Anatomy of a Short Sale

INTRODUCTION:  

Recently in the local news, we have heard that a State of Michigan Supreme Court Justices is accused of Bank Fraud in relation to the short sale of a home that she and her husband owned in Gross Pointe Park.  Judge Hathaway and her husband allegedly transferred a property in Florida to her step-daughter before the short sale and then the property was transferred back into their names after the short sale.  A short sale is a voluntary modification of the contractual agreement between a short sale lender and the Borrower wherein the short sale lender agrees to accept less than the full amount of the debt in the case of a legitimate hardship by the Borrower. The author, having formerly worked with the Wayne County Prosecutor’s Office Deed Fraud and Mortgage Fraud Unit has seen many ways to commit bank fraud and fraudulent transfers and works with clients to avoid this trap when requesting a short sale on the client’s behalf.  It should be the goal of any short sale negotiator to zealously advocate for the client while protecting the client from claims of fraud and the negotiator from legal malpractice.

For some background, According to the Cornell law Website (http://www.law.cornell.edu/uscode/text/18/1344) , 18 USC section 1344 states:

”Whoever knowingly executes, or attempts to execute, a scheme or artifice—

(1) to defraud a financial institution; or

(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;

shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both. “

M.C.L. 566.34-566.35, Michigan’s Uniform Fraudulent Transfer Act Statute, defines a transfer and when a transfer by a debtor would be considered to be with the intent to defraud a creditor. 

CLIENT PREPARATION:

When completing the client intake for a short sale, an attorney should require a complete and thorough disclosure of the client’s assets, liabilities, income, debts and the hardship reasons for a short sale.  This complete and thorough disclosure is necessary to best counsel the client on, not just the short sale, but when or how to avoid a Fraudulent Transfer or conveyance. Assets or property can legitimately be moved around within the confines of the law and the attorney and client should work together to come up with creative options based on the client’s situation and needs.

THE REQUEST FOR SHORT SALE:

The short sale lender typically asks for and requires a request for a short sale to include a full financial disclosure package of documents. Most request packages contain 1) the last two years’ tax returns; 2) the last two months paycheck stubs or proofs of income; 3) the last two months bank statements for all accounts; 4) a letter explaining hardship reason, and; 5) a monthly budget listing income and debts along with all assets and liabilities. However, other short sale lenders are more comprehensive and require the last 6 months bank statements and two year’s tax returns with all schedules.  The attorney must work closely with the client to determine where red flags may be raised regarding disclosure, how to avoid unnecessary disclosure, and still disclose what is required to avoid a claims of fraud or fraudulent conveyance.

NEGOTIATION:

The short sale lender and Borrower should have adequate, good faith disclosure in order to negotiate an agreeable solution while keeping in mind that the short sale lender is under no obligation to voluntarily modify the current debt obligation. The short sale lender assesses what they will accept based on what it determines to be an honest full disclosure by the Borrower.  Without full disclosure, the short sale lender retains the right to void the transaction and pursue any claims against the Borrower.  It is incumbent upon the attorney for the Borrower to give the requested disclosure as adequately and completely as necessary to avoid later claims.

CLOSING THE SHORT SALE TRANSACTION:

Not only is adequate, good faith disclosure necessary for negotiation, but it becomes mandatory during the actual closing of the short sale transaction. Documents presented for the Borrower’s signature at the short sale closing include affidavits that the Borrower has given full and accurate disclosure of financial information during both the request and negotiation process. The short sale lender also requires disclosure that there are no side agreements regarding the property. The reservation by the short sale lender of any and all rights to void the transaction and to pursue any and all legal claims against the Borrower, including claims of Fraud, is within those documents at closing.

CONCLUSION:  

A short sale negotiation can be a potential trap for the unwary short sale negotiator and the Borrower. Careful attention must be paid to disclose the information that is necessary, but protect the client where prudent and legitimately possible. An attorney negotiating a short sale should be clear with the Client as to potential claims of fraud or fraudulent transfer if full disclosure is not made.  Judge Hathaway’s situation should be a cautionary tale to any short sale negotiator to be zealous in negotiating but cautious in dealing with clients to ensure adequate good faith disclosure when requesting a short sale while avoiding any possible claims of malpractice.

Critique of Adam Leitman Bailey and Dov Treiman's article on MERS in ABA Probate & Property publication July/August 2012

   In a recent article (  http://www.americanbar.org/publications/probate_property_magazine_2012/2012/july_august_2012/bailey_treiman_moving_beyond_the_mistakes_of_mers_to_a_secure_and_profitable_national_title_system.html ) about MERS, the Mortgage Electronic Registration System, the authors, Adam Leitman Bailey and Dov Treiman make a set of assumptions that the current system of real estate title registration used throughout the US is broken or outdated and offer some suggestions for fixing it. Their premise is based on the recent failures that became apparent during the foreclosure process. I challenge their assumption that the current system is broken and that their suggestions are warranted.
   In the 1990's MERS was started as a short cut and a cost savings alternative for lenders and investors to the long accepted County Register of Deeds (ROD) systems that are set up all over the United States.  The authors state that the creators of MERS “intended it to simplify and centralize the tracking of rights regarding each mortgage-like instrument”. They fail to include that the system was also intended to avoid paying the filing fees required by public recording in the county ROD, which would, in turn, allow for cheaper and faster turnover of the securitized mortgages.
   The county systems are based on an open and public record of who owns "an interest" in real estate situated within that particular county. Those county systems are also uniquely keyed to the laws, especially those for foreclosure, of the State within which they reside. The authors admit that this local county system has been used since the 1600's. While this system is not without its faults, it has worked admirably for millions of documents for over 400 years. The system currently in place for centuries has been secure. Those who hold an interest in real estate who choose to avail themselves of the proper recording process are then afforded the protections of the State Law that comes along with it. 
    The contention that this system is "hopelessly behind the needs....of the 21st century" is a complete overstatement. Indeed, lenders and investors who make this argument come to it with unclean hands since the financial industry created the alleged need for instantaneous recording on such a massive scale through its securitization of mortgages. The loose lending of the early and mid- 2000's, predatory revolving refinancing, and lack of mortgage origination oversight contributed heavily to the increase in recordings at county offices and thus the reason counties fell behind in recording documents that were presented.  Shockingly enough, the authors state that in order "to sustain the kind of vibrant mortgage market seen during the housing boom, classical recording methods have to speed up...."  I am not sure why, or if, we would want to do that. We are all learning that the "vibrant mortgage market" that the authors extol was and is in reality a mortgage and real estate bubble based mostly on smoke and mirrors.
   Even after creating MERS “to simplify and centralize the tracking of rights” many users did not bother to update transfers and assignments within the MERS system which has led to more confusion of who owns what interests in real estate. The authors point out that MERS is a private system that does not share information publicly. They even contend that as a result of these errors and failings within MERS “the homeowner has no way of determining who actually has the superior right without resorting to the court system”, if a mortgage is simultaneously assigned to more than one financial institution. I see a problem here with a burden and expense shifted onto homeowners that they did not have to previously bear and should not have to bear now. The ROD recording systems were originally designed to further public policy that real estate interests be available and open to the general public to put people on notice of an interest in the property and who holds that interest. MERS is not a better replacement for this public policy need, but an obfuscation of it.
   Recognizing a need to have the public records available online and with the introduction of digital scanning, county ROD offices have not only been scanning and indexing new, incoming documents, but also scanning and indexing previously recorded documents going back decades. This is not an easy or instantaneous process. Time and money are needed to complete the process and money for County projects has been scarce in this economic downturn. The need to record deeds and mortgages is only one aspect of the slow recording problem for the authors' purposes. They seem to focus more heavily on the need to increase the speed of recording of mortgage assignments. To me, this need for speed appears to serve only the financial industry and those who securitize mortgages and is not a need of the general public. ROD offices are designed to and should serve the needs and interests of the general public.
    The authors state that there is a need for ease and efficiency in performing computer searches remotely. I agree. Local RODs are working on their systems to update records and bring them online. However, the authors touch on the possibility that increased access to digitized records would make forgery and fraud of public documents more prevalent. As a former member of a Deed Fraud and Mortgage Fraud Unit, I can say that scanning documents and making them available for the general public does not lead to an increase in fraud or forgery. Making the system national or private will not make it more secure either.
   States traditionally have had the purview of family law and real property law. The authors put forth that there should be National uniform systems for real property title registration and foreclosure processes. They concede that a National System would be over the horizon. But, each state has unique laws based on their own sovereignty that govern all real property rights within their jurisdictions that may be infringed by a National System. Many states would not like to make this drastic a change.
Furthermore, the authors suggest that foreclosure laws should be streamline for ease of global financial institutions to protect their rights. They claim it is difficult for financial institutions to keep track of 50 separate sets of state laws and procedures. They also claim that this difficulty would create more of a cost to customers if not changed. I do not agree. Lenders and Investors have always had to contend with 50 sets of state laws for mortgages and for other consumer debts. I have not heard a cry for a national consumer debt collection procedure from the financial industry.
   Besides, the states have created laws and procedures to protect the rights of all parties with an interest in real estate. The laws and procedures create a balance based on public policy between the owner and the lender. The owner is afforded protections, such as notice and a hearing and a timeframe to move out before losing possession and control of a home. The lender is afforded protections, such as an ability to gain possession and control of the property and possibly recoup any losses on the loan. Both are expected to follow the law and procedures to get the benefit and protection of the law and procedures. The recent “problems” with foreclosure laws appear to be self-inflicted by an industry that has tried to avoid the proper procedure. The proper party filing the proper paperwork in the proper timeframe at the proper place is the hallmark of a secured transaction. Without this, the party should not be allowed to avail itself if the benefits of the law and procedure nor should it be allowed to cry for changes in the rules.

In conclusion, the state systems of foreclosure and document recording may need updating to accommodate new technology, but they do not need to be overhauled for a particular industry user. The original purpose of registration of title for real property is to protect the rights of those persons with "an interest" in the property. It is not to be "profitable". Nor is it the responsibility of the ROD to create a less expensive system for those who have overused, abused, ignored, or overloaded the current system.

New Real Estate Property Sales Tax Implemented Under The Affordable Care Act

Some folks may be scared into selling their homes this year. These folks think that if they sell their home this year, they will avoid having to pay a new 3.8% sales taxes on Real Property that will be implemented on January 1, 2013 as part of the Affordable Care Act.  They think that if they sell their home in 2013 they will have to pay the sales tax on all the proceeds of the sale.

The Affordable Care Act does, indeed, implement a new sales tax on Real Property however, it is limited. First, the tax is limited to those whose incomes are over $200,000 per year ($250,000 for married couples filing jointly). Second, the tax is limited to only the proceeds for a primary residence over the current $250,000 income exclusion ($500,000 for married couples). Third, the tax is limited again to the lesser of the adjusted gross income (AGI) over $200,000 (or $250,000) or the net investment income.

What this means is that very few people, some say less than 2% of taxpayers, will be subject to this new real estate proceeds tax. Some examples are:

• A single executive making $240,000 a year sells her $500,000 beach home for a $100,000 profit. Her real estate tax on the sale of that beach home would amount to $3,800, in addition to the capital gains she would have paid anyway.  The real estate tax applies to the entire investment income as the beach home is not her primary residence. 
• A married couple filing jointly have a combined income of $185,000 a year sell their primary residence for a $575,000 profit. After the married exclusion of $500,000 they have a net gain of $75,000. The net gain makes their AGI $260,000, which is over the $250,000 threshold for computation of the tax. The couple would pay tax on the $10,000 over the $250,000 threshold ($260,000-$250,000) which amounts to a total real estate tax of $ 380. The real estate tax is based on $10,000, as this is the lesser of the AGI over $250,000 (or the net investment income ($75,000).

For more information please visit:

http://www.mirealtors.com/content/featurednews.htm?page_id=45&inCtx13news=3&site_id=1&inCtx13view=9&inCtx13news_id=279&minor=0&major=2&inCtx13pg=0

http://www.factcheck.org/2010/04/a-38-percent-sales-tax-on-your-home/

Homeowners and Borrowers should retain their own attorney to negotiate a short sale

   A short sale is when your lender agrees to accept an amount “short” of what is owed on a home loan in a sale transaction. The homeowner/borrower is then released from that obligation with or without a deficiency amount that needs to be paid. A short sale of your home is a complicated legal transaction. If you are considering a short sale for your property you are already in a compromised a vulnerable position.

   While real estate agents are trained to sell and market property most are unprepared for, uneducated on and just plain unqualified to negotiate one of the largest debts a homeowner may ever have. Most real estate agents who are “certified” short sales specialists have only taken a 3 hour course to get that certification. The implications of a short sale for a homeowner are financial, legal, and quite typically, very emotional. It is beyond the scope of a real estate agent’s job and training to understand all the current and future complexities and implications of a short sale for a homeowner. In fact, A real estate agent has an inherent conflict of interest in the transaction. The real estate agent works on a commission basis if and when the property sells. The real estate agent is unlikely to know of or offer alternatives to a short sale even if it is in the best interest of the homeowner. Sometimes a short sale is just not the best option.

   Some real estate agents offer to homeowners the services of a short sale company that they recommend or with whom they are affiliated. Some of these companies are run by or simply owned by an attorney. Homeowners may also be directly solicited by short sale companies. Once the company is engaged, the homeowner is typically steered to certain real estate agents, if they do not already have one. However, I strongly caution homeowners and borrowers from using these short sale company services. Sometimes these short sale companies are in reality hired to work for the Real Estate Broker or agent and not the homeowner. The negotiator may be AN attorney, but they are NOT THE HOMEOWNER’S attorney.  The short sale company typically makes no attempt to negotiate in the best interest of the homeowner, but rather only works to get a deal to close so that it and the agent can collect their fees. Even worse, some of the companies have “investors” who are part of the transaction. The investor buys the property at the lowest price, which makes the homeowner’s deficiency the largest. No attempt is made to negotiate the best financial and legal outcome for the homeowner. No attempt is made to negotiate in the best interest of the homeowner.

   A homeowner’s attorney is obligated by the State Bar of Michigan to work in your best legal and financial interest. A homeowner’s attorney is not in a direct conflict of interest with the closing of the short sale. A homeowner’s attorney is well prepared, highly educated and uniquely qualified to negotiate the best possible outcome for your individual situation. A homeowner’s attorney is willing to offer better alternatives to a short sale as and when they are available.

    If you own property in Michigan or are a Michigan resident, we would like to be your attorney, please contact The Law Offices of Leslie A. Butler, PLLC at leslie@lbutlerpllc.com or 734-707-8529

Finally! Big Bank Admits Fraud against FHA/HUD

This Los Angeles Times article by By Nathaniel Popper and Scott Reckard (http://www.latimes.com/business/money/la-fi-mo-citi-settlement-20120215,0,1477531.story) brings into focus an idea that I have been sharing for some time. Even before I worked with the Wayne County Prosecutor's Office Deed Fraud and Mortgage Fraud Task Force, which was the first in the nation, I strongly suspected that many banks and their agents were responsible for much of the Mortgage Fraud. Greed is behind the numbers. Plain and Simple. The Big Banks were able to repackage and sell the notes and mortgages which they originated for a handsome profit, most of them much more risky than FHA and HUD guidelines allow and all guaranteed with U.S. Taxpayer money. This was a win-win situation for the Big Banks.

I have often argued against the idea that the recent and ongoing Real Estate Bubble is the fault of ignorant borrowers who did not know what they were getting into upon signing note and mortgage documents. I have also argued against those who say the majority of notes and mortgages were the result of borrowers flat out lying on applications to gain a home. With those arguments typically went a blame game of the Clinton or Obama Administration's coercion or demands that low and moderate income borrowers be given home loans even against the better judgment of the Big Banks. The arguments would typically include that Big Banks know what risks are acceptable, but "The Administration" is forcing them to make loans.

What I saw at the Deed Fraud and Mortgage Fraud unit was and is indicative of what happened across the nation. The people working for the Big Banks either directly or indirectly as mortgage brokers were responsible for most of the mortgage fraud. Without those key people fabricating documents and data and assuring potential borrowers that it was "ok", this debacle would not have happened. If Big Banks had not been so greedy and only looking to the profit margin, this debacle would not have happened to the scale in which it did.

We need look to the settlement numbers -$25 Billion- to see that this fraud debacle was truly astounding. Settlements are usually based on what it is worth for both parties to not move further with investigation or prosecution. It is also telling that this settlement includes an admission of guilt by Citibank. Most settlement agreements avoid admissions of guilt. While I am not happy with the settlement offer (I feel it does little to help homeowners and borrowers harmed by the Bubble), I look forward to this Real Estate Bubble coming to an end.

I invite your comments to this article.