‘Who Holds The RE Legal Hot Potato?’
Several readers suggested a topic on where the legal chips may fall in a housing downturn. “Who holds the Real Estate legal hot potato(es)? So many fingers in the real estate industrial complex pie.”
“As the bubble breaks, lawsuits from upset buyers, money lenders and the like would seem to become inevitable. Who is most culpable? Are all players sufficiently shielded from a legal perspective such that R/E lawsuits will be fruitless? Will an uptick in legal actions slow or speed up the bust?”
“For example, how about collusion between loan orginators and appraisers? Provable? Actionable? Yet another example, buyers overstating income on stated income loans. Will lenders go after such individuals?”
“Another example, from yesterday, posted on this blog: ‘resale experts are saying that builders are messing up their market by dumping so many built-but-not-sold homes on the market with outsize buying incentives.’ Could recent homebuyers recover damages from a builder who is currently underselling the very same product?”
One reader replied, “I think our legal system needs to be VERY selective about what truly warrants a lawsuit in regards to housing. All out criminal activity; I’ll grant that. But ’steering’ or ‘false promises’ (i.e. a realtor says, ‘Oh this home will double in value in 3 years!’, etc. are IMO unethical, but not illegal. If the false promises are not put in writing, it’s ‘he said, she said’ and would NOT warrant a lawsuit.”
“People need to be responsible for their own actions rather then be allowed to continually play the victim role.”
Another said, “Unfortunately, in a major housing bust there would be very little ‘wealth’ to be redistributed through legal action. Builders learned long ago to use small sub-corporations for every development they ever create. The small sub-corporations go bust, file for bankruptcy or just dissolve, so even if you win a judgment it usually turns up empty.”
“Appraisers are generally covered by insurance, but if they used legitimate comps, they are fairly well insulated.”
“Any real litigation will probably take place between the MBS investors and the loan originators on the grounds of breach of contract, fraud, lack of due diligence, etc. There may also be shareholder or investor suits against the MBS entities for their failures to exercise due diligence and there may be a large number of actions seeking recourse (to return the loans) to the original lenders.”
“There will be an enormous number of prosecutions sought for mortgage fraud. What number of these will be accepted by the states and prosecutors is unknown.”
Another added, “Get ready for BK filings to stave off all the potential lawsuits. This is standard business practice.”
One agreed, “Yep. This is what happened here in the South Bay (LA) back in the mid 90s. This area is made up of mostly smaller mom & pop type builders. In 1997, we were looking for a builder to partner up with. We wanted to build on our Hermosa Beach property. We interviewed at least 5 ‘reputable’ builders. But we also did background checks on these guys too. 4 of the 5 had filed BK at some point in the 90’s.”
“But of course it did not stop them from starting up again. Most of these guys have made a ton of $$ in this latest boom but most are highly highly leveraged today.”
And another, “Here’s another major misrepresentation on the part of the mortgage industry and borrowers; many people bought investment properties and said they were going to live there. They misrepresented that it was an owner-occupied transaction. Underwriting for investment properties is much stricter.”
And finally this, “I know folks at several large consumer plaintiff law firms. (west coast) I have had conversations with all of them months ago about getting up to speed on the potential real estate problems that may arise.”
“Topics tossed around were title companies and mortgage brokers that have in any way participated in offering hints as to how to show financial information in a better light. The worst may revolve around filling out blank tax return forms with information that is different from information on the returns filed with the IRS.”
“Appraisers may have issues to deal with regarding valuing a house to the loan amount requested.”
“There is also a possibility of a case of collusion amongst banks and agents/brokers with regards to steering buyers to preferred lenders and whether or not there were kickbacks for those referrals. I worked in the legal field for 10 years. Have no doubt that there will be some very large scale litigation if prices drop much more.”
A related development:
‘Ameriquest Mortgage Co., the Orange-based lender, and its affiliates completed another round of layoffs this week. Chris Orlando, a company spokesman, declined to specify the number of employees who lost their jobs this week. The cuts came throughout the company and across the country, he said.’
‘Chris Donabedian, who worked as a senior project manager for enterprise infrastructure in Irvine, said he was among those laid off this week. The North Tustin resident had been with the company for two years.’
‘Donabedian was laid off Wednesday and given severance pay through July 21, he said. He also was offered an additional 30 days pay if he would ’sign off saying you won’t hold the company responsible for anything beyond that,’ he said.’
This was in the last post yesterday. “Interim managers at bankrupt USA Capital on Wednesday said they have not started foreclosure on properties that secured delinquent loans and have ‘not yet’ filed lawsuits to recover assets from the owners of the bankrupt private lender.”
“The private lender solicited money from individual investors to use in funding short-term mortgage loans secured by real estate. Investors were attracted by double-digit interest rates and the relative security of having real estate as collateral.”
I would love to see that 30 day pay sign off note. Possibly in the document could be a hush hush clause.
Ben, how about a discussion on realtor commissions. The fact that many builders are offering double commission shows that many realtors are not looking out for the best interest of their client. As the bubble pops, these double (or more) realtor commissions become more prevalent. As more money is lost, realtors make up for less transactions by getting more per transaction! What a crock.
Full disclosure is key, however, do you know what Cisco is making off you when you buy a router or what the car salesman is making on your lease, or the chick who sells you Christmas cards for your clients and so on? Remember, the commission almost always is chopped up before the salesperson gets his via overhead, E & O, desk fees, splits, advertising,ect.
If I may ask, what do you do and do you disclose your salary to all your clients and customers? Obviously, we then go to an hourly fee structure or a flat fee as a non-biased way to transact real estate, there are plenty of them out there, why not use them? The hourly model would never work, aka attorneys, but the flat fee model seems the most reliable.
Every FB signed about 187 things at close of escrow. 10 or so had to do with purchasing the house. Half the rest protected the agent, broker, LO, mortgage broker, lend agent, appraiser, dog catcher, home inspector, bank and all the rest from liability. A lot of the rest were affirmations that the buyer has made no false statements…. uh oh.
LMAOTF.
LOL.
I’m particularly fond of the “Owner Occupancy Agreement” which states that the buyer was actually buying the house to use as a primary residence. In the past week, I have reviewed two different bankruptcy filings wherein the borrower declared about a dozen rental properties, including the unfortunate lender’s, when they finally filed. One of those filings was honest enough to list all carry costs (more than $10k per month, which I thought was low for almost a million dollars worth of real estate) and to show a net income of $-4,500.00 per month. That’s right, he filed for a Ch. 13 bankruptcy with *negative* cash flow. He also showed a million dollars in encumberances against the properties, so there’s no equity there either. He can’t have a liquidating Plan if there’s no equity. The Bankruptcy Trustee has already filed an adversary proceeding against the debtor for this abuse of the process. We’ll see what happens.
Statement of Occupancy; one of my favorites as well. Small expansion if you please; you say carry costs $10k/mo and net cash -$4500/mo. He’s go a dozen rentals at about $480/month? And worth $75k on average? What kind of holes are these places?
Western District of Virgina. Not on the coast, and apparently not nearly as hot as he thought they were. I’m not saying it’s coal country, but it’s close.
Oh, the kind of places where if you divorce your wife she’s still legally considered your cousin. Got it.
Didn’t this idjit ever hear about multiples of 100-120? These look closer to 200+. Way too expensive to ever work. I’ll betcha there were some cases of simultaneous closings so that two sets of mortgage people didn’t know about the other debt being taken on.
Expect a lot of BK filings to stop any threat of lawsuits. Enron was the blueprint for these scumballs to rip people off, and then hide behind government protection with high priced lawyers putting out any fires. Which major HB will be first to file BK?
Which is the real shield: bankruptcy laws, or the liability protections corporations offer?
If I’m not mistaken the statue of limitations on financial fraud is seven years. Just like the last bank robbery in the S&L crisis, only a tiny fraction of a percent of the criminals will be prosecuted in that time.
Secondly, every bubble has masked massive fraud, so far, we’ve only seen the euphoria, not the crimes.
the statute of limitations for bank fraud federally is 10 years, most other things five years
The PMI companies could refuse to pay on some foreclosures because of loan application fraud ,(I would think it would be the burden of proof on the Insurance Companies part .)
PMI Lawyer: “Here are the plaintiffs’ 1040EZ forms for the last 4 years your honor. And these are the stated income forms they submitted to us showing twice that reported annual income. All that remains your honor is for you to immediately rule in favor of my insurance company -and- file loan fraud charges against these FBs -or- if you prefer we can continue this hearing and you can inform the IRS about these FBs tax fraud. Keep in mind your honor the tax fraud also gets my client, the insurance company, off the hook.”
And the PMI lawyer should also say “Keep in mind also that my client also knowingly participated in the fraud and my client’s agents encouraged the fraud and suggested that putting down false numbers would be “no problem” b/c everyone does it and in fact even told the buyer how much he needed to put down as his income to qualify for the loan after the buyer told them their true income.” They better make damn sure that no one in their house knew this was going on and participated.
Intereting problem when there is fraud on both sides or all around the transaction. Criminally, it’s called conspiracy and all you need is intent to join the conspiracy, intent that the object of the conspiracy be accomplished and any overt act. The net can be quite wide.
Prosecutors won’t care about the little fish, too many for too few resources. All they care about is flipping the little fish on the way to prosecuting the big ones. And there will be plenty of little fish willing to point the finger up the food chain.
As for the lawsuits, its about two words “deep pockets”. If someone’s got the dough to go after some lawyer will take the case.
No, that’s where those 187 signatures and such come from. The little fish will have no evidence of a verbal or implied “no problem” and even if they secretly recorded such that will at most get one employee long gone no doubt. Plausible deniability.
I doubt you’d be surprised what’s put in writing in email these days or what has been put in emails over the last few years, these are the emails people tend to keep as CYA for when the Sh*t hits the fan
” Criminally, it’s called conspiracy…”
Does that means it falls under RICO? I hope not — that’s all we need, even more taxpayer dollars spent chasing bankrupt parties and usurping the states in the process.
Bank fraud is a predicate act for RICO I beleive
What about “due diligence”? Mr PMI Lawyer, why did your client not request actual 1040’s or 1099’s from the borrower? Especially when making large financial transactions? Beat it! You deserve to get screwed for lax business practices.
PMI Lawyer; “No, the terms of the loan were NoDoc. Those terms were acceptable to regulators at the time. We would have been liable for material misrepresentation of the terms if we had insisted on 1040s and 1099s at the time.”
Gimme a break. Lawsuits? The way I see it EVERYONE is culpable, so lawyers are going to swoop in on carcasses? Oh, yeah, I know that is what they do… but
Home’owners’: nobody put a gun to your head and told you to buy at any price you may have paid.
Mortgage companies and banks: for shame! You lowered standards so much that anything with a pulse qualified and sold your souls to the devil to get more fees. How short-sighted
Builders: Morons! You hold land positions until 2012? Gee, couldn’t you pay a good economist to forecast what you should have in your portfolio and when? Also, to ramp up production and not think that there would be a time where you would have to retrench is foolhardy.
Sellers (flippers): well, what can I say - it has all been said before on this site.
Realtors: NVA (no value added) to the equation in 90+% of the transactions. Your day of reckoning is soon. Not only will you NOT be making any sales (hope you saved your pennies) but your whole monopolistic house of cards will soon implode when this market makes a FSBO out of every seller trying to not lose even more money in the sales transaction.
Everyone is to blame - nobody is blameless here (and now we will be able to add ambulance chasing lawyers to the list).
Add appraisers and the media to your list.
Clinton’s fault??
Lots of people will need to sell. How much commission is really not the issue. People who can make deals happen in this environment will do very well indeed. Realtors do not add value to transactions, they make transactions happen. People will be lining up to list with realtors who can move properties. Watch for the “my fee is 6% or you can list elsewhere” rule to return soon.
I just wish an established company with extensive experience in either searchable databases or brokering transactions (think Google or Ebay) would start an alternative MLS. Sellers pay a monthly fee and buyers get free or nearly-free access.
Within a couple of years, Realtors(R) would go the way of the travel agent.
If it could have been done the guy who created zillow would have done it. At the end of the day everything revolves around the almighty dollar. He went where the most dollars would come from.
“People will be lining up to list with realtors who can move properties.”
Personally, I think that is an accurate forecast and spells problems for limited service or MLS-only brokerages and FSBOs. These approaches thrived in a climbing market and to my knowledge have not been tested in a seriously-down market.
“People will be lining up to list with realtors who can move properties.”
Until it becomes obvious that even those realtors can’t move them.
when DOJ cracks the mls realtors will make 1% just like uk
Rebuttal to M.B.A
1)HomeBUYERS , homeowners,flippers, empty nesters,realtors = get me rich quick ARMS, & Nehmia loans. Many were honest, but many more were FRAUDS! why because in the end that is all who could play! These signed (by breaking laws) no intentions of paying (just renting money for a few months ) why not, the government gangsters get away with it!
2) Mortgage companies and banks…Profits man, EPS, stock options, and its not OUR money anyway mentality. “We keep the highest scoring (best loans) 10%, and sell the rest to Fannie or Freddie”. (semi government gangsters) (now insolvent)
3) Builders..heck they did what they always do twist, lie, withhold, and arbitrarily raise prices . In Vegas, they ratcheted up prices $8,000 per week, once the add went out $20,000 above the previous week , 4 buyers paid the freight and it STUCK!. But this time builders even beleived their own hype, as they scrambled to obtain raw materials - LAND. They sent the buyers down the street to the right loan officers “wink wink”. Now trapped as in any cycle with inventory that there is no one left to buy, and this time with commitments for years on land.
I like to say, why if the land is SO DAMN valuable today , has it been desert for 5,000 years, why not another 1 hundred? Have you stopped by Goldfield Nv.?”
Appraisers: Well the honest ones finally gave in “needing” to put food on the table. IF you didn’t give the banks, builders, homebuyer the right number someone else will, they all rationalized to themselves.
In the end it is Mass mania greed, from a SECULAR society, that hasn’t had a serious recession since 1973!
What they didn’t count on was the change in the bankruptcy laws…that creates permanent indentured servents, when they {all of the above} gambled on that real estate LOTTERY ticket!
Well said inspired .
Im sure fannie mae will figure in here somehow.
How could it not? That reminds me, how about Fitch Ratings, S&P and Moodys for telling the world that the US taxpayer would backstop the GSE’s?
Count this taxpayer out of that field of reams.
Not to mention they’re the ones rating all those MBS.
This is going to be fascinating to watch unfold from the sidelines. I think, given the leverage and amounts of money involved, that it will come unraveled fairly quickly versus other busts–but I think any recovery will take much longer, as it will likely be a long time before people want to lever up and go “all in” on real estate.
“It will come unraveled fairly quickly.”
With all the news in the last several weeks we have seen on this blog, I would tend to believe this is a pretty accurate statement.
The news from San Diego is exactly the quick unraveling that is happening right now.
Combination of variety of frauds mentioned on this tread PLUS Fanni Mae and Fredi Mac fiasco which has not srufaced yet, we are going to have a major financial crisis in this country. Much worse than Saving & Loan crisis of early 90s. Sh!t has not hit the fan yet, just wait another year.
this is 2006, everyone gets sued.
The Realtors and Homebuilders Associations sue Ben for violating the Home Owners Disparagement Act of 2006
Actually (and unfortunately), I wouldn’t be at all surprised to see some kind of action like that.
Huh? You mean Bernanke or Jones????
What CNBC Didn’t See “Addicted to Oil” Commentary Analysis(MP3)
This was an interesting clip, until they brought the guy on to analyze the market with his astrological model.
“Another example, from yesterday, posted on this blog: ‘resale experts are saying that builders are messing up their market by dumping so many built-but-not-sold homes on the market with outsize buying incentives.’ Could recent homebuyers recover damages from a builder who is currently underselling the very same product?”
I certainly hope not.
This is tantamount to saying that t eh builder should incur all risk in the transaction and the buyer none. But the buyer does not share in the loss if the builder cannot sell even at cost, as is increasingly possible with the amount of inventory out there. The builder either owns the property and is selling his property in a free market at a price the market will bear, or he is building for a buyer, under a contract that was priced, at the time of the contract, at a price the market will bear. Too bad. Only death and taxes are certain and risk is an unavoidable part of everyone’s life.
Speaking of Frannie and Freddie, it wouldn’t be a bad idea to check the prospectus for your money market funds to ensure that they don’t have F&F paper.
Had a conversation with a seller. About 9 months ago seller sold to a 1st time buyer. Buyers paid 20% over asking in a bidding war. Now the buyers are suing the sellers. The claims are for dampness, noise, inaccurate reporting of condition, and everything else they can find. Buyers accepted the seller’s inspection report, and did not do an inspection of their own.
The kicker is that they are asking the sellers to REPURCHASE the home. If the repurchase is rejected, they are asking for $500,000. Their lawyer seems to be a shark and is very agressive. The sellers think that the legal fees will run 50k to 75k.
This seems like a huge case of buyer’s remorse, and they are going through the courts to calm themselves. This is very scary. I wonder how much more of this we might see.
That is scary.
Was this FSBO or through a Realtor? If it was through a Realtor, I would think that the buyers would have signed away their rights and that it would be the Realtor that would be sued for misrepresenting the property. As far as an actual court case goes, if someone offerred 20% over ask, I’d say that they really, really, really wanted the property.
No doubt that it’s a potential nightmare for the sellers though.
I can just see the insurance companies offering homeseller’s insurance against lawsuits.
Summary judgment, caveat emptor. Opportunity to inspect which is neglected or which fails to reveal a problem = complete insulation to liability. Anything else they might have said would be deemed “puffing” or simple salesmanship, therefore no liability.
Still, they have to spend the time and money defending themselves. This is where a good homeowner’s umbrella policy comes in handy.
This is one of those times when I think the plaintiffs should have to put up the money for court costs for the defense in a bond in case they lose. As it sounds like the plaintiffs might wind up going BK if they don’t win. Which would mean that they wouldn’t be able to pay legal costs for the defense.
Backstage - I think this is going to become more and more common in the next 1-3 years. Hey look on the bright side, the realtors and MB out of work should be able to slide over to the law firms and process all of the paper these suits are going to create. Another set of NVA activities to replace those they already perform.
My reason for commenting was I heard that when the banks and Mortagage companies sells the loans they have written they are not completely off the hook. I was under the assumption that they were and that is why they didn’t do much checking on the loan applicants. My new understanding is that if the purchaser of the loan can show fraud the seller has to buy back the loan and in one case a company pushed back to the mortgage brokers 9 out of 10 bad loans due to fraud. Has anyone heard this? If this is the case I think just about every mortgage company is going to go belly up when the BK’s start.
The implications of this chain of events are interesting. If recourse is demanded and the loans go back to the originators, they need to pay cash to the MBS servicers. They won’t be able to. This would lead to bankruptcy for all of the originators. The MBS folks know this. Should they a) send the loans anyway, forcing bankruptcy and guaranteeing the loss and losing their recourse against the real estate in favor of an empty judgment for unsecured cash, or b) suck it up, foreclose the properties and take back tons of real estate at a loss? I say they will make a demand for a), then do b), then create a new option, c) and sue for the differential or loss caused by the fraud, thereby obtaining a judgment which is nondischargeable in bankruptcy and chasing the originators through all time and space.