Nevada's "Homeowner's Bill of Rights" was pitched as a way to help underwater borrowers short sell their homes to family, friends or investors, then rent or buy them back.
But now, some are questioning whether the law really gives homeowners the upper hand on banks, which frown upon such prearranged deals.
Senate Bill 321, which took effect Oct. 1, was intended to ease the rules on "arm's length" agreements, which many financial institutions have required in recent years to ensure that owners retain no interest in their homes once they sell.
But real estate lawyers disagree about how to interpret a key section of SB321, and many say it is vague and confusing. Critics argue it is ineffective. Even the bill’s lead sponsor, Sen. Justin Jones, of Las Vegas, says the new rules about arm's length agreements carry little weight.
The law is so disputable it may land in court. A judge could be called on to decide what exactly the law says. And depending on what he or she determines, homeowners could end up filing a class-action lawsuit against the banks or being sued by them for mortgage fraud.
In a short sale, a bank agrees to sell a house for less than what’s owed on the mortgage. In exchange, lenders hoping to ensure a fair price often make homeowners sign an arm’s length agreement to certify that their deal is with someone they didn't know beforehand and doesn't include a buyback or lease-back option. If sellers lie on the form, they can be jailed for fraud.
SB321 says that state law cannot require arm's length transactions in a short sale, nor can state law block a short sale that is not arm’s length.
Some lawyers and real estate agents interpret the law to mean that banks can't force people to sign arm's length agreements, meaning borrowers can short sell to anyone they want, as long as the bank approves.
Lenders still can request an arm's length agreement, “but you don’t have to sign it,” said Nevada Bankers Association CEO Bill Uffelman.
Keith Lynam, legislative chairman of the Nevada Association of Realtors, which pushed for SB321, said the law’s intent is "very clear” but admits "there are some issues with the vagueness." As Lynam sees it, the law dictates that homeowners are not required to sign arm’s length agreements and lenders cannot block short sales anymore simply because they are between family or friends.
However, attorney Jamie Cogburn, whose firm handles 75 to 100 short sales a month, said SB321 is up for interpretation. He said the “weirdly worded” law could be taken to mean that banks can decide whether or not to impose an arm's length agreement, which was the case before the law was drafted.
Banks usually want arm’s length agreements but aren't required by law to get them. Some banks don't ask for them at all.
“Frankly, it can go either way,” Cogburn said.
Attorney Judah Zakalik, a partner at Peters & Associates, said SB321 “won’t do anything” to change the way arm's length agreements are handled.
Lawyer Rory Vohwinkel called the law "extremely vague." He said banks still can require arm’s length agreements, but SB321 also allows homeowners to short sell to someone they know.
Real estate agents wanted stronger language in the bill to force banks to accept non-arm’s length short sales, but it was rejected over concerns it might violate the Nevada and U.S. constitutions, Jones said.
Instead, SB321 now essentially says the state can't outlaw short sales to family or friends but allows banks to reject those deals.
“Does it have a lot of teeth?” Jones said. “No.”
A court ruling might be needed to determine how the law should be interpreted. Such a decision could affect thousands of people.
Almost half of valley homeowners with mortgages were underwater in the quarter ending June 30. The rate was highest among major U.S. metropolitan areas and more than double the national average of about 24 percent, according to Zillow.
If banks continue to impose arm’s length agreements and a judge later rules they shouldn't have, lenders could face a class-action lawsuit from homeowners who were forced to sign the document, Vohwinkel said. If a judge were to rule that banks can, in fact, require the agreements, lenders could sue, claiming homeowners colluded with friends, family or investors to sell their debt-laden houses below market value, he said.