“Simon Rule” Gutted by New Court Decision

The so-called “Simon Rule”, among the most potent weapons available to distressed homeowners in negotiating short sales, and protecting themselves from financial liability following foreclosure, has been significantly weakened as a result of a new California court of appeals decision.  That decision, Cadlerock Joint Venture, LP v. Lobel (2012) 203 Cal.App.4th 1531, will change the landscape to the detriment of many struggling California mortgage holders.

How Does This Impact Homeowners Considering a Short-Sale?

Cadlerock now requires a court to look at who owns the loans at the time of the foreclosure by the senior lienor.  If the senior lienor has assigned/sold its junior lien to a third party prior to the foreclosure, that third party will now be able to sue the homeowner for the full amount of the junior loan after the foreclosure.  To summarize, following Cadlerock, in most situations the homeowner will lose the home and also have to repay the balance of the non-purchase money second loan.  (The court left a small amount of “wiggle room” for cases where the senior lienor assigns/sells its junior lien after the foreclosure.  There, Simon will still apply.)

Simon Rule Background

As discussed in previous articles, for the last twenty years many Californians with non-purchase money second loans have been able to protect themselves from claims brought by certain “junior” lenders after a foreclosure by the “senior” lender.  This protection originated in a landmark case called Simon v. Bank of America (1992) 4 Cal.App.4th 1537.

The Simon decision created an exception to the old rule that applies where a homeowner has two separate loans on a single property, and where the first mortgage holder (aka the “senior lienor”) forecloses on the property.  Before Simon, the second loan (aka the “junior lienor”) could collect the balance still owing on that loan after the senior foreclosed (and so long as the second loan was not a “purchase money” loan; i.e., part of the loan “package” used to buy the house).  (“Purchase money” second loans were, and still are, barred from collection under a separate rule not discussed here.)

What Simon said was that where the first and second loans were issued by the same bank (in that case, Bank of America), the bank could not collect on its second loan after foreclosing on its first loan; thus, the “Simon Rule”.  An equally important part of the rule was that a bank could not avoid this restriction by “assigning”, or selling, its second loan to another bank or investor.  In other words, courts would look to who owned the loans when they were issued.  If the same bank issued the two loans, the “Simon Rule” would apply.

In recent years, Simon became an invaluable tool in negotiating short sales involving non-purchase money second loans.  (See my January 2012 blog post, Playing the Simon Card in Short Sale Negotiations.Cadlerock now renders that tool virtually useless.

All homeowners considering short sales should consult with competent legal counsel to determine the impact of Cadlerock on their situation.  Failure to do so may result in enormous financial consequences and long-term hardship.

Lenders Pushing Back on HARP 2.0

The blogosphere is chock-full of articles announcing the most recent and substantial changes to the federal government’s HARP 2.0 refinance program.  The most significant and widely touted change to the program is its elimination of loan to value ratios that previously had limited many homeowner’s access to the program.  As now designed HARP 2.0  purports to allow for unlimited loan-to-value (LTV) on most program refinances.  Great news, right?  Well, not so fast.

As author and mortgage expert Dan Green writes this week, “[A]s many underwater homeowners are finding out the hard way, just because HARP allows it, that doesn’t mean banks will do [it].”  Statistical data compiled by Green establishes that many major lenders are restricting HARP 2.0 refis to owners with loan to value ratios in the 105% to 125% range.  Unfortunately, this leaves an enormous portion of the underwater sector out in the cold.

Over the last several years I have consulted with hundreds and hundreds of distressed property owners in Northern California, and particularly in Alameda and Contra Costa counties.  Many distressed homeowners in these regions have LTV ratios of 200% and more.  Green’s statistics show that less than 5% of HARP 2.0 mortgage refinance applicants fall within this range.  Which means that, even for those folks who otherwise meet the program’s eligibility criteria, they’re not being helped.

Moving forward, it will be critical to determine which lenders are in fact honoring the unlimited LTV criteria.  I will do my best to keep you apprised of the identity of these lenders.  In this regard, it is critical to recall that HARP 2.0 does not require homeowners to refinance through their existing lender.  Any bank representative that advises you to the contrary simply is incorrect.

Please let me know if you think you or your client may benefit from HARP 2.0, and I’ll do my best to help you select a qualified mortgage professional in your area to help with the application process.  Meanwhile, for a complete description of the current program guidelines, including a clear and comprehensive set of FAQ’s, I refer you to Dan Green’s excellent website: