Tucson Land Use Law Blog

The Walk Away

michael@landandbiz.com (Michael Fleishman) — Tue, 08 Dec 2009 21:17:15 -0800

University of Arizona College of Law Professor Brent T. White has stirred quite a bit of controversy over his recent article in the Arizona Legal Studies entitled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

His basic thesis is that despite the increasing number of homeowners walking away from their underwater mortgages, most homeowners continue to try and hold on to their homes even when it does not make economic sense to do so. He suggests that homeowners choose to try and hold on to their homes to avoid the shame and guilt of foreclosure and because of the "exaggerated anxiety" over the perceived consequences of a foreclosure created by "social control agents." In short, he believes that underwater homeowners (in Arizona and California) are not knowingly making bad choices, they just can not "cognitively grasp" that they would be better off financially by simply walking away. At the end of the day, argues White, many more underwater homeowners should be walking away from their mortgage obligations.

As a justification for his thesis, White suggests that the "norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse."

White argues that there are costs associated with walking away, but they are not outweighed by the financial benefits of a "strategic default." While White's thesis is controversial, as it applies to Arizona borrowers, he is correct. Arizona's anti-deficiency laws are incredibly broad and protect the large majority of borrowers who are now trying to keep pace with a subdivision home that is severely underwater. Arizona's anti-deficiency statute (A.R.S. Section 33-814(G)) prevents lenders from pursuing a deficiency (the difference between the amount owed by the borrower and the price bid at a trustee's sale) against the borrower. While a borrower's credit rating will undoubtedly take a severe beating from a foreclosure and the borrower may have to wait several years to obtain a federally guaranteed loan, for many underwater borrowers, the calculus leads to the undeniable conclusion that walking away makes the most financial sense.

As for the moral aspect of walking away, White reasons that the overriding message to borrowers is that they have a moral responsibility to pay off their obligation. White counters this message by pointing out that lenders are operating amorally according to market norms and could have acted to protect themselves by following prudent underwriting practices. White's final point is that "it is time to take morals out of the picture and search for an equitable solution to the negative equity problem." While White is correct in many respects, had lenders and borrowers employed a stronger sense of morals when it came to underwriting and borrowing, we might not have experienced such a severe market bubble and attendant bust.

The Jumbo Wave

michael@landandbiz.com (Michael Fleishman) — Wed, 14 Oct 2009 12:15:33 -0800

It seems that the small glimmer of hope that everyone is hoping for in the housing market is not likely to come anytime soon. Mathew Padilla has posted an excellent blog article discussing that the discussion of another wave of foreclosure implies that the current wave has already receded. Sam Khater, a senior economist with First American CoreLogic has stated: “To say there is a second wave implies the (current) wave has receded . . . I don’t see that the wave has receded.”

Call it what you will, the next foreclosure wave to hit will largely involve Pay Option ARMs. Pay Option ARMs are adjustable rate mortgages on which the interest rate adjusts monthly and the payment adjusts annually, with borrowers offered options on how large a payment they will make. The options include interest-only, and a "minimum" payment that is usually less than the interest-only payment. The minimum payment option results in a growing loan balance, termed "negative amortization." As Long and Foster's Ron Sitrin recently commented: because these loans "had negative amortization for so long, they can't refinance out of them and they cannot sell them because the loans are worth more than the properties themselves."

For the most part the expensive gated communities have avoided the impact of the current foreclosure wave, but its job loss consequences are coming home to roost in the upper income brackets. This graph puts the Pay Option ARM problem in stark terms:

As a recent post on Dr. Housing Bubble stated: "The Pay Option ARM is one of the most poorly construed mortgage product ever to face this planet. It was a pathetic attempt to allow a larger majority of Americans to have a piece of the great American credit ponzi scheme." How's that for upbeat?

Protecting Tenants at Foreclosure Act of 2009

michael@landandbiz.com (Michael Fleishman) — Tue, 14 Jul 2009 21:38:43 -0800

On May 20, 2009, President Obama signed into law Senate Bill 896, also known as the "Helping Families Save Their Homes Act of 2009." Section 702 of that Act - the "Protecting Tenants at Foreclosure Act" is very broad in scope and affects the ability of the new owner of certain foreclosure property (including Section 8 properties) to take immediate possession of that property.

The new Act has effectively mandated a tenant-friendly "non-disturbance clause", common in commercial leases, into the residential landlord-tenant world. The Act now requires landlords to provide tenants residing in foreclosed residential properties to be provided 90 days advance notice to vacate the property. However, except where the purchaser intends to occupy a given property as the primary residence, the terms of any bona fide lease remains in effect.

A lease or tenancy must meet the following requirements to be a bona fide lease: (1) The tenant cannot be the mortgagor or the child, spouse, or parent of the mortgagor; (2) The lease or tenancy must be the result of an arms-length transaction, and; (3) The rent required under the lease cannot be substantially less than fair market rent for the property or the rent is subsidized by a Federal, State or local subsidy.

This is a watershed change in the law and now provides residential tenants protections that, though common in commercial leases, rarely have been seen in the residential context. It also brings the law a small step closer to the long-past English feudal system of attornment, whereby a a new landlord had to obtain the consent of the tenant before becoming the new landlord. Such a system was abolished in 1705, but it is clear that the pendulum is swinging towards tenant protections. In light of the massive foreclosure wave that has swept this country, it is not surprising to see such a change. A lot of unsuspecting tenants were left holding the bag after their landlord lost the property to foreclosure. For what it is worth though, such a change is temporary. The Act sunsets at the end of 2012.

Looks Like No Bankruptcy Foie Gras Power For Judges

michael@landandbiz.com (Michael Fleishman) — Mon, 04 May 2009 21:17:42 -0800

When I hear the term "cram down" authority in the bankruptcy context, I keep picturing some poor mortgage lender warily stepping into a bankruptcy judge's chambers only to have a long metal pipe shoved down his throat until the lender is willing to give in on a loan modification. Only a month ago it appeared that bankruptcy judges were on their way to wielding such foie gras power.

While a "cram down" bill made it through the House of Representatives in March, Senate Bill 61 met fierce resistance and failed to muster the necessary votes to pass. Brett Weiss, a bankruptcy attorney in Maryland, provides some excellent insight in his article as to why Senate Bill 61 bill could not pass despite President Obama's apparent 100-day mandate clout and a Democratically controlled Congress. One is left to wonder why President Obama, who supported such "cram down" authority was unwilling to use some of his political capital to see this one through.

Senate Republican Leader Mitch McConnell of Kentucky seemed to echo the standard line being floated by the likes of J.P. Morgan Chase & Co., Bank of America Corp., and Wells Fargo & Co, namely that the vote was "a bipartisan rejection of an interest-rate hike, which is exactly the wrong solution for jobs, homeowners and the economy."

However, as Brett Weiss notes in his article, mortgage insurance was the real issue. Mortgage insurance gives lenders a very strong incentive not to write down principal, and gives them more money if they foreclose, even where the property is sold at a significant loss, than to work to make the loan performing. In the end it seems that saving the likes of the stronger financial institutions was more practical than forcing the likely failure of MGIC, RMIC and Genworth, mortgage insurers already on the ropes.

We're Not Leaving!!!

michael@landandbiz.com (Michael Fleishman) — Tue, 03 Mar 2009 13:11:19 -0800

As the foreclosure wave has grown into a tsunami-like crisis, advocacy groups such as the Association of Community Organizations for Reform Now (ACORN) have taken to the streets in campaigns to lobby legislators about implementing new regulations that will help stem the foreclosure crisis and curtail predatory lending. When I left the Pima County courthouse yesterday, there was an ACORN protest taking place at the same time that a Trustee's Sale was going on. An interesting contrast between ACORN's bullhorn calls to action and the trustee calling out bids.

Unquestionably, the foreclosure epidemic has resulted in some very impassioned debate as to whether and how the government should act. Rick Santelli's recent rant highlights just how impassioned this debate has become. While Santelli's rant has garnered much of the media hype, Stuart Varney's recent interview with ACORN's Bertha Lewis demonstrates just how zealous some people have become at the prospect of the government aiding struggling homeowners, who many view as irresponsible. Varney was incredulous at ACORN's suggestion that people on the verge of foreclosure should stay in their homes.

As always, the foreclosure epidemic is far more nuanced than many of the talking heads are willing to discuss. Predatory lending certainly was in force and many people were not informed of what they were getting into. Likewise, many, many people bought far more home than they could ever afford. Only time will tell whether massive government intervention or the force of the market will prevail.

Cramdown Authority

michael@landandbiz.com (Michael Fleishman) — Fri, 13 Feb 2009 09:18:08 -0800

It is clear that that lending industry has been slow to confront the ever-widening foreclosure crisis that began to pick up steam in 2007. Indeed, Sandor E. Samuels, the former chief legal officer of Countrywide Financial was quoted as saying "We are going to keep making these loans [subprime teaser loans] until the last second they are legal." Samuels' comments seem to reflect some of the general industry denial about the problem. Despite such denial, many have been advocating changes that will help address the crisis.

Last month, Arizona Attorney General Terry Goddard, along with twenty one other Attorneys General sent a letter to the U.S. House and Senate leadership urging an amendment to the bankruptcy code that would permit federal bankruptcy courts to order loan modifications, also known as "cramdown authority" in Chapter 13 bankruptcies. The Attorneys General are advocating broader authority in the bankruptcy courts to stem the foreclosure tide.

However, the lending industry has been actively lobbying against granting such cramdown authority, which they argue would reward irresponsible borrowers and result in higher borrowing costs. The general intransigence is perhaps better explained by the accounting nuances involved in allowing wide-scale modifications. Aubrey Cohen has a good blog post that describes how the securitization of loans has complicated the process.

Nonetheless, Citi recently dropped its opposition to cramdown authority, but has stood alone among the lending industry. One is left to wonder whether Citi was pressured into such a stance given that it has come to the Treasury trough twice in recent months for bailout funds. Meanwhile, the Mortgage Bankers Association recently launched a "Stop the Bankruptcy Cram Down Resource Center" to try and ward off any further attempts to empower the bankruptcy courts to force modifications. Time will tell whether the banks are able to ward off continued congressional pressure to force modifications. No small task.

Arizona Foreclosure Rates

michael@landandbiz.com (Michael Fleishman) — Mon, 19 Jan 2009 19:59:35 -0800

RealtyTrac just released its 2008 U.S. Foreclosure Market Report, which reported that there were a total of 3,157,806 foreclosure filings (default notices, auction sale notices, and bank repossessions) on 2,330,483 properties during 2008. That was an 81 percent increase over 2007 and a 225 percent increase over 2006. To get a feel for the breadth and scope of just how serious the foreclosure Juggernaut is, take a look at this map to see just how hard hit certain parts of the country were in 2008.

Arizona reported the third highest foreclosure rate of all states in 2008. 4.49 percent of all housing units in Arizona received at least one foreclosure filing during the year. Indeed, 116,911 properties in Arizona received a foreclosure filing, which also put Arizona third for total foreclosure filings. Amazingly, foreclosure activity in Arizona during 2008 increased 203 percent from 2007 and 665 percent from 2006. That last percentage far surpasses the two top foreclosure activity states - California (412 percent increase since 2006) and Florida (412 percent increase since 2006).

Not surprisingly, Pinal and Maricopa County were particularly hard hit. The Phoenix metropolitan area reported 97,684 foreclosure filings in 2008, an increase of 220.77 percent from 2007. That put the Phoenix metropolitan area fifth on the top 100 metropolitan areas, which is fairly consistent with its metropolitan population ranking. The Tucson metropolitan area reported 9,043 foreclosure filings in 2008, an increase of 113.33 percent. The Tucson metropolitan area ranked 37th on the top 100 metropolitan areas, which is again fairly close to the Tucson metropolitan population ranking.

The burn-off of the Arizona housing bubble seems to be gaining momentum faster than the meteoric rise in real estate prices. For example, take a look at the graph of median home prices in Phoenix between 1989 and 2009. Look at the incredible bell curve between about 2005 and 2008. The scary thing that some commentators are noting, is that while the bell curve has basically been erased and median prices are near 2004 levels, the current inventory of homes is far greater than 2004 levels, not to mention, it is much more difficult to qualify now. Looks like we may not hit a bottom for a while yet. The bubbly hangover may be more painful than the euphoria of the upswing, eh?

Foreclosure and The Right of Reinstatement

michael@landandbiz.com (Michael Fleishman) — Fri, 09 Jan 2009 10:19:21 -0800

So a borrower defaults under a promissory note and the deed of trust. Normally, the lender in that circumstance will exercise the power of sale clause in the deed of trust and begin the foreclosure process by noticing a trustee's sale. However, the lender may also choose to call the note due and accelerate the entire amount and proceed with a judicial foreclosure. Most lenders choose to go the trustee's sale route because it is faster and cheaper than a judicial foreclosure.

What I recently discovered, is that many attorneys do not know about a borrower's statutory right of reinstatement and how that right applies in the context of both a trustee's sale and a judicial foreclosure. Under Arizona Revised Statute Section 33-813(A), the trustor under a deed of trust (borrower) may reinstate (or cure the default under the promissory note) by paying the lender "the entire amount then due . . ., other than the portion of the principal as would not then be due had no default occurred . . ." In other words, the borrower only needs to come up with the amount he or she is in default, not the entire amount due under the promissory note. Nonetheless, many lenders' attorneys seem to believe that if the lender calls the promissory note due and exercises its right to accelerate the promissory note, the borrower must immediately pay the entire amount owed under the promissory note in order to cure the default, not just the defaulted amount.

However, in Chapparral Development v. RMED Intern, 170 Ariz. 309, 823 P.2d 1317 (App. 1991), the Arizona Court of Appeals ruled that under A.R.S. Section 33-813(A), a trustor has an absolute right to reinstatement whether a lender chooses to foreclose by means of trustee's sale or a judicial foreclosure. The difference being, if a lender chooses to pursue judicial foreclosure, a borrower's statutory right of reinstatement is cut off once the lender files the judicial foreclosure action and the borrower will have to pay the entire amount owed on the promissory note. On the other hand, in the context of a trustee's sale, the borrower can reinstate up until 5:00 p.m. the day before the date of the trustee's sale. But once the trustee's sale has been held, that right of reinstatement is extinguished.

Arroyo Grande - The New Land Department

michael@landandbiz.com (Michael Fleishman) — Tue, 25 Nov 2008 08:48:54 -0800

It has been interesting to watch the transition in the State Land Department, whose long-standing mission has been "to enhance value and optimize economic return" for the State Land Trust. In practice, the Department has simply sold trust land to the highest bidder at public auction, which historically have been developers. Despite ongoing attempts at State Land Trust reform through the initiative process, it seems that the State Land Department has slowly begun to internalize changes as to how state trust lands are to be managed.

The Town of Oro Valley's proposed annexation of nearly 9,000 acres of State Trust Land known as "Arroyo Grande" is a case in point. On November 19, 2008,the Town of Oro Valley voted 6-1 to adopt a general plan amendment, which will allow the process to begin for the possible annexation of Arroyo Grande.

Arroyo Grande will likely be a proving ground for the future of how the State Land Department manages the state trust lands. Various stakeholders already have been very active in the process. Interestingly, while Oro Valley initiated the annexation discussion with the Department, Pima County has effectively dictated much of the development of the conceptual plan. Pima County, who has been the prime orchestrator of the Sonoran Desert Conservation Plan, has been openly critical of Oro Valley's commitment to preserving open space. Pima County Administrator Chuck Huckelberry recently sent a memo to Oro Valley Town Manager David Andrews expressing concern over the absence of wording in the general plan ensuring that open space in Arroyo Grande and a wildlife corridor are sold for below-market value for conservation purposes. Despite Pima County's desire to purchase some 6,000 acres of the Arroyo Grande, it recently abandoned such efforts.

Oro Valley's Andrews recently responded to such criticism by stating that "The preservation of open space in perpetuity is a deal breaker for the town." The next phase - the pre-annexation development agreement - will prove the most interesting as the stakeholders hammer out what actually will be included in the final annexation agreement. Whether Oro Valley is truly committed to the same goals as Pima County remains to be seen. Nothing better than watching jurisdictions joust.

Illegal Immigrants and The American Dream

michael@landandbiz.com (Michael Fleishman) — Thu, 06 Nov 2008 08:25:50 -0800

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

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

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

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

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

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

Tax Lien Foreclosures - Strict Compliance Is Out!

michael@landandbiz.com (Michael Fleishman) — Tue, 21 Oct 2008 12:46:53 -0800

Under Arizona Revised Statutes Section 42-18202, a tax lien investor who wants foreclose the right of a property owner to redeem a tax lien is required, among other things, to send a notice of intent to file a foreclosure action by certified mail to the owner of record.

In 2005, the Arizona legislature amended Section 42-18202 by adding subsection C, which states: "If the purchaser fails to send the notice required by this section, the purchaser is considered to have substantially failed to comply with this section. A court shall not enter any action to foreclose the right to redeem under this article until the purchaser sends the notice required by this section."

A recent case from the Arizona Court of Appeals - DuPont v. Reuter - addressed the issue of what it means to substantially fail to comply with Section 42-18202. In DuPont, the tax lien holder sent the owner of record the required statutory notice of intent to foreclose, but failed to send the notice by certified mail. The tax lien holder subsequently obtained a default judgment and a Treasurer's Deed. The trial court later ordered that the Coconino County Treasurer cancel the issued Treasurer's Deed.

The Court of Appeals reversed the trial court's orders and the judgment, holding that the requirement to serve the notice of intent to foreclose by certified mail was not jurisdictional. Relying on Section 42-18101(B), the Court of Appeals reasoned that an insubstantial failure to comply with each and every element of the tax lien and foreclosure statutes does not preclude a tax lien holder's ability to foreclose. In the end, the Court of Appeals held that sending a notice of intent to foreclose by regular mail instead of certified mail was an "insubstantial failure" and did not automatically void the judgment and the issued Treasurer's Deed.

In contrast to the recent Court of Appeals decision in Roberts v. Roberts, here, the Court of Appeals seems to have grasped that the stated objective of the tax lien statutes is to secure the payment of unpaid delinquent taxes by preserving and enhancing the marketability of tax liens and Treasurer's Deeds, which is essential to the maintenance of county government.

The DuPont case frankly amazes me. Here you have a property owner that was willing to pay what likely amounted to tens of thousands of dollars to an attorney to fight for a property that the same owner had effectively forgotten about. The property owner in DuPont admittedly received notice that the tax lien owners were going to foreclose on the property. However, instead of paying off her back taxes, the property owner was willing to fight out the issue of whether she should have received notice by certified mail instead of regular mail. This woman had been delinquent on her property taxes for over thirteen years, and the delinquent taxes totaled some $240,000. Coconino County certainly could have put that money to good use. In the end, the property owner in the DuPont case, like property owners generally, have to take some level of responsibility in the care and ownership of property, which includes paying property taxes. The legislature has clearly codified a system in which an insubstantial failure to strictly follow the tax lien foreclosure rules will not prevent a tax lien investor from obtaining a Treasurer's Deed to any given property.

Arizona Proposition 201 - "Homeowner's Bill of Rights"

michael@landandbiz.com (Michael Fleishman) — Thu, 09 Oct 2008 08:02:25 -0800

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

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

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

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

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

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

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

Arizona State Land Trust - "The Highest & Best Use"

michael@landandbiz.com (Michael Fleishman) — Mon, 15 Sep 2008 01:17:30 -0800

When Congress established the Territory of Arizona in 1863, Congress set aside sections 16 and 36 of each township of the Territory of Arizona for the benefit of the Common Schools, a practice first established by the Northwest Ordinance in 1787. Congress recognized then the value of land and the importance of public schools to the developing nation. In addition to the land set aside by Congress in 1863, the 1910 Arizona-New Mexico State Enabling Act, which allowed the Territory of Arizona to prepare for statehood, also set aside sections 2 and 32 of each township to be held in trust for the Common Schools. The set aside for the Common Schools in Arizona currently totals approximately eight million acres.

One of the early actions by the Arizona legislature after statehood was to create the State Land Commission, who were charged with assessing, evaluating, and making recommendations about the use of the state land trust . The Commission, which later became the Arizona State Land Department, concluded that Arizona should not sell its Trust land outright, as other states had done. Instead, it should put the lands to their "highest and best use." This concept may well have been gleaned from the General Mining Act of 1872, which effectively states that mining on federal lands is deemed to be the "highest and best use" of that land.

The "highest and best use" concept has historically led the Arizona State Land Department to attempt to maximize the revenue for the designated beneficiaries of the trust, namely the Common Schools. Increasingly, this concept has been criticized because it fails to incorporate any potential for conservation of those lands.

Indeed, a 2006 initiative attempted to give the state of Arizona more power in managing the state land trust and also attempted to set aside over 600,000 acres of state trust land for conservation purposes. However, that initiative failed. A similar initiative will be on the ballot in 2008, which proposes setting aside some 570,000 acres of state trust land. Undoubtedly, the competing interests of maximizing revenues for the state land trust and the pressure to conserve sensitive state trust lands will continue to play out in both the Arizona legislature and through the public initiative process.

The American Ninja

michael@landandbiz.com (Michael Fleishman) — Wed, 20 Aug 2008 00:21:32 -0800

What do the traditional Japanese Ninja and the the American Ninja have in common? Both destablize and cause social chaos. While traditional Ninjas allegedly intended to destabilize and cause social chaos in enemy territory or against opposing rules, the American Ninja never intended to do anything but make money.

The American Ninja is actually an acronym, which stands for (N)o (I)ncome, (N)o (J)ob, no (A)ssets. Apparently, HCL Finance, who dubs itself "Home of the No Doc Loan," coined the term during the go-go days of the real estate bubble. Indeed, this "innovative product," like so many others, was a driving force in the boom.

So, combine Salomon Brothers' Lewis Ranieri's idea of buying mortgages, bundling them, and issuing bonds with the bundles as collateral and the Ninja loan, and we have the perfect recipe for disaster. The US housing market is far from bottom and the effects of ridiculous lending practices will continue to be felt for some time to come.

Arizona Tax Lien Foreclosure - Doing Your Due Diligence

michael@landandbiz.com (Michael Fleishman) — Fri, 15 Aug 2008 17:17:15 -0800

Once an investor has owned a tax lien certificate of purchase for at least three years since it was first offered for sale by the given county, the investor may seek to foreclose the right of the property owner to redeem the tax lien. Arizona's statutes (A.R.S. Section 42-18201, et seq.) govern the foreclosure process.

Specifically, Arizona Revised Statute Section 42-18201 requires that at least thirty days before filing an action to foreclose the right to redeem, the tax lien holder must send a notice of intent to file a foreclosure to the property owner. Section 42-18201 specifies exactly how that is to be done.

The recent Arizona Court of Appeals case of Roberts v. Robert, 158 P.3d 899 (App. 2007), has added to the due diligence necessary to successfully foreclose the right of a property owner to redeem a tax lien. In Roberts, the Roberts purchased two tax liens for property located in Mohave County, Arizona. The Roberts later sued the owner of record, Phyllis V. Johnson, the Mohave County Treasurer, various fictitious parties, and the "unknown heirs of any of" them "if they be deceased" to foreclose their right to redeem the tax liens.

After attempting personal service on Johnson, the Roberts discovered that Johnson had died. A son of Johnson, was served on Johnson's behalf and subsequently entered into an arrangement with the Roberts whereby they would obtain a default judgment without any subsequent assessment of fees or costs against Johnson or the son. The Roberts later obtained a default judgment barring Johnson or any person claiming title "under" her from asserting any right, title, or interest in an tot he property subject to the tax lien.

A year later, Tim Roberts appeared, claimed to be the son of and heir of Johnson, and argued that as an heir, he had a right to redeem the tax liens. He then moved for a new trial and asked the trial court to set aside the default judgment, arguing that the default judgment was void because he had not been personally served or served by publication.

The issue presented to the Court of Appeals was whether Johnson's heir had a right to redeem a tax lien. The Court of Appeals ruled that because Tim Roberts was Johnson's rightful heir, he a right to redeem. The Court also ruled that only those parties who are joined in a foreclosure action may have their rights to redeem foreclosed. Thus, ruled the Court, the Roberts need to join Tim Roberts as a defendant in their foreclosure action and obtain a judgment against him to foreclose his right to redeem.

The Court also set the standard for what level of due diligence and due process will be required in a tax lien foreclosure action in Arizona. Depending on the circumstances, the Court ruled that a tax lien holder may need to examine public records, or may need to ask relatives, friends, or the neighbors of the deceased property owner about the existence of heirs. In the end, the Court stated that whether service by publication is constitutionally sufficient will turn on the facts of the particular case, and it would not attempt to set forth a rule that will fit each circumstance.

This case clearly sets a due diligence and due process standard, but leaves it up to the circumstances of each case to dictate what efforts will justify service by publication. Indeed, the Court rejected the Roberts' contention that they did serve Tim Roberts as an "unknown heir." The Court stated that the record contained no evidence of what steps, if any, the Roberts took to identify and locate Johnson's heirs before attempting service by publication.

The message is clear - if the property owner has died, some efforts must be made to locate the heirs of the deceased property owner before service by publication will be deemed appropriate under the circumstances. This decision clearly will place a heightened burden on tax lien investors and will undoubtedly increase the cost of successfully foreclosing the right to redeem. It will be interesting to see if future court decisions spell out in greater detail what level of due diligence and due process will be required. Until then, investors beware - do your due diligence.

Affecting Title to Real Property - The "Lis Pendens"

michael@landandbiz.com (Michael Fleishman) — Thu, 14 Aug 2008 17:38:51 -0800

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

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

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

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

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

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

Tax Lien Foreclosures and Bankruptcy

michael@landandbiz.com (Michael Fleishman) — Thu, 07 Aug 2008 00:05:35 -0800

Due diligence - do it and do it well. For unsuspecting tax lien investors who have not done their research, they might be surprised to learn that while property tax liens have very high priority, in certain circumstances, a bankruptcy can wreak havoc on their investment.

It should be noted that bankruptcy courts often respect property tax liens and give them high priority in the administration of a bankruptcy estate. However, under certain rare circumstances - Chapter 7 - the bankruptcy trustee may subordinate the tax lien to the administration of the estate, effectively extinguishing the tax lien. In effect, a tax lien investor could end up an unsecured creditor - a far cry from the 16% return or title to the property that investors believed they would receive.

This is a pretty rare situation, but one tax lien investors should be aware of. In all instances, as part of a tax lien investors' due diligence, they need to determine if the subject property is subject to an automatic stay by a bankruptcy court. By consulting a title company, the county recorder, and the bankruptcy court, an investor can easily avoid such a scenario.

Staving Off The Foreclosure Juggernaut

michael@landandbiz.com (Michael Fleishman) — Sat, 26 Jul 2008 20:46:44 -0800

RealtyTrac estimates that 1 in every 171 United States households were in the process of losing their home - up 121% on last year. To give some perspective on that number, RealtyTrac estimates that almost 740,000 United States homes entered the foreclosure process in the second quarter of 2008. That number includes receiving a default or bank repossession notice or warning of an impending auction. That is an incredible number for three months.

Not surprisingly, the worst hit areas were Nevada, California, Florida and Arizona, which had seen the biggest house price rises during the boom years, and the largest volume of sub-prime lending. Indeed, California had the most filings - 202,599 - which was up 198% from the same period a year ago.

CONGRESSIONAL RESPONSE

In response to the worsening foreclosure crisis and credit crunch, both the House and the Senante approved a housing bill - The American Housing Rescue and Foreclosure Prevention Act of 2008 - that will provide mortgage relief for 400,000 struggling homeowners. The housing plan is aimed in large part at calming the financial markets, which have been riding a roller coaster of late, due in no small part to concerns over the financial stability of Freddie Mac, Fannie Mae, and the banking industry as a whole.

THREATENED VETO

Despite an early veto threat, President Bush said he will sign the bill promptly. President Bush opposed the bill because he claimed that $3.9 billion in proposed neighborhood grants did nothing to help homeowners. President Bush had objected to the neighborhood grants, which would be for buying and fixing up foreclosed properties, saying that they were aimed at helping bankers and lenders, not homeowners who are in trouble.

OVERHAULING FHA

The bill headed for the President's signature aims to spare an estimated 400,000 debt-strapped homeowners from foreclosure by allowing them to get more affordable mortgages backed by the Federal Housing Authority ("FHA"). The FHA could insure $300 billion in such mortgages. However, banks would first have to agree to take a large loss on the existing loans in exchange for avoiding costly foreclosures.

The bill also seeks to overhaul FHA by requiring lenders to show how high a borrower's payment could get under the terms of his mortgage. The bill also provides $180 million in pre-foreclosure counseling for struggling homeowners.

EASING THE CREDIT CRUNCH

The bill also is designed to relieve a broader credit crunch that has taken hold because of rising defaults and falling home values. To free up safer and more affordable mortgage credit, the bill permanently would increase to $625,000 the size of home loans that Fannie Mae and Freddie Mac can buy and the FHA can insure. They also could buy and back mortgages 15 percent higher than the median home price in certain areas.

The Treasury Department will also gain unlimited power, until the end of 2009, to lend money to Fannie Mae and Freddie Mac or buy their stock should they need it. The Federal Reserve will also more actively oversee the two mortgage giants.

OTHER PROVISIONS

The bill also includes $15 billion in tax cuts, including a significant expansion of the low-income housing tax credit and a credit of up to $7,500 for first-time home buyers for houses purchased between April 9, 2008, and July 1, 2009. The bill also allows people who don't itemize their taxes to claim a $500-$1,000 deduction on their 2008 property taxes. That chiefly benefits homeowners who have paid off their homes and can't claim a deduction for mortgage interest.

Democratic leaders also tacked on an $800 billion increase, to $10.6 trillion, in the statutory limit on the national debt, which clearly irked many conservative Republicans. Those same Republicans were vehemently opposed to the bill, particularly the help for Fannie Mae and Freddie Mac. Many argue that the companies enjoy lavish profits in good times and wield their outsized political clout to resist regulation while depending on the government to bail them out should they falter.

The Congressional Budget Office ("CBO") announced that the bailout plan could cost the government $25 billion over two years. Hard to argue that US taxpayers are not once again on the hook for a significant bailout. The difficult part in all this is to identify what the alternative is. All this "propping up" lenders and "calming" the markets gives one the feel that this is all a delicate house of cards just waiting to fall. We shall see.

Freddie and Fannie - "Daddy, we need your credit card!!"

michael@landandbiz.com (Michael Fleishman) — Mon, 14 Jul 2008 01:01:17 -0800

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

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

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

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

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

Mr. Foreclosure and the Copper Thieves

michael@landandbiz.com (Michael Fleishman) — Thu, 10 Jul 2008 18:24:26 -0800

A recent Reader's Digest article highlighted Clint Medford, referred to by some as "Mr. Foreclosure." While the foreclosure epidemic certainly has hit many homeowners and would-be investors hard, it has created a host of interesting opportunities for savvy investors and thieves alike.

Often a foreclosed home will sit empty for a time, which has invited a brand of looters who strip a home of its valuable materials. Indeed, as copper prices have sky-rocketed in recent years, desperate looters are stealing copper wires and pipes from foreclosed homes. Indeed, it has been reported that some owners of very expensive homes have stripped their own homes before foreclosure. This phenomenon is happening most prevalently in the Rust Belt states. Some estimate that the average home has over $1,000 in copper in it. Despite some recent legislative attempts to control the scrap metal market, thieves have successfully been able to find buyers for the stolen metal.

In those instances where a lender is sitting on a home that has sat for several months and no longer is inhabitable because of the destruction to the home, Medford steps in. He has created a network of banks that look to him to unload their rising stock of these uninhabitable homes. Medford has picked up houses for as little as a few thousand dollars. Rather than touch the hyper-inflated California markets, Medford focuses his purchases in the tough hit areas in the Rust Belt and places like Detroit, that has been especially hard hit.

Medford puts a little money into the house and turns around and sells it to investors looking for rental properties. Medford has a list of about 600 to 700 investors ready to purchase the homes he has picked up on the cheap from the banks. While selling to investors proved to be good business, Mr. Foreclosure has stepped into a completely new realm - mortgage lender.

For many in the foreclosure belt, many people may be able to afford some of the houses now for sale, but they can not get a mortgage. That is where Medford is stepping in. Rather than make the mistakes that many lenders were making during the rah-rah days of the hysterical real estate boom, Medford works with people by doing something unheard of - verifying their income. Hard to believe there was a time when people could get loans with NO income, just a credit score. The same buyers that obtained sub-prime loans and later faced foreclosure are the same people coming back to buy some of the homes that Medford has to offer. In other words, Medford is stepping in where the banks are all afraid to go right now.

Many question whether someone like Medford is a "foreclosure vulture" or someone willing to stop the forthcoming blight of neighborhoods hard hit by the foreclosure crisis. Sure Medford is charging 11 percent for a mortgage on a house he may have bought for a couple thousand dollars, but he is providing people an opportunity to get back into a house for less than they would be paying in rent in many places. That is a whole lot less shady than the other vultures who swoop in before a foreclosure only to grab someone's title and equity because they can think of no other options. It sure is interesting out there though.