Richard Zaretsky, Florida Real Estate Attorney

Richard Zaretsky's Short Sale Blog Articles (copyright 2008) - A Monthly Updated Table of Contents of Articles by Richard P. Zaretsky, Esq

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I have seen so many Land Trust Agreements and Declarations of Trust as a precursor to a Short Sale that I just have to write about it - again!

Previously I had written about property flips in SHORT SALE FLIP - QUESTIONABLE METHODS, but I want to touch on the latest "foolproof" craze - Land Trusts.

Here is how it works:

First you need the distressed homeowner.

Then you need the investor who wants to "control" the property so a buyer can be found for more than the investor has to pay for the property.

Next you have the investor convince the distressed homeowner to execute a quit claim from the distressed homeowner to the Trustee of the Land Trust. The Trustee is the investor and the distressed homeowner is told that since the beneficiary of the trust is the real owner of the property, he can continue to live in the property and use it without making any payments to the bank.

The Trustee is insulated from any liability for the existing mortgage(s) and promissory note(s) on the property and is not required to make any payments on the mortgage(s).

A simple Contract for Purchase and Sale of Real Estate is usually signed between the Trustee of the Trust and the distressed homeowner, and there is also executed, usually for $100 of payment, an Assignment of Beneficial Interest which document assigns the interest of the beneficial owner of the trust (also known as the distressed homeowner). This Assignment essentially puts full ownership of the home into the hands of the Trustee.

The Trustee then tries to sell the property to a new party and the Trustee pockets the difference between what is negotiated with the bank and what is paid by the new buyer.

Why these machinations?

Typically the course of events would be that the distressed homeowner finds a buyer who buys based on the short sale approved by the existing lender(s) and then resells the property to the new buyer and makes a profit. But the problem there is that because of the recent sale by the distressed homeowner, new lenders are hesitant to accept an appraisal of the same home that recently sold for a lower price. If there is no lender and it is a cash purchase, the new buyer is likely to balk at finding out from the public records that the house maybe weeks before had sold for considerably less money.

So the gimmick of the Land Trust is used to hide the real transaction. This results in not only hiding disclosure of the real transaction values from the new lending bank and its appraiser, but it can have devastating results for the distressed homeowner.

The distressed homeowner jumps from the frying pan to the fire.

The last thing the distressed homeowner needs is to be worse position than when the Land Trust was first signed, but that is what typically happens. Here is why:

1. The new "Trustee" is by the terms of the trust a fiduciary to the beneficiary. But the Trustee acts every way but as a fiduciary is to act for its beneficiary.

2. The Trustee is not looking to protect the property or create income or profit for the beneficiary. The Trustee is looking to make a profit for itself with no benefit to the beneficiary.

3. The Trustee is hiding behind the Assignment of Beneficial Interest in making those dealing with the Trustee to think they are dealing with a fiduciary - but indeed they are dealing with the principal.

4. The Trustee has no obligation to pay the mortgages that are now in arrears, or any other expenses, therefore keeping the property at risk of loss.

5. The Trustee will abandon the transaction by merely resigning if the Trustee finds that it cannot find a buyer to flip the property to at a profit worth its while after negotiating with the distressed homeowner's lender(s).

This leaves the distressed homeowner in a position where it has lost control of the house yet they are still fully obligated on the mortgage(s) and promissory notes and could have an imminent foreclosure judgment filed against them and be physically forced from their home. Added to this is the financial liability that they will incur. (See Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios).

The lowdown

My belief is that there is simply no legitimate business reason (mutual to both the distressed homeowner and investor) for using a Land Trust to accomplish a Short Sale because the Trustee is always seeking to avoid certain disclosures while maintaining control of the property. The same goes for Powers of Attorney, too.

No blog, article, human being with whom I have met in person or on the telephone, has explained a legitimate business purpose to the Land Trust as a precursor vehicle to a Short Sale. My belief is on one can and it is one of the most popular scams going right now.

Insurance underwriters also concur with my opinion, (Short Sales and Title Insurance - Critical Look at Hybrid Closing Schemes) yet there are plenty of attorneys out there that swear that it is a great way to make money. I do agree it is an easy way (although possibly an illegal way) to make money - but at the cost of further damaging the distressed homeowner. That is what got this country into trouble in the first place and I would not condone the conduct of others to continuing this problem.

Here in Florida recent legislation has tried to reign in or control transactions where the distressed homeowner gives up equity or property ownership in similar situations - but some will say that the Land Trust also insulates the investor from the controls of that law. FLORIDA FORECLOSURE FRAUD BILL - UPDATE

Distressed homeowners have plenty of solutions available to them and they are getting easier to implement. But distressed homeowners need to understand that they are in a painful situation and there is no magic pill, no extra strength Excedrin, and no person that can eliminate their pain. There are solutions and these solutions when properly applied will considerably ease the pain - but not eliminate it. Only time can heal these painful events. Land Trusts and Powers of Attorney to accomplish Short Sales will only increase the pain.

Copyright 2008 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com

The Florida Association of Realtors took the lead in making some semblance of consistency, order, and standardized forms for use by Realtors for Short Sale transactions. I doubt many Sellers or brokers realize the draconian conditions of the documents they are using. If you are among them, this article may open your eyes. Because the evolution of Short Sales in 2007 and 2008 has been so dramatic, the forms became problematic at the outset. My belief, which is shared by many informed attorneys, is that that they need dramatic changes to better represent the rights and obligations of the Seller.

For those of you that need a primer on Short Sales, I would direct you to my article BACK TO BASICS - A SHORT SALE PRIMER.

The Short Sale Addendum to Exclusive Right of Sale Listing Agreement

The Short Sale Listing Agreement Addendum is the start of the problem. (The body of the linked form is the FAR form and I have borrowed it from a broker who has it online.)

Paragraph 1 says, in part the listing broker can provide any and all mortgage and /or other lien account and payoff information to prospective Buyers and /or their agents. When I represent a Seller, the Seller usually wants to keep personal financial information private, regardless of the transaction being a short or regular sale. Authorizing "any and all" mortgage information includes financial information about the borrower that should never be in the knowledge domain of the Buyer. Further, if the Lender has advised the Seller or seller agent that it will take (for example) $250,000 for a release of the lien of the mortgage, why should that knowledge be in the domain of the Buyer? That information is or should be private between the Seller and its Lender! Disclosing the information takes any negotiating advantage away from the Seller. With that information in the hands of the Buyer, the Seller is unable to demand a higher price (and in doing so perhaps covering future tax liability or post closing demands from the Lender for a deficiency that is now larger than it could have been if the Seller could have negotiated a higher price). Indeed as I will point out shortly, the FAR Listing Agreement Addendum encourages disadvantaging the position of the Seller.

Paragraph 2 says that the broker is "authorized" to include a Short Sale contingency in the purchase and sale contract. Authorized is the wrong word. Something akin to "must" would be more appropriate.

Paragraph 4 is mysteriously silent on what happens if the Lender reduces the commission it will allow. Must the Seller honor the higher commission and thus have a remaining obligation to the listing broker for the difference? I think so!

Paragraph 5 has many references to a "deficiency judgment". There is no such thing in a Short Sale. There is merely a non-judicial deficiency. There is no judgment. For an explanation of the differences see FORECLOSURE DEFICIENCY ORDER VS SHORT SALE NEGOTIATED PAYBACK. The FAR addendum also requires that the Seller may have to pay money into escrow (this must mean the closing agent's escrow account) to make up short falls in the settlement statement that the Lender is requiring the Seller to pay. And worse again, the addendum requires the Seller to pay the Lender any short fall (deficiency) that the Lender may demand under terms the Lender can set. The huge problem here is - what if the Seller can't meet those Lender demands or terms? Then the Seller is in breach of the listing agreement!

Short Sale Addendum to Purchase and Sale Contract

The Short Sale Contract Addendum, again linked here thanks to someone who put it online, is a carry over of the problems in the Listing Addendum.

Look at paragraph 1 and you will immediately see a missing important element. Basic knowledge of the law says that a mortgage is a collateral instrument to secure the payment or performance of some obligation. The mortgage is an independent obligation. Usually in the context of real estate we talk about a "mortgage" as the obligation to pay money and it is a lien on the real estate. The real legal utilization is different. The first transaction is the lending of money, which is evidenced by a promise to repay called a Promissory Note. Usually the obligation to pay (the Promissory Note) is "secured" with the pledge of collateral - usually the real estate. So we have two independent instruments that can be independently sued upon. See my explanation mortgage components at Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios.

What I am getting at is that the Short Sale Contract Addendum does not give the Seller the ability to negotiate the terms of the repayment or no payment of the promissory note. The Short Sale Contract Addendum only deals with releasing the lien of the mortgage from the real estate. The future fate of the Promissory Note is still over the Seller's head! Again, if the Seller refuses to accept the terms offered by the Lender, the Seller is then in default of not only the Listing Agreement but the Purchase and Sale Agreement as well!

Now I suppose I am not making any friends at the FAR over this article, but I am far from alone in my opinion. I was recently at a half day seminar for real estate attorneys on the Short Sale and foreclosure issues and this same issue was raised. No one in the room said the analysis was wrong.

How to Fix the Addenda

Around the same time the FAR forms were being drafted I was also drafting similar forms for use by my clients and their brokers - and we still use them unchanged because they specifically give the Seller the right and ability to say no to the Lender in a Short Sale transaction. This is a very important right necessary to make the Trilogy of the negotiation work. See my article on the SHORT SALE TRILOGY.

The fix for the Listing Agreement Addendum and Short Sale Contract Addendum is to include language that opens up the ability of the Seller to make good faith negotiations with the Lender(s) for the terms of the release of the lien on the real estate, without a penalty or payment obligation to the broker if the negotiations fail. For example, language like, "This Contract is contingent upon an agreement between the Seller and Seller's creditor(s), acceptable to both, to sell the Premises for less than the loan amount(s)" would make a world of difference. Determining what is "good faith" is always a problem, but so is "diligent and continued efforts" as already contained in the FAR Exclusive Listing Agreement language. Contract obligations are to be conducted in good faith under Florida law, so there is nothing new here. If a reader wants a copy of the forms I have created I will try to honor your requests - just leave a comment to this article requesting them.

Time for a Fix

The old saying, if you are going to do it you might as well do it right, fits well. The FAR took the responsibility to create these addenda. Now they need to update them to be aligned with the evolution of the Short Sale process and the respective parties' rights and obligations. Remember what I said before you think I am condescending in my remarks - I opened this article with the statement that the forms became problematic because of the rapid evolution of the Short Sale process. But now that the process seems to be taking on some standards, the addenda should be repaired to properly and fairly represent the interests of all the parties to the transaction.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com

If you are a listingRealtor or a person who has just gotten foreclosure notice from your lender(s), no doubt you have heard about a myriad of "Foreclosure Defense" firms that promise to delay or prevent foreclosure or even prevent the enforcement of the mortgage because if irregularities in the loan. What in fact are foreclosure defenses?

RESPA and TILA

The most popularly cited defenses relate to violations of RESPA (Real Estate Settlement Procedure Act) and TILA (Truth In Lending Act). Other federal and state laws may also be in violation. The general remedy to the borrower for violation of these laws by the lender is "putting the parties back into the position they were in prior to them entering into the transaction." There are also remedies that include refunding all loan fees paid by the borrower, paying for the borrower's legal fees for the lawsuit, and statutory penalty fees that are, relating to the size of the loan, relatively nominal.

For the last two decades the enforcement of these laws was involved but a real problem for lenders and borrowers that were victims had easy access to attorneys that specialized in these prosecutions against the lenders. Today, these attorneys are watching TV and twiddling their thumbs for lack of business.

What Happened to Foreclosure Defense?

So the question is - why are the consumer attorneys that specialize in RESPA and TILA violations sitting with no business yet there are firms and attorneys out there that seem as busy as bees with foreclosure defense?

The answer is too obvious to the consumer attorneys with no business - the key element to a successful RESPA or TILA defense is no longer available to consumers! That key element is that the consumer is to be put back in the position they were in before the transaction. That means that the consumer (borrower) has to give the money borrowed back to the lender!!! In the 80's and 90's and most of the 2000's this was not a problem as it was easy to refinance or sell the home to pay back the lender. But today the loan is greater than the value of the home and there is no way to repay the lender! So even if the consumer wins in court, to get the benefits of the win the money has to be repaid to the lender. Since this can't be done, everyone just was spinning their wheels. And since the consumer attorneys get paid based on success - if the consumer does not repay the loan then the lender does not have to pay the penalty and attorney fees. Thus the consumer attorneys are not taking the cases!

Congress Working on the Fix

Congress is already aware that the federal laws that worked well to protect consumers in an "up market" from predatory lending have just stopped working in this "down" market, and they are exploring amendments to address the effective elimination of the RESPA and TILA violation remedy we face today

Defense or Delay?

So what are these "defense" firms doing? Many of the foreclosure complaints that we see are technically defective from a "pleading" perspective. These technical issues can almost always be fixed by the lender attorney and thus bringing them to the court's attention usually just delays the eventual finality of the foreclosure. It is like throwing peanut butter in the gears of the lawsuit - it will slow it down but not stop it.

Slowing down a case can be good if there is a viable reason to slow it down - like working on some modification or short sale or working on reinstatement. But many homeowners just want to get to live in the house for free as long as possible, and some foreclosure defense firms are happy to oblige - for a fee.

Legitimate defenses

Make no mistake, there are some legitimate defenses for a foreclosure. One we recently brought is for a usurious promissory note. In Florida, if the interest charged is over 18% the lender has to return double all of the interest charged and the note is thereafter interest free until its due date. Another defense we recently brought was where the foreclosure complaint was brought for the non-payment of the interest payment beginning March 1, 2007. But a careful reading of the loan documents showed that the first payment was not until April 1, 2007. (Here the bank will have to re-file the complaint after they re-default the borrower, but by then the home should be sold).

There are other legitimate defenses and I don't mean to be complete in this analysis, but don't confuse defense with delay. As a Realtor you need to understand these differences and guide your clients appropriately.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com. See our easy to find articles at Need Short Sale Information? - These Articles Probably Answer Your Question

"What chance is there that the bank is going to make me pay the difference (or deficiency) when we are through?" This is the most often asked question I get as an attorney that specializes in residential mortgage loan workouts and (avoiding foreclosure through short sales or modification). If you need basic information to understand the short sale and deficiency issue, see Back to Basics - a Review on Short Sales.

Our Basic Answer

Basically from what we see in our daily practice, if we could give a measure of chance that the bank will seek to have a borrower in a short sale or deed in lieu of foreclosure situation pay all or a portion of the unpaid portion, we would say it was only 30%. Don't confuse the short sale deficiency - with a foreclosure "deficiency judgment" - see: Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios for a detailed explanation).

The "But"

But it is not that simple and frankly, you would think given a set of circumstances so obvious your 4 year old would have the correct analysis, there are often results that make no sense. My best to date analysis deals with an analogy with which we are familiar - driving on the Interstate.

The Interstate Highway Analogy to Short Sale Deficiency Demands

I live close to Interstate 95, and my clients in Florida use either I-95 or I-75 to get up and down the beautiful Florida peninsula, but it works for any Interstate where it has 5 lanes. If you local Interstate has fewer lanes, just sit back and think of the free flow of traffic a wider highway would give you - and the additional zillion neighbors you would have.

The Middle Lanes

In any event, the Interstate by West Palm Beach has 5 lanes. The middle 5 carry the bulk of the traffic and you can pretty much predict that everyone there is doing the speed limit or 5 or so miles over it. This is where the bulk of short sales occur, the three middle lanes. The 30% demand / 70% release result is pretty much predicable. If you have a lot of liquidity with reachable funds, there is a 30% chance you are going to be asked to make either a reduced financial contribution or a payout over time for all or a portion of the deficiency. And if you don't have financial resources there is a 70% chance you are going to just get a release. For a better understanding to the process, see TOO RICH TO DO A SHORT SALE? - ECONOMIC LOGIC APPLIES and ECONOMICS 101 - SHORT SALES - WILL THE LENDER SHARE THE LOSS).

The Right Lane

Let's now look at the results of the two outer lanes. The right lane is reserved for "slower traffic". Here we find the most conservative drivers, and the speed they travel is a slower rate - the speed limit or usually lower. Everything in this lane is predicable and cautious. The short sale client in this lane is usually on a limited fixed income, perhaps social security, no real savings, may be disabled or cannot work anymore because of a terminal illness. The bank will (should?) analyze the finances of the borrower and see that there is no way that the borrower could either come up with any funds or repay any portion of the debt without winning the lottery. So it makes overwhelming sense that the bank for this right lane is going to give 100% of all travelers a free pass and thus a complete release from the deficiency debt.

The Right Lane Exception

Let me give you a real life case from last week. Client is a female with colon and liver cancer. She has been receiving radiation and chemotherapy for 6 months and the results are so horrific that she cannot work at all. Her prognosis is poor and she is being cared for by her mother in her mother's home, as she was unable to continue living by herself. She has no savings and is getting some social security benefits but because of her too young age it is insufficient except for food or drugs. There are two loans on the house. The first lender is still making up its mind, but the second lender, having full disclosure of her medical and financial situation, demanded a $10,000 payment at closing and $89,000 unsecured after closing at the same pay rate as the existing second mortgage. Now I could not have predicted this demand (which we outright rejected) in a million years - but this is a typical exception that we get all the time. Different yet similar problems and every once in a while this "Twilight Zone" demand from the lender.

The Left Lane and its Exception - Pop the Cork on the Cristal!

Another real life case from late this summer make the point for the "passing lane" or far left lane on the Interstate. Here we have the BMW's, Mercedes, Jaguars, and the inevitable "29 year olds driving Maseratis". Here we have still fat $250,000 and over incomes, $500,000 or more in cash or other liquidity in the bank and a free flowing checking account. My prediction to these clients is the obvious - be ready to write a check to cover the deficiency or maybe we can get a no or low interest unsecured workout amount to be paid post closing. Then we get the short sale approval documentation and low and behold, it has a complete release! The client puts away their checkbook and buys themselves another case of Cristal champagne.

Coming Up With the Average

This leads us back to the 70 / 30 percent prediction. The point is, you cannot make a prediction that is accurate. These exceptions of the right and left lane give too large a "margin of error" to be able to make any prediction reliable. So at my office and with my clients we use it as a "guideline". Your clients (if you are a Realtor) are asking the same questions. Your answers are important to them, so don't guess and hopefully our experiences in my office will help guide you.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com