Do You Know What the Administration's Plan for Housing is this Year?
"In politics, nothing happens by accident. If it happens, you can bet it was planned that way." - Franklin D. Roosevelt
You may not have had the opportunity to read the Obama Administration's Report to Congress, "Reforming America's Housing Finance Market" to prompt you I have included the link HERE
It is no secret that all of us in the real estate industries are in for some challenging times. It is also no secret it is going to continue to challenge even the best of the best. In the Report's 32 pages the agenda for our future is revealed. It's position for Fannie Mae and Freddie Mac were not a shock, however the other items discussed were certainly eye-opening.
The highlights are...
1. Plans to decrease the conforming loan limits
2. Need to Increase "Guarantee Fees" (the fee paid to any loan sold to FNMA/FHLMC)
3. Larger down payment requirements for FNMA/FHLMC loans (10% down)
4. A decrease in the FHA loan limits back to the HERA requirements (115% of current median home value) which are set to expire on October 1, 2011
5. Consolidate FHA, VA and Rural Housing into one housing unit
6. Full implementation of Dodd-Frank's consumer protection provisions (including LO comp, risk retention and underwriting standardization)
7. Requirement of originators and securitizers to retain risk (5%)
8. Shift from homeownership to affordable rental housing
9. Coordinated moves to restrict FHA's loan to value ratios and increased customer cost in preparation to shrink FHA's presence in the market
10. 3 options to wind down FNMA/FHLMC
If one or more of these proposals are to take root, how will your business be impacted? How will your customers be impacted? Will our fragile economic market be able to weather the storm of increased down payment requirements for ALL loans, maximum government loan amounts rolled back or the continued increase in costs to credit?
I hope you wil become educated and aware of the changes being made, adjust your planning and by all means, let your informed voice be heard, not through empty complaints but through targeted advocacy, grassroots movements and old fashioned tenacity.
Report From the Front Line
My husband and I were honored to host Arizona's own real estate advocate, Congressman David Schweikert at a private reception at the home of Bill Rogers in Scottsdale on Friday. Representative Schweikert has been named to the powerful House Financial Services Committee, and the Vice Chair of the Capital Markets Sub-Committee, an unheard of feat by a freshman delegate.
He once again wowed some of Arizona's toughest industry critics through his knowledge, passion and experience as a real estate agent and investor. His frank and open discussion about what he would like to see happen in the committee was impressive, especially when coupled with his desire for input from those in attendance for solutions and options.
Many in attendance were pleased to hear of the Representative's support of the March 11, 2011 Letter to the Federal Reserve requesting the delay of the April 1st deadline for Loan Officer Compensation. We were also interest to hear his impression of how the next few weeks would play out with the Fed.
Overall it was a tremendous evening for those who committed the time and money to attend.
Ha Ha
Its a fine line between numerator and denominator.
Sunday, March 27, 2011
Monday, January 31, 2011
Foreclosure losses picked up by taxpayers, investors
From the Arizona Republic 01/30/11
Catherine Reagor
In a historic wave of foreclosures, countless thousands of Americans have given up their homes, unable - or unwilling - to pay the mortgage. Plunging values left their homes worth far less than the amount of their loans.
Many borrowers let banks take the houses back, believing the lenders would simply resell them at a loss. Some borrowers even did so out of spite, angry that lenders wouldn't help them refinance or adjust their payments.
But in many cases, banks lost little or nothing on those foreclosures.
Instead, the biggest losers have been market investors and the American taxpayers.
Most foreclosures now are on loans that were issued by banks but backed by government-owned Fannie Mae and Freddie Mac. Created to boost U.S. homeownership, the Federal National Mortgage Association and the Federal Home Mortgage Corp. buy mortgages from banks and now own half of all mortgages.
It's a system that was built to encourage banks to make mortgages and keep being able to make more. But the system also means that when homeowners stop making mortgage payments, the lenders who issued the mortgages don't take the biggest loss.
"Fannie and Freddie losses are passed onto taxpayers," said Anthony Sanders, a former professor of real estate and finance at Arizona State University, now with Virginia's George Mason University.
Those federal entities' losses are expected to near $400 billion before the foreclosure crisis ends.
Many other mortgages that have failed were even riskier than the ones bought by Fannie Mae and Freddie Mac. Those were packaged by the financial industry and also resold to investors. When those loans fail, investors lose.
And many of those losses could end up hitting taxpayers, too. Big investors included government pension funds and other public agencies."If the federal government begins bailing out pension funds," Sanders said, "then the taxpayer pays for that, too."
A report from a federal inquiry into the financial meltdown, issued last week, concluded that those investments were bundled and sold even as housing prices declined - and that investors were let down at many steps along the way.
Regulators who could have seen the failures didn't understand the system, the report found. And a top investment-rating agency labeled the packaged mortgages with the top, AAA-grade, rating without reviewing the quality of the mortgages themselves.
"It has become musical chairs for mortgages and foreclosures," said Jay Butler, director of realty studies at ASU. "Whoever ends up holding the mortgage at the end holds the bag for the loss. Unfortunately, taxpayers will end up with the biggest tab."
Since 2008, nearly 150,000 homes have been foreclosed on in metro Phoenix. Housing analysts are concerned that the housing market is only halfway through the foreclosure mess.
While foreclosures continue, banks have drawn public ire, being quick to accept federal bailouts but slow to respond to federal plans meant to help struggling homeowners.
"I understand why some people want to walk away, but we should all understand who ultimately pays the bill for foreclosures," said Amy Swaney, former president of the Arizona Mortgage Lenders Association and Arizona manager of Citywide Home Loans. "Most foreclosures end up costing us all."
Catherine Reagor
In a historic wave of foreclosures, countless thousands of Americans have given up their homes, unable - or unwilling - to pay the mortgage. Plunging values left their homes worth far less than the amount of their loans.
Many borrowers let banks take the houses back, believing the lenders would simply resell them at a loss. Some borrowers even did so out of spite, angry that lenders wouldn't help them refinance or adjust their payments.
But in many cases, banks lost little or nothing on those foreclosures.
Instead, the biggest losers have been market investors and the American taxpayers.
Most foreclosures now are on loans that were issued by banks but backed by government-owned Fannie Mae and Freddie Mac. Created to boost U.S. homeownership, the Federal National Mortgage Association and the Federal Home Mortgage Corp. buy mortgages from banks and now own half of all mortgages.
It's a system that was built to encourage banks to make mortgages and keep being able to make more. But the system also means that when homeowners stop making mortgage payments, the lenders who issued the mortgages don't take the biggest loss.
"Fannie and Freddie losses are passed onto taxpayers," said Anthony Sanders, a former professor of real estate and finance at Arizona State University, now with Virginia's George Mason University.
Those federal entities' losses are expected to near $400 billion before the foreclosure crisis ends.
Many other mortgages that have failed were even riskier than the ones bought by Fannie Mae and Freddie Mac. Those were packaged by the financial industry and also resold to investors. When those loans fail, investors lose.
And many of those losses could end up hitting taxpayers, too. Big investors included government pension funds and other public agencies."If the federal government begins bailing out pension funds," Sanders said, "then the taxpayer pays for that, too."
A report from a federal inquiry into the financial meltdown, issued last week, concluded that those investments were bundled and sold even as housing prices declined - and that investors were let down at many steps along the way.
Regulators who could have seen the failures didn't understand the system, the report found. And a top investment-rating agency labeled the packaged mortgages with the top, AAA-grade, rating without reviewing the quality of the mortgages themselves.
"It has become musical chairs for mortgages and foreclosures," said Jay Butler, director of realty studies at ASU. "Whoever ends up holding the mortgage at the end holds the bag for the loss. Unfortunately, taxpayers will end up with the biggest tab."
Since 2008, nearly 150,000 homes have been foreclosed on in metro Phoenix. Housing analysts are concerned that the housing market is only halfway through the foreclosure mess.
While foreclosures continue, banks have drawn public ire, being quick to accept federal bailouts but slow to respond to federal plans meant to help struggling homeowners.
"I understand why some people want to walk away, but we should all understand who ultimately pays the bill for foreclosures," said Amy Swaney, former president of the Arizona Mortgage Lenders Association and Arizona manager of Citywide Home Loans. "Most foreclosures end up costing us all."
Saturday, January 8, 2011
New Year, New Clients and New Loan Officers?
I LOVE the start of a new year. There is something so cleansing and fresh about the beginning of January that I will start considering that it is its own "season." You know in Arizona you have several important seasons..."In Season", where hotel prices and traffic jams remind us daily that we live in a resort community. "Boot-Wearing Season", where I finally get to give my high-heeled pumps, sandals and mules a few days off during the week and bring out my high-heeled boots, you know, to protect my calves from the near freezing 60 degree weather. An now we have, "The Season of Our New Year", where desires and goals are re-born like babies with unlimited opportunities and potential.
I love everything about "The Season of Our New Year." I love that we spend time reviewing the previous year, ranking those things that have impacted, inspired or identified with us the most. But more importantly, I love that we take the time to envision what our lives will be in the future; who we want surrounding us, what we want to accomplish and who do we want to be. We may have hit speed bumps last year, we may feel as if we have had failures in the past or maybe we just started to hit our stride, but in the Season of Our New Year, it is a blank canvass, a tabula rasa for us each to decide what is to come. What an opportunity. I plan on huge successes in 2011 and for me that means that those I surround myself with will be reaching huge successes as well. I just love how that works!
Here is to an amazing 2011 and to the start of the Season of Our New Year.
Bankruptcy Filings in AZ Rise 24%
What Obstacles Will Your Clients Face in 2011?
The Wall Street Journal wrote this week that the number of Americans filing for personal bankruptcy topped 1.5 million in 2010 which is up 9% from 2009 nationwide. This is the highest level since 2005 when a revamp of the Bankruptcy Code took place. The Journal also reported that most of the uptick was accounted for in the Pacific Southwest with California increasing 25% and Arizona up 24% from 2009.
That fact begs the question that I get asked almost daily, "so how long until I can qualify to buy a new house?" My answer, almost unwaveringly begins with, "Well, what kind of loan or house are you looking to get?"
The rules regarding bankruptcies are divided into different categories of FHA, VA, FNMA/FHMLC and Portfolio Lenders. Then they are subdivided in groups of what type of bankruptcy was filed. In all cases, we must determine the cause and significance of the derogatory information, verify that sufficient time has elapsed since the date of the bankruptcy and confirm that the borrower has re-established an acceptable credit history.
In discussing bankruptcies we almost always discuss the term extenuating circumstances. FNMA/FHLMC define the term as are nonrecurring events that are beyond the borrower's control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.
If a borrower claims that a bankruptcy was the result of extenuating circumstances, the borrower must provide documentation that can be used to support and confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that confirm the inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.).
Below are the current required waiting periods for each category of loans:
FNMA/FHLMC: Chapter 7 or 11
4 year waiting period from the discharge or dismissal date
2 Years from discharge date - Extenuating Circumstances
FNMA/FHLMC: Chapter 13
2 years from the discharge date
4 years from the dismissal date
FHA: Chapter 7 or 11
2 years from the discharge date
1 year from the discharge date - Extenuating Circumstances
FHA: Chapter 13
12 months into the payout period with all payments on time AND written approval from the court. MUST be manually underwritten
VA: Chapter 7 or 11
2 years from the discharge date
1 year from the discharge date - Extenuating Circumstances
VA: Chapter 13
12 months into the payout period with all payments on time AND written approval from the court.
Portfolio Lender: All BK Types
Lender Specific
In all circumstances, if a housing related incident, such as a short sale, foreclosure or deed in lieu occurs in conjunction or within of the bankruptcy, you must reference that housing related event individually to determine the time frame for purchase.
Who Will Surround You This Year?
Possibly Fewer Loan Officers than Last Year!
As 2011 begins, there are noticeably fewer participants in our industry. The regulatory and legislative changes in our industry have been cumbersome and made for a tedious process for many. December 31st also closed out the renewal process for licensees and thus we have seen more and more individuals dropping out of the business altogether. The Nationwide Mortgage Licensing System (NMLS) reports that of over 230,000 national tests administered there is still close to a 20% failure rate.
If you are interested in who you and your clients are working with you can view license information online at http://www.nmlsconsumeraccess.org/
Ha Ha
Did you hear about the guy who sent ten puns to friends, in the hope that at least one of the puns would make them laugh.
Unfortunately, no pun in ten did.
I love everything about "The Season of Our New Year." I love that we spend time reviewing the previous year, ranking those things that have impacted, inspired or identified with us the most. But more importantly, I love that we take the time to envision what our lives will be in the future; who we want surrounding us, what we want to accomplish and who do we want to be. We may have hit speed bumps last year, we may feel as if we have had failures in the past or maybe we just started to hit our stride, but in the Season of Our New Year, it is a blank canvass, a tabula rasa for us each to decide what is to come. What an opportunity. I plan on huge successes in 2011 and for me that means that those I surround myself with will be reaching huge successes as well. I just love how that works!
Here is to an amazing 2011 and to the start of the Season of Our New Year.
Bankruptcy Filings in AZ Rise 24%
What Obstacles Will Your Clients Face in 2011?
The Wall Street Journal wrote this week that the number of Americans filing for personal bankruptcy topped 1.5 million in 2010 which is up 9% from 2009 nationwide. This is the highest level since 2005 when a revamp of the Bankruptcy Code took place. The Journal also reported that most of the uptick was accounted for in the Pacific Southwest with California increasing 25% and Arizona up 24% from 2009.
That fact begs the question that I get asked almost daily, "so how long until I can qualify to buy a new house?" My answer, almost unwaveringly begins with, "Well, what kind of loan or house are you looking to get?"
The rules regarding bankruptcies are divided into different categories of FHA, VA, FNMA/FHMLC and Portfolio Lenders. Then they are subdivided in groups of what type of bankruptcy was filed. In all cases, we must determine the cause and significance of the derogatory information, verify that sufficient time has elapsed since the date of the bankruptcy and confirm that the borrower has re-established an acceptable credit history.
In discussing bankruptcies we almost always discuss the term extenuating circumstances. FNMA/FHLMC define the term as are nonrecurring events that are beyond the borrower's control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.
If a borrower claims that a bankruptcy was the result of extenuating circumstances, the borrower must provide documentation that can be used to support and confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that confirm the inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.).
Below are the current required waiting periods for each category of loans:
FNMA/FHLMC: Chapter 7 or 11
4 year waiting period from the discharge or dismissal date
2 Years from discharge date - Extenuating Circumstances
FNMA/FHLMC: Chapter 13
2 years from the discharge date
4 years from the dismissal date
FHA: Chapter 7 or 11
2 years from the discharge date
1 year from the discharge date - Extenuating Circumstances
FHA: Chapter 13
12 months into the payout period with all payments on time AND written approval from the court. MUST be manually underwritten
VA: Chapter 7 or 11
2 years from the discharge date
1 year from the discharge date - Extenuating Circumstances
VA: Chapter 13
12 months into the payout period with all payments on time AND written approval from the court.
Portfolio Lender: All BK Types
Lender Specific
In all circumstances, if a housing related incident, such as a short sale, foreclosure or deed in lieu occurs in conjunction or within of the bankruptcy, you must reference that housing related event individually to determine the time frame for purchase.
Who Will Surround You This Year?
Possibly Fewer Loan Officers than Last Year!
As 2011 begins, there are noticeably fewer participants in our industry. The regulatory and legislative changes in our industry have been cumbersome and made for a tedious process for many. December 31st also closed out the renewal process for licensees and thus we have seen more and more individuals dropping out of the business altogether. The Nationwide Mortgage Licensing System (NMLS) reports that of over 230,000 national tests administered there is still close to a 20% failure rate.
If you are interested in who you and your clients are working with you can view license information online at http://www.nmlsconsumeraccess.org/
Ha Ha
Did you hear about the guy who sent ten puns to friends, in the hope that at least one of the puns would make them laugh.
Unfortunately, no pun in ten did.
Sunday, November 14, 2010
AZ Central Examines "Flopping"
Phoenix real estate strategy of 'flopping' examined
Manipulated short sales resold for quick profits
by Catherine Reagor - Nov. 14, 2010 12:00 AM
The Arizona Republic
As more houses in metro Phoenix go on the market for short sales, some investors have begun buying and reselling them quickly for a profit, using strategies that some in the housing industry say could be unethical or worse.
The deals work in a variety of ways, but all involve the same basic strategy. An investor persuades a lender to agree to a short sale, buying a house for less than what the lender is owed. But the investor has another buyer lined up who is willing to pay more.
The bank, usually unaware of the other waiting buyer, accepts a lower price from the investor, who then quickly resells the home - for a higher price - to the waiting buyer.
The deals, which have become more common as short sales have increased, are now drawing the attention of real-estate and financial regulators.
Most lenders object to such deal-making because, had they been aware of the other waiting buyer, they would have taken the higher price. Banks take a loss on short sales, and the deals can make their losses greater.
Real-estate professionals disagree over the nature of the deals. Some insist they are a smart way to make a profit in a tough market. Others call them unethical at best and question whether investors violate the law if they conceal information from a lender.
Many real-estate market watchers agree that the deals have negative impacts. Neighborhood housing values suffer because, while the second sale might be for the home's true market value, the first sale represents an artificially low price.
In the industry, the deals have been dubbed "flops."
In a rising market, investors "flip" houses, buying them and then reselling for a profit as overall values rise.
"Flopping is the opposite of flipping," said Amy Swaney, Arizona Regional Sales Manager for Citywide Home Loans and a past president of the Arizona Mortgage Lenders Association. "It is the art of profiting off the devaluation of property rather than an increase in value of a property."
It is impossible to know how many homes have been "flopped" since short sales began to be widely accepted by lenders in the past year.
But a key indicator is how quickly short-sale homes are resold. An owner who buys in a short sale and sells the home again within a few days most likely had the second buyer lined up in advance.
In the past year, nearly 20,000 short sales closed in metro Phoenix. Of those, at least 1,000 were flops, according to an analysis by Tom Ruff of the real-estate research firm Information Market. A few examples: a Tolleson home sold for $90,000 through a short sale and then was flopped within 20 days for $106,000; a northwest Phoenix home was purchased first through a short sale for $28,500 and then resold through a flop within two weeks for $50,000; and a Scottsdale house sold via short sale for $90,000 and then for $122,000 through a subsequent flop less than a month later.
The Arizona Department of Real Estate, mortgage giants Fannie Mae and Freddie Mac and the FBI are all investigating flopping deals.
"Short-sale flopping is one of our real-estate industry's biggest issues right now," said Judy Lowe, Arizona Department of Real Estate commissioner. "We are all looking at the legality and ethics of these deals. And it varies by flop because it appears every deal is done a little differently."
The art of the deal
Short sales slowly have grown more common as more homeowners in the region face losing their homes to foreclosure.
In some ways they are more attractive to lenders and sellers. A short sale does less damage to the seller's credit record than a foreclosure. And a lender typically is paid more money in a short sale than it could make on the home after foreclosing, partly because it has to incur costs related to taking back the home before reselling it.
But as short sales have expanded, so have the strategies some investors appear to use to make a profit. Investigators and industry professionals describe several common approaches.
- Price high, then sell low: A real-estate agent lists a home for a short sale but knowingly prices the house too high so it sits on the market for several months. As the homeowner edges closer to foreclosure, the agent recommends reducing the offering price. A buyer appears who is willing to pay less than the reduced price. The lender is persuaded to accept the deal, arguing that the home has been on the market for so long because it is overpriced and that foreclosure is imminent. The lender agrees, and the short sale is completed.
But the new buyer already has a plan to resell the house and often already has a second buyer lined up ready to pay more. The key to the arrangement is the price-setting. The high price keeps other potential buyers away and sets the lender up to be more agreeable to a low offer at the end.
The agent can receive a quick two commissions on the same property.
The lender gets less for the house than it otherwise might, and the seller may be damaged, too. The more time that passes before the sale, the more damage is done to the seller's credit from missing monthly payments.
- Steering the deal: A third party working with the seller to help facilitate the deal or a real-estate agent representing the seller ignores higher offers for a short sale. An investor buys the property without the lender ever knowing what other offers the home might have drawn. The investor then quickly resells the property for a higher price.
If a third party was in on the flop to steer the deal away from the open market and to the investor, the agent often doesn't know. If the agent was in on the flop, the agent may have received an additional payment from the investor.
The deals rely on finding a second buyer, usually another investor, willing to pay more after the short sale. In some cases, the second buyer doesn't even know that an investor is orchestrating a short sale before reselling. In other cases, buyers are looking for deals but are reluctant to deal with the paperwork hassle and uncertainty of a short sale. A flop allows them to pay a low price for the home, while the interim buyer deals with the short-sale technicalities.
The deals also require people to coordinate the arrangement and sometimes conceal information. Arizona regulators are concerned that loan officers, appraisers and real-estate and escrow agents could be acting unethically and even illegally, and some may be getting caught up in these deals without realizing it.
Many in Arizona's real-estate and lending industries are against flopping.
"I hate flop deals," said Kevin Kaufmann, a Phoenix real-estate agent specializing in short sales with Keller Williams Realty. "The deals look like a great way to make fast money, but they aren't usually in the best interest of the seller who is dealing with financial hardships and facing foreclosures."
Investigators also are watching for another type of short-sale deal that is a short-sale version of a fraud scheme used in boom times.
A buyer or buyers use a "straw buyer" to purchase a home. The buyer uses fake identification and financial information to obtain a mortgage and then never makes payments, triggering foreclosure proceedings. Immediately before foreclosure, the people running the scheme offer to buy the home in a short sale. The lender isn't aware of the connection between the original buyer and the short-sale buyer. The people in on the deal buy the house for a low price and can resell it.
A pair of Connecticut real-estate agents were convicted on fraud charges for a flopping scheme earlier this year. Both agents admitted to providing their own appraisals for the homes, acting as straw buyers to purchase homes through short sales and then reselling the homes at higher prices.
Industry concerns
Homes listed for short sale are at a record high in metro Phoenix, so the potential for more flops is significant.
In an effort to stop potential short-sale fraud, Fannie Mae and Freddie Mac recently issued warnings that homes it approves for short sale can't be resold within at least 30 days.
Mortgage research firm CoreLogic estimates that lenders will lose at least $50 million from the deals nationally this year.
The FBI has identified the deals as one of the nation's top mortgage scams now, but they are difficult to investigate and prove.
State regulators talked to the real-estate industry about foreclosure and short-sale schemes at a conference held by the Arizona Real Estate School in September.
Lauren Kingry, superintendent of the Arizona Department of Financial Institutions, said because there are so many different ways flops are handled, it's difficult to determine if the deals are illegal.
"Though many Valley attorneys say flopping is completely legal as long as it's disclosed, it's still a growing problem for the real-estate market and lenders," Swaney said. "Some deals may skirt the law, but that doesn't make them ethical. We as professionals in the industry have to watch out for our clients, whether they are homeowners, buyers or lenders."
She said some Valley escrow agents are turning away deals that require them to process the documents on a short sale and then a second sale of the same home for a higher price within days of each other.
Some groups involved in the deals say they disclose the planned resale up front so they aren't defrauding the lender or acting unethically. Some mortgage servicers may be agreeing to the deals to avoid a foreclosure. But big lenders say they are opposed to flopping.
"I am telling people flopping homes they must give full disclosure to lenders," said Phoenix real-estate attorney Scott Zwillinger. "If banks don't know about all the deals involved, then a flopper is committing fraud. That's the bottom line."
Even if deals do take advantage of lenders, public sentiment is not necessarily on the banks' side. With banks awash in criticism of how they have handled foreclosures and refused to modify loans for many needy homeowners, consumers are less likely to be outraged at a deal that takes advantage of a lender.
But in some deals, taxpayers - not lenders - may be the ones taking a loss.
For mortgages that are federally backed, lenders can seek some federal funds to cover their losses on short sales.
So if a flopping deal drives down the selling price, the lender may seek more money from the federal backer to cover the loss. It is unclear how much money lenders have been paid to recover losses in short sales.
"Flopping may be legal if all the deals are disclosed to everyone involved, but they make me furious," said Ruff, the real-estate analyst. "The money flopping deals are costing lenders ultimately is money the taxpayers are going to have to cover on mortgages that are government- backed."
Read more: http://www.azcentral.com/business/realestate/articles/2010/11/14/20101114phoenix-real-estate-short-sale-flopping.html#ixzz15JxvLIGs
Manipulated short sales resold for quick profits
by Catherine Reagor - Nov. 14, 2010 12:00 AM
The Arizona Republic
As more houses in metro Phoenix go on the market for short sales, some investors have begun buying and reselling them quickly for a profit, using strategies that some in the housing industry say could be unethical or worse.
The deals work in a variety of ways, but all involve the same basic strategy. An investor persuades a lender to agree to a short sale, buying a house for less than what the lender is owed. But the investor has another buyer lined up who is willing to pay more.
The bank, usually unaware of the other waiting buyer, accepts a lower price from the investor, who then quickly resells the home - for a higher price - to the waiting buyer.
The deals, which have become more common as short sales have increased, are now drawing the attention of real-estate and financial regulators.
Most lenders object to such deal-making because, had they been aware of the other waiting buyer, they would have taken the higher price. Banks take a loss on short sales, and the deals can make their losses greater.
Real-estate professionals disagree over the nature of the deals. Some insist they are a smart way to make a profit in a tough market. Others call them unethical at best and question whether investors violate the law if they conceal information from a lender.
Many real-estate market watchers agree that the deals have negative impacts. Neighborhood housing values suffer because, while the second sale might be for the home's true market value, the first sale represents an artificially low price.
In the industry, the deals have been dubbed "flops."
In a rising market, investors "flip" houses, buying them and then reselling for a profit as overall values rise.
"Flopping is the opposite of flipping," said Amy Swaney, Arizona Regional Sales Manager for Citywide Home Loans and a past president of the Arizona Mortgage Lenders Association. "It is the art of profiting off the devaluation of property rather than an increase in value of a property."
It is impossible to know how many homes have been "flopped" since short sales began to be widely accepted by lenders in the past year.
But a key indicator is how quickly short-sale homes are resold. An owner who buys in a short sale and sells the home again within a few days most likely had the second buyer lined up in advance.
In the past year, nearly 20,000 short sales closed in metro Phoenix. Of those, at least 1,000 were flops, according to an analysis by Tom Ruff of the real-estate research firm Information Market. A few examples: a Tolleson home sold for $90,000 through a short sale and then was flopped within 20 days for $106,000; a northwest Phoenix home was purchased first through a short sale for $28,500 and then resold through a flop within two weeks for $50,000; and a Scottsdale house sold via short sale for $90,000 and then for $122,000 through a subsequent flop less than a month later.
The Arizona Department of Real Estate, mortgage giants Fannie Mae and Freddie Mac and the FBI are all investigating flopping deals.
"Short-sale flopping is one of our real-estate industry's biggest issues right now," said Judy Lowe, Arizona Department of Real Estate commissioner. "We are all looking at the legality and ethics of these deals. And it varies by flop because it appears every deal is done a little differently."
The art of the deal
Short sales slowly have grown more common as more homeowners in the region face losing their homes to foreclosure.
In some ways they are more attractive to lenders and sellers. A short sale does less damage to the seller's credit record than a foreclosure. And a lender typically is paid more money in a short sale than it could make on the home after foreclosing, partly because it has to incur costs related to taking back the home before reselling it.
But as short sales have expanded, so have the strategies some investors appear to use to make a profit. Investigators and industry professionals describe several common approaches.
- Price high, then sell low: A real-estate agent lists a home for a short sale but knowingly prices the house too high so it sits on the market for several months. As the homeowner edges closer to foreclosure, the agent recommends reducing the offering price. A buyer appears who is willing to pay less than the reduced price. The lender is persuaded to accept the deal, arguing that the home has been on the market for so long because it is overpriced and that foreclosure is imminent. The lender agrees, and the short sale is completed.
But the new buyer already has a plan to resell the house and often already has a second buyer lined up ready to pay more. The key to the arrangement is the price-setting. The high price keeps other potential buyers away and sets the lender up to be more agreeable to a low offer at the end.
The agent can receive a quick two commissions on the same property.
The lender gets less for the house than it otherwise might, and the seller may be damaged, too. The more time that passes before the sale, the more damage is done to the seller's credit from missing monthly payments.
- Steering the deal: A third party working with the seller to help facilitate the deal or a real-estate agent representing the seller ignores higher offers for a short sale. An investor buys the property without the lender ever knowing what other offers the home might have drawn. The investor then quickly resells the property for a higher price.
If a third party was in on the flop to steer the deal away from the open market and to the investor, the agent often doesn't know. If the agent was in on the flop, the agent may have received an additional payment from the investor.
The deals rely on finding a second buyer, usually another investor, willing to pay more after the short sale. In some cases, the second buyer doesn't even know that an investor is orchestrating a short sale before reselling. In other cases, buyers are looking for deals but are reluctant to deal with the paperwork hassle and uncertainty of a short sale. A flop allows them to pay a low price for the home, while the interim buyer deals with the short-sale technicalities.
The deals also require people to coordinate the arrangement and sometimes conceal information. Arizona regulators are concerned that loan officers, appraisers and real-estate and escrow agents could be acting unethically and even illegally, and some may be getting caught up in these deals without realizing it.
Many in Arizona's real-estate and lending industries are against flopping.
"I hate flop deals," said Kevin Kaufmann, a Phoenix real-estate agent specializing in short sales with Keller Williams Realty. "The deals look like a great way to make fast money, but they aren't usually in the best interest of the seller who is dealing with financial hardships and facing foreclosures."
Investigators also are watching for another type of short-sale deal that is a short-sale version of a fraud scheme used in boom times.
A buyer or buyers use a "straw buyer" to purchase a home. The buyer uses fake identification and financial information to obtain a mortgage and then never makes payments, triggering foreclosure proceedings. Immediately before foreclosure, the people running the scheme offer to buy the home in a short sale. The lender isn't aware of the connection between the original buyer and the short-sale buyer. The people in on the deal buy the house for a low price and can resell it.
A pair of Connecticut real-estate agents were convicted on fraud charges for a flopping scheme earlier this year. Both agents admitted to providing their own appraisals for the homes, acting as straw buyers to purchase homes through short sales and then reselling the homes at higher prices.
Industry concerns
Homes listed for short sale are at a record high in metro Phoenix, so the potential for more flops is significant.
In an effort to stop potential short-sale fraud, Fannie Mae and Freddie Mac recently issued warnings that homes it approves for short sale can't be resold within at least 30 days.
Mortgage research firm CoreLogic estimates that lenders will lose at least $50 million from the deals nationally this year.
The FBI has identified the deals as one of the nation's top mortgage scams now, but they are difficult to investigate and prove.
State regulators talked to the real-estate industry about foreclosure and short-sale schemes at a conference held by the Arizona Real Estate School in September.
Lauren Kingry, superintendent of the Arizona Department of Financial Institutions, said because there are so many different ways flops are handled, it's difficult to determine if the deals are illegal.
"Though many Valley attorneys say flopping is completely legal as long as it's disclosed, it's still a growing problem for the real-estate market and lenders," Swaney said. "Some deals may skirt the law, but that doesn't make them ethical. We as professionals in the industry have to watch out for our clients, whether they are homeowners, buyers or lenders."
She said some Valley escrow agents are turning away deals that require them to process the documents on a short sale and then a second sale of the same home for a higher price within days of each other.
Some groups involved in the deals say they disclose the planned resale up front so they aren't defrauding the lender or acting unethically. Some mortgage servicers may be agreeing to the deals to avoid a foreclosure. But big lenders say they are opposed to flopping.
"I am telling people flopping homes they must give full disclosure to lenders," said Phoenix real-estate attorney Scott Zwillinger. "If banks don't know about all the deals involved, then a flopper is committing fraud. That's the bottom line."
Even if deals do take advantage of lenders, public sentiment is not necessarily on the banks' side. With banks awash in criticism of how they have handled foreclosures and refused to modify loans for many needy homeowners, consumers are less likely to be outraged at a deal that takes advantage of a lender.
But in some deals, taxpayers - not lenders - may be the ones taking a loss.
For mortgages that are federally backed, lenders can seek some federal funds to cover their losses on short sales.
So if a flopping deal drives down the selling price, the lender may seek more money from the federal backer to cover the loss. It is unclear how much money lenders have been paid to recover losses in short sales.
"Flopping may be legal if all the deals are disclosed to everyone involved, but they make me furious," said Ruff, the real-estate analyst. "The money flopping deals are costing lenders ultimately is money the taxpayers are going to have to cover on mortgages that are government- backed."
Read more: http://www.azcentral.com/business/realestate/articles/2010/11/14/20101114phoenix-real-estate-short-sale-flopping.html#ixzz15JxvLIGs
Monday, November 8, 2010
BIG Changes for AMY, FNMA and FHA
As you can see there have been some changes in my world...as Sheryl Crow croons, "A Change Will Do You Good." I could not agree more! I am so excited to announce my change to Citywide Home Loans, a Utah-based mortgage banking firm that is agressively moving into the Valley.
Citywide is one of the most dynamic mortgage banking firms in the country and is very happy to make this entrance into Arizona. As a correspondent lender, we are able to offer an array of products, make-sense underwriting and quick turn-times. Citywide wants to facilitate strong lending choices to our local real estate market.
Combined with my team's knowledge, experience and proven success in the Valley, Citywide Home Loans will be who YOU and YOUR CLIENTs will want to know!
I look forward to speaking with you soon about how this change can positively assist YOUR business.
FNMA Makes BIG Change
Source of Down Payment Options Expanded
This change, positions FNMA loans to directly be able to compete with conventional loans. In addition to the flexibility of private mortgage insurance options quality, higher loan to value, conventional loans may start making a comeback in to our market.
For loans originated AFTER December 13, 2010, Fannie Mae WILL NO LONGER require a conventional buyer to have a minimum or 5% of their own funds into the transaction! Fannie Mae will allow the use of gifts, grants, employer assistance, Community Seconds®, and other sources to comprise the borrower contribution across all LTV ratios for the purchase or limited cash-out refinance of one-unit principal residences.
FHA Changes Mortgage Insurance Lenders Change Credit Requirements
Mortgage Insurance Changes:
After October 4, 2010, new borrowers may have noticed that their FHA mortgage insurance payments were different. All loans will now have an Up Front Mortgage Insurance Cost of 1.0% and a monthly amount as indicated below:
For LTVs = or < 95%: Annual Premium is .85%
For LTVs > 95%: Annual Premium is .90%
Although the upfront cost has dropped, the increase in the annual premium will increase the monthly payment costs for borrowers making it more difficult to qualify.
Lenders Require Higher Credit Scores for FHA Borrowers:
In October, we also saw most mortgage lenders increase their minimum credit score for FHA borrowers from 620 to 640. The change is most likely attributed to FHA's increased focus on loan quality and Lender performance ratings.
Citywide is one of the most dynamic mortgage banking firms in the country and is very happy to make this entrance into Arizona. As a correspondent lender, we are able to offer an array of products, make-sense underwriting and quick turn-times. Citywide wants to facilitate strong lending choices to our local real estate market.
Combined with my team's knowledge, experience and proven success in the Valley, Citywide Home Loans will be who YOU and YOUR CLIENTs will want to know!
I look forward to speaking with you soon about how this change can positively assist YOUR business.
FNMA Makes BIG Change
Source of Down Payment Options Expanded
This change, positions FNMA loans to directly be able to compete with conventional loans. In addition to the flexibility of private mortgage insurance options quality, higher loan to value, conventional loans may start making a comeback in to our market.
For loans originated AFTER December 13, 2010, Fannie Mae WILL NO LONGER require a conventional buyer to have a minimum or 5% of their own funds into the transaction! Fannie Mae will allow the use of gifts, grants, employer assistance, Community Seconds®, and other sources to comprise the borrower contribution across all LTV ratios for the purchase or limited cash-out refinance of one-unit principal residences.
FHA Changes Mortgage Insurance Lenders Change Credit Requirements
Mortgage Insurance Changes:
After October 4, 2010, new borrowers may have noticed that their FHA mortgage insurance payments were different. All loans will now have an Up Front Mortgage Insurance Cost of 1.0% and a monthly amount as indicated below:
For LTVs = or < 95%: Annual Premium is .85%
For LTVs > 95%: Annual Premium is .90%
Although the upfront cost has dropped, the increase in the annual premium will increase the monthly payment costs for borrowers making it more difficult to qualify.
Lenders Require Higher Credit Scores for FHA Borrowers:
In October, we also saw most mortgage lenders increase their minimum credit score for FHA borrowers from 620 to 640. The change is most likely attributed to FHA's increased focus on loan quality and Lender performance ratings.
Tuesday, August 3, 2010
AAR Forms Changes Ahead!
When I approached the Arizona Association Realtors' (AAR) Risk Manangement Committee with proposed changes to the LSR and purchase contract to address the massive amounts of legislative and regulatory changes that had occurred in the past few years, I knew it would be a daunting task.
Entering their meeting was the equivalent of walking into a Real Estate All-Star Game. You had some of the most highly-respected and accomplished real estate minds from across the state gathered to determine the "winning plays" for this challenging market. Even though I felt like I was the third string bench warmer trying to suggest a new play in this huddle of pros, their team welcomed the insight and addressed the need to adapt to the new environment in which we all play.
Last week the new "playbook" made its rounds throughout the committees and related industry groups for final review and acceptance before the proposed release date which is expected sometime in October or November.
I wanted to address some of the key changes and edits that have been made and to give some background to the new forms.
If I Hear "the LSR is Not Worth the Paper it's Written on One More Time..."
Then why am I killing myself every Saturday rushing to finish the grocery shopping, or leaving the pool with the kids early so I can get home to call a proposed client who didn't seem to have the foresight enough to think..."Hey I have scheduled an appointment to look at real estate this weekend and since every media outlet on the planet is talking about how tough the mortgage industry is right now, maybe I should contact someone to see if I can get a loan."
Why am I spending another couple of hours explaining to clients that "yes it is really important that we don't guess how many hours you work per week" or "yes, even though you will rent your current house, we will still have to qualify you with both house payments."
If the Lender, the borrower or even the real estate agent does not understand that accuracy is important in the qualification department...then your right, the LSR is worthless. If speed is all that is important, there already is a place for the borrower to write in that THEY think they are qualified! You don't need me! And that was the beginnings behind the initial form changes.
Pre-Qualification Form...This Year's New LSR
RESPA changes made this year interesting for everyone, including AAR's management team. After numerous phone calls and emails, regarding the issue of what is on the LSR, it has been determined that changes would need to be made. The biggest change is the introduction of a new Pre-Qualification form, at this point, creatively penned the Pre-Qualification Form. I personally wanted to name it the Buyer Financing Form, but no one seemed to think having to request a "BFF" was as entertaining as I did!
The Pre-Qual creates a shift from what the industry has become adapted. It no longer bases any information off a particular property address and looks more to what the borrower qualifies for in monthly payment. This switch is to focus awareness on how certain property characteristics, such as taxes, HOA or flood insurance may affect a borrower's ability to qualify.
The "Pre-Qual" is not just to be based on what the borrower tells us, the lender, that they qualify for, but will inform all parties how the lender determined it. It will also specifically identify what documentation the lender had available to make the determination.
Pursuant to Section 2d of the Contract...
As RESPA requires buyers to have the opportunity to "shop" for their loan, the new requirement will give the buyer a certain number of days to finalize who their lender will be and will require them to identify that lender in the contract. If the identified Lender is not the one who completed the Pre-Qual form, a new Pre-Qual completed by the new lender will be required.
A big change will be that the Loan Status Update is now incorporated into the new LSR. This will be a change for many that have never used the old LSU form. Since I sat on the committee over 5 years ago that created the Loan Status Update, I know that its primary purpose was to educate all parties as to what steps had to occur before the buyers could get the keys to their new home. That purpose has not changed. Added regulations and legislation as well as current market conditions have created the need to reeducate our clients and ourselves as to the new logistics of financing.
There were also several changes made to the financing section of the contract as well as other minor amendments throughout. It will be interesting to see who will embrace these changes and who will not.
I thought W. Edward Deming put it best when he said, "It is not necessary to change. Survival is not mandatory."
Once the forms have been approved by the Risk Management Committee and the Executive Committee of AAR, they will be released. Keep your eyes out for that announcement.
Ha Ha Ha!
There was this guy and he had a girlfriend named Lorraine. One day he went to work and found that a new girl had started working there. Her name was Clearly and she was absolutely gorgeous.
He became quite smitten with Clearly and after while it became obvious that she was interested in him too. But this guy was a loyal man and he wouldn't do anything with Clearly while he was still going out with Lorraine.
He decided that there was nothing left to do but to break up with her. He planned several times to tell Lorraine but he couldn't bring himself to do it. Then one day they went for a walk along the riverbank when suddenly Lorraine slipped and fell into the river. The current carried her off to never be heard from again.
The guy stopped for a moment and then ran off smiling and singing........
"I can see Clearly now. Lorraine has gone."
I firmly believe that it is important to be constantly involved in the changes in our industry. For your clients best interest it is important to be represented by someone whose experience speaks for itself. Please let me know if I can be of assistance to your next customer.
Amy
Entering their meeting was the equivalent of walking into a Real Estate All-Star Game. You had some of the most highly-respected and accomplished real estate minds from across the state gathered to determine the "winning plays" for this challenging market. Even though I felt like I was the third string bench warmer trying to suggest a new play in this huddle of pros, their team welcomed the insight and addressed the need to adapt to the new environment in which we all play.
Last week the new "playbook" made its rounds throughout the committees and related industry groups for final review and acceptance before the proposed release date which is expected sometime in October or November.
I wanted to address some of the key changes and edits that have been made and to give some background to the new forms.
If I Hear "the LSR is Not Worth the Paper it's Written on One More Time..."
Then why am I killing myself every Saturday rushing to finish the grocery shopping, or leaving the pool with the kids early so I can get home to call a proposed client who didn't seem to have the foresight enough to think..."Hey I have scheduled an appointment to look at real estate this weekend and since every media outlet on the planet is talking about how tough the mortgage industry is right now, maybe I should contact someone to see if I can get a loan."
Why am I spending another couple of hours explaining to clients that "yes it is really important that we don't guess how many hours you work per week" or "yes, even though you will rent your current house, we will still have to qualify you with both house payments."
If the Lender, the borrower or even the real estate agent does not understand that accuracy is important in the qualification department...then your right, the LSR is worthless. If speed is all that is important, there already is a place for the borrower to write in that THEY think they are qualified! You don't need me! And that was the beginnings behind the initial form changes.
Pre-Qualification Form...This Year's New LSR
RESPA changes made this year interesting for everyone, including AAR's management team. After numerous phone calls and emails, regarding the issue of what is on the LSR, it has been determined that changes would need to be made. The biggest change is the introduction of a new Pre-Qualification form, at this point, creatively penned the Pre-Qualification Form. I personally wanted to name it the Buyer Financing Form, but no one seemed to think having to request a "BFF" was as entertaining as I did!
The Pre-Qual creates a shift from what the industry has become adapted. It no longer bases any information off a particular property address and looks more to what the borrower qualifies for in monthly payment. This switch is to focus awareness on how certain property characteristics, such as taxes, HOA or flood insurance may affect a borrower's ability to qualify.
The "Pre-Qual" is not just to be based on what the borrower tells us, the lender, that they qualify for, but will inform all parties how the lender determined it. It will also specifically identify what documentation the lender had available to make the determination.
Pursuant to Section 2d of the Contract...
As RESPA requires buyers to have the opportunity to "shop" for their loan, the new requirement will give the buyer a certain number of days to finalize who their lender will be and will require them to identify that lender in the contract. If the identified Lender is not the one who completed the Pre-Qual form, a new Pre-Qual completed by the new lender will be required.
A big change will be that the Loan Status Update is now incorporated into the new LSR. This will be a change for many that have never used the old LSU form. Since I sat on the committee over 5 years ago that created the Loan Status Update, I know that its primary purpose was to educate all parties as to what steps had to occur before the buyers could get the keys to their new home. That purpose has not changed. Added regulations and legislation as well as current market conditions have created the need to reeducate our clients and ourselves as to the new logistics of financing.
There were also several changes made to the financing section of the contract as well as other minor amendments throughout. It will be interesting to see who will embrace these changes and who will not.
I thought W. Edward Deming put it best when he said, "It is not necessary to change. Survival is not mandatory."
Once the forms have been approved by the Risk Management Committee and the Executive Committee of AAR, they will be released. Keep your eyes out for that announcement.
Ha Ha Ha!
There was this guy and he had a girlfriend named Lorraine. One day he went to work and found that a new girl had started working there. Her name was Clearly and she was absolutely gorgeous.
He became quite smitten with Clearly and after while it became obvious that she was interested in him too. But this guy was a loyal man and he wouldn't do anything with Clearly while he was still going out with Lorraine.
He decided that there was nothing left to do but to break up with her. He planned several times to tell Lorraine but he couldn't bring himself to do it. Then one day they went for a walk along the riverbank when suddenly Lorraine slipped and fell into the river. The current carried her off to never be heard from again.
The guy stopped for a moment and then ran off smiling and singing........
"I can see Clearly now. Lorraine has gone."
I firmly believe that it is important to be constantly involved in the changes in our industry. For your clients best interest it is important to be represented by someone whose experience speaks for itself. Please let me know if I can be of assistance to your next customer.
Amy
Thursday, July 1, 2010
Is Your Loan Officer Licensed, HUD Addresses "Kickback Violations" and Requests Real Estate Agent Opinions
You may delay, but time will not. ~ Benjamin Franklin
You Asked for it…Now You Have it!
There is no escaping it…although there are thousands of loan officers out there who are trying to do just that! Today is the official start of the national loan officer licensing requirements! After years of waiting…the day has come. In order to originate a loan as of today, a loan officer, who does not work for an exempted entity (a depository bank), MUST have their license approved by the appropriate state agency. Some states have issued extensions, but Arizona has not.
Is YOUR loan officer licensed? Did they take the minimum required 20 hours of pre-licensing education? Did they pass both the Federal and State licensing exam? According to the Nationwide Mortgage Licensing System (NMLS) test results, only 71% of originators passed the federal exam the first time around and for those who had to take the exam again, only 66% passed. The Superintendent of the Arizona Department of Financial Institutions (DFI) reports that so far they have received 3900 applications. They have processed 2600, 1500 have been approved and 1100 are awaiting additional information.
So again, is your loan officer licensed and will they be able to close your client’s loan in a timely manner? This may be a question you want to ask before it is too late. I am a licensed loan originator in both Arizona and Utah. For 20 years, my career has been and still is originating loans and I hold that fact in the highest regard. Let me know if my knowledge, experience and background can be of assistance to you or your customers!
HUD Issues Ban on Referral Fees Paid to Agents for Home Warranty Referrals
One June 25, 2010, HUD issued a final rule interpreting section 8 of RESPA and HUD’s regulations as they apply to the compensation provided by home warranty companies to real estate brokers and agents. Interpretive rules are exempt from public comment under the Administrative Procedure Act.
Under section 8 of RESPA, services performed by real estate brokers and agents as additional settlement services in a real estate transaction are compensable if the services…
1) are actual, necessary and distinct from the primary services provided by the real estate broker or agent,
2) the services are not nominal,
3) and the payment is not a duplicative charge.
A referral is not a compensable service for which a broker or agent may receive compensation.
Do you have an opinion on “Affiliated Business Arrangements” (Builder-Owned Mortgage Companies)
I have heard you talk about it in anger and I have heard you been defeated about it, but now is your opportunity to do something about it! HUD is in the process of initiating rulemaking to strengthen and clarify the prohibition against the ‘‘required use’’ of affiliated settlement service providers in residential mortgage transactions under section 8 of RESPA. HUD has received complaints that some homebuyers are committing to use a builder’s affiliated mortgage lender in exchange for construction discounts or discounted upgrades, without sufficient time to research their contracts or to comparison shop. HUD would like to solicit your experience that can be used to create the future revision or clarification of the regulatory definition of the ‘‘required use’’ of affiliated settlement service providers in residential mortgage transactions.
Background
In the late 1960s, Congress was concerned about the excessive cost of settlement services for residential loans. Congress found that many homebuyers had very little knowledge about the settlement process and that homebuyers often did not shop for, and were not involved in, choosing the settlement service providers that they would be required to use. Instead the delivery was controlled by a system by those in a position to refer settlement business (such as builders, real estate agents, and lawyers), resulting in ‘‘kickbacks’’ by settlement service providers to those who referred business to them. In this system, service providers did not compete for business by providing a quality service at a reasonable cost to homebuyers. Rather, settlement service providers generated business by providing the most lucrative kickbacks to those in a position to refer business to them.
Through RESPA and subsequent amendments, Congress sought to change this. In order to encourage consumers to shop for settlement services, and cause settlement service providers to compete for homebuyers’ business, RESPA requires that the nature and costs of real estate settlement services be disclosed in advance to the consumer, and it forbids the payment of referral fees, kickbacks, and unearned fees for real estate settlement services.
RESPA defines an ‘‘affiliated business arrangement’’ as an arrangement in which…
(A) a person who is in a position to refer business incident to or a part of a real estate settlement service involving a mortgage loan, has either an affiliate relationship with or a beneficial ownership interest of more than 1 percent in a provider of settlement services; and
(B) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider.
In RESPA covered transactions, referrals to affiliated settlement service providers are subject to civil and criminal liability under section 8 of RESPA, it can be considered a prohibited kickback or thing of value for the referral. However, there is an exemption for affiliate referrals that allows for returns on ownership interest if the referrals involve an affiliated business arrangement AND three other conditions are met. The three other conditions are:
(1) The referral is accompanied by a disclosure of affiliation and estimated charges by the provider to which the consumer is referred,
(2) the consumer is not ‘‘required to use’’ a particular settlement service provider; and
(3) the arrangement does not involve otherwise prohibited compensation.
Requiring the use of an affiliate is thus presumed to involve a violation of Section 8.
Currently, the definition of ‘‘required use’’ in HUD’s existing RESPA regulations reads as follows:
“Required use means a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service. However, the offering of a package or (combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process.”
On November 17, 2008 published a final rule amending its RESPA regulations to protect consumers from kickbacks and referral fees that tend to unnecessarily increase settlement costs. HUD, however, had received consumer complaints and comments about certain affiliated business practices. These complaints and comments included concerns that residential developers and homebuilders would offer to reduce the cost of a home (for example, by adding free construction upgrades, or discounting the home price) if the homebuyer used the developer’s affiliated mortgage lender. Buyers also complained that, in some instances, because the timing of the contract with the builder precluded the buyer from shopping, the affiliated lender used by the homebuyer was able to charge settlement costs or interest rates that were not competitive with those of nonaffiliated lenders. The complaints indicated that these incentivized referrals to affiliate lenders may be steering techniques that effectively ‘‘require the use’’ of the affiliate.
In order to address concerns about incentivized affiliate referrals, HUD intends to pursue new rulemaking on the subject of ‘‘required use.’’
HUD is requesting information from all interested members of the public, including individual consumers, consumer advocacy organizations, housing counseling agencies, the real estate and mortgage industry, and federal, state, and local consumer protection and enforcement agencies. HUD would like to hear about individual consumers’ experiences. In particular, HUD seeks information that would determine the benefits and costs of possible regulatory alternatives. For instance, have economic incentives to use affiliated lenders facilitated inflated appraisals or lowered underwriting standards in the lending market? Has required use played any role in creating recent situations where borrowers are more likely to be ‘‘underwater?’’ You are encouraged to provide data that would inform analysis of both the magnitude of the required use problem and the potential regulatory options to address the problem.
HUD invites comment on any aspect of referral arrangements in residential mortgage transactions that may assist HUD in developing any new or revised protections, but HUD specifically requests information on the following questions and requests as detailed and factual information as possible in responding to these questions.
1. Tailoring ‘‘required use’’ to reach abusive incentive schemes, but not beneficial discounts or packages.
Some have suggested that builders’ incentive programs discourage homebuyers from comparison shopping for the best loan, because:
(1) The value of some of the incentives offered by builders for the use of their affiliated lender (e.g., kitchen upgrades) are difficult for consumers to quantify when comparing the loan terms and settlement costs of the affiliated lender with those of nonaffiliated lenders; and
(2) often, in order to get the incentive a builder is offering, a homebuyer must commit to the use of the builder’s affiliated lender at the time that the contract for the construction of the home is executed, which may be many months before settlement will occur and long before the typical consumer would begin shopping for a lender; and
(3) that the builder encourages the buyer to commit to the contract before the buyer has time to fully consider alternatives and comparison shop.
To assist in determining whether these claims are correct, HUD asks:
(a) What types of discounts and incentives are tied to the use of an affiliated settlement service provider such as a mortgage lender?
(b) In a new home purchase transaction, at what points in time are incentives for the use of a builder affiliated lender discussed with a potential homebuyer?
(c) At what point, generally, in a new home purchase transaction, are the homebuyers expected to determine whether or not they will use a builder affiliated lender?
(d) Is there evidence demonstrating that homebuyers who are offered incentives by builders to use builder affiliated lenders are as likely or less likely to engage in comparison shopping for a lender as are those homebuyers who are not offered an incentive to use a builder-affiliated lender?
(e) Is there evidence that buyers using affiliated lenders pay higher rates of interest or higher closing costs than those that use unaffiliated lenders?
(f) Is there evidence demonstrating that homebuyers benefit from some types of incentives and not from others or by incentives offered by some types of business but not others? Incentives could include benefits such as discounts on the costs of settlement, payment of settlement services, and discounts on upgrades to the house.
2. Forward Loan Commitments.
A forward loan commitment (forward commitment), in its simplest definition, is a pledge to provide a loan at a future date. It is HUD’s understanding that in the homebuilding industry, some large-scale homebuilders purchase forward commitments from lenders pursuant to which the lenders make an aggregate amount of mortgage financing available to the homebuilder’s customers under the terms of the commitment.
To better understand forward commitments and their use in mortgage loan transactions, HUD seeks comment on the following:
(a) How are forward commitments purchased and used as described above, and are there alternative types, terms, or uses for builder-purchased forward commitments?
(b) Is there evidence as to the prevalence of builder-purchased forward commitments?
(c) What is the benefit to homebuyers of forward commitments in mortgage loan transactions from affiliated as well as nonaffiliated lenders?
3. Other Issues.
A concern raised is that certain incentives are built into the cost of the home and are therefore not true discounts. Many also stated a belief that an affiliated lender has a special, potentially improper, interest in financing a house at any price set by a seller.
In this regard, HUD asks:
a) Is there any data that home sellers are providing discounts or upgrades to buyers who agree to use affiliated businesses based on prices that are different from those offered to buyers who decline such offers?
(b) Is there any evidence that home sellers either include or do not include in the listed price of the house the cost of the incentives that they offer for the use of an affiliated lender?
(c) Do homes sold with incentives to the homebuyer appraise at the pre- or post-incentive price? Is it possible to isolate the effects of standard builder construction upgrades and custom upgrades requested by the consumer on the appraised value?
(d) How do affiliate-originated mortgages perform compared to the local average (e.g., in the case of default or the homeowner being ‘‘under water’’ statistics)?
(e) How do prices of new construction homes financed by affiliated lenders compare with prices of new construction homes financed by non-affiliates? That is, is there evidence that builders do not negotiate down to or near to incentivized prices in the absence of an incentive to use an affiliate?
(f) Is there data on the extent to which the current affiliated business disclosure encourages consumers to comparison shop with non-affiliated service providers before signing contracts? Can the affiliated business disclosure be improved to inform consumers of the advantages and disadvantages of affiliated lending practices?
4. One-Stop Shopping.
HUD received comments indicating that limiting referrals to affiliates adversely affects one-stop shopping options that could benefit consumers.
Accordingly, HUD asks whether there is any way to quantify the benefit to homebuyers of one-stop shopping. Additionally, is there any evidence that homebuyers derive greater benefit from one-stop shopping than from comparison shopping for the best loan terms and settlement costs?
5. Incentives vs. Disincentives or Penalties.
HUD requests comments on the relationship between incentives to use an affiliated settlement service provider and disincentives or penalties for using a nonaffiliated settlement service provider, and how incentives and disincentives might be treated in the new regulation. To assist in the development of distinctions or equivalencies between incentives and disincentives, HUD asks for information concerning cases where an incentive to use a certain provider would not have the same effect as a disincentive for failure to use another provider.
While HUD specifically seeks comments on the foregoing questions, HUD welcomes additional information that will help inform HUD’s views on this issue.
Here is your opportunity to express your concerns. I know you have opinions on this subject so here is your chance to do something about it.
ALL COMMENTS DUE by September 1, 2010
Interested persons are invited to submit comments by email.
All submissions must refer to the docket number and title.
“Docket No. FR–5352–A–01 Real Estate Settlement Procedures Act (RESPA): Strengthening and Clarifying RESPA’s ‘‘Required Use’’ Prohibition Advance Notice of Proposed Rulemaking”
Interested persons may submit comments electronically through the Federal e-Rulemaking Portal at www.regulations.gov.
Comments submitted electronically can be viewed by interested members of the public. Those who comment should follow the instructions provided on that site to submit comments electronically. Facsimile (FAX) comments are not acceptable.
Psychiatry students were in their Emotional Extremes class.
"Let's set some parameters," the professor said. "What's the opposite of joy?" he asked one student.
"Sadness," he replied.
"The opposite of depression?" he asked another student.
"Elation," he replied.
"The opposite of woe?" the prof asked a young woman from Texas.
The Texan replied,
"Sir, I believe that would be giddyup."
Have a great rest of the week and safe holiday weekend!
You Asked for it…Now You Have it!
There is no escaping it…although there are thousands of loan officers out there who are trying to do just that! Today is the official start of the national loan officer licensing requirements! After years of waiting…the day has come. In order to originate a loan as of today, a loan officer, who does not work for an exempted entity (a depository bank), MUST have their license approved by the appropriate state agency. Some states have issued extensions, but Arizona has not.
Is YOUR loan officer licensed? Did they take the minimum required 20 hours of pre-licensing education? Did they pass both the Federal and State licensing exam? According to the Nationwide Mortgage Licensing System (NMLS) test results, only 71% of originators passed the federal exam the first time around and for those who had to take the exam again, only 66% passed. The Superintendent of the Arizona Department of Financial Institutions (DFI) reports that so far they have received 3900 applications. They have processed 2600, 1500 have been approved and 1100 are awaiting additional information.
So again, is your loan officer licensed and will they be able to close your client’s loan in a timely manner? This may be a question you want to ask before it is too late. I am a licensed loan originator in both Arizona and Utah. For 20 years, my career has been and still is originating loans and I hold that fact in the highest regard. Let me know if my knowledge, experience and background can be of assistance to you or your customers!
HUD Issues Ban on Referral Fees Paid to Agents for Home Warranty Referrals
One June 25, 2010, HUD issued a final rule interpreting section 8 of RESPA and HUD’s regulations as they apply to the compensation provided by home warranty companies to real estate brokers and agents. Interpretive rules are exempt from public comment under the Administrative Procedure Act.
Under section 8 of RESPA, services performed by real estate brokers and agents as additional settlement services in a real estate transaction are compensable if the services…
1) are actual, necessary and distinct from the primary services provided by the real estate broker or agent,
2) the services are not nominal,
3) and the payment is not a duplicative charge.
A referral is not a compensable service for which a broker or agent may receive compensation.
Do you have an opinion on “Affiliated Business Arrangements” (Builder-Owned Mortgage Companies)
I have heard you talk about it in anger and I have heard you been defeated about it, but now is your opportunity to do something about it! HUD is in the process of initiating rulemaking to strengthen and clarify the prohibition against the ‘‘required use’’ of affiliated settlement service providers in residential mortgage transactions under section 8 of RESPA. HUD has received complaints that some homebuyers are committing to use a builder’s affiliated mortgage lender in exchange for construction discounts or discounted upgrades, without sufficient time to research their contracts or to comparison shop. HUD would like to solicit your experience that can be used to create the future revision or clarification of the regulatory definition of the ‘‘required use’’ of affiliated settlement service providers in residential mortgage transactions.
Background
In the late 1960s, Congress was concerned about the excessive cost of settlement services for residential loans. Congress found that many homebuyers had very little knowledge about the settlement process and that homebuyers often did not shop for, and were not involved in, choosing the settlement service providers that they would be required to use. Instead the delivery was controlled by a system by those in a position to refer settlement business (such as builders, real estate agents, and lawyers), resulting in ‘‘kickbacks’’ by settlement service providers to those who referred business to them. In this system, service providers did not compete for business by providing a quality service at a reasonable cost to homebuyers. Rather, settlement service providers generated business by providing the most lucrative kickbacks to those in a position to refer business to them.
Through RESPA and subsequent amendments, Congress sought to change this. In order to encourage consumers to shop for settlement services, and cause settlement service providers to compete for homebuyers’ business, RESPA requires that the nature and costs of real estate settlement services be disclosed in advance to the consumer, and it forbids the payment of referral fees, kickbacks, and unearned fees for real estate settlement services.
RESPA defines an ‘‘affiliated business arrangement’’ as an arrangement in which…
(A) a person who is in a position to refer business incident to or a part of a real estate settlement service involving a mortgage loan, has either an affiliate relationship with or a beneficial ownership interest of more than 1 percent in a provider of settlement services; and
(B) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider.
In RESPA covered transactions, referrals to affiliated settlement service providers are subject to civil and criminal liability under section 8 of RESPA, it can be considered a prohibited kickback or thing of value for the referral. However, there is an exemption for affiliate referrals that allows for returns on ownership interest if the referrals involve an affiliated business arrangement AND three other conditions are met. The three other conditions are:
(1) The referral is accompanied by a disclosure of affiliation and estimated charges by the provider to which the consumer is referred,
(2) the consumer is not ‘‘required to use’’ a particular settlement service provider; and
(3) the arrangement does not involve otherwise prohibited compensation.
Requiring the use of an affiliate is thus presumed to involve a violation of Section 8.
Currently, the definition of ‘‘required use’’ in HUD’s existing RESPA regulations reads as follows:
“Required use means a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service. However, the offering of a package or (combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process.”
On November 17, 2008 published a final rule amending its RESPA regulations to protect consumers from kickbacks and referral fees that tend to unnecessarily increase settlement costs. HUD, however, had received consumer complaints and comments about certain affiliated business practices. These complaints and comments included concerns that residential developers and homebuilders would offer to reduce the cost of a home (for example, by adding free construction upgrades, or discounting the home price) if the homebuyer used the developer’s affiliated mortgage lender. Buyers also complained that, in some instances, because the timing of the contract with the builder precluded the buyer from shopping, the affiliated lender used by the homebuyer was able to charge settlement costs or interest rates that were not competitive with those of nonaffiliated lenders. The complaints indicated that these incentivized referrals to affiliate lenders may be steering techniques that effectively ‘‘require the use’’ of the affiliate.
In order to address concerns about incentivized affiliate referrals, HUD intends to pursue new rulemaking on the subject of ‘‘required use.’’
HUD is requesting information from all interested members of the public, including individual consumers, consumer advocacy organizations, housing counseling agencies, the real estate and mortgage industry, and federal, state, and local consumer protection and enforcement agencies. HUD would like to hear about individual consumers’ experiences. In particular, HUD seeks information that would determine the benefits and costs of possible regulatory alternatives. For instance, have economic incentives to use affiliated lenders facilitated inflated appraisals or lowered underwriting standards in the lending market? Has required use played any role in creating recent situations where borrowers are more likely to be ‘‘underwater?’’ You are encouraged to provide data that would inform analysis of both the magnitude of the required use problem and the potential regulatory options to address the problem.
HUD invites comment on any aspect of referral arrangements in residential mortgage transactions that may assist HUD in developing any new or revised protections, but HUD specifically requests information on the following questions and requests as detailed and factual information as possible in responding to these questions.
1. Tailoring ‘‘required use’’ to reach abusive incentive schemes, but not beneficial discounts or packages.
Some have suggested that builders’ incentive programs discourage homebuyers from comparison shopping for the best loan, because:
(1) The value of some of the incentives offered by builders for the use of their affiliated lender (e.g., kitchen upgrades) are difficult for consumers to quantify when comparing the loan terms and settlement costs of the affiliated lender with those of nonaffiliated lenders; and
(2) often, in order to get the incentive a builder is offering, a homebuyer must commit to the use of the builder’s affiliated lender at the time that the contract for the construction of the home is executed, which may be many months before settlement will occur and long before the typical consumer would begin shopping for a lender; and
(3) that the builder encourages the buyer to commit to the contract before the buyer has time to fully consider alternatives and comparison shop.
To assist in determining whether these claims are correct, HUD asks:
(a) What types of discounts and incentives are tied to the use of an affiliated settlement service provider such as a mortgage lender?
(b) In a new home purchase transaction, at what points in time are incentives for the use of a builder affiliated lender discussed with a potential homebuyer?
(c) At what point, generally, in a new home purchase transaction, are the homebuyers expected to determine whether or not they will use a builder affiliated lender?
(d) Is there evidence demonstrating that homebuyers who are offered incentives by builders to use builder affiliated lenders are as likely or less likely to engage in comparison shopping for a lender as are those homebuyers who are not offered an incentive to use a builder-affiliated lender?
(e) Is there evidence that buyers using affiliated lenders pay higher rates of interest or higher closing costs than those that use unaffiliated lenders?
(f) Is there evidence demonstrating that homebuyers benefit from some types of incentives and not from others or by incentives offered by some types of business but not others? Incentives could include benefits such as discounts on the costs of settlement, payment of settlement services, and discounts on upgrades to the house.
2. Forward Loan Commitments.
A forward loan commitment (forward commitment), in its simplest definition, is a pledge to provide a loan at a future date. It is HUD’s understanding that in the homebuilding industry, some large-scale homebuilders purchase forward commitments from lenders pursuant to which the lenders make an aggregate amount of mortgage financing available to the homebuilder’s customers under the terms of the commitment.
To better understand forward commitments and their use in mortgage loan transactions, HUD seeks comment on the following:
(a) How are forward commitments purchased and used as described above, and are there alternative types, terms, or uses for builder-purchased forward commitments?
(b) Is there evidence as to the prevalence of builder-purchased forward commitments?
(c) What is the benefit to homebuyers of forward commitments in mortgage loan transactions from affiliated as well as nonaffiliated lenders?
3. Other Issues.
A concern raised is that certain incentives are built into the cost of the home and are therefore not true discounts. Many also stated a belief that an affiliated lender has a special, potentially improper, interest in financing a house at any price set by a seller.
In this regard, HUD asks:
a) Is there any data that home sellers are providing discounts or upgrades to buyers who agree to use affiliated businesses based on prices that are different from those offered to buyers who decline such offers?
(b) Is there any evidence that home sellers either include or do not include in the listed price of the house the cost of the incentives that they offer for the use of an affiliated lender?
(c) Do homes sold with incentives to the homebuyer appraise at the pre- or post-incentive price? Is it possible to isolate the effects of standard builder construction upgrades and custom upgrades requested by the consumer on the appraised value?
(d) How do affiliate-originated mortgages perform compared to the local average (e.g., in the case of default or the homeowner being ‘‘under water’’ statistics)?
(e) How do prices of new construction homes financed by affiliated lenders compare with prices of new construction homes financed by non-affiliates? That is, is there evidence that builders do not negotiate down to or near to incentivized prices in the absence of an incentive to use an affiliate?
(f) Is there data on the extent to which the current affiliated business disclosure encourages consumers to comparison shop with non-affiliated service providers before signing contracts? Can the affiliated business disclosure be improved to inform consumers of the advantages and disadvantages of affiliated lending practices?
4. One-Stop Shopping.
HUD received comments indicating that limiting referrals to affiliates adversely affects one-stop shopping options that could benefit consumers.
Accordingly, HUD asks whether there is any way to quantify the benefit to homebuyers of one-stop shopping. Additionally, is there any evidence that homebuyers derive greater benefit from one-stop shopping than from comparison shopping for the best loan terms and settlement costs?
5. Incentives vs. Disincentives or Penalties.
HUD requests comments on the relationship between incentives to use an affiliated settlement service provider and disincentives or penalties for using a nonaffiliated settlement service provider, and how incentives and disincentives might be treated in the new regulation. To assist in the development of distinctions or equivalencies between incentives and disincentives, HUD asks for information concerning cases where an incentive to use a certain provider would not have the same effect as a disincentive for failure to use another provider.
While HUD specifically seeks comments on the foregoing questions, HUD welcomes additional information that will help inform HUD’s views on this issue.
Here is your opportunity to express your concerns. I know you have opinions on this subject so here is your chance to do something about it.
ALL COMMENTS DUE by September 1, 2010
Interested persons are invited to submit comments by email.
All submissions must refer to the docket number and title.
“Docket No. FR–5352–A–01 Real Estate Settlement Procedures Act (RESPA): Strengthening and Clarifying RESPA’s ‘‘Required Use’’ Prohibition Advance Notice of Proposed Rulemaking”
Interested persons may submit comments electronically through the Federal e-Rulemaking Portal at www.regulations.gov.
Comments submitted electronically can be viewed by interested members of the public. Those who comment should follow the instructions provided on that site to submit comments electronically. Facsimile (FAX) comments are not acceptable.
Psychiatry students were in their Emotional Extremes class.
"Let's set some parameters," the professor said. "What's the opposite of joy?" he asked one student.
"Sadness," he replied.
"The opposite of depression?" he asked another student.
"Elation," he replied.
"The opposite of woe?" the prof asked a young woman from Texas.
The Texan replied,
"Sir, I believe that would be giddyup."
Have a great rest of the week and safe holiday weekend!
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