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On Wednesday, September 29th, J.P. Morgan Chase announced that it will halt foreclosures in 23 states due to loan documentation flaws.  On Wednesday, J.P. Morgan spokesman, John Kelly, stated the firm “does not expect to find any factual problems or that customers have been harmed, but if we do find any cases we will take appropriate action.”

Speculation is that this step by high-profile J.P. Morgan may pressure other lenders to make the same move of freezing foreclosures.  Presumably, such a break in foreclosure filings will allow institutions to get a handle on potentially flawed loan and foreclosure documentation.

The consequences of this decision by J.P. Morgan are difficult to foresee, but should other large lenders follow their lead residential forecl osure activity would certainly decrease, with potentially significant impacts on the residential housingmarket.  Some see a potentially positive result and suggest that a delay in foreclosure sales would permit the residential market to find a floor.  Others fear that it is only after resolving the buildup of foreclosures that the nation’s housing market will recover, and any delay in foreclosures will delay this recovery.

C.R.S. 38-35.7-101, et. seq., mandates certain disclosures in connection with the sale of “residential real property.”  However, a close reading of that statute reveals that certain of those disclosures apply not only to traditional residential properties (e.g. single family homes), but to commercial, multi-family projects, as well.  While it’s common practice in Colorado to include the so-called “special taxing district” disclosure (C.R.S. 38-35.7-101) in all commercial purchase and sale agreements, it appears that this statute also requires that disclosures concerning methamphetamine laboratories and the potable water source be included in contracts for the sale of commercial, multi-family projects.  Consider adding these “residential” disclosures to your next multi-family purchase and sale agreement.  The form of potable water source disclosure is set forth in C.R.S 38-35.7-104; an illustrative methamphetamine disclosure is set forth below.

Methamphetamine Disclosure.  If the Property is residential, and Seller knows that methamphetamine was ever manufactured, processed, cooked, disposed of, used or stored at the Property, Seller is required to disclose such fact. No disclosure is required if the Property was remediated in accordance with state standards and other requirements are fulfilled pursuant to § 25-18.5-102, C.R.S. Buyer further acknowledges that Buyer has the right to engage a certified hygienist or industrial hygienist to test whether the Property has ever been used as a methamphetamine laboratory. If Buyer’s test results indicate that the Property has been contaminated with methamphetamine, but has not been remediated to meet the standards established by rules of the State Board of Health promulgated pursuant to § 25-18.5-102, C.R.S., Buyer shall promptly give written notice to Seller of the results of the test, and Buyer may terminate this Contract, notwithstanding any other provision of this Contract.

http://www.michie.com/colorado/lpext.dll?f=FifLink&t=document-frame.htm&l=jump&iid=115d17d4.210a391e.0.0&nid=1dc05#JD_38-357-101

The Federal Housing Finance Authority (“FHFA“) is proposing new guidance on transfer fee covenants for Fannie Mae, Freddie Mac and the Federal Home Loan Banks, restricting such entities from dealing in mortgages on properties encumbered by such covenants. Typically, transfer fee covenants direct a specified percentage of the sale price on real estate encumbered by the covenant to an individual or entity, every time the property sells.  These covenants have recently become popular in a number of states as developers seek new sources of funding in the current economy – so popular in fact, that U.S. Congresswoman Maxine Waters and other are sponsoring legislation to ban these “Wall Street Resale Fees.”  The proposed FHFA guidance states that the covenants

[A]ppear adverse to liquidity, affordability and stability in the housing finance market and to financially safe and sound investments. 

Interested parties may submit comments on the proposed guidance directly to FHFA on or before October 15, 2010, via e-mail at regcomments@fhfa.gov  Include “Private Transfer Fee Covenants, (No. 2010-N-11)” in the subject line.  

pot plant eggrole's photostream flickr.jpgGovernor Ritter signed H.B. 1284 into law on June 7, 2010, which enacted the Colorado Medical Marijuana Code.  Among a host of other impacts, the Code will likely have the effect of concentrating medical marijuana production, and increasing medical marijuana businesses’ demand for commercial and industrial space to house grow operations and retail dispensaries.  Accordingly, landlords throughout the state are beginning to feel the effects of the law’s new requirements, as a market of new potential tenants emerges. 

This is coming at a time when the retail and industrial market is seeing high vacancy rates, thus making medical marijuana tenants a potentially appealing way for landlords to turn empty space into a rent-producing revenue stream. 

However, much confusion and ambiguity remains surrounding Colorado’s medical marijuana laws.  This is true both with respect to the ever-looming issue that marijuana remains illegal for any purpose under federal law, but also with respect to Colorado’s requirements themselves. 

As described in the Daily Camera, the City of Boulder’s efforts to get medical marijuana businesses within its borders to comply with its regulations is a telling example of the latter problem.    

Landlords dealing with medical marijuana tenants should always keep the federal prohibition on marijuana in mind in deciding whether to enter into leases with such tenants, and in structuring their relationships with such tenants if they do.  Under current Department of Justice policy, federal authorities should not focus their prosecution resources on “individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”  Unfortunately, given the confusion at the state and local level, it may be some time before anyone knows what “clear and unambiguous compliance” with Colorado’s medical marijuana laws even means.

The ambiguities and confusion suggest that it would be prudent for landlord to be vigilant to ensure that they obtain timely information from their medical marijuana tenants.  Particularly in this field, it is important for landlords to have early notice if problems arise with respect to the licensing or legal status of their tenants.

Photo by eggrole (flickr).

2539334956_87cef7e457.jpgA question that all creditors wish they faced: what happens if a foreclosed property sells for more than the foreclosure purchase price?  Does the extra amount received need to be credited against the deficiency balance or does the creditor get to keep the “profit”?  The short answer is that Colorado law does not require a creditor to apply the profit realized from the subsequent sale against the deficiency balance — all so-called profits are the creditor’s to keep.  However, that does not mean creditors should simply bid low, sell high, and then pursue the debtor or guarantor for a large deficiency.

Any person sued on a deficiency can raise the defense that the creditor failed to bid its good faith estimate of the fair market value of the property (less amounts withheld for taxes, prior liens and holding costs).  For instance, lets say the creditor bids $500,000.00 of a $1,000,000.00 debt at the foreclosure sale, then, one month later, sells the property for $750,000.00.  A debtor sued on the resulting $500,000.00 deficiency will undoubtedly raise failure to bid fair market value as a defense and ask that the deficiency be reduced accordingly.  The result will be costly litigation and a possible reduction to the deficiency amount. 

Another factor that needs consideration is the ability of junior creditors to redeem.  Under Colorado law a junior creditor can redeem the foreclosed property from the senior creditor by paying the senior creditor the amount of the senior creditor’s bid, in cash.  If the senior creditor bids less than the property’s fair market value then a junior creditor, with available funds, has an incentive to redeem and realize the latent profit.  That leaves the senior creditor in the position of receiving less than fair market value for the property while also facing the prospect of a possible reduction to the deficiency.

The best practice is to bid close to the property’s most recently appraised value (taking into account any prior liens and applicable holding costs).  With an appraisal in hand, a creditor has the proof necessary to overcome most any claim that the bid was not a good faith estimate of the property’s fair market value.

Photo by respres (Flickr).