Homeowners Remain Frustrated with Short Sale Process, and New Legislation Unlikely to Correct Issues

The Washington Post ran a story on the rise of short sale home transactions, along with the disappointment and frustrations home owners have with the process.

Generally, a “short sale” of a house is a sale for a purchase price that is less than the amount of the debt owed to the bank on the property. In order to do this, the home owners must obtain an agreement from their bank or lien-holders that the liens on the property will be released in exchange for the proceeds generated by the sale. Since the proceeds will not pay off the lender in full, the seller cannot force the bank to accept the deal–it can only be done with approval by all lien-holders.

And there’s the difficulty. In this foreclosure crisis, banks are overwhelmed with short sale proposals, all of which must be reviewed to determine if the “short sale” price is reasonable and better than the bank can do at foreclosure. In almost all cases, the prices will be better. But, still, the approval process requires that a bank officer agree to release the lien rights for something less than the bank is entitled to under its lien, which isn’t a decision that a bank can quickly make.

The most common complaint from sellers is that this process takes far too long, especially when there’s a buyer waiting who can simply move on to another house. In response, some law makers have filed legislation, HR 6133, that would require expedited processing and responses to short sale proposals.

This new legislation is unlikely to solve these issues, because who is to determine what is the proper timing to process short sales? Ten days? A month? And what’s the proper penalty? A forced sale? Release of the lien or deficiency rights?

I doubt that the legislators want to force their own terms onto what should be a typical “business decision” by the banks, and, if they do, there’s the risk that the lenders will simply respond immediately…with a “No” to all requests.

Recession is Over, But Bank Caution Remains

The report from the National Bureau of Economic Research that the Great Recession had ended in June 2009 comes at a time when commercial construction projects are perfectly positioned to pick back up.

Labor is readily available. Materials are available (and for discount). Land for construction has never been this cheap.

Ask any builder or general contractor what’s the hold-up, and they’re most likely to point to their bank. From what I’m hearing from contractors, the number one impediment to new growth appears to be the banks’ resistance to fund new deals, especially those with any element of risk.

Maybe the market will gain some confidence in response to this report, and then the banks will look again to the construction sector for growth. Until then, we’re all waiting.

Update: The Nashville Business Journal just posted an online article on this issue, noting that Tennessee construction projects are down 32% from this time last year.

Creditor’s Rights: From the Judge’s Perspective

Yesterday, I attended a TennBarU CLE course, called “Creditors Practice: A View from the Bench.”

Aside from the opportunity to earn brownie points as a smiling audience member to a Judge’s speech, the program gave the opportunity to hear about general sessions (a.k.a. small claims court) practice from the judge’s perspective. These courts often deal with unrepresented parties, and the practices and procedures are often confusing. The fast paced practices of the Shelby County General Sessions Court have been dubbed the “Rocket Docket.”

A common refrain was the difficult task of working with unrepresented people who don’t understand their rights. When asked about the non-lawyers’ ability to defend themselves, one judge noted that most people are “confounded by the whole process” and “surprised that it’s not more like The People’s Court.”

The Judges all try to protect anyone from being taken advantage of, but, at the same time, there are too many cases for the Judges to look after the rights of all who appear before them. From a creditor’s perspective, dealing with a pro se litigant offers those same challenges, and it’s good to hear that our judges recognize and account for those difficulties as well.

Real Property Taxes Always Get Paid First

In this economy, the best way to get paid on outstanding debt is to claim a lien on real property. Whether you’re a judgment lien creditor or a homeowner’s association, a lien can give you some sort of collateral for an otherwise unsecured debt.  In order to actually get paid, there must be equity in the property (otherwise, your lien has no value); where there’s no equity, the creditor’s lien must be recorded in advance of other creditors to get paid.

Unless, of course, that creditor is the county tax assessor, who gets to move to the front of the line for repayment. Tenn. Code Ann. § 67-5-2101(a) provides that:

The taxes assessed by the state of Tennessee, a county, or municipality, taxing district, or other local governmental entity, upon any property of whatever kind, and all penalties, interest, and costs accruing thereon, shall become and remain a first lien upon such property from January 1 of the year for which such taxes are assessed.

So, even though the bank’s deed of trust may have been recorded way back in 2002, the unpaid ad valorem county taxes for 2010 still trump that deed of trust. It’s no wonder that banks routinely require payment of the property taxes as part of the monthly loan payments.

This is one of the few exceptions to the “first to record” rule in Tennessee, and, if you’re a lien creditor, the rule of thumb is: you’ll always lose to the county property taxes.

Lien Litigation takes a Starring Role in “Holmes on Homes: Lien on Me”

The HGTV show Holmes on Homes aired a two hour special episode called “Lien on Me,” in which the host and his crew do remedial work on a house after the contractor has abandoned all work and filed a lien lawsuit against the homeowners. Apparently, the bank had canceled all further contractor draws on the construction loan, due to the lack of sufficient progress on the construction.

Like any Holmes on Homes episode, host Mike Holmes did a thorough inspection of the work performed and found the work to be incomplete, unprofessional, and, in some instances, dangerously incompetent. During the course of the filming, over 100 subcontractors were brought in, and the entire remediation took 30 months to complete. All that time, the lien litigation continued.

To say that “most homeowners aren’t so lucky” is a huge understatement.  In these situations, an owner may not have the financial resources to bring in a second contractor to complete or repair the existing work. Then, in the rush to correct the deficiencies, the owners don’t keep sufficient evidence and records of the work in dispute to prove the problems.

Holmes had a TV crew and a team of experts taking detailed notes (and HD video of all the problems).  I pity the contractor who has its work subjected to the glare of the video cameras and a TV host who has made his living identifying shoddy work.

Wall Street Journal reports on Hostile Debt Collection

The Wall Street Journal has an interesting article today, about the psychological wear of dealing with debt collection efforts. The story talks about the daily calls, 40 to 50 of them, one borrower received.

Obviously, the Fair Debt Collection Practices Act limits the contact that a bill collector can have with a borrower, but, even within the protections of that law, creditors can continue some pretty aggressive collection efforts.

This is where the collections process by an attorney and a collection agency part ways. When an attorney “escalates” collection efforts, the attorney has a number of tools at his or her disposal, such as a lawsuit and, post-judgment, bank levies, wage garnishments, and liens.

A collection agency, however, can only make more phone calls and escalate the frequency and aggression in the contact.

It’s obvious from the article that borrowers are adapting to collection efforts, even inventing mechanisms to avoid creditor phone calls, and learning other ways to beat the system. In this sea of debtors drowning in debt, the traditional collections method of bothering borrowers day and night certainly isn’t doing any good.

Wage Garnishments in Tennessee Collections

A quick post on a topic I get asked about often: Wage Garnishment.

Tennessee judgment creditors can garnish wages or contract sums due to debtors pursuant to Tenn. Code Ann. § 26-2-105, et seq. and § 29-7-101, et seq. Tenn. Code Ann. § 29-2-106 establishes the garnishment formula that calculates the amounts paid to the garnishor and the amounts to be retained by the debtor (typically 25% of the debtor’s wages). Garnishments are effective for six (6) months after issuance,  § 26-2-214(b)(1), and they are are paid in order of priority, so you may be competing with other creditors who go after the income first.

Collecting against a debtor’s wages is an effective way of getting paid, but, for debtors on the brink of bankruptcy, some caution should be exercised to determine if the seizure of potentially scarce income will push the debtor too hard.  If your debtor is already stretched thin, things will only get worse when you take 25% of his or her pay, so this is a weapon that should be used only with discretion.

Effective Post-Bankruptcy Dismissal Collections Start Immediately

In a tweet yesterday, I discussed a savvy move by a judgment creditor: as soon as a Chapter 13 Bankruptcy gets dismissed, issue a garnishment to the Chapter 13 Trustee for any funds held by the Trustee.

What a smart move by the creditor. While the author of the article calls it a “horrible result,” I’d point out that Debtors’ attorneys do something similar all the time: when a case gets dismissed, they immediately ask that the Trustee release funds on hand for payment to them for their legal fees.

Like I’ve said before, a bankruptcy dismissal is a good thing for a creditor, and, when the case is dismissed, a creditor who takes quick action will generally be rewarded. It doesn’t have to be as bold as a garnishment to the Chapter 13 Trustee–it can be as simple as being the first creditor to file a lawsuit, the first to file a judgment lien, or the first to levy a bank account (and you know where they work and bank…just check the Bankruptcy Schedules).

The key word? Be the “first” to take aggressive action.