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

Who can be compensated for negotiating short sales?

Posted on December 30, 2012 by Robert P. Dickson

Late last year, the Department of Financial Institutions published a helpful guide regarding short sales and loan modifications. In particular, the DFI intended to provide clarification in plain terms to the RCW 31.04 (Consumer Loan Act or “CLA”) and RCW 19.146 (Mortgage Broker Practices Act or “MBPA”).

Because short sales deal with two specific areas of expertise, in particular real estate transactions and negotiation with creditors (for forgiveness of debt), the regulations outlined in the MBPA and CLA are relevant.  This is because the DFI monitors and regulates loan modification and short sale negotiation services.  Simultaneously, the Department of Licensing regulates the real estate brokerage services that pertain to the actual short sale transactions.

Put simply: because short sales involve both a (1) transaction of real estate and (2) a negotiation with creditors regarding loans (and usually, deficiencies), the DFI and the Dept. of Licensing have an interest.  So, the broader question is “who can get compensated for short sale negotiation services?”  The short answer is “it depends.”

The DFI’s December 2010 bulletin on the subject states the following:

Entities engaging in short sale negotiations for compensation must obtain a license under the CLA or the MBPA, and the individuals who conduct loan modification activities on behalf of such entities must obtain a mortgage loan originator license under one of those two acts. Short sales conducted as part of the negotiation of a real estate transaction by a licensed real estate broker do not require licensure under the CLA or the MBPA, unless the real estate broker is paid separately for the short sale negotiation, in addition to receiving a commission for the real estate transaction. However, this does not extend to unlicensed assistants.
The MBPA and the CLA licensing exclusions for real estate brokers do not apply to real estate brokers who act solely as third-party short sale negotiators or loan modification services providers.Negotiating short sales for a fee is not an activity that requires a real estate license; therefore, a loan originator license from DFI is required if that is the only service the real estate licensee provides.
Real Estate licensees must be providing real estate brokerage services for the transaction in order to negotiate a short sale on behalf of either party to the transaction. Real Estate licensees may not charge any additional fee above the normal and customary commission to provide short sale negotiation services.

http://www.dfi.wa.gov/cs/pdf/short-sale-guidance.pdf

In plain English, the following may receive compensation for negotiating a short sale:

1.  Real estate broker — A broker can get paid for a short sale, BUT only if the fee is not in addition to the commission.  The broker cannot be paid anything above the commission, regardless of how much effort was expended in facilitating the short sale.

2.  Loan originator licensee OR Attorney — This individual can get paid for the actual short sale negotiations, even if he is a third-party to the transaction, however, he cannot be paid commission from a sale in the same fashion as a real estate broker.  If short sale negotiations is the only service provided, a loan originator’s license is required.

3.  Real estate broker with a loan originator OR law license — If someone has both their real estate broker’s license AND a loan originator or law license, he is eligible for both the commission and a separate fee for negotiating the short sale.  Think of this as the best of both worlds.

The above regulations can be summed up the following way — if you are hoping to get a fee for a short sale, you have to be a lawyer or a loan originator.  You cannot only be a real estate broker and expect to receive payment beyond the commission you would otherwise be entitled to in a normal real estate transaction.  For those of you reading this article who are homeowners or prospective short sale buyers, do not be fooled.  If someone is asking for payment beyond the commission for short sale negotiation services, make sure they have the proper licensing.

For more information on this subject, please visit http://www.dfi.wa.gov or http://www.dol.wa.gov, or review RCWs 31.04 and 19.146.  If you wish to search someone’s licensing status, you can also find that information at the DFI and DOL websites.  For attorney’s, you can search for that individual’s status at pro.wsba.org.

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Tax implications for short sales and foreclosures

Posted on December 30, 2012 by Robert P. Dickson

I am often asked by clients what the tax implications are should they choose to pursue a short sale or their property is the subject of a foreclosure. Technically, and they’re right. Debt obligations that are forgiven are usually counted as income to that individual. For example, if you obtain a home loan for $300,000 but sell the property via the short sale process for $200,000, that $100,000 difference that you are no longer required to pay would be taxable as income under normal circumstances. In 2007, the federal government passed the “Mortgage Forgiveness and Debt Relief Act.”

The IRS describes it as follows:

“If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.”

Cancellation of Debt is not always taxable, however. According to the IRS there are some exceptions:

–Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
–Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
–Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
–Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
–Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences

See Publication 4681.

The Mortgage Forgiveness Debt Relief Act of 2007 allows homeowners who have benefited from debt cancellation—usually from a short sale, deed-in-lieu of foreclosure, or foreclosure—to exclude the “income realized” from the forgiveness. Exclusion of income resulting from a cancellation of debt means that the amount forgiven or waived from the creditor (usually a bank) is not considered income and is excluded from determining your federal income tax basis.

Going back to the example in the first paragraph, the $100,000 debt that was cancelled would be excluded from that individual’s income of that year. In a normal year (without the Act in place), if that person made $50,000, but was forgiven $100,000 through a short sale, he or she would be required to include that sum as income for that year, making his income $150,000 and subject to the corresponding tax rate. Because that $100,000 is excluded from his income by virtue of the Mortgage Forgiveness Debt Relief Act, his tax rate is preserved at the $50,000 level.

The above information can be found at the following link: http://www.irs.gov/individuals/article/0,,id=179414,00.html

I would also refer you to an in-depth review of the law at http://www.homesalessandiego.com/blog/mortgage-debt-forgiveness-law/.

*Lawyers at Dickson Steinacker, PS are NOT tax specialists. Federal income taxes are a serious matter and should be dealt with through counsel from a qualified accountant or tax attorney. Because much of our business deals with real estate issues such as short sales, foreclosures and loan modifications, we feel it is important to be cognizant of the broader implications of debt cancellation (hence, the above blog entry). If you are in need of more detailed/specific guidance for your tax matters, we recommend contacting a tax attorney or qualified accountant. Do not rely solely on this entry for your tax strategy.

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Foreclosures: Washington State is a “non-recourse” state (sort of)

Posted on December 30, 2012 by Robert P. Dickson

Sign_of_the_Times-ForeclosureOne of the common statements made to me when new clients call to discuss their foreclosure, is the following:  “I don’t care if there is a deficiency when the bank forecloses on my property because Washington is a non-recourse state,” implying that he or she is free of having to pay a deficiency should the house sell for less than what is owed.  The response I always give to that proclamation is “it depends.”

Banks may choose between two options when deciding how to foreclose on property.  The most common (by far) is the non-judicial foreclosure.  This type of foreclosure is straightforward: the bank uses its leverage under their Deed of Trust on the home (think of the Deed of Trust as a very powerful lien…which it is) to compel a sale by the trustee that services the Deed.  This sale is called a trustee sale.  Once the property is sold to an innocent third party purchaser at the trustee sale, the bank is barred from collecting any deficiency on the collateral. For example, if your home is worth $300,000 and the bank forecloses on the property through the non-judicial foreclosure method and nets only $200,000 in the sale, the balance of the $100,000 cannot be collected from the borrower.  Thus, while the credit standing of the borrower may have taken a big hit, he or she no longer has to worry about satisfying that debt obligation.

As you might expect, foreclosures are not always that rosy: there lurks another option that banks may use at their discretion: the judicial foreclosure.

A judicial foreclosure is executed through the courts and is easily identified because it is an actual lawsuit against the homeowner.  How is this possible, you ask?  Why doesn’t the bank just go after the Deed of Trust and sell the property?  A judicial foreclosure goes one step further than regular non-judicial foreclosure: it not only allows the bank to compel a sale of the property, but it provides an avenue by which the bank can obtain a deficiency judgment for whatever balance was lacking in the sale.  Going back to our example above, if that individuals home is sold for the $100,000 deficiency, the bank can move the court to have that sum converted into a judgment against you. Judgments are nasty because they become automatic liens on all real and personal property.  With a judgment a bank can garnish wages and pursue other avenues against the borrower’s assets.

It is still a mystery to me why some people are pursued via judicial foreclosure rather than non-judicial foreclosure.  However, if I had to guess why they choose that option, I would have to say it’s because they suspect (right or wrong) that the borrower has money to cover the judgment.

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Thoughts on forensic audits and what they can (or can’t do) for you

Posted on December 30, 2012 by Robert P. Dickson

Lately I’ve been fielding calls from individuals that have obtained what are called “forensic audits” of their mortgage documents.  Usually, this is in conjunction with a difficult scenario that they have found themselves in, where they are behind on their payments and are looking for any ammunition to defend against a foreclosure.  In theory, a forensic audit is straightforward: a company will comb through your mortgage documents for “violations” or other signs of misconduct by the lending institutions.  This is usually not too difficult a task given that many of the regulations that control these transactions are extremely technical.  Violating them is easy, in other words.

The bigger issue is what to do with the violations when they are discovered.  There has not been a tremendous amount of precedent in this regard (at least in Washington, there hasn’t been), but I would advise against the notion that faulty mortgage documents equal borrower keeping home.  That is not likely to happen for a few reasons — first, the bank did loan money out to the individual, which technically, would need to return the funds if the transaction were undone and reset; second, the parties relied and acted upon the loan.  A court could reset the entire mortgage and order that, if possible, the parties be put back to their proverbial starting points.  This obviously present a problem in and of itself, given that the home may be underwater and the borrower may not have the funds to refund the bank for the money issued in the original loan.

So, in short, for those of you leaning on a forensic audit as the resolution to your mortgage predicament, I’d make sure to have a backup plan.

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Tacoma gets national attention for potential upswing in housing prices. But is it true?

Posted on December 30, 2012 by Robert P. Dickson

The Tacoma News Tribune reports that CNN Money outlined Tacoma as a large metro area that will see as much as “11.5%” growth in housing value in the coming months.  The article, however, utilizes data that some call questionable.

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What is the estate’s personal representative (executor) allowed to do with a decedent’s real property during probate during probate? (Answer: a lot)

Posted on December 30, 2012 by Robert P. Dickson

Imagine this: a loved one has died and you are left to be the executor/personal representative of the estate.  This person owned real property (a house or condo perhaps).  Now, an individual’s estranged daughter moves in and starts living in the home without permission from the estate.  What obligations or rights do you have as the executor/personal representative to the real property?

Pursuant to RCW 11.48.020 (full text below), the personal representative has the right to possess and manage real property of the estate during probate.  At common law, real property of the decedent was treated differently from personal property, as it vested in the heirs immediately upon the death of the owner.  So, the personal representative had nothing to do with the real property, including rents or profits.  The majority of states have changed the common law, like Washington, to allow the personal representative to have the immediate right to possess and manage real property, and to receive rents and profits of the estate.

 

Since in Washington a personal representative has the right to possess and manage real property, the biggest issue will likely be whether the home at issue is the property of the estate of the deceased.  Though it might not be applicable in the unlawful detainer action, if the personal representative is not collecting rent from the tenant, the failure to do so is arguably a breach of their fiduciary duties, as it could impact creditors’ claims in the probate action (and thus harm Frisbie, if ultimately she is found to only be a creditor). See e.g. City of Bellevue v. Cashier’s Check for $51,000 & $1,130.00 in US Currency, 70 Wash.App. 697, 855 P.2d 330 (1993) (administrator has a narrow ownership interest in estate real property for the limited purpose of satisfying the legitimate claims of creditors of the estate.).  As a general rule, an executor is accountable for his use of the deceased’s real property. In re Estate of Boston, 80 Wash.2d 70, 72, 491 P.2d 1033 (1971).

Interestingly, even the executor may utilize the house, however, where a person’s only right to possession of the property arises from his status as executor, if he chooses to use the house for his own benefit he must pay rent.  Id.; citing In re Estate of Hickman, 41 Wash.2d 519, 526-27, 250 P.2d 524 (1952).  RCW 11.04.250 also clearly indicates that an heir’s interest in the estate is limited by the claims of creditors, whose interests are represented by the administrator.  Until an estate is closed, the heirs may not treat estate real property as their own.  In re Estate of Peterson, 12 Wash.2d 686, 734, 123 P.2d 733 (1942)

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Forecosures to be “up” in 2011

Posted on December 30, 2012 by Robert P. Dickson

According to a recent article, many experts are predicting that the foreclosure crisis will continue through 2011.  Currently, there are about 5 million borrowers at least 2 months behind on their mortgage payments.

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Federal Trade Commission’s new rules limits up-front fees for loan modification services

Posted on December 30, 2012 by Robert P. Dickson

federal-trade-commissionOn November 19, 2010, the Federal Trade Commission (FTC) issued 16 C.F.R.  Part 322, the Mortgage Assistance Relief Services Rule (MARS) concerning providers of mortgage relief service.  While many relief providers are legitimate, “At a time when many Americans are struggling to pay their mortgages, peddlers of so-called mortgage relief services have taken hundreds of millions of dollars from hundreds of thousands of homeowners without ever delivering results,” FTC Chairman Jon Leibowitz said.  Unlike an attorney assisting a client  in a loan modification or short sale effort, many mortgage relief services do not have a good understanding of the consistently changing rules and laws (both state and federal) involving mortgages and foreclosures and are not subject to code of ethics.

The MARS Rule is designed to protect distressed homeowners from these mortgage relief scams.  The most significant new rule under MARS is that non-attorneys offering mortgage relief services may not collect any fees until:

  1. The company has provided the consumers with a written offer from their lender or loan servicer that the consumer decides is acceptable.

 

  1. The company has provided the consumers with a written from the lender or loan servicer describing the key changes to the mortgage that would result if the consumer accepts the offer.

 

  1. The company must remind the customer of their right to reject the offer without charge.

 

The MARS Rule also requires mortgage relief services to disclose key information to customers, including that the company is not associated with the government or the customer’s lender and that the lender may not agree to change the customer’s loan.   In addition, it the company tells the consumer to stop paying their mortgage, they must inform the consumer that this could cause them to lose their home and damage their credit rating.

In addition to the mandatory disclosures, the MARS Rule prohibits mortgage relief companies from making false or misleading claims about services, including claims about:

  • the likelihood of consumers getting the results they seek;
  • the company’s affiliation with government or private entities;
  • the consumer’s payment and other mortgage obligations;
  • the company’s refund and cancellation policies;
  • whether the company has performed the services it promised;
  • whether the company will provide legal representation to consumers;
  • the availability or cost of any alternative to for-profit mortgage assistance relief services;
  • the amount of money a consumer will save by using their services; or
  • the cost of the services.

In addition, the rule bars mortgage relief companies from telling consumers to stop communicating with their lenders or servicers. Companies also must have reliable evidence to back up any claims they make about the benefits, performance, or effectiveness of the services they provide.

Attorneys are exempt from this new rule as long as they are engaged in the practice of law, licensed in the state in which the consumer or home is located, and comply with the State’s ethics rules.  These are requirements that any practicing attorney should meet anyway.  In addition, and fees attorney’s collect will be placed in a client’s trust account and only withdraw for work performed in accordance with the retainer agreement the client has signed.

All provisions of the rule except the advance-fee ban will become effective December 29, 2010. The advance-fee ban provisions will become effective January 31, 2011.

 

Source: http://www.ftc.gov/opa/2010/11/mars.shtm

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Coming January 31st, FTC to limit loan modification scams

Posted on December 30, 2012 by Robert P. Dickson

According to this article from the LA Times, the Federal Trade Commission (FTC) is starting to “clamp down” on phony loan modification companies.  Essentially, starting January 31st, loan modification companies will be prevented from getting upfront fees.  The evaluation by the FTC is simple: “[i]f a [loan modification company] seeks to charge you anything or collects money upfront, it will be in violation of federal law and subject to harsh penalties.”  For loan modification companies to continue, they will have to “contact your lender or servicer and give you a written proposal describing the key changes to your mortgage terms that the note holder [usually your lender] is willing to make before any more money can be collected in advance.”  In essence, loan modification companies are will be required to complete a pre-loan modification modification, before they can execute a final loan modification, at which point, they may be paid for their services.

The articles goes on to report that attorneys are largely exempt from the law:

The only exception will be for lawyers, who typically require retainers before they begin negotiating on a client’s behalf. They will be permitted to collect retainer fees for modification efforts but only if they deposit the money into “client trust accounts” under state bar regulations. Lawyers who charge advance fees also must be licensed by state authorities and be in compliance with state laws and regulations governing professional conduct.

This new regulation from the FTC is bound to frustrate many loan modification scams that seek to obtain funds from clients, but then provide nothing in return.  Fortunately, the FTC leaves in place law firms to handle upfront fees.

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Bank of America resumes foreclosures

Posted on December 30, 2012 by Robert P. Dickson

According to the LA Times, Bank of America is ending its temporary foreclosure “freeze” in 23 states.

Given that FHA has altered the waiting period for those who engage in strategic foreclosures (this applies to those who make the strategic decision to “walk away” from their home), seeking a loan modification might be the best option.  According to “HAMP” or the Home Affordable Modification Program: “Borrower eligibility is based on meeting specific criteria including:

 

1) borrower is delinquent on their mortgage or faces imminent risk of default
2) property is occupied as borrower’s primary residence
3) mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties. 

After determining a borrower’s eligibility, a servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower’s total pretax monthly income:

  • First, reduce the interest rate to as low as 2%,
  • Next, if necessary, extend the loan term to 40 years,
  • Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount.

Note: Servicers may elect to forgive principal under HAMP on a stand-alone basis or before any modification step in order to achieve the target monthly mortgage payment.”

 

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