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Any Legal Eagles? FannieMae Property Flipping Guidance?

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Mortgage and Lending NMLS142066/250013

Everyone is aware of FHA's Property Flipping Rules.   Today I was approached to do a Conventional Loan for the buyer instead of FHA because of the FHA Flipping Rules.  I would generally avoid transcations like this however it peaked my interest based upon FHA Rules.

The following are sections of Fannie Mae Selling Guide. (See pages 101 -102).   The transaction I am being asked to do would be equivalent to a Simultaneous Closing of the purchase by a Third Party that is negotiating a Short Sale on the current loan.  They then wish to resell the loan to the borrower I am working with.  Should I look at this as a

"Types of Fraud - Diversion of sales proceeds"

and would only be possible with

"Lender Fraud-Prevention Measures - Modify closing instructions to prevent flips without lender consent."  

My opinion is that only after the current Lender consent or they had released their Lien could I look at the Transaction. 

Any One have any Opinion? 

Types of Fraud

There are a variety of types of mortgage fraud. These include:
• Undisclosed liabilities
• Misrepresentation of income or employment
• Misrepresentation of credit
• Identity theft and/or Social Security number discrepancy
• Misrepresentation of assets
• Misrepresentation of occupancy
• Misrepresentation of property value
• Property flips based on inflated appraisals or other false characteristics
• Misrepresentation of the subject property characteristics or comparables
• Sale of fraudulent loans or double selling of loans
• Mishandling of escrow funds or custodial accounts
• Diversion of sales proceeds

Lender Fraud-Prevention Measures

 

Fannie Mae works closely with lenders to combat the growing problem of fraud in the mortgage industry. Fannie Mae assumes that the information and processes on which loan decisions are based are honest, accurate, and credible, and that lenders are striving for information and process integrity at every stage in the life of a mortgage-from application through servicing. To prevent and detect fraud, it is critical that lenders know their business partners, aggressively sample their loan populations, carefully review transactions, and consider using outside resources. Specifically, lenders must:

• Have proper hiring practices in place, including careful reference checks.
• Aggressively sample loans that have a high risk for fraud as part of the quality control process. This includes loans that are early payment defaults or that involve problematic business sources, loans in high-risk areas (such as areas with high levels of early delinquencies or defaults), or those that have characteristics in common with previously detected fraudulent transactions.
• Evaluate appraisers and get references. Confirm that the appraiser is currently classified and has not been the subject of disciplinary action.
• Be selective in choosing closing attorneys and settlement agents, and communicate concerns about suspicious files to these individuals.
• Modify closing instructions to prevent flips without lender consent.
• Report suspected fraud to proper authorities.
• Report suspected fraud to Fannie Mae.

Comments(8)

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Keith Webb
Guardant Investments, Inc. - Fullerton, CA
GRI

Tim,

I understand where you are coming from but let me ask a hypothetical question.   I have cash and in a short sale situation a lender is willing to sell the property below market to me because there are no contingencies and I can close quickly.   The lender avoids a foreclosure and further liability and immediately removes the the property off their non performing assets.  The homeowner gets out of a stressful situation.   I would say this is a win-win situation for all parties.

Now, I have an asset that I can sell if I so desire and make a profit.   I thought that was what capitalism was all about, the freedom to take risk and receive reward.   There are many large companies buying REO property in bulk at 60% of today's market value, WITH THE SELLING LENDER PROVIDING LEVERAGE,  repairing and putting them right back on the market at 90% of today's value and the arbitrage is their gain.

What is the difference?   I cannot see why a large investor can do something that an individual cannot do.  There is no diversion of sales proceeds. 

I need to state that I have been in real estate for 30 years and agree that Fraud in any form is something that we cannot abide.  But a knowledgeable willing seller/lender and a knowledgeable and willing buyer should be allowed o enter into and complete a contract.   If in a subsequent and separate transaction a profit is make or lost on that sale that is what our business is all about.

Jul 03, 2009 03:34 AM
Keith Webb
Guardant Investments, Inc. - Fullerton, CA
GRI

Tim,

In review, I recognize that my comment did not address your "simultaneous close" question of ethcis.  IF full disclosure is made to the new lender then there would be no issue.  With no disclosure then one is bordering on a fraudulent representation or not providing the full disclosure in that situation.   Again, solved by a delayed transaction that records later.

Again.....my opinion only.

Jul 03, 2009 03:39 AM
Tim Bradford
Cleveland, OH
NMLS 250013

Keith,   Thanks for commenting.  I would not have an issue, provided the Investor purchase was completed prior to executing a contract to resell the property. 

After making the post, I found a warning to Title Insurance Companies with regard to issuing Title insurance on these type of transactions because if of potential fraud.  The fraud being representing the value of a property to be one amount in order to have the Short Sale approved while at the same time having a contract for a higher price already in hand.  Full Disclosure is the key, My read is that the "Short Sale Investor" should provide Full Disclosure to the Old Lender and the New Lender, and only with approval of both would it be permissiable.   

Jul 03, 2009 04:23 AM
Jim Valentine
RE/MAX Realty Affiliates - Gardnerville, NV

Tim, Your title caught my eye for another reason.  We represent an investor that bought a foreclosure.  We know we can't sell with an FHA loan for 90 days, and have an accepted offer with a conventional loan.  Yesterday the loan officer said they can't do a FNMA or Freddie Mac loan for 90 days.  I can find nothing that confirms that restriction.  Any ideas?

Jul 03, 2009 04:40 AM
Tim Bradford
Cleveland, OH
NMLS 250013

Jim,   The two references in my post reference FNMA-Selling Guide they do not give any guidance as to any time frame which leave it open to individual lenders to evalucate their risk.    I also found this issued by "First American Title Insurance" ( http://www.brokencredit.com/wp-content/uploads/2008/05/fstam.pdf ) as a warning to Title Insurance Agents about insuring Purchase and Sales like this. 

The purpose of my post is not to give any advice only to seek opinions.  As indicated before, I believe I could be comfortable if "The Short Sale Investor had completed their purchase prior to the execution of a new contract".  If the same Realtor were involved in the purchase by the "Short Sale Investor" and then the resale at a higher price, I might say the 90 day period might be acceptable because of FHA Guidelines. 

Jul 03, 2009 05:14 AM
Jim Valentine
RE/MAX Realty Affiliates - Gardnerville, NV

Thanks, Tim.  We talked to another lender yesterday who explained that our situation, a foreclosure bought by an investor that is being resold with a conventional loan, is really up to the underwriter.  It is not in the FNMA guidelines, but some underwriters are enforcing a 90 day period.  We've one lender, the one with the loan, saying it will be an issue.  Another is saying they'll check it out.  We'll pick it up next week.  Your situation is ticklish as most double escrows are ... the short sale status of the one makes it very questionable.  Good luck and thanks for the help.

Jul 04, 2009 03:53 AM
Tim Bradford
Cleveland, OH
NMLS 250013

Jim,    Depending on the particulars, if you investor buyers made repairs or improvements to the property that would influence an underwriter.  I think you understand any problem would not be with the resale of property.  The problem would have been with the purchase by the investor and if any misrepresentation had occured on the transcation that might create Legal issues.  I assume you did read the warning that was issued to First American Title Insurance agents about some of the possible issues could be. 

Jul 04, 2009 05:38 AM
Louis Carrillo
San Diego, CA

Tim,

I ran into your post while I was doing a search for a copy of the Freedie Mac guidelines on this topic.

I am an investor so we do this type of flip all the time. We purchase the property and flip it the same day.

I am part of a large community of nationwide investors who share this type on information with each other.  We always stay on top of the latest info from the top attorneys in the country.

 Many people ask the question. "how can a property have two different values in the same day if the investor didnt do any work to the property?"

The answer is that our negotiator, by negotiating the sellers debt and getting a short sale approval, takes that property out of the "distressed" category...and as you know, a property that is no longer under the threat of foreclosure has a higher value on the market.  (which is exactly why buyers typically pass up short sale listings for others which are regular listings.)

This is exactly why FHA revised their guidelines to allow for this type of flip transaction.

Freddie Mac has released their guidelines as well...

http://www.freddiemac.com/sell/guide/bulletins/pdf/bll0924xA.pdf

Jan 26, 2010 02:51 PM
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