Subprime Crisis May Not Affect Real Estate Agents or Mortgage Brokers

Below is an exerpt from the Real Estate Agents, Mortgage Brokers Could Leave Subprime Crisis Unscathed article our own Steve Sargenti co-authored in Property and Casualty Insurance News.

"Not every firm connected with residential real estate and poor credit borrowers faces catastrophic exposure to subprime mortgage losses. Front-line professionals far removed from the aggrieved investors are in much better shape.

For example, mortgage brokers and real estate agents face relatively little exposure to the subprime crisis because their direct relationships are with buyers and sellers.

By contrast with lenders and mortgage banks, mortgage brokers are arrangers of credit. They do not render investment advice nor underwrite buyer credit quality. These front-line professionals facilitate or arrange deals between willing buyers and sellers of real property.

Real estate and mortgage brokers do not face direct liability from the largest aggrieved class: the investors who own mortgage-backed securities. These front-line professionals are much safer bets to survive the subprime crisis for at least three reasons:

(1) The legal nuance that all real property is unique.

Essentially, there is no material fact to misrepresent because home value is established by the convergence of a willing buyer and willing seller. Real estate agents face borrower claims that they overpaid for their house, or did not understand the
financing, but arrangers are not responsible for truth-in-lending disclosures.

(2) Difficulty in establishing damages.

An aggrieved investor will face a number of hurdles tracing liability back to a front-line professional. For example, many states have remedy and anti-deficiency laws that require the owners of most loans secured by real property to make a difficult choice should they not be getting paid.

The choice is to forego the security (the house) and sue the borrower on the note, or obtain the proceeds via exercise of a power of sale. In short, lenders can either get a money judgment or the house, but not both.

The economy and security of foreclosure is far preferable to abandoning the security and obtaining an uncollectible judgment. What is usually left is a lender that bids the full value of their note at public sale. Successful or not, this “full credit bid” is an admission the property was worth at least the loan amount. Voilà—no damages.

(3) General unwillingness of mortgage lenders to bring direct actions against real estate and mortgage brokers.

Most mortgages are still originated through independent channels. Lenders are heavily dependent on the retail and wholesale distribution channels and are therefore reluctant to alienate these key partners."

Please click HERE to read the full article.

Toxic Homes

How does a buyer prove failure to disclose mold? You wont believe how one family did. Check out this story on ABCNews.com

Exciting news for the Colorado Mortgage Industry

The state of Colorado has issued an Emergency Rule that requires Mortgage Brokers to have Errors and Omissions insurance effective January 1, 2008. We here at CRES have been working hard at developing an E& O program that offers exceptional coverage at a price point that might surprise our customers!

There are going to be a lot of options out there, but with the current state of the industry, a lot of the other carriers are going to try to get a higher premium fueled by fears and the fact that E & O coverage is now mandatory in Colorado. After 12 years of insuring the mortgage industry, we care more about our customers than we do about the news.

Check out our new program to assist in compliance by clicking below!
Colorado 3...2...1 Comply! Program

Happy Thanksgiving!

In keeping with the holiday theme of giving thanks, during the socializing or meal, people talk about what they are thankful for or tell about experiences during the past year which have caused them to feel grateful. We at CRES have so much to be thankful for, but on the eve of the Thanksgiving holiday, we extend thanks to the over 100,000 real estate professionals that count on us for protection day in and day out.

We also extend special thanks for the professionals and countless other volunteers who performed so heroically in the face of the California wildfires. It was an awesome display of public service and humanity that we will not soon forget.

-Steve Sargenti

Selling agents Beware!

Fiduciary Duties are broader than CC 2079!

Agent Mike inspects a Northern California house hoping to secure a listing when the house goes on the market. He makes some notes about possible water leaks, cracked walls and pool damage.

Mike does not get the listing. But another agent with the same firm ends up representing the buyer. Mike is part of the same team, so he ends up showing the house to the buyers. They ultimately write an offer that is accepted.

The selling agent receives a TDS from the seller, which discloses most, but not all, of the defects Mike noted during his prospecting inspection. Turns out the slab is on-tilt and the house requires substantial repair to keep it from cracking further.

A jury found the selling agent had fulfilled their disclosure obligation in compliance with Civil Code 2079 Can the selling agent (and her employing broker) be liable for negligent non-disclosure, even though they complied with 2079?

The court says YES a selling agent may be tried for constructive fraud. Fiduciary responsibility is broader than 2079-- regardless of how a selling agent obtains information and even if the information is largely redundant to that disclosed through other sources, a fiduciary can be taken to trial for negligent non-disclosure. The case: Michel v. Palos Verdes Network Group, Inc.

Upcoming CRES Events:

National Association Of Realtors
November 13 - 16
Las Vegas, NV
Booth#: 1946

Does Your Firm Manage Properties?

It is two in the morning and the phone is ringing. The tenant has a gushing toilet. RING- The tenant has a leaking roof. RING- The tenant is mad that the next door neighbor has a stereo that he loves to play at ear-splitting volumes. Sound familiar?

As a part of their everyday activities many real estate offices will handle property management. Sometimes they will handle large apartment or condo complexes, and sometimes just a house or two for an out of town client. In any event, you face many of the same exposures.

For those who do property management, the best place to start tuning up E&O exposure is to begin with the Property Management Agreement. Think about your own: what have you agreed to do for the property owner (and sometimes more importantly) what have they agreed to do for you?

Oftentimes when faced with a Property Management claim we look to the PMA for reference to insurance or indemnity agreements between the broker and the property owner. It is imperative that you check to ensure that the property is both insured and also that the policy has appropriate coverage levels. The broker should also make every attempt to be named on the homeowners policy as an Additional Insured. This will assist you in making a defense claim to the homeowner's insurance should you ever be sued in relation to the management of property. Note that Homeowner's policies most often have bodily injury coverage (and E&O policies usually do not). You want every bit of protection you can find.

Another common allegation against managers is that they do not keep close enough tabs on the tenants, and thus the property owner tries to get paid back for damage that the tenant does. A regular drive-by (or annual inspection of the premises, if allowed by the management agreement) is a good idea. Show the owner that you are looking out for them; It goes a long way in keeping good relations with the owner.