economy

Transactions involving failed banks require extra attention

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Dirt lawyers: call your friendly, intelligent title insurance underwriter!

Unfortunately, failed banks are back in the news and again affecting the stock market and our 401(k) accounts. It is doubtful that the California and New York banks that have failed have significant assets or loans in South Carolina, but Chicago Title’s underwriters have heard of at least one recent local transaction that involved one of the failed banks.

How should real estate lawyers protect their clients and themselves?

First, here’s a link provides general information about failed banks: http://www.fdic.gov/bank/individual/failed/index.html

Next, remember that assets are not automatically transferred by state law to an acquiring bank when the FDIC is appointed receiver and simultaneously announces the acquisition of the failed bank’s assets. Also, remember that the acquiring bank is not necessarily a “successor” to the failed bank.

Such an acquisition does generally mean that we can treat the acquiring bank as the owner of certain loans of the failed bank. We can generally rely on payoff statements, releases, satisfactions, and foreclosure actions by the acquiring bank if the acquiring bank asserts that it is the assignee by purchase. Documents should recite that the acquiring bank is the assignee of the loan. And we should be able to rely on that recitation.

In foreclosure situations, the acquiring bank may be required to prove its ownership of the debt and its record interest in the mortgage.

Payoff statements from the failed bank may be relied upon and the payoff statement may be made at the failed bank’s direction. But any release or satisfaction executed in response to that payoff must come from the receiver or its attorney in fact. Closing attorneys should confirm that the appropriate signature will be obtained before making the payoff.

The FDIC should sign recordable affidavits, as receiver, to the effect that it sold the particular loan asset to the acquiring bank to support assignments and modifications.

If your client purchases an REO asset that was owned by a failed bank, the proper grantor in the deed will be the FDIC, as receiver for the named failed bank. The FDIC will likely grant powers of attorney to individuals at the failed bank, at the acquiring bank, or internally, to facilitate signing these deeds. The power of attorney should comply with South Carolina law.

FDIC Statement of Policy on Foreclosure Consent and Redemption Rights provides that where the FDIC holds a junior mortgage, it “hereby grants its consent” to any foreclosure by a holder of a bona fide senior mortgage. Your title insurance company may require notice to the FDIC and the acquiring bank.

My best advice in all these cases is to call the person who either knows the answer to your many questions or will find out the answers to each of these questions for you: your favorite friendly and intelligent title insurance company underwriter!

Fifth Circuit addresses short-term rental challenge

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This blog has previously discussed challenges by various cities, including cities in South Carolina, to short-term rentals in residential areas.

Vrbo and Airbnb are two go-to websites to find interesting short-term rentals in vacation locations. Sometimes a cabin or house seems much more appropriate and fun than a hotel room for a family get-away. Having a kitchen and room for dining is often a plus.

Arguments against such rentals often focus on noise and parking problems in otherwise quiet residential subdivisions.

Rules vary greatly in the cabins and houses we’ve rented, but a common theme seems to be that parties are not allowed. I’ve also seen limits on the number of cars that can be accommodated and, of course, the number of people permitted. Pets may or may not be allowed.

The Fifth Circuit Court of Appeals recently addressed such a challenge in Hignell-Stark v. City of New Orleans, 46 F. 4th 317 (August 22, 2022). Thanks to Professor Dale Whitman of the University of Missouri at Kansas City Law School via the Dirt Listserv for information on this case.

An ordinance in the City of New Orleans required an owner to be a resident of the city to obtain a license to become a landlord allowing short-term rentals. When the plaintiffs challenged this ordinance using a “takings” theory, the Fifth Circuit held that theory to be inapplicable because permission to make short-term rentals of a residential unit is not a property interest. It is instead, according to the Court, a privilege.

The plaintiffs also argued that the ordinance was an undue burden on interstate commerce, and the Court agreed, stating that an ordinance that discriminates against interstate commerce is per se invalid unless there are no available alternative methods for enforcing the city’s legitimate policy goals. The ordinance in question was a blanket prohibition against out-of-state property owners’ participation in the short-term rental market. The Court pointed out that the ordinance doesn’t just make it more difficult for non-residents to compete in the market for short-term rentals in residential neighborhoods; it forbids them from participating altogether.

The Court pointed to alternative methods for achieving the city’s legitimate goals of preventing nuisances, promoting affordable housing, and protecting neighborhoods’ residential character. More aggressive enforcement of nuisance laws, increased penalties for nuisance violations, increased taxes on short-term rentals, requiring an operator remain on the property during night hours, and capping the number of short-term rentals licenses in particular zoning district might be alternatives.

The ordinance was held unconstitutional and void because the city’s objectives could be addressed in other ways that did not burden interstate commerce.

What do you think? Would you be comfortable with short-term rentals in your neighborhood?

Columbia house purportedly sold as an NFT

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149 Cottage Lake Way – one of the first NFT-based residential home sales for the US

When bizarre topics are discussed in my family, we often employ the famous quote by actor Chris Tucker from the funny movie Rush Hour: “Do you understand the words that are coming out of my mouth?” I’m not sure I understand the words I am typing here, so we’ll add links below for you to read for yourself.

A company called Roofstock onChain claims to have sold a house located in Columbia, South Carolina using NFT technology. The address of the house is revealed: 149 Cottage Lake Way, and it’s located in my zip code. If you Google that address, you’ll see lots of pictures of the house and articles about this transaction.

I had to start with the basics to attempt to get a handle on this topic. An NFT is a non-fungible token, a digital asset that can come in the form of art, music, in-game items, videos, and other assets. They are bought and sold online using cryptocurrency. The NFT allows the buyer to own the original item. NFTs have been described as physical collector’s items, only digital. Instead of receiving an actual painting, the buyer gets a digital file that represents exclusive ownership.

To trade in NFTs, the buyer must first have a digital wallet that allows storage of cryptocurrency and NFTs. The wallet must be funded with cryptocurrency. After that step, there are apparently several NFT marketplaces to explore.

So how did this house purchase take place? An LLC was created for the ownership of the three-bedroom recently renovated home. (And here are the words that I don’t understand.) Several of the articles say something along the lines of: The house was sold on the Roofstock onChain NFT marketplace by transferring the home identity to an Ethereum address owned by the buyer.

Dirt lawyers, I ask you, do you see any problems with this transaction? Did anyone search the title? Was there a physical inspection of the home? Was there a survey? Were the taxes prorated?  Did a South Carolina licensed attorney close the transaction?  I have more questions, but I bet you can come up with a list of your own.

I’ll continue to read about this topic and attempt to keep readers informed. In the meantime, here are some links for your education:

The future is now? Columbia becomes blockchain testing ground with house bought as an NFT

Blockchain Makes Deeper Inroads Into Real Estate As Roofstock Announces Its First NFT Home Sale

Are NFTs the future of home ownership?

How NFTs Could Change Real Estate

Blockchain Facts: What it is, how it works, and how it can be used

Roofstock onChain – https://onchain.roofstock.com/

Welcome to Ethereum – https://ethereum.org/en/

Does real estate “wholesaling” work in our market?

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Maybe, but real estate practitioners should be careful!

A recent discussion on South Carolina Bar’s real estate section listserv surrounded whether and how to close “double closings” vs. “assignments of contracts”.  This is not a novel topic in our market. In the very hot market that preceded the crash beginning in 2007, one of the biggest traps for real estate attorneys was closing flip transactions. Title insurance lawyers fielded questions involving flips on an hourly basis!

Flips have never been illegal per se. Buying low and selling high or buying low and making substantial improvements before selling high are great ways to make substantial profits in real estate.  

Back in the day, we suggested that in situations where there were two contracts, the ultimate buyer and lender had to know the property was closing twice and the first closing had to stand on its own as to funding. In other words, the money from the second closing could not be used to fund the first closing. (Think: informed consent confirmed in writing!)

Where assignments of contracts were used, we suggested that the closing statements clearly reflect the cost and payee of the assignment.

The term real estate investors are using these days to define buying low and selling high is “wholesaling”.  A quick Google search reveals many sites defining and educating (for a price, of course) the process of wholesaling. This is a paraphrase of a telling quote I found from one site:

If you’re looking for a simple way to get started in real estate without a lot of money, real estate wholesaling could be a viable option. Real estate wholesaling involves finding discounted properties and putting the properties under contract for a third-party buyer. Before closing, the wholesaler sells their interest in the property to a real estate investor or cash buyer.

One of the smart lawyers on our listserv, Ladson H. Beach, Jr., suggested that there does not appear to be a consensus among practitioners about how to close these transactions. He suggested reviewing several ethics cases* that set out fact-specific scenarios that may result in ethical issues for closing attorneys.

In addition to the ethics issues, Mr. Beach suggested there may be a licensing issue where an assignor is not a licensed broker or agent. A newsletter from South Carolina Real Estate Commission dated May 2022 which you can read in its entirety here addresses this issue. The article, entitled “License Law Spotlight: Wholesaling and License Law” begins:

“The practice of individuals or companies entering into assignable contracts to purchase a home from an owner, then marketing the contract for the purchase of the home to the public has become a hot topic, nationwide in the real estate industry in recent years. This is usually referred to as ‘wholesaling’. The question is often, “is wholesaling legal?’ The answer depends upon the specific laws of the state in which the marketing is occurring. In South Carolina, the practice may require licensure and compliance with South Carolina’s real estate licensing law.”

The article suggests that the Real Estate Commission has interpreted that the advertising of real property belonging to another with the expectation of compensation falls under the statutory definition of “broker” in S.C. Code §40-57-30(3) and requires licensure. Further, the newsletter suggests S.C. Code §40-57-240(1) sets up an exception; licensing is not required if an unlicensed owner is selling that owner’s property. The Commission has interpreted, according to this article, that having an equitable interest is not equivalent to a legal interest for the purpose of licensing. In other words, a person having an equitable interest acquired by a contract is not the property’s owner and has no legal interest in the property for the purposes of this licensing exemption.

So real estate practitioners have several concerns about closing transactions of this type. Be very careful out there and consult your friendly title insurance underwriter and perhaps your friendly ethics lawyer if you have concerns as these situations arise in your practice.

*In re Barbare (2004), In re Fayssoux (2009), In re Brown (2004) and In re Newton (2007)

Check out “Arrived Homes” real estate investment platform

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Real estate has always been a significant investment option but shelling out the required funds may be cost prohibitive for all but the most affluent among us. Jeff Bezos and his partners may have solved this problem.

Check out the real estate investment platform Arrived Homes. Go to the site and listen to the quick explanation entitled “What is Arrive in 1 min”.  Very simply, an investor can buy “shares” of rental properties and collect the rental income attributable to those shares. If the economy holds out and real estate continues to appreciate, the properties (and the shares) will increase in value over time. The company intends to hold the properties for five to seven years before selling them and distributing the equity to the investors.

The business finds, buys and manages residential rental properties and offers shares of the properties to investors. Potential investors can browse and choose among available properties. Management includes locating tenants, maintenance, repairs, improvements as well as handling accounting and taxes.  A quick review reflects several properties in South Carolina.

An interesting Arrived approach is to encourage the tenants of the rental properties to become investors in the properties they occupy. The idea is to encourage the tenants to treat the properties as if they own them….because they do! The longer the lease the tenant signs, the larger the equity incentive.

Rental income is paid quarterly in the form of dividends. Investors can review their returns and potential appreciation in the user dashboard.

How does the company make its money? It charges two fees, a sourcing fee and an assets under management fee. The sourcing fee is paid up front and the assets under management fee is charged at 1% per year. Both fees as listed on each property’s “page”.  Costs are deducted from the rental income.

The site launched a little over a year ago and has experienced significant growth. One report indicates properties have been purchased valued at close to $40 million already. New properties are listed every couple of weeks, and many sell out quickly.  

The intent it to make investing in real estate as easy as investing in stocks with a minimum investment of only $100. It’s an interesting concept!

Short-term rentals questioned in South Carolina cities

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Vrbo and Airbnb are two go-to websites to find interesting short-term rentals in vacation locations. Sometimes a cabin or house seems much more appropriate and fun than a hotel room for a family get-away. Having a kitchen and room for dining is often a plus. And I love a hot tub with a view!

But I’ve seen a couple of news articles about South Carolina cities questioning whether these types of short-term rentals are appropriate in residential subdivisions, and I understand the concern.

WLTX posted an article on March 16 entitled, “Renters frustrated after South Carolina city pauses short-term rentals for 6 months.” The article reports that Rock Hill is halting new and renewal permits for short-term rentals for at least the next six months.

The article quotes a man who said he and his wife operate nine Airbnb locations and have been put out of business by the resolution. The article quotes the resolution: “the homes are mainly in their older neighborhoods and these transient tenants have a negative effect on the peace and perceived safety of those neighborhoods.”

An article posted on March 17 by South Carolina Public Radio entitled “Upstate cities ponder the fate of short-term rentals” discusses the Rock Hill moratorium as well as similar discussions by city officials in Spartanburg.

The city attorney in Spartanburg is quoted as saying that city’s “permissive” zoning ordinance does not address short-term rentals and that any use that is not specifically allowed is prohibited. He admitted, however, that there are “plenty” of short-term rentals—about 120 on Airbnb alone.

One councilman in Spartanburg was quoted as arguing in favor of creating rules to keep “bad actors” from causing trouble in neighborhoods.

Rules vary greatly in the cabins and houses we’ve rented, but a common theme seems to be that parties are not allowed. I’ve also seen limits on the number of cars that can be accommodated and, of course, the number of people permitted. Pets may or may not be allowed.

What do you think? Would you be comfortable with short-term rentals in your neighborhood? Could rules about groups, parties and parking make a difference?

We may see other cities in The Palmetto State considering whether to limit short-term rentals through zoning or permitting. It’s an interesting question!

D.C. Federal Court vacates CDC’s eviction moratorium

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…. then temporarily stays its ruling

This blog reported in early April that the Centers for Disease Control and Prevention (CDC) had extended the national moratorium on residential evictions through June 30. The U.S. District Court for the District of Columbia issued an order on May 5 vacating the moratorium, but later in the day temporarily stayed its own ruling to give the Court time to consider the merits of the arguments on both sides. The result of the stay is that the eviction moratorium remains in place for the time being.

The suit* resulting in these remarkable rulings was brought on November 30 by two trade associations, the Alabama and Georgia Associations of Realtors, and by individuals who manage rental properties. The complaint raised several statutory and constitutional challenges to the CDC order. Both parties filed motions for summary judgment. The plaintiffs’ motion was granted on the grounds that the CDC had exceeded its authority by issuing the broad moratorium. The Department of Justice filed an emergency appeal within hours.

The Court asked for a defense response this week and a reply from the government by May 16, so it is likely that a new order will be issued soon. But with the moratorium’s expiration date of June 30, a new ruling will have little, if any, effect. 

In addition to the national moratorium, some state and local laws restricting evictions remain in place.

The Court’s order vacating the moratorium pointed to the unprecedented challenges for public health officials and the nation caused by the COVID-19 pandemic. The difficult policy decisions, like the decision to impose the moratorium, have real-world consequences, according to the Court. The Court stated that it is the role of the political branches, not the courts, to assess the merits of such policy decisions. The Court perceived the question before it to be very narrow:  does the Public Health Service Act grant the CDC the legal authority to impost a nationwide eviction moratorium? The Court held that it does not.

*Alabama Association of Realtors v. United States Department of Health and Human Services, United States District Court for the District of Columbia, No. 20-cv-3377 (DLF).

Will we repeat the real estate crash of 2008?

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Those of us who were in the real estate industry in 2008 when the music stopped in that crazy game of musical chairs we seemed to be playing never want to see that scenario repeated.

It was frightening.

Our incomes plummeted, we had to reduce staffs, great employees left the business (many never to return), real estate lawyers dipped into their retirement and other savings to keep afloat. Real estate lawyers switched to other practice areas. I recently asked a lawyer of retirement age about his plans. His response was that he has no plans to retire because he is still making up the income lost in the crash.

Our business is crazy again.

We hear of houses routinely closing at above listing price in South Carolina. I read a national statistic that suggested more than 40% of houses are going to contract at more than the listing price.  Leading up to 2008, I can vividly remember being amazed that contracts on houses were being sold, sometimes more than once, before a closing could take place. We spent lots of time figuring out whether “flips” were illegal based on their facts. I am a member of a female lawyer page on Facebook, and someone posed the question yesterday asking how other lawyers are closing these multiple-contract transactions.

Why are we here now? Inventory is low. Builders are unable to keep up with the demand created, in part, by the angst of staying at home during COVID leading to appetites for better living space. Many have left cities for areas of less population, and, as always, the sunny South sees a constant influx of those looking for better weather.  Mortgage rates are low. The economy is good. These factors are converging and generally keeping everyone in the industry hopping.

Will the bubble burst again?

I have read everything I can find on what the experts are saying on this topic, and it appears that most economic and housing experts believe we are in much better shape this time around. The main protection appears to be responsible lending. Leading up to 2008, it seemed that anyone who could hold a pen could get a mortgage.  It now appears that loans are being made to more credit-worthy borrowers with decent down payments.

We will see a softening in the market at some point. Mortgage rates will rise resulting in less affordability in the market, and mortgage applications will decline. But that kind of cyclical activity is normal. Our business is accustomed to handling those typical economic and seasonal cycles. Everyone will probably welcome a break in the activity.

I hope and sincerely believe the experts are calling this situation correctly, so hold on for the ride and look forward to the break.

COVID forbearance extended

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The U.S. Department of Housing and Urban Development has extended COVID-19 foreclosure and forbearance moratoriums through June 30, 2021. It also extended the deadline for the first legal action and the reasonable diligence time frame to 180 days.

COVID-19 forbearance was also extended to allow up to two forbearance extensions of up to three months each for homeowners who requested a forbearance on or before June 30, 2020. These extensions are intended to provide relief to homeowners who will be nearing the end of their maximum 12-month forbearance period and have not yet stabilized their financial situation.

FHA’s streamlined COVID-19 loss mitigation home retention and home disposition options were extended to all homeowners who are behind on their mortgage payments by at least 90 days.

Diana Hoffman, Corporate Escrow Administrator with Fidelity recently wrote an excellent article about mortgage forbearance that I previously shared on this blog and am now sharing again with South Carolina closing attorneys in its entirety:

“Forbearance does not erase what the borrower owes. The borrower will have to repay any missed or reduced payments in the future. Borrowers able to keep up with their payments should continue to make payments. The types of forbearance available varies by loan type.

At the end of the forbearance, the borrower’s options can include paying their missed payments:

  • At one time
  • Spread out over a period of months
  • Added as additional payments, or
  • Added as a lump sum at the end of their mortgage

The CARES Act requires servicers to grant forbearance up to 180 days, with a one–time extension of 180 days for borrowers experiencing a hardship due to COVID–19 issues, such as, loss of income, unemployment, illness or caring for a sick relative.*

The CARES Act also provides protection against derogatory marks against the borrower’s credit. However, the servicer can report notes to the credit bureau that can be seen by any future creditor that could prevent the borrower from obtaining any type of new financing for a 12–month period.

When the Federal Housing Finance Agency reports servicers who collect payments on mortgages backed by Fannie Mae and Freddie Mac, they will only be required to cover four months of missed payments on loans in forbearance.

The big question is what happens when that four–month period is over? As it turns out, the Government Sponsored Entities (GSEs) themselves are preparing to cover any remaining advances for as long as those loans remain in forbearance.

What does this mean to the title industry? To prevent payoff losses due to deferred payments, settlement agents should:

  • Ask borrowers if they have entered into a forbearance or loan modification agreement with their lender at the opening of the transaction
  • Review the preliminary report or commitment for title insurance for junior liens, securing the deferred payments
  • Ensure the payoff request includes the following language:
    • Please furnish to us a statement of the amount necessary to pay in full including any amounts deferred due to a forbearance or modification agreement.
      If the borrower entered into a forbearance agreement and you are not the entity servicing any deferred amounts, please provide the contact information for the entity who is.
  • Review the payoff statement for deferred principal balance amounts

The last item is important. If the deferred amounts are not contained in the payoff statements, it is likely the amounts are being serviced by another loan servicer and a separate payoff statement will need to be requested”

*See above in the main article. Two extensions are now allowed.

Lawyers: Tell your clients, friends and family members!

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South Carolina launched a funded rental and mortgage assistance program

South Carolina’s Housing Authority announced last week a new funded program to assist residents who face financial difficulty in housing as a result of the pandemic.

The program, called SC Stay, has $25 million to be provided on a first-come, first-serve basis to qualified residents for rent and mortgage deficits dating back to February of 2020. Residents may receive up to a total of $7,500 for prior and/or future mortgage or rent payments. The funding is provided through the U.S. Department of Housing and Urban Development’s Community Development Block Grant Program for Coronavirus and is a part of the CARES Act.

To qualify, individuals and families must:

  • Certify that their income is at or below 80% of county medium income adjusted by family size. (A chart reflecting the requirement for each county is attached);
  • Demonstrate that they are unable to make all or part of their rent or mortgage payments or are behind on those payments because of circumstances stemming from COVID. Those circumstances may include layoffs, reduced work hours as well as the inability to work because of infection and quarantine.
  • Have landlord or lender confirmation of their past-due payments and willingness to accept payments on behalf of the tenant or borrower.

The application process can be started here or by calling (833) 985-2929.