Nevadans who are late on their mortgage payments could find it easier to deal with their bank and possibly avoid foreclosure under a law that takes effect today.
State Senate Bill 321, known as the Homeowner’s Bill of Rights, requires lenders to have a single point of contact for struggling borrowers, who say banks are bogged down by bureaucracy and give conflicting information.
It also bars bankers from trying to seize a person’s home while also pursuing a short sale at the same time, and it forces lenders to provide homeowners with foreclosure prevention options and other information before seizing a house.
Moreover, the law will make it easier for borrowers to short sell their home to a friend or relative and then rent or buy it back, an arrangement that previously could have sent the borrowers to jail.
The law, backed by the Nevada Association of Realtors, an advocacy group for real estate agents and brokers, has several exemptions and does not let delinquent borrowers keep their homes forever. However, it could stretch out the foreclosure process and make it easier to avoid foreclosure through renegotiating a loan or completing a short sale, in which the bank agrees to sell a house for less than what’s owed on the mortgage.
Here are some key aspects.
Better communication — and a longer process
Underwater homeowners face a long, grueling path to persuade their bank to short sell their house. It involves a great deal of paperwork, back-and-forth letters and emails, and numerous requests for more information.
The process can induce hair-pulling frustration. Troy Atkinson, a Las Vegas real estate lawyer, said he had clients who were told by employees of the same bank — within a week of each other — that the clients both did not make enough money and earned too much to renegotiate their mortgage.
SB321 could help fix these problems with its mandate for better communication, though it also could delay banks in seizing distressed homes.
The law requires mortgage lenders to provide borrowers with a contact person or team of individuals who can assist them on foreclosure issues. It also forces banks to give advanced notice to delinquent borrowers at least 30 days before filing a notice of default, which starts the foreclosure process.
Homeowners then get 30 days to apply for mortgage assistance. If denied, they get another month to appeal, Atkinson said.
“It definitely will take longer,” he said of the foreclosure process.
Bankers are not the only ones subject to communications deadlines. Under SB321, homeowners have to respond to a bank’s offers for foreclosure prevention within 14 days of receipt. If they don’t, the offer is deemed rejected, according to the state Realtors association.
"Arm’s length" agreement
When your home plunges in value and you can’t afford the mortgage, it can be tempting to short sell to friends or relatives and just rent from them.
It’s a temptation many Las Vegans have acted on, even though it could have sent them to jail.
SB321 could remove the threat of prison and make these deals far more common.
In a short sale, banks usually require homeowners to sign a document that certifies the sale is between people who didn’t know each other before the deal came about. It also promises the two sides have no agreements to let the sellers stay as renters or buy back the house.
Banks are not required by law to get that signed promise, known as an “arm’s length” agreement. But they usually do, and if the sellers lie about their connection to the buyers, it’s fraud.
Bill Uffelman, CEO of the Nevada Bankers Association, said banks have required arm’s length agreements because they don’t want delinquent borrowers to “benefit” from their own financial woes.
Losing a house to foreclosure wreaks greater havoc on a person’s credit rating — and, thus, the ability to get another mortgage loan anytime soon — than selling through a short sale, he said. With a prearranged buyback, borrowers could in theory get a new loan to purchase their house at a much lower price than what they originally paid, meaning their monthly mortgage payments also would be a lot less.
But under SB321, bankers are essentially barred from forcing homeowners to sign an arm's length agreement. That means underwater borrowers can short sell to anyone they want, as long as the bank approves the terms.
“Who cares who buys it?” asked real estate agent Keith Lynam, the Nevada Association of Realtors’ 2013 legislative chairman.
Although SB321 offers broad-sweeping help, it mirrors last year’s national mortgage settlement and does not apply to Nevadans who are covered by that landmark deal.
The $25 billion settlement, aimed at stopping widespread foreclosure abuses, was reached with the country’s five largest mortgage lenders — Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup and Ally Financial. If a bank is complying with the settlement, it is exempt from the bulk of Nevada’s new law.
According to the Associated Press, 60 percent of Nevada borrowers are covered by the settlement because their lender was one of the five involved.
Meanwhile, Nevadans who got their mortgage from a small bank or credit union may not be protected by the new law. Lenders that foreclosed on 100 or fewer owner-occupied homes in Nevada in the past year are exempt from the restrictions.
So, who is protected?
“Depends on who holds the mortgage,” Uffelman said.