Tuesday, April 20, 2010 has probably set a record for webinar content on a single topic on a single day: the Freddie Mac news article discussing a concept of “Short Payoff Fraud.”
Anyone who considers him/herself a serious real estate professional (real estate agents, brokers, investors, title, escrow, etc.) should conduct serious study about this issue. I have searched the Internet since the release of the news article and these are the only thorough treatments on this topic.
I network and collaborate with several well-known attorneys in the short sale field. Since my primary focus is on legal compliance in California, I’m comfortable acting as an “equal opportunity informer” sharing the insights from my colleagues and friends. So here’s the replay links:
The webinar I presented with Cory Boatright can be found at http://bit.ly/c2sPIL — warning: it’s 2 hours of content, no selling.
The “Three Lawyers Webinar” Chris McLaughlin sponsored with Jeff Watson and yours truly is at http://bit.ly/900o3b — it’s easily 1.5 hours of insightful interaction.
Jeff Watson set the entire foundation at http://bit.ly/a4QMiK — for those really into legal stuff, he laid out important issues of “privity” and other contractual concepts that other bloggers crying “fraud” need to understand in order to avoid sounding totally ignorant.
Although not a webinar, Attorney Ben Pargman has posted an “Open Letter to Freddie Mac” at http://bit.ly/9KuK2b
Most webinar listeners will be pleased to find these are free webinars that aren’t selling anything. They are content packed. They are publicly presented because we firmly believe that short sale back-to-back investors have been, and are, operating entirely legally. Freddie Mac is welcomed and encouraged to listen — if they haven’t already. We operate and advise in the sunshine, not in the shadows. This post and these links may be freely linked to.
Let a LEGITIMATE debate begin!
I appreciate your thoroughness and timeliness on issues. Keep up the good work!!!
I’m concerned about this information that has come out today. All this info is making me think that I’m not complient which is holding me back from going into short sale investing.
Special Inspector General for the Federal TARP Program Singles out Short Sale “Flopping” for Fraud Potential
April 25th, 2010 | Uncategorized
The Obama administration is trying to help more distressed homeowners keep up with their mortgage payments or sell their houses via pre-foreclosures options, but the Special Inspector General for the TARP program fears that new incentives for short sales could lead to increased fraud, and cites a common short sale transaction tactic used by many real estate investors as a prime example.
Barofsky believes that the larger government payouts lined up for borrowers and lenders who participate in short sales will lead to less lender-regulation of “flopping,” which Barofsky defines as “a scheme that typically involves industry insiders who appraise a home at a deflated value, arrange its sale to a straw purchaser and then quickly resell the property at market value, pocketing the profit.” Barofsky states in his report that deterring such activity – a positive aim in the administration’s perception – will require adopting a universal appraisal system similar to the one in place at FHA. Without this, he stated, “the program is likely to attract crooks.”
This is not good news for short sale investors, who are already feeling the crunch thanks to an un-authored but entirely official “statement” by a Freddie Mac Fraud Investigator last week stating that “short payoff fraud” (essentially defined as a short sale in which the buyer already knows that he or she will be able to sell the property for a higher price in short order) should be reported immediately upon suspicion, which can be incited by something as simple as a resell clause in a purchase agreement.
Best case scenario, it’s more bad press for short sale investors, who do not need suspicious homeowners reporting their entirely – for the time being – legal real estate investing activities to the government at every turn. I fear, however, that this is just the federal government’s way of “testing the waters” to see what the response to such fraud regulations will be before they fully commit to shutting short sale investors right out of the short sale market.
Call me a conspiracy theorist if you must, and sometimes I feel like one, but read some of the other suggestions in this report and in some cases already partially enacted:
* The administration should make participation by lenders in loan-modification campaigns mandatory
* Lenders will be asked to reduce the principal owed on a loan if the amount exceeds the value of the home by 15 percent or more if the homeowners make the required new payments
* Lenders will receive federal incentive money – and those incentive’s values are climbing – for every short sale they do under the new, federal system
And, the Treasury Department has already warned that it plans to roll out a public service campaign to deal with various neglected aspects of mortgage fraud – just in time for these new fraud regulations to hit the “big time?”
The administration is not trying to get rid of short sales. Everyone – FHA, Freddie Mac and the administration included – knows that the short sale is going to be critical to the stabilization of the housing market. But it does feel like they’re trying to get rid of the short sale investors.
1 comment so far ↓
#1 mike on 04.25.10 at 10:01 am
This tactic sounds to me as though the real crooks ( big banks ) are being paid to do short sales and investors, who will attempt to recycle these properties, for a payday, will put themselves under the thumb of the government beauracracy and be subjected to threat of possible prosecution.
This housing problem was instigated by the beauracracy and the banks, investors can help this situation by renewing objective values to otherwise bloated equity !
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Hi Ron. Thanks for clearig up the ‘3 tenors of short sales’. I’m one of those idiots trying to listen to all 3 just so as not to miss one pearl that didn’t make it to the other two webinars.
Question: your slide ‘Material Ommissions’ reminded me of a question I’ve been carrying for a while. Yor thoughts on the Pros and Cons of taking title to an upside down property ‘subject to’, and THEN asking for a short sale? I can’t really see how it could work unless the lender were smart enough to make it an ‘assumptive short sale’ and leave the existing note with the principal reduced.
Since I can’t talk back to the webinar recording, as I’m listening…
DISCLOSURE
is it really ‘disclosure’ – if no one reads it?
Chuck Shumer of NY admitted to never reading his own mortgage docs since the prepayment penalty was ‘a surprise’. Is it really disclosure when the newest revision of the CAR RPA now has an optional table of contents because its so damm long? The more disclosures, the more we can ‘disclose’ with a practical expectation that very few people will ever read it.
Personally, I would never take advantage of someone who CAN’T read. But someone who WON’T read.. that’s a different story. 🙂
Hi Terry,
Thanks for your comment. I just loaded a new post on your topic.
Ron
Hi Steve,
Is it disclosure if no one reads it? Legally: usually, yes. In the case of a short sale payoff, we are talking about disclosure to a bank. This is not a common consumer. They are in the business of reading (and writing) long documents – then they want to say an individual investor hid a material fact that was disclosed in writing. That’s unrealistic.
Moreover, Jeff Watson’s forms and my forms (mostly addendums) have the disclosure on the first page. There is no attempt to hide them deep in the document. Mine include bold print.
With respect to the assumption concept: In my point of view, once a third party takes title to the property, a rational bank should be looking at both the original borrower’s and the third party’s ability to make the mortgage. I wouldn’t want to be an investor revealing my entire financial status to the bank and arguing “hardship.” In addition, the investor is now taking property owner liabilty.
There’s more reasons not to do that, but these first 2 should be enough to make a decision.
Ron
First off, thanks for the great blog and a wealth of reviews and information. Secondly, thanks for this great webinar. Which leads me to a third point, that is indirectly related — does the 20% profit for investors restriction apply only if the “C” buyer is an FHA or otherwise government-financed? What about conventional (bank) financing (mortgage)? And cash buyers? Can Fannie Mae or Freddy Mac place the 20% profit restriction for 90 days onto the title/deed even for cash buyers? That’s what some people on online forums (which are always correct, of course) have said is happening. If Fannie/Freddy can now dictate that too, even to cash buyers, it’s a cause for protest. Can’t we all create an online RE Investors Association to advocate for our issues?
Here we go – a petition was started: http://www.change.org/petitions/view/real_estate_investors_of_america_league_reial
change_setup(‘300’, ‘29112’, ‘#1A3563’);
Hi GoldenForeclosures,
The 20% spread applies only to FHA loans as a matter of published policy. This is a threshold. Above this level, a closer review and additional appraisal is needed to underwrite the loan at a higher spread. This would look for rehab or other issues — which could also include simply the market timing or a good discount.
I haven’t yet seen any evidence of deed restrictions. If anyone has, I’d definitely want to see it.
With respect to political action, I see that you started it on your own. I’m certainly open to the issue.
Regards,
Ron
Hi Ron,
As I’m listening to the recording, ‘lenders allowing borrowers to stay in homes after foreclosure if they’ll just take care of the property until the lender decides to remarket the home’, it reminded me of a question:
‘Banks can’t own real estate’.
Does this ‘common knowledge’ actually exist somewhere in banking regulations?
And if so, has that concept been put on hold since the real estate crisis began?
And somewhat related:
I had a Chase SVP tell me he would not consider an offer I made for an assumptive short sale because ‘if you subsequently go into foreclosure, how would I explain that to OCC, OTS.
I was wondering, will Chase or any other lender EVER have to explain to OTS, OCC, FDIC or SEC how 6 MONTHS after issuing a NOD, they RESCINDED the NOD, then allowed the investor/borrower (property is a tri-plex) to receive another EIGHTEEN MONTHS (as of today) of rent checks without making a payment against the mortgage?
Maybe it’s a fluke, an isolated instance. Or maybe it’s misleading shareholders if this loan sits on their books as ‘current and performing’?
Regards,
Steve
Hi Steve,
I hate not having a citation for a legal concept when asked for it. Then I’m not much better than people who claim “breach of duty” or “fraud” without citations or authoritative links. However, I’ve read several articles over the past year or more about “changing the rules” to allow banks to intentionally hold real estate longer than one year in order to ride out a possible return in value. The concept has been defined as “allowing banks to be landlords.”
Answer: I don’t have a citation, but I agree that there is a widespread belief that some form of “banking rules” are intended to keep banks from being landlords and from holding former loan collateral (real estate) for extended periods of time, particularly more than one year. Maybe doing so requires an increase in loan loss reserves — which is a form of risk penalty for banks.
Although I can understand when banks let single family home owners with hardships stay in their homes for substantial periods of time without making payments, I can’t understand them accepting or condoning “rent skimming” where a landlord continues to collect rent while not using any of it to pay the bank. IMHO, rent skimming is “real fraud,” unlike a typical investor flip of a short sale property. “The system” should not tolerate any kind of real fraud as it undermines the legitimacy of the system. Moroever, if I was the note holder, I would be really pissed at the servicer for doing so and want to recover the losses from them.
As to an assumptive short sale of a rental property (assuming you mean the bank allows you to assume the loan as part of a short sale), there seems to be a high degree of common sense in the idea of allowing an investor to take over a property with a promise not to skim rent is better than having an obvious rent skimming situation. Unfortunately, too much of what’s been going on in the banking industry defies common sense because there too often is some unspoken incentive to make the otherwise senseless choice profitable.
Ron
Ron,
You wrote, “Moroever, if I was the note holder, I would be really pissed ..”
And how would you feel if you were the noteholder of a $750k note written at the peak of the market, and your servicer failed to foreclose when the borrower’s property taxes first went unpaid (almost immediately after the note was written 4 years ago)? NOW when you foreclose over the unpaid mortgage payments, not only do you enjoy the avoidable loss from the market declines ($300k), but you lose another $60k on the unpaid taxes and penalties.
Add to this my outrageous contact notes from the short sale (complete indifference all the way to the CEO and General Counsel’s offices), and it could make a strong argument for negligence my the servicer.
The questions in all this:
1) Are investors suing servicers yet to recover their losses? I am available as a witness. 🙂
2) My understanding is MERS keeps track of not only the servicers but also the noteholder. Do you know anyone friendly to the real estate investor community with access to MERS? Being able to contact the noteholder would be incredibly useful in negotiations. And something the servicer would most likely prefer to continue to make impossible.
Regards,
Steve
Hi Steve,
1. I’ve seen brief news blips about note holders starting to go after servicers for acting in the servicers self-interest rather than the note holders’ best interest. Just haven’t had the time to follow up on them.
2. I also understand that the Fair Debt Collection Practices Act requires debt collections (servicers) to identify the “creditor.” I haven’t invested the time to pursue the specific citations. When I raised that point to one bank negotiator, her comment was something like: “our servicing contract prevents us from disclosing the identity of the investor and that overrides federal law.” !!!
As we all know, the banks are a higher authority than federal law — certainly they seem to think so.
Ron
I guess being sued for lots and lots of money is the only thing servicers will understand.
Actually on this specific file I mentioned, I called the legal dept of the now defunct loan originator. She looked the loan # up in MERS and told me the current noteholder was “JPMorgan Chase as Trustee, Bank of America, Custodian ” (I wish I understood the subtleties of trustee v. custodian).
Would it come as any surprise to learn the law firm that replied on behalf of the servicer (Aurora) to my Qualified Written Request, wrote that the noteholder was Aurora?
Cheers!