The Housing Market is Changing – What does it mean?

The Housing Market is Changing – What does it mean?

By: D. Keith B. Dunnagan, Esq.

June 21, 2022

It wasn’t that long ago that we were looking that we had mortgage rates below 4%, multiple offers on many homes with many going into contract over list price, and buyers waiving contingencies and inspections before they even got into contract. How things have changed in the last several weeks. Now we are hearing questions like are we head for a housing recession? The answer is I don’t know, but we are seeing some concerning trends.

According to an April article in Marketwatch, mortgage delinquencies rose for the first time in more than 9 months. Some have attributed rising delinquency rates to adjustable-rate mortgages that had been at historic lows that are now beginning to recast with the rising interest rates. These rising rates that result in mortgage payment increases are putting stress on families that are already struggling with inflation and the rising costs of consumer goods. In a recent Housing Wire article it looked at housing starts and completions as a potential red flag for a housing recession. While the starts are not falling in a recession trend yet, the cost and difficulty to complete a house along with interest rates beginning to touch the 6% (something that really hasn’t been seen for almost 15 years) points to potential difficulties in the housing market.

Many of us worked through the Great Recession over a decade ago and it appears that even if the market slows down it is unlikely to be comparable to the last housing recession. However, as professional working with real estate on a daily basis we should be brushing up on our tools for a recession market. During a recession short sales and foreclosures increase and cash is king for purchasing property in a distressed sale environment. But how do we help our clients who are struggling during the market or facing a distressed sale themselves. There are a number of things we need to be thinking about.

1. Liability

Whether our client is facing foreclosure or a short sale liability on a loan (deficiency liability) needs to be considered. There are a number of statutes that apply to various situations.

CCP 580b states that when a borrower has a purchase money loan (that loan that was used to acquire the home – not a refinance loan) used to purchase a primary residence that is one – four units, then the loan is nonrecourse – meaning a lender can never pursue the unpaid portion of the loan after a foreclosure.

CCP 580d states that when a lender uses the power of sale (a non-judicial foreclosure or trustee sale) to complete a foreclosure, the foreclosing lender has made an election of remedies and by choosing to foreclose without court supervision, the lender may not then seek a deficiency judgment post foreclosure. The lender only has a right to seek a deficiency judgment if they engage in a judicially supervised foreclosure action (judicial foreclosure are very rare on residential properties). This section has seen some litigation changes over the last few years, it used to be that if a lender had successive liens and foreclosed then under the merger rule the loans would be merged and wiped out together. However, the recent Black Sky Capital case changed the application of this rule.

CCP 580e states that when a lender or lenders agree to a short sale the only proceeds available to the lender(s) is the money obtained through the short sale. During the last recession we saw instances where lender(s) would require the seller to bring additional money to the table to close, requirements by lender(s) placed upon sellers to bring additional money to the table to close is void as against public policy – only sale proceeds from a buyer are allowed and requirements on sellers to contribute are generally unenforceable.

Understand debt forgiveness taxes as it relates to mortgages. During the Great Recession the federal government passed debt forgiveness tax relief and many states had conforming legislations, however those statutes have sunset and now, if involved in a distress sale you need to be aware of the tax implication when debts are forgiven. Typically, the forgiven debt is treated as taxable income so you need to confer with an accountant on the tax liability.

It is important to remember the liability framework in a distress sale.

2. Transactional Considerations

If you are engaging in a short sale transaction, make sure to use the Short Sale Addendum advising the buyer of the short sale and conditioning performance of the agreement on approval by the lender(s). Failure to use the proper addendums could unintentionally bind the seller to a transaction that they cannot perform and that would lead to an unfortunate legal consequence.

If counseling sellers during a distress sale do not skimp on the disclosures. We saw numerous cases during the Great Recession for non-disclosure because sellers just didn’t do much because they were losing the home. Additionally, the statute of limitations varies from 3-4 years on most causes of action related to non-disclosure so there is a good chance that the recession would be over by the time a lawsuit related to non-disclosure was filed.

Understand the timing of any foreclosure if a property is in a distress sale. Pursuant to statute the Notice of Default must be in place for 90 days and the Notice of Sale must be in place for 21 days prior to a trustee sale. Know the timelines. Additionally, a recent statute change requires trustees to keep a website where the information related to foreclosures is maintained.

Finally, remember that the markets are cyclical. The go up and they go down. Clients in distress sales will be facing difficult times, as real estate professionals we need to help them navigate these real estate troubles and encourage them to see how things can be better on the other side of the liquidation sale.

There are indicators that a housing recession is on the horizon, does that mean it will definitely occur – I don’t know but we should definitely be prepared for whatever the market may throw our way in the 8-12 months.

At BPE Law we helped over 7,500 people during the Great Recession navigate the difficulties of distress sales and can help individuals, businesses and investors navigate difficult mortgage issues.

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.

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