2011, however, was not without its challenges. For the first time, we began to see an increase in cases where there was literally no viable solution. The banks and companies servicing mortgages have made loan modification an almost unattainable goal for most homeowner who need exactly that relief. Very little new progress was made on the Principal Reduction Plan front – a program which the National Association of Consumer Bankruptcy Attorneys has been working to develop in Washington. And, most importantly, it seems that the vast majority of attorneys holding themselves out as Mortgage Litigators have become the new Loan Modification boiler-room rip off. We met with many people stuck with homes that the bank will not foreclose, leaving the homeowner who wants to abandon the property to continue paying HOA dues and insurance while the banks sit back and allow their collateral to waste-away. Sadly, we met with many people who simply had no means of saving their home – through any means – and were simply forced to walk away from their piece of the American Dream.

Here is to hoping that 2012 will see some positive movement towards a real solution to the real estate crisis – perhaps an election can shake lose a truly viable solution. We at The Gibbs Law Firm, APC wish you and yours the very best for 2012. If we can assist in any way with your real estate, debt, corporate or general business legal needs, please do not hesitate to call us at (949) 492-3350.

During the Christmas holidays, we will close the office on Friday, December 23, 2011 at 12:00 PM and will reopen the office on Monday, January 2, 2012 at 9:00 AM.

The controversy with large-bank foreclosure processing has to do with several aspects of foreclosure law. Consumers have complained about the inability of big banks to prove who actually owns their loan. When loans are bundled and sold on the secondary market, often the chain of ownership is less-than perfect. In many cases an entity called MERS was the recipient of these securitized loans, then MERS assigned beneficial interests. The question has been who actually has the right to foreclose, according to the banks ability to prove who actually owns the loan.

A second, and for purposes of the banks’ internal investigations more relevant question has arisen in states where judicial foreclosures are required. Recently, attorneys for consumers have won victories by proving that bank representatives who sign an “affidavits” swearing under penalty of perjury that the bank complied with all applicable laws and that the information contained in the foreclosure lawsuit is accurate had no personal knowledge of the underlying facts and performed no independent verification of the information they were testifying to in Court under oath. In some instances, bank representatives signed hundreds of these affidavits a day. Clearly, there is no way a single individual could verify, or have personal knowledge of this much information on a given day.

In California, banks proceed to foreclosure without filing a lawsuit, or having to file the “Affidavit” described in the news in recent days. That being said, however, the banks do have an obligation to ensure that the information upon which the foreclosure is initiated is accurate. Second, the banks do have to file with the County Recorder a Declaration of Compliance with California Civil Code Section 2923.5. These declarations appear to have been signed in the same manner as the fraudulent affidavits, and accordingly, we may soon see many more banks halt their foreclosure activities in even non-judicial foreclosure states. Stay tuned – this may prove to be a very big, however temporary, road block to foreclosure.

David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firm’s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate broker’s license. The firm continues to offer a wide range of real estate and business related services as it has done for 34 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.

1. The California Senate and Assembly have passed S.B. 1178, and it is now awaiting signature by the Governor. S.B. 1178 helps to clarify and extends protection from deficiency after a foreclosure. Presently, the holder of any mortgage that was in-fact used to pay the purchase price of the real estate which serves as collateral for the mortgage, is prohibited from seeking a deficiency judgment post-foreclosure. This is true whether the loan is a first, second or third mortgage. The key to existing law, however, is that it ONLY applies to the original, “purchase money” loan. S.B. 1178 extends that protection to a loan which is a refinance of an original, purchase money loan, to the extent it refinanced actual monies used for the purchase. Any increase in the loan on refinance would not be covered. If you wish to urge our Governor to sign this bill, please follow this link: http://takeaction.realtoractioncenter.com/campaign/sb1178.
2. The Wall Street Reform and Consumer Protection Act recently signed by President Obama will have direct impacts on the residential and commercial mortgage industry, including the elimination of many of the incentives that drove borrowers into certain types of loans which many now point to as a leading cause of the economic collapse we experienced beginning in 2007. Further, nonconvential loans will continue to exists, but steps have been taken to minimize the impact on tradtional lending markets — including provisions that require the lender to ensure that borrowers have the actual ability to repay the loan they are taking; and a requirement that lenders who package nonconventional loans into securities must now retain 5% of the credit risk. Further, RESPA – the Real Estate Settlement Procedures Act will be overseen by the newly to-be-created Consumer Financial Protection Bureau, rather than HUD who is significantly over-burdened, and unable to properly oversee these important laws. Finally, tough Fannie and Freddie were not addressed in this new Act, target dates have been set by which the long-overdue overhaul process of Fannie and Freddie must begin. Next year (2011) will prove to be a pivotal year in real estate finance.
3. Fannie Mae is now going to penalize those borrowers who make the decision to “strategically default” on a Fannie Mae-backed mortgage. A borrower who is deemed to have engaged in a strategic default will not be eligible for another Fannie Mae-backed loan for a period of seven years. A strategic default is still being defined by Fannie, but it essentially is a borrower who has the ability to repay their mortgage, but chose not to due to either because the property has negative-equity, or for other reasons. Troubling, however, is a provision which would label a homeowner a “strategic defaulter” if they chose not to complete a workout alternative (loan modification, refinance, short-sale, deed-in-lieu of foreclosure, etc…) in good faith. This may ultimately affect a lot of homeowners and investors.
4. There is a lot of “chatter” about the looming Shadow Inventory. The National Association of Realtors (“NAR”) has estimated that approximately 2.4 million properties are part of the shadow inventory of homes that are at or near forclosure, but are being held back for whatever reason by the banks and mortgage servicers. NAR’s number, however, does not include homeowners who are attempting to modify their loans, or if a defaulted property is on the market as a short or foreclosure sale. Some estimates place these numbers at closer to 7 million when including the categories NAR eliminated. NAR’s estimate, in my opinion, is low, as we all know how dismal the performance has been thus far by banks and mortgage servicing companies in completing loan modifications. My own practice is seeing a significant wave of borrowers who have now given up on their modifications, and are just walking away from over-encumbered properties.

If you are interested in learning more about recent changes in Real Estate Law, or have need for legal assistance with a real estate transaction, please do not hesitate to contact our offices.

David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firm’s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate broker’s license. The firm continues to offer a wide range of real estate and business related services as it has done for 35 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.

What are the numbers? For a given household size, the median income prior to November 1, 2009 is as follows:

* Add $6,900 for each individual in excess of 4.

After November 1, 2009, the median income for a given household size is as follows:

* Add $6,900 for each individual in excess of 4.

The change in median income is broken down as follows:

Again, while this is not a significant change, it does not bode well for the future as median incomes tend to trail behind the economic recovery, so it can be anticipated that at least one more year of decrease in median income will happen even after we see a recovery. Especially hard-hit are households with one individual. A $1,042 decrease in median income represents 2% decrease over last year’s median income.

In effect, due to this quirk in the 2005 BAPCPA, in rough economic times, the law actually just made it harder for wage earners to qualify for chapter 7 bankruptcy relief. The good news is that with a thorough review of your financial circumstances, you may still qualify for relief under Chapter 7. This review, however, does require comprehensive financial data, and an attorney familiar an experienced with the deductions allowed under the BAPCPA.

Be sure that you select an attorney intimately familiar with the means testing, BAPCPA and other bankruptcy and non-bankruptcy laws as they can dramatically impact the outcome of your case.

David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firm’s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate broker’s license. The firm continues to offer a wide range of real estate and business related services as it has done for 34 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.

GLF Foreclosure and Bankruptcy

With all of the bad news these days, I thought should look at some of the more positive little-known tips and tricks if you are negotiating the difficult waters of foreclosure and/or bankruptcy.

Did You Know . . .

That virtually every lender in the United States must give you a HUD Counseling Notice within 45 days after a missed mortgage payment? [click here for a copy of the FDIC compliance handbook with applicable sections] Although the law does not contain any consequences for failing to give the notice, at least one court in Florida has stopped a foreclosure on this basis. To date, I am not aware of any California Courts preventing foreclosures as a result of this, however, this morning in Court I had an interesting conversation with another attorney. He was seeking an ex-parte Temporary Restraining Order stopping a foreclosure sale on a client’s home. The basis was alleged defects in the loan documentation, and the judge issued the TRO without any argument or discussion. Now, this was a very preliminary restraining order, it was unopposed by the foreclosing lender, and it may be lifted when the attorney returns for an Order to Show Cause why the Preliminary Injunction should be issued; but hey, its a start! In that particular instance, an Orange County Superior Court Judge was moved to stop a foreclosure sale (literally, scheduled for 9:00 am this morning — the attorney had to run downstairs to serve the TRO on the foreclosure Trustee!) based upon a technical defect in the loan. My personal opinion is that everyone has grown so tired of banks and mortgage lenders that the sympathies are shifting in favor of homeowners in trouble.

That both TARP (the Troubled Asset Relief Program — yes, the one that handed lenders literally hundreds of billions of dollars) and HAMP (the making Home Affordable Mortgage Program “President Obama” plan to stem the tide of foreclosures) require that a lender who received TARP money, must stop a foreclosure while the borrower has a loan modification application “under consideration.” Some lenders have worked around this by not considering your application as being “under consideration” until it is assigned to a negotiator, but recent pressure from the Executive Branch may push lenders to stop more foreclosures while alternatives are explored. For a great article on this, check here at the Mortgage Law Network’s site.

That although the much-hailed “California Foreclosure Prevention Act” was supposed to add 90 days to a foreclosure to allow homeowners more time to explore solutions with their lenders; it became almost immediately ineffective as a result of the Departments of Real Estate, Financial Institutions and Corporations giving the servicers who do 90%+ of all foreclosures an exemption from the law. I have previously written about this lovely bit of legislation here. That being said, most small or private lenders do not have this exemption, and must still add 90 days to their foreclosure.

That in certain circumstances, a wholly-unsecured second mortgage on your home may be stripped from the home in a Chapter 13 bankruptcy; and that under certain circumstances in a bankruptcy, the debtor can buy his or her car out from under a loan that exceeds the value of the car.

That if you are owed money, and your borrower files bankruptcy, you do not have to give up any hope of collecting. In many cases, debts can be exempted from a discharge, and/or the debtor’s discharge of his debts can be challenged if the case is defective, deficient or abusive.

That a tenant in a home that has been foreclosed, must now be given 90 days notice by the bank to leave — a new Federal law changed this and many lenders have yet to change their practices to comply. SB 896 — an extremely long and complex piece of legislation included the ”Protecting Tenants at Foreclosure Act” which provides for 90 days notice to tenants after a foreclosure before they may be evicted. As I have previously written, most attorneys for lenders in California appears to be ignoring this new law entirely — I have seen now more than ten examples of lenders giving 60 days notice under California Code of Civil Procedure 1161a, instead of the 90 day notice now required.

There there exist any number of myths surrounding loan modifications. A great article written by Stephanie Devery, a New York Real Estate Attorney covers these. The myths are: (1) that you have to be late on your mortgage to obtain relief; (2) that you need to hire a loan modification attorney or company; (3) that the loan modification process is quick; (4) that everyone will qualify for a loan modification; and (5) that you have no options if you don’t qualify under the HAMP or MHA (Making Homes Affordable) modification programs. Check out Ms. Devery’s article here for the answers to these five myths.

The point is this — debt, mortgages and bankruptcy have become increasingly complex with the myriad of knee-jerk legislation attempting to reign in our economy. Whether you are an individual in financial trouble, or someone who is owed money, you should feel free to call our offices for advice as to how to proceed. In this complex and rapidly changing environment, you don’t want your rights adversely affected by failure to obtain experienced, knowledgeable counsel.

David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firm’s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate broker’s license. The firm continues to offer a wide range of real estate and business related services as it has done for 34 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.

GLF Housing Recovery 3 Percent

An article written by Orlando Realtor^® Judy Chapman on her “Orlando For Sale” blog caught my eye the other day. The article, which had a follow-on, described in the context of realistic appreciation expectations, how long a homeowner may expect it to take for their home’s value to return to the height of the market values. In the case of Orlando property, she projects that it could take more than 10 years for values to return to their high point from 2007. So, being curious, I performed the same little analysis on Orange County, California home values. Using data from DataQuick, and assuming a three percent annual increase (Mrs. Chapman used 5.5% annual appreciation), it will be April of 2023 before Orange County home values return to their high point which was April 2006 ($694,833). Assuming at five and one-half percent annual increase, as Mrs. Chapman did, we can expect home values to return to their April 2006 high in December of 2016. These assumptions, quite obviously, assume straight-line appreciation, which almost never occurs. But, it does put things into perspective. With 125,000 new foreclosures started in the first quarter of this year in California, the current inventory of homes available for sale having climbed steadily over the past many months, it becomes clearer that the recovery is going to take a while, at least as it relates to residential real estate. It also becomes clearer that holding on to that home that is over-encumbered, in light of other financial pressures, may not be the logical decision it once seemed to be.

GLF Housing Recovery 5-5	GLF Housing Recovery 3 Percent
The Recovery at 5.5% Annual Appreciation	The Recovery at 3% Annual Appreciation

The point of Mrs. Chapman’s article, which I found interesting, is that for many who bought at or near the height of the market, those homeowners are now in essence “trapped.” By trapped, Mrs. Chapman indicates that if you must refinance, sell (for a variety of reasons, including work-related move, retirement, downsizing, divorce, marriage), or otherwise do anything but stay in your home and pay your mortgage, you are “trapped.”

This rang an bell for me, especially as it relates to our bankruptcy practice. I have a huge number of clients who insist that they retain their home while going through bankruptcy. Presently, without action from Congress (who leave for their August recess here in a few days), or short of paying down your mortgage, there is no effective means of reducing the debt one has on their house. The exception to that statement is in a Chapter 13, where the second mortgage is wholly unsecured the Chapter 13 plan can strip the second mortgage and treat it as an unsecured debt. Absent that scenario, a bankruptcy debtor’s options are limited to retaining debt on a home that is severely over-encumbered, or walking away with a truly fresh start. People’s emotional attachment to their homes often chains them to a pile of wood, concrete, stucco and drywall that in reality has become the worst financial decision they have ever made. In bankruptcy, these debtors are given the chance to walk way truly free, however, many make poor decisions and end up keeping the very home that dragged them down in the first place. I urge every client with a home and a mortgage to review very carefully their post-petition budget — can they really afford to continue paying for a house that is, essentially, worthless to them. Although it is counter-intuitive, I am forced daily to remind people that an emotional attachment to your home can be a very bad thing — one must always temper that emotion with common sense, and truly determine what is best for them in the long run.

David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firm’s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate broker’s license. The firm continues to offer a wide range of real estate and business related services as it has done for 34 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.

GLF Foreclosure Questions

Of the inquiries we receive, I believe one of the more common questions starts something like this:

“I am a tenant renting a home, and today I received a notice from the bank that they are going to foreclose on the house. What is going to happen?”

The answer is a mixed bag of good and bad. At this point, a little background is important.

What Happens to My Lease?

In California, a lease of any kind is considered an “estate” or interest in real property. Even a month-to-month lease is a leasehold interest in the property the tenant is renting. The tenant’s leasehold interest, however, is subject to all of the other interests in that property that proceed the lease. For most property in California, the single largest interest that precedes the lease is going to be the property owner’s mortgage. Technically, it is a “Deed of Trust” that secures the loan the property owner used to purchase or refinance the property. As such, when the homeowner fails to pay the mortgage, and the bank elects to foreclose the home, that foreclosure wipes-out or terminates all other interests in the property. Most importantly, a foreclosure terminates the tenant’s lease.

Upon the conclusion of the foreclosure sale, (for this discussion, we’ll assume that the bank has purchased the property at sale), the bank now owns the home free and clear of the tenant’s lease. However, the tenant is still in possession of the property. Under California law, the bank may now give the tenant sixty days notice to “quit” or leave the property if they do not want the tenant to remain in possession. Cal. Code of Civil Procedure §1161a. Alternatively, if the bank desires to do so, they can begin accepting rent from the tenant, and the tenant now has what is referred to as a “tenancy-at-will” which can also be terminated on sixty days notice. My experience thus far with persons who find themselves tenants in a bank-owned property is that the bank generally will not accept rent, but will immediately serve the tenant with a sixty day notice to quit the property. A tenant should understand that in no event after a foreclosure (absent a new lease with the bank) will they ever have a guarantee of more than sixty day’s notice that they must move. For many, this is a very stressful and tenuous time.

A new wrinkle was added to this recently with the enactment of legislation at the Federal level. The president signed into law on May 20, 2009 Senate Bill 896, a portion of which is entitled the “Protecting Tenants at Foreclosure Act of 2009.” This bill provides, in part, that termination of a tenancy upon foreclosure now requires 90 days notice. There has not yet been a test of this new law, and it contains many exceptions, including situations where State law may provide more protection for the tenant (not the case in California); where the lease is not a bona-fide, arms-length transaction. I have seen thus far at least one law firm in California representing Freddie Mac who has provided a homeowner with a sixty day, not ninety day notice post-foreclosure in spite of this new law.

Post-Foreclosure.

The good news, if there is any in all of this, is that some banks are now treating the innocent tenants with a bit more dignity and respect than in the early days of this foreclosure crisis. It is not uncommon now for a bank, shortly after serving a sixty day notice, to offer the tenant one of two additional options beyond just moving away in sixty days. The first option is often referred to as “cash for keys,” or in the bank’s vernacular, “relocation assistance.” In this scenario, the bank will give the sixty day notice to leave, but then offer the tenant money if they will leave earlier than the sixty days and leave the property in good condition. From the bank’s perspective, they are simply buying some time (getting the property back sooner), avoiding possible legal fees to evict the tenant after the notice is up and (hopefully) ensuring that the property is left in reasonably good condition and no fixtures are stolen by an angry tenant. From a tenant’s perspective, this can be a potential windfall, as some offers I have reviewed offered as much as $5,000 for a tenant to leave within thirty days of being served with the sixty day notice. Its important to note that (1) the banks are under NO legal obligation to make this offer, and (2) there is no way to predict or know if or how much of an offer will be made.

The second possible option, short of simply having to move after sixty days, is that the bank may offer to enter into a new month-to-month lease with the tenant. This offer is subject to negotiation of appropriate lease terms, and offers the tenant only limited protection from future eviction, as the bank now will have the right to terminate the tenancy again on sixty days notice. Further, these lease agreements will generally require that the property be inspected prior to entering into a lease, that there are no code violations or other problems with the property, that the tenant can prove that they are financially capable of making the rent payments to the bank, that the tenant keep the home in clean and presentable condition, and that the tenant agrees to make the home available for open houses, appraisals, inspections, showings and cooperate otherwise with the listing broker. The window for accepting either of these offers is generally pretty short — in many cases only 10 days, so it is important to respond quickly when a tenant receives these notices.

Now, the next question that comes up is what about the landlord — does he get off scott-free? The answer is “sort of.”

“Rent Skimming.”

Tenants often question the landlord and what s/he has done that that led to the property being foreclosed. “I paid my rent, but the landlord just pocketed the cash, and didn’t pay the mortgage.” Civil Code § 890 addresses something known as “rent skimming” in California. The act of rent skimming is technically defined as a property owner who, in the first year of ownership of the property, collects rent but does not pay that amount towards the mortgage(s) on the property. Additionally, rent skimming includes a person who collects rent from a property that they do not own. This later scam was really popular in the last foreclosure crisis in the early ‘90s. Civil Code § 891 goes on to provide that the holder of the mortgage and a tenant may bring an action for damages for acts of rent skimming, as defined in § 890. Civil Code § 892 provides that multiple acts of rent skimming can be prosecuted as a crime.

The difficulty with the rent-skimming statute presently on the books is that it only addresses rents collected during the first year of ownership. If the landlord has owned the property more than one year, and then stops paying the mortgage, but collects rent, then s/he is not liable for rent skimming, and shall have no civil liability to the tenant. Further, if the landlord was paying all rent collected to the mortgage company, but it simply was not enough to service the debt, then s/he is also not liable for rent skimming.

Security Deposits and Rent.

While the landlord may get off without any liability for skimming rent, but not within the narrow definition of the statute, s/he is not so lucky when it comes to the security deposit and pro-rated rent after the foreclosure sale. As discussed above, the landlord will no longer own the property upon the foreclosure sale conclusion. Assuming the bank did not conduct its foreclosure sale on the last day of the month, then the tenant is entitled to reimbursement of pro-rated rent for the days that the landlord no longer owned the property. By way of example, if the tenant paid rent to the landlord for the month of July, but the property was foreclosed by the bank on July 15th, then the landlord must refund the tenant 1/2 of that month’s rent. The reason the rent must be refunded is simple — the landlord did not own the property the entire month, and therefore is not legally entitled to collect rent for the entire month. That would then become actionable rent skimming under the portion of Civil Code § 890 that deals with collecting rent for a property the landlord does not own.

In addition to the refund of any rent collected but not earned, the landlord is still holding the tenant’s security deposit and as such, must return the security deposit within 21 days of the foreclosure sale, or pay it over to the new owner — the bank. As the landlord will almost never turn the security deposit over to the bank, they themselves are still responsible under the provisions of Cal. Civil Code § 1950.5. As described above, the landlord upon transfer of title (be it by sale or involuntary means such as foreclosure), the landlord must either turn the security deposit over to the new owner, or must refund it to the tenant. There is a provision in this part of the code that seems to indicate that the landlord can lawfully make deductions from the security deposit for damages allowed under § 1950.5, however, I believe that there is a very strong argument to be made that in the case of a foreclosure, the landlord is not entitled to take any deductions, with the possible exception of unpaid rent and unreturned personal property, from the security deposit.

Civil Code § 1950.5 is an effort to balance the need of the landlord to have some security for the repayment of costs associated with repairing damage caused by a tenant and unpaid rent, with the tenant’s right not to be charged additional “hidden” fees and costs, such as non-refundable deposits. Toward that end, the legislature limited the landlord in what they may lawfully deduct from a security deposit. Sections 1950.5(b)(1-4) provide that the landlord may only claim from the security deposit those amounts reasonably necessary to reimburse the landlord for a tenant’s default of rent, damages to the property that exceed normal wear & tear, cleaning of the property to restore it to the condition in which it was rented to the tenant and for future defaults by the tenant in any obligation to replace, restore or return personal property provided for under the lease. In subsection (h) of 1950.5, the code allows the landlord to deduct from the security deposit the foregoing amounts at the time of a transfer of the property to another owner. Presumably, this is to compensate the landlord for the reduced price s/he may have received in the sale of the property due to damages or unpaid rent. In the case of a foreclosure, however, there is no such off-setting credit, and I believe a very strong argument can be made that no such deduction is appropriate by the landlord, with the exception of the first and last provisions — unpaid rent through the foreclosure date, and/or return of personal property. Compensation to the landlord losing the property in foreclosure for damages to the property and/or cleaning simply don’t make any sense, and though I could find no reported cases on point, I believe most Courts would rule in favor of a tenant seeking full and complete refund of their security deposit from a landlord.

Finally, if the tenant had a term lease — something other than a month-to-month lease, and that lease is cut short by virtue of the bank’s foreclosure, then the tenant would likely have a claim against the landlord for breach of the lease, and further, for breach of the covenant of quiet enjoyment. Damages for such claims would have to be analyzed on a case-by-case basis. Further, tenants have to analyze the cost versus the benefit of pursuing an individual who may well be insolvent as a result of whatever economic force caused them to default on their mortgage to begin with.

David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firm’s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate broker’s license. The firm continues to offer a wide range of real estate and business related services as it has done for 34 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.

GLF Foreclosure Timeline 3-6-2009

As a part of the recently passed Budget Package for the State of California, the State Legislature and Governor Schwarzenegger have passed into law an amendment to California Civil Code § 2924 called the “California Foreclosure Prevention Act.” This latest effort to slow the pace of residential foreclosures has been somewhat mis-reported in the news as a 90 day moratorium on foreclosures. This law does not stop foreclosures in the State of California for 90 days. Instead, what the bill, passed on February 20, 2009 and becomes effective on Friday, March 6, 2009, does is add a 90 day “holding” period to the standard timeline for foreclosure of certain mortgages. The bill is only valid until January 1, 2011 unless it is later extended by the State Legislature.

The bill provides that a lender must wait an additional 90 days after the Notice of Default is recorded before they can record and publish a Notice of Trustee’s Sale. This relief is limited to loans that meet the following criteria:

1. The Loan must be a first-priority mortgage or first deed-of-trust; and
2. The Loan must be secured by the borrower’s primary residence; and
3. The Loan must have been recorded between January 1, 2003 and January 1, 2008; and
4. The borrower must have occupied the property as their primary residence at the time they became delinquent on the loan; and
5. A Notice of Default has been recorded against the property; and
6. The Loan cannot be one made, held or serviced by a California State or local housing agency or authority, or cannot be collateral for securities held by one of the foregoing agencies.

The requirement for an additional 90 days does not apply to a mortgage loan servicer who has applied for, and received an exemption from the provisions of this new law. To be eligible for an exemption, the lender must prove to the Commissioner that they have in place a comprehensive program for modification of loans for distressed homeowners. Some of the elements required to be shown include:

1. The loan modification program is intended to keep borrowers whose principal residences are homes located in California in those homes when the anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis.
2. The loan modification program targets a ratio of the borrower’s housing-related debt to the borrower’s gross income of 38 percent or less, on an aggregate basis in the program.
3. The loan modification program includes some combination of the following features:

• An interest rate reduction, as needed, for a fixed term of at least five years.
• An extension of the amortization period for the loan term, to no more than 40 years from the original date of the loan.
• Deferral of some portion of the principal amount of the unpaid principal balance until maturity of the loan.
• Reduction of principal.
• Compliance with a federally mandated loan modification program.
• Other factors that the commissioner determines are appropriate. In determining those factors, the commissioner may consider efforts implemented in other jurisdictions that have resulted in a reduction in foreclosures.
• When determining a loan modification solution for a borrower under the loan modification program, the servicer seeks to achieve long-term sustainability for the borrower.

In addition to the exemption available to lenders who prove to the Commissioner that they have a legitimate program for loan modifications in place, the additional 90 days does not apply in the following situations:

1. Where the borrower has surrendered the property to the lender or otherwise abandoned it; or
2. Where the borrower has contracted with a firm “whose primary business is advising people who have decided to leave their homes regarding how to extend the foreclosure process and avoid their contractual obligations to the mortgagee or beneficiaries;”* or
3. Where a proceeding has been filed in Bankruptcy Court, and either the proceeding is not dismissed, closed nor granted relief from stay for the foreclosing creditor.

It is interesting to note that in enacting this new anti-foreclosure law, the State has not removed the previously enacted provisions of California Civil Code § 2923.5 which requires a loan servicer to make an effort to contact the borrower to discuss their options prior to even recording a Notice of Default; that the lender must wait 30 days after making that contact, or satisfying the due diligence requirements for attempting to contact the borrower before proceeding with a foreclosure. We’ll discuss this separate legislation in a future article.

The difficulty with this latest effort to slow foreclosures is that every loan servicer will likely make application for an exemption, and the criteria for obtaining an exemption are not as clearly defined as they should be. Lenders will not likely have a hard time obtaining an exemption from the law. The good news is that the Secretary of Business, Transportation and Housing is required under the law to maintain a website that lists disclosure of what loan servicers have made application for an exemption, and what the disposition of that application was. It also must point the consumer to the loan servicer’s website discussing loan modification options and programs available. Also a positive step is a short sentence inserted into the bill which makes a violation of this new anti-foreclosure law a violation of the loan servicer’s license law, meaning the loan servicer could lose his or her license or be disciplined by their licensing agency for violating the law.

For purposes of this law, persons covered include those licensed by (1) the California Real Estate Commissioner as Real Estate Brokers (and therefore salespersons working under their license), (2) the California Commissioner of Corporations as licensed Residential Mortgage Lenders and Servicers and/or licensed Finance Lenders and Brokers, and (3) the Commissioner of Financial Institutions for Commercial and Industrial Banks, Savings Associations and Credit Unions who service mortgage loans.

GLF Foreclosure Timeline 3-6-2009

Click Above To See A Full-Sized Version of the Foreclosure Timeline.

For more information about foreclosure, foreclosure prevention, bankruptcy and other options, please feel free to call us at (949) 492-3350.

**UPDATE** – As anticipated, this piece of legislation turned out to be nothing more than a piece of swiss cheese. On June 15, 2009, the date on which the legislation actually became effective, magically almost 47 mortgage lenders, servicers and others involved in foreclosure received a temporary exemption from the law. Amazing, considering the fact that the State had posted on its website that the applications would not even be accepted until June 15, 2009. In some instances, not only did the firms receive a temporary exemption, many, such as Bank of America, Citimortgage, EMC Mortgage, Kondur Capital and Select Portfolio Servicing all received their exemptions WITHIN 24 HOURS OF ENACTMENT OF THE LAW. I am appalled at our legislators who, under the guise of protecting homeowners from foreclosure, wasted our time and taxpayer money to enact a law that is absolutely meaningless. Of the largest loan servicing companies in California (the ones who are foreclosing on 90%+ of homes in California), all are now 100% exempt from this new law. Here is a link to the current list of exempt lenders as of July 2, 2009 – be sure to check the Department of Corporations, Department of Real Estate and Department of Financial Institutions websites, all of which can be linked from the above website.

Someone in the State Legislature PLEASE tell me how it makes sense to add 90 days to the foreclosure process to allow people to negotiate a modification or some other relief from foreclosure, AND THEN EXEMPT FROM HAVING TO WAIT THAT ADDITIONAL 90 DAYS THE VERY BANKS THESE HOMEOWNERS ARE TO NEGOTIATE WITH? Way to go California – financially, and now MORALLY bankrupt.

David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firm’s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate broker’s license. The firm continues to offer a wide range of real estate and business related services as it has done for 34 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.

*This particular provision of the new law is very troublesome. Its clear that the intention is to not provide the benefit of the additional 90 days in foreclosure to people simply trying to drag-out a foreclosure, however, does someone who retains a bankruptcy attorney to file bankruptcy, which will delay the foreclosure, or someone who hires an attorney to process a loan modification trigger this exception to the rule? It will be interesting to see how this all settles out in the courts.

Where is the last, honest person?

Why the whales? After the day I’ve had, I need some serenity!

In the course of my practice, I have the opportunity to correspond with a lot of people. In our bankruptcy practice, most of those people are in dire financial situations. In what appears to be a rapidly growing trend, those in economic distress appear to be the target of more and more deceptive schemes and fraud than ever before. To this, one might respond “this isn’t new,” and of course you would be right. The news is rife with articles about people being ripped of. What I find scary these days, however, is that previously highly-regarded professionals are getting wrapped up in these schemes, and the scope of these schemes is growing exponentially every day.

Today marks a new record — I’ve spoken with or emailed more people in one day who were taken advantage of than ever before. By way of example, I spoke with prospective clients who paid a law firm — yes, a law firm, engaged in loan modifications, a large up-front fee. After months of no action, that law firm (The Rodis Law Group, later America’s Law Group) and the non-attorney parent company allegedly running the law firm had their assets frozen by the Federal Trade Commission and a Receiver installed by the US District Court to wind-up the firm’s operations. Those people who paid their money up front will almost certainly never receive their money back nor their files. In the case of my prospective client, that firm cost her $5,500 and six months time she could have used to legitimately be working on a loan modification. The scale of this fraud is unimaginable — it is alleged that in the first four months of 2009, that law firm collected $6.5 million dollars in fees from persons all over the United States. The law firm is only licensed in the State of California to practice law.

Another call involved an attorney who took an up front fee “in cash” to represent the client in a bankruptcy. Months later, when nothing had been done to move her closer to filing bankruptcy, she demanded her file and her money back, only to be given about 25% of her “cash” retainer back, and nothing substantive from her file. This prospective client is now extremely distrusting of any professional, and has again lost time and money she can dearly not afford.

Another email was from an individual who had hired a “debt relief” company out of Texas to negotiate her debt. First, let me say now that in my personal opinion, the entire “for profit” debt relief, debt consolidation, debt negotiation business is a huge scam. The person who contacted me was allegedly counseled by Debt-Relief USA to stop making payments to her creditors, and rather to make a monthly payment (presumably less than what was being paid to her creditors) each month to the company. After many months, the debt relief company would attempt to negotiate a reduced payoff with her creditors. The problem is, Debt-Relief USA filed Chapter 11 bankruptcy in June, and on June 24, 2009, the Bankruptcy Court converted the case to a Chapter 7 liquidation. The prospective client in question now not only is going to lose all or most of what was paid to the debt relief company; further, she probably does not have any deals negotiated with her lenders, and is extremely delinquent in her payments with no means of bringing the debt current. Their actions have forced this individual into bankruptcy.

I’m pretty exhausted and frankly disappointed in those who prey on people in dire straights. There are legitimate companies who can work with you to modify a loan, or attempt to negotiate an out-of-court debt settlement, but as a general rule, one should ask questions, ask to speak to referrals, search the internet for positive or negative reviews. In short, for any professional service you seek, please do your homework, and avoid those who actively seek to rip you off.

David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firm’s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate broker’s license. The firm continues to offer a wide range of real estate and business related services as it has done for 34 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.

*Image Courtesy of National Geographic — click photo to be taken to the original picture.