Consumer confidence rises in December

The Conference Board Consumer Confidence Index®, which had increased in November, rose again in December. The Index now stands at 52.9 (1985=100), up from 50.6 in November. The Expectations Index increased to 75.6 from 70.3 last month. The Present Situation Index, however, declined to 18.8 from 21.2 in November.

The Consumer Confidence Survey® is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS. TNS is the world's largest custom research company. The cutoff date for December’s preliminary results was December 21st

Says Lynn Franco, Director of The Conference Board Consumer Research Center: "Consumer Confidence posted yet another moderate gain in December as expectations for the short-term future increased to the highest level in two years (Index 75.8, Dec. 2007). The Present Situation Index, however, continued to lose ground and remains at a 26-year low (Index 17.5, Feb. 1983). A more optimistic outlook for business and labor market conditions was the driving force behind the increase in the Expectations Index. Regarding income, however, consumers remain rather pessimistic about their short-term prospects and this will likely continue to play a key role in spending decisions in early 2010."

Consumers' assessment of current-day conditions declined further in December. Those claiming business conditions are "bad" increased to 46.6 percent from 44.5 percent, while those claiming conditions are "good" decreased to 7.0 percent from 8.1 percent. Consumers’ appraisal of the job market was mixed. Those claiming jobs are "hard to get" decreased to 48.6 percent from 49.2 percent, while those claiming jobs are "plentiful" decreased to 2.9 percent from 3.1 percent.

Consumers' short-term outlook improved in December. Those anticipating business conditions will improve over the next six months increased to 21.3 percent from 19.7 percent, while those expecting conditions will worsen decreased to 11.9 percent from 14.6 percent.

The outlook for the labor market was also more upbeat. The percentage of consumers expecting more jobs to become available in the months ahead increased to 16.2 percent from 15.8 percent, while those expecting fewer jobs decreased to 20.7 percent from 23.1 percent. The proportion of consumers anticipating an increase in their incomes decreased to 10.3 percent from 10.9 percent.


The next release is scheduled for Tuesday, January 26, at 10:00 AM ET.

For further information contact:
Lynn Franco
at +1 212 339 0344
lynn.franco@conference-board.org

C.A.R. requests FHA rule be reexamined

C.A.R. recently submitted a letter to Federal Housing Administration (FHA) Commissioner David Stevens detailing the challenges facing many home buyers using FHA loans. Specifically, C.A.R. leadership addressed concerns about the lack of housing inventory available to FHA buyers due to the agency’s 90-day anti-flipping rule, and the need for this rule to be revised to reflect current market conditions. The reexamination of the 90-day anti-flipping rule was passed as an action item during C.A.R.'s board of directors meetings in October.

The letter followed a meeting with members of the 2009 and 2010 C.A.R. Leadership Teams and Commissioner Stevens, where the 90-day anti-flipping rule was discussed. During the meeting, Commissioner Stevens stated his and the FHA’s commitment to working with C.A.R. and NAR to address this issue.

Click here to view C.A.R.’s letter to Commissioner Stevens.

The Basics: Extended Home Buyer Tax Credit 2009/2010

Bringing the Dream of Homeownership Within Reach

As part of its plan to stimulate the U.S. housing market and address the economic challenges facing our nation, Congress has passed new legislation that:

• Extends the First-Time Home Buyer Tax Credit of up to $8,000 to first-time home buyers until April 30, 2010.
  
• Expands the credit to grant up to $6,500 credit to current home owners purchasing a new or existing home between November 7, 2009 and April 30, 2010.
  

Here is more information about how the Extended Home Buyer Tax Credit can help prospective home buyers become part of the American dream. If you have specific questions or need additional information, please contact a tax professional or the Internal Revenue Service at 800-829-1040.

Senate May Approve Tax Credit Wednesday

The U.S. House and Senate are close to an agreement to extend the home buyer tax credit due to expire at the end of this month.

The Senate is expected to vote Wednesday while the House could approve it later in the week – likely before Friday when the monthly report on the unemployment rate will be released.

The measure that is slated to pass would cover homes under contract by April 30. Also, anyone taking the credit from a home purchased in 2010 would be able to take the credit when they pay their 2009 taxes.

First-time home buyers would be eligible for $8,000, but purchasers don’t have to be first-time buyers. Anyone who has owned a home for at least five years could get a $6,500 credit on a new residence.

Income limitations rise under the new plan with individuals earning up to $125,000 a year and couples earning up to $225,000 eligible. People who earn more would be eligible for smaller credits.

Source: The New York Times, Jackie Calmes (11/4/2009)

NEW CALIFORNIA LAWS FOR 2009-10 AFFECTING REALTORS®

The conclusion of the first half of the 2009-10 legislative session has brought many new laws that may affect California REALTORS® and their clients. Not surprisingly in the subprime aftermath, prominently featured among the new laws is stricter regulation of the mortgage lending industry. To view the full text and legislative summary of any of the following new bills, go to www.leginfo.ca.gov.

• REO Buyer Can Select Escrow and Title: Effective October 11, 2009, the Buyer's Choice Act prohibits an REO lender selling residential property up to four units from directly or indirectly requiring the buyer to purchase escrow services or title insurance from any particular company. A buyer, however, who has received written notice of the right to make an independent selection, may agree to the REO lender's escrow or title recommendations. An REO lender that violates this law can be held liable for three times the charges the buyer incurred, whereas a violation by the seller's agent may be subject to license disciplinary action. This law expires on January 1, 2015. Assembly Bill 957.
• No Advance Fee Loan Modifications: Starting October 11, 2009, a new law prohibits anyone from claiming any compensation for negotiating or arranging a loan modification until after that person fully performs each and every service as promised. Aimed at combating loan modification scams, this ban applies to upfront fees collected by real estate agents and attorneys. The ban expires on January 1, 2013. Also effective immediately, anyone who negotiates or arranges a loan modification must give the borrower a specified notice that paying a third-party for loan modification services is unnecessary. These new requirements apply to mortgage loans secured by residential property up to four units, with certain exceptions for lenders and loan servicers acting on their own behalf. Violations can be penalized by, among other things, a $10,000 fine plus one-year imprisonment for individuals, or a $50,000 fine for businesses. Real estate brokers with existing Advance Fee Loan Modification Agreements reviewed by the Department of Real Estate (DRE) can no longer, as of October 11, 2009, enter into these agreements or collect advance fees. Agreements entered into and advance fees collected before October 11, 2009 are not affected. For the DRE announcement, go to http://www.dre.ca.gov/pdf_docs/SB94WebAnnouncement(brokers).pdf. Senate Bill 94.
• Advance Fee Redefined: Aside from loan modifications discussed above, Senate Bill 94 also broadens the definition of an advance fee which must be specially handled by real estate agents, such as by submitting an advance fee agreement for DRE review and placing funds received into a broker's trust account. Under the new definition that took effect on October 11, 2009, agents cannot separate advance fees or services into components to avoid the advance fee requirements. More specifically, an advance fee is now defined as "a fee, regardless of the form, claimed, demanded, charged, received, or collected by a licensee from a principal before fully completing each and every service the licensee contracted to perform, or represented would be performed." Exceptions include advertisements in newspapers of general circulation, tenant prescreening fees, and tenant security deposits. Senate Bill 94.
• Mortgage Loan Originators Regulated: Beginning in December 2010, a real estate licensee acting as mortgage loan originator must obtain a license endorsement, which entails education, written testing, and reporting requirements. A mortgage loan originator is anyone who, for compensation or gain, takes a mortgage loan application or offers or negotiates terms of a mortgage loan for residential property containing one-to-four units. Exemptions include real estate agents who only engage in selling, buying, or leasing activities, unless compensated by a lender or mortgage loan originator. This license endorsement requirement comports with the creation of a Nationwide Mortgage Licensing System and Registry under recent federal law. Finance lenders and residential mortgage lenders under the Department of Corporation must also register in the nationwide system. Additionally, if a real estate broker or the broker's salesperson makes, arranges, or services loans secured by residential property containing one-to-four units, the broker must notify the DRE by January 31, 2010 or within 30 days of commencing such loan activity, whichever is later. Senate Bill 36.
• Mortgage Broker Activities Restricted: Commencing January 1, 2010, a mortgage broker will be deemed a fiduciary with a duty to place the borrower's economic interest above his or her own. This fiduciary duty pertains to a mortgage broker who makes loans secured by residential property of one-to-four units. Also starting January 1, 2010, the law will strictly regulate higher-priced mortgage loans as defined, including requiring upfront disclosure if a mortgage broker only arranges higher-priced mortgage loans, restricting prepayment penalties and yield spread premiums, prohibiting negative amortization, and prohibiting mortgage brokers from steering borrowers to higher-cost loans. Assembly Bill 260.
• Appraisal Industry Oversight: The Office of Real Estate Appraisers (OREA) will have regulatory oversight of appraisal management companies, which gained prominence after Fannie Mae and Freddie Mac adopted the Home Valuation Code of Conduct (HVCC). Starting January 1, 2010, the OREA must implement a registration system for appraisal management companies, including fingerprinting and background checks for persons with operational authority as defined. On a separate note, this law clarifies what conduct constitutes improperly influencing the appraisal process by anyone with an interest in a real estate transaction. Such prohibited conduct includes withholding or threatening to withhold an appraisal fee, withholding or threatening to withhold future appraisal business, and promising future business, promotions, or compensation. Senate Bill 237.
• Mortgage Fraud Becomes a State Crime: As of January 1, 2010, anyone who deliberately makes any misrepresentation or omission during the mortgage lending process with the intent of influencing that process will be guilty of mortgage fraud under California law. A violation of this law is a crime punishable by one-year imprisonment. Under existing federal law, loan fraud against a federally-insured lender is a crime punishable by a $1 million fine, plus one-year imprisonment (18 U.S.C. section 1014). Senate Bill 239.
• Increase in Homestead Exemptions: Coming into effect on January 1, 2010, the homestead exemption protecting a homeowner's equity from judgment creditors has been increased by $25,000 across the board to $75,000 for individuals, $100,000 for married couples or family units as specified, and $175,000 for persons over 65 years, disabled, or over 55 years with limited income as specified. Assembly Bill 1046.
• 60-Day Notice to Terminate Tenants Extended: Existing law generally requiring a 60-day notice to terminate a month-to-month residential tenant, which was originally slated to sunset on January 1, 2010, has been extended indefinitely. A 30-day notice to terminate is sufficient if the tenant has lived in the property for less than one year, or if the landlord has sold the property and certain requirements are met as specified in our standard-form Notice of Termination of Tenancy (C.A.R. Form NTT). The 60-day notice requirement does not apply to fixed-term leases, such as a one-year lease. Other laws address tenants in properties foreclosed upon. Senate Bill 290.

Other Significant Laws: Other new laws that may interest REALTORS® include, without limitation, the following:

• Landlord Utilities: Requires certain utility companies to notify residential tenants of landlord's past due accounts and upcoming shutoffs, and allows tenants to begin service in their own names and deduct payment from rent (Senate Bill 120).
• Mobilehome Parks: Prohibits management from requiring a homeowner to use a specific broker or dealer when replacing a mobilehome or manufactured home on a space in a mobilehome park (Senate Bill 804).
• Swimming Pools: Requires anti-entrapment devices for owners of apartment buildings, condominium complexes, and others, including the filing of compliance statements (Assembly Bill 1020).
• Mechanic's Liens: Provides new procedures, including service of a Notice of Mechanic's Lien to the owner and mandatory recording of a lis pendens when enforcing a mechanic's lien (Assembly Bill 457).
• Low Water-Using Plants: Renders unenforceable any HOA provision prohibiting landscaping with water-efficient plants in common interest developments (Assembly Bill 1061).
• Reverse Mortgages: Provides new disclosure and other requirements under the Reverse Mortgage Elder Protection Act (Assembly Bill 329).
• Disposal of Records: Shields from liability businesses that dispose of abandoned records containing personal information by shredding or erasing, and gives a legal presumption that a tenant owns records remaining on the premises after tenancy termination (Assembly Bill 1094).
• Plumbing Fixtures: Provides new disclosure and other requirements for water-conserving plumbing fixtures effective on or after January 1, 2014 (Senate Bill 407).

The Basics: 2009 First-Time Home Buyer Tax Credit

Bringing the Dream of Homeownership Within Reach

As part of its plan to stimulate the U.S. housing market and address the economic challenges facing our nation, Congress has passed legislation that grants a tax credit of up to $8,000 to first-time home buyers.

Here is more information about how the 2009 First-Time Home Buyer Tax Credit can help prospective home buyers become part of the American dream.
Breaking news: Tax Credit Can Be Used on Closing Costs.

Who Qualifies?

First-time home buyers who purchase homes between January 1, 2009 and December 1, 2009.
To qualify as a “first-time home buyer” the purchaser or his/her spouse may not have owned a residence during the three years prior to the purchase.

Which Properties Are Eligible?

The 2009 First-Time Home Buyer Tax Credit may be applied to primary residences, including: single-family homes, condos, townhomes, and co-ops.

How Much Will the Credit Be?

The maximum allowable credit for home buyers is $8,000. Each home buyer’s tax credit is determined by two factors:

The price of the home—the credit is equal to 10% of the purchase price of the home, up to $8,000.

The buyer's income—single buyers with incomes up to $75,000 and married couples with incomes up to $150,000—may receive the maximum tax credit.

If the Buyer(s)’ Income Exceeds These Limits, Can He/She Still Get a Credit?

Yes, some buyers may still be eligible for the credit.The credit decreases for buyers who earn between $75,000 and $95,000 for single buyers and between $150,000 and $170,000 for home buyers filing jointly. The amount of the tax credit decreases as his/her income approaches the maximum limit. Home buyers earning more than the maximum qualifying income—over $95,000 for singles and over $170,000 for couples are not eligible for the credit.

Will the Tax Credit Need to Be Repaid?

No. The buyer does not need to repay the tax credit, if he/she occupies the home for three years or more. However, if the property is sold during the three-year period, the credit will be recouped on the sale.

C.A.R. reports sales increased 20.1 percent, price declined 26.4 percent

C.A.R. reports sales increased 20.1 percent, price declined 26.4 percentHome sales increased 20.1 percent in June in California compared with the same period a year ago, while the median price of an existing home declined 26.4 percent, according to a C.A.R. report released Monday. “Many first-time buyers, especially those who were previously priced out of certain areas, are realizing that tax credits from both the state and federal governments, increased affordability, and low interest rates are creating a prime time to purchase a home,” said C.A.R. President James Liptak. “June marked the 10th consecutive month of positive sales gains, and the fourth month of rising median home prices. The statewide median price for existing condos increased for the third consecutive month in June, while sales climbed 27 percent compared with last year. Both of these trends are indicative of increased interest in condos on the part of first-time and other buyers.”

Closed escrow sales of existing, single-family detached homes in California totaled 514,110 in June at a seasonally adjusted annualized rate, according to information collected by C.A.R. from more than 90 local REALTOR® associations statewide. Statewide home resale activity increased 20.1 percent from the revised 427,910 sales pace recorded in June 2008. Sales in June 2009 decreased 6 percent compared with the previous month. The statewide sales figure represents what the total number of homes sold during 2009 would be if sales maintained the June pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.

The median price of an existing, single-family detached home in California during June 2009 was $274,740, a 26.4 percent decrease from the revised $373,100 median for June 2008, C.A.R. reported. The June 2009 median price rose 4.2 percent compared with May’s $263,600 median price.

Easy Ways to Improve Curb Appeal

Curb appeal can make or break a sale in today’s market.

If your sellers are willing to improve the outside of their homes, here are some low-cost ways to increase a home’s curb appeal.

1. Clean up beds by weeding and pruning shrubs. Add mulch for a high-end look.
   
2. Invest in pots. A couple of attractive ceramic (or ceramic look-alike) pots filled with attractive plants can really make an entrance look classier.
   
3. Install landscape lighting on the path to the front door.
   
4. Replace the mailbox with a newer one and put some nice plantings at its base to dress it up.

Source: Tribune Media Services, Cameron Huddleston (07/26/2009)

Read More

6 Landscaping Tricks That Wow Buyers
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Blog: Styled, Staged & Sold!

One of the greatest areas of uncertainty among REALTORS® is in the determination of the proper listing status in the context of short sale transactions. This pervasive uncertainty is no doubt attributable in large part to an industry wide lack of experience in short sale transactions given a decade of artificially inflated sales due to subprime lending and the ease of credit. This brief article is intended as a primer for those entering the short sale market as well as a refresher for those already experienced in short sale transactions. To fully understand the reason for short sale transactions, we should briefly discuss the concept of foreclosure of real estate property.

Types of Foreclosure In California there are two types of foreclosure with which a home owner might be faced. These are the “judicial foreclosure” and the “trustee sale” (sometimes called the “power of sale” foreclosure). In a judicial foreclosure, where the amount recovered in the sale is less than the amount owed on a loan, the difference is called a “deficiency.” A “deficiency judgment” is a judgment against the borrower for the difference between the unpaid balance on the loan and the amount generated by the foreclosure sale or the fair market value, whichever is greater. Where the foreclosure is accomplished by judicial action, the lender may be able to obtain a deficiency judgment against the borrower. However, the recovery of the deficiency amount is only available in a judicial foreclosure and is not permitted after a “trustee’s sale.” In other words, if the lender utilizes the non-judicial method of a trustee sale, a deficiency cannot be collected. Additionally, the recovery of a deficiency is not possible on a “purchase money” loan, including seller-carried financing, on any real property or loans on property consisting of 1 4 family units of owner-occupied residential property. (The term “purchase money” loan refers to a loan where 100% of the proceeds of the loan went for the purchase of the home. A refinance of a loan, for example, ordinarily destroys the “purchase money” characterization since the loan proceeds from a refinance are not used to purchase the home. There are exceptions which are beyond the scope of this brief article.) Recovery of the deficiency amount is possible, however, on a refinanced property loan (non purchase money) or on a 1-4 family non-owner occupied residential property loan.

Short Sales

“Short sales” may occur once a home is in foreclosure but before the property goes to sale. In a short sale, the lender accepts an offer from a third party buyer for less than the outstanding loan on the property and forgives the deficiency owed by the borrower. This arrangement may be appealing to lenders because it saves time and money by stopping the legal foreclosure process and by taking the property off the lender’s books. However, it has come to light that some lenders agreeing to short sales are including language in the release which allows them to sue on the note even though they are releasing the security in the property. It is questionable whether the courts will allow these lenders to sue on the note after a short sale though at this time there is no appellate court has addressed the issue in the context of residential foreclosures.

Until December 21, 2007, if the lender accepted less than the balance owed and cancelled the debt, that amount would be considered debt forgiveness, and tax would be due on the amount forgiven. This forgiven amount was called “phantom income” and was treated as part of the gross income by the IRS. Lenders reported the forgiven amount to the IRS on form 1099. According to the IRS it is the same as if the borrower received that amount of income. On December 21, 2007, President Bush signed H.R.3648: Mortgage Forgiveness Debt Relief Act of 2007, which provides relief to certain homeowners facing foreclosure from the phantom income realized from debt forgiveness or foreclosure. The Mortgage Forgiveness Debt Relief Act generally applies to “purchase money” loans on property consisting of 1 4 family units of owner occupied residential property. The Act also applies to funds from a refinance loan used to construct or improve a primary residence up to the amount of the mortgage principal remaining, just prior to refinancing.

Which Option is Best for Your Client When Facing Foreclosure There are a number of reasons a home owner may prefer a short sale to a foreclosure. For example, where the loan is recourse, meaning that the lender may be entitled to a deficiency judgment against the homeowner, a short sale may be a way of eliminating that risk. Although judicial foreclosures constitute less than five percent of all residential foreclosures in California, many borrowers prefer the security and peace of mind of working out a resolution rather than allowing the property to be taken by foreclosure.

A second reason that a borrower would prefer a short sale to a foreclosure is that it may be easier to obtain credit after a short sale than after a foreclosure. While there is some dispute in the lending industry, it appears that obtaining credit is more difficult after a foreclosure than a short sale. According to the Fannie Mae latest credit guidelines, the earliest a borrower can obtain credit to purchase another home is five years to seven years after the foreclosure sale. Where the borrower can show extenuating circumstances, the length of time may be reduced to three years. In contrast, the earliest a borrower may obtain credit after a short sale is two years after the sale date. Thus, the ability to obtain credit to purchase another home, according to Fannie Mae guidelines, is restored much earlier where the property is sold in a short sale compared to when the property goes to foreclosure.

The determination of which option is best for a client facing foreclosure is the subject for someone fully informed of the intricacies of California foreclosure law. The incorrect advice can cost a client tremendously both financially and emotionally; and if an agent has provided his client incorrect or incomplete information which leads to the wrong decision, the cost can be shifted to the agent or his insurance provider by prosecuting a claim against that agent. For that reason, most of the attorneys on the CAR Strategic Defense Panel advise agents and brokers to refer every client facing imminent foreclosure to an attorney for a full explanation of the foreclosure process and the options available to the client. We also recommend that REALTORS® document this referral by sending a confirming letter and keeping it in the file as proof that this advice was given. Maintaining a detailed transaction log delineating all conversations and events is a “best practice” to be followed. This would be tremendously helpful should a client ever claim that a REALTOR® provided incorrect advice. Even if the client ignores advice to seek legal counsel, most courts will determine that the REALTOR® has discharged his or her duty if he or she can show that the client was referred to an attorney for legal counseling. In so doing, a REALTOR® is removing potential liability and placing it on the shoulders of the attorney to whom the client is referred.

Proper Use of the MLS in Short Sale Transactions

Rule 7.1 of the CARETS Rules and Regulations requires that every listing placed in the service by a participant comply with the Rules of the MLS. Rule 7.19 sets forth the rules pertaining to expiration, extension and renewal of listings. Rule 8.3 imposes an obligation on the listing participant to utilize good faith in assuring that the listing is accurate to the best of his or her knowledge and belief. Rule 10 of the Rules and Regulations sets forth the applicable statuses of listings in the MLS. (It is important to note that not all MLS Rules and Regulations provide for these same statuses. The statuses below are applicable to the CARETS’ MLS Rules and Regulations. If you are not a member of CARETS, you should consult the Rules and Regulations of your MLS to determine which statuses are available.) Those statuses include the following:

On Market Status:

On Market status refers to listings where a listing contract is in force and the property is available for offers.

Active Status:

(A) Where no offer has been received the listing is in Active (A) status. Back-up Status (B): Where an offer has been received and accepted and the seller is accepting backup offers or where an offer has been accepted that is subject to third party approval, the property is in Back-up (B) status.

Off Market Status:

Rule 10 of the MLS Rules and Regulations provides for seven different Off Market statuses.

These are as follows:

Hold Status (H):

The Hold (H) status applies where there is a listing contract in place but the seller has for some reason requested that the property not be shown.

Withdrawn (W):

The Withdrawn (W) status applies where there is a listing agreement still in place but the property is no longer being marketed.

Pending (P):

This status applies when an offer has been accepted and the Seller is no longer soliciting offers through the MLS.

Canceled (C):

The Canceled (C) status applies when a listing has been canceled.

Expired (X):

This status is applicable when the time of the listing has expired and has not been renewed.

Sold (S):

Sold (S) status applies when the listed property has been sold and escrow has closed.

Leased (L):

The Leased (L) status is used when the property has been leased.

What is the Appropriate Status for a Short Sale Listing?

Depending upon the circumstances, a short sale listing could fall into one of several different listings statuses. In the ordinary course of a short sale listing, the following would be the statuses:

Active (A): At the time of listing the property, it would be in Active (A) status unless for some reason the Seller entered into a listing contract with the agent then advised that it should not be listed. In that situation the listing would immediately go into Hold (H) or Withdrawn (W) status depending upon the wishes of the Seller, until the Seller decides how to proceed with the transaction either On Market or Off Market.

Back Up (B): In the ordinary course of short sale transactions, the property will proceed into Back Up (B) status if an offer is made on the property. This is because in a short sale transaction, the lender has to approve the offer before it is deemed accepted. Thus, the offer is accepted contingent upon the acceptance by a third party, the lender.

It is important to remember that Rule 10.2 requires that accepted offers be reported to the MLS or input into the data base as “pending” or “back-up” within 48 hours. Where the property is sold in a short sale transaction, upon final closing of escrow the broker must report or input the status change within 48 hours. At that time the status would be Sold (S).

Remarks in MLS A common question among REALTORS® is whether there should be a comment in the Remarks section of the MLS stating that the property is a short sale listing. Is this a critical piece of information that must be disclosed to the Buyer? Arguably it is a matter required to be disclosed pursuant to Article 2 of the NAR Code of Ethics as well as the disclosure requirements of Civil Code §2079(a). On the one hand, knowledge that the property is being offered as a short sale could affect the price the Buyer is willing to pay, thereby bringing offers lower than one might expect. On other hand, knowledge that the property is being offered as a short sale could result in more offers as Buyers try to take advantage of a bargain. This condition demonstrates the elasticity of demand relative to price. Please keep in mind that the CAR Short Sale Listing Agreement (SSL) includes at paragraph 5 a provision that the Seller authorizes the agent to advertise in the MLS and other advertising medium and that the property transfer, payment of commissions and sales price are subject to lender approval. Thus, an agent using the CAR SSL, which is highly recommended, has authorization to disclose in the MLS that the sale is subject to lender approval.

Not only is the Buyer affected by remarks in the MLS concerning the fact that the property is a short sale, but this is also a matter of concern to the cooperating agent who is being offered a commission relative to the selling price. Not infrequently, the lender in a short sale transaction requests the listing agent to take a commission reduction in order to “make the deal work.” While NAR has provided guidance for addressing the prohibition on contingent offers of commission, it is still a matter of interest to cooperating agents because the short sale transaction is more precarious and time consuming than a normal sale transaction. This may affect the cooperating agent’s decision whether to spend a substantial amount of time pursuing the short sale transaction. Therefore, the fact that it is a short sale should always be disclosed in the confidential broker/agent remarks or the listing agent may be required to absorb any lien holder reductions in commission.
Conclusion The real estate industry is evolving rapidly with changes occurring on a daily basis. To keep pace with this rapidly changing environment, it is imperative that the agent have a working knowledge of the MLS rules and regulations and an understanding of how they impact offers to sell real estate and offers of commission. Not only is a thorough knowledge of the MLS necessary for an efficient exchange of information between REALTORS®, but lack of knowledge is one of the primary reasons for claims against agents. For this reason, REALTORS® are encouraged to familiarize themselves thoroughly with the MLS Rules and Regulations.

Information provided by the law offices of Giardinelli & Duke, APCwww.gdlawoffices.com

NEW LOAN DISCLOSURE RULES MAY POTENTIALLY AFFECT CLOSE OF ESCROW

Starting July 30, 2009, if the APR on an initial Good Faith Estimate is no longer accurate (within a 0.125% range) at close of escrow, a lender must generally provide a residential borrower with a new disclosure and a three-day right to rescind before consummating the loan. REALTORS® are forewarned that, because of this new three-day waiting period, a lender's failure to timely provide corrected disclosures has the potential of delaying funding of the loan and close of escrow.

This new requirement is part of the Mortgage Disclosure Improvement Act (MDIA) implementing new loan procedures to protect borrowers and foster greater transparency in mortgage lending. For loan applications submitted on or after July 30, 2009, the new MDIA changes to the Truth In Lending Act are generally as follows:

• Applicability: The new MDIA rules pertain to federally-related mortgage loans covered under RESPA and secured by a consumer's dwelling. The rules apply to both purchase and refinance loans.
• Early Disclosures: A lender must provide a borrower with an initial Good Faith Estimate within three business days of receiving the borrower's written loan application as specified. For this provision, a "business day" is generally defined as a day on which the lender's offices are open for business.
• Upfront Fees Restriction: Neither a lender nor any other person may impose an upfront fee on the borrower (except for credit report) until the borrower has received the early disclosures in person or, if mailed, three business days after the early disclosures are mailed. For this rule, a "business day" is defined as all calendar days except Sundays and legal public holidays as specified.
• Seven-Day Waiting Period: A lender must wait seven business days after providing the early disclosures before consummating the loan. For purposes of this waiting period, a "business day" is defined as all calendar days except Sundays and federal legal holidays as specified. A borrower may waive the waiting period in writing in case of personal financial emergency, such as an imminent foreclosure sale.
• Re-disclosure Requirement: If the final Annual Percentage Rate (APR) at loan consummation varies more than 0.125% (or 1/8 of one percent) from the initial APR on the early disclosures of a regular transaction, the lender must provide the borrower with a corrected disclosure at least three business days before the loan is consummated. For purposes of this waiting period, a "business day" is defined as all calendar days except Sundays and federal legal holidays as specified.
• Three-Day Waiting Period: For corrected disclosures, a lender cannot consummate a loan until three business days after the the borrower receives the corrected disclosure in person. If the corrected disclosure is mailed, the borrower is deemed to have received it three business days after it is placed in the mail. A borrower may waive this waiting period in writing in case of a bona fide personal financial emergency, such as an imminent foreclosure sale.

The new MDIA rules and regulations are set forth at 74 Federal Register 23,289 (May 19, 2009) (to be codified at 12 CFR 226).

New Appraisals Problem

Realtors Say New Appraisals "Problem"

There may be another culprit scuttling a U.S. housing recovery: low home appraisals.

Flawed appraisals are derailing real estate sales and depressing values across the United States, the National Association of Realtors said recently as it reported that existing home prices declined 17 percent in May from a year earlier.

"It's pointing to thousands of delayed or canceled transactions," Lawrence Yun, chief economist of the Chicago-based Realtors group, said in an interview. "We've had a massive inundation from members saying this is a big problem."

Appraisal rules that went into effect on May 1 require lenders that sell loans to Fannie Mae or Freddie Mac to set up a firewall between appraisers and loan officers to prevent improper influence. The rules are the result of an agreement between the mortgage buyers and New York Attorney General Andrew Cuomo, who said an investigation found appraisers inflated values under pressure from lenders.

The agreement mandates that banks order a second appraisal on 10 percent of the loans they sell to Fannie Mae and Freddie Mac, and warns against accepting the higher of any two valuations. The guidelines have led to more conservative valuations by many appraisers and a "chill" in lending, according to John Brennan, research director at the Appraisal Foundation, a Washington-based trade group. A low appraisal is one that comes in under the price a prospective buyer has agreed to pay for a property.

"Sometimes policy can lead to unintended consequences," Yun said.

Low appraisals have become a focus of the California Office of Real Estate Appraisers, which oversees licensed appraisers in the state. Investigations by the Sacramento-based group rose 36 percent to 418 at the end of May from the same period last year, said Bob Clark, director of the office. The probes are looking into allegations including flawed valuations and use of comparable sales too far from the subject property, he said.

At Universal Mortgage Inc. in Brooklyn, brokers reported at least 15 sales that fell apart due to appraisals that came in below the agreed upon price.

Broker Isaac Shalom, who reported that at least four deals collapsed, said one buyer who wanted to buy a home at $850,000 delayed the purchase after an appraisal came in at $750,000.

Real estate broker Vince Saragosa had a $185,000 offer in April for a three-bedroom home in Royal Oaks, Mich. An appraiser valued the property at $128,000 and the deal fell through. "It's almost like appraisers are interfering with the market," Saragosa, owner of World Showcase Realty in Shelby Township, a Detroit suburb, said in an interview.

The discrepancy between pending home sales and the actual number of home resales reported in mid-June partially illustrates how flawed appraisals are thwarting home sales, said Walter Molony, a spokesman for the National Association of Realtors. The Pending Home Sales Index rose 3.2 percent in March and 6.7 percent in April. Completed sales of existing homes in May rose 2.4 percent.

"March and April contracts suggested that we should be seeing higher levels of sales than we're seeing," Molony said, citing longer times between contracts and closings, due in part to appraisals that come in low.

Cuomo said in December when the appraisal agreement was reached that the deal "preserves the core goals of ensuring appraiser independence and eliminating systemic conflicts of interest."

Alex Detrick, a spokesman for Cuomo, didn't immediately respond yesterday to a request for comment.

When home values come in below the sales price, that's not the appraiser's fault, it's a reflection of the market, the Appraisal Institute, a Chicago-based professional group that represents more than 25,000 appraisers, said in a statement June 23^rd. "We take offense with the notion that an appraisal is only good if it happens to come in at the sales price," the group said. "That mentality helped cause the mortgage meltdown to begin with."

More deals are falling apart in a housing market that needs transactions to recover from a three-year slump that has dragged the U.S. into a recession. Low appraisals join a list of suspected obstacles standing in the way of a rebound that includes rising interest rates, a glut of foreclosed properties, and the highest unemployment rate since 1983.

By: www.contracostatimes.com

Home Buyer Tax Credit Could Expand

A first-time home buyer tax credit of up to $8,000 has helped to move housing inventory during an otherwise sluggish real estate cycle. Now both legislators and the business community are hoping to build on the incentive's success by expanding it.

A number of bills have been introduced in the House and the Senate that lobby for an expansion of the measure. Among the proposed changes:

1. Setting a new cap of $15,000.
   
2. Extending the tax break into mid-2010.
   
3. Making the benefit available to all home buyers, not just first-timers.
   
4. Offering a separate tax credit to $3,000 for borrowers who refinance.

USA Today, Stephanie Armour (06/22/09)© Copyright 2009 Information Inc.

CALIFORNIA HOUSING FINANCE

AN IMPORTANT E-NEWS ANNOUNCEMENT FROM CALHFA:
Please DO NOT REPLY to this email message, this email box is not monitored and therefore responses to your questions may be delayed.

The California Housing Finance Agency has released the following Program Bulletin:

#2009-13 - Condominium Requrements for Conventional Loans Updated

For detailed information see the Program Bulletin page on CalHFA's web site.
http://www.calhfa.ca.gov/homeownership/bulletins/index.htm

Loan Modifications

I. GENERAL OVERVIEW

The economic downturn of the late-2000s has fueled a significant upsurge in loan modifications as a possible alternative to foreclosure. REALTORS® seeking to help distressed homeowners with loan modifications face certain legal and practical issues. They also frequently find themselves pitted against a variety of loan modification scam artists spawned by the mortgage crisis.

This legal article discusses the legal and practical issues surrounding loan modifications. It also provides working guidelines for REALTORS® assisting their clients with loan modifications.

Q 1. What is a loan modification?

A A loan modification is generally considered to be a permanent change in one or more terms of a borrower’s existing mortgage loan. In the current economic downturn, a loan modification is generally involves a homeowner seeking more affordable payments in an effort to avoid foreclosure (see Question 3).

The specific terms and conditions of a borrower’s loan modification depend on what that particular borrower successfully negotiates with the lender. The different types of loan modifications include, but are not limited to, the following:

• Reducing the interest rate;
• Forgoing an upward adjustment of the interest rate;
• Extending the repayment period;
• Reducing the principal balance owed;
• Adding delinquent payments to the principal balance;
• Forbearing a portion of the principal balance; or
• A combination of two or more of the above modification terms.

Q 2. What is loss mitigation?

A Loss mitigation generally refers to the process by which a lender attempts to mitigate or minimize its risk of loss with respect to a mortgage loan. A lender’s methods of loss mitigation may include, but is not limited to, loan modifications, short sales, refinances, and deeds in lieu of foreclosure. The popular use of the term, “loss mitigation,” may stem from the fact that many banks have “loss mitigation departments” that handle borrowers’ requests concerning delinquent loans.

Q 3. Why would a borrower seek a loan modification?

A During the current economic downturn, the typical impetus for requesting a loan modification is to make the existing mortgage loan more affordable for the homeowner who may be facing foreclosure. Oftentimes, the borrower seeking a loan modification is experiencing difficulty repaying an adjustable rate mortgage with an interest rate that has adjusted upward significantly.

Another reason a borrower may seek a loan modification is to ask the lender to reduce the principal balance which has become more than what the property is worth. Homeowners are generally disinclined to continue making mortgage payments when they deem their property investments to be losing propositions. Yet, lenders do not seem to grant requests for principal reduction as often as other types of modifications.

Q 4. Is a lender required to approve a borrower’s request for a loan modification?

A No, in most cases. It is generally up to a lender to decide whether to approve a loan modification request. For Bank of America, however, it announced in October 2008 that it will modify 400,000 loans held by recently acquired Countrywide Financial Corp. as part of an $8.4 billion class action settlement agreement.

Q 5. What would compel a lender to approve or reject a borrower’s request for a loan modification?

A The typical reason lenders approve loan modifications is to minimize their financial losses. Lenders also want to avoid the problems of foreclosure and to preserve their relationship with their borrowers.

On the other hand, some of the lenders’ reasons for rejecting loan modifications include the borrowers’ inability to qualify for the proposed modified loans and the lenders’ general unwillingness to write down principal balances. For instance, borrowers who could only qualify for their existing mortgage loans by obtaining subprime loans with low introductory teaser rates may not qualify for modified loan payments, regardless of whether the modified loan has a low interest rate and is extended to 40 years.

Another reason loan modifications may not go through is the lenders’ lack of staffing to handle loan modification requests coupled with the borrowers’ lack of follow-through. Another obstacle to loan modifications is the difficulty to get approval if a borrower has two or more mortgage loans from different lenders. One lender may be reluctant to work with the borrower if the loan modification benefits another lender. Also another serious obstacle is, even if a borrower has only one loan, it may be difficult tracking down and getting an approval if the loan has been fragmentized and sold in the secondary market to pension funds, hedge funds, insurance companies, and other investors around the world.

Q 6. Which lenders are considering loan modifications?

A Many major lenders have recently announced they are aggressively reworking mortgage loans to help homeowners remain in their homes. For instance, the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac loans, along with the HOPE NOW alliance of lenders, launched a “Streamlined Modification Plan” starting December 15, 2008 (see Question 9 for eligibility requirements).

Furthermore, in August 2008, IndyMac Federal Bank announced a systematic and streamlined loan modification program implemented by the Federal Deposit Insurance Corporation (FDIC) (which took over IndyMac Bank, FSB on July 11, 2008). As of November 2008, IndyMac had sent out over 23,000 modification letters to eligible borrowers and had completed 5,300 modifications.

Other major lenders intend to take proactive steps to modify loans for distressed homeowners. In October 2008, Bank of America publicized that, under an $8.4 billion class action settlement agreement, it would modify an estimated 400,000 loans held by newly acquired Countrywide Financial Corp. Also in October 2008, JPMorgan Chase & Co. announced that it would modify an estimated $70 billion in loans for 400,000 Washington Mutual customers. In November 2008, Citigroup announced it would make $20 billion in mass-market modifications by preemptively reaching out to 500,000 at-risk homeowners.

For more information about the loan modification programs of the above-mentioned lenders, C.A.R. offers a legal article entitled Mortgage Workout Programs for Homeowners, which includes program and contact information, available for members. For other lenders, contact the lender directly to determine whether it is considering loan modifications. Many lenders have information on loan modifications readily accessible on their Web sites.

Q 7. Where can a homeowner find assistance in doing a loan modification?

A A homeowner may seek loan modification assistance from a real estate broker. A homeowner may also contact a reputable housing, financial or credit counselor, attorney, or other qualified professional. The U.S. Department of Housing and Urban Development (HUD) has a list of HUD-approved housing counseling agencies in California, available athttp://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm?&webListAction=search&searchstate=CA.

Also, the non-profit organization Homeownership Preservation Foundation has a 24/7 toll-free Homeowner’s HOPE Hotline at (999) 995 HOPE or visit its Web site at http://www.995hope.org.

Q 8. What does the loan modification process entail?

A A brief summary of the step-by-step process of a typical loan modification is as follows:

• Borrower contacts the lender’s loss mitigation department to request a loan modification.
• Borrower fills out the lender’s forms for requesting a loan modification. Some lenders post their loan modification forms online.
• Borrower submits completed forms to the lender along with other documentation required by the lender, such as a hardship letter, bank statements, paycheck stubs, and property valuation. An agent representing the borrower may also wish to complete and submit to the lender C.A.R.’s standard form Authorization to Receive and Convey Information (Form ARC) which authorizes the agent to communicate with the lender on the borrower’s behalf.
• Borrower periodically follows up with the lender. Many practitioners believe that, to get an approval, borrowers must frequently check the status of their loan modification requests.
• Lender makes a loan modification proposal to the borrower or rejects the loan modification request.
• Lender and borrower negotiate the terms and conditions of a loan modification, and if an agreement is reached, the parties will execute the necessary documents to finalize the loan modification.
Q 9. What are the eligibility requirements for a loan modification process?

A It is up to each lender to decide its eligibility requirements. A lender generally considers its collateral position and the borrower’s ability to make the modified payments.

As an illustration of eligibility requirements, the following are the major requirements for Fannie Mae and Freddie Mac under the new Streamlined Modification Plan:

• At least 90 day delinquency on the existing mortgage loan;
• Existing loan originated before January 1, 2008;
• Borrower has not filed bankruptcy;
• Owner occupied property;
• Single family residence;
• 90 percent or higher loan-to-value ratio;
• New principal, interest, taxes, insurance and HOA dues not to exceed 38 percent of the borrower’s gross monthly income; and
• Borrower must demonstrate an ability to repay by making three monthly payments based on modified terms before modification is complete.

Q 10. Does a borrower have to be delinquent on the existing mortgage loan to qualify for a loan modification?

A It depends on the lender. Some lenders require borrowers to be delinquent on their mortgage before they will consider a loan modification. For example, to qualify under the Streamlined Modification Plan for Fannie Mae and Freddie Mac loans, a borrower must be at least 90 days delinquent on the existing mortgage loan (see Question 9).

Yet, mortgage delinquency can negatively impact a borrower’s credit and start the foreclosure process. REALTORS® may encounter clients who entertain the idea of allowing their mortgage payments to go delinquent to qualify for loan modifications. To take that risk is a decision that only the homeowner can make. A real estate agent involved in this situation should encourage a homeowner in this situation to consult with an attorney or other appropriate professional.

Q 11. How long does the loan modification process take?

A The processing time for loan modifications generally ranges from several weeks to several months. More recently, however, the loan modification process may be getting easier as more lenders streamline their procedures, set standards for approving loan modifications, and increase their staffing to handle borrowers’ requests.

Q 12. Should a borrower always agree to a modified loan as long as the monthly mortgage payments are less than what the borrower currently owes?

A No. A borrower should carefully consider all the terms and conditions of a proposed loan modification before agreeing to it. A loan modification may also have tax consequences for a borrower (see Questions 48 to 50). A borrower should make sure that the proposed modified loan terms are favorable as well as truly affordable for years to come. Otherwise, the borrower may ultimately end up financially worse off doing a loan modification than allowing the property to go straight to foreclosure.

Studies show that the re-default rate for modified loans is high. In December 2008, the U.S. Comptroller of the Currency John C. Dugan stated that over half of the loans modified in the first quarter of 2008 became delinquent within six months. (See “Comptroller Dugan Highlights Re-default Rates on Modified Loans” on the Web site of the Comptroller of the Currency, available at http://www.occ.treas.gov/ftp/release/2008-142.htm.)

II. ADVANCE FEE LOAN MODIFICATIONS

Q 13. Can a real estate agent act on behalf of a homeowner to obtain a loan modification?

A Yes. A real estate broker or a salesperson working under the broker’s supervision can act on behalf of a homeowner to obtain a loan modification. For more information about real estate licensing requirements, see Questions 38 and 39.

Q 14. As an agent, I do not want to perform loan modification services, which may take many weeks or months, only to discover that the client cannot or refuses to pay for my services. Can I collect upfront my compensation for performing loan modification services?

A No, unless certain requirements are met. Unlike sales and refinance transactions, loan modifications generally do not entail the opening of a file at an escrow or title company, whereby a neutral third-party disburses funds as a matter of course, including the payment of the broker’s compensation. Hence, real estate brokers who provide loan modification services consider collecting an advance fee, which is a fee charged upfront for services not yet performed.
California law defines an advance fee broadly to include a fee claimed, demanded, charged, received, collected or contracted from a principal for negotiating real estate loans (Cal. Bus. & Prof. Code § 10026). To collect an advance fee, a real estate broker must satisfy the following three requirements:

• The broker cannot receive an advance fee for foreclosure-related consulting services if the property is owner occupied with one-to-four dwelling units and has a recorded notice of default (see Question 15);

• The broker cannot use an advance fee agreement or advertising materials, and cannot collect an advance fee, unless the advance fee agreement, accounting format, and advertising materials have been submitted for review to the Department of Real Estate (DRE) and the broker has received a “no objection” letter from the DRE (see Questions 16 to 33); and

• The broker must place any advance fee collected into the broker’s trust account as specified (see Questions 21 to 24).

The above requirements to submit an advance fee agreement for DRE review and to place advance fees into the broker’s trust account apply to both residential and commercial loans. For a discussion of businesses that claim exemption from advance fee requirements due to an affiliation with an attorney, see Questions 43 and 44.

On the other hand, if an advance fee is not claimed or collected, a broker need not submit a loan modification agreement or advertisements for DRE review nor place any compensation received into a trust account. The broker may nevertheless consider doing other things to help ensure that the broker gets paid (see Question 35).

Q 15. Explain the prohibition against advance fees for properties in foreclosure.

A It’s a double-edged sword. Briefly speaking, for certain properties in foreclosure, a real estate agent cannot collect an advance fee without implicating the foreclosure consultant law, yet if the foreclosure consultant law is implicated, it prohibits advance fees anyway.
More specifically, the foreclosure consultant law generally applies to a “residence in foreclosure” which is defined as follows:

• The owner occupies the property as a principal residence;
• The property is one to four family dwelling units; and
• There is an outstanding notice of default recorded against the property.
(Cal. Civ. Code § 2945.1(f) (citing Cal. Civ. Code § 1695.1).)

Real estate agents are generally exempt from the foreclosure consultant law. However, a real estate agent is not exempt if, among other things, the agent claims or collects any compensation before the licensed activities have been performed or cannot be performed because the owner fails to: (1) accept an offer from a buyer or lender who is ready, willing and able to buy or lend on terms set forth in a listing or loan agreement; or (2) make loan disclosures under section 10243 of the California Business and Professions Code (Cal. Civ. Code § 2945.1(b)(3)(C)).

If implicated, the foreclosure consultant law has various rules for someone who performs foreclosure consultant services as defined. One of the rules is a prohibition against the collection of any compensation until after the foreclosure consultant has fully performed each and every service the foreclosure consultant represented that he or should would perform (Cal. Civ. Code § 2945.4(a)).

For more information about foreclosure consultants, go to C.A.R.’s legal article entitled Foreclosure Scams and the Foreclosure Consultant Law.

Q 16. What is the requirement for submitting an advance fee agreement to the DRE for review?

A No less than ten calendar days before publication or collection of an advance fee, a real estate broker must submit to the DRE the form of advance fee agreement proposed for use and all other materials for advertising, promoting, soliciting, or negotiating the advance fee (10 Cal. Code of Reg. § 2970). The information that should be included in an advance fee agreement submitted for DRE review is set forth in Question 20.

Q 17. Is the DRE review of advance fee agreements a new law?

A No. The law pertaining to advance fees is not new law. The law requiring DRE review of advance fee agreements was originally enacted in 1958 (Cal. Bus. & Prof. Code § 10085).

Q 18. Does the DRE approve advance fee agreements that have been submitted by real estate brokers?

A No. The DRE does not approve, endorse, recommend or make representations about any advance fee agreement. Agents who have undergone the DRE review process should be careful not to represent to their clients that their advance fee agreements have been “approved” by the DRE.

The purpose of the DRE review of advance fee agreements and advertisements is to determine whether the materials would tend to mislead. If the materials would tend to mislead, the DRE commissioner may, within 10 calendar days of the date he or she receives them, order that they not be used, disseminated nor published (Cal. Bus. & Prof. Code § 10085). Otherwise, the DRE may issue a “no objection” letter if appropriate.

According to the DRE, a broker cannot use an advance fee agreement or collect any advance fees until he or she receives a “no objection” letter from the DRE. (See “Advance Fees and Loan Modifications” in DRE’s Mortgage Loan Bulletin (Fall 2008) at http://www.dre.ca.gov/pdf_docs/mlb_fall08.pdf.) Yet, the applicable statute could be interpreted to mean that the DRE only has 10 days to review advance fee materials. (See Cal. Bus. & Prof. Code § 10085 (stating that “Should the commissioner determine that any [matter] would tend to mislead he or she may, within 10 calendar days of the date he or she receives same, order that it not be used, disseminated, nor published.”)

Q 19. Is there a list of DRE’s “no objection” letters for advance fee agreements?

A Yes. The DRE maintains a list of brokers who have received “no objection” letters for advance fee agreements for loan modification and similar services. The DRE’s Advance Fee Agreement Listing is available at http://www.dre.ca.gov/mlb_adv_fees_list.html. The list is updated periodically and may not include agreements which have recently been reviewed.

Q 20. What must be included in an advance fee agreement for submission to the DRE for review?

A The DRE provides a sample form “Advance Fee Agreement for Loan Modification Services” which is available at http://www.dre.ca.gov/mlb_intro_advfees_sample.html. A broker, however, is not required to use DRE’s sample form. If a broker prepares his or her own advance fee agreement, the DRE requirements for the agreement are as follows:

• Must be in contract form.
• Must be in at least 10-point type.
• Must set forth a specific, complete description of the services to be rendered for the advance fee.
• Must set forth the total amount of the advance fee.
• Must allocate estimated portions of the advance fee to each of the services the broker will provide. The services can be itemized with a description of each service.
• Must obligate the principal to pay a specified advance fee at a specified time.
• Must obligate the broker to complete the advance fee services by a specified date.
• Must contain the following notice in at least 10-point bold type: “Notice: The amount or rate of fees specified in this agreement for services is not fixed by California law. Fees are set by each broker individually and are subject to negotiation between the client (principal) and the broker.”
• Must obligate the broker to deposit the advance fee into a trust account.
• Must identify the trust account number and depository.
• Must obligate the broker to provide the principal with verified accountings (see Questions 24 and 25).
• Must obligate the broker to use the advance fee to fund specified services for the principal’s benefit.

• Must not characterize any portion of the advance fee as “non-refundable.” The advance fee remains the property of the principal and is refundable to the extent it is not expended for the services specified in the agreement.

• Must contain refund language for portions of the advance fee not expended if the contract is cancelled or the advance fee services are not performed.

• Must not contain any provision purporting to relieve the broker from any obligation to fulfill verbal agreements and representations made by the broker’s e
mployees and agents.

• Must have space for broker and principal to sign and date.

• Must include the broker’s DRE license number.
• For loan modifications, short sales, and similar services, the agreement must include the lender name, address, loan number, and the following notice:

“Notice: California Civil Code Section 2945.1(b)(3) prohibits any real estate licensee from claiming, demanding, charging, collecting or receiving any compensation from a person whose residence is in foreclosure until all of the promised services have been fully performed and completed. DO NOT SIGN THIS AGREEMENT IF A NOTICE OF DEFAULT HAS BEEN RECORDED AGAINST THE PROPERTY.”

• For loan modifications, short sales, and similar services, the advance fee agreement must include the following certification in at least 10 point bold type:
“PRINCIPAL/BORROWER CERTIFIES THAT A NOTICE OF DEFAULT HAS NOT BEEN RECORDED AGAINST THE PROPERTY, __________________ (Initials of Principals).”
• For short sales, the agreement must describe whether the services include or exclude submitting a buyer’s offer to purchase.
(10 Cal. Code of Reg. § 2970; see also DRE’s “The Essential Elements of an Advance Fee Agreement” available at http://www.dre.cahwnet.gov/pdf_docs/adv_fees_essential_elements.pdf.)

For the DRE requirements of a verified accounting of an advance fee agreement, see Question 26. For more information on submitting advance fee loan modification agreements for DRE review, see Questions 28 to 33.

Q 21. What is the requirement of placing an advance fee in the broker’s trust account?

A Even if a broker obtains a “no objection” letter for an advance fee agreement from the DRE, a broker entering into an advance fee agreement with a client must nevertheless deposit any advance fee collected into a broker’s trust account with a bank or other recognized depository. Such funds are trust funds, not funds of the agent, and must be handled accordingly. For more information about trust fund handling, C.A.R. has a legal article entitled Trust Fund Accounts Guide. See also DRE’s Reference Book, Chapter 23 on Trust Funds, available at http://www.dre.ca.gov/pdf_docs/ref23.pdf.

Q 22. Can a broker deposit an advance fee into the broker’s business bank account?

A No. A broker who collects an advance fee must deposit it into a trust account as specified (see Question 23).

Q 23. What are the requirements for a broker’s trust account?

A A broker’s trust account must meet the following requirements:
• It must be designated as a “Trust Account” in the name of the broker (or in a fictitious name if the broker is the holder of a real estate license bearing that fictitious name) as trustee; and
• It must be maintained at a bank or other recognized depository located in California.
(Cal. Bus. & Prof. Code § 10145; 10 Cal. Code of Reg. § 2832.)

Q 24. Under what circumstances can a broker withdraw an advance fee from the broker’s trust account?

A For an advance fee deposited into a broker’s trust account, amounts may not be withdrawn on the broker’s behalf until actually expended for the benefit of the principal or five days after a verified accounting as specified (see Question 25) has been mailed to the principal (Cal. Bus. & Prof. Code § 10146). Furthermore, if an advance fee loan modification agreement is cancelled before the rendering of all the services, or if not all of the advance is expended, the broker must refund the unused portion of the advance fee to the client (“Advance Fees and Loan Modifications” in DRE’s Mortgage Loan Bulletin (Fall 2008) at http://www.dre.ca.gov/pdf_docs/mlb_fall08.pdf).

Q 25. What are the verified accounting requirements for an advance fee that has been placed in a broker’s trust account?

A A broker who intends to collect an advance fee must submit the format of the verified accounting, along with the advance fee agreement, for DRE review before using the form or collecting an advance fee (10 Cal. Code of Reg. § 2970). The information that should be included in the verified accounting form for submission to the DRE is set forth in Question 26.

Furthermore, when a broker collects an advance fee, a verified copy of an accounting must be furnished to each principal at the end of each calendar quarter and when the advance fee agreement has been completely performed by the licensee (see also Question 24). A verified copy of the accounting must also be furnished to the DRE upon demand. (Cal. Bus. & Prof. Code § 10146.)

Q 26. What must be included in a verified accounting of an advance fee agreement that is submitted to the DRE for review?

A The DRE provides a sample form “Verified Accounting for Advance Fees” to be used in connection with its “Advance Fee Agreement for Loan Modification Services.” The “Verified Accounting for Advance Fees” form is available at http://www.dre.ca.gov/pdf_docs/AdvanceFeeSampleAccounting.pdf.

A broker is not required to use the DRE sample form. If a broker prepares his or her own verified accounting form, the DRE requirements for the verified accounting form are as follows:

• Must state the agent’s name.
• Must state the principal’s name.
• Must describe the services rendered or to be rendered.
• Must state the amount of the advance fee collected.
• Must identify the trust account number and depository.
• For a loan modification, short sale, and similar service, the accounting format must include the lender name, address, and loan number.

• For arranging a loan secured by real property (or a business opportunity), the accounting must include a list of the names and addresses of persons to whom the principal’s loan requirements were submitted and the submittal dates.

• Must include the amount allocated or disbursed from the advance fee for each of the following: (1) Providing each of the services rendered or to be rendered; (2) Commissions paid to field agents and representatives; and (3) Overhead costs and profits.
• Must be signed by the broker underneath the attestation, “I hereby represent and attest that this is a true and accurate accounting.”

• For disbursements made for advertising, the verified accounting must include a copy of the advertisement, the name of the publication, the number of advertisements actually published, and the dates they were carried. Note: This requirement is generally inapplicable to a loan modification transaction because a broker is unlikely to conduct any advertising on the homeowner’s behalf.

(10 Cal. Code of Reg. § 2972; see also DRE’s “The Essential Elements of an Advance Fee Agreement,” which is available at http://www.dre.cahwnet.gov/pdf_docs/adv_fees_essential_elements.pdf.)

Q 27. If a broker does not intend to collect an advance fee for loan modification services, does the broker still have to submit a loan modification agreement, advertising materials, and a verified accounting form to the DRE for review?

A No. If a loan modification service agreement does not involve an advance fee, the broker need not submit these materials for DRE review.

Q 28. Is a broker who intends to collect an advance fee for loan modification services required to use the DRE sample forms?

A No. A broker is not required to use the DRE sample forms, “Advance Fee Agreement for Loan Modification Services” and “Verified Accounting for Advance Fees.” The DRE drafted these sample forms to facilitate its review process of advance fee loan modification agreements. Brokers may submit their own forms instead, but, according to the DRE, the review process may be lengthy and involve several revisions causing delays before the forms can be used and advance fees collected. (See DRE’s “Introduction to Sample Advance Fee Agreement” at http://www.dre.ca.gov/mlb_intro_advfees_sample.html.)

Q 29. If a broker intends to use the DRE sample forms for an advance fee agreement, does the broker still have to submit them for DRE review?

A Yes. Even if a broker uses the DRE sample forms, “Advance Fee Agreement for Loan Modification Services” and “Verified Accounting for Advance Fees,” the broker must still fill in certain information and submit them for DRE review. However, using the DRE sample forms will facilitate DRE’s review process. The broker must also submit to the DRE all other materials to be used for advertising, promoting, soliciting, or negotiating an advance fee (10 Cal. Code Reg. § 2970).

For the DRE’s instructions for submitting the sample advance fee forms, go to “Introduction to Sample Advance Fee Agreement” at http://www.dre.ca.gov/mlb_intro_advfees_sample.html.

Q 30. If a broker intends to use the DRE sample forms “Advance Fee Agreement for Loan Modification Services” and “Verified Accounting for Advance Fees,” should the blank spaces on the forms be completed before they are submitted to the DRE for review?

A Yes, but only certain information (as specified below) must be completed prior to submission for DRE review. The remaining information on the “Advance Fee Agreement for Loan Modification Services” and “Verified Accounting for Advance Fees” sample forms is to be left blank until the broker enters into the advance fee agreement with a client.

A broker should complete the following information on the “Advance Fee Agreement for Loan Modifications Services” before submitting the agreement for DRE review:

• Broker’s (or corporate broker’s) name;
• Fictitious business name (DBA) if applicable;
• Trust fund bank account number and depository;
• Amount of the advance fee to be collected; and
• Dollar amounts equaling the respective percentages of the advance fees.

Furthermore, the broker should complete the following information on the sample form “Verified Accounting for Advance Fees” before submitting the form for DRE review:

• Broker’s (or corporate broker’s) name;
• Broker’s address;
• Trust fund account number and depository; and
• Amount of the advance fee to be received.

(See DRE’s “Introduction to Sample Advance Fee Agreement,” available at http://www.dre.ca.gov/mlb_intro_advfees_sample.html.)

Q 31. Can a broker submit an advance fee agreement for providing limited services, such as reviewing the borrower’s financial condition, obtaining property information, or reviewing the borrower’s documents?

A No. According to the DRE, an advance fee loan modification agreement must provide for the broker to submit to, or negotiate with, the lender or loan servicing agent a proposed modification or other solution. Services such as reviewing the borrower’s financial condition, obtaining property information, or reviewing the borrower’s documents are just some of the steps in a single transaction where the borrower seeks assistance on his or her loan. The DRE will not consider advance fee agreements that only provide for partial services with no requirement to contact the lender or servicing agent. (See “Advance Fees and Loan Modifications” in DRE’s Mortgage Loan Bulletin (Fall 2008), available at
http://www.dre.ca.gov/pdf_docs/mlb_fall08.pdf.)

Q 32. Can a salesperson submit an advance fee agreement for DRE review in the salesperson’s name, instead of the broker’s name?

A No. According to the DRE, an agreement submitted by the salesperson or an agreement for an unlicensed person, corporation or fictitious business name to provide the services will be returned without consideration. (See Advance Fees and Loan Modifications” in DRE’s Mortgage Loan Bulletin (Fall 2008), available at http://www.dre.ca.gov/pdf_docs/mlb_fall08.pdf.)

Q 33. Where does a broker submit a request for DRE’s review of an advance fee agreement?

A A request for DRE’s review of an advance fee agreement should be sent to:
Department of Real EstateMortgage Loan Activities UnitPost Office Box 187000Sacramento, California 95818-7000

Q 34. What is the penalty for violating the advance fees requirements?

A A violation of the advance fee requirements is subject to, among other things, disciplinary action by the DRE to revoke or suspend a real estate license. According to the DRE, many brokers are currently under DRE scrutiny for possible violations. (See “Advance Fees and Loan Modifications” in DRE’s Mortgage Loan Bulletin (Fall 2008) available at http://www.dre.ca.gov/pdf_docs/mlb_fall08.pdf.)

In addition to disciplinary action by the DRE, a violation of the advance fee requirements may be subject to criminal and civil liability depending on the circumstances. The use or dissemination of any materials which the DRE has ordered not to be used is a misdemeanor punishable by six months imprisonment plus a $1,000 fine for each violation (Cal. Bus. & Prof. Code § 10085). Furthermore, any failure to comply with the verified accounting procedures for handling advance fees is presumed to be embezzlement for which the principal may sue to recover, among other things, treble damages for amounts misapplied plus attorneys’ fees (Cal. Bus. & Prof. Code § 10146 and Cal. Penal Code § 506).

III. LOAN MODIFICATION CONTRACTS

Q 35. Instead of collecting an advance fee, are there other things a real estate broker could do to help make sure that he or she will be compensated for performing loan modification services?

A Yes. Instead of collecting an advance fee, a real estate broker and homeowner may agree that the broker will perform a series of distinct loan modification services and be compensated once each service has been performed. For example, a broker and homeowner may agree that the homeowner will pay a certain dollar amount after the broker provides the homeowner with an initial consultation, another dollar amount after the broker prepares and submits a loan modification package to the lender, and another dollar amount after the broker has negotiated the loan modification with the homeowner’s lender. Alternatively, the broker and homeowner may agree that the broker will charge a certain hourly rate for services rendered, and that the broker will collect that hourly fee after performing an hour of work.

Other things a broker could do to help ensure he or she will be compensated includes prescreening the homeowner to assess his or her creditworthiness upfront, entering into a written loan modification agreement (see Question 36), and following up with the client to collect payment once the broker’s compensation is due.

Q 36. Absent an advance fee, is a broker legally required to have a loan modification contract in writing?

A No. The statute of frauds is a law that requires certain contracts to be in writing and signed to be enforceable. As an example, a real estate broker seeking to recover compensation for listing a property for sale must have a written agreement signed by the seller (Cal. Civ. Code § 1624). However, the statute of frauds does not cover an agreement to compensate a broker for providing loan modification services or mortgage broker services. Hence, if no advance fees are collected, a broker may sue to recover compensation for performing loan modification services absent any agreement in writing.

Even though a broker may pursue a claim for compensation absent a written loan modification agreement, the broker is nevertheless strongly advised to get the agreement in writing and signed by the homeowner. A written loan modification agreement can clearly delineate each party’s rights and obligations to help avoid misunderstandings and disputes. Furthermore, if a broker elects to sue for compensation, a written loan modification agreement can serve as evidence of the broker’s entitlement to compensation.

Q 37. Does C.A.R. have a standard form loan modification agreement?

A No. C.A.R. does not have a standard form loan modification agreement (with no advance fee). Decisions to draft or revise C.A.R. standard forms are made by the Standard Forms Advisory Committee. REALTORS® may submit any suggestions or comments about C.A.R. standard forms to carforms@car.org.IV. LICENSING REQUIREMENTS
Q 38. Is a real estate license required for providing loan modification services?

A Yes, in most cases. A real estate broker’s license is generally required when someone acting for profit performs loan modification services for a borrower. More specifically, unless an exemption applies (see Question 41), a real estate broker’s license is required for someone who, for compensation or in expectation of compensation, does or negotiates to do any of the following acts on behalf of another:

• Negotiates loans secured by real property;
• Performs services for borrowers, lenders or note holders for loans secured by real property;
• Solicits borrowers or lenders for loans secured by real property; or
• Collects payments for loans secured by real property.

Cal. Bus. & Prof. Code § 10131(d). See also “Advance Fees and Loan Modifications” in DRE’s Mortgage Loan Bulletin (Fall 2008) (stating that “Unless otherwise exempt, a real estate license is required to solicit, market, or provide loan modification, short sale and other loss mitigation services that involve the negotiation or renegotiation of the terms of a loan or sale of a property”), available at http://www.dre.ca.gov/pdf_docs/mlb_fall08.pdf.

Q 39. Why is a real estate license generally required for loan modification services?

A The purpose of a real estate license is to protect the public from dealing with incompetent or untrustworthy real estate practitioners (California Employment Stabilization Commission v. Morris (1946) 28 Cal.2d 812, 817). With the recent mortgage crisis, loan modification scams have exploded onto the real estate scene (see Question 40). REALTORS® who offer legitimate loan modification services often find themselves pitted against loan modification scam artists.

Q 40. What is a loan modification scam?

A There is a multitude of loan modification scams, and as soon as the public becomes savvy to one type of scam, the scam artists think up another. Scam artists also know how to take advantage of the vulnerability of distressed homeowners facing foreclosure. Ironically, one popular tactic scam artists use is to warn homeowners about loan modification scams, but hold themselves up as reputable businesses.

Scam artists dupe homeowners out of substantial sums of money by offering to provide loan modification services, pretending to work for the lender, or claiming to have a special rapport with the bank personnel. Many scammers charge homeowners upfront fees, ranging from a few hundred to several thousand dollars. Yet, what in fact happens is they provide shoddy service or no service at all and abscond with the money.

Aside from homeowners, REALTORS® and other people involved in loan modifications may also be targeted by scam artists. One common scenario involves scammers who solicit REALTORS® for their leads and clients, often offering referral fees that may violate the law.
To safeguard against loan modification scams, REALTORS® and their clients should be knowledgeable about the laws pertaining to licensing and referral arrangements as discussed below. Knowing these laws will help REALTORS® and their clients distinguish between scam artists and legitimate businesses. For more information about foreclosure-related scams, C.A.R.’s Legal Department has a legal article entitled Foreclosure Scams and the Foreclosure Consultant Law, available for members.

Q 41. Are there any exemptions to the real estate licensing requirement for persons performing loan modification services?

A Yes. Homeowners can perform loan modification services on their own behalf. Another exemption from licensing requirements is available for housing counselors who provide loan modification services free of charge (see Question 42). Attorneys are also exempt from the real estate licensing requirements, but only to a limited extent as discussed below (see Questions 43 to 44). For other exemptions to the licensing requirements, C.A.R. offers a legal article entitled Licensing Chart for REALTORS®.
Q 42. Is a real estate broker’s license required for someone who provides loan modification services free of charge?

A No. A real estate broker’s license is not required if someone performs loan modification services on behalf of a homeowner without compensation or expectation of compensation (Cal. Bus. & Prof. Code § 10131). Indeed, various housing counseling agencies offer free assistance to distressed homeowners. A list of HUD-approved Housing Counseling Agencies in California is available at http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm?&webListAction=search&searchstate=CA.

Q 43. Is a real estate broker’s license required for an attorney who provides loan modification services?

A It depends. An attorney rendering legal services to a client is exempt from licensing requirements if the attorney is not using or attempting to use the exemption for the purpose of evading the licensing laws (Cal. Bus. & Prof. Code § 10133(a)(3)). Moreover, for loan modifications and other loan-related activities, the exemption from the real estate license requirement for an attorney only applies if all of the following conditions are met:
• The attorney is licensed to practice law in California;
• The attorney renders services in the course of his or her practice as an attorney;
• The attorney is not actively and principally engaged in the business of negotiating loans secured by real property;
• The attorney’s disbursements are not charges or costs and expenses regulated by Article 7 loans (commencing with Cal. Bus. & Prof. Code § 10240); and
• The attorney’s fees and disbursements are not shared, directly or indirectly, with the person negotiating the loan or the lender.
(Cal. Bus. & Prof. Code § 10133.1(a)(5).)

Q 44. Can a loan modification business circumvent the advance fee or licensing requirements by affiliating or associating itself with an attorney?

A No, in many cases. REALTORS® and their clients should be wary of unscrupulous people who claim that their affiliation or association with an attorney enables them to practice real estate without a license, to collect advance fees, or both.

One common scenario is a broker who claims the advance fee being charged is exempt from the advance fee requirements (see Question 14) because the broker has an in house attorney or an affiliation with a law firm to negotiate the loan modification with the lender. In truth, there is no such exemption from the advance fee requirements. Furthermore, although attorneys may not be subject to DRE requirements for advance fees, an attorney or law firm is generally prohibited from “fee splitting” or sharing legal fees with a person who is not an attorney (Cal. Rules of Prof. Conduct Rule 1 320(A)).

Another common scenario is for a loan modification business to claim exemption from both the real estate licensing laws and advance fee requirements due to its affiliation with an attorney or law firm. Yet, in truth, a loan modification business is not exempt from the real estate licensing merely because it is affiliated with an attorney or law firm. Furthermore, an attorney rendering legal services is not exempt from the real estate licensing requirements unless certain parameters are met as discussed above (see Question 43).

Other than these two scenarios, there are many other business arrangements involving attorneys. Some of them are legitimate enterprises, whereas others are not, depending on their specific facts and circumstances. The DRE is currently conducting a number of investigations of people who are attempting to affiliate with attorneys to circumvent the advance fee and licensing requirements (see “Advance Fees and Loan Modifications” in DRE’s Mortgage Loan Bulletin (Fall 2008), available at http://www.dre.ca.gov/pdf_docs/mlb_fall08.pdf). For referral arrangements involving attorneys, see Question 45.

V. REFERRAL ARRANGEMENTS

Q 45. Can a real estate broker pay, or receive compensation from, an attorney in exchange for the referral of loan modification business?

A No, according to the DRE. REALTORS® may be propositioned by attorneys (or people who claim to be attorneys) to refer loan modification business in exchange for a fee. The DRE states that it has been advised by the Department of Housing and Urban Development (HUD) that “referral fees paid or received in a loan modification transaction would constitute a violation of the Real Estate Settlement Procedures Act (RESPA).” See “Advance Fees and Loan Modifications” in DRE’s Mortgage Loan Bulletin (Fall 2008), available at http://www.dre.ca.gov/pdf_docs/mlb_fall08.pdf).

Furthermore, an attorney or law firm is generally prohibited under State Bar rules from paying a referral fee to a non-attorney (Cal. Rules of Prof. Conduct Rule 1 320(B)).

Under RESPA, a real estate agent is generally prohibited from giving or receiving anything of value in exchange for a referral for a transaction involving one-to-four residential units with a federally-related mortgage loan as defined (12 U.S.C. § 2607(a)). A federally-related mortgage loan includes first trust deeds, junior liens, purchase money loans and refinances (12 U.S.C. § 2602(1)(A)). However, RESPA specifically exempt, among other things, a loan conversion which is defined as any “conversion of a federally related mortgage loan to different terms that are consistent with provisions of the original mortgage instrument, as long as a new note is not required, even if the lender charges an additional fee for the conversion” (24 C.F.R. § 3500.5(b)(6)). The Fall 2008 DRE Mortgage Loan Bulletin does not address the RESPA exemption for loan conversions under 24 C.F.R. § 3500.5(b)(6).

Also exempt from RESPA is a payment for reasonable services actually rendered (24 C.F.R. § 3500.14(g)(1)(iv)). For more information about RESPA, C.A.R. has a legal article entitled Referral Fees and Arrangements.

Q 46. Can a real estate broker pay, or receive compensation from, an unlicensed loan modification servicer or other unlicensed person in exchange for the referral of loan modification business?

A No, according to the DRE (see discussion in Question 45).

Q 47. Can a real estate broker pay or receive compensation from another real estate broker in exchange for the referral of loan modification business?

A Probably not for RESPA transactions involving one-to-four residential units with a federally related mortgage loan. RESPA exempts referral arrangements between real estate agents and brokers, but not mortgage brokers (24 C.F.R. § 3500.14(g)(1)(v)). Because loan modification may be construed as mortgage brokerage activity, a broker-to-broker referral arrangement for loan modification may arguably violate RESPA.

VI. TAX CONSEQUENCES

Q 48. Are there any potential tax consequences for obtaining a loan modification?

A Yes. Any debt cancelled or forgiven by a lender, such as a principal reduction in a loan modification situation, may be taxable to the borrower as “debt discharge income.” As background, when a taxpayer obtains a new loan, the loan proceeds the taxpayer receives are not taxable income because there is an offsetting obligation to repay. However, if the debt is later cancelled, such as in a loan modification situation, the debt discharged may be taxable as ordinary income.

Q 49. Are there any exemptions from debt discharge income tax?

A Yes. Debt discharge income is not always taxable. Most notably, Congress recently enacted the Mortgage Forgiveness Debt Relief Act of 2007 which exempts from federal income tax any debt forgiven for a loan secured by a qualified principal residence (see Question 50). Yet, homeowners may qualify for other exemptions from debt relief income tax, including the following:

• Debt discharged through bankruptcy.
• When the owner is otherwise insolvent which means the owner’s current liabilities exceed current assets. This exemption, however, only applies to the extent that the liabilities exceed assets.
• Forgiveness of a non-recourse loan resulting from foreclosure (see the IRS’s Questions and Answers on Home Foreclosure and Debt Cancellation, available at http://www.irs.gov/newsroom/article/0,,id=174034,00.html). The IRS defines a non-recourse loan as a loan for which, in case of default, the lender’s only remedy is to repossess the property and not the borrower personally.
• Purchase-money seller financing (but the discharged debt is treated as a reduction in the taxpayer’s tax basis).
• Qualified real property business indebtedness (but the discharged debt is treated as a reduction in tax basis).
• Qualified farm indebtedness.

With many homeowners seeking loan modifications being upside-down on their properties, they are likely to qualify for the above insolvency exemption from debt relief income tax. However, because determining insolvency can be complicated, the assistance of a tax specialist is highly recommended.

Alternatively, homeowners are also likely to fall under the non-recourse loan exemption to debt relief income tax. For example, under California’s anti-deficiency rules, a loan made to purchase owner-occupied, one-to-four dwelling units is a non-recourse loan (Cal. Code of Civ. Proc. § 580b).
For more tax information, C.A.R. provides members with a legal article entitled Taxation of Foreclosures, Deeds in Lieu of Foreclosure, and Short Sales. Tax information is also available at the IRS website at www.irs.gov.
Q 50. What is the exemption from debt relief income tax under the Mortgage Forgiveness Debt Relief Act of 2007?

A The federal Mortgage Forgiveness Debt Relief Act of 2007 exempts from federal income tax any debt forgiven for a loan secured by a qualified principal residence. “Qualified principal residence” indebtedness is debt incurred in acquiring, constructing, or substantially improving a principal residence (up to $2 million). This tax break applies to debts discharged in the calendar years 2007 to 2012. Any discharged debt excluded from income under the new law must nevertheless be subtracted from the tax basis of the taxpayer’s principal residence for purposes of calculating capital gains. (Internal Revenue Code § 108(a)(1)(E).)

California law conforms to the federal Mortgage Forgiveness Debt Relief Act to a limited extent. The exemption from state tax only applies to debts discharged in 2007 and 2008. Furthermore, under California law, the maximum qualifying debt is only $800,000, not $2 million, and the maximum tax exclusion is $250,000 for couples filing joint returns (and $125,000 for individual taxpayers). (Cal. Rev. & Tax. Code § 17144.5.)

VII. ADDITIONAL INFORMATION

Q 51. Where can I obtain more information?

A This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.'s legal products and services, please visit C.A.R. Online at www.car.org.

Readers who require specific advice should consult an attorney.

C.A.R. members requiring legal assistance may contact C.A.R.'s Member Legal Hotline at 213.739.8282, Monday through Friday, 9:00 a.m. to 6:00 p.m.

C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at 213.739.8350 to receive expedited service.

Members may also fax or e-mail inquiries to the Member Legal Hotline at 213.480.7724 or legal_hotline@car.org.

Written correspondence should be addressed to: CALIFORNIA ASSOCIATION OF REALTORS®Member Legal Services525 South Virgil AvenueLos Angeles, California 90020