Earthquake Leaves Mortgage Chaos

When Rose recovered from the initial shock of last week’s earthquake, she began to worry about her two-bedroom Tarzana condo and how the earthquake would affect her plans to refinance her mortgage.

Rose, who does not want her last name used, was one of the lucky ones. The interior of her condo suffered only cosmetic damage, and the complex itself seems to have fared pretty well. Getting a new loan on the condo will probably be more complicated now, however. Plus, Rose’s tenants packed up and moved two days after the quake because they couldn’t stand the shaking anymore.

“I need to sort through what I’m going to do,” Rose said. “I was hoping a new loan would be approved soon so that I could save money on my mortgage,” she said. “But my gut feeling is that it’s going to be put on hold.”

Homeowners who sustained serious damage from the Northridge temblor are obviously in a quandary about what to do. There are many more people lucky enough to have suffered very little damage, but they are still worried about their property values and prospects for getting their mortgages refinanced, and whether pending sales of property will actually go through.

“We are still figuring out what our policy is going to be,” said Kathy Marshel, Los Angeles regional manager at Chase Manhattan Personal Financial Services, which has offices in Encino. “The process is going to get delayed--especially in the Valley.”

The decision of what to do with particular loans is being made on a “case-by-case basis,” Marshel said. “We want to make sure we have a solid piece of collateral.” In some cases, Chase Manhattan will send out an appraiser for a second look. If an initial review suggests there may be a problem, she said, then an inspector will be asked to take a close look at any earthquake-related damages. Figuring what a property is worth after all the earth movements is very uncertain, Marshel conceded. “It’s a very tough judgment call to make.”

“The procedure that we’re going to be following is what’s required by the VA, FHA, Fannie Mae, Freddie Mac and other investors,” said Ann Pennywitt, vice president at ARCS Mortgage Inc. in Calabasas. “We’re all going to be driven by what the secondary mortgage market requires,” she added. “Secondary market investors (those who buy mortgages) don’t want a re-verification of value, they want to know if there has been substantial damage to the property.”

“People who are going through the process of getting a loan with us will have to show that there are no visible signs of damage to their property from the earthquake.” Some properties will have to be inspected, others will need reappraisal. When there is a reassessment of the appraisal, Pennywitt said, “the appraiser will have to address . . . what market value losses may have occurred as a result of the quake.”

There will be other new demands. Because many businesses have been adversely affected by all the shaking, Pennywitt said, “we’ll require reverification of employment for certain loans.” On government-backed loans, she said, lenders will generally want any damage to a property to be repaired before the loan is made. If damage to a property is not substantial, she said, lenders may agree to close a loan so long as repair money is set aside in escrow.

All this extra work will lengthen the loan process, Pennywitt predicted. At ARCS’ headquarters last week, staffers and outside contractors were using hair dryers and clotheslines to dry out documents that were soaked when its building was flooded. Pennywitt remains optimistic about moving things along, though. “We’re hearing from some of our loan officers that they can accomplish the extra paperwork in just a few days,” she said. And, loans that were supposed to close within the next two weeks will have their loan-rate lock-in period extended.

Dennis B. Ellman, a real estate partner at the Century City law firm Greenberg, Glusker, Fields, Claman & Machtinger and a resident of Encino, reports that he has received numerous calls from clients with questions about pending sales and other real estate transactions.

“If a residence is significantly damaged or destroyed, buyers generally have a right to cancel a sales contract and tenants can terminate their lease,” Ellman said. “I think there will be purchasers who will attempt to either terminate their escrows or obtain a reduction of the purchase price based on the fact that the neighborhood has changed because of the earthquake. I don’t believe, however, that the law will give them relief in this situation,” Ellman said. Most courts will only allow the sales transaction to be canceled if there has been serious damage to the premises.

While the risk of a property being destroyed traditionally passed to a buyer as soon as a purchase contract was signed, that’s no longer the case. The risk does not pass from seller to buyer until escrow closes or until a buyer takes possession--whichever comes first, Ellman said. Real estate contracts were also traditionally not considered to be time sensitive like other types of contracts. Most residential sales contracts in California, however, provide that “time is of essence” in closing the deal. If a seller can make needed repairs within a reasonable time beyond the intended closing date of a sale, most courts will still consider the buyer obligated, Ellman said. If the repairs would take a long time, the buyer is more likely to get off the hook.

These are confusing times and all the rules are uncertain, said Joe Conrad, president of the Spectrum Group, a Woodland Hills-based mortgage brokerage, and a board member of the California Assn. of Mortgage Brokers, Los Angeles chapter. Lenders will continue to make money available, Conrad said.

“If you’re in the process of getting a loan, lenders are not overly concerned with cosmetic cracks but with structural damage. They want to know the impact on property value,” Conrad said. “The majority of lenders don’t want to know about damage to the neighborhood but damage to the structure.” Besides, he averred, “you could make an argument that the value of properties in damaged neighborhoods has gone up because there’s less to choose from.”

A house that was worth $200,000 two weeks ago is probably still worth $200,000, assuming there has been no structural damage, Conrad said. “The current level of concern will pass,” he said. “If anything, the earthquake may create a shortage of available housing and in the long term, all this may help fuel the local economy.”

“Nobody really knows where values are going except by complete conjecture,” said Mark Soroko, manager and vice president of the Bank of Hollywood in Toluca Lake, which makes commercial loans and brokers residential loans. “I don’t think we have a true handle yet on the damage,” Soroko said. “Time will tell what the trend will be,” he said.

For now, “people are still in a state of shock.”