A failed Las Vegas casino project has resulted in hundreds of millions on contractor claims against the title insurer. Fidelity National leads a group of insurers in defending the title, and is countersuing associated corporations. The basis for the suit is that the parent corporation should be held liable for the losses of the subsidiary. While the lawyers for Soffer, the parent corporation claim that the Las Vegas venture is a separate entity, the attorneys for Fidelity see it differently.

“These corporate and partnership entities are a fiction created to deceive lenders, title companies and members of

Fountainbleau Las Vegas

the public, and to hide assets and avoid liabilities,” it says in their suit. While corporate entities normally shield principals and other entities from liabilities, this case appears to have factors which could threaten the corporate veil.

The Miami judge in the underlying bankruptcy case learned that the Vegas casino project transferred nearly $5 million to lenders on the eve of filing for bankruptcy protection. “It certainly smacks to me of a fraudulent transfer,” Judge A. Jay Cristol said.

Regardless, it is an interesting case to watch, as it has several important subjects; a large title claim, corporate protection issues, and bankruptcy issues.

The real estate industry has been gearing up for a crisis in the commercial property market for some time. Crashing property values and loan balloon payment dates have been on a collision course, with nothing anyone can do about it. I have spoken with several bank officers year who have told me that most lenders are preparing to take losses, and work with the current property owners rather than foreclose. This makes sense, as it would be preferable to keep an existing property manager in charge, especially if the building is being run about as well as it can in the current environment. If the bank forecloses, all they can do is sell it to another owner, who needs a new mortgage and will likely face tenant loss with the change of ownership. The current owner knows the tenants, and has established relationships with them, and knows the building.

This strategy appears to be widely agreed upon. The commercial real estate industry calls this scenario “extend and pretend”, as they extend the balloon payment date, and pretend the market will come back. According to industry experts, the era of wishful thinking is about to end. “One thing that is worrisome is that banks are still delusional,” said Richard Green, director of the USC Lusk Center for Real Estate in an LA Times article. The article states that most insiders expect a “long awaited blood-bath” in commercial markets. “After spending more than a year in suspended animation, the commercial real estate industry is expected to hit bottom in 2010 with a wrenching thud,” is the lead sentence.

The idea of delaying foreclosure appears to be sneaking into the residential market, as well. Fannie Mae announced today its “Deed for Lease” program, where delinquent homeowners can stay in their houses under a 1 year lease, rather than be foreclosed upon. The program will “eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities,” Jay Ryan, a Fannie Mae vice president, said in a statement. Even homeowners who do not qualify for loan modification can take advantage of this program, which is being managed by an unnamed private company.

This program might be one of a number of attempts to keep a flood of foreclosures from hitting the resale market. In hard hit Florida, the legislature is working on a new law to require mediation to keep foreclosures at bay. “What this court system has is virtually a tsunami of these filings,” said Justice Barbara Pariente. The measure proposed by the Task Force on Residential Mortgage Foreclosures recommends trying mediation on owner-occupied homes before cases go to court. There are currently almost 300,000 filings in Florida, with more on the way.

In the Chicago area, foreclosures do not appear to be letting up either, but are moving to more affluent areas. The most recent spike of defaults is in the outlying Chicagoland counties, with Will and Kane Counties reporting double digit increases. “We’re expecting it to get worse in the near term,” said Scott Berger, program manager at Kane County’s Development Department. The Chicago Tribune describes it as “The morass of mortgage foreclosures continues to climb its way up the Chicago area’s socioeconomic ladder.”

It has been relatively well-known that many municipalities do not consider the sale prices on foreclosures when calculating property values, for the purpose of taxation. The position of assessors in often that these transactions are “distress sales”, and do not represent the true nature of an arms-length exchange.

Recently, foreclosures have come to represent a much larger share of the volume of recorded transactions. In some cases, “foreclosure” properties sustain more than half of all sales in a municipality. When this happens, are they still “outlier” numbers, which should be discarded? It is easy to agree that a run-down, damaged property sold at a courthouse-steps auction may not bring a price representative of the true market.

However, the common practice is now that a property is taken back by a lender, reviewed by a property manager, cleaned and repaired, and then marketed through the traditional Realtor/MLS system. Not only are most foreclosure properties marketed professionally, they can come with perks that even “normal” listings don’t have. Freddie Mac offers a 2 year home warranty on the homes it offers for sale, as part of its SmartBuy Sales Promotion. People purchasing single family homes as a primary residence will receive a comprehensive two-year home warranty paid for by Freddie Mac as part of HomeSteps’ SmartBuy sales promotion. In addition,  Freddie Mac will pay up to 3.5 percent of the sales price in buyer’s closing costs, potentially saving qualified buyers of HomeSteps homes thousands of dollars in transaction costs. I’d like to hear opinions as to whether you think a property sold in this scenario should still be rejected as a market indicator for taxes.

I also just became aware of a procedure in some counties where the sale of a foreclosure property is listed in the “online” records using the historical transaction price of the original foreclosed borrower. Consider this scenario:

Joe Spender buys a property in 2005 for $495,000. He defaults on the mortgage, and is foreclosed.

The lender sells the property in 2008 to Sally Saver for $292,000.

When the property is researched using the online records, the sale shows up as Sally Saver, September 2008, $495,000. This would be so misleading to potential buyers in the area and other interested parties that you might not believe it could happen. Believe it. According to this Miami Herald article, the buyer even went to the trouble of contacting the records office for clarification. The article describes the event:

Assuming it was a simple data-entry mistake, she called the county Property Appraiser’s Office. It wasn’t an error, she was told. Because the sale was a foreclosure, and the Property Appraiser’s Office isn’t recognizing foreclosure sales, the new sales price wasn’t listed and the old, previous price and date remained — with her name attached to it.

There are several issues for the title professionals to weigh in on here. First, the approach taken by the assessor. Not to be overlooked is how this affects the accuracy of the online records. I’d like to hear opinions from readers, as well as other examples of this you may have seen in your area.

The Florida legislature recently enacted law which raised various court filing fees in the state. Most notable is the fee for filing a foreclosure action in circuit court. The fee is now $1900.00 for a foreclosure of more than $250,000. It also costs an additional $1900.00 to file a cross claim or counter claim on a similar foreclosure.

Here is an example of fees from the Palm Beach County website, but most counties are similar. Lenders may be slower to act on foreclosure filings when faced with this expense, especially when the prospects for profitable results are not likely.

Floridians are already concerned about the additional dangers created by vacant foreclosure properties, especially if a severe hurricane hits. Mike Manikchand of Lehigh Acres sees a half-dozen empty, foreclosed-upon homes, sitting on weed-strewn yards and he wonders what will happen if a hurricane slams into southwest Florida this year. “A lot of these places will get destroyed.” he says.
Unoccupied, these homes would be defenseless in a storm; there will be no one to put up shutters, batten down garage doors and otherwise secure homes. But that’s not all. Nearby homes and their residents would also be at risk from wind-propelled debris.

No one really knows who will secure all the foreclosed homes if a storm does approach. A property management company hired by the bank could do the work, or else it could be a real estate agent, a homeowners’ association or even resourceful neighbors who clear debris from yards and board windows. Yet no state laws mandate who prepares buildings before a hurricane; even officials from the Florida Division of Emergency Management say that securing foreclosures isn’t a concern. The issue of who cares for vacant homes during a time of crisis seems simple: The legal owner is responsible for securing the property. But communities are already struggling to get banks to mow lawns, much less put up hurricane shutters — if they weren’t swiped from the foreclosed home, along with appliances, copper wiring and air conditioners. If the bank hasn’t yet taken the title of a home, the property is in a kind of limbo, and local officials or homeowners associations may have no legal right to trespass and secure it. And many hard-hit counties don’t have the money or manpower to do it.

A $2000 bill for a bank to foreclose might have the additional affect of putting them one step closer to being the legal owner, which adds the exposure of liability for injury and damages. I suspect that many banks will secure their position with a lis pendens, and take their time with the actual foreclosure. At least until after hurricane season.

Over the years I have written several articles about instances of deed fraud. In these cases, a person intending to commit fraud executes a deed transferring a property into their name without the knowledge of the true owner. The most common method used is to find a vacant and un-mortgaged home, and then forge the signature of the current owner on a quit-claim deed. Once this fraudulent deed is recorded, the criminal can sell, mortgage, or rent out the home and pocket the proceeds.

In a recent incident from California, a slightly different variation of the trick was used. In this case, the true owners apparently vested their California property into a corporation which the couple uses to do their real estate business. The company was named “California Housing Association LLC”, although it is domiciled in Nevada. This transaction was executed in 2007.

Fast-forward to 2009, where a person named Raymond Tate allegedly forms a CA corporation with the same name, and then proceeds to sell the property to an apparently innocent third party. The original owners discover this unknown person living in their home, and the scheme is uncovered. The local county sheriff has some trouble figuring out what to do, and it takes some time to backtrack the process. Fortunately, the title insurer states that the new deed out of the CA corp is invalid. It would be easy to determine this if the corporation was not in existence when the property was vested into it in 2007.

With this advice from the title insurer, the sheriffs department arrests Tate and charges him with attaining property by false pretenses, attempting to record a false document, filing a forged document and making a false statement to a notary. The story gets more interesting, Tate goes on to claim that he had the right to sell the house. When contacted by the press, he insisted he believed the property had been vacated and that California records show that the company that owned it did not exist. He said the state gave him the authority to create that company. The person arrested is Raymond Tate III, age 37 of Santa Cruz. Research located a real estate agent named Raymond Tate, with offices in Nevada and California, the two states connected to the story. However, the photo of the real estate agent appears to be of a man older than 37.

As deed fraud continues to be a problem, some states are drafting legislation specifically targeting the crime. A Tennessee bill is working through the legislature largely in part of the efforts of Adbul Zaif of Memphis. His home was stolen using deed fraud and eventually was partially burned, with broken Windows and used syringes strewn about. Weeks earlier, there was a report of a robbery, shooting, and rape at this home, before squatters were evicted. Two were arrested and firearms were discovered, including one previously stolen from a state trooper. TN Rep. Henry Fincher states that this legal loophole should be closed. “I don’t care if it’s a deed or a check. We prosecute people for worthless checks, the general sessions courts are full of them. We need to be prosecuting people that are forging deeds too,” Rep. Fincher said.

Back in California, a Monterey County man is under investigation for combining deed fraud with a foreclosure-rescue scam. Over the past few months, 11 homes have been deeded to Antonio Gomez. All of the homes were in foreclosure, and several of the prior owners claim to have never signed deeds, and some have claimed to have given Gomez cash to “fix their credit”, in one instance $50,000. The pattern was noticed by the county assessor who saw the multiple deeds with prices far below market value. He turned them over to the District Attorney who is investigating.

It is common knowledge that real estate purchases and refinances are in much lower volume today compared with just a few years ago. The volume of interested buyers has evaporated, and the number of borrowers qualified with credit and equity are both a fraction of what they once were.

For some individual title abstractors, this has resulted in a lower volume of search orders in the marketplace. To make matters worse, an additional obstacle to completed transactions is becoming more commonplace. When a willing buyer or borrower has executed a sales contract or loan application,  met the qualification criteria of the lender, and the property appraised, it was usually likely that the transaction would close.

More frequently,  loan underwriters are throwing last minute stipulations back at the borrower. Loan officers and appraisers are reporting that lenders are suddenly requesting specific items before funding. Recent examples have included a letter from the borrower explaining why his income went from $70,000 in 2007 to $68,000 in 2008; a notarized letter from a borrowers employer verifying their job title; a 3rd review of appraisal by a 3rd appraiser; and copies of insurance policies on a separate property, one not being financed. These were on separate transactions. In addition, parties to the transaction figured that the lender had all of this confirmed earlier in the approval process.

In the current lending environment, it is certainly reasonable for mortgage lenders to request these verifications. However, title abstractors should be aware that if their arrangement with their client is to only be paid for “closed files” that they be aware of this accelerating trend. More importantly, it is another good reason for abstractors who still maintain to this arrangement to seriously look at transitioning clients away from it. In the worst case, abstractors should not be afraid to ask their client about how solid the deal looks, and if they think the lender will have any additional last minute conditions to be met. It may not help if the current deal falls apart, but it may let your client know that you are keeping abreast of developments in the industry, and have them think about managing their title orders more closely.

One real estate agent in South Carolina has seen an increase in the number of “dry closings“. The parties all sign their documents but everything is held in escrow until the funding arrives from the lender, after the last-minute condition is met. There is a number of reasons why these can turn into problems, not the least of which is when one does not ever get funded. In addition, the accruals and per-diems can change, making the prior HUD inaccurate.

It used to be that the vast majority of non-closed files were eliminated in the approval process, before title was ordered. In more cases, condition requests from loan underwriters are coming at the last minute. To date, many of these can be met, with the only consequence being a delayed closing. There is a definite uptick in the number of deals that fail because of these issues, however. In one case, a borrower lost his job in the week it was taking him to get a reappraisal. As it is not likely that this trend will decline in the near future, which may even result in closing agents to try and install the practice of paying for closed files more frequently.

It is tempting for individual abstractors to look for any new business that comes their way, but taking bad business is even worse in a bad economy.

Foreclosures now represent nearly half of real estate transactions nationwide. According to the National Association of Realtors, distressed properties already make up 45% of transactions, and climbing. Home prices continued to decline at a record pace last month, with no sign of stabilizing. further price declines could result in even more foreclosures, as homeowners are unable to refinance out of unaffordable ARM’s, or just simply realize they are extremely out of equity, and walk away from the property.

When borrowers do leave their property, they do not always simply “walk away.” Last week, a home in Monsey NY was completely demolished just a few days before the scheduled foreclosure auction. The property owner Samuel Fisch later admitted to tearing down the structure. A neighbor who had helped out by paying the property taxes initially received a summons for not obtaining proper demolition permits, but it was later determined that he was not the owner. Abraham Miller said he never owned the house at 1 Carlton Road, and was only doing the owner a favor by paying the property taxes. “A gentleman bought this property two years ago and he couldn’t pay his taxes,” Miller said yesterday. “He asked if I’d borrow him the money to pay the taxes. That’s my whole connection to this whole thing.”

Most distressed properties do not meet this extreme fate, but more often homeowners damage or strip out properties before being forced out due to foreclosure.

In Fort Myers, about 20 people did $75,000 worth of damage to an abandoned home in foreclosure. People living in the area said they had seen numerous cars going down the dirt road to the secluded house on many occasions since the home was foreclosed upon last year. An inspection of the home’s interior showed every room had some type of destruction, from broken windows to smashed in plaster to paint which was tacky to the touch, reports say. After the party, windows remained broken, huge holes were punched in walls throughout the structure, graffiti and expletives were spray painted on the walls and ceilings and two Budweiser beer cans were hung on a living room wall. Debris was scattered outside the house, but remarkably the inside — minus all the damage — appeared to be relatively clean. Deputies estimated the multi-story structure is about 4,000 square feet.

Some teenagers take advantage of foreclosed properties in less destructive ways. Skateboarders from as far away as Europe are flocking to Florida and California to enjoy the multitude of empty swimming pools, which make extraordinary skating venues. “We have more pools than we know what to do with,” said a skater who goes by the name ‘Mr. Peacock’. Thousands of homes, many with pools behind them, are in foreclosure. “I can’t even keep track of them all anymore” he said. Skaters are finding a surplus of deserted pools in which to perfect their acrobatic aerials. In these boom times for skaters, Mr. Peacock travels with a gas-powered pump, five-gallon buckets, shovels and a push broom, risking trespassing charges in the pursuit of emptying forlorn pools and turning them into de facto skate parks.

More often, however, it is the property owner doing the damage. Borrowers will tear out anything not nailed down to try and sell it cheap for cash. Appliances, cabinets, garage doors, even electrical fixtures are removed and sold. I have seen ads on Craigslist all over the country where the appliances for sale show a photo of built-in appliances or cabinets, with listing advises that the buyer needs to remove the items. With these instructions, and pictures of almost new appliances, it is not likely that the seller is simply “upgrading.” One Craigslist ad in California lists items such as outlets and the shower stall in addition to appliances.

This ad in the Miami Craigslist is for the AC compressor unit:

I am loosing my house to foreclosure and wanting sell the 4 year old 3 ton HVAC compressor before I do.
Compressor is like New and is pictured in this ad.
Still has freon charge so will have to be drain before moved.
I work nights and am off on Fridays and that is the best day to pick it up!

There is usually no legal action taken against the suspected strippers, who are generally assumed to be the homeowners who defaulted on their mortgages. That may change with the case of an Independence Township home, valued at about $2 million, which was stripped of a long list of items in January. “It could be a larceny charge and malicious destruction of property,” said Sgt. Matt Baldes of the Oakland County Sheriff’s Independence Township substation. “I’ve been at houses where they’ve stripped the whole kitchen out and then try to sell back the cabinets to me,” said Realtor John Graham, who lists several foreclosed homes in Oakland County. He’s also been through foreclosed homes that have price tags on things such as furnaces and plumbing. “I’ve seen it before — price tags on things, and then they let people come through and buy them,” he said.

Is it legal? “If you have a dishwasher that’s a built-in, it stays. If it’s on wheels, you can take it with you,” said Phil Seaver, owner of Seaver Title in Bloomfield Hills.  Real estate lawyer John Talpos of the Troy-based Talpos & Arnold law firm agrees with him. “You can’t take down a door on the basis (that) it’s removable and you can take it off at the hinges,” Talpos said. He added the terms of most mortgages likely prohibit any destruction of the home. “You’ve got a co-owner, so to speak, and you can’t do anything to diminish the value of the co-owner’s interest,” he said. “(The lender) probably has the right to come in your house and just look at it to make sure.”

That did not stop John Burgur’s landlady from stripping his rental property last year. She took fans off the ceiling and the knobs off the doors, carted out the refrigerator and yanked up a toilet. She even pulled the plates off electrical outlets and unscrewed the faucet handles. His coffee maker and shower rod were gone. “I’m going to strip this mother,” the 70-ish property owner raved to Burgur, as she ripped apart the 950-square-foot unit on Island Way. Welcome to a dark corner of the foreclosure business: People who lose their homes to foreclosure and in a pique of revenge strip the homes before the bank takes them back.

With home prices and sales continuing to plummet, this is not the last we will hear about this.

The economic decline is reaching the real estate market at the highest levels. Reported to be the worlds most expensive house, Villa Leopolda is a 22-acre compund in the French Riviera. At a selling price of $750 million, it was put under contract to a Russian billionaire named  Mikhail Prokhorov. Shortly after contracting to buy the house, his investment fortune was reduced in the economic downturn and credit crisis.

He is now trying to get his $55 million deposit back.

In Palm Beach Florida, developer Frank McKinney has put on hold plans to build a $125 mansion in tony Manalapan. The sliver of land between the Atlantic Ocean and the intracoastal waterway is considered one of the best locations in the Palm Beaches, but McKinney says it would be foolish to build in the scary time.

A few miles south in Boca Raton, Dru Schmitt built a 23,000 square foot mansion on an ocean-access canal. In 2008, the palatial French-Country styles home was complete, with four kinds of rare onyx in the bedroom, music piped underwater in the resort-style pool, a computerized television system holding 850 movies and hand-shaved walnut floors. The doorknobs and hinges alone cost $160,000. Yet when Dru and his wife and kids moved in, they discovered a problem. It was too big. So days after moving in, they put it on the market. Listed for $24.9 million, it was eventually sold last month for $10 million.

In Greenwich CT, Stan and Dorothea Cheslock built their 26,000-square-foot dream house on 30 acres here. The home featured an indoor pool, 6 bedrooms, 10 bathrooms, a wine cellar, a Siberian spruce sauna, an oak-paneled billiard room, a 50-foot lap pool and a French birdcage elevator that rises 40 feet from the great room to the cupola.

It needs a staff including  a chef and groundskeepers and gardeners to take care of the trees, lawn, gardens, pool, deer-repelling. There are three different kinds of grounds teams.The total upkeep is more than $200,000 a year

With just the two of them living there most of the house was empty. When the merchant banking firm that Mr. Cheslock co-owned lost $100 million in value, the house was placed on the market for $31 million. After almost 2 years and no takers, the house was placed for auction with an opening bid of only $19 million. The house failed to sell at action, as well.

In East Hartford CT, homeowner Lisa Murzin-Pelcz has been fighting to keep her house for more than a year. She has used the bankruptcy court, mortgage resolution centers, and debt consolidation companies to try and remain living in her home of 8 years.  “When I moved here, I said I was never moving again. I had moved so many times,” said Murzin-Pelcz, 46. “I said, ‘They’d have to take me out in a pine box.‘” She is hoping that the mortgage restructuring of the new stimulus bill will help her to be able to afford the home.

Hartford Superior Court Judge Robert Satter gave Murzin-Pelcz yet another month of reprieve from foreclosure — her last, he said from the bench. “I have no confidence that the government is going to help you,”

A woman in North Carolina finally lost her bid to fight off a foreclosure after being delinquent for 8 years.

A popular technique being used by homeowners is to demand proof that the foreclosing bank owns the mortgage. With multiple assignments and resales of mortgage instruments in the securities market, it is sometimes difficult for the plaintiff to come up with the documents. Homeowner Kathy Lovelace was profiled in an MSNBC story. “I’m going to hang on for dear life until they can prove to me it belongs to them,” said Lovelace, a 50-year-old divorced mother who owns a $200,000 home in Zephyrhills, near Tampa. “I’ll try everything I can because it’s all I have left.”  She was successful in stopping the foreclosure proceding by requiring the bank to produce the original loan document. Tom Deutsch, deputy executive director of the American Securitization Forum, a group that represents banks, law firms and investors, dismissed the strategy as merely a stalling tactic, saying homeowners are “making lawyers jump through procedural hoops to delay what’s likely to be inevitable.”

A house used in the show “Extreme Makeover” was saddled with $400,000 in delinquent debt and is now subject to foreclosure.

New home construction slowed to a virtual standstill in January as builders recognize the almost non-existent market for new homes, and flood of foreclosures on the market. The Commerce Department reported new home construction dropping 16.8 percent to the slowest pace on records dating back a half-century.

All of the major builders cited tightened lending standards and employment uncertainty as reason that buyers are staying out of the market.

At the same time, planned development of vacant land in many cities is frozen. In Chicago, several large tracts were scheduled for development of major commercial projects, which are not on hold indefinitely. A developer had indicated an interest to transform a vacant retail store into a mixed use building, but withdrew when the economy began to weaken. “Until the economy turns around, I don’t know if you’ll see much in the way of mixed use going on,” Mayor Ken Nelson said. The suburb of Oak Forest saw vacancy of centralized “auto rows” , leaving behind 8 acres of concrete where car dealerships once operated.

When Courtesy Chevrolet closed in Thousand Oaks CA, it left behind not only an empty showroom but almost 80 employees unemployed. The store had been a fixture in the city for 40 years. Nearby Van Nuys lost 300 jobs when wheel maker Superior industries closed its plant around the same time.

The description of the once booming area is now “an increasingly bleak landscape”, dotted with For Lease signs.