CMBA Stands Strong in in this issue - · PDF filein this issue... CHAIRMAN’S CORNER ......
Transcript of CMBA Stands Strong in in this issue - · PDF filein this issue... CHAIRMAN’S CORNER ......
CALIFORNIA MORTGAGE FINANCE NEWS 1
CALIFORNIA MORTGAGE BANKERS ASSOCIATION
THE VOICE OF REAL ESTATE FINANCE
S U M M E R2 0 1 3
in this issue...CHAIRMAN’S CORNER page 1
EXECUTIVE DIRECTOR’S LETTER page 5
LEGISLATIVE REPORT page 7
RESIDENTIAL NEWS page 8
COMMERCIAL NEWS page 9
ROUNDTABLE ARTICLE page 10
LEGAL—RESIDENTIAL page 11
LEGAL—COMMERCIAL page 16
CALENDAR page 17
WELCOME NEW MEMBERS page 19
PHOTO GALLERIES page 40
ROAD TRIP page 44
Contact: California Mortgage
Bankers Association
(916) 446-7100 Phone
(916) 446-7105 Fax
[email protected] Email
555 Capitol Mall, Suite 440
Sacramento, CA 95814
California Mortgage Finance News is published four
times per year: Spring, Summer, Fall and Winter.
California Mortgage Finance News is published by
the California Mortgage Bankers Association.
editor: Dustin Hobbs
publisher/layout: Wolfe Design Marketing
It’s truly an honor
to be the new
Chairman of the
California Mortgage
Bankers Association.
My first order of
business is to thank
the outgoing Chairman, Buck Hawkins
of Castle & Cooke, for his leadership
over the last year. The organization is in
fantastic shape and Buck’s guidance as
Chairman has been critical in maintaining
the momentum the association has
continued to generate over the last several
years. I also want to thank the incoming
members of the Executive Board: Kevin
Randles, President, Commercial; Chris
George, President, Residential; and Matt
Ostrander, Secretary. Your collective
dedication to CMBA is well-documented
and I look forward to working with each
of you. Last but not least, my thanks go
out to all the other new, returning, and
termed out members of the board. We all
act in a volunteer capacity but we are an
enthusiastic bunch that I know we will
accomplish a lot in the next year.
It’s an exciting time in our industry.
On the commercial side we read about
increasing rents and reduced vacancies.
There are discussions in certain markets,
like my home base of San Francisco,
about whether we may have already
reached a peak. On the residential
side, it’s increased median prices and
permits and lack of inventory. Yet as I
begin writing this article, the breaking
headline is that Detroit just became
the largest city in history to declare
bankruptcy. Our unemployment rate
continues to be stubbornly high and
our economy still seems to be stuck in
the mud. To top it all off, legislation has
recently been introduced in Congress to
privatize Fannie Mae and Freddie Mac at
a time when both have started to enjoy
strong profits. So what gives?
It’s tough to get your arms around
what’s going on in today’s economy. We
extrapolate both good and bad news and
as a result we don’t have a strong grasp
on the direction we’re headed. I don’t
have all the answers but it does appear
CHAIRMAN’S CORNER
CMBA Stands Strong in the Face of ChallengesBY DENNIS SIDBURY, NORTHMARQ CAPITAL, CMBA CHAIRMAN
CONTINUED ON PAGE 4
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CALIFORNIA MORTGAGE FINANCE NEWS 3
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SUMMER 20134
CHAIRMAN’S CORNER CONTINUED FROM PAGE 1
this recovery will be slow going. Patience,
persistence and perseverance will be key
to sustaining and nurturing economic
growth, because we will continue to
face headwinds from all directions. Case
in point: just when we’re projected to
potentially start seeing some real growth,
we’ll be faced with the midterm elections!
Despite the volatility in the
macroeconomic markets, what I am
certain about is the direction of this
organization. We have thrived in the
face of arguably the worst mortgage
crisis in history in our role as the only
organization to represent California’s
residential and commercial real estate
finance industry. Our legislative and
regulatory representation is solid.
We have continued to build off last
year’s success on the residential side in
narrowing the scope of the Homeowner’s
Bill of Rights. While industry isn’t exactly
thrilled with the final result, the initial
versions of the bill were much, much
worse. Additionally, CMBA managed to
stave off proposed legislation that would
be devastating to the commercial side of
the business. Our legislative advocates do
a tremendous job of educating lawmakers
on the potential unintended consequences
of things such as reckless use of eminent
domain as well as implementation of a
split tax roll for real estate taxes.
We continue to strengthen the
educational piece of our mission
with the implementation of new
opportunities like our CFPB webinar,
held earlier this year. We’ve also worked
on refining and improving our core
conferences and events. And we still
manage to have some fun with our
regional networking receptions!
None of this would be possible
without the fantastic staff we have in
Sacramento. Susan Milazzo leads the
charge as the Executive Director but she
enjoys strong support from Stacey (Ward)
Mansell—Meeting Services Director,
Dustin Hobbs—Communications
Director, and Carol Danaher—Office
Manager. We are appreciative of all you
do to make this association the strongest
of its kind in the country. Challenges we’ll
face in the next year (CFPB regulations
going into effect in January, eminent
domain threatening local housing
markets, and continued efforts to pass
commercial split-roll bills) will be met
with an industry and an association ready
to continue efforts to strengthen the real
estate finance industry and our economy.
•
Epstein Turner WeissA ProfEssionAl CorPorATion
Partners
David B. EpsteinJonathan M. TurnerMichael R. Weiss
633 West Fifth street suite 3330
Los angeles, Ca 90071
Phone: 213-861-7487Fax: 213-861-7488
California Law Firm serving the Mortgage Lending Community
CMBA member David Epstein is the partner heading the firm’s practice in:
• Lien priority and title defects• Insurance and title insurance coverage• Mortgage repurchase and warehouse lending• Loan fraud• real estate litigation• Business and commercial law
www.epsteinturnerWeiss.com
ETW Color Ad.indd 1 3/2/12 3:17:59 PM
CALIFORNIA MORTGAGE FINANCE NEWS 5
In many areas
across the country,
the nation is
seeing healthy
signs of recovery
in the real estate
market. Home
sales and prices are up despite slight
upticks in interest rates and we can
finally breathe a little easier. One of
the key features in the future of the
mortgage industry will be the fate of
the GSEs. With the vast majority of
single-family mortgages backed by
the GSEs, it is apparent the system
cannot continue indefinitely under
this model. When Fannie and Freddie
were taken into conservatorship on
September 6, 2008, the move was
endorsed by many leaders including
Ben Bernanke who indicated that it
was necessary to ensure the financial
soundness of the companies. The
action of conservatorship was to be
temporary however there has been
lengthy debate on how to unwind, if
you will, the government take over
and take the GSEs to their next form.
Considering the record profits Fannie
and Freddie have reported we can
assume the financial soundness of
the companies has been reinstituted
and a solid plan to move ahead must
be implemented.
Recently, David Stevens, President
and CEO of the Mortgage Bankers
Association, spoke at our Western
Secondary Market Conference and
shared with the attendees the national
organization’s vision for GSE reform.
You can find the presentation titled
“Key Steps to GSE Reform” on the
MBA’s website but here are the
highlights from the concept:
• Ensuring liquidity through a
common, fungible GSE security.
This would reduce costs to
taxpayers , enhance liquidity,
and encourage a competitive
secondary market.
• Up-front risk sharing. Offer risk
sharing to lenders at point of sale
and removing risk at the back
end for loans already on the GSEs
balance sheet.
• Secondary market for smaller
lenders. Ensuring equal access
to options for lenders of all sizes
allowing for greater competition
in the market.
• Expanding credit access.
Transparent and consistent
underwriting will also allow for a
competitive market.
• Common securitization platform.
Creating a standardized platform
with the input of industry that
creates potential taxpayer savings
that addresses the needs of
today’s market.
As of this writing, President
Obama is calling for private capital
to take a lead role in the nation’s
mortgage market with government
continuing to provide a backstop
against catastrophic risk. He endorses
the Senate bill Senator Bob Corker
(R-TN) and Senator Mark Warner
(D-VA) authored that would replace
Fannie and Freddie with a privately
capitalized system.
Stevens’ appeal to the conference
crowd was to educate them on the
MBA’s work on this issue and to ask
that they be an active proponent of
this plan. Whether you are a large
or small lender; in all states or just a
few; this plan will benefit the future
of your company and your ability
to provide access to affordable
credit for qualified borrowers. The
easiest way to participate in the
industry’s national efforts is to join
the Mortgage Action Alliance (MAA).
It is a free, non-partisan service that
provides you up to date information
on legislative activities and easy to
follow instructions on how you can
be a part of the voice of real estate
finance in our nations’ Capitol. Visit
the MBA’s website for information on
how to join.
MAA is essential for state efforts
as well. The California MBA has
EXECUTIVE DIRECTOR’S LETTER
MBA Chief Stevens Lays Out MBA Plan for GSE ReformBY SUSAN MILAZZO, CMBA EXECUTIVE DIRECTOR
CONTINUED ON PAGE 17
Seattle Boston Newark Portland New York Las Vegas Scottsdale Orange County San Diego County Los Angeles County
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(877) 686-9145
experienced litigators connecting the mortgage banking industry with exceptional results
CALIFORNIA MORTGAGE FINANCE NEWS 7
The Legislature
returned from its
summer recess
in early August
and is now in the
final weeks of the
legislative year.
September 13 is the final scheduled
day for the Legislature to meet before
it adjourns for the year. There are
over 900 bills pending so there will
be a great deal of activity in the final
weeks and days of session. Assembly
Democrats have lost the two-thirds
majority gained in the 2012 elections
that is necessary to raise taxes or
approve constitutional amendments
because of vacancies and special
elections. They are not expected to
regain their super-majority level in the
Assembly again until after the session
adjourns this Fall. Senate Democrats,
however, continue to maintain their
two-thirds majority. The loss of a
two-thirds majority of Democrats in
the Assembly will make it less likely
for tax increases to pass out of the
Legislature this year.
Entering into the final weeks of
the 2013 legislative session, it remains
a relatively quiet year with respect
to onerous residential mortgage
and foreclosure related legislative
issues, especially as compared to
the last several years. The respite is
likely due to several factors, not the
least of which the heavy volume
of recently enacted mortgage and
foreclosure state legislation, including
the Home Owner Bill of Rights.
Other factors, however, include the
continuing dramatic improvement in
the California housing market and the
reduction statewide in foreclosures.
California home values have increased
substantially in the first half of 2013.
Many localities have experienced
double-digit increases in home values,
greatly helping those homeowners
underwater on their homes.
Foreclosures in California are also now
at pre-crisis levels. A recent statewide
report for the first half of this year
listed foreclosures filings at nearly
87,000, which is a 48% drop from the
previous six-months and a 60% drop
from a year ago.
Legislative volume for commercial
lending related issues continues
to be high as compared to historic
levels. Leading the list of those
commercial lending related issues
of concern are efforts to increase
taxes on commercial properties
and/or on commercial property
transactions. These efforts include a
proposed constitutional amendment
reducing the state constitution’s
requirement that a two-thirds vote
of the electorate be obtained for
local governments to impose special
taxes to a new lower threshold of
55 percent. CMBA is taking active
positions on those bills negatively
impacting commercial property
transactions and/or increasing the
costs associated with the sale or
transfer of commercial properties.
The following is a list of several
bills that have the potential to impact
the residential housing marketplace,
commercial properties, and
commercial property financing:
SB 391—Recording Fees &
Affordable Housing
Passed out of the Senate & in the
Assembly.
SB 391 would enact the
California Homes and Jobs Act of
2013. It is intended to fill part of the
funding gap created with respect to
affordable housing and community
redevelopment projects when
state redevelopment agencies were
eliminated last legislative session.
There is widespread support in the
legislature for creating some form
of replacement for redevelopment
agencies that can be used for new
affordable housing projects and to
promote homeownership. The bill
would make legislative findings and
declarations relating to the need for
LEGISLATIVE REPORT
Industry Getting Respite from Mortgage LegislationBY PAT ZENZOLA, KP PUBLIC AFFAIRS, CMBA LEGISLATIVE COUNSEL
CONTINUED ON PAGE 18
Seattle Boston Newark Portland New York Las Vegas Scottsdale Orange County San Diego County Los Angeles County
As counselors in a complex legal environment, we search for the best solutions regardless of difficulty. We understand the goals of our clients and strive to exceed their expectations. We provide our clients with cost-effective legal strategies in litigation. With our accomplished and capable team of attorneys, in 10 offices across the country, we are committed to providing our clients with exceptional service and results.
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(877) 686-9145
experienced litigators connecting the mortgage banking industry with exceptional results
SUMMER 20138
There is a host
of attributes and
characteristics
independent
mortgage bankers
share that make us
good at our work.
Arguably, one of the most important
is our entrepreneurial spirit, our ability
to see possibility where others might
not. However, it could also be argued
that entrepreneurialism without
focus may actually be a detriment in
achieving success.
Think about Apple. As a company,
Apple has the brains and brawn to
create anything they could dream up,
from mobile phones to rocket ships.
But they do not make rocket ships.
They perfect the handful of products
they know they make best. All their
energy, their thought, their time
and money go into creating the best
consumer electronic devices on the
market. That’s focus. And it has led
them to global success.
Confucius say, man who chase
two chickens catch neither of
them. Essentially, this is the law of
diminishing returns; if you have one
goal, the probability of achieving it is
relatively high, but with each added
goal, the probability of achieving
any of them lowers. And this exists
as much in the mortgage industry
as anywhere else. For a company to
dilute where they spend their energy
by pursing any and all opportunities
that arise, it decreases the likelihood
of succeeding at any of the ventures.
By narrowing focus, however, a
company has the ability to hone in on
and perfect its offering.
Given the increasing complexities
of the mortgage industry, it is
imperative that businesses focus their
core competencies, business channels
and assets (cash, infrastructure,
acumen, marketing, etc.) thoughtfully.
Instead of sharing the areas in
which my company has decided to
focus, I would like share with you the
process by which we go through to
make those strategic decisions on what
we will give our attention and focus.
The biggest notion for us to
remember is that just because we
can do something, does not mean
we should do something. Tempering
the desire to chase bright and shiny
objects takes restraint. What makes
having restraint easier is to have a
very thorough and thoughtful process
by which our company makes large
decisions like adding an additional
area of focus. No big decisions are
made without this process.
First, I ensure to engage all senior
and middle management from the
beginning, because their buy-in on
the decision is critical. Together, we
engage in a full-on assessment of
what resources would need to be used
to add an additional area of focus,
RESIDENTIAL NEWS
The Discipline of FocusBY DAVE ZITTING, FOUNDER AND CEO/PRESIDENT OF PRIMARY RESIDENTIAL MORTGAGE, INC. AND MEMBER OF THE CMBA BOARD OF DIRECTORS
from where those resources would
be diverted and how that will impact
the productivity and probably of
success from the areas from where our
attentions have been taken.
Think about it this way: new
opportunities do not necessarily come
with increased capacity to put toward
them. Meaning, any resources put
into new ventures is taken from the
already-vetted, core competencies in
which we are already engaged. We
have to ask ourselves: is the potential
gain worth the potential risk?
Because of the correlation
between focus and success, companies
are not just more likely to thrive, but
they can also be viewed as less risky
by their communities, their customers,
their financial counterparties and
regulators. We all know that trust is an
immeasurable commodity.
Now, these models and areas
of focus may not be right for all
mortgage lenders, but they have
served my company well. It has not
been easy and has certainly been
a lesson learned over time as we
have matured. Focus can be hard to
achieve and sometimes even harder to
maintain. This is why I refer to focus
as a discipline, something that requires
vigilant practice to master.
•
CALIFORNIA MORTGAGE FINANCE NEWS 9
COMMERCIAL NEWS
Life Company Risk-Based Capital for Commercial MortgagesBY DAVID M. ROSENTHAL, MAI, FRICS, PRESIDENT & CEO, CURTIS-ROSENTHAL, INC.
On July 17, 2013,
the Financial
Condition
Committee of the
National Association
of Insurance
Commissioners
(NAIC) adopted new rules for
monitoring Risk-Based Capital (RBC) for
commercial mortgages in good standing
held by life insurance companies.
These new rules replaced the Mortgage
Experience Adjustment Factor (MEAF)
which had been the prior standard.
Critics of the MEAF standard
had argued that under certain market
conditions, use of the MEAF could
magnify even minor differences among
insurance companies. Unlike the prior
MEAF structure, the new rules will
reflect the migration of loans to different
risk cohorts over time, resulting in
a natural increase to RBC as market
conditions deteriorate and a reduction
of RBC when market conditions are
favorable. This will provide companies
with a greater ability to plan appropriate
capital use and allocation.
The goals of developing the new
monitoring standards were as follows:
1. Improve the objectivity of the
regulatory tool used to assess RBC
2. Objectively evaluate the risk level of
individual commercial mortgages
3. Assess risk using loan-level
information
4. Appropriately distinguish between
differing levels of credit risk
CONTINUED ON PAGE 22
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SUMMER 201310
ROUNDTABLE ARTICLE
Commercial/Multi-Family OutlookEDITOR’S NOTE—This is the latest in a series dealing with the issues facing the real estate finance industry. Each issue we touch on a
different topic, asking CMBA’s experts for their thoughts on the issue at hand. In this issue of CMFN, we ask four experts about the future
of the commercial/multi-family real estate market. All four will be leading panel discussions at CMBA’s 16th Annual Western States CREF
Conference, September25–27, 2013 in Las Vegas. Registration information is available at www.CMBA.com. Kevin Randles is Senior
Vice President with CBRE, and currently serves as CMBA’s Commercial President. Randles is also chairman of this year’s Western States
CREF Conference. Guy Johnson is CEO/Chairman of Johnson Capital, and is moderating the closing session at this year’s conference.
Eric Von Berg, CMB is a principal with Newmark Realty Capital, Inc. Eric will lead the conference’s structured finance panel. Finally,
Dennis Williams is Senior Vice President-Managing Director with NorthMarq Capital and will moderate the CMBS-focused session.
Q: What is the one trend that folks
should keep an eye on during the
12 months?
Randles: A trend to monitor
during 2013 and 2014 is a movement
toward increased complexity in the
commercial real estate market. With
minimal new construction in the
works, property values are improving,
but the usual fundamentals are not at
the root of increasing values.
In many submarkets, property
values have recovered almost to
peak levels, but net rental rates have
declined, and the increased property
values are being driven solely by
attractive debt paired with historic
low interest rates. Even though
rents are recovering, expenses have
continued to inflate faster than rent
growth, thereby creating “new
normal” levels for net rents.
With limited new construction
and few high quality properties for
sale, property values have risen on
the acceptance of lower cap rate
yields. For example, during 2012, we
experienced 31,000,000 square feet of
shopping center space construction,
but as compared to 2004 there was
over 216,000,000 square feet. Hence,
values will simply rise due to a
scarcity of product, but not necessarily
with rising fundamentals (increased
net rents, increased consumer sales,
increased new jobs, etc.)
Thus, the secondary trend to
watch becomes seeing if lenders
choose to follow the bent toward rising
property values rather than relying
on cash flows, or net rental rates. We
believe that the majority of lenders will
follow the upward swing as the largest
cohort of lenders are banks, which
typically lend on market values rather
than relying on durable cash flows.
And, since banks represent about half
of the new mortgage loan originations
annually, it seems logical that increased
lending will follow, which will drive up
property values, whether or not rental
fundamentals improve.
These times do indeed create a
time when investors need increased
transparency and market intelligence
to overcome a low-yield environment
and justification of investment value
when there’s not much room for error.
Johnson: The biggest issue that I
see right now is regarding the impact
that rising interest rates could have
on cap rates and the resulting values.
Rates have risen over 100 basis points
in a very short period of time. Cap
rates are nearly always directly related
to the cost of capital. At the low cap
rates (particularily on multifamily)
that we have had recently, a 1%
movement makes a significant change
in values. A change from 5% to 6%
results in a 17% decrease in value,
while a change from 9% to 10%
results in an 11% decrease in value.
The market will need to keep a close
eye on the properties (especially Class
A apartments) that have been recently
selling at very low cap rates as it could
change very quickly.
Von Berg: It is hard to pick a
single trend. Let me give you two:
• Rising Interest Rates and the effect
on cap rates: This is a big concern
especially in the apartment sector.
Bubbles are hard to spot when
you are in them, but if the 10-
year T-bill rises to anywhere near
the historic average of 6.5% then
today’s apartment valuations with
4% cap rates will look like another
CONTINUED ON PAGE 25
Legal
CALIFORNIA MORTGAGE FINANCE NEWS 11
HAMP EnforcementAre Courts Trending Toward a Private Right of Action?
BY JOEL L. INCORVAIA & G. EHRICH LENZ, INCORVAIA & ASSOCIATES
Residential
Several recent cases may signal
an increased willingness by the
courts to allow borrowers to bring
claims against lenders who fail to
provide them with a permanent loan
modification under HAMP. Lenders
would be wise to review their
procedures, form agreements and form
correspondence to borrowers seeking
HAMP modifications to minimize
their exposure to liability from
disgruntled borrowers.
The HAMP Modification Process.
The Home Affordable Mortgage
Program (“HAMP”) is part of the
Emergency Economic Stabilization
Act enacted by Congress in 2008
in response to rapidly deteriorating
market conditions. The Secretary
of the Treasury negotiated Servicer
Participation Agreements (“SPA”)
with lenders which required them
to identify homeowners who were
at risk of foreclosure, and modify
the loans of eligible homeowners. A
qualified borrower under HAMP must
first comply with a Trial Period Plan
(“TPP”) in which the borrower makes
trial payments to the lender in the
amount of the proposed modification.
If the borrower complies with all
the terms of the TPP agreement, and
the borrower’s representations to
the lender remain true, the lender is
required under the SPA and HAMP
guidelines to offer the borrower a
permanent modification.
HAMP has spawned hundreds
of lawsuits by borrowers who were
denied permanent modifications
by their lenders. Early on, most
courts rejected borrower claims
because HAMP did not provide for
a private right of action to enforce
its loan modification requirements.
Courts found that the borrowers
lacked standing to bring any type
of HAMP claim against their lender,
including judicial enforcement of
TPP agreements.1
The Beginning of a Trend Toward
Private Enforcement of HAMP?
Several recent reported decisions
cases have reversed this trend and
found that TPP agreements created
enforceable contract rights by
borrowers against lenders under state
law. In Wigod v. Wells Fargo Bank,
N.A. (2012 7th Cir.) 673 F.3d 547, the
Seventh Circuit Court of Appeals
held that the borrower could bring
claims against a lender arising out of
its refusal to modify the borrower’s
loan. In Wigod, the lender provided
the borrower with a TPP agreement
that stated the borrower would be
provided with a loan modification
if the borrower complied with all
terms of the TPP. The lender allegedly
refused to provider the borrower with
a permanent modification because it
could not modify the loan to conform
to its investor guidelines.
The Wigod court found that
the language of the TPP created a
valid offer and that the borrower’s
agreement to open a new escrow
account in furtherance of the TPP,
among other things, was sufficient
consideration for the TPP to be
enforceable. The Wigod court also
held that because any permanent
modification provided to the borrower
was required to be consistent with
HAMP guidelines, the terms of the
TPP were sufficiently definite to form
an enforceable contract.
The lender argued that the
borrower’s claims were really HAMP
claims “in disguise,” and had to be
dismissed because there was no
private right of action to enforce
HAMP. The Wigod court rejected
this argument, concluding that the
borrower’s state law claims were
not subject to dismissal just because
they referred to or incorporated some
element of HAMP.
In Sutcliffe v. Wells Fargo Bank,
N.A. (2012 N.D. Cal.) 283 F.R.D. 533,
CONTINUED ON PAGE 30
Legal
SUMMER 201312
Residential
Closing Protection LettersOverlooked Indemnity Coverage For Common Foreclosure Defense Claims
BY JOANNE N. DAVIES, ESQ. & RANDALL L. MANVITZ, ESQ., BUCHALTER NEMER
Mortgage lenders are all too familiar
with borrowers’ assertions that they
did not receive two properly dated
copies of the Truth-In-Lending Act
(“TILA”) mandated Notice of Right to
Cancel form (“NORTC”) at closing.
Under TILA, the failure to provide
two copies of the NORTC form
allows a borrower to rescind the loan
years after the closing. As a result,
this claim has become a standard
borrower assertion in defense of a
foreclosure action.
While frequently overlooked by
mortgage lenders and their counsel,
these types of claims are often covered
by a little understood title insurance
indemnity agreement commonly
known as a closing protection letter
or insured closing letter. The closing
protection letter provides the lender
with the ability to recover its losses
from the issuer of the closing protection
letter which is generally a title insurance
underwriter such as Fidelity National
Title and its many brands of companies
(Chicago Title, Commonwealth Land,
Alamo Title, Ticor Title), First American
Title Insurance, Stewart Title, and
Old Republic National Title. This
article provides an overview of closing
protection letters and their coverage of
NORTC claims.
1. Closing Protection Letters
Title underwriters issue closing
CONTINUED ON PAGE 31
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Legal
CALIFORNIA MORTGAGE FINANCE NEWS 13
Residential
Marketing Agreements For Mortgage BankersBY STANLEY M. GORDON, GORDON & ASSOCIATES
Marketing
Agreements have
been used for
years by mortgage
bankers to solidify
relationships with
sources of business,
primarily real estate brokerage
companies. These agreements were
often an initial step towards the
parties forming an Affiliated Business
Arrangement (AFBA), as permitted by
the Real Estate Settlement Procedures
Act (RESPA), 12 USC 2601 et. seq.
However, marketing agreements are
now becoming the preferred business
sourcing relationship because of our
present era of increased regulatory
scrutiny and a sense of risk resulting
from recent class action challenges to
AFBAs. This new legal environment
requires greater diligence in the
structuring and management of new
and existing marketing agreements.
Prior to 2010, there was limited
guidance and oversight of marketing
agreements by HUD, which
administered RESPA until recently.
There had been many instances of
significant overpayments by mortgage
bankers to real estate brokerage
companies for broad and vaguely
defined advertising and promotional
services. The amounts being paid
being were often the result of bidding
rather than being based on a defensible
determination of the reasonable value
of the services or facilities, as required
by RESPA. Moreover, many of the
agreed upon services were often not
performed; and, those services which
were being performed would usually
not be documented.
The legal landscape for marketing
agreements began to change after
several class actions were filed in
2007 claiming that home warranty
marketing agreements with real
estate brokerage companies were
referral fee arrangements. In 2008,
HUD was requested by the home
warranty industry and the National
Association of Realtors (NAR) to
issue definitive RESPA guidelines for
the use of marketing agreements by
home warranty companies. HUD
was reluctant to take an active role
in this area, recognizing that what it
said, although focused on the home
warranty industry, would have
implications for the use of marketing
agreements by the mortgage industry.
Nevertheless, in June of 2010
HUD issued its Interpretive Rule
on Payments by Home Warranty
Companies to Real Estate Brokers
and Agents. This was followed by
HUD’s Response to Public Comments
in November of 2010, which, in part,
responded to concerns by NAR on
the advertising aspect of marketing
agreements between real estate
brokers and mortgage bankers.
The main guidelines under
HUD’s Interpretive Rule are that the
settlement service provider, such
as a mortgage banker, can pay the
real estate broker for marketing and
promotional services actually rendered
so long as: (1) the payment is for the
reasonable value of the services; (2)
the services are compensable and
meaningful; and, (3) the services are not
duplicative. Furthermore, there must
be a legitimate effort to determine the
fair market value of the services, which
is distinct from the economic benefit
that these services might have for the
particular recipient. Related to this is
the necessity to document the extent
to which these services or facilities are
actually provided. Significantly, HUD
stated that questions concerning the
validity of services under marketing
agreements, whether they were
actually performed and properly valued
would be determined by it on a case
by case basis. This position by HUD
significantly impairs the use of class
action litigation to challenge marketing
agreements under RESPA.
Although the Interpretive Rule
focused on compensable services for the
marketing of home warranties by real
estate brokerage companies, there were
significant comments relevant to the
use of these agreements by mortgage
CONTINUED ON PAGE 34
Legal
SUMMER 201314
Residential
Eminent Domain Dominates Mortgage DiscussionBY MICHAEL PFEIFER, CMBA GENERAL COUNSEL, SMITH DOLLAR, PC, & DUSTIN HOBBS, CMBA COMMUNICATIONS DIRECTOR
EDITOR’S NOTE—Just prior to press time, several further developments occurred. A host of bondholders and servicers filed suit to
block the City of Richmond from seizing mortgages through eminent domain. Additionally, Fannie Mae, Freddie Mac and the Federal
Housing Finance Agency (FHFA) both released statements that highlighted their concerns with the program and make clear their intention to
take action if necessary.
After months of debate, and countless
meetings in locations from Suffolk
County, NY to San Bernardino, CA,
San Francisco Bay Area investors at
Mortgage Resolution Partners (MRP)
have finally found a partner willing to
experiment with their controversial
eminent domain program. On July
30th, the city of Richmond (population
106,500) announced its intention
to move forward with MRP’s plan,
starting with sending letters to banks
and mortgage note holders making
offers to buy the loans at steep
discounts—reports are that some
offers are as low as 25 cents on the
CONTINUED ON PAGE 34
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11234 El Camino Real, Suite 100 · San Diego, CA 92130 · (800) 865-6266 or (858) 794-2155 · www.residentialmortgage.net
Legal
CALIFORNIA MORTGAGE FINANCE NEWS 15
Residential
The Demise of Short Sale Deficiencies on Residential Loans in CaliforniaA Post-Mortem Examination
GENE WU, PARTNER, & DANIEL ARMSTRONG, ASSOCIATE, ANGLIN FLEWELLING RASMUSSEN CAMPBELL & TRYTTEN, LLP
For decades, lenders have grappled
with, and sometimes stumbled over,
the anti-deficiency rules found in the
California Code of Civil Procedure
(“CCP”) sections 580a through 580e.
CCP §580d precludes a lender from
collecting a deficiency after a non-
judicial foreclosure.1 CCP §580b
prohibits a deficiency judgment on
a “purchase money loan.” Effective
January 1, 2013 that prohibition also
covers the refinance of a purchase
money loan unless the lender has
advanced new principal in the
refinance transaction.
There are many familiar
exceptions to these sweeping rules
including the “fraud exception” found
in the California Financial Code. For
example, under certain circumstances
§7460 allows a lender to recover
actual damages for fraud and limited
exemplary damages. Less familiar,
however, are recent expansions of the
anti-deficiency statutes for short sales.
Even when a borrower and a lender
agree to sell an underwater property
to a third party, and the parties agree
the lender may recover the deficiency,
CCP §580e now supersedes the
parties’ agreement.
In September of 2010, the
California Legislature added §580e
which, at the time, prohibited any
deficiency judgment for a short sale
involving a first deed of trust.2 Less
than a year later, in July of 2011, the
Legislature expanded this prohibition
to include short sales of dwellings
regarding any deed of trust.3 This
present version of §580e makes clear
that its provisions cannot be waived
by any agreement, including the
short sale agreement. Unlike other
legislation purportedly designed to
ameliorate the effects of the real estate
market collapse (such as the Perata
Mortgage Relief Act and portions of
the California Homeowner Bill of
Rights) §580e does not expire on its
own terms and will, unless repealed,
become a permanent fixture of
California short sale law.
With the recent increase of short
sales in California—from a few
thousand in 2008 to approximately
110,000 in 20104—many were
completed before the effective dates
of the amendments to §580e. Some of
these short sale agreements provided
that borrowers would remain
obligated to repay any deficiency
following the sale. These clauses
conflicted with the later enacted
§580e. The question remained
whether these contractual obligations
were enforceable if the short sales
were completed before the effective
dates of the amendments.
On July 17, 2013, the Court of
Appeal of California answered this
question in Bank of America, N.A. v.
Roberts, 2013 Cal. App. LEXIS 563 (Cal.
App. 5th Dist.) The Roberts court held
the amendment to §580e did not apply
retroactively.5 Bank of America was
thus entitled to enforce the deficiency
clause in its short sale agreement
because the sale was conducted before
the effective date of the applicable
amendment to §580e.
Six days later, on July 23, 2013,
the Court of Appeal filed its opinion
in Coker v. JP Morgan Chase Bank,
N.A., 2013 Cal. App. LEXIS 573 (Cal.
App. 4th Dist.) Although this court
was likewise presented with the
question of whether §580e applied
CONTINUED ON PAGE 38
Legal
SUMMER 201316
Commercial
Implications for Lenders of California’s New EnergyUse Disclosure Requirements for Nonresidential Buildings
BY GREGG J. LOUBIER & EMILY L. MURRAY, ALLEN MATKINS LECK GAMBLE MALLORY & NATSIS, LLP
California’s recently enacted Energy
Use Disclosure Requirements will
be going into effect on September 1,
2013. Among other things, these
regulations require that nonresidential
building owners disclose the last 12
months of a building’s energy usage
to a prospective lender financing the
entire building, no later than submittal
of the loan application. While there
are no affirmative obligations upon
the lender to do anything with the
data that they receive, a building
owner’s failure to comply could
have transaction consequences.
Lenders should therefore be aware
of the requirements and document
compliance in the loan file and
transaction documents.
The Regulatory Requirements
California Public Resources Code
Section 25402.10 requires owners
of certain types nonresidential
buildings located in California
to disclose energy usage of such
buildings prior to the sale, lease, or
financing thereof. In December 2012,
after years of delays, the California
Energy Commission (“CEC”) adopted
regulations implementing Section
25402.10, and requiring compliance
on the following schedule:
On and after September 1, 2013,
for nonresidential buildings with a
total gross floor area of more than
50,000 square feet;
On and after January 1, 2014, for
nonresidential buildings with a total
gross floor area of more than 10,000
square feet; and
On and after July 1, 2014, for
nonresidential buildings with a total
gross floor area of more than 5,000
square feet.
Nonresidential buildings less than
5,000 square feet are not required
to comply with the regulations. The
regulations, sample disclosure forms,
and a FAQ are available on the CEC’s
website: http://www.energy.ca.gov/
ab1103/
Owners of nonresidential
buildings subject to the regulations
are required to register their buildings
with “Portfolio Manager,” the U.S.
Environmental Protection Agency’s
ENERGY STAR program online
tool. Within Portfolio Manager, the
building owner must request that
applicable utilities release the last 12
months of energy use data for the
building. The building owner then
downloads from Portfolio Manager
the following four documents: (1)
Disclosure Summary Sheet, (2)
Statement of Energy Performance,
(3) Data Checklist; and (4) Facility
Summary (the “Disclosure Data”).
The building owner must provide
the Disclosure Data to a prospective
lender financing the entire building,
no later than submittal of the loan
application. Thus, after September 1,
2013, the Disclosure Data should be
included with the loan application for
financing of a nonresidential building
with a total gross floor area of more
than 50,000 square feet.
Implications for Lenders
There are no affirmative
obligations for lenders under the
Energy Use Disclosure Requirements.
Lenders are not required to compel
owner compliance or to do anything
with the Disclosure Data that they
receive, nor are lenders required
to account for a building’s energy
consumption in financing that
building. Nevertheless, the hope of
the California legislature is that, over
time, lenders will begin to utilize
the Disclosure Data in financing
CONTINUED ON PAGE 39
CALIFORNIA MORTGAGE FINANCE NEWS 17
used the MAA system to create a
call to action on critical pieces of
legislation that have been proposed
in our state. When crucial votes are
before a particular committee or
in either house of the Legislature,
that system can be utilized to
engage the mortgage industry and
allow you to personally contact
your representative to voice your
position. Don’t work in a vacuum.
Find out how you can be a part of
the associations that support you and
your company.
The industry must stand together
to continue to educate policymakers
on what measures will strengthen
the housing recovery and what
EXECUTIVE DIRECTOR’S LETTER CONTINUED FROM PAGE 5
measures will dampen the progress
already made. If you are not already
a member of MAA, I encourage you
to join today and add to the strength
of the one voice for the real estate
finance industry.
•
September 25–27, 201316th Annual Western States CREF ConferenceEncore at the Wynn Las VegasRegister now at www.CMBA.com!
Platinum Sponsors
Titanium Sponsors
Lanyard sponsor
Premier Golf SponsorProperty Sciences
Gold SponsorsAllen Matkins; Arbor Commercial Mortgage; Ares Management; Bancorp; The Bank of Hemet; Barclays; Bolour Associates; BofI Federal Bank; CBRE; Centerline Capital Group; Celtic Bank; CIBC World Markets; CorAmerica Capital, LLC; Dougherty Funding, LLC; Goldman Sachs; Greystone; Guggenheim Commercial Real Estate Finance; Jefferies LoanCore, LCC; John Hancock Real Estate Finance Group; LoanDocSolutions; Morgan Stanley; Morrison Street Capital; Nikols Mortgage Funds; Prime Finance; RAIT Financial Trust; ReadyCap Commercial, LLC; Redwood Trust; Starwood Mortgage Capital; UBS Securities; Union Bank; Wells Fargo Commercial Mortgage; William Blair
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Silver SponsorsAEI Consultants; AES Due Diligence, Inc.; Barry Slatt Mortgage; Curtis Rosenthal, Inc.; EBI Consulting; Grandbridge Real Estate Capital; GRS Group, HFF; HomeStreet Capital; Johnson Capital; Jones Lang LaSalle; Koss REsource; LEM Capital; Marcus & Millichap Capital Corp.; Newmark Realty Capital, Inc.; Northwest Commercial Mortgage; Pacific Southwest Realty Services; Partner Engineering & Science, Inc.; SCS Engineers; Severson & Werson
Publication SponsorsCommercial Mortgage Alert; Commercial Mortgage Insight; GlobeSt.com; Mortgage Banking Magazine; National Mortgage News; Scotsman Guide
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Sponsors
December 2, 2013CMBA Annual Legal Issues ConferenceWestin South Coast Plaza, Costa Mesa, CARegister now at www.CMBA.com!
Lunch Sponsor Break Sponsor
Wright, Finlay & Zak, LLP
Gold SponsorInterthinx; Primary Residential Mortgage, Inc.; Smith Dollar PC; The StoneHill Group, Inc.
CALENDAR
2013 CalendarMark your calendars now!
Registration and Sponsor-Exhibitor
information at www.CMBA.com
SUMMER 201318
establishing permanent, ongoing
sources of funding dedicated to
affordable housing development. It
would impose a fee of $75 to be paid
at the time of the recording of real
estate instrument, paper, or notice
required or permitted by law to be
recorded, with the exception of those
documents recorded in connection to
the a sale of a real property.
AB 561—Documentary Transfer Tax
In Assembly Revenue and Taxation
Committee.
AB 561 was made a two-year bill
at the author’s request, so it will not be
eligible to be heard in committee until
2014. AB 561 represents a potential
massive tax increase on commercial,
industrial, and residential rental
property by adopting the “change
in control” definition from property
tax law for purposes of determining
whether a documentary transfer tax
is due. The bill is a majority vote bill,
so it does not include the two-thirds
floor vote requirement that is typically
required in a bill that increases
taxes. Under this bill, a legal entity
(corporation, partnership, LLC, etc.)
that owns real estate and undergoes
a change in control for property tax
purposes would be required to pay
a transfer tax. Current law prohibits
the imposition of a documentary
transfer tax on the making or delivery
of a conveyance to make effective an
order of the Securities and Exchange
Commission, if specified requirements
are met. Recent amendments would
also eliminate that prohibition. CMBA
has an oppose position on the measure.
LEGISLATIVE REPORT CONTINUED FROM PAGE 7
NMLS (Nationwide Mortgage Licensing System) ID: 407870. Information is intended for Mortgage Professionals only and not intended for consumer use as defined by Section 1026.2 of Regulation Z, which implements the Truth-In-Lending Act. The guidelines are subject to change without notice and are subject to Kinecta Federal Credit Union underwriting guidelines and all applicable federal and state rules and regulations. Kinecta Federal Credit Union is an FHA Approved Lending Institution, and is not acting on behalf of or at the direction of HUD/FHA or the federal government. Availability of some loan products may vary in some states/counties and loan limits may apply. Certain loans available to $3.5MM on exception. 12928-07/13
Purchases. With competitive products and superlative service, Kinecta is ready to help you turn your client’s dream into a reality. To learn more about our products and services, contact a Kinecta account executive today at www.LoanKinection.com.
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Kinecta Federal Credit Union – a 70-year tradition providing a range of loan products and a dedication to service
800.854.4600 l www.LoanKinection.com l coast to coast
Purchases. We’ve Got What You Need.
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CONTINUED ON PAGE 19
CALIFORNIA MORTGAGE FINANCE NEWS 19
NEW MEMBERS
Welcome New MembersWelcome to the CMBA family!
ADVANTAGE CREDIT, INC.T.J. [email protected], CAIndustry Product Provider
ALT & ASSOCIATESVeronica [email protected], CAIndustry Professional Advisor
THE BANCORP BANKJohn [email protected] York, NYCommercial/Multi-Family Mortgage Banker
DIRECT VALUATION SOLUTIONS, INC.T. Michael [email protected], CAIndustry Technology Provider
CALYX SOFTWAREJack [email protected], TXIndustry Technology Provider
CITYLIGHTS FINANCIAL EXPRESS, INC.John M. Miller, [email protected] Hills, CAResidential Mortgage Banker
ELM SERVICES, LLCAugust [email protected] Park, KSIndustry Professional Advisor
FIRST RATE FINANCIAL GROUPGlenda [email protected] Village, CAResidential Mortgage Banker
FIRST TECH FEDERAL CREDIT UNIONPeter [email protected] View, CACommercial/Multi-Family Mortgage Banker
SUBURBAN MORTGAGE, INC.Thomas F. [email protected], AZResidential Mortgage Banker
TFLG, A LAW CORPORATIONEric [email protected], CAIndustry Professional Advisor
VANDALAY APPRAISALSChristopher [email protected], CAIndustry Product Provider
SB 426—Deficiency Judgments
Chaptered by Secretary of State.
Chapter 65, Statutes of 2013.
SB 426 prohibits a deficiency from
being owed or collected following
foreclosure. Language was amended
late in the legislative process that
addresses CMBA concerns regarding
prior versions of the bill. Specifically,
there were concerns regarding the
potential for the bill to negatively
impact situations where a deficiency
could be satisfied by a guarantor or from
assets other than the property securing
the mortgage loan, either in residential
or commercial transactions. Those
concerns were addressed with language
making it clear that the new statute does
not affect the liability that a guarantor,
pledgor or other surety might otherwise
have with respect to the deficiency,
or that might otherwise be satisfied in
whole or in part from other collateral
pledged to secure the obligation that is
the subject of the deficiency
AB 1091—Department of
Corporations Administrative Citation
Passed out of the Assembly &on the
Senate Floor.
AB 1091 originally would have
provided the Commissioner of the
Department of Corporations with
the ability to issue an administrative
citation for violations of the California
Finance Lenders Law or the Residential
Mortgage Lending Act for up to $2,500
per violation. This authority would be
similar to citation authority granted to
the Commissioner of the Department
of Real Estate in the prior legislative
session, but the bill did not include
many of the protections and qualifiers
to protect against excessive or punitive
fines. CMBA worked with the author’s
office and committee staff to align the
citation authority in AB 1091 with
the provisions previously enacted
with respect to the Department of
Real Estate. The bill passed out of the
Assembly Committee on Banking and
Finance with those positive changes.
As amended, the commissioner
shall give due consideration to the
appropriateness of the amount of the
fine with respect to factors such as the
gravity of the violation, the good faith
of the person cited, and the history of
previous violations. A citation issued
and a fine assessed while constituting
discipline for a violation of the law,
shall be in lieu of other administrative
LEGISLATIVE REPORT CONTINUED FROM PAGE 18
CONTINUED ON PAGE 21
SUMMER 201320
CALIFORNIA MORTGAGE FINANCE NEWS 21
discipline by the commissioner for
the offense or offenses cited, and the
citation against and payment of any
fine by a licensee shall not be reported
as disciplinary action taken by the
commissioner. The amendments
also allow for a citation to include a
violation or violations, whereas the
previous bill language focused on
a citation and up to $2,500 penalty
being assessed for each violation.
AB 905—Energy Efficiency
Environmental Fee Covenants
In Assembly Judiciary Committee.
AB 905 has been made a two-year
bill, which means it will not be eligible
to be heard in committee until 2014.
With respect to commercial properties
the AB 905 would allow for an
environmental covenant fee of up to
2% of the cash value of the property
for the purpose of financing energy
and water efficiency improvements.
CMBA opposes the measure because
the covenant fee will make commercial
parties less attractive to perspective
purchasers (due to the additional new
cost factor) and because the covenant
fee would survive not only a normal
sale but also foreclosure.
Recent amendments would
require the instrument containing
the covenant to include specified
information including a legal
description of the property subject
to the covenant, the dates for
commencement and expiration of
the covenant, and a specified notice
relating to the terms and conditions
of the covenant. The amendments
also would require the covenant to
be subject to and subordinate to the
lien and encumbrance of any first
mortgage or any other mortgage
against the property subject to certain
requirements. The covenant fee would
continue, however, to survive sale or
foreclosure as amended.
SB 30—Mortgage Debt Forgiveness
Passed out of the Senate & in
Assembly Revenue and Taxation
Committee.
The state Personal Income
Tax Law conforms state tax law
to specified provisions of Federal
law relating to the exclusion of
the discharge of qualified principal
residence indebtedness for tax
purposes. SB 30 would extend the
operation of the state exclusion of
the discharge of qualified principal
residence indebtedness to debt that
is discharged before January 1, 2014,
thereby extending the application of
the exclusion for an additional year.
SB 30 was recently amended so that
it would become operative only if SB
391, which would enact a new fee for
the recordation of certain real property
transaction documents, is enacted
and takes effect. CMBA has a support
position on SB 30.
AB 59—Local Parcel Taxes
impacting Commercial Properties
In Assembly Revenue and Taxation
Committee.
AB 59 has been made a two-year
bill, which means it will not be eligible
to be heard in committee until 2014.
This bill would allow school districts
to enact a real property parcel tax
at a higher level for businesses as
compared to residential property. The
bill also states that the amendments
are declaratory of existing law, and
shall apply to transactions predating
its enactment. CMBA has an oppose
position on this measure.
SCA 7—Real Property Tax
In Rules Committee.
The California Constitution
prohibits the ad valorem tax rate on
real property from exceeding 1% of the
full cash value of the property, subject
to certain exceptions. This measure
would create an additional exception
to the 1% limit for a rate imposed by a
city, county, city and county, or special
district to service bonded indebtedness
incurred to fund public library facilities,
that is approved by 55% of the voters
of the city, county, city and county, or
special district.
Article XIIIA of the state
constitution requires approval of
two-thirds of the electorate for local
governments to impose special taxes,
and intends that a tax imposed on a
group of taxpayers, rather than the
general public, requires a greater level
of voter sanction. This safeguard,
along with limits on property taxes,
was instituted by Proposition 13 more
than 30 years ago to protect taxpayers
at large from being overruled by a
minority group, and has since been
reinforced by the voters with passage
of Proposition 218 in 1996, and more
recently, Proposition 26 in 2010. SCA
7 would undo the safeguards put into
place by Proposition 1. CMBA has an
opposed position on SCA 7.
•
LEGISLATIVE REPORT CONTINUED FROM PAGE 19
SUMMER 201322
Special Thanks to our 2013 President’s Council Sponsors
Affinity Programwww.BankersInsuranceService.com
www.WellsFargo.com/Mortgage
Your Continued Support for California’s Real Estate Finance Industry is Greatly Appreciated!
www.AllenMatkins.com
www.CMGFI.com
5. Derive RBC factors for each risk
category
The new standards will determine
the RBC component for a life insurer’s
portfolio of commercial mortgage
loans using a process similar to that
now used to assign capital charges to
corporate bonds. Individual loans will
be grouped into risk cohorts based on
indicators of credit quality. Capital
requirements will then be assigned to
each risk cohort.
“New” Measures to Assess Risk of
Default
Standard and familiar commercial
mortgage industry measures, specifically
debt service coverage (DSC) and loan-
to-value (LTV), were adopted as good
indicators of default probability. RBC
for performing commercial mortgages
will therefore be based on these two
measures; however, RBC for non-
performing loans will continue to be
computed as before.
The new method of analysis will
assess the risk of assets held by life
companies so that regulators will be
able to identify weakly capitalized
companies. Capital requirements will
change over time as loan characteristics
and portfolio composition evolve with
market conditions.
This approach is similar to the
method used in the banking industry to
assess regulatory capital requirements
for CRE loan assets by focusing on the
ability of borrowers to make payments
as required by the terms of the loan.
Components of the New Model
The new model consists of the
following components:
1. Establish five risk cohorts for
commercial mortgages in good
standing and assign an RBC charge
to each cohort.
2. Assign each loan in good standing
to one of the risk cohorts based on
its DSC and LTV.
3. Apply the assigned RBC factor to
the statutory carrying value of each
loan, and sum the result in order to
determine the RBC for commercial
mortgages in good standing of the
company.
4. Assign mortgages over 90 days past
due or in the process of foreclosure
to a sixth and seventh category,
and apply factors of 18% and
23% respectively to the statutory
carrying value.
5. Assign Farm/Ag Loans in good
standing to one of the five risk
categories based on LTV only.
Analytical Tool—CMM
Commercial Mortgage Metrics
(CMM), an analytical model developed
and owned by Moody’s Analytics, will
be used to evaluate future credit risk for
commercial mortgages. CMM analyzes
credit events which fundamentally
depend on the financial condition of the
borrower to make required payments,
including: the value of the underlying
collateral, the market in which the
COMMERCIAL NEWS CONTINUED FROM PAGE 9
CONTINUED ON PAGE 23
CALIFORNIA MORTGAGE FINANCE NEWS 23
collateral is operating and the level of
associated debt.
CMM uses algorithms to assess
the likelihood of default based on
commercial mortgage loan experience
tracked from the 1970’s through 2010.
Data tracked includes both loan level
data and aggregate default rates for loans
held by life companies, banks and CMBS.
Debt Service Coverage (DSC)
Research has shown that DSC is
a powerful predictor of commercial
mortgage default risk and it is a largely
objective calculation that uses actual
revenues and expenses of the collateral
to determine NOI. For the purpose of
RBC, DSC will be calculated as the
ratio of the property’s NOI to the loan’s
standardized debt service.
NOI will be developed using
standards provided by the CREFC
Methodology for Analyzing and
Reporting Property Income Statements.
NOI will be adjusted to a 3 year rolling
average for the DSC calculation.
Standardized debt service will be
determined based on a fixed 25 year
amortization and either the actual
interest rate for fixed rate loans or the
higher of the current rate or the average
rate over the prior 12 months for
variable rate loans.
There are additional rules for
calculating DSC in special situations
such as Cross Collateralization or
Unavailable Operating Statements
resulting from: loans on owner
occupied properties, borrower not
providing annual operating statements,
construction loans, non-senior financing,
credit enhancements, or non-income-
producing land.
COMMERCIAL NEWS CONTINUED FROM PAGE 22
CONTINUED ON PAGE 24
SUMMER 201324
Loan to Value (LTV)
LTV, which is a predictor of both
default risk and severity of loss, will
be determined by dividing the current
principal balance of all pari passu and
senior debt by the current property
value. Current property value will be
determined by adjusting the appraised
value from loan origination by any change
in value of the NCREIF Real Property
Price Index from the time of origination
to the time of the measurement.
Restructured Loans
Life company lenders have significant
flexibility when managing commercial
mortgages to respond prudently to
changes with a borrower, the property,
or the economic environment. As
portfolio lenders, life companies are
not typically limited by REMIC rules
or other provisions that restrict loan
modifications. Under the new rules,
performing modified commercial
mortgages, or restructured loans, will be
treated the same as other commercial
mortgages that are not restructured.
Documentation and Confidentiality
This new program will be based
on values and analyses that are not part
of a life company’s annual statement.
Documentation will be available
to the insurance commissioner to
examine on request as part of the RBC
report; however, confidentiality of the
documentation of these calculations
will be protected as required under
state statutes.
Conclusion
In light of tightening regulatory
scrutiny throughout the financial industry,
the NAIC has taken a proactive step to
improve the method of monitoring life
company portfolio commercial mortgage
loans in order to determine appropriate
levels of risk based capital. This forward
looking move should provide a more
objective and realistic assessment of
commercial mortgage default risk, and it
should continue to provide for the safety
and soundness of life companies that
make commercial mortgages now and in
the years ahead.
•
COMMERCIAL NEWS CONTINUED FROM PAGE 23
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CALIFORNIA MORTGAGE FINANCE NEWS 25
asset bubble brought on by the
Fed’s current policy of pumping
into the economy the steroids of
successive Quantitative-Easings
and near zero Fed-Funds rates.
Other commercial property
sectors have also seen cap rate
compression but nothing as severe
as in the multifamily sector.
• FASB Accounting Changes to
lease accounting: The Financial
Accounting Standards Board
has proposed new accounting
rules that will put assets and
liabilities on a company’s books
for every lease over 12 months. In
commercial property finance we
convert leases into loans. Many
companies have a cost of capital
lower than the cost of funds
available to most commercial real
estate investors. These companies
may lose an important incentive
to lease versus own if all of their
lease transactions start to show
up on their financial statements.
We have no idea how the stock
market will react when the
liabilities of a company such as
Walgreens explode.
Williams: Clearly interest rate
volatility is the most important factor
in the market today. The uncertainty
regarding rates is driven to a large
extent by speculation as to when the
Federal Reserve will begin to take
the pedal off the gas. When the Fed
recently hinted it might soon pull back
on its stimulus activities rates shot up
dramatically. We’ve witnessed a nearly
100 basis point increase in the 10 year
treasury rate since the beginning of
May. If the Fed ends its buying activity
prematurely in the eyes of bond
investors we could see a further spike
in rates, and this would obviously have
a very adverse impact on our business.
Q: What action(s) can government
take (or not take) to help reinvigorate
the private investment market?
Johnson: The market prefers
stability. The greatest issue with
government intervention is that even
experts often struggle with predicting
what changes will be made and
how they will affect the market. My
perception is that in general when
rumors of government intervention
begin to circulate, such as a proposed
change in Proposition 13 or an increase
ROUNDTABLE ARTICLE CONTINUED FROM PAGE 10
CONTINUED ON PAGE 26
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SUMMER 201326
in transfer/mortgage taxes, lenders
and borrows become hesitant in the
marketplace. This is often justifiable as
it makes it extremely difficult for them
to anticipate their expected returns.
This hurts the entire market.
Williams: As a result of the
financial crisis banks have been subject
to a great deal more scrutiny from
regulators. Given the depth of the
crisis one would expect to see more
regulation. However in our discussions
with banks it’s clear the federal
government has made it harder for
regulated financial institutions to make
loans. Community and regional banks
are the primary source of financing
for private investors, and to the extent
the federal government modifies its
policies to encourage lending the
results will be positive for the market.
Von Berg: I believe the
important part of the question is:
NOT TAKE. Investors and therefor
markets optimize for current known
conditions. It is best for us if Congress
and the California Legislature leave
us alone. Right now there is a great
deal of scary government noise out
there: threats to increase property
taxes; impose new transfer taxes;
eliminate the GSE’s, etc. For those
of us active in California the threat
of the split-roll tax, creating higher
taxes for commercial property, is a
big concern. Also a big concern is
the threat by the State to start to tax
changes in recorded ownership and
the placement of mortgage liens on
property. Each sector of commercial
real estate has its own battles. The
shopping center sector recently had a
victory with the imposition of sales
tax on internet purchases to level the
playing field. The self-storage industry
is fighting threats to impose sales tax
on the rental of storage units. We as
California mortgage bankers follow
all these sector issues on behalf of our
lender-clients.
Randles: The federal government
is doing its best to bolster capital
values by employing quantitative
easing, but it is time to ease off
the government printing press to
encourage a rise in interest rates. A rise
in interest rates will create increased
revenue for both business and
consumers alike. With higher interest
rates—an increase in the USTs by
50% from current levels—continues
to produce a mortgage rate below 6
ROUNDTABLE ARTICLE CONTINUED FROM PAGE 25
CONTINUED ON PAGE 27
Margaret CruzAudit Manager
Ida Cefalu MaitinoSr. Tax Manager
Henry ChavezSr. Audit Manager
Je�rey SpiegelPrincipal
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CALIFORNIA MORTGAGE FINANCE NEWS 27
percent, which would be near a trailing
10-year average. This rate is believed
can still support current low cap rate
yields relative to property valuations.
With a slight give-back in the spread
gained from cap rates over the risk-free
rate will be required, but that is doable
as the current spread approaches two
times the long-term average.
Driving interest rates up should
be a goal of the Federal Reserve, as
retiring baby boomers will begin to
rely more on fixed income—savings,
bonds and real estate investments to
provide sources of income. If boomers
can live more in earnings than on
dipping into principal, than equities
can continue their upward trajectory
as investors will remain steady with
investments rather than creating exit
plans to get access to their principal for
day-to-day survival and interest and
dividends will save the day.
Lenders, too, will generate
increased interest income and will
likely be willing to lend more dollars.
Increased interest income will support
higher stock prices of lenders and
increased lending will improve
property values, and thereby return
greater confidence to the market.
Thus, the federal government
should think more about raising
interest rates as opposed to full
employment, as the baby boomer
demographic is large enough to move
markets as if greater interest and
dividends can be earned then increased
consumerism can take hold, which
then positively affects all pocketbooks.
The negative effect to all of this will be
the risk of property value erosion due
to a possible rise in cap rates expected
to run in tandem with interest rates.
However, the spread premium from
current cap rates over the risk-free
treasuries has been at an all time
high, and one could expect some of
this profit to be given back, thereby
becoming a relative non-event for
property values and cap rates.
As can be seen in this chart, the
spread between Average Cap Rates
and the 10 Year US Treasury yields is
the highest it has been since 2003. We
can even go back farther to show, but
the trailing ten year average spread
is 350 BPs and current it is 500 BPs.
Hence, there is a good 150 BPs that
can be given back in the form of rising
Treasurys. While not to mention that
mortgage spreads could tighten on
increased competition thereby keeping
all in mortgage rates down. Thus, the
risk to rising cap rates appears minimal.
Q: Which lending product or
regional market is poised for the
most growth (or decline)?
Williams: The revitalization
of the CMBS market has been an
encouraging trend in the market.
Last year conduits originated close to
$50 Billion in commercial mortgages
and this year the number is expected
to exceed $70 Billion. This is up
from effectively zero in the period
from 2008–2010. The continued
reemergence of CMBS as a viable
source of commercial financing has
had a significant positive impact on
property values in secondary markets.
These markets became effectively
illiquid in the immediate aftermath of
the financial crisis, so even in a rising
rate environment assuming CMBS
continues to grow I would expect to
see further value appreciation in the B
and C markets.
Von Berg: The area of lending
that will have the greatest growth will,
of course, be construction lending.
When you start from a number close
to zero, the percentage increase
ROUNDTABLE ARTICLE CONTINUED FROM PAGE 26
CONTINUED ON PAGE 29
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CALIFORNIA MORTGAGE FINANCE NEWS 29
looks very big; it’s that dividing-by-
zero phenomenon. I am active in
Northern California that is actually
starting to see a construction boom;
in apartments, medical buildings and
corporate campuses. We are also
seeing spec office building getting
underway. Some new hotels may
even break ground. Developer clients
are saying there is a shortage of steel
workers and construction prices are
shooting up.
The regions that will see the most
growth will be those communities,
mainly coastal and urban, that attract
the innovators. The Silicon Valley, San
Francisco, San Diego, West LA are
worldwide magnets for different types
of talent. We live in a world today
where employers follow the talent;
not like prior generations where it
was the other way around. Also,
we are seeing a trend toward age-
ghettoization. 20 and 30 somethings
want to live with other 20 and 30
somethings. Once these people have
children too big to push around in
strollers they are off to join other
families in the burbs. The elderly also
are looking for their own attractions.
This new mobility and age-
ghettoization will create opportunities
for investors and lenders.
Randles: The CMBS (conduit)
mortgage product is poised for a
rise in production as it is the only
source of capital that is willing to
accept risk and supply interest-only
mortgages for secondary market
properties. The advantage of an I/O
loan to a 25 year amortizing loan is
150 to 200 BPs on borrowed capital
costs annually, which can be used
for a variety of investments such
as to mitigate risk for early prepay
strategies of a property investment.
CMBS will also supply a greater
amount of leverage for secondary
and some tertiary market located
properties, thereby, enhancing
property level yields and allowing
less equity at risk for investors.
Agency lending is expected to
decline with Federal mandate to
manage down the Agencies thereby
reducing the reliance on the Federal
government’s balance sheet. This
is expected to see a stabilizer in
property values for the multihousing
sector as less low-rate, high-lever debt
will be available.
Johnson: Fannie Mae and
Freddie Mac’s multifamily products
have greatly contributed to the
market over the last several years.
If the government decides to alter
or eliminate these agencies, it could
dramatically change the landscape
very quickly. While other lenders
would likely be willing to finance
Class A properties, the impact to
Class B & C properties could be
very substantial.
•
Have you updated your
Membership Directory listing?
One of the benefits of your CMBA
membership is inclusion in our
online Membership Directory—
make sure your company’s info is
up to date! Email [email protected]
for more information!
ROUNDTABLE ARTICLE CONTINUED FROM PAGE 27
Feeling BuriedBy New
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SUMMER 201330
the lender sent the borrowers a TPP
agreement stating that the lender
would notify the borrowers if they
qualified for a loan modification. The
borrowers complied with the TPP,
but were never informed whether
they qualified for a modification. The
borrowers sued for breach of contract
under California law to enforce the
TPP. The court noted that there was
a split in authority regarding whether
the TPP created an enforceable
contract, and found more persuasive
the reasoning of cases finding that the
TPP created an enforceable contract.
Relying heavily on Wigod, the court
in Sutcliffe held that the TPP must be
interpreted to require the lender to
modify the borrower’s loan once the
borrower has complied with the TPP.
Also relying on Wigod, the
California Fourth District Court of
Appeal in West v. JP Morgan Chase
Bank, N.A. (2013) 214 Cal.App.4th
780, recently held that a borrower
who complied with the TPP could
bring state law contract and tort
claims against her lender. In West,
the lender sent the borrower a letter
stating that if she complied with all
of the terms of the TPP, the lender
would “consider” a loan modification.
The lender later sent the borrower
a letter denying the borrower a
loan modification based upon the
lenders Net Present Value (“NPV”)
determination regarding the loan. The
letter also described a procedure by
which the borrower could contest
the accuracy of the lender’s NPV
calculation. The borrower alleged that
she timely requested a re-evaluation of
the NPV determination and continued
to make TPP payments while awaiting
the results. The complaint alleged the
lender later told the borrower that no
foreclosure sale had been scheduled,
but two days later the home was sold
at a trustee’s sale.
The court in West interpreted
the TPP to require the lender to
offer a permanent loan modification.
The court reasoned that because
Department of the Treasury Directive
09-01 and HAMP guidelines required
lenders to offer a permanent
modification if the borrower complied
with the TPP agreement, the lender
was required to offer a permanent
modification to the borrower that was
consistent with HAMP guidelines.
(West, at 798.) In addition, the court
held that the lender’s letter providing
for an appeal of the lender’s NPV
calculation was a modification of
the TPP agreement which could be
enforced by the borrower.
Notably, both the Wigod and West
courts found that regardless of the
actual language used by the lender, the
TPP agreement had to be interpreted
in a manner consistent with the
requirements of the HAMP guidelines.
In short, the courts made the HAMP
guidelines part of the TPP agreement
and allowed borrower enforcement of
the program guidelines through state
law breach of contract claims.
A Thorough Review of Agreements
and Forms Would Be Wise.
The decisions in Wigod, Sutcliffe
and West may signal a shift in the
courts favoring enforcement of
HAMP claims under state law
when the borrower has otherwise
complied with a TPP agreement.
West, in particular, demonstrates that
communications between lenders
and borrowers may also give rise to
state law contract and tort claims
against lenders. Loan servicers
should be careful in their borrower
communications to emphasize that
no promises are being made that
the borrower will qualify for a loan
modification and that a permanent
modification can only be granted if the
borrower has entered into and fully
performed under the TPP and satisfied
all other program requirements. Also,
loan servicers should make sure that
TPP agreements are only made after a
full review of the borrower’s financial
information and completion of the
NPV analysis. Finally, servicers should
be willing to enter into a permanent
loan modification if the borrower fully
performs under the TPP agreement.
•
1 See, Grajeda v. Bank of America, N.A. (2013
S.D. Cal.) 2013 WL 2481548 (borrowers
lacked standing and had no claim as third
party beneficiary of HAMP; and Juarez
v. Suntrust Mortgage, Inc. (2013 E.D.Cal.)
2013 WL 1983111; Nungary v. Litton Loan
Servicing, LP (2011) 200 Cal.App.4th 1499
and Lucia v. Wells Fargo Bank, N.A. (2011
N.D. Cal.) 798 F. Supp.2d. 1059, rejecting
the borrower’s argument that a TPP
agreement created an enforceable contract.
HAMP ENFORCEMENT CONTINUED FROM PAGE 11
CALIFORNIA MORTGAGE FINANCE NEWS 31
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protection letters to lenders to provide
an assurance to the lender that the
underwriter’s issuing agent, a title/
escrow company or closing attorney,
appropriately handles the signing of
the loan documents and disbursement
of the loan proceeds. The American
Land Title Association (“ALTA”) has
promulgated various forms of the
closing protection letter since 1987.
Many forms are broad in scope and
cover all future transactions involving
the lender and issuing agent, but some
apply to a single transaction. A small
number of states have promulgated
a specific form and at least one state,
New York, does not allow them.
Likewise, in order to limit their
risk exposure, some title insurance
underwriters have made modifications
to the standard ALTA forms such as
adding clauses to include deadlines
for claims, precluding claims based
on consumer protection laws, or
establishing monetary limits to the
indemnity amount. A close review
of the form of the particular closing
protection letter at issue is necessary
to determine coverage.
2. Problems With Locating Closing
Protection Letters
It is not uncommon for a lender
to be unable to locate the closing
protection letter despite having
a policy and practice of requiring
them. One source for finding a
missing closing protection letter is
from the title/escrow company or
closing attorney that was responsible
for closing the transaction at issue.
They often have electronic access to
the title underwriter’s database of
historically issued closing protection
letters or may keep copies of closing
protection letters in their own files.
However, with the financial crisis
of 2008, many of the title/escrow
companies and closing attorneys are
no longer in business. The major title
underwriters have generally survived
the financial crisis although they may
have consolidated various brands.
It is not in the interest of the title
underwriter to locate an applicable
closing protection letter so expect that
the first response is that no such letter
exists. Significant discovery is often
necessary to obtain a letter or access
to the database to show an applicable
letter was issued.
3. Truth-In-Lending Claims For
PROTECTION LETTERS CONTINUED FROM PAGE 12
CONTINUED ON PAGE 32
SUMMER 201332
Notice of Right To Cancel Forms
In the mid-2000s, Plaintiffs’
attorneys began sending letters to
thousands of borrowers at a time
informing them that they may be
entitled to significant damages or to
rescind their loan if the borrower was
unable to locate two properly completed
copies of the NORTC. Cookie-cutter
claims poured in claiming that borrowers
were not provided appropriate NORTC
forms. Now, the assertion is commonly
made in defense to foreclosure actions.
The amounts at issue can be significant.
A borrower will claim to be entitled to
the return of all of the closing costs and
interest paid over the life of the loan
plus attorneys’ fees. Rescission of the
loan involves termination of the lender’s
security interest.
The good news for lenders is that
these claims may be covered by a
closing protection letter.
4. Language Of The Closing
Protection Letter That Provides
Indemnity
The typical closing protection
letter requires the title insurer to pay
the lender for “actual loss” “arising out
of” the closing and involving either:
Paragraph 1: Failure of the Issuing
Agent or Approved Attorney to
comply with your written closing
instructions to the extent that they
relate to (a) the status of the title to
said interest in land or the validity,
enforceability and priority of the
lien of said mortgage on said interest
in land, including the obtaining of
documents and the disbursements of
funds necessary to establish such status
of title or lien, or (b) the obtaining
of any other document, specifically
required by you, but only to the
extent that said instructions requires
a determination of the validity,
enforceability or effectiveness of such
other documents, or (c) the collection
and payment of funds due you, or
Paragraph 2: Fraud or dishonesty
[or negligence] of the Issuing Agent or
Approved Attorney in handling your
funds or documents in connection
with such closings.
Coverage Under Paragraph 1:
Many lenders’ standard form
closing instructions require that the
settlement agent provide two properly
PROTECTION LETTERS CONTINUED FROM PAGE 31
CONTINUED ON PAGE 33
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CALIFORNIA MORTGAGE FINANCE NEWS 33
completed NORTC forms to each
borrower. Paragraph 1 covers loss
related to a borrower’s TILA claim that
the settlement agent failed to provide
the appropriate NORTC forms as
required by the closing instructions.
The condition that the closing
instructions relate to the “priority of
the lien” is met because the remedy
for a TILA claim based on a NORTC
form is rescission of the loan which
voids the lien. Title underwriters have
agreed that actual losses caused by the
failure to follow closing instructions
resulting in a borrower’s claim that the
lien is invalid is covered by Paragraph
1 of the closing protection letter.
Coverage Under Paragraph 2:
The indemnity provided by
paragraph 2 covers an overlapping but
separate set of circumstances. Title
PROTECTION LETTERS CONTINUED FROM PAGE 32 insurers have agreed that if the issuing
agent failed to appropriately distribute
the NORTC forms as it was supposed
to, the lender’s actual loss would also
be covered by Paragraph 2. Notably,
the language of paragraph 2 does not
have the same limiting language to
matters that affect the status of title
or enforceability of the mortgage as
found in paragraph 1. However, some
closing protection letters may include
limiting language.
5. What Is The Scope Of The
“Actual Loss” Covered Under The
Closing Protection Letter
Actual loss is not defined in the
closing protection letter and there
is scant case law discussing “actual
loss” as used in the closing protection
letter. As a result, significant debate
often ensues over what is recoverable
under “actual loss.” A few examples of
the areas often debated are whether
“actual loss” includes attorneys’ fees
and loan write-offs.
Whenever a borrower asserts a
TILA claim based on a NORTC form,
lenders and their counsel should
diligently analyze whether they have a
claim for indemnity based on a closing
protection letter. Coverage under a
closing protection letter may result in
a significant recovery.
•
SUMMER 201334
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M O R T G A G E B A N K I N G L AW
bankers. The major position was that
the direct marketing or promotion of
a service provider to the consumer by
a real estate brokerage company or its
sales agent, such as verbal pitches or
handing out promotional materials, was
a referral in all cases. HUD stated that it
reached this conclusion because of the
unique position of the broker or sales
agent to influence the client’s selection
of a settlement service provider. This
was a bold and overly broad assertion
by HUD in an effort to use its position
to reshape the marketplace.
HUD did, however, distinguish
direct marketing of the client or
consumer from general marketing
to the public, which it found to be a
compensable service under RESPA.
General marketing includes the
mortgage banker having a presence or
link on the real estate broker’s website
and joint newspaper or broadcast
advertising. Some ambiguity remains
about HUD’s comments on the presence
of brochures or marketing materials in
real estate sales offices when there is
no consumer specific direct marketing
effort associated with them.
RESPA is now administered by the
Consumer Financial Protection Bureau
(CFPB). Although the CFPB has not
yet focused on marketing agreements,
when it does it will address them in a
broad, and possibly restrictive, manner
with reference to all settlement service
providers. It can be expected to adopt
expansive positions beyond RESPA
under its authority to protect the
consumer. Hence, care and foresight
are advisable in reviewing or entering
into marketing agreements.
•
MARKETING AGREEMENTS CONTINUED FROM PAGE 13
dollar. Although much of the reporting
and promotion of the plan focuses on
aiding distressed borrowers, over 70%
of loans on which the city made offers
are current (444 out of 624). To get an
idea of the scope of the program, the
aggregate face value of the 624 loans
is $241.98 million, with the current
market value estimated by MRP and
the city to be $177.16 million. The
32 servicers who received offers will
have an opportunity to avoid eminent
domain by selling the loans to the
city to be rewritten to current (or less
than current) market value, giving the
affected homeowners instant equity.
But, as the axiom goes, there is
no free lunch. What will be the true
cost of this program? As previously
documented in these pages and
discussed in more detail below, there
are significant questions about the
legal/constitutional validity of the
program. But even if there weren’t,
the negative impact on both the
community and national mortgage
market could very well outweigh any
legitimate benefit to homeowners
already enjoying an increase in their
home values in a recovering market.
(According to Zillow, values in the
affected area have gained 22.7% in
the last year, equating to roughly
$38,000 in value on an average home
value of $205,700.
At the local level, it seems
unavoidable that virtually anyone with
‘skin in the game’ will have to account
for the new risk by layering additional
cost on future loans—to be paid for
by future borrowers. MBA President/
CEO David Stevens summed up the
EMINENT DOMAIN CONTINUED FROM PAGE 14
CONTINUED ON PAGE 37
Unemployment Mortgage Assistance Up to $3,000 per month for as long as 12 months
Mortgage Reinstatement Assistance Program
Helps homeowners catch up on their pastdue payments with up
to $25,000
Principal Reduction ProgramReduces a homeowner’s principal by as much
as $100,000
Transition Assistance Program
Up to $5,000 to help homeowners relocate after executing a short sale or
deed-in-lieu of foreclosure
Unemployment Mortgage Assistance Up to $3,000 per month for as long as 12 months
Mortgage Reinstatement Assistance Program
Helps homeowners catch up on their pastdue payments with up
to $25,000
Principal Reduction ProgramReduces a homeowner’s principal by as much
as $100,000
Transition Assistance Program
Up to $5,000 to help homeowners relocate after executing a short sale or
deed-in-lieu of foreclosure
Careers with Momentum
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PrimeLending Loan O�cers deliver unsurpassed service and quality support
throughout the entire lending process.
We work together to have a profound and positive impact on the lives of all we
serve, from every client to each referral source.
Our Core Convictions
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PrimeLending is looking to grow our familyand we want you to be a part of it.
PrimeLending, a PlainsCapital Company, has a foundation of strength, stability and resilience to help employees grow their
businesses and have a positive e�ect on homebuyers, referral partners and communities.
As a PrimeLending employee, you can expect to receive support and service in a compelling corporate culture.
Ask me how to begin your career with momentum.
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Cell: 916.317.3072 | Fax: [email protected]
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CALIFORNIA MORTGAGE FINANCE NEWS 37
local impact with a sober warning to
city officials: “Mortgages in Richmond
will become more expensive, making
neighboring cities more desirable for
prospective home buyers, which will
hold down home values for everyone
in Richmond. In short, the program is
ill-advised and likely unconstitutional
and will add to Richmond’s problems
rather than solve them.”
Although the program is presently
limited to loans in Richmond, the
national implications are potentially
devastating. Ratings firm Moody’s
noted in a report on August 5th
that widespread use of eminent
domain authority to seize loans from
investors at severe discounts would
“increase losses on RMBS,” adding
that the losses would be “significant.”
Last year, when the epicenter of
all things eminent domain was in
San Bernardino, Fitch Ratings noted
the specific negative impact the
program could have on private-label
securities. And, when government
and industry seem to be united in at
least the belief that private money
(read: no more Fannie/Freddie market
hegemony) must return to the market
to ensure its long-term health, it
seems counterproductive to embark
on a program that would likely
weaken private investors and, in turn,
strengthen the market’s appetite for
GSE-backed loans, which are exempt
from the Richmond program and
MRP proposals.
As for the legal battle that’s likely
to ensue, the soon-to-be opponents
have already laid out the path they
intend to take. A recent white
paper published by the Securities
and Financial Markets Association
(SIFMA), prepared by attorneys with
O’Melveny & Myers LLP, reveals that
there are two main arguments that
industry will pursue in challenging
the legal validity of “eminent domain”
loan seizures by municipal entities:
First, industry will likely argue
that the program is purely for the
private gain of MRP and therefore
violates the “public use” requirement
of the U.S. Constitution’s Fifth
Amendment. Under a long line of U.S.
Supreme Court cases, this provision
requires that seizing of private
property under the Fifth Amendment’s
“takings clause” must provide a
benefit for the community. Industry
representatives and others contend
that while the Supreme Court has
ruled, in Kelo vs. City of New London
(2005), that private property can be
seized from one owner and given to
another, the “public use” language in
the Constitution still requires a public
benefit. But, unlike the comprehensive
redevelopment project in Kelo, the
MRP proposals involve seizing
hundreds of loans from dozens of
different investors, with no guarantee
that the homeowners involved won’t
default. It is difficult to see a public
benefit in trading public funds for bad
loans and transforming municipalities
into foreclosing creditors—especially
when the actual creditors on the loans
that are performing will likely to sue
to prevent it.
Secondly, industry will likely
claim that the seizures represent a
violation of the ‘just compensation’
clause of the Fifth Amendment,
as MRP’s plan (including the one
underway in Richmond) explicitly
hinges on paying servicers less than
market value for the subject loans
in order to provide a return to the
MRP investors. Industry will argue
this procedure does not constitute
‘just compensation.’ There are also
several other claims that industry
representatives are likely to make,
including: (1) that by rewriting
mortgage contracts beyond the
municipality’s borders, the program
violates the “due process,” “contracts”
and “interstate commerce” clauses of
the U.S. Constitution, and (2) that the
program violates numerous title and
lien priority laws as well as various
securities laws to the extent the
loans are part of a mortgage backed
securitization. How all of this will
shake out in the courts is by no means
certain. But the City of Richmond’s
recent actions make it almost certain
that we are about to find out.
Stay tuned to www.CMBA.
com to get the latest on any further
eminent domain developments in
Richmond or elsewhere.
•
EMINENT DOMAIN CONTINUED FROM PAGE 34
INDUSTRY NEWSMEMBERSHIPCONFERENCE INFORMATION
RESOURCESand much more!
Visit us on the web atWWW.CMBA.COM
SUMMER 201338
retroactively, it did not reach the
issue. Instead Coker focused on
§580b—the provision that prohibits
a deficiency judgment following
foreclosure on a purchase money
loan. Coker recognized that a short
sale is not a foreclosure, but held that
§580b applies to a purchase money
loan regardless of the mode of sale.
Thus §580b prohibited a deficiency
judgment following the short sale
even though the borrower agreed in
the short sale agreement to remain
responsible for any deficiency.
The court found it unnecessary to
determine whether §580e applied
retroactively because §580b prohibited
a deficiency judgment.
It may appear that the holding
in Coker swallows the rule of Roberts.
After all, the finding that §580e is not
retroactive seems ineffectual if §580b
will nonetheless prohibit a deficiency
judgment following a short sale. But
the distinction lies in the nature of
the loan at issue—i.e. whether it is
a purchase money loan. The Roberts
court addressed a short sale on a
home equity loan (non-purchase
money loan); therefore §580b was
not applicable and since the short
sale was conducted before the
amendment to §580e the deficiency
clause was enforceable. The Coker
court, on the other hand, addressed a
short sale on a purchase money loan,
which warranted the anti-deficiency
protection of §580b.
In summary, sections 580b &
580e, as interpreted through Coker and
Roberts, provide broad anti-deficiency
protection, even for borrowers who
executed short sale agreements
that preserved deficiency liability.
Nonetheless, there is an exception.
Short sale agreements that assigned
deficiency liability for non-purchase
money loans remain enforceable in two
narrow circumstances: 1) the loan is
secured by a first deed of trust and the
sale was completed before September
30, 2010; or 2) the loan is secured by a
second deed of trust and the sale was
completed before July 15, 2011.
Following the recent amendments
to sections 580b & 580e and the
holding of Coker, the future of
short sale deficiency judgments on
residential loans in California looks
grim for lenders. But the holding of
Coker leads to an interesting tension
perhaps not considered by the court.
Although newly amended §580b(c)
prohibits a deficiency judgment on any
loan originated after January 1, 2013
that refinances a purchase money loan,
there is an exception to the extent the
lender advances new principal (termed
a “new advance”.) If §580b is indeed
applicable “regardless of the mode of
sale” (to short sales) as stated by the
court in Coker, does the exception
in §580b(c) for any “new advance”
conflict with the broader prohibition
on deficiency judgments following
short sales in §580e? If so, Coker may
breathe new life into a narrow class of
short sale deficiency judgments going
forward, unintentionally reviving a
specter of the deficiency liability it
helped send to the grave.
•
1 A deficiency exists if the total debt exceeds
the fair market value at the time of sale.
2 Stats. 2010, ch. 701 (Sen. Bill No. 931) § 1,
p. 4069
3 Stats. 2011, ch. 82 (Sen. Bill No. 458) §
1, p. 1954; the statute is limited to short
sale of a “dwelling of not more than four
units” and applies only when the short
sale is conducted “in accordance with the
written consent” of the lender. Notably, the
anti-deficiency protections of §580e are not
available if the borrower is a corporation,
limited liability company, limited
partnership or political subdivision of the
state; the protections are also not available
to the extent the borrower commits fraud
with respect to the sale or waste with
regard to the real property.
4 Sen. Judiciary Com., Report on Sen. Bill
No. 458 (2011-2012 Reg. Sess.) as amended
April 4, 2011, p. 2
5 The Court of Appeal also determined that
the “one-form-of-action rule” in CCP §726
was not applicable to a short sale.
SHORT SALE DEFICIENCIES CONTINUED FROM PAGE 15
CMBA has
created profiles on
networking sites
Facebook and LinkedIn
CALIFORNIA MORTGAGE FINANCE NEWS 39
transactions, perhaps by offering
preferred terms to the owners of
energy efficient buildings.
Potential implications for lenders
lie primarily with a building owner’s
failure to comply, or compliance
irregularities. There is no specific
regulatory penalty for owner non-
compliance, as the government does
not have an enforcement mechanism.
However, a failure to disclose a
building’s energy usage could be
viewed as a material failure by the
owner to comply with applicable
law. Moreover, a failure to timely
commence the disclosure process
could result in transaction delays,
particularly if title companies require
proof of compliance.
Therefore, lenders should be
aware of the disclosure requirements,
and take care to document timely
compliance in the loan file. Lenders
should also consider updating their
transaction documents to require
assurances of compliance, such as
representation and warranty by the
owner for the benefit of the lender.
•
CALIFORNIA NEW ENERGY CONTINUED FROM PAGE 16
FOLLOW CMBA ON
TWITTER!Make sure and follow CMBA
(@CAMortgBankers) on Twitter
to get the latest updates on
legislative, regulatory issues,
and conference and event info!
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Sign up now for CMBA’s AnnualWestern States Legal Issues Conference
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SUMMER 201340
PHOTO GALLERY
JULY 9–11, 2013, SAN FRANCISCO, CA
41st Annual Western Secondary Market Conference
Prior to the start of the conference, CMBA’s 2013-2014 Board of Directors
was sworn in. Congratulations to Dennis Sidbury (right) of Northmarq
Capital, our new chairman, and CMG Financial’s Chris George (left),
CMBA’s Residential President.
This year’s conference included a stirring and inspiring presentation by adventurer Aron Ralston, subject of the Oscar-nominated film 127 Hours, starring
James Franco. Photo from left: Matt Ostrander, Parkside Lending, LLC, Conference Chairman; Ralston; Chris George, CMG Financial.
The board also welcomed several new members, including Don Curtis of OSC
/ A Breckenridge Company, and Annemaria Allen of The Compliance Group.
CALIFORNIA MORTGAGE FINANCE NEWS 41
We also heard about MBA’s plan for the future of the GSEs from
David Stevens, President and CEO of the Mortgage Bankers Association.
The conference was chock-full with informative panels, including this one
dealing with broker-to-banker and mini-correspondent issues. From left:
Rob Mally, Flagstar Bank; Bill Moffatt, Plaza Home Mortgage, Inc.;
Matt Ostrander, Parkside Lending, LLC, and Mark Zierott, Cole Taylor.
Thanks to First Mortgage Corporation for their support! From left:
Mark Hayes; Andrea Hanna; Sharon Magnuson; and Clem Ziroli, Jr.
The conference wouldn’t be possible without the support and sponsorship of
great companies like Bankers Insurance Services, represented by Maria Heller.
SUMMER 201342
PHOTO GALLERY
AUGUST 4–6, 2013, LAS VEGAS, NV
18th Annual Western States Loan Servicing Conference
This year’s Western States Loan Servicing Conference gave attendees timely information and knowledge about what lies ahead for servicers and the
industry. This panel focused on the technological changes industry is going through. From left: Shawn Burke, ServiceLink; Chad Mosley, Mortgage
Contracting Services; Caroline Ritchie, Lender Processing Services; Bob Phelps, TD Service Company; Jane Mason, Clarifire; and Tommy A. Duncan,
CMT, Quality Mortgage Services.
Our REO panel provided details about foreclosures, short sales, auction
and trends. Back row (from left): Dave Sunlin, Auction.com; Tom Moon,
Pacific Moon Real Estate; Shane Ross, Selene Finance; Scott Sawyer,
Peak Loan Servicing; and Paul Mousseau, Nationstar Mortgage.
The conference was led by our co-chairs this year, Chad Mosley and
Caroline Reaves of Mortgage Contracting Services. Special thanks for all
their hard work!
CALIFORNIA MORTGAGE FINANCE NEWS 43
Thanks to our sponsors, including
Safeguard Properties, a Titanium sponsor.
Represented here by Tod Burket.
We also want to thank longtime
supporters of the conference, like
Andrew Pomerantz of WeAppear.
com/Hoffman and Pomerantz, LLP.
Pictured here with his son, Spencer.
Strong supporters of CMBA and the conference
also includes San Ramon-based Got Appraisals!
From left: David Barnes and Nick Roberson.
SUMMER 201344
Building Stronger Partnerships
Starting off in Los Angeles, Susan met with Joe Lynyak (center) and
Christine A. Scheuneman (right), partners with Pillsbury Winthrop Shaw
Pittman LLP. The firm is a full-service practice, and Joe and Christine are
partners in the firm’s Financial Services practice. For more information, call
the Los Angeles office at (213) 488-7265 or go to www.pillsburylaw.com.
Next, Susan stopped off at the offices of GreenBox Loans, Inc. and met
with company executive Raymond Eshaghian, another longtime supporter
of CMBA. To find out more about GreenBox, a residential lender, call
(800) 919-1086, or go to www.greenboxloans.com.
Staying in the area, Susan stopped off at the San Rafael offices of Axis
Appraisal Management to meet with company executives and staff. Thanks
to Axis for their support of CMBA! For more information about the appraisal
management firm, go to www.axis-amc.com or call (888) 806-AXIS.
Heading next to the San Francisco Bay Area, Susan met with executives
at Moss Adams, LLP, a leader in assurance, tax, consulting, risk
management, transaction, and wealth services. Thanks to the company
for their support! To find out more, go to www.mossadams.com, or call the
San Francisco offices at (415) 956-1500.
CALIFORNIA MORTGAGE FINANCE NEWS 45
Just south of Sacramento, at the offices of TFLG, a real estate litigation
law firm specializing in the representation of lenders, loan servicers and
REO servicers. Thanks to Eric Fernandez (center), and Viana Barbu (left),
for their time! To find out more about the firm, go to www.tflglaw.com or
call their Davis offices at (530) 750-3700.
Heading downstairs (literally!), Susan met with CMBA’s Commercial
President, Kevin Randles, a senior vice president with CBRE, specializing
in the origination of debt and equity financing for commercial and
multihousing properties located in the Western U.S. For more information,
call the Sacramento offices at (916) 446-6800 or go to www.cbre.us.
Traveling to the San Diego area, Susan met first with Joel Incorvaia of
Incorvaia and Associates, a law firm dealing primarily with real estate
and business matters. Joel has been a supporter of CMBA for a number of
years. To find out more, call the Del Mar offices at (858) 259-2220 or go
to www.incorlaw.com.
Finishing up the visit to San Francisco, Susan visited the offices of
Weintraub Tobin, meeting with firm shareholder Keith Kandarian, whose
practice involves banking & finance and corporate work. To find out
more, call Keith at (415) 772-9620, or go to www.weintraub.com.
SUMMER 201346
Next, Susan stopped off at the offices of Quality
Claims Management, a premier provider of
customized insurance recovery solutions. Thanks
to (from left) Amy Goss; Deborah Martin-
Dominick; Elena Savage; Colleen Tretola;
Colleen Gorman; and Anne Schupack for their
time and support! For more information, go to
www.qualityclaims.com or call (866) 450-1183.
Continuing the tour of San Diego, Susan visited
with Integrity First Financial Group, a direct
lender that joined CMBA earlier this year.
Thanks to company execs (from left) Anthony
Balsamo, Trevor Gates, Susan, and Alex Barnett
for their support! Call (888) 467-3075 or go to
www.integritydirectmortgage.com to find out more.
Susan completed her San Diego trip with a stop
at the Plaza Home Mortgage offices, meeting
with company president and CEO Kevin Parra.
Kevin also serves on CMBA’s board of directors.
Plaza is a wholesale and correspondent lender.
To learn more, call (858) 346-1208 or go to
www.plazahomemortgage.com.
California Mortgage Bankers Association • 2013 Media Planner / page 1 of 5
California Mortgage Bankers Association l www.cmba.comThe California Mortgage Bankers Association serves to represent the residential and commercial real estate finance industry before all governing bodies. CMBA encourages and promotes sound business practices and honesty in marketing, origination, lending and servicing of mortgage loans through our educational and networking opportunities.
California Mortgage Bankers Association publications - distribution, 2,500 to 15,000 per issue
For advertising questions / reservations: (530) 642-0111 / [email protected]
CALIFORNIA MORTGAGE BANKERS ASSOCIATION
THE VOICE OF REAL ESTATE FINANCE
2013 Media PlannerCALIFORNIA MORTGAGE BANKERS ASSOCIATION
CMBA is excited to announce our new publication program for 2013. Your company will be able to efficiently maximize your marketing dollars,
influence current and prospective clients through CMBA’s uniquely targeted advertising program which offers:
Year-round exposure –to the real estate financial marketplace via print and digital media
Readers purchasing power –finance billions of dollars in property sales annually and
spend billion + annually on products and services
Special discount packages –which includes FREE ads for advertisers who participate in multiple CMBA publications
Frequency, brand recognition or target market – Optimize your marketing through - one or many - CMBA promotion platforms:
California Mortgage Finance News
CMBA Legal News
CMBA Legislative & Buyer’s Guide
CMBA E-News - monthly electronic bulletin
CMBA Website
CMBA publications: Reaching your target
CALIFORNIA MORTGAGE BANKERS ASSOCIATION555 Capitol Mall, Suite 440Sacramento, CA 95814
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