Lex Spaeth

REO Buyer Can Select Escrow and Title:

Effective October 11, 2009, the Buyer's Choice Act prohibits an REO lender selling residential property up to four units from directly or indirectly requiring the buyer to purchase escrow services or title insurance from any particular company. A buyer, however, who has received written notice of the right to make an independent selection, may agree to the REO lender's escrow or title recommendations. An REO lender that violates this law can be held liable for three times the charges the buyer incurred, whereas a violation by the seller's agent may be subject to license disciplinary action. This law expires on January 1, 2015. Assembly Bill 957.

A shattered California home building industry received a boost Wednesday when the state Senate voted to extend a popular $10,000 tax credit that fueled thousands of new-home sales last spring and summer.

The Senate voted 35-1 to reauthorize the use of $30 million in credits not awarded during the first program. That should allow the state to give tax credits to about 4,300 more buyers of new unoccupied homes, many of which are in inland areas of California including the Central Valley. Eligible buyers would get a maximum of $3,333 in credits for each of the next three years.

Senate Bill X3 37 goes now to the Assembly, which is expected to consider it next week. It must pass that legislative body and be signed by Gov. Arnold Schwarzenegger to become law. But the Assembly approved an earlier version of the bill by wide margins and the governor has said he favors the buyer tax credit as a stimulus to the economy.

"This tax credit worked so well that in just four months it was gone," said Sen. Ray Ashburn, R-Bakersfield, author of SB X3 37. "This is a good program that assisted people in buying homes and sharing in the American dream."

More than 10,600 buyers of new homes were approved for the tax credit before the state Franchise Tax Board stopped taking applications July 2. Many buyers combined it with a federal $8,000 tax credit for first-time homebuyers to claim up to $18,000.

Since July, the FTB has determined that the average state credit will be $7,000, not the full $10,000. That freed up another potential $30 million in credits. According to the bill, buyers who close escrow after the credit is reauthorized will be eligible; but not those who closed escrow on new homes between July 2 and the date the bill goes into effect.

Reaction in the building industry Wednesday was swift.

"We're very pleased," said Allison Barnett, legislative advocate for the California Building Industry Association, a builder trade group that sponsored the bill. "The credit has been effective in creating jobs, getting people back to work and getting people back in the sales offices, which is essential for recovery in California."

Builders contend the tax credit has helped them trim excess inventory, selling thousands of finished, but unsold, homes. Critics, including some economists, have argued the tax credit does little to stimulate the larger economy. And others question subsidizing new-home sales when there is a massive glut of existing homes for sale in California.

Brad Diede, executive vice president of the California Association of Specialty Contractors, said his group lobbied lawmakers statewide to extend the credit. Said Diede, "What we saw was employers putting people back to work after they had to lay them off. It's stimulating the economy all the way around."

The FTB said Sacramento, Roseville and Fresno were among top cities where residents received tax credits.

An earlier version of the bill, carried most of this year by Assemblywoman Anna Caballero, D-Salinas, failed to pass before a September legislative deadline. Many thought the bill was dead. But it was folded Wednesday into Ashburn's SB X3 37 as part of a special session on water policies.

Ashburn carried the original bill last February to allocate $100 million for buyer tax credits. That was passed to win key Republican votes for plans to close a then-$42 billion state budget deficit.

People who watch housing prices have predicted for months that another deluge of foreclosed homes would soon hit the market – once again crushing Sacramento-area property values.

But the flood of bank repos hasn't materialized. And now, a leading California foreclosure analyst says it probably won't.

"From the things I'm seeing, there's not going to be a wave any time soon," said Sean O'Toole, president of ForeclosureRadar, a Contra Costa County firm that tracks mortgage defaults and foreclosures.

Despite a growing number of loan defaults and delinquencies, O'Toole said banks are now selling more homes than they're repossessing – and political pressure on them to work with homeowners is slowing foreclosure rates. Other market watchers also see banks slowly dribbling out their supply of repossessed homes.

"From all appearances, it does look like they're managing it better," said Charlene Singley, president of the Sacramento Association of Realtors.

If the supply of homes for sale remains in balance with demand, the danger of another sharp downturn in prices is lessened, at least in the short run, O'Toole and others said Thursday.

The prospect of another wave of new foreclosures has long threatened to destabilize a capital-area market precariously balanced by massive repo sell-offs, curtailment of new-home production and buyers enticed by lower prices, low interest rates and tax credits.

Even as disaster scenarios remain easy to imagine, the number of area for-sale signs is now at an encouraging 52-month low.

Still, the downside to this relative steadiness in the near term, O'Toole acknowledged, may be that it will take longer to work through the mortgage crisis and recover.

On Thursday, La Jolla researcher MDA DataQuick offered fresh evidence of the market's tenuous balance.

Regional home sales in September ticked up slightly from August, with 3,454 new and existing homes changing hands in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties. Yet September marked a fourth straight month in which sales fell below the same time last year.

That's because recent sales have been unable to match last year's sharp rise as banks unloaded thousands of repos, a phenomenon that also put downward pressure on area home values. O'Toole said banks have cut their statewide repo inventory by 41 percent in the past year.

Now that the repo sales pace has slowed in Sacramento County – from 70 percent of sales in February to 53 percent in September – median sales prices have quickly stabilized.

DataQuick reported a September median price of $176,000 in Sacramento County. Median is that point where half the homes cost more and half less. That was down from a 2009 high of $180,000 in August, but still well above February's housing bust low of $160,000.

Fewer repo listings this year brought another phenomenon not seen since the boom: bidding wars. The phenomenon so frustrated state employee Lauri Lathrop that she finally bought a new house in Elk Grove in September.

"I was putting in offers $15,000 above the asking price, and I was getting outbid," she said Thursday. "I saw this new house and nobody could outbid me. It was like it was mine," she said.

Lathrop obtained a favorable interest rate and an $8,000 federal tax credit for first-time buyers – though she missed the window for a $10,000 state tax credit for buyers of new homes.

Such perks combined with affordability to prod more buyers off the fence this year. Sales of new and existing homes combined from January through September this year total 30,231, beating 29,751 during the same period in 2008 and 26,777 from January through September 2007.

As a result, the number of for-sale signs in El Dorado, Placer, Sacramento and Yolo counties has fallen to May 2005 lows, according to Sacramento researcher TrendGraphix.

The affiliate of Lyon Real Estate counted 6,129 listings in the four counties at the end of September. The numbers have fallen for 25 straight months since peaking at 16,262 in August 2007.

TrendGraphix said 13.4 percent of current listings are bank repos and 27 percent are short sales, in which owners hope lenders will accept a sales price below what they owe. That means 40 percent are so-called "distress sales."

That's scary, but real estate agents like Singley and Carey Covey of Cook Real Estate maintain there is an ample supply of buyers. And sales statistics from the Sacramento Association of Realtors show that banks are faster to approve short sales now than months ago.

As the repo share of the sales mix has continued to decline, short sales rose to almost 20 percent of sales in September in Sacramento County and the city of West Sacramento, SAR reported.

Covey, who specializes in selling bank-owned homes, said he believes the supply of repos will remain steady. But he expects no trouble selling them at such a pace.

"As of right now, we're still short on supply, and there's still a lot of demand," he said.

Finally, I wondered how long it would take?

Loan modification firms that promise to help struggling borrowers get their mortgages rewritten have been banned immediately from asking for cash upfront.

Attorneys, too, who specialize in loan modifications are no longer allowed to ask consumers for payment before they perform services. The ban expires on Jan. 1, 2013.

The abrupt change in California law comes after Gov. Arnold Schwarzenegger Sunday signed Senate Bill 94, by Sen. Ron Calderon, D-Montebello. As an urgency measure, the bill takes effect immediately.

Calderon, in an interview Monday, called the signing "a very big victory."

Schwarzenegger's action follows massive numbers of complaints to the state Department of Real Estate from consumers who said they paid up to $4,000 upfront to firms that often abandoned them.

Schwarzenegger also moved Sunday on a second mortgage front, cracking down on risky lending that fueled the housing boom. He signed Assembly Bill 260, which prevents mortgage brokers from earning lucrative special fees for originating high-risk loans.

The bill limits the size of prepayment penalties and bans more special fees to brokers for making loans with such penalties. When the new law goes into effect Jan. 1, mortgage brokers will have a fiduciary duty to borrowers, meaning they must put borrowers' financial interests above their own when making loans.

The bill also bans negative amortization loans. Those are loans that grow larger if a borrower makes only a minimum payment that doesn't even cover interest costs. Thousands of Sacramento-area borrowers and more statewide are struggling with such so-called pay option loans.

The bill's author, Assemblyman Ted Lieu, D-Torrance, said, "This bans some of the worst practices in the subprime mortgage industry. These are practices that led to the foreclosure crisis that eventually caused a financial crisis that triggered a recession."

Most of the loans banned by the bill have already been suspended by lenders, which have greatly tightened credit rules.

In the wake of the mess left by such mortgages, loan modification firms have proliferated, many demanding upfront fees. SB 94 aims to stop abuse of borrowers in trouble.

Loan-modification firms have made relentless pitches to borrowers through radio and television ads, postcards and telephone calls. Many desperate people have turned to them, often coughing up a few thousand dollars for help that didn't come.

"This is a huge problem, and the signing of this (bill) will help," said Tom Pool, spokesman for the California Department of Real Estate. He said the department has 1,300 complaints on file and has issued 400 cease and desist orders against loan modification firms. The law banning advance fees aplies to firms in California or elsewhere that solicit clients in California.

The new law also specifies that loan modification firms must tell potential clients they can get the same services for free from government-approved nonprofit mortgage counselors. The firms cannot receive payment until they have performed all services promised in a contract with the borrower. Borrowers must pay the loan modification firm for services provided, even if the firm can't get the loan modified.

Lawmakers passed the ban on upfront fees with a two-thirds vote, backed by a coalition that included the California Association of Realtors, cities hard hit by foreclosures, organized labor and consumer groups.

The ban on advance fees was made temporary in recognition that many firms follow the rules, said Pool. It also recognizes that the loan meltdown will eventually end.

"We didn't want to put a permanent ban on legitimate business during a temporary crisis," he said.

A short sale is a process in which the mortgage holder agrees to accept less than the balance owed on the mortgage at sale to prevent foreclosure. The lender would much rather see you sell the property than be forced to take the property through foreclosure, as foreclosure is a costly and time-consuming process.

Generally speaking, a short sale occurs when a homeowner who is behind on his or her mortgage payments, and who owes more on his home than it is currently worth, contacts the mortgage lender asking the lender to allow him to sell the home for less than the balance of the mortgage. For example, if you owe $100,000 on your mortgage, but are only able to sell your home for $80,000, you would need to have your mortgage lender agree ahead of time to allow the sale to proceed. In fact, there is little use in putting your home on the market until you, or your attorney, have spoken with your mortgage company's loss mitigation department to discuss proceeding with a short sale. Many lenders will authorize short sales in an attempt to prevent property from falling into foreclosure; however, some lenders will not allow short sales to proceed. Usually, no lender will authorize a short sale unless the borrower is already in arrears on his mortgage, as the lender will see this as evidence that the borrower can no longer afford the home. In addition, your mortgage lender's loss mitigation team will probably want to see documentation of your income and assets to verify that a financial hardship exists and that you truly cannot afford the home.

In regards to your credit score, the negative credit impact of a short sale is generally significantly less than that of a foreclosure. A short sale will not appear as a foreclosure on your credit report, and therefore only the previous delinquency on your mortgage will appear. Also, I believe that most mortgage lenders report a mortgage that is paid through a short sale as being in a redemption status. While the delinquency and change of status on your mortgage loan will certainly lower your credit rating, from my experience, the negative impact is usually much less than the negative credit implications of an actual foreclosure. If you must choose between a short sale and allowing your home to go into foreclosure, from a credit perspective, a short sale is probably the wiser choice. Again, I encourage you to speak with an experienced real estate attorney to discuss the details of your situation to help you determine the best course of action in your circumstances.