Archive for the 'Real Estate' Category

In a Turn of Events That’s Sure to End Well, Mortgage-Backed Securities Are Cool Again

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You’ve probably heard the phrase “mortgage-backed security” plenty of times in recent years. And if you’re anything like me, and most of the rest of the country, you probably don’t have the clearest idea of what that is.

To most people, a “mortgage-backed security” is little more than a piece of paper that somehow brought the Western world to the brink of economic collapse.

Anyway, the New York Times is reporting that these legal and financial instruments are regaining in popularity, largely due to the fact that most analysts believe that the housing market has finally bottomed out, and real estate prices now have nowhere to go but up. And mortgage-backed securities are so cheap that many investors see them as no-lose propositions: even in the worst case scenario, they are betting that they can still make money off of them.

A mortgage-backed security is a type of bond that involve mortgage debts being pooled together into large bundles, and then sold to investors, who collect dividends which are ultimately derived from the payments that homeowners make on the original mortgages. These pools often contain hundreds of mortgages, and they can be chopped up and resold countless times – to the point that a homeowner who dabbles in investment can end up owning shares of their own mortgage and never know it.

These securities found their way into countless investment portfolios around the world. So, when the housing crisis hit, and record numbers of borrowers began defaulting on their mortgages, these bonds suddenly became worthless, causing huge amounts of wealth to simply evaporate.

So, could this resurgance in interest lead to a repeat of the 2008 financial crisis? Obviously, that question is impossible for even the most brilliant economists in the world to answer, so I’m not even going to try.

It is worth noting, however, that the legal landscape has changed since 2008. Most significanlty, the Dodd-Frank Wall Street Reform and Consumer Protection Act (usually just referred to as “Dodd-Frank”) has created many new rules regulating risky financial instruments such as mortgage-backed securities, which are meant to smooth out some of their rough edges, and give investors incentives to be more prudent.

One of the biggest factors that led to the rise and fall of the mortgage-backed security was the fact that banks were able to lend money to people without much regard to their ability to repay the loans. They could simply issue the loan, and sell it to a bigger bank, which would, in turn bundle it up in a package of securities to be sold to investors. The investors down the line bore the ultimate risk of the borrower defaulting. Because of this fact, banks were issuing mortgages to anybody with a pulse when the housing market was booming. And why shouldn’t they? They profit even if the borrower defaults.

Dodd-Frank requires the originators of assets (lenders) to retain at least 5% of the credit risk of the loans they issue. This should, in theory, give them an incentive to be more diligent in issuing mortgages than they were before the financial crash.

However, if you listen to any pundit talk about this law, you’ll probably hear one of two things: it doesn’t go far enough, and leaves plenty of loopholes for Wall Street to exploit, and they’ll be back to their old ways in no time. At the other end of the spectrum, you’ll hear people saying that the law goes way too far, and will cripple banks’ ability to issue credit, which is necessary for any modern economy to function.

Maybe it’s just a symptom of how divided the political discourse has become in the last few years, but you’d be hard-pressed to find anyone making the case that Dodd-Frank strikes a good balance between protecting consumers and ensuring that banks are able to continue to easily issue credit to deserving borrowers.

Even one of the cornerstones of Dodd-Frank couldn’t be implemented until very recently: one of the key provisions of the law was the creation of the Bureau of Consumer Financial Protection, which is intended to regulate financial products aimed at individuals, such as credit cards, payday loans, and others. However, President Obama wasn’t able to appoint a director for this bureau until just a few months ago, because Senate Republicans refused to allow a vote on the confirmation of the president’s appointee. They openly stated that they had no objections to the director’s qualifications – they were simply opposed to the bureau’s very existence, and would do everything they could to stop it form being implemented. This required the president to resort to a recess appointment.

So, will Dodd-Frank ensure that this new wave of mortgage-backed securities doesn’t collapse the economy? In theory, its provisions do give incentives for everyone involved to be much more diligent in assessing the risks of their actions, since it makes it more difficult for them to shift risks elsewhere. I honestly have no idea. What I can say, however, is that the predictable calls to repeal it are premature. The fact is, the old way of doing things on Wall Street simply do not work anymore. We should give this law at least a few years to see if it works. If there are parts of it that do more harm than good, they should be changed. And, if the entire law proves to be an unmitigated disaster, it should be scrapped. What we should not do with Dodd-Frank, however, is let the perfect be the enemy of the good.

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Renter’s Woe: The Nightmare of Tenant Eviction Litigation Lists

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Having just moved into a new apartment this weekend, I couldn’t help but think how many wonderful and interesting things there are to do in this world that beats the hell out of the mind-numbing mundanity of moving.  It sucks so much, in fact the only thing that sucks more than the process of moving is finding a place.  It’s a task that I’m sure takes its toll on everyone who has to do it, so I’m sure as heck glad that as far as I know, California doesn’t keep a list of renters involved in eviction litigation like New York.

Not that I’ve ever been sued in a landlord-tenant case before.  Seriously, I haven’t.  To all potential landlords out there who I may have to rent from one day, know that I’m not joking.  Because I don’t want to end up like James Whelan, the tenant who is suing in the link above.

This was news to me, but apparently in some states, like the aforementioned New York, the government keeps a running tally of all tenants that have been sued for eviction.  The list is open for viewing to the public and, in theory, may sound like a good idea.  Landlords are given notice of potentially bad tenants so that they can avoid renting to people who habitually cannot make their rent.  These “professional tenants” can often end up causing landlords to lose thousands of dollars in uncollectable rent.  The rub is that the list includes all tenants who have been sued for eviction, even the ones who won their eviction cases against their landlords.

You can probably see the problem here.  If a vindictive landlord wants a tenant out and wrongfully sues to evict him or her, the innocent tenant ends up on the list regardless of whether or not they were in the wrong.  Even if the tenant wins the case, chances are the landlord won’t be renewing the tenant’s lease and so when the tenant goes apartment hunting, he or she may find they’ve been blacklisted by landlords who see the tenant’s name on the list.  That’s the situation Whelan, a New York renter, was trying to avoid by preemptively suing to keep his name off the eviction litigation list.  Should he win his lawsuit, it would likely stop New York from continuing its practice of naming names.

But, for anyone renting in New York or any state with a similar practice, Whelan’s lawsuit probably does little to relieve your anxiety.  The fact of the matter is that the practice itself isn’t necessarily illegal or unconstitutional per se.  Every time anyone files any lawsuit in America, both parties’ names are listed for public viewing.  Such general docket information has always been public information and nowadays is even usually viewable online.  Certainly the details of people’s lawsuits can always be sealed with both parties and the court’s consent, but generally the names of the parties and indeed the existence of a lawsuit will still remain in public record.

However, this fact doesn’t make the tenant eviction litigation list from feeling any less sleazy and exploitative.  Most states that have such lists in place usually sell it to private companies who often resell it to members in the real estate industry who in turn use the list’s information for tenant screening purposes.  There’s definitely money to be made for states that have these tenant eviction litigation list, so it’s probably likely that the practice won’t be going away without a fight.

But for now, what can you do if you find yourself in an oh-so-precarious situation ala Whelan’s?  It’s sad to say, but short of trying to change the law like Whelan is doing, there’s probably not much you can do other than hope for the best and try to keep on your landlord’s good side.  It’s hard enough finding a good place to rent when you have good credit and a litigation-free record.  It took me a little over a month to finally find my new digs; I can only imagine how long it would’ve taken me if I had to deal with having to explain why my name was on a don’t-rent list (again, potential future landlords, please note I have a perfect credit rating and have never been evicted in my life).

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Neighbor Dispute Over Vegetable Garden a Waste of Judicial Resources

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A woman in Oak Park, Michigan could spend 93 days in jail for growing vegetables in her garden.  When Julie Bass replaced the grass and trees in her front yard with cabbage, carrots, tomatoes etc., her neighbor called the city and complained.  The neighbor felt that Bass’s yard disrupted the look of the neighborhood.  Bass was issued a ticket, which she refused to pay.  Now, the case is in the beginning stages of litigation.

This story is a perfect example of a neighborhood dispute that went too far.  Why neighbors prefer to litigate, rather than sit down over a cup of coffee and sort out their differences, is beyond my understanding.  Taking a closer look into this case yields how unlikely it is for the offended neighbor to win.

The neighbor claims that Bass’s yard disrupted the look of the neighborhood.  A possible legal justification for this claim could be nuisance.  Property law includes an area devoted to specifically to defining nuisance.  For a nuisance, there needs to be some unreasonable or unlawful use of property and a resulting damage to another which prohibits the person from enjoying his or her property.

It cannot be said that Julie Bass has made some unreasonable or unlawful use of her property.  Bass tore up her front lawn, installed a new sewer system, and planted vegetables in raised wooden planters.  Her actions are not unreasonable, nor is it against the law to landscape your property in such a fashion.  Additionally, there is no proof that the neighbor has suffered damage to the extent that he or she cannot enjoy his or her property.  Not liking a fellow neighbor’s landscaping ideas and actions is not enough to declare a nuisance.  One needs some resultant damage and inability to enjoy one’s property, which does not seem to be the case in this situation.

Another option for the neighbor is to try to get a permanent injunction prohibiting Bass from growing her vegetables.  Again, the neighbor would have to show some sort of inadequate damage and practical reasoning for the injunction.  With the facts of this situation, it is going to be very difficult to show that the neighbor has suffered some sort of damage from Bass’s yard to the extent that an injunction is the only possible remedy.  It seems very unlikely that the neighbor could convince the court to grant a permanent injunction, prohibiting Bass from growing vegetables.

One thing to note is that important facts are missing from this news report.  There are no pictures of Bass’s yard so that the reader can paint a picture in his or her head.  We do not know how far Bass’s home is from her other neighbors.  We do not know if the system(s) installed produce loud noises or requires high maintenance to the extent that it is disruptive to the neighbors.  We also are not told what the “look of the neighborhood” is.  Perhaps if the neighbors were very close and the system(s) in place were very loud, the neighbor may have some justification to prove a nuisance or have a permanent injunction granted.

However, as the article reads, there seems to be no damage suffered by the neighbor.  Additionally, how can vegetation disrupt a neighborhood’s look?  Most people have grass and flowers in their yards.  Instead of flowers, if a person has vegetables, it certainly is not an eyesore.

Rather than wasting judicial resources on such miniscule matters, neighborhoods should work together to sort out their differences.  Many neighborhoods have neighborhood watch groups where people come together and discuss safety matters for the neighborhood.  Similarly, a group should be created where neighbors can come together and sort out their differences regarding each others’ properties, landscaping choices etc.  Not only will such groups emphasize the importance of communication, but it will strengthen the unity amongst neighbors.  This in turn will lead to less frivolous lawsuits, and keep the courtrooms free for more pertinent matters.

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“Sovereign Citizens” Taking Over Vacant Homes in Atlanta

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This is certain to end well (also reported here).

A group of people calling themselves “sovereign citizens” have decided that banks and governments cannot legally own property. They just…decided that that’s the case, and boy howdy are they sticking to it.

They’ve begun moving into unoccupied, bank-owned homes, changing the locks, and putting up “no trespassing” signs around the property. I probably shouldn’t have to tell you that these actions have no legal basis, and anyone who persists in illegally occupying a bank-owned home (yes, Virginia, banks can own property) will be forcefully evicted, and possibly arrested for trespassing.

Now, there have been other stories of homeless or otherwise destitute individuals and families moving into foreclosed homes temporarily. While I don’t condone such conduct, this isn’t comparable. Someone who temporarily occupies a foreclosed home to keep from freezing to death, knowing that what they’re doing is illegal, and presumably willing to accept the legal consequences, is very different from somebody who deliberately concocts a crackpot legal argument, then sanctimoniously occupies someone else’s property (having the gall to put up “no trespassing” signs, for example).

Crackpot groups like “sovereign citizens,” “freemen on the land,” and others have been around for a while. However, it seems like these groups have become more common in recent years. Or maybe they’re simply becoming more vocal, and getting more attention. We did, after all, see a brief spike in the activities of far-right militias during the Clinton years. Perhaps there’s just a certain group of people who get really riled up whenever we have a Democrat for a president, and who bristle at even the smallest expansion of federal power (real or imagined).

While these groups differ in their exact ideologies, they do share a common element: they firmly believe in bizarre legal theories, and base their actions on these theories, even though they have never been successfully used in court, and have no basis in constitutional, statutory, or case law.

While someone who has studied the law can usually recognize these legal arguments as ridiculous on their face, laypersons are sometimes taken in by them, because sometimes they seem intuitively reasonable, and if they’re correct (which they’re not), they would relieve individuals of a great deal of accountability to the law. And who hasn’t craved that every once in a while?

These “arguments” are numerous, but I’m going to discuss a few of the more common ones, and explain why they’re wrong.

Myth: An indictment/court summons/tax bill/parking ticket has my name in ALL CAPS. I don’t spell my name in all caps. Therefore, the legal document doesn’t actually address me, and I don’t have to respond to it.

Fact: I honestly can’t believe people still buy this one. The basic argument is that, because all the relevant court documents wrote your name in all caps, it actually addresses someone else, and you can’t be forced to obey the court order without violating your right to due process (which requires, among other things, that defendants be given notice of the crimes they’re charged with). Every court that has been presented with this argument has dismissed it out of hand, as patently frivolous. Sometimes, they’ll impose sanctions on parties who employ these frivolous arguments, if the court believes they should have known better. Honestly, do you think that, if this argument had any legal merit whatsoever, court documents would still list names of parties in all caps?

Myth: Banks and the government cannot own property.

Fact: Yes, they can. Honestly, I don’t know how to put it more simply than this. Even if you believe with absolute certainty that there’s some secret code in the constitution, the bible, or whatever, which proves beyond a shadow of a doubt that the Founding Fathers/God/The Flying Spaghetti Monster never intended for banks to be able to own property, everyone else disagrees with you. So, like it or not, banks do have a legal property interest in the properties they foreclose, and the courts and police are going to enforce those rights.

Myth: I don’t have to pay taxes.

Fact: Yes, you do. If you think you’ve come up with some bombproof, ironclad, original legal argument that you think will get you off the hook come tax time, chances are someone else has already thought it up, and it’s failed. Just so you know, the income tax is constitutional, and all arguments to the contrary have been rejected as frivolous.

Myth: I can enjoy all the benefits of being a U.S. citizen, and squirm my way out of most of the responsibilities.

Fact: Really, that’s what all of these phony legal arguments are about – a desire to get something for nothing. Whether it involves getting a free house, or enjoying government services without paying taxes, these arguments are not rooted in some principled desire to protect individual liberty. It should go without saying that there’s no such thing as a free lunch.

These are just a few of the baseless legal positions that fringe groups cling to. There are plenty of others, most of them equally ridiculous. If you really need legal advice, you should seek the assistance of a lawyer, not somebody wearing a sandwich board on the street.

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Top 5 Tips Real Estate Agents Should Know to Avoid Foreclosure and Short Sale Lawsuits

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Real estate agents who take on listings for a short sale or foreclosure should remember several points to protect themselves against potential legal action.  Below are the top 5 tips:

  1. When taking on a short sale listing, the homeowner is known to be in financial distress. At this point, your primary responsibility is to the homeowner, even at the expense of your commission. To proceed with any other intention breaches your fiduciary responsibility, a phrase used again and again in lawsuits that basically amounts to a breach of trust.
  2. In taking a short sale listing, you will have obtained access to privileged financial information about the homeowner. Attempting to leverage this information for your own benefit leaves you vulnerable to fraud charges.
  3. Not closing a deal due to a lack of commission, then simply informing your client that the lender wouldn’t accept the offer leaves you open to a host of lawsuits for one reason: Lenders record all negotiating phone calls. Should your client investigate the matter, their attorney will almost certainly subpoena these recordings. Additionally, the attorney will likely subpoena your notes and the preliminary HUD-1 Statement, which will contain your commission.
  4. Filing “creative” paperwork with the title agent (who often might well be a friend) with the intent to close the deal and still land a commission is risky. When dealing with short sales, the paperwork should always be handled by an attorney.
  5. Many self-proclaimed “short-sale experts” have taken only a short course on the subject and may have never actually closed a short sale. Jumping into this arena shouldn’t be taken lightly—not being completely familiar with the process can leave the door open for clients to cry foul should the sale not go through, and ignorance is seldom a successful defense. Speak with experts, learn the finer points of short sales, then proceed with you best efforts to help the client. Above all else, if you’re unsure about the process, refer your client to an agent with the knowledge to properly conduct the sale.

Short sales are not like regular listings. Timing, pricing, the desperation of the client and the lender moving toward foreclosure all create many issues not usually dealt with in normal home sales. The best thing a real estate agent can do when dealing with a short sale is to get educated on the process; if you do not have experience with short sales, find an agent that does and work closely with them instead of tackling the sale solo, or turn the sale over to them altogether. Working with a real estate attorney can also help reduce liability, especially in situations where conflicts and moral dilemmas may already be present. These tips can help ward away many of the pitfalls from short sales.

Guest blog courtesy of Show Appeal Realty, an Arizona real estate brokerage selling Scottsdale Homes and helping homeowners with Phoenix short sales.

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