Commentary on Washington State law and how it Relates to real Estate

IMF pushing for US banks to reduce principal amounts on home loans

Posted on December 30, 2012 by Robert P. Dickson

HouseDebtAccording to a recent Washington Post article by Howard Schneider, the International Monetary Fund is pushing for lenders in the United States to agree to principal reductions on their existing loans.

As a general rule, banks are very (VERY) reluctant to reduce principal reductions.  It will be interesting to see if these types of pressures, from international organizations to be exact, will actually have an effect on the loan modification strategies that US lending institutions currently follow.

Here’s a quote from the article:

 

“International Monetary Fund chief Christine Lagarde called on the U.S. government to reduce the mortgage debt owed by homeowners as a way help to revive the nation’s economy and stimulate growth in the wider industrialized world.

Speaking Thursday at the Brookings Institution, Lagarde urged that this relief be extended to loans held by mortgage giants Fannie Mae and Freddie Mac. The issue of whether to reduce mortgages held by Fannie Mae and Freddie Mac, representing more than half of U.S. home loans, has become contentious in Washington in recent months.

Ahead of the IMF’s spring meetings next week, agency analysts have been warning that household debt — in particular, mortgages that are in default or that exceed the value of the borrower’s home — is dragging down growth in developed countries at a time when the global economy is struggling to revive.”

Photo: renjith krishnan

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How to secure attorney’s fees on a contractor’s bond

Posted on December 30, 2012 by Robert P. Dickson

ConstructioWorkerWhenever you find yourself dealing with a contractor, you will also find yourself dealing with that contractor’s bond almost without exception.  Under Washington statute Title 18, general contractors and subcontractors alike are required to file evidence of a surety bond with the Department of Labor and Industries of Washington State.  RCW 18.27.040 (general contractor bond must be in the amount of $12,000 and a subcontractor or “specialty” contractor bond must be in the amount of $6,000).  The statute’s purpose is “to afford protection to the public including all persons, firms and corporations furnishing labor, materials, or equipment to a contractor from unreliable, fraudulent, financially irresponsible, or incompetent contractors.”  RCW 18.27.140.  It is a misdemeanor for a contractor to work without first being registered pursuant to the statute.  RCW 18.27.020(2)(a).

The mandatory contractor’s bond requirement is important to potential litigants because any person who may file a claim against the contractor is also permitted to specifically name the surety bond as a party to the suit.  Of course, naming the bond involves particular pleading requirements in order to comply with the statute.  When done right this statute can secure you an increasingly rare award as part of the recovery: YOUR ATTORNEYS’ FEES!!  See RCW 18.27.040(6).  Such statutes are quite in the opposite of the general rule that each party in a civil action is responsible for paying its own attorneys’ fees and costs.  In re Impoundment of Chevrolet Truck, 148 Wn.2d 145, 160, 60 P.3d 53 (2002) (commonly referred to as the “American rule”).  In an effort to put some teeth in the statute, Washington legislators expressly included that attorneys’ fees were a possible award to bona fide litigants.

However, the statute has been subject to some scrutiny in recent caselaw from several levels of the State’s judiciary in recent months.  The contractor’s registration statute was thoroughly examined in Cosmopolitan Engin. Group, Inc. v. Ondeo Degremont, Inc., 159 Wn.2d 292, 149 P.3d 666 (2006).  In that case, one litigant claimed that the contractor’s bond statute allowed the prevailing party to recover its attorneys’ fees from both the contractor and the surety bond itself.  Id. at 298.  In undertaking its statutory interpretation of RCW 18.27.040, the Court deduced that the placement of the attorneys’ fee provision, when considering the statutory scheme in its entirety, refers “only to action for recovery against the contractor’s bond.  Id. at 299.  Hence, the Court limited recovery of attorneys’ fees under this section to the amount of the contractor’s bond due to its precise placement in the contractor’s bond statute.  In apparent dicta, the Court further rationalized its decision based on the legislatures’ failure to expressly identify that attorneys’ fees were available in suit “against the contractor or against the contractor’s bond” independently of one another.  Id. at 301.  The court’s reasoning makes sense due to the fact that a litigant could not sue a contractor’s bond under the statute without first initiating a claim against the contractor for breach of contract.  The Cosmopolitan decision and its authority for limiting an attorney fee award specifically to the amount of the bond was reaffirmed as recently as last December in an appellate decision from Division Three.  See Brotherton v. Kralman Steel Structures, Inc., 2011 WL 6822261, *5-9 (Div. 3 2011).  Thus, the prospect of pursuing fees from the contractor party seems to be quite settled without much room to argue the alternative.

Cosmopolitan also explained that RCW 18.27.040 is a one-way statute.  Id. at 302, n.3.  What is meant by “one-way” is that a subcontractor can sue up the chain and recover against the upper tier contractor’s bond, but not vice versa. Id.  Such a dynamic allows suppliers to recover against bond rather than resorting to placing a lien on the consumer’s property for a dispute that does not necessarily involve the homeowner at all.  Id. (citing Int’l Comm. Collectors, Inc. v. Carver, 99 Wn.2d 302, 308, 661 P.2d 976 (1983); Stewart Carpet Serv., Inc. v. Contractors Bonding & Ins. Co., 105 Wn. 2d 353, 365-66, 715 P.2d 115 (1986)).

Photo Credit: scottchan

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Taxes and loan modifications: what’s the impact?

Posted on December 30, 2012 by Robert P. Dickson

How does a loan modification effect a person’s taxable income?

1.      The general rule is that when debt for which a person is liable is canceled or forgiven, the canceled amount must be included in a party’s reported income.

Generally, if a debt for which a person is personally liable is forgiven, the forgiven amount must be included in that person’s income.   The IRS defines debt to include any indebtedness for which one is personally liable, or subject to which one holds property.  If a person is not personally liable for a debt, the cancellation income will need to be included if a person retains the collateral and either: (1) the lender offers a discount for the early payment of the debt, or (2) the lender agrees to a loan modification that results in the reduction of the principal balance of the debt.

Taxes2.      There is an exception to the general rule for debt incurred to finance the purchase, construction or substantial improvement of a person’s residence.

A person can exclude canceled debt from income if it is qualified principal residence indebtedness.  Qualified principal residence indebtedness is any mortgage a person took out to buy, build or substantially improve his or her main home.  The mortgage must be secured by the main home.  A person’s main home is the home where he or she ordinarily lives most of the time.  A person may only have one main home at any one time. The IRS has not provided guidance on what it considers a “main home,” but does say it will look at the facts and circumstances in every case.  A person is limited to excluding $2 million of qualified principal residence indebtedness.  If a person excludes canceled qualified principal residence indebtedness and continues to own the home after the cancellation, the person must reduce the basis of the home by the amount of the canceled indebtedness, but may only reduce the basis to zero.  The legal authority for this memo comes from IRS Publication 4681, except where other authorities are cited.

Photo: cooldesign

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What can a landlord do with personal property left over from a tenant?

Posted on December 30, 2012 by Robert P. Dickson

Under RCW 59.18.310(b) the landlord may immediately enter and take possession of any property of the tenant found on the premises and may store it in a reasonably secure place if the tenant defaults in rent and reasonably indicates the intention not to resume tenancy.   The landlord must make reasonable efforts to provide the tenant with notice containing the name and address of the landlord and the place where the property is stored, and informing the tenant that a sale or disposition of the property shall take place pursuant to RCW 59.18.310, and the date of the sale or disposal, and the tenants right to have the property returned prior to the sale under RCW 59.18.230.  The landlord may satisfy the notice obligations by mailing it first class, postage pre-paid to the tenant’s last known address and to any other address provided by the tenant.

The landlord must return the property to the tenant after the tenant has paid the actual or reasonable drayage and storage costs, whichever is less, if the tenant makes a written request for the return of the property before the landlord has sold or disposed of the property.

dsasadassaAfter 45 days from the date of the notice the landlord may sell or dispose of the personal property and apply any income from the sale against moneys due, including actual or reasonable costs of drayage and storage, whichever is less.

If the property is less valued at less than $250 the landlord may sell or dispose of the property after 7 days from the date of the notice of sale or disposal is mailed or personally delivered, provided the landlord makes reasonable efforts to notify the tenant.

If a writ of restitution has been executed by the sheriff, RCW 59.18.312 applies and the landlord’s rights differ slightly.  The landlord “shall” enter and take possession of tenant property found on the premises, and may store the property in a reasonably secure place, with the option of selling or disposing of the property.  The landlord must store the property if the tenant serves him with a written request to do so within 3 days after service of the writ.  Without such service the landlord may elect to store the property.  If the tenant objects to the storage the property must be deposited upon the nearest public property and may not be stored by the landlord.

Before the landlord is entitled to a sale of the property valued at over $250 he must give notice to the tenant via first-class mail or personal delivery.  For property valued at $250 or less the landlord may sell or dispose of the property after seven days from the date the notice is mailed or delivered to the tenant.  Any income generated by the sale may be applied against any moneys due the landlord for drayage and storage of the property.

 

Photo Credit: Bill Longshaw, at Freedigitalphotos.net

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What is a deed-in-lieu?

Posted on December 30, 2012 by Robert P. Dickson

dsadsadasDebtors who have defaulted on their obligations under a real estate security agreement typically face foreclosure, either judicial or non-judicial.  A deed in lieu of foreclosure is another type of procedure to deal with a distressed property.  A deed in lieu is a transfer to a lender of title to real estate that fully or partially satisfies the debt that the property secures. These transactions may have significant benefits for both parties. First, a deed in lieu saves much of the time and cost of a foreclosure and gives the lender more direct and immediate control of the property. A deed in lieu may also be beneficial to the debtor if he or she just wants to convey the property and essentially be done with it.

 

While deeds in lieu have these advantages there are some potential pitfalls to this procedure.  First, if there are junior mortgages or liens on the property the deed in lieu does not serve to extinguish those liens.  In the event that there are junior liens, chances are good that unless the senior and junior lienholders negotiate an agreement the junior liens will be advanced against the title in the senior lienholder’s hands.  Second, a deed in lieu may be considered to be an equitable mortgage and not a complete conveyance. Only one Washington case has held found a deed in lieu to be an equitable mortgage, but depending on the nature of the transaction it remains a possibility.  Finally, a deed in lieu may be set aside on the grounds of fraud or overreaching. Washington courts have failed to do so thus far but other jurisdictions have done so, particularly when the value of the land exceeds the indebtedness or when the lender is desperate or suffers a disability.

With these advantages and possible pitfalls in mind, but before a deed in lieu is actually conveyed, the mortgagor and the lender should enter into an agreement that covers these details.

Photo Credit: Renjith Krishnan/FreeDigitalPhotos.net

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Foreclosing on an agricultural property – what you need to know

Posted on December 30, 2012 by Robert P. Dickson

dsaWhen a party forecloses on residential or commercial property they may have options on how to do so. However, when the property being foreclosed on is being used for agricultural purposes Washington law only permits judicial foreclosure. RCW 61.24.030(1). Real property is considered “used for agricultural purposes” if it is used in a manner that produces crops, livestock or aquatic goods. RCW 61.24.030(2). Despite these fairly strict protections for agricultural land, lenders may have alternatives if they draft a deed of trust.

In a recent but unpublished decision a state appellate court upheld a party waiving the right to a judicial foreclosure based solely on the fact that the land was being used for agricultural purposes. Schroeder v. Haberthur, unpublished 2011 WL 4599661 (Oct. 6, 2011). Additionally the parties to real estate transaction may stipulate in a deed of trust that the land is not and will not be used for agricultural purposes. The grantee of the deed of trust may require the grantor to warrant in the deed of trust that the land will not be used for agricultural purposes without the consent of the grantee. Id. Absent such agreements however, deeds of trust and power of sale foreclosure are unavailable for agricultural land and foreclosure must occur judicially.

Photo Credit: federico stevanin

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Foreclosure Fairness Act: Links and Resources

Posted on December 30, 2012 by Robert P. Dickson

Here are some useful links to assist those wanting more information about the Foreclosure Fairness Act:

Department of Commerce, FFA timeline

Washington State Department of Commerce, foreclosure page

Washington State Housing Finance Commission (good resource for home ownership issues)

US Department of Housing and Urban Development (housing counselor search)

Dickson Law Group (law firm short sale and loan modification expertise…and the sponsor of this great blog, of course.)

Department of Financial Institutions – Home ownership page

 

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Foreclosure Fairness Act Guide

Posted on December 30, 2012 by Robert P. Dickson

17994ju9klmmlpuRecently, I’ve had the privilege to address some professional groups regarding the latest developments on foreclosure law in Washington State.  A lot has changed in the world of foreclosures due to the July 22nd passing of the Foreclosure Fairness Act (FFA).  The Department of Commerce has published a helpful timeline which traces the path of the new foreclosure procedures and homeowner mediation rights created by the law.  Using that as a starting point, I’ve created my own table which outlines the step-by-step process of a foreclosure under the FFA:

 

Step

Action

Notes

1

 Notification of Rights/Initial Meeting Option:

60-days prior to Notice of Default: lender must notify homeowner by letter and telephone of right for in-person meeting (must notify mediation right—must be requested before Notice of Trustee Sale).

Meeting: if borrower elects to have an in-person meeting, the parties will discuss

(i) the borrower’s financial ability to modify or restructure the loan, and

(ii) Explore options to avoid foreclosure, such as a short sale or deed in lieu of foreclosure.

 Must be both a phone call and letter. This is interesting because it requires bank to make two forms of contact.  If the borrower does timely respond, the lender must wait to send the Notice of Default until ninety (90) days after the FFA Notice was sent.

2

 Mediation Request:

Request Mediation through attorney or housing counselor through the Department of Commerce.

 This is an option up until the Notice of Trustee Sale is recorded.  Once the Notice of Trustee Sale is recorded, the option expires.

Mediators are largely from non-profit dispute resolution centers (“DCRs”)

3

 Mediation Notification:

Within 10 days after getting mediation request, Dept. of Comm. Notifies all parties and selects a mediator.  The Deed of Trust Trustee will also be notified.

 Dept. of Comm. will also notify the parties of the required documentation.

4

 Mediation Schedule:

Scheduled no less than 45 days after mediator selected. This can be agreed-upon by the parties, but 45 days is the default.

Mediator sets time at least 15 days prior to mediation.

 

 Homeowner may be represented by an attorney of other advocate, including a housing counselor.  At the mediation, the lender must have someone of authority to modify or negotiate an agreement (can be by phone)

5

 Documents:

Homeowner – (1) Financial statements, (2) current/future income, (3) debts/obligations, (4) 2 years tax returns.

 

Lender – (1) Loan balance, (2) list of fees/charges, (3) payment history, (4) net present value and loan inputs (5), (6) copy of note/deed of trust

 Not providing documents in a timely manner is often the trigger-point for negotiating in bad faith.  It is vital the individuals provide those documents on time and as completely as possible.  If they are NOT complete, the party must have an explanation.

6

 Mediation:

During the mediation, mediator will encourage the parties to look at all options, and provide a written certification within 7 days after mediation that the parties acted in good faith.

 

Considerations:

1.      Borrower’s economic circumstances

2.      Net present value of modified loan vs. anticipated recovery at foreclosure

3.       Loan mod and net present value calculations are established by the FDIC or other programs

4.       Other loss mitigation guidelines (fed. insured loans)

 

Mediation fee maximum of $400; and can last up to three (3) hours.  It is also split equally between the parties (borrower/lender).

 Parties are obligated to act in good faith. Mediator will adjudge whether parties acted in good faith towards a resolution.

Bad Faith:

(i) failure to participate in the mediation,

(ii) failure to timely share required information,

(iii) failure to pay the party’s share of the mediation fee,

(iv) failure to send an authorized representative to the mediation, and

(v) a request by the lender that the borrower waive future claims.

Good Faith:

(i) Communicate openly and understand/listen to borrower

(ii) Flexibility

(iii) Commitment to keep agreements

7

 Conclusion:

Parties come to an arrangement (loan mod, short sale, etc.). The mediator will establish terms of the resolution and provide the FFA certification on the Dept. of Commerce’s form.

 Homeowner may enjoin the sale of the property if the bank did not mediate in good faith.

Picture credit: jscreationzs,

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California courts upholding MERS foreclosure methods, inspite of note/deed of trust issues

Posted on December 30, 2012 by Robert P. Dickson

Housing Wire‘s website had an interesting little article about some decisions that are coming out of California regarding MERS and its ability to foreclose on properties without having property assignment of the deeds of trust.

I speak with a lot of individuals who approach foreclosure from the standpoint that if the foreclosing entity does not have both the note and deed of trust assigned to them, they therefore cannot foreclose.  MERS (Mortgage Electronic Registration System) presented a problem because it dealt with many of these types of arrangements.  We are now starting to see that the court is not buying that argument, and that at a minimum, MERS may act as an agent on behalf of banks to execute their rights under deeds of trust.

I’m sure there will be more battles forthcoming regarding this issue, but California seems to be laying out at least an initial trend.

The most telling quote from the short article is the following:

“MERS’ legal standing as mortgagee, or agent of the note holder, gives MERS the authority under California law to take action on behalf of the owner of the note,” said Janis Smith, MERS vice president of corporate communications.

(Granted, it’s from MERS, so take that into consideration.)

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