Washington Real Estate Law Blog

Podcast: Defining easement

Robert Dickson — Thu, 03 May 2012 07:58:05 -0800

In this podcast, Rob Dickson explains the basic definition of an easement.

Overview: Joint property ownership in Washington State

Robert Dickson — Wed, 02 May 2012 16:12:24 -0800

Owning property together with someone else is often referred to as concurrent or joint ownership (the terms concurrent or joint essentially mean the same thing in the property ownership context). There are two types of concurrent ownership that are recognized in Washington State: (1) tenancy in common, or (2) joint tenancy with right of survivorship (RCW 64.28). Usually, people refer to the joint tenancy with right of survivorship simply as "joint tenancy."

What's the difference?

Tenancy in common is the the default method of concurrent property ownership. It does not include rights of survivorship, meaning that each individual property owner may pass on his or her portion of the property ownership to heirs. In a sense, it is more divisible, meaning that tenants in common may transfer their portion of ownership to other parties. Unlike joint tenancy with rights of survivorship, a tenancy in common may be created if the parties have unity of possession or equal rights to possession of the property. This is true even though owners of the property may own disproportionate stakes in the property.

Joint tenancy with rights of survivorship can only be created under specific circumstances. This form of concurrent ownership provides that transferring of the property right is more limited. Unlike tenancy in common, co-owners of the property own the property "together" in the truest sense. If one should pass away, that person's share of the property would transfer to the other individual or individuals, depending on the number of co-owners. Thus, the survivorship aspect of joint tenancy means that the property ownership is a non-probate asset. To create a joint tenancy, the property must follow the four "unities" requirement: (1) unity of time (property acquired at same moment of time), (2) unity of title, (3) unity of interest, and (4) unity of possession.

For a more detailed breakdown of tenancy in common, check out this blog post. Though the article is somewhat old, it provides a good overview and includes some important case citations.

Photo credit: digitalart

Podcast: Foreclosure Fairness Act -- What is it, and how to take advantage of the mediation option

Robert Dickson — Mon, 30 Apr 2012 08:49:58 -0800

In this podcast, Rob Dickson describes how the new Foreclosure Fairness Act has impacted foreclosures in Washington. (Photo Credit: jscreationzs)

Podcast: Washington State is a "non-recourse" loan state (kind of)

Robert Dickson — Tue, 24 Apr 2012 08:56:21 -0800

In this podcast, Rob Dickson discusses the difference between non-recourse and recourse loans and how they effect foreclosures in Washington State.

Beginning the Eviction (Unlawful Detainer) Process in Washington: Notice, Service of Process, and the Show Cause Hearing

Shad O. McOmber — Wed, 18 Apr 2012 11:50:00 -0800

Washington has a very streamlined legal process for landlords to evict a tenant called an unlawful detainer action (assuming, of course, that the landlord is justified in doing so). RCW 59.12.030 defines unlawful detainer, and outlines many of the grounds for eviction. Because the unlawful detainer action simplifies and expedites the eviction process for the landlord, Washington has very specific statutory rules that landlords (and their attorneys) must follow in order for the eviction to be effective. Proper notice and proper service on the tenant are essential parts of an unlawful detainer action.

Notice

Before the landlord can begin the actual legal action against the tenant, notice must first be given to the tenant to vacate the premises for reasons stated in RCW 59.12.030. To do so, the landlord must follow one of three options outlined in RCW 59.12.040 by either (1) leaving a copy of such notice with the tenant personally, or (2) leaving a copy with a person at the residence and also sending a copy via mail to the residence, or (3) posting a copy in a conspicuous place at the residence, leaving a copy with anyone at the residence, and sending a copy via mail to the residence. As a practical matter, it would be wise to document each step in this process to prove compliance with this procedure, which is usually done by affidavit.

If the tenant does vacate the premises, the landlord can immediately take possession of the premises and, pursuant to RCW 59.18.310, can seek to recover from the tenant outstanding rent owed, if any. If the tenant left behind personal property at the premises, look here for a discussion on what the landlord may or must do.

Commencing the Action (Summons and Complaint)

If the tenant does not vacate the premises, an unlawful detainer legal action is required to effectively evict the tenant. To begin, just like in any other civil action, the landlord must file a summons and complaint (or, better yet, have an attorney do so). If rent is owed, the complaint should provide the amount. The summons must state, among other things, the timeframe within which the tenant must respond. See RCW 59.12.080; RCW 59.18.365. In other civil actions, the timeframe is typically 20 days, but because this action is more streamlined, RCW 59.12.070 allows a landlord to require response within as few as seven days (although no more than thirty days).

To properly serve the defendant with the summon and complaint, the same process is required for service as in other civil actions, see RCW 59.18.365, which generally requires personal service, or if the court allows, by publication.

Show Cause Hearing

Along with the summons and complaint, the landlord can also obtain from the court, and serve on the tenant, an order requiring the tenant to appear in court at a show cause hearing. See RCW 59.18.370. Conveniently, the timeframe for the tenant to appear at this hearing can be exactly the same as the timeframe as required for the tenant to respond to the summons and complaint (i.e., within as few as seven days, but no more than thirty days). What makes this hearing so useful for the landlord is that, at the hearing, the burden is on the tenant, rather than the landlord, to show cause (or prove) why the property should not be restored to the landlord. This hearing is the most expeditious way for the landlord to retake possession of the premises because, if the tenant cannot do so, or if the tenant fails to appear altogether, then the court will typically order the sheriff to restore property to the landlord. The court may also grant to the landlord other requests made in the complaint, such as payment of outstanding rent.

Podcast: Second mortgages and foreclosures

Robert Dickson — Wed, 18 Apr 2012 11:31:37 -0800

Photo credit: renjith krishnan

IMF pushing for US banks to reduce principal amounts on home loans

Robert Dickson — Fri, 13 Apr 2012 08:05:48 -0800

According to a recent Washington Post article by Howard Schneider, the International Monetary Fund is pushing for lenders in the United States to agree to principal reductions on their existing loans.

As a general rule, banks are very (VERY) reluctant to reduce principal reductions. It will be interesting to see if these types of pressures, from international organizations to be exact, will actually have an effect on the loan modification strategies that US lending institutions currently follow.

Here's a quote from the article:

"International Monetary Fund chief Christine Lagarde called on the U.S. government to reduce the mortgage debt owed by homeowners as a way help to revive the nation’s economy and stimulate growth in the wider industrialized world.

Speaking Thursday at the Brookings Institution, Lagarde urged that this relief be extended to loans held by mortgage giants Fannie Mae and Freddie Mac. The issue of whether to reduce mortgages held by Fannie Mae and Freddie Mac, representing more than half of U.S. home loans, has become contentious in Washington in recent months.

Ahead of the IMF’s spring meetings next week, agency analysts have been warning that household debt — in particular, mortgages that are in default or that exceed the value of the borrower’s home — is dragging down growth in developed countries at a time when the global economy is struggling to revive."

Photo: renjith krishnan

Podcast: What is a Short Sale?

Robert Dickson — Thu, 12 Apr 2012 20:33:46 -0800

Photo credit: ddpavumba

How to secure attorney's fees on a contractor's bond

Bryan D. Johnson — Thu, 12 Apr 2012 16:22:17 -0800

Whenever you find yourself dealing with a contractor, you will also find yourself dealing with that contractor’s bond almost without exception. Under Washington statute Title 18, general contractors and subcontractors alike are required to file evidence of a surety bond with the Department of Labor and Industries of Washington State. RCW 18.27.040 (general contractor bond must be in the amount of $12,000 and a subcontractor or “specialty” contractor bond must be in the amount of $6,000). The statute’s purpose is “to afford protection to the public including all persons, firms and corporations furnishing labor, materials, or equipment to a contractor from unreliable, fraudulent, financially irresponsible, or incompetent contractors.” RCW 18.27.140. It is a misdemeanor for a contractor to work without first being registered pursuant to the statute. RCW 18.27.020(2)(a).

The mandatory contractor’s bond requirement is important to potential litigants because any person who may file a claim against the contractor is also permitted to specifically name the surety bond as a party to the suit. Of course, naming the bond involves particular pleading requirements in order to comply with the statute. When done right this statute can secure you an increasingly rare award as part of the recovery: YOUR ATTORNEYS’ FEES!! See RCW 18.27.040(6). Such statutes are quite in the opposite of the general rule that each party in a civil action is responsible for paying its own attorneys’ fees and costs. In re Impoundment of Chevrolet Truck, 148 Wn.2d 145, 160, 60 P.3d 53 (2002) (commonly referred to as the “American rule”). In an effort to put some teeth in the statute, Washington legislators expressly included that attorneys’ fees were a possible award to bona fide litigants.

However, the statute has been subject to some scrutiny in recent caselaw from several levels of the State’s judiciary in recent months. The contractor’s registration statute was thoroughly examined in Cosmopolitan Engin. Group, Inc. v. Ondeo Degremont, Inc., 159 Wn.2d 292, 149 P.3d 666 (2006). In that case, one litigant claimed that the contractor’s bond statute allowed the prevailing party to recover its attorneys’ fees from both the contractor and the surety bond itself. Id. at 298. In undertaking its statutory interpretation of RCW 18.27.040, the Court deduced that the placement of the attorneys’ fee provision, when considering the statutory scheme in its entirety, refers “only to action for recovery against the contractor’s bond. Id. at 299. Hence, the Court limited recovery of attorneys’ fees under this section to the amount of the contractor’s bond due to its precise placement in the contractor’s bond statute. In apparent dicta, the Court further rationalized its decision based on the legislatures’ failure to expressly identify that attorneys’ fees were available in suit “against the contractor or against the contractor’s bond” independently of one another. Id. at 301. The court’s reasoning makes sense due to the fact that a litigant could not sue a contractor’s bond under the statute without first initiating a claim against the contractor for breach of contract. The Cosmopolitan decision and its authority for limiting an attorney fee award specifically to the amount of the bond was reaffirmed as recently as last December in an appellate decision from Division Three. See Brotherton v. Kralman Steel Structures, Inc., 2011 WL 6822261, *5-9 (Div. 3 2011). Thus, the prospect of pursuing fees from the contractor party seems to be quite settled without much room to argue the alternative.

Cosmopolitan also explained that RCW 18.27.040 is a one-way statute. Id. at 302, n.3. What is meant by “one-way” is that a subcontractor can sue up the chain and recover against the upper tier contractor’s bond, but not vice versa. Id. Such a dynamic allows suppliers to recover against bond rather than resorting to placing a lien on the consumer’s property for a dispute that does not necessarily involve the homeowner at all. Id. (citing Int’l Comm. Collectors, Inc. v. Carver, 99 Wn.2d 302, 308, 661 P.2d 976 (1983); Stewart Carpet Serv., Inc. v. Contractors Bonding & Ins. Co., 105 Wn. 2d 353, 365-66, 715 P.2d 115 (1986)).

Photo Credit: scottchan

Taxes and loan modifications: what's the impact?

Brandon M. Waldron — Tue, 13 Dec 2011 11:17:32 -0800

How does a loan modification effect a person's taxable income?

1. The general rule is that when debt for which a person is liable is canceled or forgiven, the canceled amount must be included in a party’s reported income.

Generally, if a debt for which a person is personally liable is forgiven, the forgiven amount must be included in that person’s income. The IRS defines debt to include any indebtedness for which one is personally liable, or subject to which one holds property. If a person is not personally liable for a debt, the cancellation income will need to be included if a person retains the collateral and either: (1) the lender offers a discount for the early payment of the debt, or (2) the lender agrees to a loan modification that results in the reduction of the principal balance of the debt.

2. There is an exception to the general rule for debt incurred to finance the purchase, construction or substantial improvement of a person’s residence.

A person can exclude canceled debt from income if it is qualified principal residence indebtedness. Qualified principal residence indebtedness is any mortgage a person took out to buy, build or substantially improve his or her main home. The mortgage must be secured by the main home. A person’s main home is the home where he or she ordinarily lives most of the time. A person may only have one main home at any one time. The IRS has not provided guidance on what it considers a “main home,” but does say it will look at the facts and circumstances in every case. A person is limited to excluding $2 million of qualified principal residence indebtedness. If a person excludes canceled qualified principal residence indebtedness and continues to own the home after the cancellation, the person must reduce the basis of the home by the amount of the canceled indebtedness, but may only reduce the basis to zero. The legal authority for this memo comes from IRS Publication 4681, except where other authorities are cited.

Photo: cooldesign

What can a landlord do with personal property left over from a tenant?

Brandon M. Waldron — Mon, 14 Nov 2011 16:13:36 -0800

Under RCW 59.18.310(b) the landlord may immediately enter and take possession of any property of the tenant found on the premises and may store it in a reasonably secure place if the tenant defaults in rent and reasonably indicates the intention not to resume tenancy. The landlord must make reasonable efforts to provide the tenant with notice containing the name and address of the landlord and the place where the property is stored, and informing the tenant that a sale or disposition of the property shall take place pursuant to RCW 59.18.310, and the date of the sale or disposal, and the tenants right to have the property returned prior to the sale under RCW 59.18.230. The landlord may satisfy the notice obligations by mailing it first class, postage pre-paid to the tenant’s last known address and to any other address provided by the tenant.

The landlord must return the property to the tenant after the tenant has paid the actual or reasonable drayage and storage costs, whichever is less, if the tenant makes a written request for the return of the property before the landlord has sold or disposed of the property.

After 45 days from the date of the notice the landlord may sell or dispose of the personal property and apply any income from the sale against moneys due, including actual or reasonable costs of drayage and storage, whichever is less.

If the property is less valued at less than $250 the landlord may sell or dispose of the property after 7 days from the date of the notice of sale or disposal is mailed or personally delivered, provided the landlord makes reasonable efforts to notify the tenant.

If a writ of restitution has been executed by the sheriff, RCW 59.18.312 applies and the landlord’s rights differ slightly. The landlord “shall” enter and take possession of tenant property found on the premises, and may store the property in a reasonably secure place, with the option of selling or disposing of the property. The landlord must store the property if the tenant serves him with a written request to do so within 3 days after service of the writ. Without such service the landlord may elect to store the property. If the tenant objects to the storage the property must be deposited upon the nearest public property and may not be stored by the landlord.

Before the landlord is entitled to a sale of the property valued at over $250 he must give notice to the tenant via first-class mail or personal delivery. For property valued at $250 or less the landlord may sell or dispose of the property after seven days from the date the notice is mailed or delivered to the tenant. Any income generated by the sale may be applied against any moneys due the landlord for drayage and storage of the property.

Photo Credit: Bill Longshaw, at Freedigitalphotos.net

What is a deed-in-lieu?

Brandon M. Waldron — Fri, 11 Nov 2011 14:29:17 -0800

Debtors who have defaulted on their obligations under a real estate security agreement typically face foreclosure, either judicial or non-judicial. A deed in lieu of foreclosure is another type of procedure to deal with a distressed property. A deed in lieu is a transfer to a lender of title to real estate that fully or partially satisfies the debt that the property secures. These transactions may have significant benefits for both parties. First, a deed in lieu saves much of the time and cost of a foreclosure and gives the lender more direct and immediate control of the property. A deed in lieu may also be beneficial to the debtor if he or she just wants to convey the property and essentially be done with it.

While deeds in lieu have these advantages there are some potential pitfalls to this procedure. First, if there are junior mortgages or liens on the property the deed in lieu does not serve to extinguish those liens. In the event that there are junior liens, chances are good that unless the senior and junior lienholders negotiate an agreement the junior liens will be advanced against the title in the senior lienholder’s hands. Second, a deed in lieu may be considered to be an equitable mortgage and not a complete conveyance. Only one Washington case has held found a deed in lieu to be an equitable mortgage, but depending on the nature of the transaction it remains a possibility. Finally, a deed in lieu may be set aside on the grounds of fraud or overreaching. Washington courts have failed to do so thus far but other jurisdictions have done so, particularly when the value of the land exceeds the indebtedness or when the lender is desperate or suffers a disability.

With these advantages and possible pitfalls in mind, but before a deed in lieu is actually conveyed, the mortgagor and the lender should enter into an agreement that covers these details.

Photo Credit: Renjith Krishnan/FreeDigitalPhotos.net

Foreclosing on an agricultural property - what you need to know

Brandon M. Waldron — Fri, 11 Nov 2011 14:18:04 -0800

When a party forecloses on residential or commercial property they may have options on how to do so. However, when the property being foreclosed on is being used for agricultural purposes Washington law only permits judicial foreclosure. RCW 61.24.030(1). Real property is considered “used for agricultural purposes” if it is used in a manner that produces crops, livestock or aquatic goods. RCW 61.24.030(2). Despite these fairly strict protections for agricultural land, lenders may have alternatives if they draft a deed of trust.

In a recent but unpublished decision a state appellate court upheld a party waiving the right to a judicial foreclosure based solely on the fact that the land was being used for agricultural purposes. Schroeder v. Haberthur, unpublished 2011 WL 4599661 (Oct. 6, 2011). Additionally the parties to real estate transaction may stipulate in a deed of trust that the land is not and will not be used for agricultural purposes. The grantee of the deed of trust may require the grantor to warrant in the deed of trust that the land will not be used for agricultural purposes without the consent of the grantee. Id. Absent such agreements however, deeds of trust and power of sale foreclosure are unavailable for agricultural land and foreclosure must occur judicially.

Photo Credit: federico stevanin

Foreclosure Fairness Act: Links and Resources

Robert Dickson — Fri, 23 Sep 2011 11:46:40 -0800

Here are some useful links to assist those wanting more information about the Foreclosure Fairness Act:

Department of Commerce, FFA timeline

Washington State Department of Commerce, foreclosure page

Washington State Housing Finance Commission (good resource for home ownership issues)

US Department of Housing and Urban Development (housing counselor search)

Dickson Law Group (law firm short sale and loan modification expertise...and the sponsor of this great blog, of course.)

Department of Financial Institutions - Home ownership page

Foreclosure Fairness Act Guide

Robert Dickson — Fri, 23 Sep 2011 10:13:46 -0800

Recently, I've had the privilege to address some professional groups regarding the latest developments on foreclosure law in Washington State. A lot has changed in the world of foreclosures due to the July 22nd passing of the Foreclosure Fairness Act (FFA). The Department of Commerce has published a helpful timeline which traces the path of the new foreclosure procedures and homeowner mediation rights created by the law. Using that as a starting point, I've created my own table which outlines the step-by-step process of a foreclosure under the FFA:

Step	Action	Notes
1	Notification of Rights/Initial Meeting Option: 60-days prior to Notice of Default: lender must notify homeowner by letter and telephone of right for in-person meeting (must notify mediation right—must be requested before Notice of Trustee Sale). Meeting: if borrower elects to have an in-person meeting, the parties will discuss (i) the borrower’s financial ability to modify or restructure the loan, and (ii) Explore options to avoid foreclosure, such as a short sale or deed in lieu of foreclosure.	Must be both a phone call and letter. This is interesting because it requires bank to make two forms of contact. If the borrower does timely respond, the lender must wait to send the Notice of Default until ninety (90) days after the FFA Notice was sent.
2	Mediation Request: Request Mediation through attorney or housing counselor through the Department of Commerce.	This is an option up until the Notice of Trustee Sale is recorded. Once the Notice of Trustee Sale is recorded, the option expires. Mediators are largely from non-profit dispute resolution centers (“DCRs”)
3	Mediation Notification: Within 10 days after getting mediation request, Dept. of Comm. Notifies all parties and selects a mediator. The Deed of Trust Trustee will also be notified.	Dept. of Comm. will also notify the parties of the required documentation.
4	Mediation Schedule: Scheduled no less than 45 days after mediator selected. This can be agreed-upon by the parties, but 45 days is the default. Mediator sets time at least 15 days prior to mediation.	Homeowner may be represented by an attorney of other advocate, including a housing counselor. At the mediation, the lender must have someone of authority to modify or negotiate an agreement (can be by phone)
5	Documents: Homeowner – (1) Financial statements, (2) current/future income, (3) debts/obligations, (4) 2 years tax returns. Lender – (1) Loan balance, (2) list of fees/charges, (3) payment history, (4) net present value and loan inputs (5), (6) copy of note/deed of trust	Not providing documents in a timely manner is often the trigger-point for negotiating in bad faith. It is vital the individuals provide those documents on time and as completely as possible. If they are NOT complete, the party must have an explanation.
6	Mediation: During the mediation, mediator will encourage the parties to look at all options, and provide a written certification within 7 days after mediation that the parties acted in good faith. Considerations: 1. Borrower’s economic circumstances 2. Net present value of modified loan vs. anticipated recovery at foreclosure 3. Loan mod and net present value calculations are established by the FDIC or other programs 4. Other loss mitigation guidelines (fed. insured loans) Mediation fee maximum of $400; and can last up to three (3) hours. It is also split equally between the parties (borrower/lender).	Parties are obligated to act in good faith. Mediator will adjudge whether parties acted in good faith towards a resolution. *Bad Faith: (i) failure to participate in the mediation, (ii) failure to timely share required information, (iii) failure to pay the party’s share of the mediation fee, (iv) failure to send an authorized representative to the mediation, and (v) a request by the lender that the borrower waive future claims. Good Faith*: (i) Communicate openly and understand/listen to borrower (ii) Flexibility (iii) Commitment to keep agreements
7	Conclusion: Parties come to an arrangement (loan mod, short sale, etc.). The mediator will establish terms of the resolution and provide the FFA certification on the Dept. of Commerce’s form.	Homeowner may enjoin the sale of the property if the bank did not mediate in good faith.

Picture credit: jscreationzs,

California courts upholding MERS foreclosure methods, inspite of note/deed of trust issues

Robert Dickson — Mon, 19 Sep 2011 08:14:32 -0800

Housing Wire's website had an interesting little article about some decisions that are coming out of California regarding MERS and its ability to foreclose on properties without having property assignment of the deeds of trust.

I speak with a lot of individuals who approach foreclosure from the standpoint that if the foreclosing entity does not have both the note and deed of trust assigned to them, they therefore cannot foreclose. MERS (Mortgage Electronic Registration System) presented a problem because it dealt with many of these types of arrangements. We are now starting to see that the court is not buying that argument, and that at a minimum, MERS may act as an agent on behalf of banks to execute their rights under deeds of trust.

I'm sure there will be more battles forthcoming regarding this issue, but California seems to be laying out at least an initial trend.

The most telling quote from the short article is the following:

"MERS' legal standing as mortgagee, or agent of the note holder, gives MERS the authority under California law to take action on behalf of the owner of the note," said Janis Smith, MERS vice president of corporate communications.

(Granted, it's from MERS, so take that into consideration.)

Who can be compensated for negotiating short sales?

Robert Dickson — Wed, 24 Aug 2011 16:33:20 -0800

Late last year, the Department of Financial Institutions published a helpful guide regarding short sales and loan modifications. In particular, the DFI intended to provide clarification in plain terms to the RCW 31.04 (Consumer Loan Act or "CLA") and RCW 19.146 (Mortgage Broker Practices Act or "MBPA").

Because short sales deal with two specific areas of expertise, in particular real estate transactions and negotiation with creditors (for forgiveness of debt), the regulations outlined in the MBPA and CLA are relevant. This is because the DFI monitors and regulates loan modification and short sale negotiation services. Simultaneously, the Department of Licensing regulates the real estate brokerage services that pertain to the actual short sale transactions.

Put simply: because short sales involve both a (1) transaction of real estate and (2) a negotiation with creditors regarding loans (and usually, deficiencies), the DFI and the Dept. of Licensing have an interest. So, the broader question is "who can get compensated for short sale negotiation services?" The short answer is "it depends."

The DFI's December 2010 bulletin on the subject states the following:

Entities engaging in short sale negotiations for compensation must obtain a license under the CLA or the MBPA, and the individuals who conduct loan modification activities on behalf of such entities must obtain a mortgage loan originator license under one of those two acts. Short sales conducted as part of the negotiation of a real estate transaction by a licensed real estate broker do not require licensure under the CLA or the MBPA, unless the real estate broker is paid separately for the short sale negotiation, in addition to receiving a commission for the real estate transaction. However, this does not extend to unlicensed assistants.

The MBPA and the CLA licensing exclusions for real estate brokers do not apply to real estate brokers who act solely as third-party short sale negotiators or loan modification services providers. Negotiating short sales for a fee is not an activity that requires a real estate license; therefore, a loan originator license from DFI is required if that is the only service the real estate licensee provides.

Real Estate licensees must be providing real estate brokerage services for the transaction in order to negotiate a short sale on behalf of either party to the transaction. Real Estate licensees may not charge any additional fee above the normal and customary commission to provide short sale negotiation services.

http://www.dfi.wa.gov/cs/pdf/short-sale-guidance.pdf

In plain English, the following may receive compensation for negotiating a short sale:

1. Real estate broker -- A broker can get paid for a short sale, BUT only if the fee is not in addition to the commission. The broker cannot be paid anything above the commission, regardless of how much effort was expended in facilitating the short sale.

2. Loan originator licensee OR Attorney -- This individual can get paid for the actual short sale negotiations, even if he is a third-party to the transaction, however, he cannot be paid commission from a sale in the same fashion as a real estate broker. If short sale negotiations is the only service provided, a loan originator's license is required.

3. Real estate broker with a loan originator OR law license -- If someone has both their real estate broker's license AND a loan originator or law license, he is eligible for both the commission and a separate fee for negotiating the short sale. Think of this as the best of both worlds.

The above regulations can be summed up the following way -- if you are hoping to get a fee for a short sale, you have to be a lawyer or a loan originator. You cannot only be a real estate broker and expect to receive payment beyond the commission you would otherwise be entitled to in a normal real estate transaction. For those of you reading this article who are homeowners or prospective short sale buyers, do not be fooled. If someone is asking for payment beyond the commission for short sale negotiation services, make sure they have the proper licensing.

For more information on this subject, please visit http://www.dfi.wa.gov or http://www.dol.wa.gov, or review RCWs 31.04 and 19.146. If you wish to search someone's licensing status, you can also find that information at the DFI and DOL websites. For attorney's, you can search for that individual's status at pro.wsba.org.

Tax implications for short sales and foreclosures

Robert Dickson — Wed, 04 May 2011 08:02:21 -0800

I am often asked by clients what the tax implications are should they choose to pursue a short sale or their property is the subject of a foreclosure. Technically, and they’re right. Debt obligations that are forgiven are usually counted as income to that individual. For example, if you obtain a home loan for $300,000 but sell the property via the short sale process for $200,000, that $100,000 difference that you are no longer required to pay would be taxable as income under normal circumstances. In 2007, the federal government passed the “Mortgage Forgiveness and Debt Relief Act.”

The IRS describes it as follows:

“If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.”

Cancellation of Debt is not always taxable, however. According to the IRS there are some exceptions:

--Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.

--Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

--Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.

--Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.

--Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences

See Publication 4681.

The Mortgage Forgiveness Debt Relief Act of 2007 allows homeowners who have benefited from debt cancellation—usually from a short sale, deed-in-lieu of foreclosure, or foreclosure—to exclude the “income realized” from the forgiveness. Exclusion of income resulting from a cancellation of debt means that the amount forgiven or waived from the creditor (usually a bank) is not considered income and is excluded from determining your federal income tax basis.

Going back to the example in the first paragraph, the $100,000 debt that was cancelled would be excluded from that individual’s income of that year. In a normal year (without the Act in place), if that person made $50,000, but was forgiven $100,000 through a short sale, he or she would be required to include that sum as income for that year, making his income $150,000 and subject to the corresponding tax rate. Because that $100,000 is excluded from his income by virtue of the Mortgage Forgiveness Debt Relief Act, his tax rate is preserved at the $50,000 level.

The above information can be found at the following link: http://www.irs.gov/individuals/article/0,,id=179414,00.html

I would also refer you to an in-depth review of the law at http://www.homesalessandiego.com/blog/mortgage-debt-forgiveness-law/.

*Lawyers at Dickson Steinacker, PS are NOT tax specialists. Federal income taxes are a serious matter and should be dealt with through counsel from a qualified accountant or tax attorney. Because much of our business deals with real estate issues such as short sales, foreclosures and loan modifications, we feel it is important to be cognizant of the broader implications of debt cancellation (hence, the above blog entry). If you are in need of more detailed/specific guidance for your tax matters, we recommend contacting a tax attorney or qualified accountant. Do not rely solely on this entry for your tax strategy.

Foreclosures: Washington State is a "non-recourse" state (sort of)

Robert Dickson — Mon, 02 May 2011 15:54:06 -0800

One of the common statements made to me when new clients call to discuss their foreclosure, is the following: “I don’t care if there is a deficiency when the bank forecloses on my property because Washington is a non-recourse state,” implying that he or she is free of having to pay a deficiency should the house sell for less than what is owed. The response I always give to that proclamation is “it depends.”

Banks may choose between two options when deciding how to foreclose on property. The most common (by far) is the non-judicial foreclosure. This type of foreclosure is straightforward: the bank uses its leverage under their Deed of Trust on the home (think of the Deed of Trust as a very powerful lien...which it is) to compel a sale by the trustee that services the Deed. This sale is called a trustee sale. Once the property is sold to an innocent third party purchaser at the trustee sale, the bank is barred from collecting any deficiency on the collateral. For example, if your home is worth $300,000 and the bank forecloses on the property through the non-judicial foreclosure method and nets only $200,000 in the sale, the balance of the $100,000 cannot be collected from the borrower. Thus, while the credit standing of the borrower may have taken a big hit, he or she no longer has to worry about satisfying that debt obligation.

As you might expect, foreclosures are not always that rosy: there lurks another option that banks may use at their discretion: the judicial foreclosure.

A judicial foreclosure is executed through the courts and is easily identified because it is an actual lawsuit against the homeowner. How is this possible, you ask? Why doesn’t the bank just go after the Deed of Trust and sell the property? A judicial foreclosure goes one step further than regular non-judicial foreclosure: it not only allows the bank to compel a sale of the property, but it provides an avenue by which the bank can obtain a deficiency judgment for whatever balance was lacking in the sale. Going back to our example above, if that individuals home is sold for the $100,000 deficiency, the bank can move the court to have that sum converted into a judgment against you. Judgments are nasty because they become automatic liens on all real and personal property. With a judgment a bank can garnish wages and pursue other avenues against the borrower’s assets.

It is still a mystery to me why some people are pursued via judicial foreclosure rather than non-judicial foreclosure. However, if I had to guess why they choose that option, I would have to say it’s because they suspect (right or wrong) that the borrower has money to cover the judgment.

Thoughts on forensic audits and what they can (or can't do) for you

Robert Dickson — Wed, 09 Mar 2011 09:23:00 -0800

Lately I've been fielding calls from individuals that have obtained what are called "forensic audits" of their mortgage documents. Usually, this is in conjunction with a difficult scenario that they have found themselves in, where they are behind on their payments and are looking for any ammunition to defend against a foreclosure. In theory, a forensic audit is straightforward: a company will comb through your mortgage documents for "violations" or other signs of misconduct by the lending institutions. This is usually not too difficult a task given that many of the regulations that control these transactions are extremely technical. Violating them is easy, in other words.

The bigger issue is what to do with the violations when they are discovered. There has not been a tremendous amount of precedent in this regard (at least in Washington, there hasn't been), but I would advise against the notion that faulty mortgage documents equal borrower keeping home. That is not likely to happen for a few reasons -- first, the bank did loan money out to the individual, which technically, would need to return the funds if the transaction were undone and reset; second, the parties relied and acted upon the loan. A court could reset the entire mortgage and order that, if possible, the parties be put back to their proverbial starting points. This obviously present a problem in and of itself, given that the home may be underwater and the borrower may not have the funds to refund the bank for the money issued in the original loan.

So, in short, for those of you leaning on a forensic audit as the resolution to your mortgage predicament, I'd make sure to have a backup plan.