Banking Law

Housing Wire had an interesting post the other day that concerned a recent panel discussion at a REO Exposition in Dallas about the Protecting Tenants at Foreclosure Act of 2009. Apparently, this wonderful slice of federal sausage caught many real estate brokers "flatfooted."

"PTFA was a complete shock to the industry, none of us saw it coming, none of us knew anything about it," [California attorney Robert] Jackson said.

Jackson told the audience that the PTFA "completely changed the way REO evictions are conducted." By "completely changed," Jackson did not mean "made them a whole lot easier."

During a session at the REO Expo in Dallas, Jackson explained that, previously, when a foreclosure occurred, all other secondary liens were wiped out. But with the PTFA, tenant leases are given a "super priority" over the first lien mortgage.

The law is so inclusive, Jackson said, that even an oral lease between homeowner and tenant agreed to minutes before a foreclosure auction can be enforced in court. That's probably the hardest concept for those working in the REO space to understand, he said, because the law reversed existing legal precedent.

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The new law creates new risk for all those involved in the foreclosure and eviction process. Jackson and the panel told the gathered REO brokers that tenant and homeowner lawsuits are on the rise, and it is vital for brokers to have extensive documentation of activities.

Previously, brokers would hire inexperienced employees, usually college students working for minimum wage to conduct occupancy verifications. Now, the extensive laws at the federal, state and municipal levels, necessitates employees specifically trained to handle occupancy verifications. Asset management companies rely on REO brokers to be the eyes and ears for the company and put a human face on the new owner of the property when dealing with the recently foreclosed upon homeowner, tenants and neighbors, while collecting as much information as possible.

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Brokers were warned to minimize risk by getting approval from asset management companies' legal departments for all documents left at the house. Sometimes, brokers will unintentionally open themselves up to lawsuits by opening mailboxes or looking at mail (a federal offense), or disclosing the wrong information to neighbors.

Another major change for brokers is that "cash for keys" is now called "relocation assistance." Brokers were told to tread lightly, and make sure they understand what laws in their state apply to them when making an offer. The same policy goes for lockouts and private property disposal.

Sheila Bair recently publicly criticized federal policy of the past several decades that encouraged increased home ownership in this country. At the rate the federal government is going with legislation that makes consumer lending a compliance nightmare for lenders, they'll lower the margins on an already razor-thin margin business to the point that I doubt we'll have to worry about an excess of cheap mortgage money chasing too many potential borrowers in the future. At some point, the big four lenders who currently make more than two-thirds of all first residential mortgage loans in this country will have driven out most of the remaining competitors (or they will have willingly departed) and will be pricing such loans so that even many of "the few" (Ms. Bair's characterization) of those who currently benefit from federal home-ownership policy will be driven out of home ownership and will need Ms. Bair's latest pet project: federally-subsidized "affordable" rental properties.