I didn’t have much chance to blog the last couple months. My resolution is to post more frequently this year.

Where will the economy take us this year? That’s the million dollar question. The GNP grew to 5.5%. Manufactures are restocking shelves. Some sectors of the economy are showing signs of life. That’s the good news. Signs of a recovery, but does it have traction? The national debt is approaching $1.3 Trillion. Sales of existing homes are at a 40 year low. Less than 5% of the millions of loan modification requests are getting approved and completed. Banks are taking an equally hard line on short sales. The employment market, particularly where real jobs are needed, is looking as bleak as the housing market with six job seekers for every opening. Locally we have years of office and retail space inventory. Retail real estate rents are almost half of what they were in 2007. You can lease first class retail strip center space for $18.00 PSF; these are store rooms that were pro forma $30.00 PSF space a few short years ago. Secondary space is more dismal. There are some deals being made, but few are bankable leases. The books of developers with extensions on 2007 or earlier construction loans are not looking too good. And a lot of the lenders that put them into those loans are gone; and for good reason. Then there is the $800 Billion of Commercial Mortgage-Backed Securities that are scheduled into default over the next three to four years. If CMBS defaults start to spike at the same time that the next wave of Alt-A defaults are scheduled to renew their upward trajectory, which could be as early as spring, it could set our recovery back a bit. Clearly there will be a lot of opportunity for those who can carve out a niche in these trends. A lot of displaced professionals are starting new businesses and buying franchises. Many of them will prosper and add value to our economy.

Last night the Food Channel has a special show on potatoes. Apparently world-wide consumption of potatoes is at an all time high. At the same time, the Travel Channel had a special on super yachts. Same thing, orders for new super yachts is at an all time high. I don’t watch a lot of TV, but I did find that programming juxtaposition interesting.

It will be in interesting year to say the least.

You’ve heard of rent-to-own and you’ve heard of deed in lieu of foreclosure. Well, now we have own-to-rent, a program intended to help thousands of homeowners stay in their homes rather than losing them to foreclosure. Here’s the press release from Fannie Mae:

WASHINGTON, DC — Fannie Mae (FNM/NYSE) is implementing the Deed for Lease™ Program under which qualifying homeowners facing foreclosure will be able to remain in their homes by signing a lease in connection with the voluntary transfer of the property deed back to the lender.

Leases under the new program may be up to 12 months, with the possibility of term renewal or month-to-month extensions after that period. A Deed for Lease property that is subsequently sold includes an assignment of the lease to the buyer.

The program will attract only a small percentage of qualified troubled homeowners. Considering number of qualifying home owners compared to the number of upside down loans, pre- and current-foreclosures, and future rate readjusts, not sure it’s going to make a big dent in the problem. The argument for the plan being, hold off on a foreclosure sale until the market recovers then sell for a higher price point. Critics believe this action only postpones the pain at tax payer expense. Another sign the recession is not over for everybody.

The Seattle Times reports today defaulted commercial loans are hitting local lender P&Ls. The commercial loan default wave is barley news worthy at this point. A number of local banks have been hit with cease and desist letters from the Feds in recent weeks. What’s interesting is that Seattle-Bellevue-Everett metro had the nation’s highest delinquency rate for construction and land loans in the second quarter of this year. I don’t think you can blame the developers, at least not all of them. Clearly lenders have been reckless in their evaluation of project viability and employment of funds held in their trust. When a lender approves a deal based on pro forma development costs and income with no basis in reality, backed by other projects from the same developer that are also based on blue sky pro forma income, at some point someone needs ask hard questions or put on the breaks. But no one did. Why is that? It’s way more fun to just make deals and get paid. No one wants to be accused of being a deal breaker. Plus, if your favorite developer is in obvious trouble, or is clearly cooking the books, that next loan may be all it takes to pull out of the tail spin. Right? Well, it sure doesn’t look like now.

The Mastro “friends and family” investor debacle grinds on. Does anyone have a clue how many other friends and family of other developers are in line for the big burn on limited liability company investments here in Washington State, regionally or nationally? Between your mom and pop developers, syndicators, 1031 exchange partnership members, and REITs, all of whom have heavily leveraged the savings of their investors, there is still a lot of blood being spilt with no tourniquet in sight. Some investors were well disclosed; most not creating a real liability issue for the sponsors. As a side question, why isn’t security law compliance part of the due diligence on a commercial loan application when it should be obvious based on a surface examination of the entity closing the loan that investor funds are at risk? I think a close examination would show that security law violations have been flagrant and widespread in the past decade locally and nationally. Which gets us back to the problem of today’s defaulted commercial loans – as long as the rising tide is lifting boats, no need to ask hard questions or disclose uncomfortable realities. A couple years ago everyone’s financial statements in these deals looked like rock stars. Now you have projects and partnerships in default and foreclosure with no end in sight. Lost are deferred salaries, retirement plans, college education funds, and saving. Despite the continuing reports that the economy is recovering, I think we have a very long, long way to go before all the trouble commercial assets shake out of the system. And the analysis didn’t take an economics degree to figure out in the first place. Assigning unrealistic cap rates to nonexistent income on marginalized deals based on beating the next guy to market never made much sense to me. I guess no one wants to be accused of being a deal killer or having a bad attitude. So scratch that. That’s all for now.

Last month Division 2 of the Washington Court of Appeals upheld the proposition that a real estate purchase and sale agreement lacking specific terms is unenforceable. In 16th Street Investors LLC v. Morrison, (unpublished opinion) the court found the PSA did not create a legal obligation for the seller to sell, but rather an agreement to agree, and in doing so reversed the trial court’s decision ordering specific performance of the contract.

This case involved the proposed sale of redevelopment property in downtown Vancouver, Washington. The property was one of several acquired by a speculator and promoter of a revitalized downtown Vancouver. As part of the sale Mr. Morrison wanted an option to purchase a condominium in the redeveloped property if there was a residential component.

The buyer and seller executed a purchase agreement. The buyers completed their due diligence and ordered the closing agent to prepare closing documents. Upon examination, Mr. Morrison felt that the language granting his right to purchase a condominium was unacceptable. He refused to close. The buyer’s sued and the trial court ordered specific performance. Mr. Morrison appealed the trial court’s decision.

The Court of Appeals examined the essential terms of a real estate contract, stating that they generally include the “subject matter of the agreement, the consideration and terms of payment.” Hubbell v. Ward, 40 Wn.2d 779, 787, 246 P.2d 468 (1952). When a contract contains all of the material and essential terms of a future contract such that a court can ascertain what the parties must do to constitute performance, then the court may order specific performance. Hubbell, 40 Wn.2d 787.

The Hubbell court separately enumerated 13 specific material factors in a real estate contract (involving structures, not just land): (a) time and manner for transferring title; (b) procedure for declaring forfeiture; (c) allocation of risk with respect to damage or destruction; (d) insurance provisions; (e) responsibility for: (i) taxes, (ii) repairs, and (iii) water and utilities; (f) restrictions, if any, on: (i) capital improvements, (ii) liens, (iii) removal or replacement of personal property, and (iv) types of use; (g) time and place for monthly payments; and (h) indemnification provisions. Hubbell, 40 Wn.2d at 782-83; Kruse v. Hemp, 121 Wn.2d 715, 722, 853 P.2d 1373 (1993).

The court found that the purchase and sale agreement proposed by Morrison contained all of the material elements. However, the court found that a memorandum attached the PSA expressing Morrison’s desire to purchase a condominium to be “ ‘an agreement to do something which requires a further meeting of the minds of the parties and without which it would not be complete.’ “ Keystone Land & Dev. Co. v. Xerox Corp., 152 Wn.2d 171, 175, 94 P.3d 945 (2004) (quoting Sandeman v. Sayres, 50 Wn.2d 539, 541-42, 314 P.2d 428 (1957)). Agreements to agree are unenforceable in Washington. Keystone, 152 Wn.2d at 175.

In looking at the purchase agreement with memorandum as an organic whole, the Court of Appeals decided that because one part of the agreement – the condominium carve-out – was not specific enough to determine what the parties intended, the whole contact failed.

Quite often we see terms added to a standard purchase agreement using NWMLS Form 34 Addendum/Amendment to Purchase and Sale Agreement. This case is a reminder that hastily drafting resulting in ambiguous terms can lead to an unenforceable agreement if one of the parties later decides to back out of the deal. In this case as late as after all conditions have been met and the parties are at the closing table.

September is almost over and I haven’t had the chance to post to the BLOG all month. There were several stories that I was working on this month that I didn’t get around to completing, including:

Newsweek issued a warning about the impact the commercial real estate bubble will have on the greater economy. (Not that it’s news at this point.) The nation’s offices, hotels, and malls now carry $3.5 trillion in debt. Falling rent and rising defaults could inflict more damage on the greater economy (and result in further cap rate creep) in the coming year. According to sources, Seattle-Bellevue has over eleven years of Class A office inventory based on historic absorption rates. The spread between bid and offer on commercial sales continues to stall activity. Those sales that are closing are for the most part at barn burner prices. There is activity in commercial leasing and sales with some deals closing, however, it’s a tough market with no immediate end in sight. It’s a great time to be a cash buyer.

Housing is showing some signs of life with prices stabilizing in parts of the Seattle market. The Obama first time buyer tax credit is helping. Demand for residential properties priced over $1.5MM, however, is all but dead. Influencers include a general lack of interest in McMansions and lack of creative financing for upper end buyers. The high end outlying market has been way overvalued for a long time now. Financing will loosen up eventually, but the days of no down and easy credit and terms for high end buyers won’t be back soon.

Home inspectors in Washington State must now be licensed. RCW 18.280.020 provides that a person shall not engage in or conduct, or advertise or hold himself or herself out as engaging in or conducting, the business of or acting in the capacity of a home inspector without first obtaining a license as provided in this chapter. Any person performing the duties of a home inspector on June 12, 2008, has until July 1, 2010, to meet the licensing requirements. However, if a person performing the duties of a home inspector on June 12, 2008, has proof that he or she has worked as a home inspector for at least two years and has conducted at least one hundred home inspections, he or she may apply to the board before September 1, 2009, for licensure without meeting the instruction and training requirements of RCW 18.280. In order to become licensed as a home inspector, an applicant must furnish proof of a minimum of one hundred twenty hours of classroom instruction and up to forty hours of field training supervised by a licensed home inspector and pass a written exam. The license must be renewed every two years. A good law and one that was long overdue. Even with licensing in place, however, buyers still need to check the fine print on the contract, particularly the waiver and limitation of warranties.

Last week John Koskinen, Chairman and Chief Executive of Freddie Mac, made the bold statement that the worst of the housing market is “clearly” behind us. This must be some kind of “exit” statement as he’s heading for the door next month. He sees the uptick in housing numbers and lull in foreclosures as basis for renewed enthusiasm and optimism. But is it time to break out the party hats? Not just yet. According to recent studies by Deutsche Bank and Credit Suisse, we may be in for a renewed cycle of loan defaults equal or in my opinion, greater than we experienced in 2007-2008.

A recent research report by Deutsche Bank, as reported on MSNBC, estimates that roughly half of all U.S. homeowners will be under water by 2011. Credit Suisse recently reported that we may be in for a renewed cycle of loan defaults equal, or in my opinion, greater than we experienced in 2007-2008. Credit Suisse estimates that during June 2009 mortgage defaults reached a two year low and are now one third the number that occurred during the fourth quarter 2008 peak. The next great wave will be in resetting teaser rates in Alt-A and Option loans.

We should see Alt-A and Option adjustable defaults begin to swell later this year, peaking in 2011 with a slow decline into 2012-2015. During that next peak in resetting teaser loans, the number of loan defaults and foreclosures will in all likelihood be higher than in fourth quarter 2008, and more than three times what we are experiencing this year.

Alt-A and Option teaser loans were not limited to one or another economic class. They helped the poor and well heeled buy up on property they couldn’t otherwise afford. The bigger problem with this next wave in resets is that it begins in a world where millions of jobs have already been lost along with billions in home equity, unlike the world of 2007-2008 when we kicked off this great recession we’re in today. That means that folks close to the edge will fall off even faster than before unless there are effective programs in place to refinance and stem the flood tides of default and foreclosure.

With the next great wave of resets on the horizon, I’m not ready to start celebrating the turning of the tide just yet. Lenders and government officials must put effective programs in place to take out the teaser loans that could pull our economy and housing market out to sea in the greatest riptide we’ve seen in our housing history.

On August 1, 2009, the FTC began enforcing its so called “Red Flag Rules,” which requires certain businesses, including franchisors, to develop effective programs to identify the warning signs of identity thief.

Franchisors that regularly extend “credit” to their franchisees or arrange financing are subject to the rule. A franchisee may be regarded as a creditor if it defers payments from its franchisees or extents credit or if a franchisor bills a franchisee after providing goods or services. The other way a franchisor would fall under the rule is if it suspects that it may be subject to risk of identity thief. With such broad coverage, most national and regional franchise systems would appear to be subject to this new rule.

If a franchise system is subject to the rule, then it is responsible to develop and put an effective identity theft program into place. The program must be approved by the corporate board of directors or senior management. Failure to comply could result in a franchisor being fined civil penalties.

Although burdensome on franchisors, hopefully this new rule will help curb identity thief, a growing international concern. For more information about the Red Flag Rules, the FTC has published a free plain-language handbook, Fighting Fraud with the Red Flags Rule: A How-To Guide for Business. For a free copy of the guidebook, or for more information about compliance, visit the FTC’s website.

Postscript: With news today of Federal prosecutors charging a Miami man of trying to gain access to 130 million credit and debit card accounts, mostly though hacking into retail networks, it’s difficult to argue against the logic of the Red Flag Rule, despite the obvious burden it places on certain business and franchise enterprises.

Hope you’re enjoying the heat. Certain lenders may not be enjoying the heat caused by the new changes to RCW 64.24.

On July 26, 2009, legislative changes to the Washington Deed of Trust Act went into effect. The Act amends RCW 61.24.005, 61.24.010, 61.24.040, and 61.24.060; reenacting and amending RCW 61.24.030; adding new sections to RCW 61.24; adding a new section to RCW 59.12.

The principal amendments require coaching of delinquent borrowers for deeds of trust made from January 1, 2003, to December 31, 2007. Prior to sending a notice of default, the trustee, beneficiary, or authorized agent must contact the borrower by letter and by telephone in order to assess the borrower’s financial ability to pay the debt secured by the deed of trust and explore options for the borrower to avoid foreclosure.

According to the legislative record, a 30-day extension is made to the current timeline for foreclosure, measured from the time the lender contacts the borrower by letter and telephone to attempt a work out to avoid foreclosure.

During the initial contact, the beneficiary or authorized agent must advise the borrower that he or she has the right to request a subsequent meeting and, if requested, the beneficiary or authorized agent shall schedule the meeting to occur within fourteen days of the request. The assessment of the borrower’s financial ability to repay the debt and a discussion of options may occur during the initial contact or at a subsequent meeting scheduled for that purpose. During the initial contact, the borrower must be provided the toll-free telephone number made available by the department to find a department-certified housing counseling agency and the toll-free numbers for the department of financial institutions and the statewide civil legal aid hotline for possible assistance and referrals.

The new law does not apply to deeds of trust securing: commercial loans, obligations of a grantor who is not the borrower or a guarantor, or a purchaser’s obligations under a seller-financed sale.

After the initial contact is made, if the lender is to proceed with a notice of default, then the notice must contain the following:

You should take care to protect your interest in your home. This notice of default (your failure to pay) is the first step in a process that could result in you losing your home. You should carefully review your options. For example:

You may feel you need help understanding what to do. There are a number of professional resources available, including home loan counselors and attorneys, who may assist you. Many legal services are lower-cost or even free, depending on your ability to pay. If you desire legal help in understanding your options or handling this default, you may obtain a referral (at no charge) by contacting the county bar association in the county where your home is located. These legal referral services also provide information about lower-cost or free legal services for those who qualify.

That’s just some of the highlights. For full detail see http://apps.leg.wa.gov/billinfo/summary.aspx?bill=5810&year=2009#documents.

Because these new requirements only apply to institutional loans, it is hard to determine if they will actually assist in preventing foreclosures. Lenders must be willing to actually modify loans and work with borrowers for the new law to have any actual benefit. Otherwise it’s little more than window-dressing. While all institutional lenders have loan modification programs, few if any really work for consumers facing declining home values, along with job loss, reduced hours and pay, or loss of spousal income. The barriers are substantial and most borrowers don’t qualify under present standards. Without a willingness to modify loans on a broader basis, the new laws simply forestall the inevitable, causing a brief reprieve from foreclosure at a greater administrative expense, which will ultimately be borne by all borrowers. The new Act expires December 31, 2012. If it were open-ended, I suspect we’d all be in for a lot more heat when shopping for new loans.

On July 26, 2009 amendments to the Seller Disclosure Act (RCW 64.06) go into effect. The amendments impact mandatory seller disclosures in both improved and unimproved residential real estate transactions. According to an analysis by a non-partisan legislative staff for the use of legislative members in their deliberations, the changes include:

The definition of “unimproved residential real property” is modified to exclude timber land.

A seller must amend the disclosure statement if the seller learns from a source other than the buyer of additional information or an adverse change that makes the disclosure inaccurate.

Unimproved Residential Real Property Disclosure Statement.
Several questions on the disclosure statement are modified in the title, flooding, soil stability, and environmental sections.

Title.
• The question regarding rights-of-way, easements, or access limitations is modified to ask whether they affect the buyer’s use of the property rather than “may” affect the buyer’s use of the property.
• The question relating to zoning violations, nonconforming uses, or any unusual restrictions on the property is modified to ask whether they affect future construction or remodeling rather than “would” affect future construction or remodeling.
• Rather than asking whether there are any covenants, conditions, or restrictions which affect the property, the question asks whether there are any recorded against the title.

Flooding, Soil Stability, and Environmental.
• Questions related to flooding, standing water, or drainage problems and fill dirt, waste, or other fill material are moved to the “Environmental” section.
• The question related to transmission poles is changed to ask whether there are transmission poles or other electrical utility equipment installed, maintained, or buried on the property that do not provide utility service to the structures on the property.
• The question related to radio towers is modified to ask for information about those that cause interference with cellular telephone reception.

Improved Residential Real Property Disclosure Statement.
Several questions on the disclosure statement are modified in the title, water, structural, systems and fixtures, and environmental sections.

Title, Water, Structural, Systems and Fixtures.
• Rather than asking whether there are any covenants, conditions, or restrictions which affect the property, the question asks whether there are any recorded against the title.
• A question is added about defects in the operation of the water system.
• Rather than asking whether the roof has ever leaked, the question asks whether the roof has leaked within the last five years.
• A question is added about whether the property has a wood stove, fireplace insert, pellet stove, or fireplace and whether the wood stove or fireplace inserts are certified as clean burning appliances to improve air quality and public health by the U.S. Environmental Protection Agency.

Environmental.
• A question is modified to ask whether there is any flooding, standing water, or drainage problems that affect the property or access to the property.
• A question is modified to ask about dirt, waste, or other fill material on the property.
• The question related to transmission poles is changed to ask whether there are transmission poles or other electrical utility equipment installed, maintained, or buried on the property that do not provide utility service to the structures on the property.
• The question related to radio towers is modified to ask for information about those that cause interference with cellular telephone reception.

See Final Bill Report SHB 1420 (http://apps.leg.wa.gov/documents/billdocs/2009-10/Pdf/Bill%20Reports/House%20Final/1420-S%20HBR%20FBR%2009.pdf).

In reviewing the changes, it seems that many of the questions that arguably drew upon ambiguous personal interpretation, belief, or state of mind have been simplified and call for fact answers. For example, the question “are there any rights-of-way, easements, or access limitations that may affect the buyer’s use of the property…” has been changed by deleting the word “may.” This makes a lot of sense. After all, who other than the buyer can really say if a right-of-way may affect his or her use of the property? The disclosure concerning covenants, conditions, or restrictions has been updated to simply ask if there are any CC&Rs recorded against title, with the words “that effect title” removed. How is a lay person to determine if a covenant effects title or not? Overall the amendments add clarity and precision to the seller’s disclosure obligations. More clarity should result in fewer lawsuits.

Sellers are supposed to furnish a disclosure document to buyers in compliance with RCW 64.06 within five days of presenting an offer. Buyer’s have three days to accept or rescind their offer. However, according to RCW 64.06.07, other than the right of recision prior to closing, RCW 64.06 provides no other remedy to a buyer if a seller fails to deliver a disclosure statement in a residential sale transaction.

The NWMLS has updated Form 17 for the sale of improved residential real property, Form 17C for the sale of unimproved real property, and Form 35, the inspection addendum. Any disclosure in a residential real estate sale after July 26, 2009 should be on the new NWMLS forms or derived directly from RCW 64.06 to comply with the new law.

On April 7, 2009 the Washington Legislature passed House Bill 1856, amending RCW 59.18.570. The new law is designed to provide greater protection to victims of domestic violence, sexual assault, unlawful harassment, or stalking. The statute provides a means for victims of these crimes to flee an abusive situation, and more important, break a residential lease after meeting certain qualifications.

In brief, if a tenant or household member is victim of one of these crimes, has a valid protective order, reports the act to a qualified third party and furnishes this information to the landlord, then the tenant or household member may terminate the rental agreement and quit the premises without further obligation. The request to terminate must be made within ninety days of the reported act. If the rental is terminated under this section, then the tenant is discharged from payment of rent for any period following the last day of the month of the quitting date. Further, the tenant or household member is entitled to return of its deposit, even if the agreement has a forfeiture clause.

If the harassment is from the landlord, then the tenant may terminate the rental agreement and quit the premises prior to making a copy of the protective order or written record of the report, provided that a copy of the order and record are furnished in seven days.

The revisions to RCW 59.18.570 also address adding or changing locks, engagement of law enforcement, and procedures for vacating the dwelling unit.

The forgoing is only a brief explanation of the new law. The full House Bill may be found at http://apps.leg.wa.gov/documents/billdocs/2009-10/Pdf/Bills/House%20Passed%20Legislature/1856-S.PL.pdf. If you are a renter and victim of domestic violence, sexual assault, unlawful harassment, or stalking, then you may wish to consult with an attorney for detail on the law and breaking your lease.

The amendment to RCW 59.18.570 are sensible clarifications to existing law designed to protect a vulnerable class of Washington citizens. The effective date of the new law is July 26, 2009.