Gotta Love Foreclosure Law, Lawmakers!

I’ve been away from this space a while now, though not engaged in idle pursuits.  Since July 3rd, I’ve written two articles for publication of 12,400 and 16,400 words.  That’s a lot of characters, I guess, but what’s with the 400 extra words?  You can read such things on http://ssrn.com, if you’re so inclined.  I’ve pined for the informality of the blogosphere.  And I’ve been treated by our State Legislature to free material of interest to real estate lenders and owners, in the form of new Arizona statutes that went into effect at the end of July.  Both deal with residential foreclosure scenarios, and the lenders’ nemeses, the defaulting borrower and the occupants of the house.  These statutes are intended to protect the unwary and unfortunate.  Let’s see how they work.

The first statute is the new A.R.S. Section 33-1331.  This reads that the owner of a house in foreclosure can’t rent to a new tenant after owner gets a notice of sale, without first letting the tenant know that the property is possibly being foreclosed upon.  Failure to do that subjects the owner to damages and “injunctive relief”.  No explanation is afforded on what sort of an injunction would be involved – would it be an order to “not get your house foreclosed on?”  I suppose the real relief needed would be to get your security deposit back and to be fully released from any payment obligations under the lease.  The notice to the tenant has to disclose who you can contact (lender or attorney for lender) to get more information on the pending foreclosure.  Bulletin: You can’t get anyone from a lender or its legal eagles to discuss a pending residential foreclosure with anyone other than the defaulting borrower, no matter how serious a matter the renter thinks it is.  If you call the law office, the first question you’ll get is “what is that foreclosure file number?”- and good luck guessing the correct answer.  The legislature forgot to compel these foreclosing persons to address the foreclosure with the renter.

What the legislature remembered to do is to make the statute inapplicable to apartment projects of 4 or more units – why do those renters get less protection under the statute?  The other small omission in the new law is dealing with the circumstance where the rental agreement postdates when “the foreclosure action was initiated.”  Problem is, the recording of the notice of trustee’s sale, or NOTS, which initiates the foreclosure, isn’t simultaneous with the lender’s giving notice of that recording to the borrower; in fact, the foreclosure statutes provide the lender a few days to give its borrower notice of the recording.  Bummer for the borrower here; technically, it could lose the renter’s lease even if it tries to comply with the statute, if the timing of conditions is bad.

The other new statute is A.R.S. Section 33-807.01.  It obligates the lender, in certain circumstances, to “attempt to contact the borrower [in writing] to explore options to avoid foreclosure at least 30 days before” it records the NOTS.  Sounds nice, for sure – now, what is meant by these phrases: “attempt to contact” and “explore options?”  My problem with the first phrase is this:  What if the borrower has already moved out of the house (hey, he rented the place a week before the NOTS went out to the house), and left no forwarding address but a mail box number – or his mother in law’s house?  How heroic do the lender’s measures have to be to give that required written notice?  Hire a P.I. to find the borrower?  What if the borrower moved to Dallas?  Second, what does “explore options” mean, and how sincere does that options-exploration effort have to be, if the borrower can be found?  Must the “options” be contained in the written notice?  Is it enough to say “why don’t you consider paying the mortgage installments?”  Doesn’t this statute just invite discussion of (a) deeds in lieu of foreclosure and (b) short sales – and are those better alternatives to just walking away, if you’re the defaulting borrower?  Is the hit the borrower’s credit score will take from a deed in lieu or short sale necessarily less severe than if the foreclosure just runs its course?  You sure about that?

It’s noteworthy that the statute only applies to non-judicial foreclosures, since the triggering of the required notice is a function of recording a notice of trustee’s sale.  Hey, judicial foreclosures make for more work for lawyers – I’m not complaining, you know!  Note also that the statute doesn’t apply to casual lenders who made five or fewer loans in one year secured by real estate, or to lenders complying with “the United States department of treasury home affordable modification program.”  Whatever that means.  Okay, what it’s supposed to say is that the HAMP participants have to give notices under federal law, and federal law preempts state law, so the HAMP participating lenders (both of them) don’t have to comply with any conflicting state notice requirements.   Unfortunately, that isn’t what the provision says.  Regardless, the statute doesn’t require lenders to “provide a modification,” just discuss it.  Ultimately, this statute seems to be largely window-dressing allowing some lawmakers to campaign on the theme that they looked out for the little guys – borrowers and renters of houses.  Good show; thanks for the added landfill material.  

--MNW

Just good advice

I spent the first part of this week at a seminar in San Diego where the focus was on the psychology of building and maintaining wealth. We heard from several pretty interesting speakers, including Keith Cunningham, Michael Smorch, Joe Williams, and Scott Harris, in addition to some market specific people like Joel Comm and Frank Kern.

Frank Kern was pretty interesting. If you don't know his story, he was pretty poor, working in direct sales, and got so he really did not like working with people. He sent for many "how to make money" products, and ultimately started an internet business selling people books about how to teach your parrot to talk. No, really!

That web site made him some $3000 or more per month. Subsequent web sites made him many millions. So I was pretty interested in what he had to say. It was something I have heard many times, from other speakers, in other ways. Keith Cunningham says it like this: Get in line, stay in line. If you get bored with being in line, or if the line isn't moving how you want, then you will probably get out of line, and you will have to return to the end of the line. The people at the front of the line started at the back.

Keith also says "Ordinary things, done consistently, produce extraordinary results." Frank Kern, (paraphrased), says that you have to quit sitting on the couch watching TV. You need to want to succeed more than you want to sleep. Most people would rather sleep.

Ray Kroc, founder of McDonalds, said that the key to success is to find a good idea and take immediate and massive action.

Most of us have great ideas, but never do anything with them. We do not need to have a great idea, though. For every business, there are people who have succeeded, and people who have failed at the same business. If you want to take a date to the very best restaurant, you probably will not be taking them to the most profitable restaurant; McDonald's does not have the best hamburgers in the world, but they have one of the best business models and management teams.

Entrepreneurs (and I include myself here) are usually in love with their idea, their product -- and this is a problem, because they should be more concerned with how the business works, not the product. Another gem from Keith Cunningham: Anything worth doing, is worth doing BADLY. He says this because most people who want to do something really well, will never actually do anything, because there is always some way to do it a little better.

A company I worked for at one time created a new type of product, and we pre-sold thousands of them. When we finally shipped them, they were, well, version 1 and had a 100% return rate. But version 2 was much better. We crushed the market and kept market share, because we had excellent customer service and took care of every customer and got them a version 2 unit as fast as we could. We did something badly and got our foot in the door. It was something worth doing.

Sometimes we just need to hear what we already know.

--PLH