Bruce Methven

Given the terrible state of the economy and the real estate markets – and given the large number of subprime residential loans made during past years – many borrowers are looking for loan modifications as an alternative to foreclosure. Unfortunately, at least at this point there is not much that can be done for many homeowners, although this area is in flux and additional government and lender programs may become available.

Obviously there is no point paying for loan modification work unless there is a good chance to modify the loan. (Where there isn't a good chance of modification, unfortunately there are limited options, such as bankruptcy, giving the lender a deed in lieu of foreclosure, possibly finding someone to arrange a short sale of the property or walking away from the property, although all of these have drawbacks.) This article discusses what we believe makes a homeowner a good candidate for loan modification. Other attorneys may have different opinions. Our opinion also is that, because of the cost, litigation with the lender is not an option for most homeowners. Finally, this article is directed at California borrowers; each state has its own real-estate laws.

For an owner to be a good candidate for loan modification, the property must be the owner's principal residence – and not a vacation home or second home. While there are exceptions, in general most lenders are not modifying loans on vacation homes or second homes.

Also, while Notices of Default alone are OK, no foreclosure sale should be set yet. Many lenders write off the loans when they set a foreclosure sale and therefore become very hard to work with respect to loan modifications.

If the loan has been modified previously, it probably cannot be modified again (although there are some exceptions if there is no waiver of rights in the prior loan modification and other conditions are met).

Neither spouse may be out of work or expected to lose their job in the near term (unless the unemployed spouse's income was not used to get the loan, which is unlikely).

Often no decrease in the interest rate is possible if the loan is already at a fixed rate of 6% or less, although a longer loan-term (an increase in the amortization term) may be possible.

In addition, for an owner to be a good candidate at least one of the following must be present:

• The current value of the home must be less than the loan against it.
• There must be an upcoming or relatively recent interest-rate increase or a recalculation (recasting) of the loan causing higher monthly payments.
• There is past hardship (death of spouse, loss of job, sickness, etc.) that has been resolved.
• There is a substantial lending violation, for example, a violation of the Truth-In-Lending law or RESPA. (This is usually not something an owner can determine.)

Further, after modification, the borrower must have no more than an 80% debt to income ratio (for example, $100,000 annual income and $80,000 in annual debt payments). It's possible to run trial figures using a fixed 6% rate for 30 years and an online mortgage calculator. One place that mortgage calculators are available are at http://www.mortgage-net.com/calculators/.

If a loan modification occurs it usually is in the form of a decrease in the interest rate. At times, it may be possible to also extend the term of the loan from 30 to 40 years, but this depends on the lender. Owners should realize that reductions in the principal of the loan are very rare. Certainly if there is any equity in the property a principal reduction is not possible. Sometimes a principal reduction is possible if a spouse has died or there is a major (far beyond the usual) lending violation. Even then, often the value of the property must so much less than the balance owed that there is no reason for the owner not to walk away.

An owner who seems to be a good candidate for loan modification should try to find an attorney or loan modification company who will make a more thorough review of the loan documents, etc. and give an opinion about the chances for loan modification (although there will usually be a charge for that) before committing to a full agreement for loan modification services.

Borrowers who obtain Fannie Mae (FNMA, the Federal National Mortgage Association) loans for apartment buildings frequently receive lower-interest loans - but must comply with all of the Fannie Mae requirements. One of these is that they hire an attorney to prepare an opinion letter to the initial lender and Fannie Mae (which buys the loans after they have closed). The lender is required to hire an attorney for an opinion letter, but the borrower still must have its own attorney as well. This article is designed to provide a few tips and cautions about the process for these loans.

The borrower's attorney must be licensed to practice law in the state where the property is located. If the property is located in one state and the borrower is located in another, the lender and Fannie Mae may require that two different attorneys be hired.

The borrower should get the borrower's attorney involved as early as possible in the process, since a number of items that need to be completed for the opinion letter - such as obtaining certificates of good standing for the borrower from the State -- take time. The loans are only good for a specified period; after that, the interest-rate lock is lost - and the borrower's counsel's opinion letter and the investigations on which it is based must be completed prior to closing.

Among other things, the borrower's attorney is required to review the articles and the bylaws, operating agreement or limited partnership agreement of the borrower, plus any amendments to those documents. If the borrower is a limited liability company or limited partnership, then the borrower's attorney also must review the organization documents for the manager(s) of the limited liability company or the general partner of the limited partnership (and also obtain certificates of good standing for them). As a result, it's a good idea for the borrower to round up these documents early in the process.

In addition, the borrower must be a single-asset entity, meaning that it owns only that one property and engages in business solely with respect to that property. The lender, which must follow the Fannie Mae requirements, often requires that amendments be made to the borrower's organizational documents to create or strengthen the single-asset entity restrictions.

There are a number of new requirements for the Fannie Mae loans, many of which are novel. For example, Fannie Mae now has a requirement that the borrower certify, after "due inquiry and investigation" that "there is no evidence of any illegal activities relating to controlled substances on the Property". Since this is a new provision, there is no guidance as to what constitutes compliance with this requirement. That may require the borrower to investigate whether any police reports have been filed regarding illegal drug activity concerning the apartment - which again can take time. Because of these new and untested loan provisions, it is in the best interest of the Borrower to engage counsel to help them interpret and understand how these requirements may impact their particular loan package.

Fannie Mae has its own forms - note, deed of trust, borrower's counsel's opinion letter, and many more - and it is very rare that any of those provisions can be changed. Essentially, the price of getting the lower-interest rate on a Fannie Mae loan is that everything is done the way Fannie Mae wants. Still, it can be well worth it. Borrowers just need to remember that they should get their attorneys involved and begin gathering the documents to be reviewed very early in the process.

There are a number of steps that creditors with commercial debts can take to enforce judgments they have received against businesses that owe them money. (Consumer debt collection is much more regulated and is not addressed in this article.) Collection agencies generally work on a contingency-fee basis, often charging 25% to 40% of the amounts collected. Where the amount owed is larger (at least $5,000 or more), there is an attorneys' fees clause and the debtor has assets (and particularly where the creditor has a security interest in some or all of those assets), it may cost less in the long run to hire an attorney on an hourly basis for collection.

Debts incurred primarily for business purposes are not (unlike consumer debts) subject to the federal Fair Debt Collection Practices Act or the California Fair Debt Collection Practices Act.

Enforcing Judgments Entered in States Other than California

(If you already have a California judgment, you may want to skip ahead to the next section.)

If the creditor already has a state-court judgment from a state other than California, the first step is obtaining a sister-state judgment from a California court. (If the creditor has a final federal-court judgment entered outside California, the judgment may be enforced by registering it in a federal-district court in California, and then enforcing it just as if the judgment had been entered there in the first place.)

The process of obtaining a sister-state judgment is initiated by filing an application for entry of judgment with a California court. The application should be filed in the county where the business's primary office is located – but it can be filed in any county if the business is a "nonresident". A copy of the original judgment that has been properly authenticated by the court issuing it must be attached to the application. Once the application is filed in California, the court clerk must enter judgment.

If there is the potential for great or irreparable injury (e.g., the debtor is concealing or transferring assets, is on the verge of insolvency, or intends to leave California), the application can request that the Court issue a writ of execution or other enforcement immediately.

In any case, notice of entry of the judgment must be served on the debtor in the same manner as a summons and complaint. Unless the creditor has obtained a writ or other means of enforcement based on potential great or irreparable injury, the creditor must then wait 30 days before commencing enforcement proceedings, including obtaining issuance of a writ of execution, obtaining and recording an abstract of judgment for real estate, or filing a judgment lien on personal property. If the debtor does not file a motion to vacate the judgment within the 30-day period, enforcement of the judgment proceeds just as with a judgment that was obtained in California originally.

Writs of Execution

A writ of execution is a key tool for enforcing a judgment. The debtor does not receive any advance notice of this, so generally will not find out about it until it is used to seize the debtor's income or assets.

A separate writ of execution must be issued for each county in which a levy is to be made. As a result, immediately upon entry of judgment it is often best to obtain a separate writ for each county in which the debtor has a place of business or assets. Each writ is good for 180 days and can be immediately renewed. Multiple levies can be based on a single write of execution. Levies can be issued against bank accounts, accounts receivable, personal property, etc., although intangible personal property (bank accounts, accounts receivable, notes, etc.) often should be pursued first because it is more expensive and more complex to levy on tangible personal property (inventory, equipment, etc.). Still, if the debtor has an ongoing business, a levy on inventory or installing a keeper may be highly effective, although expensive.

If time is of the essence – for example, due to concerns that the debtor may dispose of or harm the collateral – the writ of execution can be sought on an ex parte basis, which is faster than the usual process. In addition, at the same time a temporary restraining order can be sought ex parte against the debtor as an "and/or" alternative to provide protection in case the Court declines to issue the writ of execution ex parte.

If the debtor is hiding assets or keeping them at home, or the assets are outside of California, then a "turn-over" order can be obtained from the Court directing the debtor to transfer the property to the levying officer. This type of order is enforceable by contempt of court, which can make it more effective than levying on property. Because of this, a turn-over order must be served on the debtor personally. This type of order cannot be used with third parties, although a third party holding property of the debtor can be served with a copy of the writ of execution and notice of levy.

It is also possible to obtain a seizure order if the property is being kept at a private residence or other "private place". (A levying officer cannot seize such property without a court order.) In addition, it is possible to obtain an order appointing a receiver or ordering the levying officer to take action needed to preserve the property, for example, to keep a debtor from spending or transferring accounts receivable as they are received.

Bankruptcy

Of course, the debtor may declare bankruptcy. Entities (corporations, LLC's, etc.) may file either a Chapter 7 bankruptcy (liquidation) or a Chapter 11 bankruptcy (reorganization with the intent of keeping the business going). Individuals (which include sole proprietorships) may file either a Chapter 7 bankruptcy (liquidation) or a Chapter 13 bankruptcy (sometimes called a wage-earner's plan), with the latter often used to prevent foreclosure of a personal residence.

The first things to be done in a bankruptcy are to file a request for special notice (to guarantee receiving notice of all hearings, etc. in the bankruptcy) and to file a claim for the debt, unless the debtor has the amount and type of debt and the value of any assets securing the debt correctly listed in the schedules the debtor files or the bankruptcy is a no-asset Chapter 7.

A secured creditor has a large advantage in bankruptcy. Claims (debts) in a bankruptcy are broken into three categories. Priority claims, which include the costs of the bankruptcy proceeding (including fees that must be paid to bankruptcy trustees) and most taxes, take first priority over everything else. The second category is secured claims; a secured creditor has the right to be paid from the security, assuming there are enough other assets to pay the priority claims. If the value of the assets securing a secured creditor's claim are not worth enough to cover that entire claim, the creditor is a secured creditor up to the value of those assets and an unsecured creditor with respect to the remainder. The third category is claims that are not secured by any assets.

In a Chapter 7 liquidation, the assets are sold (with certain exceptions for individual debtors like "tools of the trade"). Then the priority claims are paid first, the secured creditors are paid to the extent the value of the assets securing their claims cover those debts, and the remainder is paid pro-rata to the unsecured creditors.

In a Chapter 11 reorganization (for entities) or a Chapter 13 plan (for individuals), a repayment plan must be approved. The repayments are generally made over three to five years. The plan does not have to pay unsecured claims in full as long as long as unsecured creditors receive at least as much under the plan as they would if the debtor's assets were liquidated.

In a Chapter 11 reorganization or a Chapter 13 wage-earner's plan, the debtor is not supposed to use any "cash collateral" (such as accounts receivable) securing a secured creditor's claim unless the debtor receives Court approval. In those situations the creditor can require that it be "adequately protected". Some debtors, though, use cash-collateral without Court approval. If that is occurring, the creditor may need to file a motion for adequate protection to protect its collateral. (Creditors have an opportunity to vote for or against payment plans, but the process can be complicated and will not be discussed here.)

If the bankruptcy is dismissed (which can happen if the debtor does not file the appropriate schedules or act in accordance with the bankruptcy rules), then collection efforts resume back in the state court.