How things have changed in the last four months. The market was strong and poised for further advancement. The topics dominating the headlines were limited supply, cannabis, rent control and hazard insurance in rural areas. All of that has changed. In the span of a few short months, unemployment that was at record lows is now at record highs. As California begins to rollback some of its phased re-opening, certain business sectors are being forced to reduce capacity or close altogether for a second time, putting people back in the unemployment line.
Preparing to Help Clients in Foreclosure and Avoiding Foreclosure
By: D. Keith Dunnagan, Esq.
July 21, 2020
Recently, NPR reported more than 4.75 million mortgages or 9% of all mortgages are in some sort of a forbearance plan with their lender and they suspect this number is low. The National Multi-family Housing Council reports that in June 94.4% of renters paid a full or partial rent payment, but cautions that the high rent payment statistics may be attributed in part to expanded unemployment benefits, which unless Congress acts to extend, will be coming to an end on July 31, 2020.
With the increasing defaults and potential increase in evictions for non-paying tenants, ultimately, clients may be looking at foreclosure alternatives. The COVID-19 pandemic has created a new set of economic problems. While expanded unemployment benefits provided a short-term safety net for the unemployed, it is not a long-term solution. Consequently, we are anticipating that as a result of these economic issues that there will likely be a significant rise in foreclosures. It is time to dust off all that Great Recession knowledge involving foreclosures and short sales. Recognizing that this market is different from the Great Recession that was based upon bad paper. Loans that were in arrears because of negative amortization provisions before the borrower ever walked out of the escrow office, is not the case now. Short sales may not be immediately the soup de jour as property values still remain strong.
Some key things to remember as we move forward:
- When meeting with a prospect who is selling try to determine the basis for selling. Many will be forced to sell because of an inability to make mortgage payments and you should be attempting to determine the extent of a default and whether a foreclosure has been commenced.
- Remember your timeline for a foreclosure. The Notice of Default must be in place for 90 days and a Notice of Trustees Sale for 21 days (total of 111 days) but can be extended through forbearances and modification requests.
- Determine whether there is any equity in the home. Many will be reluctant to sell. They don’t see alternative paths and securing a new home will be scary for the seller. Look for alternate solutions than can accomplish the clients’ goals.
- Again, be mindful of the timeline (see bullet point 2 above) as decisions will need to be made with that timeline in mind. Especially important when contemplating a sale as you need to account for the escrow period.
- Determine whether or not the property has equity. Unless the property was purchased recently, most should have equity as values have consistently risen for several years now. If there is not enough equity to cover the cost of sale, make sure to use the CAR Short Sale Addendum and make sure the proper contingencies related to bank approval are included.
- In the Great Recession we did not worry much about the Home Equity Sales Contract Act (HESCA), because most homes were undervalued. In this market, many homes may have equity. Make sure you use the right contract. The CAR forms contain a HESCA compliant contract with the critical components included. Use it and understand when it is needed. For the basics, if a property is in foreclosure, has equity, and the purchaser will NOT occupy the home being purchased then HESCA applies.
- Remember the anti-deficiency statutes and how they apply. Under CCP 580b on a purchase money loan for a home occupied by the buyer as a principal residence there is no deficiency obligation. Under CCP 580d after a non-judicial foreclosure the foreclosing lender cannot pursue a deficiency judgment. Under CCP580e after a short sale on a 1-4 unit residential dwelling there is no deficiency liability.
This market is changing and it will be important to know how to help your clients navigate the world of foreclosures and when to employ short sale or HESCA sale strategies. Your clients are looking to you to guide them during this difficult time. Remind them that this shall pass and be a source of hope for them as they move past these difficult times.
Your clients will have questions regarding the legal implications of the decisions made related to potential foreclosures. We are here to provide assistance when needed and do not hesitate to reach out. We look forward to continuing to serve you and your clients with their real estate needs.
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.
