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Should Short-Sellers Be Required to Post Good Faith Money?

Strange Days Indeed.

There is an ancient Chinese proverb that goes something like this, "May you live in interesting times". Well we certainly are living in "Interesting times" and this true story is proof;

Last year a client of mine without the use of a Realtor entered into a Rent-to-Own agreement with a Sell-Lord. A  Sell-Lord for those of you who don't know is someone who has purchased another home or otherwise moved on and now because of both lending and real estate markets can not sell traditionally and so they are now unwilling landlords. Because they couldn't sell and weren't willing to wait to sell, they have decided to rent, rent to own, or any other scheme to generate income from the property.

In my clients case, the seller agreed in a very poorly written agreement which was created by my client to sell for either the then agreed upon price or what the bank appraises the property for at the time of closing. Or at least this was my client's understanding, frankly the document was so poorly written that it is doubtful that it would pass legal muster. The seller additionally agreed to (belive it or not) apply 100% of the rents collected during the rental period towards the buyers/renters down payment. In this case we are talking about nearly $13,000. Making matters worse, the property went into early stages of foreclosure and the bank began making property inspections and even attempted to secure the property prior to legal foreclosure.

Finally, due to many foreclosures in the immediate vicinity the house did not appraise for the agreed upon dollar amount, the deal fell apart and of the course the house subsequently went back to the bank. Ironically, the amount to pay off the loan would have been sufficient to do so with the net proceeds from the sale at the appraised value. According to the agreement the purchaser lost several thousands dollars in un-recouped rent, deposits and the cost to appraise the home.

This same customer went on to purchase another home, this time a short-sale. This house did not appraise for what they agreed upon and so the buyer lost another $900 of inspection fees. In this case the seller did no wrongdoings, the market simply was unstable and the appraiser injected his politics into the report when he described the market as "a victim of the current lending crisis" whatever that is supposed to mean and called it a "declining market" even though technically there are no "declining markets" in Raleigh.

Fast forward to our most recent attempt; the buyer is now living in a motel because the bank evicted her from property number 1 and her possessions are in a truck outside. She has entered into another short-sell agreement (because she is obviously a glutton for punishment), paid for inspections and the attorney has discovered in the title search unpaid judgements against the seller which the seller claims the can not pay. Because of this, he can not legally transfer a Warranty Deed to the buyer and is now asking his lender to negotiate settlements with his creditors who have sued him to pay off those debts with the proceeds from the short-sale. Did you get that? He is actually asking his mortgagee who is Wells Fargo who have already agreed to accept less than what is due to pay off the mortgage in the first place to accept even less by paying off his credit cards companies who have sued him and obtained a judgment against him! Can you belive the marbles on this guy?

My reccomendation; if you are a buyer and are planning to  purchase a home in short-sale or pre-foreclosure; protect yourself by asking the seller to deposit into escrow an equal amount of Good Faith Money to yours in order to cover your expenses if the seller can't perform due to undisclosed liens and or judgements that could prevent him or her from legally selling you the home! Expect resistance from the seller and or his agent and even from your own agent, but if the seller isn't willing to risk his money then why would you risk yours? Move on and buy the home from the bank in foreclosure if you must have the home.

Fraud and the Mortgage Broker;

...who's to blame the bank or the broker or the borrower?

According to Meriam-Websters defenition of FRAUD: : intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right b: an act of deceiving or misrepresenting : trick 

Using this commonly accepted defenition of fraud then the most common form of fraud is comitted in and example of when a loan officer who knows that a person who earns $30,000 per year and then signs his/her name to the page three of the Universal Residential Loan Application (URLA/1003) where is states that person makes anything more. In this case both the loan officer and the borrrower are complicit in misrepresentation of material facts to the lender. Because the lender may not have required income documentation from persons who met other lending criteria doesn't make it OK to misrepresent your income, assets or anything else that may impact your lenders perception of your ability to repay the loan you have requested and it doesnt make it the lenders fault either.

Another example of fraud in the mortgage process is when collusion occurs between the loan officer and the real estate appraiser. Because of the rise of the Internet over the past decade, this has become more common  and the use of digital cameras and other destop publishing software and so has this has made this form of fraud easier to commit and harder to detecet by lenders and banks.  I have personally seen appraisals commissioned by other lenders where a manufactured home was compared to a site-built home. In this case the apprisaer outright lied and called it a modular home when it was not. In another example of fraud the apprasier used  genuine sales that were not in the same city of the subject property. The apprasier committed fraud by placing it closer on the map location to the subject property than it actually was! A simple Mapquest check would have revealed this, but underwriters rely on the state licensed real estate apprasier to tell the truth and when trust begins to break down by those who have fidiciary trust relationship like brokers, appraisers and realtors, then we move into our present day quandry and who do you trust?

Photo-shopping of bank statements, creating pay stubs and W2 earning statements is another common type of fraud and it has become easy for someone with a piece of software and 30 minutes can create documents nearly indistinguishable from orginals and with the rise of improved digital color copiers and other destop publishing software, it is nearly impossible to detect fraud with the most accomplished of "tricksters".

Now that we have an understanding of what FRAUD is, let's look at how FRAUD has played a critical role in the current mortgage crisis and why it is causing banks to re-think their relationship with mortgage brokers. It is FRAUD  why the secondary marketplace i.e.; it is Fannie Mae and Freddie Mac’s soon will stop purchasing and insuring  loans that have been  originated by mortgage brokers because according to thse agencies (not the banks)  an overwhelming amount of mortgage fraud is occurring in brokered loans. Therefore if banks can’t securituze, insure or otherwise or sell them to the government insured agencies they certainly aren’t going to expose shareholders to further risk of buying brokered loans in this environment. This is happening because the trust relationship with brokers has been viloated!

Recall that it was only late last fall that FNMA and FHLMC were taken over by the Treasury department. Had they had been  bank holding companies they would have been shuttered,  their assets sold off to other banks and likely bankrupt but because they are “too big to fail”  GSE’s Shareholder value was wiped out and today both companies stock trade at less than 50 cents per share! Both agencies are responsible for nearly ½ of ALL existing and future mortgages in this country. For the record we are talking about several trillions of dollars! And even though of late our law makers throw figures like hundreds of billions of dollars and trillions like they are usual and customary number, they are not! If Fannie and Freddie fail, then we will see easily another 50% of real estate sales immedialty fall out of the market place becuase that is about the percentage of loans are being originated by both agencies. For the past decade more and more of the retail origination was being done by brokers and  they got rich from doing so and have sustained none of the losses borne by the banks and shareholders because they have no vested interest in the success or failure of that loan once the commission check is cashed!

Nothing last forever  and when you understand this then you can easily see why it is logical to blame the broker for the fraudulent activity. Even though banks and lenders bought riskier and riskier loans a secondary market for them existed and while admittedly RISK and FRAUD are frequent bedfellows they  aren’t interchangeable nouns. Unlike banks, mortgage brokers are regulated by state agencies who each have their own sundry of rules and regulations and even though 14 states to date have voluntarily joined the National Registry of Loan officers, in the past the barriers to entrance for loan officers and brokers were minimal if any at all even existed. In most states it was more difficult to become a cosmetologist! Rogue loan officers and brokers were able to   move undetected   from state to state unlike loan officers in a  bank who must successfully pass state, federal criminal checks along with fiancial responsibilities and they must be bondable too.

Further compounding this problem is the little known fact that not one state has a criminal code for mortgage fraud therefore it is up to the FBI to prosecute and generally will only do so if a federally chartered bank  has been defrauded; in other words the broker would have to take money from the bank by not funding loans they received monies for. Even then it is very difficult to determine who is wholly at fault because that type of crime requires a title company or an attorney and generally includes a realtor and a live  borrower. Contrast to the bank environment numerous and varying hands and eyes review each loan file and so when fraud is detected regardless of the perpetrator it is reported to the proper authorities and people go to jail. In most broker environments due to cost prohibition  and frankly lack of ownership and financial responsibility to buy back fraudulent loans  these safeguards simply do not exist.

In many ways Mortgage Brokers have become a victim of their own success. For years they have rejected voluntary licensing, regulation and education requirements. But do not despair; instead of sitting on the sidelines the good brokers or as I like to call them the “Lepers who have the most fingers” have seen the writing on the walls and instead of complaining are happy to see laws tightening which are squeezing out the bad apples and admittedly some good ones too   and are becoming lenders because in fact soon there will be no brokers left at all. Maybe the National Association of Mortgage Brokers can lobby congress for a bailout, or become a loan officer at a.....bank.