Updated 01/04/2010

An open letter to Sacramento and Congress:  first tuesday’s legislative prescriptions for a stable, more vigorous California real estate market.  The most recent updates are shown in blue.

General

• CALIFORNIA:  Foregoing needless political correctness in legislative language. This legislation would end the practice of using or needlessly updating legislation to include pronouns correcting gender. Instead of using “he” or “she”, we propose the use of the pronoun “they” to convey male and female, both singular and plural. This would serve to clarify law without creating an unnecessary division of gender, and prevent the legislature from spending valuable resources on extraneous updates of legislation merely for the sake of political correctness.

Property Disclosures

• CALIFORNIA:  Requiring a Criminal Activity Disclosure Statement on all single family residential (SFR) sales. Criminal activity undisclosed by the seller and his broker constantly results in an asymmetry of critical property information between them and the buyers and their selling agents. Prospective buyers are not presently provided known information on criminal activity at the property or in the area. Buyers might value the property differently if they actually know what the sellers and the listing agents know regarding relevant criminal activity — the sole reason known or readily-available material facts are disclosed. [For more information, see the December 2009 first tuesday article, Safety disclosures: crime and the prospective buyer.]

• CALIFORNIA:  Requiring a statement disclosing an SFR’s operating expenses. Prospective homeowners (especially those taking the leap from tenancy to first-time homeownership) need to be educated on the true cost of owning a home as a standard matter of course. An SFR’s operating data is known and readily available to the seller and his listing agent, is not known to the buyer, and if it were known might alter the buyer’s pricing of the property on a comparison of its operation costs with other available properties. This disclosure would be similar to the Annual Property Operating Data (APOD) commonly used for income properties. [See first tuesday Form 306]

Landlord/Tenant Relationships

• CALIFORNIA:  Establishing parameters and time periods for late charges on residential rentals. Unregulated late charges lead directly to their unlawful use by landlords as penalty amounts, windfalls unrelated to the cost of collection or loss of use of the late payment. Case law so dictates, but is ignored or gamed by discounting rent if paid before it’s delinquent. Late-charge legislation controlling mortgage lender late charges and the grace period for delinquencies has kept lender conduct in line with the best interests of society, limited to the lender’s actual costs — no profit permitted for collection efforts. [For more information, see first tuesday's Real Estate Property Management, 5th Edition, Chapter 22, “Other amounts due under three-day notices,” 2010, Renaud 177]

• CALIFORNIA: Establishing statutory late charges and grace periods for residential rental and lease agreements. Late charges for delinquent rent payments under rental and lease agreements need to be set by statute, just as they are with mortgage payments, and for the same reason: to avoid abusive and excessive late charges in housing. Housing, as a necessity, cannot be subject to punitive extraction by vengeful landlords. Consider a grace period of ten days (mortgage payments currently have a 15-day grace period) with a maximum late charge of the lesser of $35.00 or 5%. Only one late charge may be imposed for any delinquency until it is brought current. A payment made during the month following the nonpayment or late payment is counted as an on-time payment for the next month’s rent, just as with mortgage payments. Thus, late fees do not compound from month to month when the tenant falls one month behind. [For more information on housing as a necessity, see the November 2010 first tuesday article, Is housing a luxury or a necessity?]

Lending

• FEDERAL:  Reinstate California’s restraints on lender use of “due-on” clauses. Property owners must be able to freely transfer property and buyers take title subject to any encumbrances of record (as they could before lender de-regulation in 1982) without title being fettered and sales inhibited by lender interference. Lenders should not be able to seize the opportunity on receipt of a request for a beneficiary statement to increase their portfolio yields by exacting assumption fees and modifying interest rates, payment schedules, due dates, etc. simply because the property is security for a mortgage. [For more information, see the November 2008 first tuesday article, The unfair advantage lenders take: a call for change.]

• FEDERAL:  Returning mortgage principal reduction power to bankruptcy judges. In order to force lenders to take serious steps towards meaningful loan modifications for insolvent negative equity homeowners, lenders must have competition to do so in the form of judicial cramdowns in bankruptcy (as they did before 2006). The return of hundreds of thousands of California homeowners to solvency is a social and economic good voluntarily accomplished by the lender or involuntarily imposed on them by the bankruptcy courts. [For more information, see the January 2010 first tuesday article, Cramdowns, cramdowns, cramdowns.]

• CALIFORNIA:  Discontinuing the CAL-VET program. The CalVet program is a California government-operated financing scheme which issues bonds to fund variable rate mortgages made to veterans. CalVet mortgages are structured as archaic land sales contracts with title vested in the name of CalVet, not the veteran buyer. CalVet loans are more stringent and restrictive against the veteran-borrower ‘s  rights of possession and equity financing arrangements than a mortgage insured by the Federal Housing Administration (FHA) or the federal Veterans Administration (VA). They are also peculiarly all variable interest rate loans, which should not be the staple of any stable mortgage  program sold to anyone and especially not of one that is run by the state government. The CalVet program is an unnecessary burden on both the state and on veterans and should be discontinued and phased into the private banking sector over time.  [For more information on CalVet loans, see Chapter 41 of first tuesday's Finance, 5^th edition.]

Licensing

• CALIFORNIA:  Real estate licensing for the industry’s “gray area” practitioners. This legislation would require all individuals providing real estate sales and property management services to be licensed, regardless of citizenship or residency status. Those who work in the industry must be policed if we are to protect real estate consumers from dishonest conduct — no matter the characterization of the individual who is the source of the service. Issuing licenses to all honest individuals operating as agents in California and controlling them through the DRE’s present structure (as they did before the early 1990s) is better than adding a requirement for escrow officers to verify (police) licensing before disbursing broker fees.

• CALIFORNIA:  Mandating the disclosure of an employing or corporate broker’s license number on all first-point-of-contact materials. This legislation would require sales agents and brokers who represent real estate consumers to disclose the DRE license number of their employing or corporate brokers in addition to their own DRE license number on any materials meant to be the first point of contact with real estate consumers. This legislation would provide greater transparency to the consumer and compel employing brokers to more closely monitor the actions of the licensees working under their direction. [For more information about the existing DRE license number disclosure requirements, see the January 2009 first tuesday Legislative Watch.]

• CALIFORNIA: Establishing a DRE Office Management endorsement, and an apprenticeship requirement for new sales agents. Increased scrutiny is required to straighten brokers’ lax oversight of sales agents, a negligence which helped bring about the Great Recession and the current lack of public confidence in real estate licensees. Brokers with more than three agents working under their license will be required to obtain a Department of Real Estate (DRE) endorsement for Office Management, subject to an additional three to six hours of continuing education and an annual renewal fee as set by the DRE, say $25. Additionally, newly-licensed sales agents need to be “apprenticed” to a broker for a period of two years before they can directly act on behalf of a broker with a client. The same sort of training and timeframe is currently required of appraisers, who are in positions to be of far less harm to the public than wayward and unschooled agents. [For more information about the need for increased oversight of sales agents by their employing brokers, see the December 2010 first tuesday article, The rabbit and the greyhound: DRE disciplinary action and broker supervision.]

Taxation

• CALIFORNIA:  Oversight of qualified intermediaries in §1031 exchanges. Unbelievable as it may be after decades of thievery or gross negligence, no entity, either government or private, is responsible for the oversight of intermediaries in a §1031 exchange. To protect investors and their brokers from negligent or unscrupulous intermediaries, the Attorney General should be authorized to register and regulate these individuals before they can hold themselves out as intermediaries and accept funds or title to property. [For more information, see the March 2010 first tuesday article , Failure of §1031 “qualified” intermediary to fund defers profit tax.]

• CALIFORNIA:  Requiring licensees to discuss known tax aspects of a transaction as part of their fiduciary duties. Brokers and agents do not currently have to disclose their knowledge of any tax consequences of a real estate transaction to their principal client, even if they are aware of the repercussions; repercussions which exist in every real estate sale. This legislation would mandate the disclosure to a client of known tax aspects of a transaction in an effort to combat the wide-spread phenomenon of the “dumb agent” — the agent who, despite his knowledge, is legally allowed to remain silent about consequences known to him in a transaction.  A preprinted, boilerplate advisory to see another professional if you have concerns about the tax aspects of a transaction does not disclose the agent’s knowledge, which if disclosed might affect the client’s decisions – and thus is a material fact deceitfully omitted.

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