Tucson Land Use Law Blog

Tucson Land Use Law Blog

Insight & commentary on local land use and real estate issues

Rising Housing Prices + Stagnant Economic Picture = Hard to Buy (or Rent)

Posted in Real Estate

While median home prices are clearly beginning to find some traction, having risen 6.6% from the first quarter of 2013 to the first quarter of 2014 (and just 12% of the national 2006 peak), national wages and income have remained stagnant.  The below graph highlights that real median household income in the United States has slipped significantly since 2006, when it peaked at the height of the housing bubble.


Nationally, asking prices (year-over-year in June 2014) rose faster than wages per worker (year-over-year in 2013) in 95 of the 100 largest metro areas.  Translated – it is getting increasingly more difficult for people to afford to buy a home.  This problem has been most pronounced in those areas most impacted by the housing bubble, namely California and the Southwest.  In Phoenix, Las Vegas, Sacramento, and Orange County, price gains have slowed significantly in recent months after rising nearly 20% year over year in 2013 due to the latest investor speculation wave.

Not only are potential home buyers finding it difficult to purchase a home, renters are increasingly finding the market much more expensive.  According to Mark Takano, a California Representative, “Rental costs are getting further and further out of reach for working families. Wall Street’s purchasing of hundreds of thousands of foreclosed homes for the purpose of converting the properties into rentals and securitizing them into bonds, is troubling.”

While private equity firms are snapping up houses as unprecedented rates, the average worker is finding it harder and harder to rent or own a house.  Indeed, companies like the Blackstone Group, American Homes4Rent, Colony Financial, Silver Bay, Starwood Waypoint, and American Residential have spent approximately $20 billion purchasing nearly 150,000 single family homes nationwide, and converted them into rental properties.  Housing advocates say that the after effect of the housing bubble has been the institutionalization of the single-family rental market, leading Wall Street to take a more direct role at playing landlord, while transforming a rental industry that was once dominated by mom-and-pop owners into one where Wall Street is a major player, once again transforming the housing market in ways never seen.  The below infographic shows how private equity has transformed the rental market since the housing bust.


Don’t Fall Asleep at the Wheel

Posted in Tax Lien Foreclosure

David Funkhouser and Benjamin Nielsen, attorneys with Quarles & Brady LLP, recently warned in their Commercial Litigation Law Update that Arizona tax lien foreclosures are wreaking havoc on lenders and borrowers.  Quarles & Brady represents many large banks and lenders, so it should come as little surprise that they are concerned about the impact of tax lien foreclosures on their lender clients.  Lenders should be concerned, as real property tax liens have lien priority over just about everything, including lenders’ deeds of trust.  Funkhouse and Nielsen claim that “lenders are losing millions of dollars, and homeowners are losing their homes.”  They go on to pose the question of why are lenders allowing it to happen?  They provide three possibilities:

1. Financial institutions — particularly large financial institutions that operate nationally — may simply be unaware of the tax lien process in Arizona.

If this is true, then these institutions would be well advised to seek legal counsel, lest indeed, they lose their collateral.

2. The tax lien foreclose action does not timely reach the hands of the appropriate person within a financial institution and/or their outside counsel; thus, no one responds and judgment is entered.

Having handled upwards of 1,600 tax lien foreclosure actions on behalf of tax lien investors, I see it time and again that large financial institutions fail to act in these cases or fail to act timely.  When they do act, it is often after a default application is about to become effective.  I even had a case where a major bank wired in funds to the Pima County Treasurer as I was walking from the parking garage on my way to obtain a Final Judgment foreclosing the rights of all parties to redeem the subject tax lien – the final step in a foreclosure action.  The foreclosure crisis exposed many of the systemic weaknesses in the large financial institutions.  They are often too large to handle the onslaught of demands placed upon them.  Most institutions use corporate statutory agents, and by the time a lawsuit is filed and forwarded to the institution, it simply takes too long for those institutions to dole out the work to their appointed outside counsels.  Sometimes, they fail to act and lose their collateral in the process.

3. Some financial institutions may be hesitant to redeem tax liens on properties with upside-down loans.

It is true that some banks simply do not want to pony up the money to secure their deed of trust position.  Why spend more money to secure an underwater property?  Even when the math adds up, as Funkhouser and Nielsen point out, it simply makes no sense why a bank is willing to let a property go so as to avoid paying the real property taxes.  Rational explanations are not always available.

Funkhouser and Nielsen cast this warning: “Falling asleep at the wheel can cost lenders their security interests and borrowers their homes — all while the tax lien holder, who purchased the tax lien for a few thousand dollars, enjoys a windfall.”  While it remains very rare for any tax lien investor to achieve such a windfall, lenders (and those attorneys representing them), should grab a Monster or a large cup of coffee, and be very aware of what is going on with their portfolios and lawsuits, as yes, a tax lien is a very powerful instrument indeed.

The Next Default Tidal Wave

Posted in Foreclosure Topics

While most reports show an improving housing market, it seems that the fallout from the housing borrowing binge has yet to fully materialize.  According to Reuter’s Peter Rudegeair, “U.S. borrowers are increasingly missing payments on home equity lines of credit they took out during the housing bubble, a trend that could deal another blow to the country’s biggest banks.”

According to Steve Cook of Real Estate Economy Watch, “Nearly half of the nation’s outstanding second lien home equity lines of credit (HELOC) will amortize over the next several years, raising monthly payments and increasing the risk of a rash of new delinquencies that could result in new defaults and foreclosures.”  The reason is that borrowers will now be required to start paying down the principal on these loans, as opposed to just paying the interest.  Peter Rudegeair reports that this “shift can translate to their monthly payment more than tripling.”

Lender Processing Services and Equifax are now warning that aging HELOC loans written in the final years of the housing boom could result in a huge number of defaults, creating a “wave of disaster.”  Indeed, some forty-eight percent of outstanding second lien HELOC loan that were originated between 2004 and 2006 will begin amortizing over the next couple of years.  While the home equity market is experiencing lower delinquencies overall, according to LPS Senior Vice President Herb Blecher, many borrowers will see their monthly payments increase substantially, likely leading to a wave of new delinquencies.  Indeed, only fourteen percent of these second lien HELOCs have passed the 10-year reset mark, leaving a very large segment of the market at risk.  The biggest banks are carrying over $10 billion of HELOCs on their books.

Amy Crews Cutts, chief economist at Equifax, recently told mortgage bankers that the coming increases to homeowners’ monthly payments on these home equity lines is a pending “wave of disaster.  Peter Rudegair reported that more than $221 billion of HELOCs at the largest banks will amortize over the next four years, about 40 percent of the home equity lines of credit now outstanding.  According to Rudegair’s Reuter’s article, in 2014, borrowers on $29 billion of these loans at the biggest banks will see their monthly payment jump, followed by $53 billion in 2015, $66 billion in 2016, and $73 billion in 2017.

Equifax’s Crews Cuts believes that in terms of loan losses, “What we’ve seen so far is the tip of the iceberg. It’s relatively low in relation to what’s coming.”  By all accounts, absent a rapid improvement in home equity levels, 2015-2017 may well usher in a substantial wave of new defaults, causing notable pain to the largest banks’ balance sheets.


MERS Exodus

Posted in Foreclosure Topics, Tax Lien Foreclosure

The Mortgage Electronic Registration System (MERS) was created by the mortgage industry to fast-track the loan assignment process and helped bypass the burden of having to record every assignment.  MERS was a perfect solution during the mortgage securitization frenzy. 

When the housing bubble imploded and foreclosure activity went through the roof, MERS found itself the target of many lawsuits.  Homeowner after homeowner challenged MERS’ legal authority to foreclose, as it was supposed to simply serve as an electronic registry, though it was often the named beneficiary under deeds of trust, though a "nominal" beneficiary.  MERS made it through the foreclosure crisis pretty well, all things considered.  Most legal challenges failed, as the courts likely couldn’t open up that kind of systemic Pandora’s box.  

Well, according to Bloomberg, MERS’ chief legal officers, its national litigation coordinator, its corporate counsel, and its chief internal auditor have all now left the company.  Hard to say why the exodus, but it may signal another closed chapter in the foreclosure crisis.  Job done, time to move on. 

National Mortgage Settlement – Done?

Posted in Foreclosure Topics, Tax Lien Foreclosure

Joseph Smith, the monitor of the National Mortgage Settlement has reported that the five major banks have officially fulfilled the consumer relief obligations of the National Mortgage Settlement.  He further reported that the banks have provided more than $50 billion of gross relief, which allegedly equates to more than $20 billion in credited relief. 

Smith filed final crediting reports with the U.S. District Court for the District of Columbia tfor Bank of America, JP Morgan Chase, Citi, and Wells Fargo, which detailed how these servicers gave consumer relief.

Smith’s office found that more than 600,000 families received some form of relief, which was broken into 17% refinancing assistance, 37% first lien principal forgiveness, 15% second lien principal forgiveness and 31% other relief.

In total, Bank of America, Chase, Citi, Wells Fargo and ResCap provided $8.6 billion, $4.2 billion, $1.8 billion, $4.3 billion and $200 million, respectively, in total relief obligations.

Smith said that they will continue to monitor the servicers and are only about halfway through the settlement process. The office will continue to test the servicers’ compliance with the settlement’s servicing rules. 

The banks had major incentives to provide relief early, which they have complied with.  It remains to be seen whether the banks will be able to meet the stringent servicing requirements, which plagued them during the financial crisis. 

A View of the Pima County Tax Lien Sale (2014)

Posted in Tax Lien Foreclosure

Well, the 2014 tax lien sales in Arizona are complete.  I attended the Pima County tax lien sale where over $10 million dollars of tax liens were sold over the course of two days.  What was readily apparent from the beginning is that investors looking to fetch high interest rates on tax liens were going to be sorely disappointed.  The competition was incredibly stiff, with one San Diego hedge fund purchasing nearly $4 million dollars worth of liens at rates of 3-4%, while another Florida fund purchased nearly $2 million dollars worth of liens in the 4-5% range.  Indeed, investors were even bidding down $200 liens to 4-5%.  Several liens were even purchased for 1-2%. 

This is a far-cry from just a few years ago where an investor could often pick up a $1,000 tax lien on improved property for 16%.  It is clear that in this low interest rate environment, where large funds are able to obtain money at extremely low rates, small investors have largely been shut out.  It is no longer about who has done the best due diligence, but who has access to the cheapest money.  By the end of the Pima County sale, it really was just a handful of investors that were purchasing all the liens.

So long as the Fed continues to keep interest rates at near historic lows, all those people who have bought into the late-night infomercial view that you can get liens for 16% and get houses free and clear will be sadly awakened to the new reality in tax lien investing.


Tax Lien Foreclosures & MERS

Posted in Tax Lien Foreclosure

The Arizona Court of Appeals (Division 2) recently issued an opinion regarding the extent to which parties must be noticed in a tax lien foreclosure action.  

In this case, the subject real property (the "Property") was owned by Robert and Carri Anderson.  The Property had a first position Deed of Trust, securing the Promissory Note.  The Deed of Trust designated EquiFirst as the Lender and the Mortgage Electronic Registration System ("MERS") "as a nominee for Lender and Lender’s successors and assigns," as the "beneficiary under the Security Instrument," and as the legal title holder. 

In 2005, EquiFirst endorsed the Note "Without Recourse, Pay to the Order of" to Wells Fargo.  EquiFIrst also transferred the Note’s servicing rights to Homecomings Financial, LLC, a subsidiary of GMAC.  GMAC subsequently became the holder of the Note, and placed it into trust, appointing U.S. Bank as trustee.

In February 2007, Delo purchased a tax lien on the Property from the Pinal County Treasurer on a property.  In June 2010, after the statutory three-year waiting period has passed, Delo initiated a tax lien foreclosure action.  Delo named as Defendants in the case, the Andersons, EquiFirst, and the San Tan Heights Homeowners Association.  However, DELO did not name MERS or any of the GMAC parties.  

None of the named Defendants appeared to defend or paid of the tax lien, and Delo obtained a default judgment.  On October 7, 2010, the Pinal County Treasurer issued a Treasurer’s Deed for the Property to Delo. 

In the meantime though, the Andersons had defaulted on the Note and MERS instructed the trustee to initiate a trustee’s sale to sell the Property.  In May 2010, before the Treasurer issued Delo the Treasurer’s Deed, the trustee recorded a Notice of Trustee’s Sale, setting an August 31, 2010 sale date.  GMAC, represented by U.S. Bank, was the highest bidder at the sale and a Trustee’s Deed was issued to U.S. Bank. 

In December 2010, Delo filed a quiet title action against the GMAC parties.  The trial court ruled in favor of Delo concluded that because Delo had recorded a Lis Pendens against the Property on August 12, 2010, before any recorded interest of the GMAC parties, the GMAC parties had received notice and an opportunity to intervene in the Delo’s tax lien foreclosure action.  The trial court further concluded that having failed to intervene, the GMAC parties could not claim that their interests were prior to Delo’s interest.

The GMAC parties appealed the trial court decision arguing that as the holder of the Note they had the right to enforce it.  They further argued that the lack of a recorded assignment of the Note had no bearing on the case because MERS, as GMAC’s agent, held a valid legal interest before Delo initiated his tax lien foreclosure action.  

The Court of Appeals reversed the trial court ruling that "due process requires a tax lien holder to engage in ‘diligent search and inquiry’ for persons and entities holding a legal or equitable interest in property before interests can be foreclosed by default."

The Court of Appeals concluded that the Deed of Trust designated MERS as nominee for the lender, its successors and assigns, the beneficiary of the Deed of Trust, and the legal title holder, and that it was recorded in September 2005.  Accordingly, the Court of Appeals reasoned, MERS’ interest in the Property vested long before Delo acquired any interest in the Property, and MERS should have been named in Delo’s tax lien foreclosure action.  

In the end, the Court of Appeals dispelled with this appeal pretty simply by stating that Delo knew that MERS was an interested party all along, as MERS was identified as the beneficiary under the Deed of Trust, which was identified in the limited report that Delo ordered. 

One take away for any tax lien holder or attorney representing a tax lien holder is order a litigation guarantee from the title company, as the title company would have identified the exact parties that would have needed to be named in the action.  A limited title report typically would not have such a section in the report. 

The other take away from this opinion is found in Footnote 3, where the Court stated that there is no requirement that an endorsement of a promissory note be recorded to be valid.  The Court relied on the recent Arizona Supreme Court case – In re Vasquez – that ruled recording an assignment of a deed of trust is not required prior to filing a notice of trustee’s sale.  This case established in Arizona that simply holding the note provides the power to perform a trustee’s sale.  This Footnote emphasizes the general trend towards a recognition of the MERS system nationally – though not every state has jumped on board that train.

When in doubt – name every party that MIGHT have an interest.  Better to spend a few hundred dollars extra on service of process then have a Treasurer’s Deed overturned.

National Mortgage Settlement & Bounced Government Checks

Posted in Foreclosure Topics

The New York Times recently reported that when homeowners went to cash checks coming from the National Mortgage Settlement, the checks bounced – yes bounced. 

Ronnie Edward, whose home was sold in a foreclosure auction, apparently waited three years for his $3,000 check. When it arrived, he went to his local bank in Tennessee, only to learn that the funds “were not available.”  Mr. Edward was taken aback. “Is this for real?” he asked.

The Times further reports that "it is unclear how many of the 1.4 million homeowners who were mailed the first round of payments covered under the foreclosure settlement have had problems with their checks. But housing advocates from California to New York and even regulators say that in recent days frustrated homeowners have bombarded them with complaints and questions." 

"The first round of the settlement checks was mailed last week. In recent days, problems arose at Rust Consulting, a firm chosen to distribute the checks, people briefed on the matter said. After collecting the $3.6 billion from the banks, these people said, Rust failed to move the money into a central account at Huntington National Bank in Ohio, the bank that issued the checks to homeowners."

"Banking regulators, frustrated with missteps at Rust, urged the consulting firm to shore up the account Tuesday. Now, regulators say the problems are resolved, and are urging homeowners to try again. Officials worry that homeowners, weary from a process that has stretched on for years, will give up."

“We apologize to anyone who experienced problems trying to cash their checks,” a senior vice president at Rust, James Parks, said in a statement. “We are working hard and communicating with the banking regulators, the servicers, and other banks to ensure those issues are not repeated.”

This obviously will not engender much hope or trust in a system that has been mired in controversy since the housing crash that started to implode in late 2007.

Foregiveness Act Survives the Fiscal Cliff

Posted in Real Estate

The Mortgage Debt Relief Act of 2007 has survived the "fiscal cliff," which will invariably lead to a continued increase in the number of short sales nationwide.  The "fiscal cliff" deal will extend the Act for another year, meaning that homeowners who receive debt forgiveness resulting from a foreclosure, deed in lieu, or short sale will be exempt from being taxed on that forgiven debt.

The amount extends up to two million of debt forgiven on the homeowner’s principal residence.  In order for a homeowner to qualify, the forgiven debt must have been used to "buy, build, or substantially improve" their principal residence and be secured by that residence.

Will They Extend It?

Posted in Foreclosure Topics, Tax Lien Foreclosure

So, the election is over and the "fiscal cliff" is awaiting.  Will The Mortgage Forgiveness Debt Relief Act of 2007 (the "Act") be extended?  Given its bi-partisan support in the past, I would venture to say that it likely will be extended another year. 

The extension of the Act is a concern for many given that the housing market is nowhere near out of the woods.  The real issue is that if the Act is not extended, borrowers in most states will have to pay income tax on the amount of any debt forgiven in a short sale, deed in lieu of foreclosure, or foreclosure.

However, for some property owners in Arizona, the expiration of the Act may not have any appreciable impact because of Arizona’s broad anti-deficiency protections for borrowers.  Assuming your property is located on under 2 1/2 acres and utilized as a single or two-family home, the property is deemed a qualifying property for anti-deficiency protection.  Additionally, assuming your loan (and even a second loan) was used for the purchase of the home, it is deemed a non-recourse loan and and any deficiency will not be considered income because it is non-recourse debt.  See I.R.S. Publication 4681.  This IRS Publication states that "if you are not personally liable for the debt, you do not have ordinary income from the cancellation of the debt…" Therefore, in Arizona, even if the Act is not extended, you may not have any tax liability in the event of a short sale or foreclosure if your property is protected by Arizona’s anti-deficiency statutes.