Tucson Land Use Law Blog : Tucson Land Use Lawyer & Attorney : Fleishman Law Firm : Tax Liens, Foreclosures, Zoning

Despite unending attempts to step the flow of illegal immigration to the United States through an increasingly militarized border, the mortgage lending industry was not about to pass up the chance to capitalize on the estimated 12 million illegal immigrants in the United States looking for their own slice of the American dream. 

Enter the "ITIN Mortgage."  During the expansion of the housing bubble, many lenders offered home-mortgage loans to undocumented immigrants without requiring Social Security numbers.  While lenders used to require a Social Security number and verified income, those requirements obvioiusly changed during the loose lending days.  Indeed, if lenders were willing to lend money to legal residents without a job or income (think "NINJA" loans), why not lend to people who are not even legal residents of the United States? 

As the lending industry loosened, lenders began allowing illegal foreign nationals to use a taxpayer identification number ("ITIN") to qualify for a mortgage.  The IRS issues ITINs to both resident and nonresident aliens so they can pay taxes.  Obviously, the U.S. Government is not going to pass up a chance to collect taxes from undocumented residents.  According to the Government Accounting Office, a significant number of the nearly 9 million holders of ITINs are illegal immigrants. 

Tim Sandos, President and Chief Executive of the National Association of Hispanic Real Estate Professionals estimates that since 2000, illegal immigrants have taken out more than $1 Billion in ITIN mortgages.  Interestingly, as National Public Radio recently reported, ITIN mortgages have on average out performed conventional mortgages.  In part this is due to borrowers putting 20-30% down on a mortgage.  More than can be said of most borrowers today.  Amazingly, it has been reported that ITIN mortgages have had a delinquency rate of one half of one percent, compared to 6.4% for all home loans.

While ITIN mortgages have been big business, the tightening credit market has necessarily impacted this area of lending.  Moreover, as the immigration debate has intensified, these mortages have come under increasing pressure.  Indeed, Tim Sandos, when he worked for Citigroup received death threats because he was working with illegal immigrants.  In 2007, Representative John T. Doolittle  of California introduced a bill in Congress that would prohibit financial institutions from providing home mortgages to anyone who lacks a Social Security number.  The bill, H.R. 480, would have amended the Truth in Lending Act to make ITIN mortgage lending illegal. 

Given the surprising stability of ITIN mortgages, lenders certainly are not inclined to shed these solid performers, but the political and credit climate is changing that.  Indeed, as recently reported in an Active Rain blog, Banco Popular, the largest niche provider of ITIN mortgages, will no longer provide such loans.  Perhaps the ITIN mortgage will disappear like the American Ninja. 

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You have to wonder why an initiative (Proposition 201) entitled the "Homeowner's Bill of Rights" is sponsored by Local 359 of the Sheet Metal Workers International Association.  

According to the Home Builders Association of Central Arizona, the union used the threat of an initiative as a pressure tactic in a campaign to get Chas Roberts, an Arizona heating and cooling company, to unionize.  Interesting tactic.  Given the breadth and scope of this initiative, someone else is steering the ship.  Well, union officials respond that they're just trying to give extra legal protection to their members, who are also home buyers. 

Whatever the rationale for putting the initiative to Arizona voters, the initiative has run into formidable opposition in the form of  Arizonans Against Lawsuit Abuse, which is funded by The Coalition for Affordable Housing and The Home Builders Association of Central Arizona and supported by the home builders, several chambers of commerce, and Realtor groups.  Perhaps forcing the home builders to raise money to defeat Proposition 201 was sufficient grounds to put the proposition to the voters.

Not surprisingly, the opposition's strategy is to buck-shot shot the lawyers.  Indeed, one of the recent ads in opposition shows a lawyer sleeping on a couch in his office while the lawyer dreamily states: "I should fly to Arizona and change their laws.  What if they tried to sell a house and were forced to go to court?  Big money for me.  Wait, wait, what if when they tried to buy a house, they were forced to go to court then too?  Big money for me again.  And what if, even if they were just shopping for a house they could go to court?  Big money comes my way one more time.  With all these lawsuits, lawyers will be dancing in the aisles."

The opposition's entire focus is how this Proposition will line the pockets of lawyers.  There is no question that Proposition 201 may provide additional work for Arizona attorneys.  However, Proposition 201's foes are likely much more concerned about the fact that if Proposition 201 passes, home builders will have to provide a 10 year warranty on materials and workmanship, provide the owner of the home the choice of at least three qualified licensed contractors for each contract or subcontract for repair or replacement of any defect, disclosure of a seller's financial relationship with any financial institution, refund 95% of a purchase contract deposit within 100 days of execution, and extension of a dwelling action to ten years from the current eight year period. 

The opposition is rightfully concerned that Proposition 201 prevents any purchase contract from having a provision requiring the purchaser to pay the attorney's fees or expert fees of the seller under any circumstances.  While this certainly sounds heavily skewed in the buyer or owner's favor, the fact is, Arizona law (A.R.S. Section 341.01) still provides that the prevailing party in any dispute arising out of contract is entitled to recovery of their reasonable attorney's fees.  

In the end, while the opposition to Proposition 201 fears that lawyers will be the winners in the end, their attacks fail to recognize that purchasers of homes would still be responsible for footing the bill for their own legal expenses, which is a built-in mechanism for limiting frivolous lawsuits, not to mention that sanctions (Rule 11, Arizona Rules of Civil Procedure) remain available to ward off such suits.  Forget the attorney's fees and "lawyer" abuse, the home builders should be much more concerned about having to offer 10 year warranties, fully disclose their relationships with lenders and title companies, and actually fix or pay for defects.

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In cases involving real property, a plaintiff often will file what is called a "lis pendens," which is Latin for suit pending. The purpose of filing a lis pendens is to secure a plaintiff's claim on a property so that a sale, mortgage, or encumbrance of the property will not diminish the plaintiff's rights to the property, should the plaintiff prevail in its case.

The practical effect of filing a lis pendens is to alert a potential purchaser of the property in dispute that the property's title is in question, which obviously makes the property a whole lot less attractive to any potential buyer. In other words, once the lis pendens is recorded, it serves to place a cloud on the title to the property in question until the lawsuit is resolved and the notice is released or expunged. More importantly, the lis pendens has the effect of preventing most lenders and title companies from lending money on the security of land that is subject to a lis pendens.

Arizona's lis pendens statute is found in Arizona Revised Statutes Section 12-1191(A), which states in part that in "an action affecting title to real property, the plaintiff at the time of filing the complaint, or thereafter, . . . may file in the office of the recorder of the county in which the property is situated a notice of the pendency of the action or defense." A recent decision from the Arizona Court of Appeals in Sante Fe Ridge Homeowners' Association v. Carla Bartschi discussed under what circumstances does an action affect title to real property.

In Sante Fe, the Sante Fe Homeowners' Association filed a complaint against Carla Bartschi alleging breache of contract and sought injunctive relief for Bartschi's alleged violations of the Association's CC&R's. Sante Fe alleged that Bartschi had failed to maintain the landscaping on her property. In conjunction with its lawsuit, Sante Fe filed a lis pendens against Bartschi's property. Bartschi answered Sante Fe's complaint and filed a counter claim for wrongful recordation of the lis pendens, and sought statutory damages , attorney's fees, and costs under Arizona Revised Statutes Section 33-420(A). The trial court eventually granted Bartschi's request for statutory damages, ruling that Sante Fe's action did not affect title to real property and the lis pendens was prematurely recorded.

On appeal, the Arizona Court of Appeals ruled that Sante Fe's action did not affect rights incident to title to real property. The court reasoned that a "lawsuit affects a right incident to title if any judgment would expand, restrict, or burden a property onwer's rights as bestowed by virtue of that title." The Court ruled that Sante Fe's recordation of the lis pendens was premature because at the time it recorded the lis pendens no basis existed to conclude that a lien would be imposed on real property. If Sante Fe had obtained a lien against Bartschi, a basis may have existed to conclude that Sante Fe's action affected title to real property.

As a practitioner, it is nice to have additional guidance from the courts on issues like these, but it is troubling to think how much Sante Fe was willing to pay to appeal the decision. I have to wonder if the Association members were aware of Sante Fe's decision to appeal the trial court's ruling, and whether they would have allowed the Board to authorize the appeal if they knew how much money the Association stood to lose if Sante Fe lost on appeal, which in large part they did.

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Looks like Freddie and Fannie needs Daddy's credit card. With $5.3 TRILLION in combined mortgage debt (about 1/2 of the total mortgage debt in the United States), when Wall Street and the Feds begin to worry about Freddie and Fannie's financial health, there is good reason to be concerned.

Freddie and Fannie are the MAJOR players in buying and guaranteeing loans in the secondary mortgage market. Well, last night the federal government moved on two fronts to shore up Freddie and Fannie and try an allay the markets before they open on Monday. First, the Treasury said it would provide additional liquidity as needed (Remember Bear Stearns?). Unlike the Bear Stearns melt-down however, Freddie and Fannie generally have not faced liquidity problems. But as their problems proliferate, there is always a danger that they might face funding difficulties, thus, the need for daddy's credit card, just in case.

The feds also moved on another front - recapitalization. Freddie and Fannie are seriously undercapitalized. Freddie and Fannie are known as government sponsored enterprises ("GSE's"). As GSE's, Freddie and Fannie do not have to follow the same rules as others. Freddie Mac, for example, had about $16 billion in shareholder capital at the end of the last quarter, supporting $2.1 trillion in assets. Any real private financial sector institution operating with than kind of capitalization would be required to raise more money. But it seems that Freddie and Fannie don't have to play by real rules because the government has their back. That is why Freddie and Fannie can exist in a world where all their assets are invested in the mortgage market - not the place to be right now, right?

Nonetheless, it is interesting to not that last week Fed Chairman Ben Bernanke and Henry Paulson, appearing before the House Financial Services Committee stated that the Office of Federal Housing Enterprise Oversight (Freddie and Fannie's regulator), found both companies adequately capitalized. Indeed, Democrat Chris Dodd, the Senate Banking Committee Chairman also said that "Fannie and Freddie are in sound situation. They have more than adequate capital -- in fact, more than the law requires. They have access to capital markets. They're in good shape. The chairman of the Federal Reserve has said as much. The secretary of the Treasury as said as much."

The only thing stopping Daddy (Treasury/Henry Paulson) from extending credit is Congress. While this situation reeks of a potential bailout, the silver lining in all this is that Fannie and Freddie not only have a rich daddy, they happen to be backed by pretty decent mortgages, not the subprimes that tanked many mortgage lenders. Still, their shares have been battered, down nearly 45% last week. The real purpose in all this is to assuage market fear. The feds don't want market turmoil, otherwise, the house of cards comes tumbling down.

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