Mortgages without appraisals?

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Fannie and Freddie are relaxing their rules!

Government-chartered entities Fannie Mae and Freddie Mac are relaxing their decades-old appraisal rules to allow some refinances and, more significantly, some sales to close without new appraisals. Both entities indicate they will only permit loans to close without appraisals in situations where they have substantial data on the properties in question as well as the local real estate markets.

How will the new plans work? Lenders will submit loan files to either Fannie or Freddie for underwriter analysis. The entities’ proprietary systems (automated valuation models) will be employed to determine whether sufficient valuation data is available to support the requested loan amounts.  These systems are said to be depositories of millions of prior appraisal reports and “proprietary analytics” that allow for computer-driven valuations of properties. If the system determines that no appraisal is required, the borrower will be given the choice of proceeding without an appraisal or coming out of pocket for an appraisal.

Should local residential contracts be tweaked? Should lawyers advise their purchaser clients to obtain appraisals?  We will have to cross those particular bridges.

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This seems reminiscent of the situation in the early 1990s where title insurance companies limited their requirements for current surveys. Residential lenders were given the survey coverage they required without the cost of updated surveys. Lawyers were left holding the bag, so to speak, to advise their purchaser clients of the benefits of surveys and to encourage them to incur the cost despite the fact that there was suddenly no lender or title company requirement.

Lawyers are not typically involved in residential transactions prior to loan approval, however, so it is entirely possible they will not be involved with the question of whether to obtain appraisals unless astute and cautious buyers specifically seek advice up front.

Fannie and Freddie have been quietly phasing in this new process for months and indicate appraisals will continue to be required for most loans. Fannie estimated that only ten percent of loans were eligible to close without appraisals at the inception of its program for refinances. That percentage is likely to be smaller for sales.

Both entities require at least twenty percent equity to qualify. Fannie’s program includes single-family homes, second homes and condominiums.  Freddie’s program is limited to single-family, single-unit primary residences. Homes in disaster areas, manufactured homes, and homes valued at more than $1 million will not qualify. The borrower’s credit scores and credit worthiness will also be considered.

Real estate agents are likely to love this new technology-based innovation. It will save money as well as time. Appraisers (like surveyors in the 1990s) will not be happy as this program is phased in.

What do you think? Are appraisals a good thing?  Will foregoing appraisals be akin to the “no doc” and “low doc” mortgages that helped lead us to the financial crisis of 2008? Are actual inspections by trained human beings of the interiors of residences necessary to establish value? Let’s see how this plays out!

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Feds extend footprint of shell game again

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Will this obligation eventually extend to South Carolina?

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Secretly purchasing expensive real estate continues to be a popular method for criminals to launder dirty money. Setting up shell entities allows these criminals to hide their identities. When the real estate is later sold, the money has been miraculously cleaned.

In early 2016, The Financial Crimes Enforcement Network (FinCEN) of the United States Department of the Treasurer issued an order that required the four largest title insurance companies to identify the natural persons or “beneficial owners” behind the legal entities that purchase some expensive residential properties.

At that time, the reach of the project extended to the Borough of Manhattan in New York City, and Dade County, Florida, where Miami is located. In those two locations, the designated title insurance companies were required to disclose to the government the names of buyers who paid cash for properties over $1 million in Miami and over $3 million in Manhattan. The natural persons behind the legal entities had to be reported for any ownership of at least 25 percent in an affected property.

By order effective August 28, 2016, all title insurance underwriters, in addition to their affiliates and agents, were required to be involved in the reporting process, and the footprint of the project was extended.

The targeted areas and their price thresholds as of August 28, 2016 were:

  • Borough of Manhattan, New York; $3 million;
  • Boroughs of Brooklyn, Queens and Bronx, New York; $1.5 million;
  • Borough of Staten Island, New York; $1.5 million;
  • Miami-Dade, Broward and Palm Beach Counties, Florida; $1 million;
  • Los Angeles, San Francisco, San Mateo, Santa Clara and San Diego Counties, California; $2 million; and
  • Bexar County (San Antonio), Texas; $500,000.

By order effective September 22, 2017, wire transfers were included, and the footprint of the project will include transactions over $3 million in the city and county of Honolulu, Hawaii.

Although the initial project was termed temporary and exploratory, FinCEN has indicated that the project is helping law enforcement identify possible illicit activity and is also informing future regulatory approaches. The current order extends through March 20, 2018.

We have no way of knowing whether or when this program may be expanded to South Carolina, but it is entirely likely that expensive properties along our coast are being used in money laundering schemes. We will keep a close watch on this program for possible expansion

The Episcopal Church case is out; It will take more than faith to deed, mortgage and insure church properties

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Today, I am thankful to be a real estate lawyer. As I attempt to decipher the South Carolina Supreme Court’s 77-page opinion involving the Episcopal Church published on August 2,* my mission is limited to the real estate issues.

I don’t have to solve the mystery of the rights of gays in churches. I don’t have to ascertain whether the “liberal mainline” members or the “ultra-conservative breakaway” members make up the real Episcopal Church.  I don’t have to delve into the depths of neutral principles of law vs. ecclesiastical law. I don’t have to figure out who will own the name “Episcopal Diocese of South Carolina.”

The real estate issues are sufficiently thorny to occupy our collective real estate lawyer brains, but I am attempting here to boil those issues down to a manageable few words for all of us.

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St. Philip’s and St. Michael’s Episcopal Churches, Downtown Charleston, SC 

 

News articles refer to the properties as being valued at hundreds of millions of dollars. The historic value of the properties, including St. Michael’s and St. Philip’s of Charleston, is also quite significant.  I assume a petition for rehearing will ensue as well as an appeal to the United States Supreme Court. Nothing is settled at this point. Let’s not try to insure these titles anytime soon.

The controversy began five years ago when 39 local parishes in eastern South Carolina left the Episcopal Church over, among other issues, the rights of gays in church. Since then, the two sides have been involved in a battle over the church’s name, leadership and real estate.

Interestingly, the national church had offered a settlement to the breakaway parishes that would have allowed them to retain their properties if they gave up the name and leadership issues. That settlement offer was apparently summarily rejected.

Wednesday’s ruling upholds the Episcopal Church’s position that it is a hierarchal church rather than a congregational church in which the vote of church membership can determine the fate of real property. It also orders the breakaway group to return 29 properties to the national church. Seven parishes may maintain their independence.

The position of the properties turns on whether the local parishes agreed to be bound by the “Dennis Canon” which was enacted in 1979 and provided, in effect, that real property of a parish is held in trust for the national church and the local Diocese, subject to the power of the local parish over the property, so long as the parish remains a part of the national church and Diocese. No evidence was found in the records of the seven parishes that those parishes ever agreed to be bound by the Dennis Canon. The other 29 properties were the subject of documentation to the effect that the local churches intended to hold the property in trust for the denomination. The opinion did not uphold the Dennis Canon in and of itself. Explicit recognition of the Canon was required.

That, in short, is the impact of the 77-page opinion on real estate lawyers. We will need to watch for a possible rehearing, appeal periods and a potential settlement. In the meantime, we will sit tight and not involve ourselves in sales and mortgages of these properties.

Now that I’ve had a chance to think about it, I am always thankful to be a real estate lawyer!

*The Protestant Episcopal Church in the Diocese of South Carolina v. The Episcopal Church, South Carolina Supreme Court Opinion 27731, August 2, 2017.

The Quicken decision is out

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It’s not what dirt lawyers wanted or expected

The South Carolina Supreme Court never ceases to amaze when it decides real estate cases. Dirt lawyers seldom know what to expect. We read the precedents. We attend the hearings. We listen to the Justices’ questions. We believe we get a glimpse of what they may be thinking. But we miss the mark. Last week, the South Carolina Supreme Court decided the much anticipated Quicken case*, and if I had predicted the top five possible outcomes, I would not have come close to the actual decision.

I fully expected a 3-2 decision in either direction. But it is a 5-0 strongly written decision. It is a decision that was written to dispose of the controversy. It is a decision that was written to deny the possibility of reconsideration.

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This is an unauthorized practice of law case brought in the Court’s original jurisdiction. The case was assigned to Circuit Court Judge Diane Goodstein as Special Referee to take evidence and issue a report. Judge Goodstein held a two-week trial and issued a report finding, essentially, that no South Carolina licensed lawyer quarterbacked (my word) the mostly Internet-based residential refinance closings. In the facts recited in Judge Goodstein’s report, lawyers were peripherally involved in all of the steps required by State v. Buyers Service Co.** and its progeny, but no lawyer was actually involved in a way that the interest of the borrower was protected.

(Summarizing the prior decisions, the steps requiring lawyers are: (1) document preparation; (2) title search; (3) closing; (4) recording; and (5) disbursement.)

The Supreme Court somehow reviewed the same record and found that lawyers were involved and used their professional judgment in each step. The facts recited in the Court’s decision were not recognizable from the facts recited by Judge Goodstein’s report. The Court completely rejected the report and apparently decided that a finding of UPL under the circumstances would “mark an unwise and unnecessary intrusion into the marketplace”. “Simply put,” the Court stated, “we believe requiring more attorney involvement in cases such as this would belie the Court’s oft-stated assertion that UPL rules exist to protect the public, not lawyers.”

Most South Carolina dirt lawyers were hoping the Court would find a South Carolina licensed lawyer must be at the center of each closing, overseeing each step, and insuring that the consumer client’s interests were protected in each step. That is definitely not what we got.

There is, however, some good news in this decision. The Court made the clearest implication to date (without an explicit holding) that Buyers Service and its progeny may not apply in the commercial arena. The Court repeatedly stated that the context of this case is the residential refinance arena. I have discussed this case with several commercial lawyers to ascertain whether they are now comfortable to forego certifications that other South Carolina licensed lawyers are involved in the closing steps that are not under their control. They seem to feel slightly more comfortable, but not comfortable enough to let go of that step. Perhaps the passage of time will help.

Other good news is that, despite the facts recited by Judge Goodstein to the contrary, the Court clearly stated that lawyers were involved and used their professional judgment in each required step. The out-of-state entities who do business here should make sure their processes include this professional judgment in each step of the closing.

After reading this case a dozen times, I’ve decided that no law has changed. Nothing will change in our local processes. Nothing will likely change dramatically in the processes of the out-of-state entities who do business here. If I had not read Judge Goodstein’s report and if I had not attended the Supreme Court’s hearing, I would probably not be shocked with this result.

I would love hear what you think.

*Boone v. Quicken Loans, Inc., South Carolina Supreme Court Opinion 27727, July 19, 2017

** State v. Buyers Serv. Co., 292 S.C. 426, 357 S.E.2d 15 (1987)

Sometimes the sky isn’t so blue in Malibu

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California case might spell trouble for real estate agents and brokers across the country

The California Supreme Court decided a case in late 2016 that may have wide-ranging effect for real estate companies in that state.* The case involves a Chinese millionaire’s 2007 purchase of a mansion in Malibu for $12.25 million.

The seller, a trust, engaged Chris Cortazzo, a salesman in Coldwell Banker’s Malibu West office to sell the property.  As Cortazzo prepared to list the property, he obtained information from the tax assessor’s office that indicated the property’s living area was 9,434 square feet. The building permit described a single-family residence of 9,224 square feet, a guest house of 746 square feet, a garage of 1,080 square feet and a basement of unspecified area. The MLS listing stated that the property “offers approximately 15,000 square feet of living area”. Cortazzo also prepared and distributed a flyer making the same square footage representation.house measuring tape

In 2007, a couple made an offer to purchase the property. By handwritten note, Cortazzo informed them that Coldwell Banker did not “guarantee or warrant” the square footage, and advised them to “hire a qualified specialist to verify the square footage”. When the couple requested documentation of the square footage, Cortazzo gave them a letter from the property’s architect stating the “size of the house, as defined by the current Malibu building department ordinance is approximately 15,000 square feet.”  In a cover note, Cortazzo again cautioned them to hire a specialist. This sale fell through.

Horishi Horiike had been working for several years with Chizuko Namba, a sales person in Coldwell Banker’s Beverly Hills office, to find a residential property to buy. Namba showed Horiike the residence in question. Cortazzo gave Horiike the marketing flyer advertising approximately 15,000 square feet and an MLS printout that did not specify the square footage and contained note in small print that “Broker/Agent does not guarantee the accuracy of the square footage.” Horiike and the selling trust entered into a contract.

Before the closing, Horiike signed three disclosure forms confirming that Coldwell Banker represented both the buyer and the seller in the transaction. Under California law, a real estate broker may act as a dual agent for both parties, provided both parties consent to the arrangement after full disclosure.  The broker may act through one or more “associate licensees”, typically the salespeople who operate under the broker’s license and supervision. The governing statute provides that when an associate licensee owes a duty to any party in a real estate transaction, that duty is equivalent to the duty owed to that party by the broker.

Cortazzo did not state in writing to Horiike that there may be a discrepancy in the square footage, as he had done with the previous potential buyer. He also did not advise Horiike to retain an expert to verify the square footage. After the closing, Horiike learned that the property had less than 12,000 square feet of living area (although Coldwell Banker experts testified at trial that the living area was 14,186 square feet.)

In 2010, Horiike filed suit against Cortazzo and Coldwell Banker for intentional and negligent misrepresentation, breach of fiduciary duty, unfair business practices and false advertising. He did not sue the selling agent, Namba.

In a unanimous decision, California’s Supreme Court stated that the case presented a single, narrow question:  whether the associate licensee who represented the seller owed a duty to learn and disclose all information materially affecting the property, including the discrepancy in the square footage. The Court held that Coldwell Banker, as broker, owed a fiduciary duty to both parties and that Cortazzo, as associate licensee, had the responsibility to properly investigate and disclose all important information related to the transaction. The Court concluded Cortazzo owed a duty to Horiike equivalent to the duty owed to him by Coldwell Banker.

Several trade associations filed amicus briefs in the case. One concern is that an agent working with a buyer has no idea what property that buyer will ultimately purchase. Whether the same broker will represent the seller can’t be predicted. Another concern is that this decision may also reach commercial transactions. It is also possible that this case may open selling agents open to lawsuits from their clients for over-disclosure.

Could this happen in South Carolina? A provision in our statutory scheme may save brokers from the fate set out in this case, at least where different branch offices of a real estate firm are involved. Here, each branch office must be managed by a broker-in-charge. South Carolina Code §40-57-350 (I)(2) states that a broker-in-charge and associated licensees in one office of a real estate brokerage firm may conduct business with a client of another office of the real estate brokerage firm without creating a dual agency relationship, so long as the branch offices each have separate brokers-in-charge and do not share the same associated licensees.

I can’t find similar protection for listing and selling agents who work in the same branch office, nor for companies with listing and selling agents in the same location.  And, as we all know, there is no predicting what our court might say in connection with real estate matters. We will have to pay attention to see whether other courts, and particularly South Carolina courts, follow the lead of the California Supreme Court.

*Horiike v. Coldwell Banker Residential Brokerage Co., 1 C5th 1024 (2016)

How to cure a defective deed

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Why South Carolina should consider a legal specialty in real estate.

The Real Estate Practices Council of the South Carolina Bar is considering petitioning our Supreme Court to create a specialty for the practice of real estate law. Two committees have been formed, one to consider residential real estate as a specialty and the other to consider commercial real estate as a practice specialty. If you have ideas that may help, please pass them along to me!

One reason for consulting a real estate lawyer might be for assistance in curing a defective deed. It is impossible to list all the types of defects that appear in deeds of record. The list grows every day! Some of the most common defects are property description discrepancies, grantor and grantee name discrepancies, out-of-state forms that do not comply with South Carolina statutory requirements, right of survivorship attempts that fail, discrepancies in ownership percentages, failure to recite consideration, grantor signature discrepancies, and authority issues of seller entities.

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Curing defective deeds will often require corrective deeds or quitclaim deeds from parties with outstanding interests. Note that corrective deeds are exempt from the deed recording fees imposed by §12-24-10 et seq. of the Carolina Code. See, specifically, §12-24-40(12). With corrective deeds, it may be necessary to obtain a deed back from the grantee. An example would be a deed from the developer to Richard Roe for lot 35, where Mr. Roe actually bought and occupied lot 34. To cure this problem, in addition to obtaining a deed from the developer to Mr. Roe of lot 34, Mr. Roe would need to convey lot 35 back to the developer. I continue to be amazed at the number of real estate professionals who think this step can be skipped, and that a corrective deed will somehow get the title back for the other lot. Also remember that mortgages may have to be re-executed or otherwise corrected once the deed issue is cured.

I am often asked whether the lawyer can “fix” the problem on the original deed and re-record it without the involvement of the parties. The answer is a strong “no”. The grantor must at least initial any changes. The more serious the problem, the more likely it will be that a corrective deed will be needed and that the grantor as well as the grantee will have to be involved.

When a deed discrepancy is discovered after the title has been conveyed again, the question often arises whether the corrective deed should run to the original grantee, and whether that would create the necessity for deeds from each grantor to each grantee in the chain of title after the problem. I often suggest that the corrective deed be given to the current property owner. The participation of intervening property owners is not needed.

Deed reformation actions are possible, and foreclosures often include additional causes of action for deed reformation to correct legal descriptions and other mistakes. Title insurance companies are often responsible to pay for these additional causes of action.

With these difficulties to be faced, don’t you think real estate practice as a specialty is a good idea?

Court decides timeshare owners can sue developers

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Real Estate Commission does not have exclusive jurisdiction

The South Carolina Supreme Court, answering questions certified to it by the Federal District Court, held last week that the South Carolina Real Estate Commission (REC) does not have exclusive jurisdiction to determine violations of the South Carolina Vacation Time Sharing Plans Act.*

The Court also stated that the REC’s determination of a violation of the Time Act** is not a condition precedent to a private cause of action to enforce the Act and that the determinations of the REC are not binding on the courts.

These questions arose from two sets of litigation in the federal court involving individuals who entered into contracts with developers to purchase timeshare interests.

One set of plaintiffs, the Fullbrights, brought a purported class action against a timeshare developer, Spinnaker Resorts, Inc., seeking the return of money paid under a contract to purchase, plus interest, as well as a declaration that the contract was invalid.

The other set of plaintiffs, the Chenards, brought suit against another timeshare developer, Hilton Head Island Development Co., LLC, alleging fraud, negligent representation and violations of the Unfair Trade Practices Act as well as violations of the Timeshare Act.

In answering the questions, the Supreme Court stated that it was not taking any positions on the merits of the cases, which remain under the jurisdiction of the federal court.

The Court found that §27-32-130 unambiguously allows for lawsuits by stating that the provisions of the Act do not limit the right of a purchaser to bring a private cause of action. The developers had argued that this statute is ambiguous and that public policy evidenced by the Timeshare Act as a whole requires the REC’s jurisdiction to be exclusive.

These determinations will no doubt clear the way for class action lawsuits against timeshare developers.

 

* Fullbright v. Hilton Head Island Development Co., LLC, South Carolina Supreme Court Opinion No. 27220 (May 17, 2017).

** S.C Code §27-32-10 et seq.