Presenting a live 90 ‐ minute webinar with interactive Q&A Title Insurance Risks in Distressed Real Estate Transactions Evaluating and Dealing With Liens and Other Encumbrances During Title Due Diligence THURS DAY, MARCH 10, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f David Weissmann, Partner, Weissmann Zucker Euster , Atlanta Karl R. Phares, Underwriting Counsel, First American Title Insurance Company National Commercial Services Overland Park Kan National Commercial Services , Overland Park, Kan. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Title Insurance Risks in Distressed Real Estate Transactions Transactions Evaluating and Dealing With Liens and Other Encumbrances During Title Due Diligence David A. Weissmann Weissmann Zucker Euster Morochnik P.C. Atlanta, Georgia 30305 404.364.4620 direct david@wzlegal.com 5
6 Flushing the System – Where We Are W A Wh t th S Today hi Fl
THE GREAT FLUSH Impediments to liquidating bad assets are p q g alleviating somewhat as: The Fed continues to put extreme pressure on banks to increase capital reserves and bank losses are lessening somewhat, allowing more bad loan losses to be recognized g Banks are still reluctant to reveal the extent of their losses, which are exaggerated due to declines in property values t l Long term capital is more readily available from insurance companies and even CMBS loans but short p term capital remains scarce 7
As long as “deleveraging” continues, banks are reluctant to loan against real estate to facilitate g purchases of REO (real estate owned) property Capital for REO purchases is coming from private sources and vulture funds d lt f d Property values have declined dramatically, as much as 75% or more in some cases as 75% or more in some cases 8
M th d f Di Methods of Disposition of Bad iti f B d Assets Note Sales – the sale of the note and accompanying loan and security documents p y g y “The” surprise of this downturn – Note sales have been more prevalent than in other downturns Short Sales – the borrower sells the secured property for a price less than the outstanding balance of the loan and the lender releases the balance of the loan and the lender releases the loan documents REO Sales the sale of the foreclosed asset or REO Sales – the sale of the foreclosed asset or receiver’s sale 9
Note Sales The loan generally is delinquent or soon to be delinquent q Electronic auctions have become commonplace, but more recently word of mouth and sales teams have been utilized The borrower is a possible purchaser, for a discount, but some banks have been reluctant to “reward” the borrower even though borrower is most likely “purchaser” to preserve equity most likely purchaser to preserve equity 10
Note Sales Technically, the sale is not complicated, but can happen quickly pp q y Sale is “as is” with limited representations as to ownership of the loan documents, outstanding balance and status of default and status of default Short review period; may allow conversations with borrower Documents will be sold “free and clear” of all liens, participations and encumbrances but generally no other arranties or representations other warranties or representations 11
Note Sales Mechanics of the transfer Endorsement of the note, or allonge , g Transfer and assignment of loan documents Recordable assignment of security instruments Assignment or amendment of UCC’s Estoppel from borrower: outstanding balance/default May be impossible to obtain M b i ibl t bt i 12
Note Sales – Quick Cash Motivations for the lender are quick transposition of loan obligation into cash g Federal reserve requirements have not necessarily changed, but they are being more scrutinized and enforced, requiring quick infusion of cash into bank’s liquidity coffer The ratio of loan to deposits or cash reserves indicate one element of financial stability 13
Note Sales – Quick Cash Some State loan-to-deposit ratios are*: California 101% Connecticut 104% Florida 94% Georgia 95% Hawaii 78% New York N Y k 70% 70% North Dakota 172% *Source: Federal Reserve Publication 2009 14
Note Sales – Quick Cash Please note that if bank has a high loan-to-deposit ratio, and property values decline, then even if the p p y loan-to-value ratio of loans generally was conservative (i.e. 80%), many loans could still be “underwater” thereby threatening the financial “ d t ” th b th t i th fi i l stability of the bank 15
Note Sales - Words of Caution Pay attention to default letters and notices to determine status of loan Third tier financing may not be of public record – must to be careful regarding liens on the loan documents Title searches may not reveal litigation that can impact the loan or the collateral Pooled collateral prevents borrower from bidding on its own loan separately it l t l 16
Short Sales Property is sold for less than the debt Necessitates an agreement with the lender to release g the collateral May involve a delinquency or “wish” note Lenders are reluctant to accept a short sale if the borrower will retain tangible benefit of the property, as purchaser or tenant h t t 17
Short Sales Affidavit is required whereby purchaser affirms that: The borrower is not related through blood or business There are no hidden agreements or special understandings d di There are no oral agreements whereby borrower retains possession or beneficial ownership or retains possession or beneficial ownership, or proceeds of sale 18
Short Sales Penalty for false affidavit is that the affiant and purchaser may be liable for the deficiency p y y because the lender relied on the purchaser’s promises and affirmations when releasing the collateral to the detriment of the lender ll t l t th d t i t f th l d 19
REO Sales The traditional means of flushing the system – foreclosure followed by sale of the “real estate y owned” Value used by lender at foreclosure is generally higher than a purchaser will pay While banking regulations do not require a quick sale, liquidity and reserve requirements generally necessitate quicker sales 20
REO Sales The sales are “as is” – some lenders even want indemnities from the purchaser for property p p p y liabilities (hazardous materials and others) The less a lender knows about liabilities, the better Lender’s may therefore avoid complete inspections of the property so as to be a “mere holder” of secured property rather than a true property owner property rather than a true property owner 21
REO Sales Typically short fuses – 30 day inspection followed by 15 day closing y y g Leverage is very much with the purchaser and re- trading is common The calendar quarter may drive the sales; as bank books are cleaned up, the bank becomes more attractive to the Fed and to potential suitors 22
CREDITORS RIGHTS AND MORTGAGE CREDITORS RIGHTS AND MORTGAGE MODIFICATIONS: TITLE INSURANCE INDUSTRY RESPONSE TO AN ECONOMIC INDUSTRY RESPONSE TO AN ECONOMIC COLLAPSE 23
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