ManagingManagingYour Real Estate Your Real Estate

PortfolioPortfolio

E. Andrew Keeney, Esq.E. Andrew Keeney, Esq.Kaufman & Canoles, P.C.Kaufman & Canoles, P.C.150 West Main Street, Suite 2100150 West Main Street, Suite 2100Norfolk, VA 23510Norfolk, VA 23510(757) 624-3153(757) 624-3153eakeeney@kaufcan.comeakeeney@kaufcan.comwww.kaufmanandcanoles.comwww.kaufmanandcanoles.com

Shawn A. Goldfaden, Esq.Shawn A. Goldfaden, Esq.Stewart Title Guaranty CompanyStewart Title Guaranty Company609 Global Way, Suite 122609 Global Way, Suite 122Linthicum Heights, MD 21090Linthicum Heights, MD 21090(410) 789-8400(410) 789-8400sgoldfad@stewart.comsgoldfad@stewart.comwww.stewart.comwww.stewart.com

ScheduleSchedule9:00-9:159:00-9:159:15-9:309:15-9:309:30-10:009:30-10:00

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11:30-12:0011:30-12:00

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Greetings & Overview of the ProgramGreetings & Overview of the ProgramFundamentalsFundamentalsDue Diligence of the Entire Real Estate PortfolioDue Diligence of the Entire Real Estate PortfolioTax LiensTax LiensWorkout AgreementWorkout AgreementBreakBreakStrategies Including Loan Modifications of ExtensionsStrategies Including Loan Modifications of ExtensionsDeed in LieuDeed in LieuShort SalesShort SalesLunchLunchEverything You Wanted to Know or Not Know About Everything You Wanted to Know or Not Know About ForeclosuresForeclosuresAlternative Programs & PotpourriAlternative Programs & Potpourri

FundamentalsFundamentals

Let’s Make a Deal – WhatLet’s Make a Deal – WhatAre the Odds?Are the Odds?

A.A. Deed of trust recorded against wrong propertyDeed of trust recorded against wrong propertyB.B. Location of foreclosure sale changedLocation of foreclosure sale changedC.C. Foreclosure & credit union buys the propertyForeclosure & credit union buys the propertyD.D. Unrecorded deeds of trust?Unrecorded deeds of trust?E.E. You decide – actual examplesYou decide – actual examplesF.F. Review every real estate loanReview every real estate loan

1)1) PFCUPFCU2)2) HELOC shut downsHELOC shut downs

1st Mortgage Balances Lead Loan 1st Mortgage Balances Lead Loan Growth in 2008Growth in 2008

Data for all US CUs as of Dec. 31, 2008Data for all US CUs as of Dec. 31, 2008

Source: Callahan’s Peer to Peer Software

Credit Union Mortgage Lending Rises Credit Union Mortgage Lending Rises Double-Digits in a Down MarketDouble-Digits in a Down Market

Sources: Callahan’s Peer to Peer Software, Mortgage Bankers Association, Office of Thrift Supervision

First Mortgage Market Share First Mortgage Market Share Doubles in Two YearsDoubles in Two Years

Sources: Callahan’s Peer to Peer Software, Mortgage Bankers Association

Real Estate Delinquency Rises as Real Estate Delinquency Rises as the Economy Impacts Membersthe Economy Impacts Members

Data for all US CUs as of Dec. 31, 2008Data for all US CUs as of Dec. 31, 2008

Source: Callahan’s Peer to Peer Software

Credit Union Delinquency Remains Below that of Credit Union Delinquency Remains Below that of FDIC-Insured Institutions Across the BoardFDIC-Insured Institutions Across the Board

1.37%1.20% 1.06% 1.26%

1.89%

2.93%

3.80%

1.61%

4.64%

2.73%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

Total Loans & Leases

All Real Estate Loans

Home Equity Loans

First Mortgages

Credit Cards

Credit UnionsFDIC Insured

Data as of December 31, 2008Data as of December 31, 2008

Source: Callahan’s Peer to Peer Software

Delinquency Ranges from 0.72% to 2.83% Delinquency Ranges from 0.72% to 2.83% across U.S. CUsacross U.S. CUs

Source: Callahan’s Peer to Peer Software

Credit Union Charge-offs are Lower Credit Union Charge-offs are Lower than FDIC-Insured Institutionsthan FDIC-Insured Institutions

0.91%0.27%

0.62%0.10%

2.71%

1.28% 0.99%1.58%

0.81%

5.44%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Total Loans All Real Estate Home Equity Loans

First Mortgages Credit Cards

Credit Unions FDIC Insured

Data as of December 31, 2008Data as of December 31, 2008

Source: Callahan’s Peer to Peer Software, FDIC

Credit Unions Modified over $1.2 Billion Credit Unions Modified over $1.2 Billion in Real Estate Loans in 2008in Real Estate Loans in 2008

Data for all US CUs as of Dec. 31, 2008Data for all US CUs as of Dec. 31, 2008

Source: Callahan’s Peer to Peer Software

Mortgage FraudMortgage Fraud• FinCEN reported through suspicious activity reports FinCEN reported through suspicious activity reports

(SARs) 156,000 mortgage fraud subjects and 2,360 (SARs) 156,000 mortgage fraud subjects and 2,360 other SAR types for a total of 158,360 in 2008other SAR types for a total of 158,360 in 2008

• Mortgage loan fraudsters are using multiple channelsMortgage loan fraudsters are using multiple channels• Financial institutionsFinancial institutions• Non-depository financial institutions such as: money service Non-depository financial institutions such as: money service

businesses, securities brokers, securities dealers, insurance businesses, securities brokers, securities dealers, insurance companies, casinoscompanies, casinos

• Watch out for the crooksWatch out for the crooks• Constantly undertake due diligenceConstantly undertake due diligence

Due Diligence of theDue Diligence of theEntire Real Estate PortfolioEntire Real Estate Portfolio

Tax LiensTax Liens

Due DiligenceDue Diligence• Get copies of all of your loan documentsGet copies of all of your loan documents• Review all loans, even those that are not delinquentReview all loans, even those that are not delinquent• If they are delinquent – WHY?If they are delinquent – WHY?• Forbearance agreementForbearance agreement• Decision point – 3 paths:Decision point – 3 paths:

• Member cures the delinquency & the loan is reinstated as currentMember cures the delinquency & the loan is reinstated as current• Credit union & member negotiate a resolutionCredit union & member negotiate a resolution• Member does not secure the delinquency, becomes further delinquent Member does not secure the delinquency, becomes further delinquent

& credit union forecloses& credit union forecloses• Get the deedGet the deed

• Short saleShort sale• Deed in lieuDeed in lieu• ForeclosureForeclosure

• Write offsWrite offs• Stay on scheduleStay on schedule• Review and revise loan extension policiesReview and revise loan extension policies

Loan Extension PoliciesLoan Extension Policies(according to NCUA)(according to NCUA)

• Loan extension policies should address the Loan extension policies should address the qualifications & procedures for granting qualifications & procedures for granting extension agreements, including:extension agreements, including:• Documentation of the reasons for granting Documentation of the reasons for granting

extensionextension• Identification of the persons with the authority Identification of the persons with the authority

to approve extensionsto approve extensions• Require that the member demonstrate a Require that the member demonstrate a

“reasonable ability” to meet his or her “reasonable ability” to meet his or her payment obligation following the extensionpayment obligation following the extension

• Limitations on the frequency of extension Limitations on the frequency of extension agreementsagreements

Real Estate Owned (REO)Real Estate Owned (REO) Property owned by a lender after an Property owned by a lender after an

unsuccessful sale at a foreclosure auction unsuccessful sale at a foreclosure auction and held in inventory. This is common and held in inventory. This is common because most of the properties up for sale because most of the properties up for sale at these auctions are worth less than the at these auctions are worth less than the total amount owed to the bank: the total amount owed to the bank: the minimum bid in most foreclosure auctions minimum bid in most foreclosure auctions equals the outstanding loan amount, the equals the outstanding loan amount, the accrued interest and any fees associated accrued interest and any fees associated with the foreclosure sale.with the foreclosure sale.

OreoOreo Other real estate; other real estate owned. Other real estate; other real estate owned.

Generally, foreclosed property held by Generally, foreclosed property held by lending institutions. An account at banks lending institutions. An account at banks or credit unions that includes property or credit unions that includes property other than real estate used for bank other than real estate used for bank operations.operations.

Recognizing Tax Lien IssuesRecognizing Tax Lien Issues

The Impact of Tax LiensThe Impact of Tax Liens• Federal tax liens and State tax liensFederal tax liens and State tax liens

• TermTerm• Evidence ofEvidence of• Craft v. USCraft v. US• Ruggerio v. USRuggerio v. US

• Municipal liensMunicipal liens• ProceduresProcedures• New legislationNew legislation

• Ground RentsGround Rents• New ground rent legislationNew ground rent legislation

Forbearance or Workout Forbearance or Workout AgreementsAgreements

Forbearance or Workout Forbearance or Workout AgreementsAgreements

• Update title reportUpdate title report• Judgment lien searchJudgment lien search• Update credit bureau reportUpdate credit bureau report• Research & update status of real Research & update status of real

property taxes & insuranceproperty taxes & insurance• Identify sources of recovery, if anyIdentify sources of recovery, if any• Property inspectionProperty inspection• Obtain appraisal or market analysisObtain appraisal or market analysis

Standstill AgreementStandstill Agreement Agreement whereby a lender makes no Agreement whereby a lender makes no

further collection efforts on an unpaid further collection efforts on an unpaid loan, acting in the belief that foreclosure loan, acting in the belief that foreclosure would jeopardize the ability of a borrower would jeopardize the ability of a borrower in financial difficulty to repay any portion in financial difficulty to repay any portion of the debt. Such agreements are found of the debt. Such agreements are found most frequently in loans secured by real most frequently in loans secured by real estate, whether both parties agree that a estate, whether both parties agree that a renegotiated loan is better than a renegotiated loan is better than a defaulted borrower.defaulted borrower.

Strategies IncludingStrategies IncludingLoan Modifications ofLoan Modifications of

ExtensionsExtensions

Loan RestructuringLoan RestructuringThe Workout & Workout AgreementThe Workout & Workout Agreement

• Initial ActionsInitial Actions• Learn the factsLearn the facts

• Talk to member to learn initial problem & discuss Talk to member to learn initial problem & discuss desired result(s)desired result(s)

• Assess what you already knowAssess what you already know• Order the necessary searches & documentsOrder the necessary searches & documents

• Preliminary analysis – look at the current Preliminary analysis – look at the current situation as both a modification situation as both a modification && as if you as if you were doing due diligence on a loan to a new were doing due diligence on a loan to a new borrowerborrower

• Re-read member’s loan & security documents Re-read member’s loan & security documents with the information you learned from the with the information you learned from the searches and initial analysis questions in mindsearches and initial analysis questions in mind

The Workout & Workout The Workout & Workout AgreementAgreement

• Drafting the workout agreementDrafting the workout agreement• Begin by outlining the provisions that concern you or use Begin by outlining the provisions that concern you or use

a standard forma standard form• Basic types of changes (“Business Terms” vs. “Technical Basic types of changes (“Business Terms” vs. “Technical

Points”)Points”)• Specific provisions and issuesSpecific provisions and issues

• RecitalsRecitals• Provision stating that the original documents, except as Provision stating that the original documents, except as

inconsistent with the Workout Agreement, remain in full inconsistent with the Workout Agreement, remain in full force & effectforce & effect

• Disclaimer stating that the Workout Agreement was drafted Disclaimer stating that the Workout Agreement was drafted by both parties & that both parties were given the by both parties & that both parties were given the opportunity to be represented by counselopportunity to be represented by counsel

• Indemnification & hold harmless clauseIndemnification & hold harmless clause• Waiver of jury trial (if not already included)Waiver of jury trial (if not already included)• Notice provisionsNotice provisions

The Workout & Workout The Workout & Workout Agreement (cont.)Agreement (cont.)

• Courts take 3 general approaches as to pre-Courts take 3 general approaches as to pre-petition waivers of relief from automatic stay:petition waivers of relief from automatic stay:

• General enforceableGeneral enforceable• Per se unenforceablePer se unenforceable• Pre-petition waiver is but 1 key factor in deciding Pre-petition waiver is but 1 key factor in deciding

whether cause exists to grant reliefwhether cause exists to grant relief• Strive to reduce exposure to lender liability – Strive to reduce exposure to lender liability –

yesyes, they will blame the credit union, they will blame the credit union

Alternative MeasuresAlternative Measures• Extend the loanExtend the loan• Lower the paymentLower the payment• Lower the interest rateLower the interest rate• Set up escrow account for taxes & insuranceSet up escrow account for taxes & insurance• Principal forbearance with the mortgage Principal forbearance with the mortgage

essentially being divided into 2 loans – borrower essentially being divided into 2 loans – borrower makes regular payments on 1 smaller loan & the makes regular payments on 1 smaller loan & the other loan becomes a 0 interest loan that is paid other loan becomes a 0 interest loan that is paid back when the home is soldback when the home is sold

• Only 1 in 10 homeowners is eligible to refinance Only 1 in 10 homeowners is eligible to refinance due to current market valuesdue to current market values

• Currently 78.5% refi requests turned downCurrently 78.5% refi requests turned down

Alternative Measures (cont.)Alternative Measures (cont.)• If they’ll work with us . . . we’ll work with If they’ll work with us . . . we’ll work with

themthem• Distribute the responsibilitiesDistribute the responsibilities

• Counseling membersCounseling members• Loan rewrites, extensions & modificationsLoan rewrites, extensions & modifications• CollectionsCollections• OREOs and auto repossessionsOREOs and auto repossessions

• CEO overview, updates & responsibilityCEO overview, updates & responsibility

Deed in Lieu of ForeclosureDeed in Lieu of Foreclosure

Deed in Lieu of Foreclosure – Deed in Lieu of Foreclosure – When Is It Appropriate?When Is It Appropriate?

• Members hands over keysMembers hands over keys• Member transfers all the collateral to the Member transfers all the collateral to the

credit unioncredit union• Deed in lieu is more appropriate when Deed in lieu is more appropriate when

property value is less than the debtproperty value is less than the debt• Deed in lieu is more appropriate when the Deed in lieu is more appropriate when the

title is cleantitle is clean

How a Deed in LieuHow a Deed in Lieuof Foreclosure Worksof Foreclosure Works

• Member & credit union execute transfer Member & credit union execute transfer documentsdocuments

• Property insurance by credit unionProperty insurance by credit union• Credit union obtains physical possession Credit union obtains physical possession

including the keysincluding the keys• Deed of trust often remains in place until Deed of trust often remains in place until

the property is soldthe property is sold• Credit union obtains new owner’s title Credit union obtains new owner’s title

insurance policiesinsurance policies

Advantages & Disadvantages of Advantages & Disadvantages of Deed in LieuDeed in Lieu

• AdvantagesAdvantages• QuickQuick• InexpensiveInexpensive• ConsensualConsensual• Limited publicity for the memberLimited publicity for the member• No litigationNo litigation

• DisadvantagesDisadvantages• Existing liens are not extinguishedExisting liens are not extinguished• Transfer taxesTransfer taxes• Fraudulent conveyance riskFraudulent conveyance risk• Title insuranceTitle insurance

Deeds in Lieu of Foreclosure Deeds in Lieu of Foreclosure (continued)(continued)

• What are the basic business and legal issues What are the basic business and legal issues involved with a deed-in-lieu or deed-in-escrow?involved with a deed-in-lieu or deed-in-escrow?

• What are the title insurance issues in deeds-in-lieu / What are the title insurance issues in deeds-in-lieu / deeds-in-escrow, and what endorsements are deeds-in-escrow, and what endorsements are applicable and available?applicable and available?

• What are the risks of recharacterization based on What are the risks of recharacterization based on the “clogging” doctrine or a determination that the the “clogging” doctrine or a determination that the transaction is in fact an equitable mortgage?transaction is in fact an equitable mortgage?

• What constitutes adequate consideration for a What constitutes adequate consideration for a lender receiving a deed-in-escrow as part of a loan lender receiving a deed-in-escrow as part of a loan workout?workout?

• What factors do the courts consider when deciding What factors do the courts consider when deciding whether to enforce a deed-in-escrow?whether to enforce a deed-in-escrow?

Short SalesShort Sales

Short SalesShort Sales• Why are short sales important as an option?Why are short sales important as an option?• What effect is the short sale on the lender’s What effect is the short sale on the lender’s

bottom line? Customer’s bottom line? bottom line? Customer’s bottom line? • StatisticsStatistics• Short salesShort sales• DeficiencyDeficiency• Promissory Note ObligationsPromissory Note Obligations• ““Recourse” vs. “Non-recourse” DebtRecourse” vs. “Non-recourse” Debt

Short Sales (cont.)Short Sales (cont.)• From Wikipedia:From Wikipedia: A A non-recourse debtnon-recourse debt or or nonrecourse loannonrecourse loan is a secured loan is a secured loan

(debt) that is secured by a pledge of collateral, typically real (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the lender is simply example, if real estate prices have dropped), the lender is simply paid out the difference. Thus, non-recourse debt is typically paid out the difference. Thus, non-recourse debt is typically limited to 80% or 90% loan-to-value ratios, so that the property limited to 80% or 90% loan-to-value ratios, so that the property itself provides "overcollateralization" of the loan. The purpose of itself provides "overcollateralization" of the loan. The purpose of non-recourse debt is to require lenders to underwrite their loans non-recourse debt is to require lenders to underwrite their loans on a sustainable and prudent basis since the lender is in the first-on a sustainable and prudent basis since the lender is in the first-loss position with these loans, not the borrower. Non-recourse loss position with these loans, not the borrower. Non-recourse debt is usually carried on a company's balance sheet as a debt is usually carried on a company's balance sheet as a liability, and the collateral is carried as an asset.liability, and the collateral is carried as an asset.

Short Sales (cont.)Short Sales (cont.)• MarylandMaryland: A recourse state. The State of Maryland has : A recourse state. The State of Maryland has

long-standing foreclosure legislation that allows lenders up long-standing foreclosure legislation that allows lenders up to three years to file a deficiency judgment for the balance to three years to file a deficiency judgment for the balance of loans after the proceeds of a foreclosure sale have been of loans after the proceeds of a foreclosure sale have been applied provided the bank does not purchase the property applied provided the bank does not purchase the property back at foreclosure.back at foreclosure.

Everything You Wanted to Everything You Wanted to Know or Not Know About Know or Not Know About

ForeclosuresForeclosures

Foreclosures in Maryland and the Foreclosures in Maryland and the District of ColumbiaDistrict of Columbia

Foreclosures & Other Claim Foreclosures & Other Claim Related IssuesRelated Issues

I. Maryland:I. Maryland:A. Procedure: quasi-judicial A. Procedure: quasi-judicial B. New foreclosure legislationB. New foreclosure legislationC. Foreclosure consultingC. Foreclosure consultingD. Equity stripping D. Equity stripping E. Protection of Homeowners in Foreclosure Act E. Protection of Homeowners in Foreclosure Act

(PHIFA)(PHIFA)1. Julian v. Buonassisi, et al., No. 2740, Sept. 1. Julian v. Buonassisi, et al., No. 2740, Sept.

Term, 2007Term, 2007

Foreclosures & Other ClaimForeclosures & Other ClaimRelated Issues (cont.)Related Issues (cont.)

II. District of Columbia:II. District of Columbia:• A. Home Equity Protection Act of 2007 (D.C. Act A. Home Equity Protection Act of 2007 (D.C. Act

A17-205)A17-205)• - Judicial Foreclosure Available: No - Judicial Foreclosure Available: No •   - Non-Judicial Foreclosure Available: Yes - Non-Judicial Foreclosure Available: Yes •   - Primary Security Instruments: Deed of Trust - Primary Security Instruments: Deed of Trust •   - Timeline: Typically 60 days - Timeline: Typically 60 days •   - Right of Redemption: No - Right of Redemption: No •   - Deficiency Judgments Allowed: Yes - Deficiency Judgments Allowed: Yes • In Washington D.C., lenders may foreclose on In Washington D.C., lenders may foreclose on

deeds of trusts in default using the non-judicial deeds of trusts in default using the non-judicial foreclosure process.foreclosure process.

Foreclosures & Other Claim Foreclosures & Other Claim Related Issues (cont.)Related Issues (cont.)

• Non-Judicial Foreclosure Non-Judicial Foreclosure • The non-judicial process of foreclosure is used The non-judicial process of foreclosure is used

when a power of sale clause exists in a mortgage when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the or deed of trust. A "power of sale" clause is the clause in a deed of trust or mortgage, in which clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of to pay off the balance on a loan in the event of the their default. In deeds of trust or mortgages the their default. In deeds of trust or mortgages where a power of sale exists, the power given to where a power of sale exists, the power given to the lender to sell the property may be executed the lender to sell the property may be executed by the lender or their representative, typically by the lender or their representative, typically referred to as the trustee. Regulations for this referred to as the trustee. Regulations for this type of foreclosure process are outlined below in type of foreclosure process are outlined below in the "Power of Sale Foreclosure Guidelines". the "Power of Sale Foreclosure Guidelines".

Foreclosures & Other Claim Foreclosures & Other Claim Related Issues (cont.)Related Issues (cont.)

• Power of Sale Foreclosure Guidelines Power of Sale Foreclosure Guidelines • If the deed of trust or mortgage contains a power of sale clause and If the deed of trust or mortgage contains a power of sale clause and

specifies the time, place and terms of sale, then the specified specifies the time, place and terms of sale, then the specified procedure must be followed. If the terms of the sale are not procedure must be followed. If the terms of the sale are not established in the deed of trust, the lender, or his representative, must established in the deed of trust, the lender, or his representative, must obtain a court order specifying the terms of the sale. However, no obtain a court order specifying the terms of the sale. However, no foreclosure sale may take place unless the lender gives written notice, foreclosure sale may take place unless the lender gives written notice, by certified mail (return receipt requested), to the borrower at his last by certified mail (return receipt requested), to the borrower at his last known address. This notice must also be sent to the Mayor of the known address. This notice must also be sent to the Mayor of the District of Columbia, or his designated agent. Both notices must be District of Columbia, or his designated agent. Both notices must be sent at least thirty (30) days prior to the sale, with the thirty (30) day sent at least thirty (30) days prior to the sale, with the thirty (30) day period beginning on the day the notice is received by the Mayor. This period beginning on the day the notice is received by the Mayor. This notice must be given in addition to any notices set forth by the court, notice must be given in addition to any notices set forth by the court, the mortgage or the deed of trust. the mortgage or the deed of trust.

• In Washington D.C., lenders may obtain a deficiency judgment against In Washington D.C., lenders may obtain a deficiency judgment against the borrower for the difference between the foreclosure sale amount the borrower for the difference between the foreclosure sale amount and the amount remaining on the original loan. The borrower has no and the amount remaining on the original loan. The borrower has no rights of redemption.rights of redemption.

Foreclosures & Other ClaimForeclosures & Other ClaimRelated Issues (cont.)Related Issues (cont.)

• Foreclosure with second mortgage lenderForeclosure with second mortgage lender• Bankruptcy of second mortgage lenderBankruptcy of second mortgage lender• Title insurance coverage continuation Title insurance coverage continuation • Mayor and City Council of Baltimore City v. Wells Mayor and City Council of Baltimore City v. Wells

Fargo (reverse redlining case)Fargo (reverse redlining case)

How to Avoid ForeclosuresHow to Avoid ForeclosuresWhy try and help the borrower avoid foreclosure? Why try and help the borrower avoid foreclosure? The housing market values may continue to weaken The housing market values may continue to weaken thus adding to an over appreciated asset. The home thus adding to an over appreciated asset. The home value may deteriorate as homeowners abandon value may deteriorate as homeowners abandon properties and leave them open to depreciation. properties and leave them open to depreciation. Title issues may stall foreclosure rights. Title issues may stall foreclosure rights. Homeowners may look for BK protection thus Homeowners may look for BK protection thus triggering many facets of protectiontriggering many facets of protection. . •Short SalesShort Sales

How to Avoid Foreclosures (cont.)How to Avoid Foreclosures (cont.)• Restructuring Restructuring

• Misconception: Restructuring violates the Misconception: Restructuring violates the contractual rights of investors.contractual rights of investors.

• Misconception: Restructuring is a bailout of Misconception: Restructuring is a bailout of subprime borrowers and/or investors.subprime borrowers and/or investors.

• Misconception: Restructuring will create a Misconception: Restructuring will create a windfall for subprime borrowers.windfall for subprime borrowers.

• Misconception: Restructuring will deny Misconception: Restructuring will deny investors their expected return.investors their expected return.

• Misconception: Restructuring is unnecessary Misconception: Restructuring is unnecessary based on past levels of credit losses.based on past levels of credit losses.

• ModificationsModifications• Refinance Refinance

2006 ALTA Title Insurance 2006 ALTA Title Insurance PoliciesPolicies

2006 ALTA Title Insurance Policies2006 ALTA Title Insurance Policies• INTRODUCTION TO ALTA 2006 POLICIES AND INTRODUCTION TO ALTA 2006 POLICIES AND

ENDORSEMENTSENDORSEMENTS• THE HIGHLIGHTS OF THE NEW 2006 POLICIESTHE HIGHLIGHTS OF THE NEW 2006 POLICIES• NEW COVERAGESNEW COVERAGES

• Coverage for Electronic TransactionsCoverage for Electronic Transactions• Survey Coverage Survey Coverage • Tax CoverageTax Coverage• Gap CoverageGap Coverage• Covered Risks Relating to Excluded Matters Covered Risks Relating to Excluded Matters

• OTHER EXPANSIONS OF COVERAGE OTHER EXPANSIONS OF COVERAGE

2006 ALTA Title Insurance Policies 2006 ALTA Title Insurance Policies (cont.)(cont.)

• Creditors’ RightsCreditors’ Rights• Unmarketable TitleUnmarketable Title• Mechanic’s LiensMechanic’s Liens• Priority Priority • THE NEW ENDORSEMENTSTHE NEW ENDORSEMENTS

• EXHIBIT 1: Endorsement 7.1 (Manufactured Housing – Conversion; Loan) & 7.1-06 (6-EXHIBIT 1: Endorsement 7.1 (Manufactured Housing – Conversion; Loan) & 7.1-06 (6-17-06) 17-06)

• EXHIBIT 2: Endorsement 9.3 (Restrictions, Encroachments, Minerals – Loan Policy) & EXHIBIT 2: Endorsement 9.3 (Restrictions, Encroachments, Minerals – Loan Policy) & 9.3-06 (6/17/06)9.3-06 (6/17/06)

• EXHIBIT 3: Endorsement 14.3 (Future Advance – Reverse Mortgage) & 14.3-06 EXHIBIT 3: Endorsement 14.3 (Future Advance – Reverse Mortgage) & 14.3-06 (6/17/06)(6/17/06)

• EXHIBIT 4: Endorsement 22 (Location) & 22-06 (6/17/06) EXHIBIT 4: Endorsement 22 (Location) & 22-06 (6/17/06) • EXHIBIT 5: Endorsement 22.1 (Location and Map) & 22.1-06 (6/17/06)EXHIBIT 5: Endorsement 22.1 (Location and Map) & 22.1-06 (6/17/06)• EXHIBIT 6: ALTA Endorsement 11-06 (Mortgage Modification) (Not new but relevant)EXHIBIT 6: ALTA Endorsement 11-06 (Mortgage Modification) (Not new but relevant)

2006 ALTA Title Insurance Policies 2006 ALTA Title Insurance Policies (cont.)(cont.)

• THE NEW FORMSTHE NEW FORMS• EXHIBIT 7: 2006 Lender’s Title Policy (6/17/06)EXHIBIT 7: 2006 Lender’s Title Policy (6/17/06)• EXHIBIT 8: 2006 Enhanced and Enhanced Short Form Lender’s EXHIBIT 8: 2006 Enhanced and Enhanced Short Form Lender’s

Policies (1/1/08) Policies (1/1/08) • EXHIBIT 9: Lender’s Commitment for Title Insurance (6-17-06)EXHIBIT 9: Lender’s Commitment for Title Insurance (6-17-06)• EXHIBIT 10: Insured Closing Protection Letter (1-1-08)EXHIBIT 10: Insured Closing Protection Letter (1-1-08)

• THE DIFFERENCES BETWEEN THE 2006 POLICIES AND THE 1992/1970 THE DIFFERENCES BETWEEN THE 2006 POLICIES AND THE 1992/1970 POLICIES POLICIES

• WHAT THE 2006 POLICIES DO NOT DO WHAT THE 2006 POLICIES DO NOT DO • WHAT ENDORSEMENTS TO THE 2006 POLICIES TO ASK FORWHAT ENDORSEMENTS TO THE 2006 POLICIES TO ASK FOR

Alternative Programs & Alternative Programs & PotpourriPotpourri

1031 EXCHANGES1031 EXCHANGESASSET PRESERVATION, INC.ASSET PRESERVATION, INC.

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1031 Exchanges1031 ExchangesI. EXCHANGES IN A FORECLOSUREI. EXCHANGES IN A FORECLOSURE

1.1.Taxpayer under water due to the loan balance Taxpayer under water due to the loan balance being in excess of FMV or being unable to pay being in excess of FMV or being unable to pay mortgage balance on the due datemortgage balance on the due date

2.2.Loan balance in excess of basis of property Loan balance in excess of basis of property (taxpayer may incur taxable gain if foreclosure (taxpayer may incur taxable gain if foreclosure is in full satisfaction of debt)is in full satisfaction of debt)

3.3.Deed in lieu to lender rather than foreclosureDeed in lieu to lender rather than foreclosure4.4.No cash to pay any tax liability – resulting from No cash to pay any tax liability – resulting from

deficiencydeficiency

1031 Exchanges (cont.)1031 Exchanges (cont.)5.5. Non-Recourse DebtNon-Recourse Debt

1. Taxpayer will recognize capital gain in an amount 1. Taxpayer will recognize capital gain in an amount equal to the total debt secured by the property less equal to the total debt secured by the property less taxpayer’s adjusted basistaxpayer’s adjusted basis

6.6. Recourse Debt: Two Types of LiabilityRecourse Debt: Two Types of Liability1. Taxable Disposition of Property: Gain or loss 1. Taxable Disposition of Property: Gain or loss

recognized-The difference between the fair market recognized-The difference between the fair market value of the property and the taxpayer’s adjusted value of the property and the taxpayer’s adjusted tax basis immediately prior to the disposition.tax basis immediately prior to the disposition.

2. Forgiveness of deficiency if FMV is less than 2. Forgiveness of deficiency if FMV is less than recourse liability: ordinary income to extent of recourse liability: ordinary income to extent of deficiency (unless excepted)deficiency (unless excepted)

7.7. Exchange equation appliesExchange equation applies8.8. Trade up or even in value and reinvest all net Trade up or even in value and reinvest all net

equityequity

1031 Exchanges (cont.)1031 Exchanges (cont.)9.9. Partial tax deferral is another possibilityPartial tax deferral is another possibility10.10. Replacement property may have equal debt Replacement property may have equal debt

so full tax deferral is achievable with minimal so full tax deferral is achievable with minimal cashcash

11.Sale or assignment of note and mortgage to 11.Sale or assignment of note and mortgage to lender or third party will not qualify for §1031 lender or third party will not qualify for §1031 purposespurposes

12.Deed in lieu constitutes the sale of the 12.Deed in lieu constitutes the sale of the relinquished property and starts the 45/180 relinquished property and starts the 45/180 day periodsday periods

13.Exchange must be structured and exchange 13.Exchange must be structured and exchange documents prepared in advance of deed in documents prepared in advance of deed in lieulieu

II. FINANCIAL BACKINGII. FINANCIAL BACKING1.1. Does the QI offer customers the written backing of a Does the QI offer customers the written backing of a

large creditworthy entity?large creditworthy entity?2.2. What is the financial rating and balance sheet of this What is the financial rating and balance sheet of this

entity?entity?3.3. Does the QI conduct due diligence on the depositories Does the QI conduct due diligence on the depositories

holding the funds and monitor them?holding the funds and monitor them?4.4. Does the QI offer segregated accounts?Does the QI offer segregated accounts?5.5. Does the QI offer a qualified escrow account?Does the QI offer a qualified escrow account?6.6. Does the QI offer a qualified trust account?Does the QI offer a qualified trust account?7.7. Does the QI have sufficient fidelity bond coverage?Does the QI have sufficient fidelity bond coverage?8.8. Is the QI audited by a recognized external independent Is the QI audited by a recognized external independent

auditor?auditor?9.9. What types of internal audit controls are in place?What types of internal audit controls are in place?10.10.Does the QI allow the taxpayer to require notarized Does the QI allow the taxpayer to require notarized

signature for the movement of funds?signature for the movement of funds?

1031 Exchanges (cont.)1031 Exchanges (cont.)

1031 Exchanges (cont.)1031 Exchanges (cont.)III. SECUITY QUESTIONSIII. SECUITY QUESTIONS

1.1. Does the QI have specific written Does the QI have specific written policies for moving exchange funds?policies for moving exchange funds?

2.2. Does the QI have a written investment Does the QI have a written investment policy?policy?

3.3. What security mechanisms are in place What security mechanisms are in place to protect against the misappropriation to protect against the misappropriation of funds?of funds?

1031 Exchanges (cont.)1031 Exchanges (cont.)IV. EXPERIENCEIV. EXPERIENCE

1.1. Is the QI staffed by trained experts CPAs, attorneys and Is the QI staffed by trained experts CPAs, attorneys and §1031 exchange specialists?§1031 exchange specialists?

2.2. Does the QI have significant expertise in reverse and Does the QI have significant expertise in reverse and improvement exchanges as well as delayed exchangesimprovement exchanges as well as delayed exchanges

3.3. Does the QI offer CE approved courses taught nationwide?Does the QI offer CE approved courses taught nationwide?4.4. Will the QI provide §1031 handbooks and up-to-date tax Will the QI provide §1031 handbooks and up-to-date tax

materials?materials?5.5. Does the QI provide extensive exchange resources available Does the QI provide extensive exchange resources available

on the internet?on the internet?6.6. How many years has the QI been in business? How many years has the QI been in business? 7.7. How many exchanges has the QI facilitated? How many exchanges has the QI facilitated? 8.8. What is the average dollar size of exchanges facilitated?What is the average dollar size of exchanges facilitated?9.9. Will the QI provide a reference and client list?Will the QI provide a reference and client list?10.10. If there is a parent company backing the QI, how many years If there is a parent company backing the QI, how many years

has the parent company been in business? has the parent company been in business? 11.11. What is the level of education and training of the staff?What is the level of education and training of the staff?

Bankruptcy – Automatic StayBankruptcy – Automatic Stay• General standard for relief is either:General standard for relief is either:

• For cause, including lack of adequate protection of creditor, orFor cause, including lack of adequate protection of creditor, or• Debtor has no equity in propertyDebtor has no equity in property

• Exceptions for real estate lenders – single asset real estate debtorExceptions for real estate lenders – single asset real estate debtor• Secured lender with a claim against “single asset real estate Secured lender with a claim against “single asset real estate

debtor” is entitled to relief from the automatic stay within the debtor” is entitled to relief from the automatic stay within the latter of:latter of:• 90 days of the filing of bankruptcy petition, or90 days of the filing of bankruptcy petition, or• 30 days after court determination that debtor is a “single asset 30 days after court determination that debtor is a “single asset

real estate debtor”real estate debtor”UNLESSUNLESS

• ExceptionsExceptions• Debtor has filed a plan with a reasonable possibility of Debtor has filed a plan with a reasonable possibility of

being confirmed, orbeing confirmed, or• Debtor is making monthly payments equal to non-default Debtor is making monthly payments equal to non-default

contract interest on the unsecured amount of the lender’s contract interest on the unsecured amount of the lender’s claimclaim

CramdownCramdown• Factors to be consideredFactors to be considered

• Sophistication of the party making the waiver of an automatic Sophistication of the party making the waiver of an automatic staystay

• Whether or not there was any monetary consideration given for Whether or not there was any monetary consideration given for the waiverthe waiver

• Whether other parties are affected, including unsecured & Whether other parties are affected, including unsecured & junior creditorsjunior creditors

• Feasibility of the debtor’s planFeasibility of the debtor’s plan• Evidence of the fraud or coercionEvidence of the fraud or coercion• Likelihood of reorganizationLikelihood of reorganization• Potential prejudice to creditor if waiver is not enforcedPotential prejudice to creditor if waiver is not enforced

• Cramdown – rewrite of the terms of the mortgageCramdown – rewrite of the terms of the mortgage• The bankruptcy court already has the authority to approve a plan The bankruptcy court already has the authority to approve a plan

submitted by the debtor that unilaterally rewrites the mortgagesubmitted by the debtor that unilaterally rewrites the mortgage• Extend termExtend term• Revise or eliminate amortization scheduleRevise or eliminate amortization schedule• Reduce interest rateReduce interest rate• Strip away unsecured portionsStrip away unsecured portions

Cramdown (cont.)Cramdown (cont.)• Requires confirmation of the bankruptcy plan by the Requires confirmation of the bankruptcy plan by the

bankruptcy courtbankruptcy court• Objections by creditorsObjections by creditors

• Cramdown plan must not discriminate unfairly against Cramdown plan must not discriminate unfairly against “cramdown claims”“cramdown claims”

• Plan must also treat cramdown claims in a manner that is Plan must also treat cramdown claims in a manner that is “fair & equitable”“fair & equitable”

• A fair & equitable treatment is 1 of 4 alternatives:A fair & equitable treatment is 1 of 4 alternatives:• Whether or not discrimination has a reasonable basisWhether or not discrimination has a reasonable basis• Whether the debtor can carry out the plan without Whether the debtor can carry out the plan without

discriminationdiscrimination• Whether the discrimination proposed is in good faithWhether the discrimination proposed is in good faith• Whether the degree of discrimination is directly related to Whether the degree of discrimination is directly related to

the basis or rationale of discrimination, i.e. why the the basis or rationale of discrimination, i.e. why the different treatmentdifferent treatment

Cramdown SolutionsCramdown Solutions• The bankruptcy court already has the The bankruptcy court already has the

authority to approve a plan submitted by authority to approve a plan submitted by the debtor that unilaterally rewrites the the debtor that unilaterally rewrites the mortgagemortgage• Extend termExtend term• Revise or eliminate amortization Revise or eliminate amortization

scheduleschedule• Reduce interest rateReduce interest rate• Strip away unsecured portionsStrip away unsecured portions

E. Andrew Keeney, Esq.E. Andrew Keeney, Esq.Kaufman & Canoles, P.C.Kaufman & Canoles, P.C.150 West Main Street, Suite 2100150 West Main Street, Suite 2100Norfolk, VA 23510Norfolk, VA 23510(757) 624-3153(757) 624-3153eakeeney@kaufcan.comeakeeney@kaufcan.comwww.kaufmanandcanoles.comwww.kaufmanandcanoles.com

Shawn A. Goldfaden, Esq.Shawn A. Goldfaden, Esq.Stewart Title Guaranty CompanyStewart Title Guaranty Company609 Global Way, Suite 122609 Global Way, Suite 122Linthicum Heights, MD 21090Linthicum Heights, MD 21090(410) 789-8400(410) 789-8400sgoldfad@stewart.comsgoldfad@stewart.comwww.stewart.comwww.stewart.com