Foreclosure & Home Foreclosure & Home Ownership: Legal OverviewOwnership: Legal Overview

Eric Dunn

Northwest Justice Project

New Advocate TrainingApril 17, 2008

Home Purchasing: Process

• Purchase & Sale Agreement– Price, closing date, other terms set

• Must meet Statute of Frauds (RCW 64.04.010)• Usually, NWMLS Form 21 (next slide)

– Earnest money generally paid to seller– Usual “contingencies” – financing, inspection

• Seller’s Disclosures - RCW 64.06 et seq.– Due within 5 business days after P&S Agmt.– Gives buyer right to rescind (3-days)

(And no, we didn’tget the house, dammit)

Real Estate Contracts, RCW 61.30

• Not the same thing as:– Purchase & Sale Agreement– Option to Purchase

• Real Estate Contract:– Seller retains legal title to property– Purchaser gains right to possession & equitable title– Purchaser pays sale price over time (installments)– Payment of sales price vests legal title in Purchaser– Seller may declare forfeiture if Purchaser defaults:

• Seller recovers property, purchaser loses all rights• Statutory Notice & Cure Provisions

Real Estate Agents• Governing Statutes

– Licensing Act, RCW 18.85 et seq.

– Relationships & Duties, RCW 18.86 et seq.

• Fiduciary Duty to Client– Harstad v. Frol, 41 Wn. App. 294; 704 P.2d 638 (1985)

• Duty established upon listing of property (for seller)

– Moon v. Phipps, 67 Wash.2d 948; 411 P.2d 157 (1966) • Other facts & circumstances may establish duty

– Dual Agency okay by written consent, RCW 18.86.060

Financing: Purchase Money Loans

• Traditional Model (some would say quaint)– Very credit-worth borrower – Minimum 20% down payment– Balance financed by “conventional” loan

• Promissory Note to secure repayment• Mortgage or Deed of Trust as collateral

– Loan fully amortized over 30 years– Bank earns modest profit over time interest

What’s the difference between a mortgage and a deed of trust?

• Mortgage, RCW 61.12– 2-party security instrument (borrower & lender)– Can only be judicially foreclosed– Borrower has post-sale redemption right

• Deed of Trust, RCW 61.24– 3-party instrument (borrower, lender, trustee)– Trustee has power of sale (in case of default)

• Also called “non-judicial foreclosure”• No deficiency after trustee’s sale RCW 61.24.100

Deed of Trust Foreclosure, RCW 61.24• Trustee’s sale is final

– No post-sale redemption, RCW 61.24.050– Right to possession in 20 days, RCW 61.24.060

• Borrower’s right to cure default– Reinstate (i.e., past due amount + fees) up to 11 days

before sale, RCW 61.24.090– Otherwise, must pay loan in full before sale

• RCW 61.24.040(f)

• Defects in foreclosure process– May provide grounds to restrain sale– May force trustee to start process over– Injunction provision not particularly useful

• RCW 61.24.130 (borrower must post security)

Foreclosure “Rescue” Scams• Transaction, or set of related transactions,

designed to unfairly acquire a gain from a homeowner faced with pending or anticipated home foreclosure by:– Appropriation of Home Equity; or

– Diversion of Homeowner’s Funds

Typical Foreclosure Rescue Scams• Quick-Hitters

– Scammer promises bogus or useless service– Homeowner pay direct fees or diverts mortgage payments

• Stalls– Scammer offers help getting loan or selling home– Scam artist reports progress, but continuous delays– Deal closes on eve of foreclosure (grossly unfair terms)

• Sale-Leasebacks (a.k.a. “lease-options”)– Scammer agrees to pay off or reinstate mortgage– Scammer takes deed, but with promise to re-convey– Scammer “leases” home to homeowner, who pays “rent”– Homeowner never gets opportunity to “buy back” deed– Scammer then claims ownership & removes homeowner

H.B. 2791• New Foreclosure Rescue Scam Legislation

– Signed 3-31-08, takes effect 6-12-2008– Will be codified at RCW 61.34, RCW 59.18

• Highlights:– Regulates “Distressed Property Transactions”

• Must use written contract, homeowner gets 82%+ of FMV, have ability to buy-back, right to cancel, et al.

– Makes “Distressed Property Consultants” fiduciaries– Protects victims against summary judicial eviction– Bans “equity surplus transactions”– Authorizes exemplary CPA damages up to $100K

• Scams pre-dating HB 2791– Usually assailable under CPA & common law theories– Some provisions of HB 2791 useful anyway

“Modern” Purchase Loans

• “Sub-prime” Loans– Loans at higher rates to borrowers with poor credit– “Alt-A” loans: hybrid of sub-prime & conventional

• 20% Down Payment No Longer the Norm– Banks supplement collateral with “PMI”

• Loans not always fully-amortizing– Borrower left with balloon payment– Often more than initial principal

• Good News & Bad News:– Good: More people can buy homes– Bad: Artificially inflates home prices

• Speculators profit, while families pay more• Might cause a bubble – oh, wait a minute…

“Post-Modern” Purchase Loans• Jumbo Mortgages”

– More than $417,000 principal• Too much for Fannie & Freddie• Looser underwriting guidelines

– Common Features:• Adjustable rates• 40+ year terms

• Toxic ARMs– Hybrid ARMS (“2/28,” “3/27,” etc.)

• Payment goes up, never goes down• Substantial payment shock at reset

– Payment-Option ARMs• Pay less than interest, until . . .• Negative amortization cap reached,• Then, massive payment shock (must fully amortize)

Mortgage Brokers• What is a mortgage broker?

– Home loan retailer (many different “suppliers,” i.e. banks)– Shops application to different lenders, picks “best” ones

• Borrowers often expect broker will use expertise to choose• But brokers often sell more expensive loans to make extra $$

– Gets commission from loan closing

• Governing Laws– Licensing Act, RCW 19.146 et seq.

• Establishes relationships, duties; requires written contract• Administrative Enforcement by Dept. of Financial Institutions

– Now will owe fiduciary duty to borrower• SB 6381 (effective June 12, 2008)• Dicey claim at common law

– Rushing v. Stephanus, 64 Wn.2d 607; 393 P.2d 281 (1964)– Brazier v. Security Pac. Mtg., 245 F.Supp.2d 1136 (W.D.Wn. 2003)

Loan Closing & ServicingServicing means receiving any scheduled periodic payments from a borrower pursuant to the terms of any mortgage loan, including amounts for escrow accounts … and making the payments to the owner of the loan or other third parties of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the mortgage servicing loan documents or servicing contract. In the case of a home equity conversion mortgage or reverse mortgage as referenced in this section, servicing includes making payments to the borrower.-- Regulation X, 24 CFR § 3500.2

Real Estate Settlement Procedures Act (RESPA), 12 USC 1601 et seq.• Governs real estate closings

– Requires HUD-1 settlement statements– Additional required disclosures at closing– Prohibits certain kickbacks & fee-splitting

• Also governs mortgage servicing– “Qualified Written Request” for information– Right to dispute servicing errors– Requires notice if servicing rights transferred

• Implemented by Regulation X, 24 CFR § 3500• Similar protections under Washington Mortgage

Loan Servicing Act, RCW 19.148, 19.149

HUD-1 Settlement Statement• HUD-1 required in “every settlement involving a

federally related mortgage loan in which there is a borrower and a seller”– 24 CFR § 3500.8(a) (Regulation X)

• Must “conspicuously and clearly itemize all charges imposed upon the borrower and all charges imposed upon the seller in connection with the settlement”– 12 USC § 2603

• Settlement agent must provide completed HUD-1 to borrower, seller, lender and/or their agents– 24 USC § 3500.10(b)

Servicing means receiving any scheduled periodic payments from a borrower pursuant to the terms of any mortgage loan, including amounts for escrow accounts under section 10 of RESPA (12 U.S.C. 2609), and making the payments to the owner of the loan or other third parties of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the mortgage servicing loan documents or servicing contract. In the case of a home equity conversion mortgage or reverse mortgage as referenced in this section, servicing includes making payments to the borrower.

-- Regulation X, 24 CFR § 3500.2

Servicing Issues

Servicing Problems Are Common!

• Payments not properly posted, credited

• Property taxes/insurance not paid

• Bogus fees & charges

Servicing errors usually produce multiple derivative problems.

– Print-out of loan history available– Customer Service phone logs available

Home Equity (Refinance) Loans

Predatory Lending:• Loan in which lender secures an unjust gain at

the expense of consumer borrower– Excessive Cost of credit (i.e. “finance charge”)– Loan inappropriate for borrower’s situation– Other unfair terms, circumstances

• Alternatively, broker makes unjust gain (at consumer’s expense) by arranging loan– Loan may be abusive in its own right; or– Broker fees make respectable loan predatory

• (Borrowing) Double Trouble: both broker and lender benefit from predatory terms & practices

What makes a loan “predatory”?• Excess cost

– Interest rate too high (compared to going rate)– Excessive up-front finance charges (aka “points/fees”)

• Inappropriate Loan– Borrower qualified for substantially better terms– Loan not suitable for borrower’s needs

• Loan fails to meet borrower’s objectives• Or, borrower better off with no loan at all

• Unfair Play/Fraud– Borrower tricked/misled -- actively or passively– Lender/broker manipulated/exploited circumstances– Credit discrimination (high NJP field office priority)

• Exploitation of borrower’s disability, language barrier, etc.• Educational deficit related to membership in protected class

Some Classic Predatory Tactics• “Loan Flipping”

– Refinance loan designed just to gain transaction fees– No corresponding benefit to borrower from refinance– May be repeated multiple times

• “Steering”– Targeting borrowers with certain vulnerabilities for

unfavorable loans– Vulnerabilities often correspond to protected classes– Often involves making subprime loans to borrowers

who would qualify for conventional loans

• “Packing”– Adding in “junk fees”– Selling useless products & services along with loan– Often associated with home improvement scams

• “Bait & Switch”– Attract borrower by advertising low rates– Actually intending to sell loans at higher rates

• “Asset-Based Lending”– Borrower lacks income to make payments– Borrower must sell or refinance home

More Classic Predatory Tactics

Basic Anti-Predatory Lending Statutes• Truth-In-Lending Act (TILA), 15 USC § 1601 et seq.

– Lender must make “Material Disclosures”• Amount Financed (principal)• Finance Charge (interest & fees)• Total of Payments• Annual Percentage Rate (finance charge as APR)• Schedule of Payments

– Failure to make accurate disclosures is actionable• Can seek damages up to 1 year• Can seek loan rescission up to 3 years (or until sale)• Per se violation of Wash. Consumer Protection Act

• Standard form, calculations for disclosures– Theoretically enables comparison shopping for credit

• Implemented by Regulation Z, 12 CFR § 226

Home Ownership & Equity Protection Act (HOEPA), 15 USC § 1639

• Applies to high-cost home equity loans only– Loan’s cost must exceed “triggers”

• APR 8% above benchmark Treasury security• Points/Fees exceed 8% of loan amount

– Regulation Z, 12 CFR § 226.32• Extensive protections for covered loans

– Thus, HOEPA-covered loans very rare

• Strong remedies for HOEPA violations– TILA damages, rescission remedies– Per se Washington CPA violation

State Law Causes of Action• Common Law

– Fraud, Negligent Misrepresentation– Breach of Fiduciary Duty (brokers only)– Unconscionability

• Statutory– Consumer Protection Act, RCW 19.86 et seq.

• Prohibits “unfair or deceptive acts or practices”• In scope of trade or commerce

– Mortgage Broker Practices Act, RCW 19.146 et seq.• Regulates those who broker loans (licensed or not)

– Credit Service Organizations Act, RCW 19.134 et seq.• Regulates those who perform “credit services”

– Consumer Loan Act, RCW 31.04• Regulates certain non-traditional lenders

– Usury, RCW 19.52 et seq.• For most purposes pre-empted (DIDMCA, AMTPA)

What’s a “Reverse Mortgage?” A “reverse mortgage” is a home equity loan in which the borrower’s duty to repay is deferred until the owner dies, moves out of the home, or until the home is sold.

What to know about reverse mortgages:• Must be age 62+ to qualify

– Older the borrower, more you can borrow

• Proceeds kept in cash may affect public benefits

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