New Law Clarifies Disciplinary Grounds For Real Estate Licensees

(CAR)
On July 27, 2007, Governor Arnold Schwarzenegger signed into law Assembly Bill 840 clarifying the authority of the California Department of Real Estate (DRE) to discipline a real estate licensee on the basis of a criminal conviction. Effective January 1, 2008, the DRE will be able to suspend or revoke a real estate license based upon a misdemeanor conviction (or guilty plea) if the crime is substantially related to the functions of the licensed profession, but regardless of whether the crime involves moral turpitude. The new law does not change the DRE’s current authority to revoke a license based upon a felony conviction (or guilty plea).

This new legislation addresses the interplay between two existing sections of the California Business & Professions Code. Currently, section 10177(b) allows the DRE to revoke a license if the licensee is convicted of a felony or a crime involving moral turpitude. Section 490, on the other hand, allows a state licensing board to revoke a license if the licensee has been convicted of a crime substantially related to the qualifications, functions, or duties of the licensed profession.

Last year, however, a court ruled that sections 490 and 10177(b) are not independent grounds for disciplinary action, but that section 490 limits the DRE’s authority to take disciplinary action (Petropoulos v. Department of Real Estate (2006) 142 Cal. App. 4th 554). Hence, the court decided that, under a two-prong requirement, a real estate license may be revoked based on a misdemeanor conviction only if it is a crime involving moral turpitude and substantially related to the functions of the licensed profession. The new law starting January 1, 2008 does away with the “moral turpitude” prong.

To view the full text of Assembly Bill 840, go to www.leginfo.ca.gov.

Realtor’s Error: This ‘Short Sale’ Led to Loss of Home

by Eric Forster

Edna P. purchased her home in Mount Vernon, NY, three years ago. Her mortgage broker obtained 100% financing for her: A first mortgage (Option Arm) for 80% of the purchase price and a second mortgage for the balance. She could barely afford the monthly payments the first few years. This year, her interest rate was re-set causing the monthly payments to double, and she defaulted on the loans. The first mortgage lender filed for a judicial foreclosure.

The thing to do, she knew, was to sell the house and move back to a rental. She hired a realtor who, after comping the neighborhood, told her that the house was worth $75,000 less than what she’d paid for it. “You’ll need to do a ‘Short Sale’”, he told her, “and any offer you get will have to be approved by your current lenders.” And indeed, within two weeks the realtor had secured an offer to purchase the property, and sent the offer to the foreclosing lender with a request to approve the short sale.

The lender never approved the short sale. Instead, it proceeded with the foreclosure and obtained the Deed to Edna’s house, and then evicted her and her children. It was then that Edna asked a cousin, a branch manager with another mortgage lender, to inquire on her behalf and find out why her lender never approved the short sale.

What the cousin found out has now prompted Edna to sue her realtor. It seems that the realtor had sent the short sale offer to the wrong bank. Edna’s lender was never made aware, as a result, of the pending offer, and had no reason to stop the foreclosure.

Housing Collapse: You’ve Ain’t Seen Nothing Yet

But the Fed can stop the hemorrhaging

By Eric Forster

Almost daily, mortgage lenders notify me by e-mail that they are pulling out of the market. Some, like American Home, are already in Chapter 11. Others, like Indymac or National Home Equity, are revamping their lending philosophy. All dread in next two years.

In the next two years, many Neg-Am loans will be coming home to roost. Those with low-threshold triggers – the loans that do not allow the accumulated Deferred Interest to exceed 110% or 115% of the original loan balance – will see monthly payments that double and triple, sending the loans into default.

Let me be gentle here: You’ve seen what the Chinese government did to the FDA official who’d allowed the export of poisonous food products. Following a very short trial, Zheng Xiaoyu was executed. My suspicion is that the people who came up with the brilliant idea to lower the Neg-Am trigger from 125% to 115% and then 110% would probably meet a similar end had they done it in China. Their folly will cause hundreds of thousands of homeowners to lose their homes in the very near future.

The situation can be remedied in two ways: The Fed can lower interest rates, thus decreasing the payment shock to Neg-Am homeowners; the lenders, on their end, can change the terms of those loans and increase the allowable deferred interest to 125%.

As of today, the banks and the Fed act like a deer in the headlights: while some lenders are filing for bankruptcy, the rest seem to be in a terminal state of shock.

Mediation For The Defaulting Homeowner

By Eric Forster

With the collapse of the sub-prime mortgage market due to unprecedented loan defaults, bankers and housing industry experts expect a snowballing effect which could have a lasting effect on the economy as a whole. Already, we are seeing foreclosure statistics which are the highest in a generation, and there is no light as yet at the end of the tunnel.

Typically, a loan default is covered by existing laws dealing with secured properties. A default on a car loan translates into an almost immediate repossession, while a mortgage default can lead to either a judicial foreclosure or to a trustee’s sale (in Trust Deed states). The process is well-trodden and almost never calls for mediation between the lender and the homeowner. This time, I believe that there is a need for a third-party intervention before the homeowner loses his/her home.

In 1999, at the top of the tech bubble, then-Fed chairman Alan Greenspan described the stock market as going through “irrational exuberance.” A year later, a new bubble was formed, this time in the housing industry. Until that bubble burst in 2006, it seemed that sellers, buyers, realtors and lenders all expected real estate prices to continue to appreciate at rates of 20-30% per year, seemingly endlessly. It was during that time that many loan underwriters abdicated their responsibilities and began to approve loans, as the saying in the industry went, “for anyone who had a pulse.”

As long as home prices continued to increase at a blinding rate, there was no reason for the lenders to worry about the security for the loan they approved and funded. Now, in a very different market environment, they find themselves facing mass defaults on loans and very angry homeowners who say that the loan underwriters deceived them when they allowed them to purchase homes for which they were clearly unqualified.

Mediating the opposing interests of the bank and the homeowner would allow for a win-win proposition, where the homeowner could possibly get to keep his mortgage – and the home – using either a temporary debt relief or a change in the rate and the terms of the mortgage. The lender would avoid “buying back” a defaulted loan and the need to increase their regulatory reserve requirement. In previous housing downturns the foreclosed homeowner had little if any recourse, while this time, real estate attorneys foresee tens of thousands of homeowner lawsuits targeting lenders who’ve burdened them with financing they could ill-afford, let alone qualify for.

The sub-prime mortgage crisis is different from the last one lenders faced – that in the aftermath of Hurricane Katrina and the devastation visited on New Orleans and parts of Mississippi and Alabama. Katrina rendered thousands of homes uninhabitable and owners temporarily or permanently relocated. Most lenders there responded to the disaster by placing a moratorium on the mortgage payments and by working through and with the insurance companies.