition to doing a short sale, nor is there a duty to sign another loan promising to pay some or all of it, nor can the lender lawfully make such an extortionate demand as a condition of otherwise approving a complying short sale ! The Arizona case of Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988) established that a lender cannot bypass the anti-deficiency statutes by waiving a foreclosure (pretending that the anti-deficiency statutes are a foreclosure remedy only) and instead suing the debtor directly on the promissory note (bypassing a true foreclosure). The Arizona Supreme Court stated clearly that it is not how a debt is enforced that triggers the anti-deficiency rules, it is rather the legislature's all-encompassing intent to solely limit any and all remedies for a default of a qualifying residential purchase money loan to a return of the property, no matter HOW it is enforced. If the loan itself is a non-deficiency type, then no other method of collection is permissible other than a forfeiture of the property, as all remedies are limited to that, only, and the creditor may not seek a direct collection of money from the borrower at any time and under any guise. Since the borrower is absolutely protected by the Supreme Court and law from personal liability for the debt, demands against the debtor to pay it or to sign new documents to "remain liable" for it or contrived penalties for not paying it (such as intimating that some kind and debt action will ensue or by aborting an otherwise Guideline-comporting short sale) are unlawful. Aside from being a fairly obvious violation of the federal Unlawful Debt Collection Practices Act, 15 USC 1692 (the lender, servicer or attorney for the creditor threatens a collection right or remedy - such as personal judgment--it does not legally have), it could very well be a felony for a lender to demand money for a non-deficiency loan or to insist or imply that it has the legal right to do so under ARS 13-2320 (barring Bank misrepresentation in consumer lending) as a precondition to approving a short sale. If the consumer finds himself in this position, he needs legal counsel, immediately, and SHOULD NOT SIGN THESE UNLAWFUL AGREEMENTS. MOREOVER, IF THE BORROWER HAS ALREADY SIGNED ONE AND ANY COLLECTION ON IT IS EVER INITIATED, THE BORROWER STILL HAS CLAIMS. THE BORROWER, NOW THE VICTIM OF A CRIME, MAY HAVE A VERY SUBSTANTIAL LAWSUIT AGAINST THE LENDER AND ITS COLLECTION COMPANY AND LAWYERS (AND OTHERS WHO AIDED AND ABETTED) FOR THIS PRACTICE-EVEN IF THE LENDER ENFORCING IT IS NOT THE ORIGINAL ONE MAKING THE LOAN, SINCE THE LIABILITY FOR CONSUMER LAW VIOLATIONS FOLLOWS THE TRANSFEREES OF CONSUMER LOANS.  (On that note, if you have been a victim of these practices, let us know, as we are trying to get an accurate tally for a potential class action, call 1-800-999-4LAW or e-mail us at wecurbbadbanks@eckleylaw.com ). Also, again as noted above, agents, title companies and escrows who put these deals together and close them without advising the borrowers of the civil or criminal rights and implications risk aider and abettor liabilities in this activity. Best warning to them: DON'T DO THESE DEALS!

There are a number of other ill-practices some lenders and servicers engage in. These are but a few. The general rule is to never sign legal documents without counsel.

   
THE “PUSSYCAT” BANKS HAVE TURNED RABID:

How do the Banks get away with these predations and, in some cases, financial crimes? It might be because no one knows, BUT LET’S BE MORE FRANK, HERE. IS MORE LIKELY BECAUSE NO ONE CARES OR TELLS! EVERYONE IS MAKING MONEY PICKING OVER THE BLEACHED BONES OF THE BORROWER! And before one laments the Banks’ positions in the financial shambles our economy has become, note that the Banks are currently declaring record profits. The fact is that they are not losing a dime in any of this and are actually making a pile. What they are not getting from you on the modification, short sale or deed back deals, they are getting in cash “in the dark and on the backside” directly or indirectly from the government! The only one getting “done in” in this Crash is………YOU!

FOR A SHOCKING AND ENTIRELY UNSETTLING BUT TRUE STORY ABOUT WHAT THE BANKS ARE UP TO (“GREED IS GOOD”), go to http://www.youtube.com/user/fiercefreeleancer .

Look out for our future Newsletters with more hard-hitting realities



ABOUT THE AUTHOR:

J. Robert Eckley is a multi-state real estate, agency and banking law attorney, successful litigator, popular writer, educator, economist, past Realtor and national speaker with an immense personal and professional involvement in forefront issues over the past three decades. He has established precedent at the Supreme Court and co-founded transactional laws, rules and forms that guide practitioners today. He has been a real estate licensee and a former Realtor for three decades, was named to numerous Commissioner's Advisory Committees and Governor’s Agency Advisory Committees, received a host of leadership and instructor awards, is a CCIM Affiliate, testified in Congress against the due-on-sale clauses in 1982, fought the clause in state and federal courts, fought against all and defended a half dozen state and nationally chartered banks and thrifts, and has received leadership awards and honors from U.S. President Reagan and former Arizona Governor Napolitano, to cover just a few of the miles he has gone.  Often as entertaining as he is practical and enlightening!  See more at eckleylaw.com