Eighth Circuit Court ruling makes loans disappear

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The decision could make significant changes in the secondary market

foreclosure

I refer you to this article from Bloomberg that led me to read the Eighth Circuit Court of Appeals case decided last month, CityMortgage, Inc. v. Equity Bank, N.A.*.

In South Carolina and most other states, the bank has the power to pursue the borrower personally if it can’t sell the property that is subject to a mortgage for the full amount of the loan after a foreclosure. There are a handful of “non-recourse” states where it is not possible to pursue the borrower personally. But this case was decided under Missouri law, and Missouri is not one of those unusual states.

The article makes a point that’s news to me: non-recourse mortgages are standard in most countries other than the United States.

The case involved a repurchase demand under an agreement between CityMortgage and Equity Bank. Twelve loans were involved, six that had been foreclosed and six that had not. The surprising ruling relates to the six mortgage foreclosures. The Eighth Circuit affirmed the lower court, which had held that the six loans that had been foreclosed no longer existed.

The dissent got it right, however, by stating that the loans were not “liquidated” or “extinguished” by the mortgage foreclosures. The dissent states the obvious: a mortgage is a security interest in real property that serves as collateral for the borrower’s loan. When the mortgage is foreclosed, the underlying promissory note survives and the borrower continues to be liable for the resulting deficiency (absent further action such as a new agreement or a discharge in bankruptcy.)

The article correctly states that the Eighth Circuit transformed recourse loans into non-recourse loans by its ruling. The article also states that non-recourse loans may lead to higher interest rates and larger swings in housing prices.  Purchasers on the secondary market won’t pay as much for non-recourse loans, and, for that reason, this case could have a significant impact on the secondary market if other circuits follow the lead of the Eighth Circuit.

* No. 18-1312 (8th Cir. 2019)

A sign of the times?

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Zillow begins to market title and escrow services

welcome to the future sign

A November 12 article in the “Title Report” states that Zillow has begun testing its own title and escrow services in a handful of markets.

After making significant strides in revenues in the third quarter, Zillow is testing the waters in our arena. But, thankfully, we aren’t yet seeing these activities in South Carolina. Zillow had previously used third party title and escrow agents for its transactions. It continues to use third parties in most markets.

A Zillow spokesman told the “Title Report”, “We are also building title and escrow services in-house as a part of our long-term goal of delivering a true, seamless, end-to-end transaction experience for consumers.”

Zillow told the Title Report that more than 80,000 homeowners requested offers in the third quarter. It purchased nearly 2,300 homes and sold more than 1,200 homes in the same time frame. The spokesman said the company believes these results demonstrate that the business model to mechanize real estate transactions is gaining traction as consumer demand reveals people want an easier way to buy, sell, rent and finance homes.

stay tuned

This blog has previously suggested that the role of the local real estate agent may change to assisting sellers in analyzing the various offers they receive from iBuyers plus managing inspections and other steps in the real estate closing channel. As long as closings remain the practice of law in this state, our local dirt lawyers will remain involved in the closing process.

We promise to keep you informed of developments! Watch this space.

SC Supreme Court rule change affects every lawyer with a trust account

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Make one simple change to stay in compliance

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On October 23, our Supreme Court implemented several changes to the South Carolina Appellate Court Rules dealing with lawyer and judicial disciplinary rules enforcement procedures. If things go well in our respective practices, most of us will never have to study the rule changes.

But one change affects every lawyer with a trust account.

Rule 1.15(h) of the Rules of Professional Conduct has been amended to state that every lawyer maintaining a trust account must file a written directive requiring his or her financial institution to report to the Office of Disciplinary Counsel, rather than to the Commission on Lawyer Conduct, when any properly payable instrument is presented for payment against insufficient funds.

In other words, NSF checks must now be reported by your bank to the ODC.

The Court recognized in a footnote that these written directives will take time to update and that lawyers whose written directives currently require reporting to the Commission on Lawyer Conduct are not in violation of the rule. The Court stated that lawyers should update these directives at their earliest convenience.

Most dirt lawyers pay close attention to detail, and I would recommend paying attention to this one sooner rather than later.

Thirty-year fixed-rate mortgages

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Are they still the most logical choice for all buyers?

Is the mortgage industry due for a facelift?

facelift

I recently saw an interesting article from MReport via American Land Title’s Newsletter dated February 26, entitled, “A Mortgage Best Fit; Lenders are bypassing the 30-year fixed-rate mortgage in favor of loans that are tailored to specific borrower niches”. I recommend that all dirt lawyers read this article to understand that the mortgages you may be closing in the future may not be the same as the mortgages you closed in the past. You can read the article in its entirety here.

My husband and I built a house and closed a mortgage loan in 2011, and, although we told the lender and real estate agent we intended to pay the loan off quickly, both insisted on the old-fashioned 30-year fixed rate mortgage with a twenty-percent down payment. The lender didn’t even offer alternatives. In 2011, the housing market was just returning from the financial debacle that began in 2007, so everyone was being extremely careful. (I remember being questioned about why our income tax picture had changed in the years leading up to 2011 and having to write a letter explaining that children grow up and leave home.) I’m not sure we would be approached in the same way today, based on this article.

First-time buyers often choose 30-year mortgages because no one explains other options and because it’s the product their parents understand and recommend. The traditional mortgage is generally the safest option because of its reliable, consistent monthly payment. Interest rates have been low for many years now, and this fact also supports the wide-spread use of the traditional mortgage. Why risk a variable rate when the fixed rate is low?

This article suggests, however, that millennials and other first-time buyers may now be more inclined to select shorter-term and adjustable-rate options. Someone who is just entering into the housing market may envision living in their starter home for only a few years and may prefer an adjustable rate mortgage to take advantage of the low interest rate up front. This article suggests that millennials may be saddled with student debt and may be a more transient group, so they don’t want to commit to anything that lasts thirty years. Few envision themselves working for a single company for any length of time. They believe they must change jobs to increase their incomes. This article also suggests that millennials may not be loyal to a geographic area.

In addition to variable rate mortgages, this article suggests the concept of the equity-sharing mortgage, where an investor shares in the appreciation in the home value in exchange for down payment assistance or lower payments. These new-fangled products may enable low- and moderate- income borrowers to enter the housing market.

Some lenders are recognizing that these trends mean that the entire underwriting process needs to be reexamined to accommodate the millennial market. And they also recognize that veterans may have difficulty getting the service and products they need to buy homes because VA loans are a little more expensive for lenders to close. More education for veterans and training for loan officers may be needed to accommodate the veteran population. Online and mobile-friendly mortgages are also likely to change the face of the mortgage industry in the future.

Day of the Dead: Director Cordray didn’t get his Halloween wish

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President Trump signed the legislation repealing the CFPB arbitration rule

As we discussed in this blog last week, the United States Senate recently voted to dispose of a Consumer Financial Protection Bureau (CFPB) rule that allowed consumers the right to bring class action lawsuits to resolve financial disputes. Under that rule, banks and credit card companies could not use mandatory pre-dispute arbitration clauses in the fine print of credit card and checking account agreements.

Day of the DeadThe vote was 51-50 with Vice President Pence casting the deciding vote. The vote in the Senate followed a previous vote with the same result in the House of Representatives, leaving only the stroke of President Trump’s pen to finalize the repeal.

After the Senate’s vote, CPBP director Richard Cordray released a statement stating the action was “a giant setback for every consumer in the country.” “Wall Street won”, he said, “and ordinary people lost.”  Interestingly, Director Cordray wrote a letter directly to President Trump on October 30 pleading with him to save the arbitration rule.

The letter said, “This rule is all about protecting people who simply want to be able to take action together to right the wrongs done to them.” It also appealed to President Trump’s support of veterans and lower income Americans by saying, “I think you really don’t like to see American families, including veterans and service members, get cheated out of their hard-earned money and be left helpless to fight back.”

The letter obviously had no effect. President Trump signed the law on November 1 to the delight of banking and business groups. Director Cordray said, “In signing this resolution, the President signed away consumers’ right to their day in court.”  The Trump administration, however, is clearly in favor of dismantling regulatory efforts it believes may put a damper on the free market in any way.

Trick or Treat!

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Senate votes to rescind CFPB class action rule

Is this action scary for consumers?

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The United States Senate voted last week to dispose of a Consumer Financial Protection Bureau (CFPB) rule that allowed banks and credit card companies to use mandatory pre-dispute arbitration clauses in the fine print of credit card and checking account agreements to deny consumers the right to bring class action lawsuits to resolve financial disputes.

The vote was 51-50 with Vice President Pence casting the deciding vote. Lindsey Graham voted against the repeal. The House of Representatives had already voted to rescind the rule, and President Trump is expected to sign the bill into law.

When the rule was passed last year, CFPB Director Richard Cordray said the purpose was aimed at giving consumers more power by discontinuing the abusive practice of banks inserting arbitration clauses into their contracts for consumer financial products and services and literally “with the stroke of a pen” blocking any group of consumers from filing class action lawsuits. He also said CFPB’s research indicated that these “gotcha” clauses force consumers to litigate over small amounts ($35 – $100) acting alone against some of the largest financial companies in the world. Consumers are forced, he said, to “give up or go it alone.”

After the Senate’s vote last week, Director Cordray released a statement stating the action was “a giant setback for every consumer in this country.”  “Wall Street won”, he said, “and ordinary people lost.”

HousingWire reported on October 30 that Director Cordray wrote a letter directly to President Trump pleading with him to save the arbitration rule. According to the HousingWire report, the letter said, “This rule is all about protecting people who simply want to be able to take action together to right the wrongs done to them.” It also said, “I think you really don’t like to see American families, including veterans and service members, get cheated out of their hard-earned month and be left helpless to fight back.”

Time will tell whether the President will listen to Director Cordray. But it is clear that the CFPB continues its efforts to shake up the market. It has also been clear up to this point Republicans are seeking to dismantle those efforts that they feel hurt the free market.

What should dirt lawyers do about the Equifax data breach?

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Protect yourself! Advise your clients!

Everyone should have heard about the Equifax data breach at this point, but have you taken any action to protect yourselves and your clients in the face of it?

Equifax has created a website that allows individuals to determine whether their information has been compromised and allows them to sign up for a free year of credit monitoring. Originally, the fine print on this site indicated taking advantage of the free-year credit monitoring service would result in a waiver of legal rights against the company, but I understand the company folded under extreme pressure and removed this language. In any event, please read the fine print since it is apparently changing as this story unfolds.

This website indicated my information had been stolen as well as my husband’s and several colleagues at work. I recommend that you check here to find out whether you need to take further action.

security unlocked data breach

What action should you take?  I am already a member of a credit monitoring service, so I did not sign up for the free year with Equifax. Regardless, I prefer to keep my legal rights intact. I may need those rights! You may decide to take advantage of the service. You may decide to bite the bullet and sign up for an independent credit monitoring service, and you may decide to remain with that service for more than a year.

What else can be done? I have read many news articles and opinion pieces on this matter and decided to have my credit reports frozen with TransUnion, Experian and Equifax.  You may want to take that action, too, so I have linked those websites for you.

Consider this. If your name, address and social security numbers were compromised, this information is not going to change and the potential financial devastation is not going to resolve itself in the span of one year. Everyone who was compromised will need to be vigilant about checking and credit card accounts indefinitely.

As a real estate lawyer, you may want to advise your clients, as a service to them, about this conundrum and the actions they may be able to take to protect themselves. You may also want to reach out to your real estate agents and lender contacts to ask them to spread the word. Assuming a leadership role in this situation will serve those who rely on you well and will set you apart as a professional who works diligently to protect those who need protection.