Home Appraisers: Dave Towne On Possible Fraud - Property Purchase Incentives

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"Appraisers……

I hope you are busy, and may not like to read a whole bunch of ‘stuff’, but this is important info.  This article is from the 5/12/2010 blog MortgageNewsDaily.com, written by Adam Quinones:

Home Sellers Push Buyer Incentives as Tax Credit Expiration Erodes Loan Demand

The homebuyer tax credit has expired and the housing industry is scrambling to refocus its marketing efforts on the core fundamentals of sustainable homeownership.

From a CNBC story titled: "Homebuyer Tax Credit Ends, But Other Incentives Emerge"

"The expiring credit—which gives first-time homebuyers and some current homeowners a tax credit of up to $8,000 if they sign a contract by midnight tonight and close the sale by June 30—has been widely viewed as helping boost home sales in recent months. For that reason, some real estate firms are pushing home sellers to offer incentives of their own, usually by agreeing to refund some of the purchase price to the buyer. Some developers are offering similar refunds to buyers of new homes or condos."

AND...

"One of the larger companies pushing the new incentives is Coldwell Banker, a subsidiary of the global real estate giant Realogy. It is asking sellers to participate in a program that will give buyers 3 percent off the agreed-to sale price, up to a maximum of $8,000. The program will run from May 1 through July 31."

While I do not see any RESPA or Reg Z violations yet, these "incentives" are MISLEADING.

If the refund strategy is attempted before closing, it would be viewed by an underwriter as a reason to reduce the sales price by the size of the "refund"....which negates the refund, lowers the value of the home and increases the loan to value ratio (which could affect loan pricing). If the refund is done post-closing and the HUD is amended, the loan would be a prime "buyback" candidate as appraisals are under a great deal of scrutiny by regulators, specifically over-inflated valuations. If the refund is done post-closing and the HUD is not amended...that is when we can start talking about illegalities.

The Coldwell Banker program that "gives buyers 3 percent off the agreed-to sale price, up to a maximum of $8,000" is smoke and mirrors (not in a fraudulent way). This is nothing more than good 'ol seller concessions. Fannie Mae calls them "Interested Party Contributions".

NOTE: The article is written as "3 percent off the agreed-to sale price". That should have read "3 percent OF the agreed-to sales price"...if it was not a typo, this tactic is not seller concessions, it is a refund. See comments about refunds.

From the Fannie Mae Seller Guide:

Interested party contributions (IPCs) are costs that are normally the responsibility of the property purchaser that are paid directly or indirectly by someone else who has a financial interest in, or can influence the terms and the sale or transfer of, the subject property. Fannie Mae does not permit IPCs to be used to make the borrower’s down payment, meet financial reserve requirements, or meet minimum borrower contribution requirements.

IPCs are either financing concessions or sales concessions. Fannie Mae considers the following to be IPCs:

funds that are paid directly from the interested party to the borrower;
funds that flow from an interested party through a third-party organization, including nonprofit entities, to the borrower; funds that flow to the transaction on the borrower’s behalf from an interested party, including a third-party organization or nonprofit agency; and funds that are donated to a third party, which then provides the money to pay some or all of the closing costs for a specific transaction.

Plain and Simple: seller concessions are very common in this housing environment, every buyer should request this "incentive". While the borrower is required to have "skin in the game" (3.5% for FHA), these IPC are intended to help cover a portion of the borrowers closing costs or buy down their interest rate. Nothing illegal about that...unless the concessions are coming from a builder and are offset by higher costs elsewhere in the transaction.

The removal of government funded homebuyer incentives is forcing loan originators, realtors, and builders to produce new promotion strategies and modernize long-standing advertising approaches. Given the ever-evolving regulatory regime and super sensitive risk retention environment, the rush to innovate new trade tactics will likely lead to more and more violations and loan repurchase requests.  Be very careful and always ensure you are within compliance. 

Dave Towne, Appraiser Education Service"