Be Wary of the Dangers when “Interest-Only” Loans Re-Set.
In May, 2015, I blogged on the subject of California’s Home Equity Sales Contract Act (Civil Code 1695 et seq.) and what impact this may have on real estate sales. However, given the growing numbers of owners coming in for consultations with this problem and the number of real estate agents that do not as yet sense the importance of this issue, I feel compelled to expand upon why this is so important to you.
Back in the early 2000’s, lenders were playing very loose with the types of loans they were writing and this built up the house of cards that came tumbling down by 2009 causing the Great Recession. At its height in 2005-2006, large numbers of home purchasers obtained loans that were “Interest-Only” for the first 10 years. This made the loans easy to afford for buyers to acquire bigger and more costly homes. But they all contained a ticking time bomb: at some point the borrower would have to start paying down the principal on the loan as well thus converting the loan from interest-only to fully amortized. Naturally, this could cause a dramatic increase in what the borrower must pay every month for the loan.and possibly make the loan unaffordable. This is the bomb that is exploding today.
Thousands of such borrowers have now received or will receive notices that their loans will soon be “re-setting” to fully amortized payments. The increases can be very substantial. So borrowers typically go through a series of actions hoping to solve the problem and keep their home: These actions generally take the following path:
First: They seek loan modification. But most lenders today are not interested in modifying loans – especially loans that are in trouble – and there is no law compelling them to do so. The lenders want these bad loans off their books;
Next: They seek to refinance the loan but in a great many cases there is insufficient equity in the Property to get a loan large enough to pay-off this existing loan. Further, even if there was enough equity, these borrowers often find that they could not afford the payments on the new loan;
Lastly: If they find that there is no solution that would allow them to keep their home, they decide to sell and at least have the remaining equity to move forward with. So they decide to List their home for sale with their favorite real estate agent. And this is where the Equity Sales Act may come into play.
If the loan does re-set prior to the sale, the Seller may default in payment of the increased loan and this may result in foreclosure proceedings being commenced by the recording of a Notice of Default. If the property is the Seller’s personal residence and if the Buyer will NOT use the property as a personal residence, the Buyer must use a home equity sales contract, such as the C.A.R. standard form “Notice of Default Purchase Agreement” and attachments which incorporate the many requirements of the Act. Sellers and Buyers will not generally be aware of the Act or the need for these different Contract documents. They will expect their real estate agents to be aware of the situation and use he right forms.
The most critical part of the Act requires the Buyer to deliver to the Seller a Notice of the Five Day Right of Recision, and Cancellation forms. Until this Recision period ends, neither the Buyer nor agent him can ask the Seller to sign any deed or other transfer document. Since this right of recision doesn’t start to run until the Buyer has provided the Notice, the Seller can cancel at any time before the expiration… even after close of escrow! Moreover, since this cannot legally be waived by a Seller, the delays caused by attempting compliance late in the sale could cause delays that could endanger the sale.
But it can be even worse if the transaction goes forward without complying with the Act. The legal penalty for violating the Act is three times the equity plus attorney fees and court costs. Plus criminal penalties may apply.
The attorneys at BPE Law Group have assisted over 6,000 property owners and their agents to understand the issues arising from financing problems with real property. We can help you understand and deal with the risks and develop and implement strategies to minimize and possibly avoid the negative impacts of judgment risk, tax liability, credit damage, and job loss risks. If you need assistance with any real estate or business transaction, please call our main office at 916-966-2260 to schedule a low-cost consultation appointment either in our Fair Oaks or Sun City Lincoln office.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.